City Council Meeting: August 14, 2012

Agenda Item:  8-C  

 

To:               Mayor and City Council

From:           Gigi Decavalles-Hughes, Director of Finance

Andy Agle, Director of Housing and Economic Development

                   

Subject:        Contingency Planning Related to the Dissolution of Redevelopment

 

Recommended Action

Staff recommends that the City Council:

1.     Authorize staff to proceed with certain priority projects while suspending other priority projects, in light of recent legislative actions related to the dissolution of redevelopment; and

2.     Direct staff to return to Council at a future date with additional information, as well as necessary appropriations or adjustments related to project budgets.

 

Executive Summary

This report provides information about recent amendments to the State law that dissolved redevelopment agencies, the impacts of those amendments upon the City’s ability to fund priority capital improvement projects, and recommendations regarding continued work on each project.    

 

Background

On December 29, 2011, the California Supreme Court delivered a decision requiring all California redevelopment agencies, including the Redevelopment Agency of the City of Santa Monica (RDA), to be dissolved as of February 1, 2012.  Following the Supreme Court decision, on January 10, 2012, the Council elected to become the Successor Agency to the Redevelopment Agency in order to satisfy obligations of the former agency, as well as to retain housing assets and functions of the former agency. Subsequently, Council approved draft Recognized Obligation Payment Schedules (ROPS) and administrative budgets for the January – June 2012 (First ROPS), July ‑ December 2012 (Second ROPS), and January – July 2013 (Third ROPS) periods, as required by law.

On June 12, 2012, to ensure consistency with the adoption of the City’s FY 2011-13 Biennial Budget, the Successor Agency adopted its second year of the FY 2011-13 Biennial Budget and the first year of the Fiscal Year 2012-14 Biennial Capital Improvement Program Budget, which included the capital improvement projects prioritized by the Redevelopment Agency (RDA CIPs) in its FY 2009-10 through FY 2013-14 Five-Year Implementation Plan (Implementation Plan), adopted on November 17, 2009. The Agency’s Implementation Plan was prepared in accordance with redevelopment law in effect at the time and reflected extensive input supplied at a series of public discussions with Council, the community and various stakeholders. Specifically, the plan was formulated to achieve the community’s established goals of affordable housing, disaster prevention and mitigation, and community, commercial and institutional revitalization.

 

As originally contemplated and detailed in the Agency’s Implementation Plan of 2009, the Agency would fund the RDA CIPs (priority projects) with available tax increment revenue and through a series of debt financing structures. The Agency established funding priorities totaling $283 million based on a variety of assumptions regarding growth in tax increment, borrowing costs, timing of borrowing, State take backs of local funds, leveraging opportunities and State law.  In 2011, approximately two years after adoption of the Implementation Plan, several priority projects achieved critical-path milestones in design, environmental analysis, and construction contracting to require moving forward with debt issuance to fund the projects.  On March 8, 2011, the Agency and Council approved an agreement with Wells Fargo Bank for a $60 million bank loan and on May 24, 2011, Council authorized the issuance of tax allocation bonds of $36.5 million to support completion of priority projects.

 

Pursuant to the requirements of the City-Agency Cooperation Agreement adopted on August 10, 2010, as well as State law at the time, the former Redevelopment Agency made payments to the City for implementation of priority projects.  Payments to the City were made from bond and loan proceeds, as well as tax increment proceeds received by the Agency.  With the funds received from the Agency, the City entered into contracts with designers and contractors to implement priority projects.   

 

Discussion

On June 27, 2012, as part of the FY 2012-13 State budget package, the State Legislature passed and the Governor signed AB 1484.  While the legislation was intended to clarify existing legislation related to the dissolution of redevelopment, it included many provisions that made the redevelopment dissolution process even more unfavorable for local government.

 

AB 1484

AB 1484 contains several provisions that impose significant new burdens upon cities.  Key provisions that could have significant fiscal impacts on the Santa Monica include:

 

Previously Received Property Taxes:  AB 1484 requires an accounting of property taxes paid to redevelopment agencies from November 2011 through January 2012 relative to enforceable obligations approved by the DOF on the First ROPS.  If property taxes paid exceed enforceable obligations recognized by the DOF, each successor agency would be required to remit the difference.

 

Due Diligence Reviews: The bill requires each successor agency to employ a licensed accountant, approved by the county auditor-controller, to conduct “due diligence” reviews of successor agency housing and non-housing obligations for the purpose of determining available housing and non-housing funds that may be transferred for the benefit of the State and other taxing entities (e.g., counties,  special districts, etc.).  To facilitate this review, each successor agency is required to submit to the California Department of Finance (DOF) an inventory of all housing assets by August 1, 2012, an accounting of all available cash and cash-equivalent housing assets by October 1, 2012, and an accounting of all non-housing cash and cash-equivalent assets by December 15, 2012. 

