By Larry Kosmont, President & CEO of Kosmont Companies
Successor Agencies have assumed control and will be responsible for the winding down of the activities and assets of former Redevelopment Agencies under the supervision of Oversight Boards, which are currently being assembled. Following audits by Counties and the State of previous redevelopment transactions and ongoing Successor Agency obligations, properties of the former Redevelopment Agencies will begin to come onto the market. Cities are now handicapped with respect to future economic development without the capacity for tax increment financing. New and relatively untried tools such as infrastructure financing districts and community-based economic development authorities will be explored and implemented as a replacement for redevelopment, while existing tools, such as lease/lease-back financing and sales tax reimbursement agreements will concurrently be revisited. Several redevelopment legislation clean-up measures are underway to provide guidance and options to cities in California, but filling the void left by redevelopment will still be a formidable task.
Where We Are
Redevelopment is dead, and effective February 1, 2012 the dissolution process has begun. Though it is procedurally untried, the unwinding process is vaguely similar to certain aspects of private sector liquidation in that, by and large, the new decision makers (Oversight Boards) will act much like creditor committees, seeking to liquidate assets in order to share in the sale proceeds in addition to getting public agency-owned properties back on the tax rolls.Due to the unique and untested requirements and processes in AB1X 26, Successor Agencies (the cities that formerly had redevelopment properties) and private sector entities that took part in the program or may want to buy those properties are focused on several key questions going forward, regarding such issues as the next steps in redevelopment dissolution, the availability of properties going forward, the feasibility of redevelopment without tax-increment financing, replacement economic development tools, and potential redevelopment legislation clean-up.
- Successor Agencies have already made the decision to remain in control of the redevelopment dissolution program. Almost every city in the state elected to become a Successor Agency to its redevelopment agency, enabling them to finish ongoing projects and dispose of assets with the express review and approval of Oversight Boards.
- Seven-member Oversight Boards will be formed over the next two months (deadline is May 1, 2012), to oversee the winding down of redevelopment assets and activities. For the most part, careful attention and emphasis is being put into the selection of board members, as these are the individuals who will decide what happens to former agency assets (though decisions can be appealed to the State Department of Finance and/or State Controller’s Office). Oversight Board members are appointed by county board of supervisors (two), the city mayor (one), the largest special district by property tax share within the jurisdiction of the former agency (one), county superintendent of education (one), Chancellor of the California Community Colleges (one), and one member representing employees of the former agency.
- Successor Agencies have adopted their Enforceable Obligation Payment Schedules (“EOPS”) in January 2012. Audits and reviews of former agency transactions are now underway by the Department of Finance and the county auditor-controllers to scrutinize the EOPS and Recognized Obligation Payment Schedules (“ROPS”) and importantly, to set up the liquidation of former agency assets, including notes and properties.
Will Properties Become Available? If So, When?
Properties will become available. Timing is unclear. The Successor Agency EOPS must be ratified by the county auditor-controller, State Controller’s Office, and Department of Finance. The primary assets referenced on EOPS require ongoing payments (e.g. bond payments). Concurrently, real estate assets are being placed on lists by Successor Agencies to be disposed of “expeditiously and in a manner aimed at maximizing value” subject to the direction of the Oversight Boards as outlined in AB1X 26. Successor Agencies are currently evaluating preferred methods of disposition, initiating assessments of value, and formulating strategies to be recommended to Oversight Boards, once they are formed (by May 1, 2012).
Can Cities Accomplish Economic Development Without Tax Increment Financing (“TIF”)?
Terminating redevelopment essentially eliminated TIF in California. As a result cities have lost their primary leverageble revenue source for economic development projects. California is now one of only two states in the nation without some form of this valuable financing instrument. TIF enables public agencies cities to freeze property and other tax revenues, such that additional increment can become available to match or enhance private sector equity/debt investment. Without this tool, California cities are limited in ways to assist public-private projects and pay for infrastructure.
