Rally Aided by Firefighters in California City Hall: Muni Credit

In Farmersville, California, a city of 11,000 in the agricultural San Joaquin Valley, firefighters sleep in the city council chambers, share a bathroom with the public and prepare meals in a city hall break room.

Municipal officials had different plans for their emergency personnel, cobbling together funds from the local redevelopment agency to build a $5 million fire station, said Rene Miller, the city manager. The city had to kill the project -- and one to improve the main road into town -- after California Governor Jerry Brown and lawmakers dissolved the agencies, Miller said.

The step freed up $1 billion to cut state deficits, among measures the Democrat championed to fix California’s finances. It also left cities and counties with $29.8 billion in debt incurred by their former agencies. The bonds are gaining as investors buy them for their relatively higher yields.

“For our little city, we were always very conservative and we were good stewards of the money we had,” Miller said in a telephone interview. “Unfortunately we all got punished.”

Ripple Effect

Across California, the loss of redevelopment -- in which tax revenue generated by new projects goes to combat blight -- has torpedoed a 98-unit affordable housing site outside San Diego, stalled efforts to relocate farmworkers from a mobile- home park in the Riverside County desert and frustrated investors in properties in Hemet, southeast of Los Angeles.

The agencies’ end also increased fiscal strains on municipalities such as San Bernardino, which cited the loss of about $5 million a year in transfers to the general fund as contributing to its Aug. 1 bankruptcy filing.

This month, state Senator Lois Wolk, a Davis Democrat, introduced a bill that would create a replacement for redevelopment agencies by making it easier to start so-called infrastructure financing districts.

Efforts to resurrect the agencies have failed so far. In September, Brown vetoed bills by the Democratic leaders of the state Assembly and Senate that sought to revive elements of the program.

The 74-year-old governor wrote that replacing redevelopment would endanger the savings the state had counted on.

School Cuts

In an Oct. 31 address in Los Angeles, Brown acknowledged that many city officials opposed ending redevelopment. The alternative, he said, was even deeper cuts to education.

“Because the money went increasingly to redevelopment -- as much as 12 percent of local property taxes -- the state had to backfill the difference to schools,” he told more than 100 people at a downtown hotel.

From the mid-1970s to 2011, the year lawmakers voted to end redevelopment, the share of local property taxes devoted to that purpose increased to 12 percent on average from about 2 percent, according to a February 2011 report by the nonpartisan Legislative Analyst’s Office.

By ending redevelopment, California’s leaders created a “wasteland scenario” that has crippled local economic development and endangered the budgets of cities such as San Bernardino, said Chris McKenzie, executive director of the League of California Cities.

“If people care about the construction of public infrastructure -- simple things like parks and libraries and schools -- which I know they do, these things have been hurt considerably,” McKenzie said in a telephone interview. “It’s also devalued redevelopment bonds. These downgrades eventually can color other bonds issued by local governments.”

California Year

Holders of redevelopment securities are benefiting from a rally in California debt as municipal yields remain near 47-year lows.

Bonds of California issuers have earned 8.4 percent this year, beating the 7 percent return for the $3.7 trillion national market for local debt, Barclays Plc data show.

A federally taxable San Jose redevelopment bond maturing in 2035 traded yesterday at an average yield of 5.79 percent, data compiled by Bloomberg show. That was about 3.1 percentage points more than similar-maturity Treasuries, down from a difference of about 3.8 percentage points at the start of the year.

Bankruptcy Example

In San Bernardino, the loss of redevelopment monies -- which had subsidized the general fund -- helped push the city 60 miles (100 kilometers) east of Los Angeles into bankruptcy. With the loss of the subsidy, “the cash-flow situation quickly became critical,” City Attorney James Penman said in an interview.

San Bernardino’s collapse isn’t likely to be replicated widely, said Eric Hoffman, a senior vice president in the public finance group at Moody’s Investors Service in San Francisco. Few cities relied on the proceeds to prop up general funds to the extent San Bernardino did, he said. That doesn’t mean that some of their debt isn’t vulnerable, he said.

“It’s certainly an issue for the tax-allocation bonds, which we have under review for possible withdrawal due to a lack of information,” Hoffman said in an interview.

Farmersville, on a highway connecting the San Joaquin Valley to Kings Canyon National Park in the Sierra Nevada, had planned to use redevelopment funds to improve the main road into town to attract business, Miller said. Like the fire station, the project was shelved, she said.

“We are barely keeping our police and fire staff on duty,” she said. “There is nothing left for development.”

Losing Money

About 250 miles to the southeast, 11 buildings on Mobley Lane in Hemet purchased by the city’s former redevelopment agency are boarded up, their fate in limbo. The private owners of five adjacent sites complained that their property values are suffering as thieves strip metal from air-conditioning units of the vacant sites.

“We’re losing $1,000 every month because of the vacancies,” said Carina Alvarez, who said she bought a four- plex for $170,000 in 2010 and spent more than $60,000 upgrading it to rent out. “No one wants to live in a ghost town.”

Hemet had planned to use redevelopment money earmarked for housing for low- and moderate-income residents to unify the homes under common management or replace them, John Jansons, the community investment director, said in an interview. Instead, the city had to return the money to the state, he said.

“We were two years into this when the governor made his announcement,” he said. “That really cut the knees out from under us.”

In trading yesterday, yields rose on most maturities of municipal debt. Yields on benchmark tax-exempt debt due in 30 years reached 2.61 percent, the highest in almost a month, Bloomberg Valuation data show.

To contact the reporter on this story: James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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