Forfeiture of Cash Assets: It is anticipated that the DOF will utilize the due diligence findings as the mechanism to seize any cash assets that it concludes are not legally or contractually dedicated or restricted for the funding of an enforceable obligation.  To compel compliance with its findings, AB 1484 authorizes the DOF to withhold a city’s share of sales taxes and property taxes in the amounts asserted by the DOF to be owed by a successor agency, as well as assess a ten percent penalty, plus interest, for failure to make the payments.  Several cities, as well as the League of California Cities, have signaled their intent to file legal challenges regarding the constitutionality of the sales and property tax withholding provision of the legislation.

 

Bonds and Loans of 2011: AB 1484 provides a process for housing bonds and loans issued prior to 2011 to be used for their intended purposes.  However, the legislation is unclear in its treatment of non-housing bonds and loans issued after January 1, 2011, but before the original redevelopment dissolution legislation was adopted, and fails to clarify the inconsistent provisions of the previous redevelopment dissolution legislation regarding bond proceeds. 

 

Potential Impacts of AB 1484

While certain provisions of AB 1484 could be struck down as unconstitutional, and the City may be able to make legal and practical arguments that successfully protect priority projects, the adopted legislation, as well as the DOF’s approach to implementing the legislation, could have serious implications for the City.  Key risks and potential impacts to the City include:  

 

Previously Received Property Taxes: In early July, the City received notice from the Los Angeles County Auditor-Controller that the Successor Agency would be required to make a $12.7 million payment on July 12, 2012, to reflect property taxes received in excess of DOF-approved ROPS obligations.  Of the $12.7 million sum paid by the Successor Agency, the City received $2.2 million back as its share of underlying property taxes. On July 24, 2012, an information item was sent to the Council indicating that the payment had been made, subject to reservation of rights, because of the dire statutory consequences of failing to make the payment.  Therefore, the $12.7 million is no longer available to fund the affordable housing and capital projects to which the funds had previously been committed.

 

Due Diligence Reviews:  The DOF has maintained that any contracts involving redevelopment tax increment that were executed after June 27, 2011 do not qualify as enforceable obligations.  The DOF has maintained that its deadline applies to redevelopment agency contracts and city contracts.  In Santa Monica’s case, the City entered into several design and construction contracts using funds, including the 2011 tax allocation bond proceeds and the Wells Fargo Loan proceeds, that were properly paid to the City pursuant to a validated cooperation agreement from 2010.  The due diligence review will identify the execution dates of the various contracts, setting the stage for the DOF to challenge the validity of the City’s design and construction contracts, even though the City entered into the contracts pursuant to prevailing law at the time.

 

Forfeiture of Cash Assets:  With a potential determination that contracts executed after June 27, 2011 are no longer valid, there is a significant risk that the DOF could attempt to seize any funds that have not have been paid pursuant to the contracts.  Such a move could undermine the City’s ability to use existing funds for contracts that are underway.  While the City believes that these contracts were properly executed pursuant to the law, the DOF may not agree and may use the considerable power allocated to it under AB 1484 to seize such funds.  In addition to undermining the City’s ability to use existing funds for contracts that are underway, the DOF could also attempt to demand repayment of any funds that have already been spent on projects or could be spent during the due diligence review period.  The DOF could use the threat of withholding the City’s sales or property taxes to compel the City to make such payments.  

Bonds and Loans of 2011: The former redevelopment agency secured over $96 million of bonds and bank loans during 2011 in order to enable the City to move forward on priority projects.  The bonds and loans include covenants and other provisions that restrict the use of the proceeds to certain projects and purposes.  Nonetheless, the fact the AB 1484 provides protection only for pre-2011 housing debt creates additional uncertainty with respect to the DOF’s intentions regarding post-2011 non-housing debt, particularly since AB 1484 retained language that bond proceeds issued before June 28, 2011 could be spent for the purposes intended.  If the DOF is ultimately successful in precluding the use of these bond proceeds, it would eliminate the primary funding source for several key priority projects.

 

Recommended Contingency Plan

Key provisions of AB 1484, as well as the DOF’s aggressive implementation, create significant uncertainty with respect to Santa Monica’s long-planned priority projects.  Provisions that would allow the DOF to raid the City’s General Fund create even greater risks.  In order to mitigate risks to the City, while attempting to ensure that certain priority projects that are underway are completed according to community expectations, a contingency plan comprised of adjustments to certain priority projects is recommended.  If successful legal challenges, DOF actions, or legislation reduces the risks associated with these projects, the contingency plan can be further adjusted.  The recommended project adjustments follow.

