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TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY
SUBJECT: FY04-05 ADDITIONS TO THE CONSOLIDATED LOAN BETWEEN THE CITY AND AGENCY
DATE: SEPTEMBER 7, 2004
Staff Coordinator: Kathryn Downs, Accounting Manager
Receive and file this staff report, which provides information regarding the FY04-05 advance of $60,907 to the Rancho Palos Verdes Redevelopment Agency ("Agency"). The Consolidated Loan Agreement dated December 1, 2003 authorizes the FY04-05 advance.
The Agency was formed in 1984 with the purpose of financing long-term capital improvements (i.e. de-watering wells, Abalone Cove sewer system) designed to eliminate physical and economic blight in Project Area No. 1 through stabilization of hazardous landslides. The Agency’s Project Area No. 1 was divided into two geographical areas: Abalone Cove and Portuguese Bend. The geographical areas are accounted for in separate funds of the Agency.
Abalone Cove Fund Financing
The Abalone Cove landslide abatement project of the Agency was initially financed by the issuance of $10 million of County Improvement District Bonds (the "Bonds") in 1991. The Bonds were issued as part of the Reimbursement and Settlement ("Horan") Agreement entered into between the County, City, Agency and the Horan litigants in 1987. After payment of amounts previously owed the County and the City, approximately $6.7 million of net bond proceeds were transferred to the Agency's Abalone Cove fund in 1991 to finance landslide abatement projects.
Under the terms of the bond restructuring in 1997, the County Bonds were repaid through the Agency's issuance of $5,455,000 of tax allocation bonds (the "1997 RDA Bonds") and a lump sum payment of $4,545,000 to the County. The lump sum payment was funded with $2 million of accumulated tax increment, $1 million of fund reserves from the Abalone Cove fund and a loan to the Abalone Cove fund by the City in the amount of $1,545,000.
As part of the 1997 bond restructuring, accrued interest on the original $10 million County Bonds was recalculated at a lower interest rate (5 percent vs. 7.7654 percent per the original Bonds) and deferred by the County. The deferred interest totaling $3,111,400 is non-interest bearing and is subordinate to the payment of the 1997 RDA Bonds. Per the terms of the 1997 bond restructuring, the County began impounding all Agency tax increment in November 1997 for repayment of the $5,455,000 1997 RDA Bonds and the $3,111,400 deferred interest debt. No deferred interest shall be paid to the County until the 1997 RDA Bonds are paid in full. As of June 30, 2004, $765,143 of tax increment has been impounded to apply to scheduled bond payments until the 1997 RDA Bonds are paid in full. Impounded tax increment will thereafter be applied to the $3,111,400 of deferred interest obligation owed to the County until paid in full.
The City and the Abalone Cove fund of the Agency entered into a Loan Agreement, dated November 30, 1997, when the City advanced $1,545,000 to the Abalone Cove fund as a part of the 1997 bond restructuring. An additional $12,000 loan was made from the City to the Abalone Cove fund in FY02-03 to perform miscellaneous Abalone Cove Sewer site restoration activities. On December 1, 2003, the loan agreement was revised to capture the annual cost of resources provided by the City; and to define the maturity date as November 27, 2034, which is the legal limit date for the repayment of indebtedness by the Agency. The revised Consolidated Loan Agreement included an additional advance for County tax increment administration fees of $21,309 previously paid by the City’s General fund, and the FY02-03 Education Revenue Augmentation Fund (ERAF) shift of $19,046 also paid by the City’s General fund. Principal owed the City by the Abalone Cove fund was $1,597,355 as of June 30, 2004. Including accrued interest of $898,879, the total amount owed to the City by the Abalone Cove fund was $2,496,234 as of June 30, 2004. The Consolidated Loan Agreement between the City and the Agency continues to be subordinate to the payment of the 1997 RDA Bonds and deferred interest debt.
The Abalone Cove sewer project was completed during FY02-03 and the system is operational. With the completion of the sewer project, the Abalone Cove fund was depleted. Any future Abalone Cove Agency projects will require funding by the City.
