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Flash: Revelopment Agency Shutdown May Cost Berkeley $1.3M

By Thomas Lord
Tuesday June 04, 2013 - 03:14:00 PM

The shut-down of Berkeley's redevelopment agency may wind up costing the city more than $1.3 million dollars, including $750,000 dollars gone missing from the Retiree Medical Trust Fund. Oddities in how how the now defunct redevelopment agency was financed have left it with outstanding debts which the state is declining to repay.

In an effort to avoid this loss the city is taking the state to court, a topic that will be discussed at tonight's closed session before the regular council meeting. 

Berkeley caught with its pants down

In February 2012 all redevelopment agencies in the state were shut down. Redevelopment agencies were first established in the 1920s. They allowed municipalities to claim a portion of property taxes to be used to help finance private developers for purposes such as fighting blight or building affordable housing. Facing a financial crisis, the state legislature passed a law that all but eliminated redevelopment agencies. Subsequently, the state supreme court ruled that the agencies had to be eliminated entirely. 

Redevelopment agencies were replaced, temporarily, with "successor agencies" whose purpose was to wind down the debts and dispose of the assets of the redevelopment agency. 

Berkeley's successor agency inherited two large debts to the city itself: one an outstanding debt of $550,000 dollars related to a 1997 transfer from the city's general fund to the redevelopment agency; the other an outstanding debt of $750,000 arising from a $600,000 transfer from the city's Retiree Medical Trust Fund to the redevelopment agency. 

Had the redevelopment agency continued to exist these debts would have been repaid from the agency's tax and other revenues, or simply refinanced. When the state legislature shut down the redevelopment agencies, it agreed to honor debts to third parties but not, in general, debts of a city to itself. The state has declined to further pay back the money transferred from the Retiree Medical Trust Fund and has warned that it is likely to decline paying back the funds transferred from the General Fund in 1997. 

Berkeley disputes the state's rulings about these obligations and is apparently taking the state to court over the matter. 

Additionally, the state objected to how the city classified certain operating expenses of the successor agency. As a result, the state has rejected repayment of an additional $64,000 in operating expense. 

The strange Savo Island loan that wasn't

In 2002 the Savo Island affordable housing project needed financing help for repairs and maintenance. They talked with the city about borrowing $600,000 via the redevelopment agency. 

The city tentatively agreed and proactively transferred $600,000 from the Retiree Medical Trust Fund to the redevelopment agency. 

Subsequently, loan negotiations with Savo Island stalled. Savo Island found financing elsewhere. The redevelopment agency was left with an unallocated, borrowed $600,000. The Retiree Medical Trust Fund was left with a corresponding shortfall. 

Rather than return that money to the Retiree Medical Trust Fund and avoid debt service, the redevelopment agency first spent $275,000 of it on the Jubilee Senior Apartments project, and then transferred the remaining $325,000 to the city's Housing Trust Fund. 

Dizzy yet? 

The redevelopment agency itself remained on the hook for that $600,000 loan and planned to repay it from its tax revenues, largely derived from the Savo Island project. 

The 1997 bond issue that wasn't

In 1997, sitting on a large enough surplus, the City transferred a cool $1M to the redevelopment agency. In return, the agency issued bonds to the city itself with the understanding that, upon demand, the city could require the agency to sell the bonds on the market to third parties. 

Somehow that bond sale never happened and the $1M debt remained strictly between the city's redevelopment agency and the city's general fund: exactly the sort of self-dealing "debt" that the state declines to pay. 

Then City Manager Phil Kamlraz saw the problem coming in 2011. In September of that year he successfully urged council to scramble to opt-in to a program that would let the redevelopment agency continue to exist in exchange for the city paying $410,000 the first year and $97,000 each subsequent year to the county. Otherwise, Kamlraz wrote: "Upon dissolution of the Agency, all agreements between the Agency and the City would be considered null and void which could jeopardize the existing loan agreements, including the $1 million 1997 housing loan from the General Fund." 

In October of 2011 the state's supreme court declared that opt-in provision unconstitutional. The redevelopment agency would be dissolved in February of 2012 and there was nothing Berkeley could do about it. Kamlraz's proposed last minute save couldn't work. 

Next steps

The agenda for tonight's closed session includes discussion of the city's attempts to take the state to court to reverse these funding denials. 

Scheduled for 6:45 is a public report about that closed session. 

Hey, it's only $1.3M, right?