Page 1 of 8

,;:."T o,,_ ..;:- . ... t A /-i-

~ ~ ~ w 1111 " 0 ,.,

'I- DEPARTMENT CIF EDMUND G. BROWN JR .• GOVERNOR

~"lt.i~cfl~,P. FI NAN C E------9-l_S_L_ST_R_E_ET_O_SA_c_R-AM_E_N_T_o_C_A_0_9_5_B_1_4_-3_7_D_S_O_w_w_w_.-oo-F-.c-A-.G-ov

October 31, 2013

Mr. William Fulton

Director, Planning and Neighborhood Restoration Department

City of San Diego

1222 First Avenue, MS 501

San Diego, CA 92101-4154

Dear Mr. Fulton:

Subject: Other Funds and Accounts Due Diligence Review

This letter supersedes the California Department of Finance's (Finance) original Other Funds and

Accounts (OFA) Due Diligence Review (DDR) determination letter dated August 29, 2013.

Pursuant to Health and Safety Code (HSC) section 34179.6 (c), the City of San Diego Successor

Agency (Agency) submitted an oversight board approved OFA DDR to Finance on May 29, 2013.

The purpose of the review was to determine the amount of cash and cash equivalents available for

distribution to the affected taxing entities. Since the Agency did not meet the January 15, 2013

submittal deadline pursuant to HSC section 34179.6 (c), Finance was not bound to complete its

review and make a determination by the April 1, 2013 deadline pursuant to HSC section

34179.6 (d). Finance issued an OFA DDR determination letter on August 29, 2013.

Subsequently, the Agency requested a Meet and Confer session on one or more items adjusted by

Finance. The Meet and Confer session was held on September 30, 2013.

Based on a review of additional information and documentation provided to Finance during the

Meet and Confer process, Finance has completed its review of those specific items being

disputed. Specifically, the following adjustments were made:

• The Agency's transfers to the City of San Diego (City) were previously increased from

$121,300,276 to $142,367,046. Based on our review during the Meet and Confer, this

adjustment was appropriate. Exhibit A-1 and B of the DDR identifies multiple transfers

between January 1, 2011 through January 31, 2012. In addition to the transfers

disallowed in the DDR, Finance determined the following transfers do not meet the

definition of an enforceable obligation as further discussed below:

o Exhibit A-1, Item 1 - The Agency transferred $11,322,000 on August 26, 2011 for

the Ballpark Cooperation Agreement (Agreement); however, the transfer is not

allowed. The Agency contends this transfer was for debt service payments to the

City in accordance with the February 22, 2000 Agreement between the former

City of San Diego Redevelopment Agency (RDA) and the City related to an

Page 2 of 8

Mr. William Fulton

October 31, 2013

Page 2

earlier Memorandum of Understanding entered into for the purposes of

constructing a ballpark and a new development in the Ballpark District.

Per HSC section 34179.5 ( c) (2), the dollar value of assets and cash transferred

by the former RDA or successor agency to the city, county, or city and county

that formed the former RDA between January 1, 2011 through June 30, 2012,

must be evidenced by documentation of the enforceable obligation that required

the transfer. HSC section 34179.5 states enforceable obligation includes any of

the items listed in subdivision ( d) of section 34171, contracts detailing specific

work that were entered into by the former RDA prior to June 28, 2011, with a

third party other than the city, county, or city and county that created the former

RDA. HSC section 34171 ( d) (2) states enforceable obligation does not include

any agreements, contracts, or arrangements between the city that created the

RDA and the former RDA unless they were entered into within the first to years of

the creation of the RDA or at the same time and solely for the purpose of issuing

debt.

The City indicates that the payment was required under Section 400 of the

Agreement as related to the City's Series 2007A Lease Revenue Bonds.

However, the Agreement was not entered into within the first two years of the

RDA's creation, nor was the agreement entered into at the same time and solely

for the purpose of issuing the City's Series 2007 A Lease Revenue Bonds.

Therefore, this item does not meet the definition of an enforceable obligation and

is not allowed. The OFA balance available for distribution will be increased by

$11,322,000.

