Title
Staff Report for Resolution Appropriating $2,437,273 from the General Fund Economic Uncertainty Reserve Fund for the Purpose of Making a Required Payment to the Alameda County Auditor-Controller Related to the Dissolution of the San Leandro Redevelopment Agency
Staffreport
SUMMARY AND RECOMMENDATIONS
Staff recommends that the City Council approve a resolution appropriating $2,437,273 from the General Fund Economic Uncertainty Reserve Fund for the Purpose of Making a Required Payment to the Alameda County Auditor-Controller. This payment is required pursuant to a determination made by the California Department of Finance as part of the Due Diligence Review process. The payment demand was subsequently upheld by the Superior Court of the State of California.
BACKGROUND
In 2002, the City of San Leandro loaned $2,887,617.44 to the Redevelopment Agency of the City of San Leandro for the purposes of carrying out redevelopment activities in the Plaza Project Area (“Plaza Project Loan”). The loan was memorialized in a December 5, 2002 Promissory Note with an interest rate of six percent and no penalty for pre-payment. The Plaza Project Loan was subsequently confirmed by Redevelopment Agency Resolution No. 2004-011 RDA.
On March 7, 2011, in response to a proposal by the State Legislature to eliminate all redevelopment agencies state-wide, the Redevelopment Agency passed Resolution No. 2011-006 RDA, which authorized full repayment of the Plaza Project Loan. The balance due at the time was $2,137,273.49. Earlier, on January 21, 2011 the Redevelopment Agency also made a regularly scheduled debt service payment on this loan of $300,000, which included both principal and interest.
In June of 2011, the State Legislature adopted Assembly Bill AB x1 26 (“AB 26”), which caused the dissolution of all redevelopment agencies and outlined the process and procedures for winding down their activities and finances. AB 26 included a provision that retroactively invalidated payments made on City-Agency loan agreements after January 1, 2011. After a legal challenge, the California Supreme Court upheld AB 26 and it went into effect on February 1, 2012.
On January 11, 2013 the City, in its capacity as Successor Agency to the Redevelopment Agency, submitted a Due Diligence Review (“DDR”) for the non-housing funds of the former Redevelopment Agency. The intent of the DDR was to determine the fund balance of the former Redevelopment Agency that was available for redistribution to the local taxing entities. The DDR, which was prepared by a licensed accounting firm, determined that the Agency had an unencumbered fund balance of $438,604. Consistent with the requirements of AB 26, the Successor Agency remitted that amount to the Alameda County Auditor-Controller on May 7, 2013. In its review of the DDR, the California Department of Finance (“DOF”) demanded that the Successor Agency also remit an additional payment of $2,610,750. That amount constituted a demand to reverse the full repayment of the Plaza Project Loan, the regular debt service payment on the Plaza Loan made in January 2011, and an additional debt service payment on a separate Joint Project Loan made in January 2011. This demand was based on the “claw back” provision of AB 26 that retroactively invalidated these payments.
On December 12, 2013, the Successor Agency initiated litigation asserting that the “claw back” provision violated the State Constitution. In the lawsuit, the Successor Agency also challenged the DOF’s denial of approximately $11.1 million in enforceable obligations, comprised of the separate Joint Project Loan ($2.0 million) and $9.1 million in funding for capital projects that had been re-authorized by the Successor Agency Oversight Board.
On September 23, 2014, the Superior Court of California, County of Sacramento issued a decision siding with the Successor Agency on the issue of the $11.1 million in enforceable obligations, but predominantly siding with the DOF on the issue of the “claw back.” The court determined that the Successor Agency was obligated to remit the two payments made on the Plaza Project Loan in 2011; the $300,000 debt service payment and the subsequent full repayment of $2,137,273. In total, this demand is $2,437,273.
Both the DOF and the Successor Agency filed appeals on the Superior Court’s decision. On May 14, 2015, the Successor Agency received a letter from the DOF indicating that it would no longer oppose the $11.1 million in enforceable obligations and that it had instructed the Attorney General to cease litigation, including the appeal. In response, the Successor Agency agreed to drop its appeal of the “claw back” demand.
On June 23, 2015 the Successor Agency received a revised DDR Determination letter from the DOF that included a revised payment demand for $2,437,273.
Analysis
In general, the Successor Agency received a favorable outcome from this litigation. A total of $13.5 million was disputed, and the Successor Agency prevailed on $11.1 of that amount. The re-entered Joint Project Loan was listed on the recently submitted Recognized Obligation Payment Schedule for January-June 2016 and almost $2 million in funding will be received in January and remitted to the City General Fund. The City will also start receiving funding for the $9.1 million in capital projects in January.
However, the Successor Agency was not successful in fighting the “claw back” demand. This is consistent with the outcome for several other cities that were in similar situations. Given that the Successor Agency exhausted its options for disputing this determination, and that it succeeded in most of its other litigation with the State, staff recommends appropriating funding to make the $2,437,273 payment at this time.
Upon remittance of this payment, the Successor Agency will be eligible to receive a Finding of Completion from the DOF. A Finding of Completion is a required prerequisite for seeking approval of a Long Range Property Management Plan. The Property Management Plan will in turn enable the Successor Agency to make its real estate assets available for sale and development. The status of these properties has been in limbo for the past four years in spite of strong interest from the development community. Additionally, the Finding of Completion will enable the Successor Agency to seek approval to spend so-called “stranded bond proceeds.” The Successor Agency presently has over $2 million in proceeds from a 2008 bond issuance that could be spent for qualified capital projects in the Joint Project Area.
Once payment is made on the $2,437,273 demand, the funds will be redistributed by the County Auditor-Controller to the local taxing entities. As a taxing entity itself, the City will receive a portion of this amount, proportionate to its share of local property tax revenues. Staff estimates that the City will receive approximately 12 percent of the payment, or $290,000.
Previous Actions
• On June 21, 2004 the Redevelopment Agency passed Resolution No. 2004-011 confirming the loan from the City General Fund to the Plaza Project Area
• On March 7, 2011 the Redevelopment Agency passed Resolution No. 2011-006 appropriating funding to pay the full remaining balance on the Plaza Project Loan of $2,137,273.49
Fiscal Impacts
Remittance of the full DDR payment demand will cost $2,437,273, which requires increasing the FY 2015-16 Budget by the same amount and will be funded by a new appropriation of funds from the General Fund Economic Uncertainty Reserve Fund. The City will subsequently receive $290,000 in revenue from the redistribution of these funds.
Budget Authority
$2,437,273 from the General Fund Economic Uncertainty Reserve Fund is available.
ATTACHMENTS
Attachments to Staff Report
• May 14, 2015 Letter from Department of Finance Regarding Reentered Agreements
• June 23, 2015 Revised Due Diligence Review Letter from the Department of Finance
PREPARED BY: Jeff Kay, Business Development Manager, Community Development Department