SR-08-14-2012-8CIs
City of
Santa Monied
City Council Report
City Council Meeting: August 14, 2012
Agenda Item:
To: Mayor and City Council
From: Gigi Decavalles- Hughes, Director of Finance
Andy Agle, Director of Housing and Economic Development
Subject: Contingency Planning Related to the Dissolution of Redevelopment
Recommended Action
Staff recommends that the City Council:
1. Authorize staff to proceed with certain priority projects while suspending other
priority projects, in light of recent legislative actions related to the dissolution of
redevelopment; and
2. Direct staff to return to Council at a future date with additional information, as well
as necessary appropriations or adjustments related to project budgets.
Executive Summary
This report provides information about recent amendments to the State law that
dissolved redevelopment agencies, the impacts of those amendments upon the City's
ability to fund priority capital improvement projects, and recommendations regarding
continued work on each project.
Background
On December 29, 2011, the California Supreme Court delivered a decision requiring all
California redevelopment agencies, including the Redevelopment Agency of the City of
Santa Monica (RDA), to be dissolved as of February 1, 2012. Following the Supreme
Court decision, on January10,20122012, the Council elected to become the Successor
Agency to the Redevelopment Agency in order to satisfy obligations of the former
agency, as well as to _ retain housing assets and functions of the former agency.
Subsequently, Council approved draft Recognized Obligation Payment Schedules
(ROPS) and administrative budgets for the January — June 2012 (First ROPS),
July - December 2012 (Second ROPS), and January — July 2013 (Third ROPS) periods,
as required by law.
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On June 12,, 2012, to ensure consistency with the adoption of the City's FY 2011 -13
Biennial Budget, the Successor Agency adopted its second year of the FY 2011 -13
Biennial Budget and the first year of the Fiscal Year 2012 -14 Biennial Capital
Improvement Program Budget, which included the capital improvement projects
prioritized by the Redevelopment Agency (RDA CIPs) in its FY 2009 -10 through
FY 2013 -14 Five -Year Implementation Plan (Implementation Plan), adopted on
November 17, 2009. The Agency's Implementation Plan was prepared in accordance
with redevelopment law in effect at the time and reflected extensive input supplied at a
series of public discussions with Council, the community and various stakeholders.
Specifically, the plan was formulated to achieve the community's established goals of
affordable housing, disaster prevention and mitigation, and community, commercial and
institutional revitalization.
As originally contemplated and detailed in the Agency's Implementation Plan of 2009,
the Agency would fund the RDA CIPs (priority projects) with available tax increment
revenue and through a series of debt financing structures. The Agency established
funding priorities totaling $283 million based on a variety of assumptions regarding
growth in tax increment, borrowing costs, timing of borrowing, State take backs of local
funds, leveraging opportunities and State law. In 2011, approximately two years after
adoption of the Implementation Plan, several priority projects achieved critical -path
milestones in design, environmental analysis, and construction contracting to require
moving forward with debt issuance to fund the projects. On March 8, 2011, the Agency
and Council approved an agreement with Wells Fargo Bank for a $60 million bank loan
and on May 24, 2011, Council authorized the issuance of tax allocation bonds of
$36.5 million to support completion of priority projects.
Pursuant to the requirements of the City- Agency Cooperation Agreement adopted on
August 10, 2010, as well as State law at the time, the former Redevelopment Agency
made payments to the City for implementation of priority projects. Payments to the City
were made from bond and loan proceeds, as well as tax increment proceeds received
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by the Agency. With the funds received from the Agency, the City entered into
contracts with designers and contractors to implement priority projects.
Discussion
On June 27, 2012, as part of the FY 2012 -13 State budget package, the State
Legislature passed and the Governor signed AB 1484. While the legislation was
intended to clarify existing legislation related to the dissolution of redevelopment, it
included many provisions that made the redevelopment dissolution process even more
unfavorable for local government.