Finance notes the transferred amount of $11,322,000 in question only reflects

the payments made during the period January 1, 2011 through January 31, 2012,

and not those payments made during the Recognized Obligations Payment

Schedules (ROPS) for July through December 2012 (ROPS II) period; this item

was not specifically denied on the (ROPS II) period.

o Exhibit A-1, Items 2, 3, and 4 - The Agency transferred $3,294,500 to the City

pursuant to an agreement resulting from a Community Development Block Grant

(CDBG) audit finding. The payments are not former RDA obligations to the

United States Department of Housing and Urban Development (HUD), but rather

obligations to the City in response to a HUD audit. Our review indicates that in

2008 HUD audited the City based on a citizen complaint that the City had loaned

funds to the former RDA, dating back to the 1970's, that have accumulated

interest in violation of HUD rules and regulations. The audit found that the City

had 1) $11 million in unsupported program costs, 2) $1.8 million in ineligible grant

costs, and 3) issued loans to the RDA but failed to execute loan

agreements. For the latter finding, the audit recommended that the City "execute

loan agreements between the City and the RDA indicating specific loan terms for

repayment of loans totaling $139,201,997". The City and the former RDA

entered into a loan agreement on June 30, 2010.

Based on our review, the former RDA's repayment of the loans is considered

income related to Units of General Local Government (UGLG) and per page 16-

15 of the CDBG manual is "treated as additional CDBG funds subject to all

requirements [of CDBG grant funds]" and spent on the program. In addition, per

Page 3 of 8

Mr. William Fulton

October 31, 2013

Page 3

HU D's February 21, 2010 letter to the City, HUD confirmed that the Agency's

repayment to the City is considered CDBG program income for the City and is to

be used on CDBG activities. Therefore, we have determined that these funds

are for the amounts loaned by the City to the RDA and are not the same as the

$12.8 million total due to from the City to HUD. Therefore, we determined this is

a City and RDA loan agreement, which is not an enforceable obligation at this

time.

As previously stated, HSC section 34179.5 (c) (2) states the dollar value of

assets and cash transferred by the former redevelopment agency (RDA) or

successor agency to the city, county, or city and county that formed the former

RDA between January 1, 2011 through June 30, 2012, must be evidenced by

documentation of the enforceable obligation that required the transfer.

Therefore, the transfer was not made pursuant to an enforceable obligation and

is not permitted. However, The repayment of these loans may become

enforceable obligations after the Agency receives a Finding of Completion from

Finance. If the oversight board makes a finding that the loans were for legitimate

redevelopment purposes, these loans should be placed on future Recognized

Obligation Payment Schedules (ROPS) for repayment. Refer to HSC section

34191.4 (b) for more guidance.

We also note that the City's obligation to repay the audit findings cannot be made

from the Agency's repayments to the City. Therefore the Agency's payments

should not be relied upon by the City for repayment to HUD. This would directly

conflict with provisions of the CDBG program as indicated above.

Finally, we note that this item was not specifically denied on the ROPS for the

January through June 2012 (ROPS I) and ROPS II periods; therefore, the

transferred amount only reflects those payments made during the period of

January 1, 2011 through January 31, 2012, and not those payments made during

the ROPS I and ROPS II periods.

o Exhibit A-1, Item Nos. 5, 9 and 11 - The Agency transferred payments totaling

$1,007,407 to the City on August 24, 2011; however, the transfers are not

allowed. The Agency provided City Council resolutions, not resolutions of the

former RDA, and a long-term loan agreement between the City and the RDA. As

stated above, per HSC section 34179.5 (c) (2), the dollar value of assets and

cash transferred by the former redevelopment agency (RDA) or successor

agency to the city, county, or city and county that formed the former RDA

between January 1, 2011 through June 30, 2012, must be evidenced by

documentation of the enforceable obligation that required the transfer. The

agreement was not entered into within the first two years of the RD A's creation;

therefore, these items do not meet the definition of an enforceable obligation and

are not allowed. As such, the OFA balance available for distribution will be

increased by $1,007,407.

o Exhibit A-1, Item Nos. 6 and 8 - Section 108 payments were partially adjusted

totaling $211,422. The Agency transferred $186,247 on January 31, 2011 and

$402,000 on July 15, 2011 to the City for the City Heights Section 108 Loan (City

Heights) and the Naval Training Center Section 108 Loan (Naval Training

Center). The amount of $186,247 transferred on January 31, 2011 consisted of