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
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,
Prepared by: Nia Tang, Acting
Administrative Services Officer
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Approved: |
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Forwarded to Council: |
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Andy Agle, Director Housing and Economic Development |
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Rod Gould City Manager |
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Approved: |
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Gigi Decavalles-Hughes Director of Finance |
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