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CDC - Item 4A - Discussion of State Legislation Regarding Redevelopment AgenciesTO: THE HONORABLE CHAIRMAN AND COMMF MEMBERS FROM: JEFF ALLRED, EXECUTIVE DIRECTOR DATE: JULY 12, 2011 SUBJECT: DISCUSSION OF STATE LEGISLATION REGARDING REDEVELOPMENT AGENCIES SUMMARY The Commission /City Council will discuss the adverse implications of the budget trailer bills (ABx1 26 and ABx1 27) that have been enacted by the State legislature and signed into law by the Governor. ABx1 26 dissolves redevelopment agencies by October 1, 2011 unless the city hosting a redevelopment agency agrees to make payments to continue operations. The fundamental decision that each city and redevelopment agency is being forced to make within a very short time frame is whether to: A) dissolve the redevelopment agency and surrender its revenues and assets; or, B) make payments to the State Department of Finance in order to continue the operations of the redevelopment agency. The estimate for Rosemead's initial payment is in excess of $2 million. In addition, Rosemead would be required to make annual payments to the State based on the amount of tax increment revenues generated. Rosemead's annual payments are initially estimated be approximately $500,000; however, as Project Area 1 expires in 2013, those annual payments will be reduced proportionately. Recommendation: No action is required at this time. BACKGROUND /ANALYSIS Over the past several years, public facilities and the quality of life have been improved in Rosemead's redevelopment project areas. Examples of these improvements have included the following: Completed Projects • Construction of the Garvey Community Center and Rosemead Community Recreation Center; • Construction of the Public Safety Center and adjacent Zapopan Park on Garvey Avenue; APPROVED FOR CITY COUNCIL AGENDA: City Council Meeting July 12, 2011 Page 2 of 6 • Construction and operation of the Garvey and Angelus Senior Citizen Housing Centers with ongoing rent subsidies; • Construction of landscaped street medians, sidewalks, traffic signals and lighting improvements along the Garvey Avenue corridor as well as Rosemead Blvd.; • Construction of infrastructure along Walnut Grove Avenue to accommodate the corporate headquarters for Southern California Edison and Panda as well as the Wal -Mart shopping center; • Construction of Fire Station No. 4 on San Gabriel Blvd. • Construction of the Rosemead Aquatics Center (in progress); • Construction of the Rosemead Park walking trail; • Construction of the Rosemead High School track; • Acquisition of the Glendon Hotel for renovation and expansion by a private company (sale of the property is currently in escrow); • Owner - Occupied Housing Rehabilitation program to improve the housing stock of the community; • Purchase of residential properties for low /moderate housing in conjunction with the HOME program to meet State Regional Housing Needs mandates; Current Projects in Planning Phases Redevelopment projects currently underway or in the planning stages under the Capital Improvement Program (CIP) include: • $4 million from bond proceeds for the planned Rosemead Community Recreation Center Expansion, Parking Lot Improvements and Downtown Plaza project (currently under design); • $780,000 from bond proceeds for sewer projects primarily to increase capacity on Garvey Avenue • $1 million from bond proceeds for Zapopan Park improvements City Council Meeting July 12, 2011 Page 3 of 6 • $180,000 from bond proceeds for Rosemead Park north playground equipment and fencing • $250,000 from bond proceeds for Valley Blvd. Downtown streetscape improvements $6,210,000 TOTAL Ongoing Operational Costs Funded by Redevelopment The Governor's proposal to abolish redevelopment agencies as of July 1, 2011 would have devastating impacts upon the City of Rosemead's budget and its ability to continue various service delivery programs. The elimination of redevelopment agencies would create a shortfall in funding to the City of approximately $2 million per year, making the continuation of various services virtually impossible. Examples of affected services and budget impacts include the following: • Salaries and benefits for redevelopment activities $930,600 Rosemead Chamber of Commerce $48,000 • Housing Rehabilitation and other programs $261,000 • Planning projects and other redevelopment programs $139,300 • Senior Housing Centers and Subsidies $601,600 Total Annual Expenses $1,980,500 Impacts of State Legislation The Governor has signed ABx1 26 and ABx1 27 into law. ABx1 26 (the "Dissolution Bill) dissolves or eliminates redevelopment agencies. ABx1 27(the "Continuation Bill ") allows cities to continue redevelopment agencies to continue or stay in business if they "pay to play" by making payments for the benefit of the State. The fundamental decision that each city is being forced to make within a very short time frame is whether to: A) dissolve the redevelopment agency and surrender its revenues and assets to a "successor agency" which can be the City if the City so chooses, for ultimate conversion into cash, which cash will be distributed to schools, the local county, and other government entities; or, B) "pay to play" by making payments to be determined by the State Department of Finance in order to continue the operations of the redevelopment agency. The estimate for Rosemead's initial "play to pay" payment is in excess of $2 million. In addition, Rosemead would be required to make annual payments to the State based on the amount of tax increment revenues generated. Rosemead's annual City Council Meeting July 12, 2011 Page 4 of 6 payments are initially estimated be approximately $500,000; however, as Project Area 1 expires, those annual payments will be reduced proportionately. In the meantime, the legislation prohibits redevelopment agencies from entering into new contracts or amending contracts as well as several other enumerated actions. However, existing contractual obligations will remain in full force and effect. (The City Attorney and staff would argue that the approximately $7 million in redevelopment bond proceeds on deposit with the Rosemead Community Development Commission are contractually obligated through third -party agreements with parties involved in the bond transactions and are, therefore, not subject to forfeiture or surrender to the State.) This position is likely inconsistent with