·       Affordable Housing Production:  Most of the City-assisted affordable housing that is currently under construction in Santa Monica was funded by loan agreements that were executed before the DOF’s purported deadline of June 27, 2011.  Two of the housing developments that are under construction involve final loan agreements that were executed after the DOF deadline, though the City made enforceable commitments to the two developments prior to the supposed deadline.  As the two developments were funded by a bank loan issued in 2008, AB 1484 provides a process for the two developments to continue forward and staff recommends that the City pursue the process.  Two other affordable housing developments, which were not funded with pre-January 1, 2011 bank, loan or bond proceeds, had completed property acquisition, and received enforceable construction-funding commitments from the City, prior to the alleged deadline.  However, the final loan documents for the two developments were not completed prior to the DOF deadline of June 27, 2011.  One of the developments has received a tax credit allocation and other funding commitments.  Staff recommends that the City pursue DOF approval of release of the funds for the development. 

 

·       Mountain View Mobile Home Park:  Another affordable housing program that is affected by redevelopment dissolution is the program for new mobile homes at Mountain View Mobile Home Park (MVMHP).  The City entered into a $9 million contract with Golden West Homes to construct and install new manufactured homes for interested homeowners at MVMHP, pursuant to guidelines approved by the City Council on December 14, 2010.  Ten households at MVMHP applied to participate in the program during the application period, for a total estimated cost of $1.5 million.  Staff recommends that the City continue forward with providing new homes for those ten households and suspend the remainder of the program until there is certainty that any additional expenditure of funds would not become a liability of the City’s General Fund.

 

·       Senior Housing Voucher Program: The City entered into a $20 million contract with the Santa Monica Housing Authority to continue to administer a senior housing voucher program.  The contract is funded by redevelopment housing funds that had been paid to the City to implement affordable housing programs pursuant to the validated cooperation agreement.  There is a considerable risk that the DOF will attempt to seize any funds that were not promised to voucher recipients prior to June 28, 2011.  Given that the program supports 81 low-income, vulnerable seniors who are at risk of homelessness, staff recommends that the Housing Authority continue to operate the program and seek DOF concurrence for these expenditures.

 

·       Civic Center Joint Use Project:  The Redevelopment Agency entered into a $56 million memorandum of understanding (MOU) with the Santa Monica-Malibu Unified School District to implement recreational and cultural improvements at Santa Monica High School that could serve students and the broader community.  Payments required to be made to the District pursuant to the MOU were included on the First ROPS and were rejected by the DOF.  As a result, City staff communicated to District staff that a $4.065 million payment had been denied.  In turn, District staff requested that the MOU be suspended until the Successor Agency is authorized to make payments to the District.  Staff supports the District’s request.  The District also stated that it had expended a portion of the $4.065 million payment but would return any unexpended funds once a complete accounting has been finalized.         

 

·       Palisades Garden Walk and Town Square: The City entered into a $47 million contract with W.E. O’Neil to construct the parks. The project is currently well underway, with substantial completion anticipated by August 2013. In order to reduce potential risks to the General Fund, staff has worked with the contractor to value engineer the project to realize approximately $6 million in savings without compromising the integrity of the overall design and community expectations for the construction of both Palisades Garden Walk (PGW) and Town Square. Savings will be achieved through simplification of the design of the grove picnic area near the 100‑year-old Moreton Bay Fig Tree (Morty), reduction in the quantity of free standing benches, simplification of the bicycle parking area to the south of Ocean Lodge Motel, substituting trees for shade structures in the play area, and examination of plant quantities and sizes to achieve savings. Additionally, there are savings from suspending the Freeway Capping & Bridging (Colorado/Ocean Sidewalk Widening and Intersection Improvements), a component of the PGW and Town Square Project. This work would have completed the western end of the Colorado Esplanade Project, and this scope of work will now be absorbed by the Colorado Esplanade Project, since this portion is part of the $6 million savings noted above. Suspending the park construction at this time is not recommended because subcontracts, custom work form, plant materials and earthwork have been purchased.  Recommencing work in the future is expected to significantly increase overall construction costs and the City would risk leaving a very large, partially constructed park in a very central location.

 

·       Civic Auditorium: The City entered into a $51.9 million contract with Morley Construction Company for design services and renovation costs.  Early concept plans have been developed for the project, which were conceptually reviewed by the Landmarks Commission in May 2012.  Additionally, various studies to assess abatement needs have been completed including assessments of the facility’s need for roofing repairs and water intrusion remediation.  Given the uncertainties related to redevelopment funding and the fact that significant construction activities have not commenced, staff recommends that the City suspend the project at this time.  Staff is currently exploring alternative options for rehabilitation of the Civic Auditorium and anticipates returning to Council in the fall for a study session to discuss these options, any of which will likely require several years to implement. Staff recommends that the Civic Auditorium close as planned in June 2013 because, in the current financial climate, the City does not have the means to continue to subsidize the operations of the facility, estimated at approximately $2 million per year and growing over time. In addition, staff does not recommend long-term public use of the facility until seismic retrofitting is complete. The closure will affect the staff positions that had been previously identified for retention.  City management staff is committed to assisting the position incumbents to find other positions inside or outside the City.

