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01-17-2012 - Impact of ABX1 26 to the City and Community Develo - Item 13 (2).doc TO: Andrew G. Pasmant, Executive Director and the Community Development Commission FROM: Christopher J. Chung CDC Director SUBJECT: IMPACT OF ABX1 26 TO THE CITY AND COMMUNITY DEVELOPMENT COMMISSION RECOMMENDATION: It is recommended that the Community Development Commission Board receive and file this report. DISCUSSION: In order to balance the State budget, the Governor signed several budget-related bills on June 29, 2011, including ABX1 26, which moved to eliminate redevelopment agencies, and ABX1 27, which could have established a voluntary alternative redevelopment program whereby an agency could continue to exist upon the enactment of an ordinance by the City to comply with the provisions of ABX1 27. These two bills were passed as part of the 2011-12 state budget and work together to eliminate redevelopment agencies (ABX1 26) unless they agree to pay the state $1.7 billion in this fiscal year and $400 million to schools and special districts in subsequent budget years (ABX1 27). In July 2011, California Redevelopment Agency(CRA) v. Matosantos was filed in the California Supreme Court by CRA, the League of California Cities (League), and the cities of San Jose and Union City, challenging the constitutionality of ABX1 26 and ABX1 27. The CRA/League legal team argued these two budget bills directly violated Proposition 1A (2004), Proposition 22, and Article 16 Section 16 of the California Constitution. On December 29, 2011, the California Supreme Court ruled in CRA v. Matosantos.  The Court upheld ABX1 26 (the redevelopment elimination bill), but struck down AB X1 27, As a result of this court ruling, the Voluntary Alternative Redevelopment Program is no longer valid and all redevelopment agencies cease to exist as of February 1, 2012. IMPACTS TO CITY AND CDC: ABX1 26 will have significant detrimental impact to the City of West Covina. ABX1 26 states that after October 1, 2011 (now extended to February 1, 2012 by court order), “… any agreements, contracts, or arrangements between the city and the redevelopment agency…” are invalid, subject to two narrow exceptions: Agreements entered into in connection with the issuance of bonds issued prior to December 31, 2010, solely for the purpose of repaying the bonds; and, Agreements entered into within two years from the date the Agency was created. Impact on City’s Loan to the CDC/Redevelopment Agency/Community Facility District Sales Tax Reimbursement In 1973, the City of West Covina provided the Redevelopment Agency (CDC) a loan after its formation to complete economic development and redevelopment activities (2 ½ years after the formation of the Redevelopment Agency). In the years since, these loans have been increase to complete more projects in the City. The CDC currently has two loans with the City in the total amount of $21.5 million. Pursuant to the existing loan agreements, the CDC is making annual payment to the City this fiscal year in the amount of $2,259,228 on the $21.5 million loans. This income is a critical revenue component of the City’s General Fund. In addition, the City and CDC had a sales tax reimbursement for the Community Facility District (CFD) Bonds. The Sales Tax Reimbursement Agreement provides for the CDC to reimburse to the City the annual sales tax revenues generated by the businesses within the CFD district (Westfield Mall), that are used to pay towards debt service on the CFD Bonds. If the Reimbursement Agreements are determined to be invalid by the State, the City will not be able to be reimbursed for the sales tax revenues paying the CFD bonds and will therefore lose approximately $1.1 million in General Fund Revenues per year. As a result of invalidating these loans with the City, the City’s General Fund reserves could be reduced by 75%. Fiscal Impact to the City/CDC Assuming that the State’s assertion that the City Loans and the CFD (mentioned above) are invalid, it is estimated that the City stands to experience approximately $4.8 million in additional general fund deficit. For FY 2011-2012, the following is a list of CDC budgeted expenditures that the CDC currently funds: City Annual Loan Payment: $2,259,228 CDC Sales Tax Reimbursement Agreement for CFD: $1,136,000 Salaries/benefits for 19 (7.3 FTE) City (non-CDC) personnel: $ 885,659 Discover newsletter: $ 15,000 Graffiti abatement: $ 36,934 Election cost: $ 14,700 Administrative and Overhead: $ 408,057 Accounting, Auditing and HdL property and sales tax: $ 31,586 Self Insurance $ 39,058 City website (Civica): $ 12,500 TOTAL REVISED ANNUAL IMPACT: $4,838,722 Impact on the CDC: The dissolution of the CDC will have tremendous impacts on the City’s ability to eliminate blight, attract new tenants, create new jobs, protect existing jobs and revenues, and to generate new sales and property tax revenues. The CDC is responsible for redevelopment, economic development and housing for the City of West Covina. The CDC has worked diligently under its Economic Development arm to attract new tenants, preserve existing businesses, and assist developers, property owners and