Defaults May Loom on California Redevelopment Agency Debt
As many as 100 municipalities that took over bond obligations when California erased redevelopment agencies may not get the tax revenue they’re counting on tomorrow to make payments, the state Finance Department said.
Such cities and counties may face cash-flow constraints that eventually may threaten defaults, said Matt McCleary, a project manager at Rosenow Spevacek Group Inc. The Santa Ana firm is advising about 35 cities on redevelopment issues.
About 400 redevelopment agencies that helped finance projects to overcome blight were dissolved Feb. 1 by Governor Jerry Brown to redirect more than $1 billion of their funds to help fill a budget gap. Bonds for the projects were to be repaid with increased property-tax revenue from the revitalized areas.
“It’s a sector where investors have always been skeptical,” said Eric Friedland, director of municipal research at Schroders Plc (SDR)’s investment management unit in New York, which oversees about $2 billion in municipal debt. “It’s a sector that’s always carried more risk in the muni world. What this has done is make it an even more risky sector.”
The Finance Department set a May 15 deadline for so-called successor agencies to submit plans for repaying redevelopment bondholders and other creditors. Local assessors will be directed to withhold property taxes normally distributed to local governments if they don’t have approved plans by June 1, the department warned.
Many Plans Set
As of yesterday, 302 successor agencies had their repayment plans approved, said H.D. Palmer, a Finance Department spokesman.
The state is racing to approve pending plans from 69 more agencies submitted in the past few days, Palmer said by e-mail.
“It is very easy to believe that all real obligations (bonds) as determined by the state will indeed be paid off on time and on schedule,” McCleary said by e-mail. “However, because of local (internal) cash-flow issues and the way cities structured their budgets, the reality is many enforceable obligations may not get paid in their entirety this fall.”
California lawmakers and Brown dissolved the redevelopment agencies effective Feb. 1 to help balance the budget. At the time, Brown aides said $30 billion in outstanding redevelopment debt would be repaid, mainly by cities and counties that wound up with the former agencies’ assets.
Finance Department officials are working overtime to process paperwork submitted after the May 15 deadline, Palmer said. Most cities and counties will have enough money in reserve to meet obligations to bondholders, even if property taxes are temporarily withheld, he said.
“The deadlines have been clear since the first week of March,” Palmer said by telephone. He couldn’t identify the redevelopment agencies for which successor plans haven’t been submitted.
While cities have known of the need to get a repayment schedule approved by the Finance Department, some were left shorthanded after the dissolution of the redevelopment agencies caused them to fire employees, said Chris McKenzie, executive director of the League of California Cities.
Many cities and counties will continue to negotiate with the state for “weeks and months,” McKenzie said by e-mail. Some bond payments and credit ratings may be jeopardized in the meantime, unless funds are set aside to make the payments.
While bondholders are protected by state and federal law guaranteeing payments, some are cautious about the unwinding of the redevelopment agencies, said Schroder’s Friedland.
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