AB 1484
AB 1484 contains several provisions that impose significant new burdens upon cities.
Key provisions that could have significant fiscal impacts on the Santa Monica include:
Previously Received Property Taxes: AB 1484 requires an accounting of property taxes
paid to redevelopment agencies from November 2011 through January 2012 relative to
enforceable obligations approved by the DOF on the First ROPS. If property taxes paid
exceed enforceable obligations recognized by the DOF, each successor agency would
be required to remit the difference.
Due Diligence Reviews: The bill requires each successor agency to employ a licensed
accountant, approved by the county auditor - controller, to conduct "due diligence"
reviews of successor agency housing and non - housing obligations for the purpose of
determining available housing and non - housing funds that may be transferred for the
benefit of the State and other taxing entities (e.g., counties, special districts, etc.). To
facilitate this review, each successor agency is required to submit to the California
Department of Finance (DOF) an inventory of all housing assets by August 1, 2012, an
accounting of all available cash and cash - equivalent housing assets by
October 1, 2012, and an accounting of all non - housing cash and cash - equivalent assets
by December 15, 2012.
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Forfeiture of Cash Assets: It is anticipated that the DOF will utilize the due diligence
findings as the mechanism to seize any cash assets that it concludes are not legally or
contractually dedicated or restricted for the funding of an enforceable obligation.
To compel compliance with its findings, AB 1484 authorizes the DOF to withhold a city's
share of sales taxes and property taxes in the amounts asserted by the DOF to be owed
by a successor agency, as well as assess a ten percent penalty, plus interest, for failure
to make the payments. Several cities, as well as the League of California Cities, have
signaled their intent to file legal challenges regarding the constitutionality of the sales
and property tax withholding provision of the legislation.
Bonds and Loans of 2011: AB 1484 provides a process for housing bonds and loans
issued prior to 2011 to be used for their intended purposes. However, the legislation is
unclear in its treatment of non - housing bonds and loans issued after January 1, 2011,
but before the original redevelopment dissolution legislation was adopted, and fails to
clarify the inconsistent provisions of the previous redevelopment dissolution legislation
regarding bond proceeds.
Potential Impacts of AB 1484
While certain provisions of AB 1484 could be struck down as unconstitutional, and the
City may be able to make legal and practical arguments that successfully protect priority
projects, the adopted legislation, as well as the DOF's approach to implementing the
legislation, could have serious implications for the City. Key risks and potential impacts
to the City include:
Previously Received Property Taxes: In early July, the City received notice from the Los
Angeles County Auditor - Controller that the Successor Agency would be required to
make a $12.7 million payment on July 12, 2012, to reflect property taxes received in
excess of DOF- approved ROPS obligations. Of the $12.7 million sum paid by the
Successor Agency, the City received $2.2 million back as its share of underlying
property taxes. On July 24, 2012, an information item was sent to the Council indicating
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that the payment had been made, subject to reservation of rights, because of the dire
statutory consequences of failing to make the payment. Therefore, the $12.7 million is
no longer available to fund the affordable housing and capital projects to which the
funds had previously been committed.
Due Diligence Reviews: The DOF has maintained that any contracts involving
redevelopment tax increment that were executed after June 27, 2011 do not qualify as
enforceable obligations. The DOF has maintained that its deadline applies to
redevelopment agency contracts and city contracts. In Santa Monica's case, the City
entered into several design and construction contracts using funds, including the 2011
tax allocation bond proceeds and the Wells Fargo Loan proceeds, that were properly
paid to the City pursuant to a validated cooperation agreement from 2010. The due
diligence review will identify the execution dates of the various contracts, setting the
stage for the DOF to challenge the validity of the City's design and construction
contracts, even though the City entered into the contracts pursuant to prevailing law at
the time.
