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OFFICE OF THE INDEPENDENT BUDGET ANALYST

202 C STREET MS 3A SAN DIEGO, CA 92101

TEL (619) 236-6555 FAX (619)-236-6556

OFFICE OF THE INDEPENDENT BUDGET ANALYST REPORT

Date Issued: February 6, 2014 IBA Report Number: 14-06

City Council Docket Date: February 10, 2013

Item Number: TBD

Reinstatement of the Convention Center

Phase II Loan Agreement and ROPS 6

OVERVIEW

Per AB 26 enacted on June 28, 2011, California Redevelopment Agencies (RDA) were dissolved

on February 1, 2012, and their rights, powers, duties, and obligations were vested in the

successor agencies. The City Council designated the City of San Diego to serve as the former

RDA’s Successor Agency for purposes of winding down its operations; making payments on

enforceable obligations; and liquidating the agency’s unencumbered assets for distribution to the

county, school districts, and other local public agencies. The City also chose to serve as the

Housing Successor Entity and retain the former RDA’s affordable housing assets and assume

related responsibilities. Since that dissolution, successor agencies across the State have faced

challenges and uncertainty, particularly since AB 26 did not provide specific direction for the

administration of the dissolution and wind up activities. An additional dissolution law—AB

1484—was passed as a trailer bill to the FY 2013 state budget on June 27, 2012. AB 1484 took

immediate effect and required successor agencies to learn and implement significant new rules of

conduct and includes new deadlines and severe late penalties.

A large part of winding down activities includes making payments on enforceable obligations of

the former RDA.1

Per AB 26, successor agencies are required to prepare Recognized Obligation

Payment Schedules (ROPS) for enforceable obligations allowed to be made during each

applicable six-month period (January 1- June 30 and July 1-December 31) until all obligations

are fulfilled. AB 26 includes restrictions on what constitutes an enforceable obligation and each

ROPS must be approved by the (1) City Council as the approval body for the City as Successor

Agency, (2) Successor Agency Oversight Board, and (3) State Department of Finance (DOF).

Sources of funds for making payments on ROPS include the Redevelopment Property Tax Trust

Fund (RPTTF), formerly known as tax increment; bond proceeds; and other revenues, such as

1

Enforceable Obligations are generally defined to include several categories, such as bond obligations and written

contracts for specific performance with parties that are not the sponsoring entity, such as the City.

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rental income. RPTTF is distributed by the County Auditor and Controller (CAC) in January and

June for each related ROPS period. From the State’s perspective, a primary goal of dissolution

and unwinding activities is to maximize the amount of property tax revenue—previously

provided to former RDA’s in the form of tax increment—for distribution to local taxing entities.

AB 1484 required successor agencies to retain the services of a licensed accountant to conduct

two Due Diligence Reviews (DDR)—one of the Low and Moderate Income Housing Funds

(housing funds) and the second for non-housing funds to identify unobligated funds available for

remittance to the CAC for distribution to local taxing entities. After both of the DDRs are

concluded and funds have been remitted to the CAC, successor agencies receive a Finding of

Completion which provides particular benefits. For example, it enables the Successor Agency to

expend excess non-housing bond proceeds for eligible projects. Starting with ROPS 5, the DOF

is no longer denying items that involved the expenditure of non-housing bond proceeds and

additional line items have been added to ROPS 6 using this funding source. Receiving the

Finding of Completion also allows successor agency oversight boards to conditionally reinstate

loans between cities and the former RDAs that were previously invalidated by the DOF.

Successor Agency

Payment to CAC

City Received

21% Share

Housing Fund DDR $13.3 million – May 20131

$2.8 million

Non-Housing Fund DDR $167.3 million – November 2013 $34.9 million

1The City Council authorized the remittance be made in two installment payments for the Housing Fund DDR and

the related loan from the City to the Successor Agency through a combination of actions taken on April 8 and May

13, 2013.

As shown in the table above, the Successor Agency remitted funds per the Housing Fund and

Non-Housing Fund DDRs, and received a Finding of Completion from the DOF on December 2,

2013. This report provides information on the proposed reinstatement of the Convention Center

Phase II loan agreement between the City and the former RDA. We are also providing

information on ROPS 6 and the related Successor Agency budget. Both of these items will be

brought to Council on February 10, 2014.

Fiscal/Policy Discussion

Reinstatement of the Convention Center Phase II Loan Agreement

As noted above, one of the benefits of the Finding of Completion is that it allows successor

agency oversight boards to conditionally reinstate loans between cities and the former RDAs that

were previously invalidated as enforceable obligations on future ROPS, subject to the DOF’s

approval. Stipulations for reinstatement of loan agreements include:

 Must be for legitimate redevelopment purposes;

 Maximum limit on the amount of annual repayments;

 No repayments prior to FY 2014;

 Limits interest rate and re-sets commencement date;

 Repayment in accordance with schedule over reasonable term of years;

 Priority to repay housing fund if balance due; and

 20% of repayments deposited to housing asset fund.

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increase total RPTTF revenue.

Staff used residual RPTTF distributions for FY 2014 (ROPS 4 and 5) to calculate the amount

available for the payback of any reinstated loans in FY 2015.