tenants through the planning and building entitlements. Such services are invaluable in creating a business friendly environment and to support the ongoing efforts to improve the economic health of the City. The CDC has a rich history of successful redevelopment projects and has made West Covina what it is today by removing blight in the community. CDC has rehabilitated old and dilapidated uses (commercial shopping centers, residential, industrial and offices), attracted new development and businesses, created thousands of jobs (full-time, part-time, construction jobs, etc.), developed new affordable housing, and has improved the current housing stock of the City. As a direct result of CDC’s redevelopment and economic efforts over the past eleven (12) years, the CDC/City has created over 6,792 in new employment opportunities, 5,150 construction jobs, over $6.8 million in annual new sales tax revenues to the City, approximately $6 million in annual new gross property tax increment, and over $600 million in private investments in our community. Furthermore, one of the primary core goals of redevelopment is to improve and increase the supply of affordable housing within the community. Under redevelopment, the CDC has financially assisted over 3,000 affordable units, which include: 1,010 new housing units restricted to affordable housing families; 142 down payment assistance to first time homebuyers; and, 2,141 home improvement loans to West Covina residents to improve the housing stock in West Covina. ABX1 26 will severely limit the City’s future ability to pursue economic and affordable housing development and would eliminate future redevelopment projects that remove blight in West Covina. Over the years, redevelopment tax increment dollars have been utilized to fund various tools in redevelopment including: acquisition of blighted property, participating agreements with tenants, developers, and business owners, Disposition and Development Agreement for sale of CDC property for new developments, marketing, and entitlement assistance. Some of West Covina’s showcase projects that have benefited as a result of redevelopment include the award winning Big League Dreams Sports Park and West Covina Heights Redevelopment project, West Covina Nissan and Citrus Grove, Lakes Office Towers, The Curve, Penske Audi/Mercedes, Westfield Mall and expansion, Eastland Center, Fairfield Marriott, Lark Ellen Apartments, Promenade Apartments, West Covina Senior Villas I, and soon to be completed West Covina Senior Villas II. Impact on CDC’s land assets Currently, the CDC owns approximately 188.57-acres of land. Most of the properties include restricted properties for parking use at Westfield Mall (22.51 acres) and Westfield Eastland Shopping Center (5.83 acres), and approximately 156 acres in the Sportsplex site (golf course, AAA, 730, 880 pad). Under ABX1 26, all the assets will be required to be transferred to a Successor Agency. With the Successor Agency Oversight Board composition, there is no guarantee that the interest of West Covina’s needs would be honored by the Successor Agency. Its primary purpose is to quickly dissolve a redevelopment agency and to dispose of its assets. All actions by the Successor Agency would have to be approved by the Oversight Board. The proceeds from the sales of the assets and the CDC fund balances would be utilized to pay off its bonded indebtedness. Any remaining asset would be transferred to the County Auditor-Controller for distribution to taxing entities. CONCLUSION: ABX1 26 was poorly drafted law, which did not consider many of the fundamental challenges in implementing said law. As such, ABX1 26 created many outstanding issues on implementation and interpretations of said laws. It is important to note that many schools may not receive the “additional” dollars from the dissolution of redevelopment agency as the CDC has various existing pass through agreements which allocated tax increment funding directly to the schools serving West Covina (see attached article). Staff has prepared this report to brief the City Council on ABX1 26 and has outlined the potential impacts to the City/CDC. It is clear that there are still many unanswered questions and outstanding issues resulting from ABX1 26 that can only be clarified by new clean-up legislation and/or legal challenges from the cities to determining court rulings. Senator Ed Hernandez and Alex Padilla has introduced legislation (SB 659) that the California Redevelopment Association, League of California Cities, lobbyist, and housing advocates are support to temporarily postpone the formal dissolution process to April 15, 2012. The City Manager is taking actions to protect City funds and assets and will also be preparing various reports, which will address City options in response to the State actions including potential legal options against the State and lobbying efforts. Prepared by: Mike Lee Assistant CDC Director Reviewed/Approved by: Christopher J. Chung CDC Director Reviewed & Approved by: General Counsel to the CDC Finance Attachment No. 1 - Contra Costa Times article “School administrator see little gain from state Supreme Court ruling on redevelopment agencies”