LOS ANGELES — Los Angeles and Riverside counties are working on programs to help redevelopment successor agencies in their jurisdictions refund bonds to capture interest-rate savings.
Since California’s more than 400 redevelopment agencies were dissolved in early 2012, only three refundings have been conducted.
The programs under way in the two big Southern California counties could herald a change.
State law gives redevelopment successor agencies the ability to refund bonds for the purpose of debt service savings.
The state ended redevelopment in large part because of the perception city governments used it to grab too large a share of the property tax pie.
In most cases city governments are serving as the successor agencies that administer outstanding redevelopment bonds. But cities may not be highly motivated to conduct a refunding because they won’t see much of the benefit because money freed-up through refinancing must be shared with other jurisdictions.
That’s where the L.A. County program comes in.
Los Angeles County’s 71 former redevelopment agencies have more than 300 series of tax allocation bonds outstanding with par value more than $3.5 billion, according to a webinar the Los Angeles County treasurer’s office conducted last week.
County officials estimate that of the TABs currently outstanding in the county, approximately $1 billion are callable in 2013 and could achieve $90 million in present value debt service payment savings.
“A lot of these bonds are priced at above-market interest rates,” said Doug Baron, director of finance and investments for Los Angeles County.
Los Angeles County would create a joint powers authority for the program, but the successor agencies would still be the bond issuers, Baron said. Their bonds would be bought by the county JPA, which would sell the revenue bonds to the capital markets, he said.
The debt service savings will generate additional residual property tax revenues through that will be distributed to the local taxing agencies.
It makes sense for the county to handle the refundings, because they have the expertise, and the successor agencies are so overwhelmed with the dissolution process, Baron said.
The webinar conducted to inform successor agencies about the program had 107 individual participants representing 51 of the 71 agencies in Los Angeles County, Baron said.
The program was created because the county recognizes that there is little incentive for the successor agencies to do refundings, and because the county, which issues a variety of long-term and short-term paper annually, has the staff and expertise, Baron said.
The amount of savings accrued through the refundings will benefit the state and the county more than the individual cities, said Christopher Hans, chief deputy chief executive officer for the Riverside Executive Office.
According to Baron, cities receive anywhere from 5% to 25% of these property tax revenues. The county estimates that it typically receives between 15% to 30% of these same revenues. School districts and special districts are the other principal recipients.
The state benefits from the savings, because the more money schools receive through property taxes, the less the state has to provide through an equalization law that requires all school districts in the state have the same level of funding.
Riverside County is not as far along with its program as Los Angeles County. Hans said they have just progressed to the point where they are putting together a team.
Riverside County has three financial advisors as a result of a request for proposal it issued several years ago, he said.
“We had calls from the three of them, before we started putting together the program,” Hans said.
They are contemplating conducting a webinar similar to the one held by Los Angeles County to inform successor agencies about both the benefits and how such a program would be structured.
So far, Riverside has received some interest from its successor agencies in working with the counties on refundings, while others are not as interested, Hans said.
“Perhaps a webinar would turn them around,” Hans said.
The smaller successor agencies may not be as interested, because they have limited staff and the savings would be divided between the various municipalities that receive a share from property taxes, Hans said.
Hans estimates that there are 50 bond issuances in his county – and not all of them would result in enough savings through a refunding to make the effort worthwhile, Hans said.
Riverside County also does not have the large staff that Los Angeles County does to handle refundings. He said the county typically issues five times a year and could probably handle 10 with its current staff.
“We could be started by early this summer,” Hans said. “We are hoping to get our first deal done by September.”
But the benefit for both counties is that much of the data that goes into bond documents for municipalities and districts in their regions comes from the county.
“We provide them with the underlying data,” Baron said.
Los Angeles County is developing a list and expects to have between five and 10 successor agencies participating in the first go-around, Baron said.
“We are the point where people are expressing interest,” Baron said. “There is not a formal commitment until we take it to the oversight board, which wouldn’t happen until June or July.”
Investors understand redevelopment, but what it means in the post-dissolution world of oversight boards and state Department of Finance involvement has been of some concern, said De La Rosa & Co. public finance banker Ralph Holmes.
“The county taking it on gives comfort to investors that liens be respected and they will get paid,” Holmes said. “I think it gives a lot of comfort to credit agencies.”
Moody’s Investors Service Wednesday withdrew 22 California redevelopment agency bond ratings, but Holmes said he wasn’t concerned about the impact.
Moody’s has been more critical of the impact of the dissolution in its ratings than Standard & Poor’s, but Holmes points that S&P rates more of the state’s redevelopment agencies, - and had done so prior to the dissolution.
The three refundings that have occurred post-dissolution were rated by S&P, he said.
“At the end of the day, the investors will look at the individual credits themselves,” Holmes said. “They don’t just look at the ratings -- that world doesn’t exist anymore.”
Since the county collects property taxes and has to review the successor agencies’ state-mandated payment schedules before they go to the state, it makes sense for them to be involved in the refundings, he said.
“The fact that they would sponsor the program gives it credibility and comfort,” Holmes said. “The benefit for the issuers is a lot of the documentation comes from county data anyway.”
De La Rosa & Co. was selected to be one of the underwriters for the program through an RFP process, he said.
“That’s the other thing the county offers, they have already gone through the process and vetted everybody,” Holmes said.
The county also has more credibility with investors, because they are not the successor agency, he said.
Citi is co-underwriter for the program. KNN Public Finance is financial advisor. Orrick, Herrington & Sutcliffe LLP is bond and disclosure counsel.
Dennis Tripp of Harvey Capital Corp., has been active in buying California redevelopment agency paper, but is currently looking at the bonds with a jaundiced eye.
“One of the things that has been bothering me is disclosure, which is increasingly becoming a problem,” Tripp said.
Quite often issuers are telling investors that needed information is not available, he said.
Some of the redevelopment tax-allocation bonds have barely made coverage, or not made coverage, and Tripp will not invest in bonds that don’t contain the margin of safety he are looking for.
The kind of disclosure he is looking for includes detail about the taxable value of properties in a project area, what the incremental value of the former redevelopment area is, and what the debt service coverage is, which is critical to figuring out the margin of safety for bond investors. If Tripp doesn’t see that level of detail in the documents, he is not buying them.
“If property values shrink, we want to know there is enough margin of safety,” he said. “I have a number of brokers who cover me that ask if I am bidding on these bonds” when they hit the market, Tripp said. His answer is “no,” unless the level of needed disclosure is provided.
“I see a fair amount trading at a price, but sometimes they are trading on a price on what I view to be ignorance,” he said.
A big problem is the state wasn’t really staffed up to deal with all the issues related to dissolution.
Tripp has found the state to be relatively insensitive to issues in the process of defining the recognized obligations of the former agencies, resulting in some successor agencies making late payments on the bonds.