Millions of $

Residual Distribution in Base Year (ROPS 2 and 3) $ 34.6

Residual Distribution in FY 2014 (ROPS 4 and 5) 53.9

Difference 19.3

Maximum Repayment Amount of 50% 9.7

Stipulation - 20% to Housing Fund 1.9

Amount Available for Loan Repayment in FY 2015 $ 7.8

About $9.7 million is the amount available for FY 2015 per the formula. Based on the

stipulations for reinstatement, 20% or about $1.9 million will be deposited into the Housing Fund

and 80% or about $7.8 million will be deposited as residual RPTTF into the City’s General Fund.

The proposed item is to reinstate the loan agreement between the City and former RDA within

the stipulations, including recalculating the accumulated interest on the remaining principal

amount from the date of the loan at the present Local Agency Investment Fund (LAIF) interest

rate (in this case 0.26%). As noted in the staff report, the terms required by the dissolution

legislation are less favorable than the original agreement; however, these are funds the City

would not otherwise have received.

The DOF has invalidated five debt repayment agreements between the City and former RDA that

could potentially be reinstated, including the:

 Reimbursement agreement for Convention Center Phase II bond debt ($226.6 million);

 Reimbursement agreement for Petco Park bond debt ($237.7 million);

 Long-term debt agreement for startup and other activities ($193.8 million);

 Repayment agreement for Community Development Block Grant (CDBG) debt related

to the U.S. Department of Housing and Urban Development Office of the Inspector

General’s audit ($78.8 million); and

 Naval Training Center (NTC) Section 108 loan agreement ($7 million).

Successor Agency staff assessed the potential reinstatement of these agreements based on

possible impacts to the General Fund and to pending litigation and are recommending that the

Convention Center Phase II loan agreement be reinstated and included as an enforceable

obligation on ROPS 6.2

In this case, the $7.8 million would be applied toward the debt service

for the Convention Center Phase II bonds in FY 2015, subject to the DOF’s approval.

3

This

would free up $7.8 million in the General Fund assumed in the Five-Year Financial Outlook (FY

2

The assessment is discussed in more detail in the staff report and City Attorney Office’s confidential

memorandum.

3 The City’s projected debt service payment for the Convention Center for FY 2015 is about $12.6 million. Per the

original loan repayment agreement, the former RDA would have paid $3.5 million toward the debt service for the

Convention Center Phase II in FY 2015. This payment was scheduled to increase each year by $500,000 until it

reaches $9 million in FY 2025/26 and then remain at $9 million until the full amount would have been paid in FY

2042/43.

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2014-2018) for this purpose.

In subsequent fiscal years, the amount will be calculated in the same manner and also factor in

whether other loans should be reinstated. Additionally, it is not certain how much, if any,

residual funds will be available for reinstatement. Therefore, while these funds are unexpected

and useful for FY 2015, the City should not count on this amount coming into the General Fund

annually.

ROPS 6 and the Successor Agency’s Administrative Budget

Total outstanding debt on ROPS 6 for the period July through December 2014 is about $1.7

billion, as shown in the table below. It is difficult to compare total outstanding debt or

obligations from one ROPS period to the next due to accounting challenges with preparation of

ROPS based on the way the DOF has set up the form. Since two ROPS periods make up a fiscal

year, their totals will vary depending on what payments are due during that timeframe. For

example, larger debt service payments are generally paid in the second half of the calendar year.

It is anticipated that ROPS expenditures will decrease over time as enforceable obligations are

fully depleted. Note that the large decrease in total outstanding debt from $6.4 billion on ROPS 3

to $1.6 billion on ROPS 4 is due to DOF’s denial of several agreements between the City and

former RDA, such as the Cooperation Agreement.

Total obligations for the six-month period for ROPS 6 are $133.8 million. Subject to approval of

the Oversight Board and DOF, about $73.8 million or 55% of enforceable obligations are

anticipated to be paid from RPTTF, and $57.9 million or 43% will be paid from bond proceeds,

reserve balances, and other funding.

Millions of $

ROPS 1

Jan-June

2012

ROPS 2

July-Dec

2012

ROPS 3

Jan-June

2013

ROPS 4

July-Dec

2013

ROPS 5

Jan-June

2014

Proposed

ROPS 6

July-Dec

2014

Total Outstanding Debt or Obligation 6,471.8 6,265.7 6,420.7 1,616.1 1,477.5 1,693.2

Total Obligations for Six-Month

Period

207.0 95.0 188.0 143.7 88.4 133.8

Enforceable Obligations Paid from

RPTTF

3.3 10.6 76.6 51.2 30.4 73.8

Administrative Cost Allowance (3% of

RPTTF)

- 0.3 2.3 1.5 1.8 2.21

Enforceable Obligations Paid from

Other Revenue Sourcesa

203.7 84.3 109.1 92.5 58.8 57.9

a

Other revenue sources include housing funds, bond proceeds, and reserves as well as rents, developer proceeds,

grants or any other general revenues.

Successor Agency Budget for ROPS 6

Successor Agency staff facilitate dissolution and wind down activities and include both Civic

San Diego and City staff. Civic San Diego is responsible for assisting with Successor Agency

and Housing Successor Entity functions, including administering existing contracts, processing

payments, preparing ROPS for each 6-month period, coordinating with the DOF, providing

project management, and various other duties as needed for the wind down. Staff from several

City departments provide legal, financial, accounting, and administrative support services for the

Successor Agency to facilitate dissolution and wind down activities, such as the Office of the