New & Untried Economic Development Tools
In the next year, there will be a prevalent debate about which tools should be authorized as a replacement for redevelopment. Most alternatives will involve the reintroduction of tax- increment at some level:
- Infrastructure Financing Districts (“IFD”), which divert property tax revenues for public infrastructure improvement projects (highways, transit, water, sewer, parks, etc.). The current IFD statute requires approval by all effected taxing authorities and a vote by all constituent parties. As such, the process is too cumbersome and not workable.
- Community-Based Economic Development Authorities – some charter cities have had such authorities in place, such as the City of Placentia (a Kosmont client), where the Industrial Commercial Development Authority was established in 1982. The City of Alhambra is a charter city that is leading the way by adopting an economic development ordinance that empowers the City to acquire or lease property, provide for site preparation work, accept financial assistance from public and private sources, provide financial assistance to projects, issue debt, and other essential economic development activities. Other charter and general law cities in California must decide whether to pursue similar actions. Ideally incorporated into any such model would be broadened surplus property disposition, ability of general law cities to create TIF-based reimbursement agreements, and capacity for cities to sell property below market to encourage private investment and job creation.
Existing Economic Development Tools Are Being Revisited (partial list):
- Lease / Lease-Back Financing
- With and without General Fund guarantees
- Site specific tax revenue pledges for hotels and retail
- Ground Leases
- Sales Tax Reimbursement Agreements
- Operating Covenants (e.g. for Retailers and Auto Dealers)
Clean-Up Legislation in Process (As of March 2012)
- SB 654 (Steinberg) – Various Redevelopment Clean-Up
- Currently at Assembly Desk
- Would allow for L/M Income Housing Fund to transfer to Successor Housing Agency
- Would allow certain City/Agency loans as Enforceable Obligations
- AB 1585 (Perez) – Various Redevelopment Clean-up
- Currently with Senate Rules Committee
- Some overlap with SB 654 re: Housing Fund Balance and City/Agency loans
- Additionally addresses employee project and termination and other admin costs
- Requires Oversight Board to direct Successor Agency to prepare inventory of assets and fair market values and adopt asset disposal/transfer strategies
- SB 986 (Dutton) – Bond Proceeds
- With Senate Committee on Governance & Finance
- Provides that all bond proceeds generated by former Agency are encumbered and not remittable to County Auditor-Controller
- Requires that proceeds are used by the Successor Agency for the purposes for which the bonds were sold
- Obligates Oversight Board cooperation with respect to establishment of enforceable obligations related to bond proceeds
- SB 1220 (DeSaulnier, Steinberg, Assembly Member Atkins)– Housing Opportunity Trust Fund Act of 2012
- With Senate Committee on Transportation & Housing
- Imposes $75 on recordation of real estate documentation to support affordable housing development
- SB 1151 (Steinberg) – Long Range Asset Management Plan
- With Senate Committee on Governance & Finance (hearing scheduled for April 18, 2012)
- Requires Successor Agency to prepare long range asset management plan outlining a strategy for ongoing economic development and housing functions
- Plan would require Oversight Board & DOF approval
- SB 1156 (Steinberg) – Community Development and Housing Joint Powers Authority
- With Senate Committee on Transportation & Housing(hearing scheduled for April 10, 2012)
- Authorizes Cities/Counties to form “Community Development and Housing Joint Powers Authorities” to assume from Successor Agencies the responsibility for managing the assets and property of the former redevelopment agency
- Authorizes these entities to exercise specified powers included in the RDA law and to exercise certain other powers relating to financing its activities such as establish additional sales tax
Economic Development – A New Wave is Coming
As the burden of redevelopment dissolution and the roles and responsibilities of the various successor entities become clear, it is also becoming evident that there is significant room for differentiation in how cities cope and position themselves for future economic development efforts. Cities should be assertive in their pursuit of asset strategies, starting with full consideration of an upgraded and updated economic development strategy. Now, more than ever, local governments will need to be creative in their exploration and implementation of economic incentives and public financing tools for economic development projects. While redevelopment was the most widely used revenue-financing tool, it was in fact just one tool in the toolbox at the disposal of California cities.
More to come, so stay tuned!