 

·       Pico Library: Although originally intended to be constructed using redevelopment funds, the dissolution of redevelopment required the City to use one-time funds for a $7 million contract with R.C. Construction Services for construction of the Pico Branch Library.  The City could consider suspending construction of the Pico Branch Library in order to provide a reserve in the event that projects that are further along in construction, such as PGW and Town Square, are successfully undermined by the DOF.  Given the many years of planning for the branch library, as well as its critical importance to the Pico neighborhood, staff recommends against its suspension.

 

·       Phase IV ATMS Traffic Signal Upgrade: The City entered into contracts totaling $4.4 million for critical traffic and circulation infrastructure improvements in the Mid-City area, Arizona Avenue through the downtown, the Main Street/Neilson Way corridor, and portions of Ocean Park Boulevard. The project is currently under construction and is anticipated to be completed in December 2012.  Staff recommends the project continue to completion as a suspension of construction could compromise public safety at intersections that are currently under construction.

 

·       Colorado Esplanade: The adopted budget anticipates using general funds, Metro Grant funding and contributions from development agreements to support the construction of the Colorado Esplanade.  The City could consider suspending the project in order to provide a reserve in the event that projects that are further along in construction, such as PGW and Town Square, are successfully undermined by the DOF.  Given the broad support for the project from community stakeholders and boards and commissions, as well as the critical role the Esplanade plays in addressing pedestrian, bicycle, and automobile circulation near the Exposition Light Rail terminus station, staff recommends that the project continue forward.  In addition, maintaining the City’s general funding commitment will ensure that the grant funding stays with the project.  Due to the recommended removal of the intersection work at Colorado and Ocean from the PGW project, value engineering will need to occur to incorporate that work into the Esplanade Project. The majority of the construction budget will be used for vehicle and roadway improvements to address Downtown traffic at the critical intersection of Colorado Avenue and 4th Street, and to integrate the Expo Light Rail station.  

 

·       EXPO Light Rail Enhancements: The City entered into $34.5 million of contracts with Metro and the Exposition Light Rail Construction Authority (EXPO) to fund station area improvements, as well as enhancements such as additional platforms, pedestrian crossings, and station entrances.   Payment was allocated from the 2011 tax allocation bond proceeds in accordance with the bond covenants.  Final design of the three Santa Monica stations is progressing toward completion and construction is expected to start in late 2012.  Given that the City has already contracted with the transit agencies for these improvements, as well as the fact that a significant portion of the contracted funds would likely be required to be paid under any circumstances, staff recommends that the project continue moving forward to ensure opening of the stations in early 2016.

 

 

While continuing forward with any projects poses significant financial risks for the City, staff believes that it is in the community’s best interest to continue forward on certain projects.  Following DOF’s review of the Agency’s Third ROPS, as well as the completion of due diligence reviews, staff will return to Council for additional direction.  In summary, staff recommends the following contingency adjustments:

 

 

Priority Projects

 

Actions

Affordable Housing Production

Seek DOF approval

Mountain View MHP

Suspend, other than initial households

Senior Housing Vouchers

Continue and seek DOF approval

PGW and Town Square

Value engineer and continue

Civic Center Joint-Use Project (CCJUP)

Suspend

Civic Auditorium Renovation

Suspend, other than necessary repair/abatement

Pico Library

Continue

Phase IV ATMS Traffic Signal Upgrade

Continue

Colorado Avenue Esplanade

Value engineer and continue

EXPO Light Rail Enhancement

Value engineer and continue

 

 

Alternatives

In addition to the recommended contingency plan, Council could choose to:

 

1.     Suspend all projects until it is clear that the original funding plans will be upheld.

 

2.     Continue forward on all projects, in order to meet community priorities.

 

3.     Modify the plan with respect to which projects continue forward and which are suspended.

 

Financial Impacts & Budget Actions

Based on Council’s authorization, staff would return to Council following the DOF’s review of the Third ROPS and upon completion of the due diligence reviews.  Eventually, budget changes may be necessary to formally adjust project budgets and reflect any additional changes.  If necessary, additional budget changes may include appropriation of residual property taxes, EXPO land-sale proceeds, and Charnock settlement reserves, as well as acceptance of grants, where applicable, to allow the continuing projects to be funded and completed as planned and anticipated by the community.

 

Prepared by: Nia Tang, Acting Administrative Services Officer

 

Approved:

 

Forwarded to Council:

 

 

 

 

 

 

Andy Agle, Director

Housing and Economic Development

 

 

Rod Gould

City Manager

Approved:

 

 

 

 

 

 

Gigi Decavalles-Hughes

Director of Finance