Forfeiture of Cash Assets: With a potential determination that contracts executed after
June 27, 2011 are no longer valid, there is a significant risk that the DOF could attempt
to seize any funds that have not have been paid pursuant to the contracts. Such a
move could undermine the City's ability to use existing funds for contracts that are
underway. While the City believes that these contracts were properly executed
pursuant to the law, the DOF may not agree and may use the considerable power
allocated to it under AB 1484 to seize such funds. In addition to undermining the City's
ability to use existing funds for contracts that are underway, the DOF could also attempt
to demand repayment of any funds that have already been spent on projects or could
be spent during the due diligence review period. The DOF could use the threat of
withholding the City's sales or property taxes to compel the City to make such
payments.
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Bonds and Loans of 2011: The former redevelopment agency secured over $96 million
of bonds and bank loans during 2011 in order to enable the City to move forward on
priority projects. The bonds and loans include covenants and other provisions that
restrict the use of the proceeds to certain projects and purposes. Nonetheless, the fact
the AB 1484 provides protection only for pre -2011 housing debt creates additional
uncertainty with respect to the DOF's intentions regarding post -2011 non - housing debt,
particularly since AB 1484 retained language that bond proceeds issued before
June 28, 2011 could be spent for the purposes intended. If the DOF is ultimately
successful in precluding the use of these bond proceeds, it would eliminate the primary
funding source for several key priority projects.
Recommended Contingency Plan
Key provisions of AB 1484, as well as the DOF's aggressive implementation, create
significant uncertainty with respect to Santa Monica's long- planned priority projects.
Provisions that would allow the DOF to raid the City's General Fund create even greater
risks. In order to mitigate risks to the City, while attempting to ensure that certain
priority projects that are underway are completed according to community expectations,
a contingency plan comprised of adjustments to certain priority projects is
recommended. If successful legal challenges, DOF actions, or legislation reduces the
risks associated with these projects, the contingency plan can be further adjusted. The
recommended project adjustments follow.
• Affordable Housing Production: Most of the City- assisted affordable housing
that is currently under construction in Santa Monica was funded by loan
agreements that were executed before the DOF's purported deadline of June 27,
2011. Two of the housing developments that are under construction involve final
loan agreements that were executed after the DOF deadline, though the City
made enforceable commitments to the two developments prior to the supposed
deadline. As the two developments were funded by a bank loan issued in 2008,
AB 1484 provides a process for the two developments to continue forward and
staff recommends that the City pursue the process. Two other affordable
housing developments, which were not funded with pre- January 1, 2011 bank,
loan or bond proceeds, had completed property acquisition, and received
enforceable construction - funding commitments from the City, prior to the alleged
deadline. However, the final loan documents for the two developments were not
completed prior to the DOF deadline of June 27, 2011. One of the developments
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has received a tax credit allocation and other funding commitments. Staff
recommends that the City pursue DOF approval of release of the funds for the
development.
• Mountain View Mobile Home Park: Another affordable housing program that is
affected by redevelopment dissolution is the program for new mobile homes at
Mountain View Mobile Home Park ( MVMHP). The City entered into a $9 million
contract with Golden West Homes to construct and install new manufactured
homes for interested homeowners at MVMHP, pursuant to guidelines approved
by the City Council on December 14, 2010. Ten households at MVMHP applied
to participate in the program during the application period, for a total estimated
cost of $1.5 million. Staff recommends that the City continue forward with
providing new homes for those ten households and suspend the remainder of the
program until there is certainty that any additional expenditure of funds would not
become a liability of the City's General Fund.
• Senior Housing Voucher Program: The City entered into a $20 million contract
with the Santa Monica Housing Authority to continue to administer a senior
housing voucher program. The contract is funded by redevelopment housing
funds that had been paid to the City to implement affordable housing programs
pursuant to the validated cooperation agreement. There is a considerable risk
that the DOF will attempt to seize any funds that were not promised to voucher
recipients prior to June 28, 2011. Given that the program supports 81 low -
income, vulnerable seniors who are at risk of homelessness, staff recommends
that the Housing Authority continue to operate the program and seek DOF
concurrence for these expenditures.
