SAN FRANCISCO — The National Federation of Municipal Analysts warned Wednesday that uncertainty surrounding California redevelopment agencies’ $23 billion of debt could lead to further defaults.
The RDAs officially dissolved Feb. 1 under the terms of a new law, after the state Supreme Court struck down a companion law that would have allowed agencies to stay open if they made a substantial payment.
The NFMA said “uniform guidance” and clean-up legislation is needed as soon as possible to avoid unintended bond covenant violations and-or missed debt service payments.
“While we are aware that the law provides clear intention that the repayment of bonds will be honored, it is the implementation of the law that causes us concern,” Jason Kissane, an NFMA board member and a managing director at National Public Finance Guarantee Corp., said during a conference call with reporters.
The California high court’s decision started the process of unwinding the redevelopment agencies and transferring their obligations, including bonds, to new “successor agencies” under a complicated process.
The process involves oversight and review of RDA finances by a local oversight board, county auditor-controllers, the state controller’s office and the state Department of Finance.
Several localities have already been struggling with the shutdown of their redevelopment agencies.
Chris McKenzie, executive director of the California League of Cities, said the group has been working with Assembly Speaker John Perez on amending his proposed legislation, AB 1585, to address the concerns the NFMA has noted.
“The timing of debt service payments is a concern we have had for months,” McKenzie said.
He said the bill, which had to be in print for 30 days before it moved, should be heard by the Assembly’s housing and local government panel in the near future. It requires a two-thirds vote to pass.
The Department of Finance has always said that bondholders should be protected under the new law.
“Finance’s position continues to be that successor agencies will pay bond debt using the same mechanisms that the RDAs used to pay that debt,” said H.D. Palmer, a spokesman for the department. “The RDAs were able to pay the debt without legislation telling them specifically what to do, and the successor agencies can do the same.”
The NFMA said the transfer of the debts to the successor agencies, typically the city or county that had previously been overseeing the redevelopment agencies, is worrisome because of the complexity of complying with bond covenants and security provisions.
The federation said it needs “explicit guidance” on things such as the use of tax-increment revenues formerly collected by the RDAs. As the law stands, the county auditors will pool tax increment revenues into a property tax trust fund.
“Basically, they are pooling all revenues at the top of the waterfall,” Kissane said.
There are $23 billion of outstanding tax-allocation bonds in California and another $6 million tied to tax-increment revenues, according to the NFMA.
The issues raised by the NFMA mirror those raised by rating agencies.
The credit rating agencies warned earlier this year that redevelopment agency uncertainties could lead to a rash of downgrades for various reasons, including risks to bond indentures stemming from a new law.
Fitch Ratings has placed all California tax-allocation bonds on review for potential downgrade.
Moody’s Investors Service downgraded $11.6 billion of tax-allocation bonds rated above Baa2 by one notch, while keeping them all on downgrade review.
Standard & Poor’s has downgraded several redevelopment credits.