SAN FRANCISCO — The San Jose Redevelopment Agency has received an extension on letters of credit from JPMorgan on $95 million of variable-rate debt, avoiding the threat of a default this month.
Redevelopment agencies across California have been in legal limbo since the governor signed legislation in June forcing the agencies to either fork over large payments to the state or shut down.
Redevelopment interests are suing the state to try to block the two new laws, and while the case is pending the agencies are barred from entering or amending financial contracts, such as letters of credit.
Gov. Jerry Brown last month vetoed cleanup legislation that would among other provisions have allowed the San Jose Redevelopment Agency to extend the letter of credit on the subordinate tax-allocation bonds, which was to expire Nov. 25.
Without clear legal authority to amend the contract itself, the San Jose RDA found a way around the problem.
The city’s acting director of finance, Julia Cooper, said JPMorgan technically issued the new the letters of credit with the trustee, U.S. Bank, extending the backstop on $95 million of variable-rate debt to July 1, 2012. Thus, the reimbursement agreement with the Redevelopment Agency stays in place.
“After the governor vetoed the legislation we continued to engage in dialogue with JPMorgan along with the state treasurer’s office and governor’s office to move things along,” Cooper said. “I think JPMorgan realized, as well as we did, the importance of the business relationship and got comfortable with the assurances we could provide them.”
A spokesman said in a prepared statement that JPMorgan was happy to have reached an agreement.
Expiration of the letter of credit would have triggered a tender offer on the bonds by JPMorgan and subsequently the Redevelopment Agency would have had to make higher payments in a shorter time frame on the outstanding debt — money the city and the RDA said they didn’t have.
Cooper said the city will await the outcome of the lawsuit before deciding on a strategy for the variable rate debt after July 1. The suit is to be argued before the state Supreme Court on Nov. 10 and a decision is expected in January.
San Jose is a plaintiff in the lawsuit.
To keep its RDA from being abolished, San Jose would have to pay $50 million this fiscal year to the state if the new law stands and $10 million to $11 million on an ongoing annual basis. The city’s general fund is already supporting the RDA this year with $10 million to pay debt service because of decreasing property values that cut the agency’s revenue from the growth in incremental property taxes.
San Jose is also on the hook for $63 million in loans it has made to its RDA.
The Redevelopment Agency has a $156.4 million debt-service payment due this fiscal year on agency-issued bonds and the city has a $25 million payment due on debt secured by the city.