Portuguese Bend Fund Financing
While the Abalone Cove fund of the Agency has primarily relied upon bond proceeds to finance landslide abatement projects, the Portuguese Bend fund of the Agency relies on the City to finance its landslide projects. The City and the Portuguese Bend fund of the Agency first entered into a Loan Agreement, dated July 1, 1990, when the City began making advances to fund landslide projects in the Portuguese Bend area of the Agency. Between 1990 and 2000, a total of $4,320,552 was advanced from the City to the Portuguese Bend fund. As noted above, on December 1, 2003, the loan agreement was revised to capture the annual cost of resources provided by the City; and to define the maturity date as November 27, 2034, which is the legal limit date for the repayment of indebtedness by the Agency.
Principal owed the City by the Portuguese Bend fund was $4,320,552 as of June 30, 2004. Including accrued interest of $5,207,338, the total amount owed to the City by the Portuguese Bend fund was $9,527,890 as of June 30, 2004.
Purpose Of Consolidated Loan Agreement Between The City And Agency
Tax increment growth over the last ten years has averaged 10.6 percent annually. If tax increment continues to grow at a similar pace in the future, there may be sufficient tax increment to repay a portion, or all of the Agency’s debt to the City after the Agency’s debt to the County is repaid in full.
Staff has prepared an analysis titled Tax Increment Projections & Debt Service Schedule (see attachment A). The analysis includes the Agency’s debt service schedule, as well as estimated Agency tax increment projections. The first five years of the analysis use the same property value growth rates and interest rates as presented in the 2004 Financial Model. The analysis indicates that as much as $7.4 million may become available to repay the Agency’s debt to the City, before the Agency’s ability to collect tax increment expires in 2034.
Recommendation To Add FY03-04 ERAF Shift And Administrative Costs To Consolidated Loan Balance
In the event that sufficient tax increment becomes available to repay the City a portion, or all of the loan amount, the Consolidated Loan Agreement between the City and the Agency captures the cost of resources provided by the City, including: 1) Any ERAF shifts paid from the City’s General fund; 2) Annual County administrative fees paid from the City’s General fund; and 3) Administrative services and facilities (e.g. staff time, equipment usage, insurance, facilities, and incidental administrative expenses such as printing costs).
The State of California enacted law (Chapter 260, Statutes of 2003) requiring California redevelopment agencies to shift $135 million of property tax increment to K-12 schools and community colleges during FY03-04. The state Director of Finance determined the Agency was required to transfer $32,878 to the ERAF by May 10, 2004. The Agency was unable to make the required ERAF payment; and therefore, as required by state law, the City’s General fund paid the required shift of $32,878. The FY04-05 State budget includes another ERAF shift of approximately $60,000; however, the Agency has not yet received notification of the precise amount to be shifted for FY04-05. Considering the continued California budget crisis, the Agency should expect additional future ERAF shifts. The Consolidated Loan Agreement provides a mechanism to add ERAF shifts to the consolidated loan balance between the City and Agency.
The County continues to charge an annual fee to administer the Agency’s tax increment. The Agency’s Debt Service fund has no cash to pay the annual fee; therefore, the City’s General fund must pay for it on behalf of the Agency. The Consolidated Loan Agreement provides a mechanism to add the annual fee to the loan balance between the City and Agency.
Per the Consolidated Loan Agreement, each July 1st, the City’s department heads confirm the level of service provided to the Agency during the fiscal year just ended. Staff calculates the total cost of services provided to the Agency and amounts remitted on behalf of the Agency, for addition to the consolidated loan balance each August 1st. It would not have been appropriate to charge the cost of administrative services provided by the City before the Agency’s capital improvement projects were complete.
The August 1, 2004 addition to the consolidated loan balance in the amount of $60,907 includes:
Interest on the advance between the City and Agency continues to be based upon the interest rate earned by the City’s Local Agency Investment Fund (LAIF) deposits plus three percent. The consolidated loan balance is subordinate to the 1997 RDA Bonds and the deferred interest debt owed to the County.
The additional advance of $60,907 must be drawn from General fund reserves. The calculation of estimated General fund reserves is presented in Attachment B labeled "FY04-05 Statement of Estimated General Fund Reserves". A budget adjustment is not required to record the advance in the City’s general ledger.
Director of Finance and Information Technology