• Civic Center Joint Use Project: The Redevelopment Agency entered into a
$56 million memorandum of understanding (MOU) with the Santa Monica - Malibu
Unified School District to implement recreational and cultural improvements at
Santa Monica High School that could serve students and the broader community.
Payments required to be made to the District pursuant to the MOU were included
on the First ROPS and were rejected by the DOF. As a result, City staff
communicated to District staff that a $4.065 million payment had been denied. In
turn, District staff requested that the MOU be suspended until the Successor
Agency is authorized to make payments to the District. Staff supports the
District's request. The District also stated that it had expended a portion of the
$4.065 million payment but would return any unexpended funds once a complete
accounting has been finalized.
Palisades Garden Walk and Town Square: The City entered into a $47 million
contract with W.E. O'Neil to construct the parks. The project is currently well
underway, with substantial completion anticipated by August 2013. In order to
reduce potential risks to the General Fund, staff has worked with the contractor
to value engineer the project to realize approximately $6 million in savings
without compromising the integrity of the overall design and community
expectations for the construction of both Palisades Garden Walk (PGW) and
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Town Square. Savings will be achieved through simplification of the design of the
grove picnic area near the 100 - year -old Moreton Bay Fig Tree (Morty), reduction
in the quantity of free standing benches, simplification of the bicycle parking area
to the south of Ocean Lodge Motel, substituting trees for shade structures in the
play area, and examination of plant quantities and sizes to achieve savings.
Additionally, there are savings from suspending the Freeway Capping & Bridging
(Colorado /Ocean Sidewalk Widening and Intersection Improvements), a
component of the PGW and Town Square Project. This work would have
completed the western end of the Colorado Esplanade Project, and this scope of
work will now be absorbed by the Colorado Esplanade Project, since this portion
is part of the $6 million savings noted above. Suspending the park construction at
this time is not recommended because subcontracts, custom work form, plant
materials and earthwork have been purchased. Recommencing work in the
future is expected to significantly increase overall construction costs and the City
would risk leaving a very large, partially constructed park in a very central
location.
• Civic Auditorium: The City entered into a $51.9 million contract with Morley
Construction Company for design services and renovation costs. Early concept
plans have been developed for the project, which were conceptually reviewed by
the Landmarks Commission in May 2012. Additionally, various studies to assess
abatement needs have been completed including assessments of the facility's
need for roofing repairs and water intrusion remediation. Given the uncertainties
related to redevelopment funding and the fact that significant construction
activities have not commenced, staff recommends that the City suspend the
project at this time. Staff is currently exploring alternative options for
rehabilitation of the Civic Auditorium and anticipates returning to Council in the
fall for a study session to discuss these options, any of which will likely require
several years to implement. Staff recommends that the Civic Auditorium close as
planned in June 2013 because, in the current financial climate, the City does not
have the means to continue to subsidize the operations of the facility, estimated
at approximately $2 million per year and growing over time. In addition, staff does
not recommend long -term public use of the facility until seismic retrofitting is
complete. The closure will affect the staff positions that had been previously
identified for retention. City management staff is committed to assisting the
position incumbents to find other positions inside or outside the City.
• Pico Library: Although originally intended to be constructed using
redevelopment funds, the dissolution of redevelopment required the City to use
one -time funds for a $7 million contract with R.C. Construction Services for
construction of the Pico Branch Library. The City could consider suspending
construction of the Pico Branch Library in order to provide a reserve in the event
that projects that are further along in construction, such as PGW and Town
Square, are successfully undermined by the DOF. Given the many years of
planning for the branch library, as well as its critical importance to the Pico
neighborhood, staff recommends against its suspension.
