SAN FRANCISCO — Confusion over the law ending redevelopment agencies in California has raised the specter of defaults on San Jose redevelopment debt as city officials squabble with Santa Clara County officials over tax revenue.
The uncertainly has caused JPMorgan to reconsider an extension of its letters of credit backing $94 million of bonds issued by the city’s former redevelopment agency.
San Jose Mayor Chuck Reed said in a letter Friday to the county Board of Supervisors that the city could default on bonds if the county moves forward with its interpretation of how the property tax revenue of the former city RDA is doled out.
Reed said the county’s interpretation of the law ending redevelopment puts the county’s share of the revenue ahead of all existing debt, including that owed to bondholders.
The mayor said it would cost $16 million of tax revenue needed to pay debt service due Aug. 1 on non-housing subordinate tax-allocation bonds issued by San Jose’s RDA.
County officials have also proposed deducting other taxes from the calculation of tax increment, or tax growth, the city had expected to receive as the successor to the redevelopment agency, according to Reed.
“Taken together, the successor agency will be in default on senior and subordinate tax-allocation bonds and subordinate non-housing tax allocation bonds,” Reed wrote. “There is no authority in the law that allows a subordinate creditor to leapfrog in priority over bondholders.”
The city’s acting finance director, Julia Cooper, said debt service on the subordinate bonds would be affected first and could spread to “a billion-plus” of senior bonds.
“We are just trying to work through this and get it resolved,” Cooper said.
County officials did not respond to a request for comment.
The San Jose Mercury News quoted Santa Clara County Executive Jeff Smith saying the city has the resources to make the $19.3 million payment to the county through its general fund or reserves.
San Jose and Santa Clara County have battled over RDA money before.
Last year, following a lawsuit by the county, the two sides agreed on a payment plan for the city to reimburse the county tens of millions of dollars.
Uncertainties around the tax payments led JPMorgan to reconsider its extension of four letters of credit that back the $94 million of subordinate bonds.
The bank is only offering a 30- to 60-day extension to give the situation time to be resolved.
The San Jose City Council must approve the short-term bond security by Tuesday or else JPMorgan will tender an offer for the bonds and cause higher payments if an agreement isn’t reached by Wednesday, according to a city staff report.
The city estimates extending the letters of credit by 60 days will cost $360,000. JPMorgan declined to comment for this story.
In October, San Jose struggled to negotiate a six-month extension of LOCs on the same bonds because of the legal doubts caused by the state’s termination of redevelopment.
JPMorgan technically issued the new letters of credit with the trustee, U.S. Bank, extending the backstop on variable-rate debt to July 1, 2012.
Last year, a new law upheld by the state Supreme Court dissolved California’s 400 redevelopment agencies. Since then, there’s been a scramble by the “successor agencies” — in most cases, including San Jose’s, the municipalities that had created them — to dissemble their debts and assets.
The process involves a local oversight board, county auditor-controllers, the state controller’s office and the state Department of Finance.