the legislation. It is one of the many issues that will have to be litigated if the legislation as a whole is not struck down. Due to the lack of certainty on the status of the CDC's bond proceeds the City Attorney cautions against any use of those proceeds for at least of the summer until the Court gives some direction on the matter. If the City or CDC expends those bond proceeds, the City could be challenged by the State of Oversight Board who may take action to reclaim those funds from the City's General Fund or perhaps from other State allocated funds. It is also not clear how the State may attempt to recoup expenditures that it finds are contrary to the legislation. Moreover, if the redevelopment agency is dissolved, the City would lose the annual revenues to pay for the ongoing operational costs listed above. This would create a significant deficit in the City's annual General Fund budget and could result in the loss of staff positions, as well as the loss of the ability to perform the housing - related work that is vital to the community's affordable housing stock. The League of California Cities and the California Redevelopment Association will challenge the legality of these legislative mandates by filing an action before the California Supreme Court. One of the purposes of the law suit is to obtain a "stay" on the implementation of the legislation. At this time we have been informed that the League and CRA plan to file its action before July 15, 2011 directly with the California Supreme Court. Timeline Absent a "stay" of implementation granted by the California Supreme Court, the following will occur within a short time frame. August 1, 2011 The State Department of Finance will publish the 2011 -2012 remittance amounts that must be paid by redevelopment agencies to continue operations. August 15, 2011 Deadline to appeal any errors in the State's calculations of tax increment revenue and financial obligations City Council Meeting July 12, 2011 Paae 5 of 6 October 1, 2011 Those redevelopment agencies that do not "volunteer" to pay remittances to the State will be dissolved and their assets transferred to "successor agencies ". Prior to this date, if a redevelopment agency intends to "volunteer" to make the payments in order to remain in operations, it must enact a non - binding resolution of intent and notify the county auditor - recorder, the Department of Finance and the State Controller. This is also the date that a Statement of Indebtedness is due to the State. This will be the final statement of indebtedness for dissolving redevelopment agencies. For continuing redevelopment agencies it is important to list all forms of indebtedness. November 1, 2011 Prior to this date, an ordinance must be enacted to enable a redevelopment agency to continue to exist including a commitment to make payments for the benefit of the State beginning on January 1, 2012. City's Ability to Pay the State to Continue Redevelopment Under the legislation, the State plans to accumulate $1.7 billion in the 2011 -12 Fiscal Year from cities to assist in balancing the State's large deficit. In subsequent years, this amount will be reduced to $400 million which will be allocated to school and other taxing districts in the Counties. For Rosemead, our 2011 -12 payment has been estimated at little more than $2 million and approximately $500,000 for the 2012 -13 fiscal year. In years subsequent to 2012 -13, the amount will be recalculated using current tax increment data. Since the Agency's Project Area 1 will be expiring in 2013, it is estimated that the amount due in subsequent years would be reduced substantially. In terms of ability to make the payment, the Redevelopment Agency is estimated to have $2,253,345 in cash resources as of June 30, 2011 once all existing liabilities are paid. In addition, the CDC is projected to receive $1 million at the close of escrow of the Glendon Hotel within the next couple of months. Additionally, the Low -Mod Housing fund will have approximately $2,013,425 in cash at June 30, 2011; however, up to $1,404,000 (the amount equal to the transfer from tax increment to low -mod housing for 2011 -12) would be legally eligible to be used for the required 2011 -12 payment. Under the legislation, the City cannot utilized any of the existing bond proceeds to make the required payment. City Council Meeting July 12, 2011 Page 6 of 6 It's anticipated that if these payments are made, the Redevelopment Agency would be able continue most operational functions and programs in the short -term; however, some future Capital Improvement Projects would be jeopardized and ongoing funding would be reduced for some staffing or programs. The first year payment can be made from cash reserves and the Glendon Hotel proceeds stated above, but the ongoing payments in future years will need to be taken from the ongoing tax increment revenues. This will likely result in a deficit in the Agency of approximately $500,000 in the 2012 -13 fiscal year. Compounding this shortfall, Project Area 1 will expire in 2013 and much of the tax increment funding currently used for ongoing programs and projects will be eliminated. This equates to additional loss of approximately $750,000 in the 2013 -14 fiscal year. Therefore, the Council would likely not have to make any immediate cuts to programs or services for the current fiscal year, but would need to make some difficult choices for the upcoming fiscal years since the funding will be lost permanently. In the event that the City was either not able to make the ransom payments or chooses not to make the payments, the funding for approximately $2 million in ongoing redevelopment operations and programs would be eliminated. This includes funding for the two low- income senior housing complexes, city staffing, the Chamber of Commerce, fagade improvement programs and other various programs related to economic development. While it is believed that the State would take ownership of both the Angelus and Garvey Housing complexes, it is unclear if they would continue to honor the land lease obligations to the City or how the rental subsidies would be funded. All of the details related to these issues are still unknown, but the impact will be significant. Staff is currently evaluating all the programs currently funded by redevelopment and will be ready to provide the Council with several options for cuts should the determination be made to dissolve the Agency.