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• Phase IV ATMS Traffic Signal Upgrade: The City entered into contracts totaling
$4.4 million for critical traffic and circulation infrastructure improvements in the
Mid -City area, Arizona Avenue through the downtown, the Main Street/Neilson
Way corridor, and portions of Ocean Park Boulevard. The project is currently
under construction and is anticipated to be completed in December 2012. Staff
recommends the project continue to completion as a suspension of construction
could compromise public safety at intersections that are currently under
construction.
• Colorado Esplanade: The adopted budget anticipates using general funds,
Metro Grant funding and contributions from development agreements to support
the construction of the Colorado Esplanade. The City could consider suspending
the project in order to provide a reserve in the event that projects that are further
along in construction, such as PGW and Town Square, are successfully
undermined by the DOF. Given the broad support for the project from
community stakeholders and boards and commissions, as well as the critical role
the Esplanade plays in addressing pedestrian, bicycle, and automobile circulation
near the Exposition Light Rail terminus station, staff recommends that the project
continue forward. In addition, maintaining the City's general funding commitment
will ensure that the grant funding stays with the project. Due to the
recommended removal of the intersection work at Colorado and Ocean from the
PGW project, value engineering will need to occur to incorporate that work into
the Esplanade Project. The majority of the construction budget will be used for
vehicle and roadway improvements to address Downtown traffic at the critical
intersection of Colorado Avenue and 4th Street, and to integrate the Expo Light
Rail station.
• EXPO Light Rail Enhancements: The City entered into $34.5 million of
contracts with Metro and the Exposition Light Rail Construction Authority (EXPO)
to fund station area improvements, as well as enhancements such as additional
platforms, pedestrian crossings, and station entrances. Payment was allocated
from the 2011 tax allocation bond proceeds in accordance with the bond
covenants. Final design of the three Santa Monica stations is progressing
toward completion and construction is expected to start in late 2012. Given that
the City has already contracted with the transit agencies for these improvements,
as well as the fact that a significant portion of the contracted funds would likely
be required to be paid under any circumstances, staff recommends that the
project continue moving forward to ensure opening of the stations in early 2016.
While continuing forward with any projects poses significant financial risks for the City,
staff believes that it is in the community's best interest to continue forward on certain
projects. Following DOF's review of the Agency's Third ROPS, as well as the
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completion of due diligence reviews, staff will return to Council for additional direction.
In summary, staff recommends the following contingency adjustments:
Priority Projects
Affordable Housing Production
Mountain View MHP
Senior Housing Vouchers
PGW and Town Square
Civic Center Joint -Use Project (CCJUP)
Civic Auditorium Renovation
Pico Library
Phase IV ATMS Traffic Signal Upgrade
Colorado Avenue Esplanade
EXPO Light Rail Enhancement
Alternatives
Actions
Seek DOF approval
Suspend, other than initial households
Continue and seek DOF approval
Value engineer and continue
Suspend
Suspend, other than necessary repair /abatement
Continue
Continue
Value engineer and continue
Value engineer and continue
In addition to the recommended contingency plan, Council could choose to:
1. Suspend all projects until it is clear that the original funding plans will be upheld.
2. Continue forward on all projects, in order to meet community priorities.
3. Modify the plan with respect to which projects continue forward and which are
suspended.
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Financial Impacts & Budget Actions
Based on Council's authorization, staff would return to Council following the DOF's
review of the Third ROPS and upon completion of the due diligence reviews.
Eventually, budget changes may be necessary to formally adjust project budgets and
reflect any additional changes. If necessary, additional budget changes may include
appropriation of residual property taxes, EXPO land -sale proceeds, and Charnock
settlement reserves, as well as acceptance of grants, where applicable, to allow the
continuing projects to be funded and completed as planned and anticipated by the
community.
Prepared by: Nia Tang, Acting Administrative Services Officer
Andy Agle, Director ` 1
Housing and Economic Development
Approved:
,for Gigi Decavalles- Hughes
Director of Finance
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Forwarded to Council:
Rod Gould
City Manager