Agencies' bond blitz carries a big cost
By Loretta Kalb and Phillip Reese The Sacramento Bee
Published: Sunday, Nov. 13, 2011 - 12:00 am | Page 1A
Copyright 2011 The Sacramento Bee. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.
Targeted for extinction and running out of time, California's redevelopment agencies earlier this year embarked on a wave of costly borrowing unequaled in their history.
When the dust settled, the agencies with a mission of helping economically galvanize California's urban areas had incurred a record $1.2 billion in new bonded indebtedness secured by property tax growth, according to a Bee analysis of records from the California State Treasurer's Office.
The money didn't come cheap.
When selling a bond, redevelopment agencies incur a debt that must be repaid with interest. The onslaught of bonds early this year outstripped demand and pushed interest rates higher. General concern over government finances and unrealized predictions of a municipal bond market collapse further inflated interest rates.
As a result, two-thirds of bonds issued by redevelopment agencies earlier this year carried interest rates above 7 percent, a larger proportion of high-interest bonds than during any other similar period since the early 1990s, treasurer's data show.
Residents will ultimately pay the price, since higher payments on debt service will limit funds available for urban improvements.
"It was a modern-day gold rush," said state Treasurer Bill Lockyer. "The cottage industry that runs and works around redevelopment agencies panicked."
Redevelopment officials, in the main, say they had no choice but to sell the bonds in a hurry.
Gov. Jerry Brown proposed eliminating the agencies in January in his state budget. Subsequent legislation gave the agencies until Oct. 1 to pay a significant portion of their annual property tax proceeds to the state to avoid death.
The League of California Cities and the California Redevelopment Association filed suit in July, asking the state Supreme Court to block the plan. The court's decision is due by mid-January.
Because of the legislation and ensuing litigation, redevelopment agencies aren't issuing new bonds; the bonds sold earlier this year could be their last.
In the meantime, projects funded by the bonds already under way can continue, but those that haven't started are on hold, pending the court's decision.
"Our biggest fear was that redevelopment agencies would be killed or that our ability to issue bonds would be denied. And we'd be done," said Jason Behrmann, city manager in Galt, where the redevelopment agency in February issued about $6 million in new bonds. "Our choice was to stop, and not move forward. Or to push forward."
The type of bonds sold by Galt, often called "tax increment bonds," are secured by property tax growth. Tax increment bonds, excluding refinancings, were the sole focus of The Bee's analysis. Here's how they work:
Say property in a redevelopment district garners $10 million in property taxes when a redevelopment agency forms. Year after year, that money will go to the county, cities and other public entities where the district is located. But as property taxes grow in the district to, say, $12 million, most of the incremental $2 million gain flows to the redevelopment agency.
That extra money can be used to secure bonds. And as money from the bonds is spent on improvements, the value of property, ideally, grows and produces more tax income.
Credit ratings agencies play a role in the process, evaluating the ability of redevelopment agencies to make payments. They usually give tax increment bonds for redevelopment lower ratings than other bonds because property values can decline, said Paul Rosenstiel, a former state deputy treasurer and current principal at De La Rosa & Co., an investment banking firm.
Standard & Poor's, a principal rating agency, rated 63 of the 80 bonds issued by California redevelopment agencies earlier this year, deeming them investment grade but giving more than half a rating of A- or worse. An A- is seven levels below the top AAA rating S&P gives to the safest investments.
Galt officials sold bonds rated BBB+ by Standard & Poor's, a less than stellar grade that helped push the agency's total interest costs to 9.7 percent on the $6 million in new debt, state treasurer's data show.
Davis, with two separate bond issues totaling $18 million, garnered a solid A+ rating from Standard & Poor's, as the city is deemed to have a strong capacity to repay. Even so, the city will pay effective rates of 7.1 percent on one $13.3 million issue and 8.4 percent on $4.7 million on another.
Folsom, the other local redevelopment agency that took part in the rush, earned an A- rating from Standard & Poor's on $21.4 million in new variable-rate bonds, only slightly better than the grade the agency gave Galt bonds.
"We felt it was our only opportunity to keep the money from the redevelopment agency within Folsom and use it for Folsom projects," said Jim Francis, Folsom's finance director.
Those projects include downtown redevelopment, completion of a Sutter Street renovation and work in the central business district.
For its part, Galt plans to use bond money on a corridor that extends from the existing Civic Center to an Old Town railroad property. The city will plant grass, trees and shrubs; acquire aging buildings and vacant properties for retail development; install a parking lot next to a future train station; and make street improvements.
Davis wants to use its bond money to build a parking garage and a hotel/conference center.
While Davis, Galt, Folsom and others could conceivably refinance their new bonds at better rates in the future, Lockyer, the state treasurer, said issuing so many high-interest bonds so fast could hurt taxpayers.
The bonds were sold as the market reeled from a prediction by noted Wall Street analyst Meredith Whitney of large-scale municipal bond defaults. Also, property values were falling and cities were already dealing with large deficits.
"The average interest rate was about one percentage-point higher than historic rates, and that was in a low-rate environment," Lockyer said. "The result was taxpayers incurring greater debt."
The long term fate of the bonds is now in the hands of the state Supreme Court.
Without intervention, the state's plan, requiring agencies to "opt in" by making annual payments to the state, could hamstring local agencies, eventually forcing them to defer and eliminate projects, said Jim Kennedy, interim executive director for the California Redevelopment Association.
Projects at agencies that don't "opt in" are set to be administered by successor agencies guided by an oversight board. Those agencies could choose to eliminate all the bond projects – or keep them all on track.
When the dust settled, the agencies with a mission of helping economically galvanize California's urban areas had incurred a record $1.2 billion in new bonded indebtedness secured by property tax growth, according to a Bee analysis of records from the California State Treasurer's Office.
The money didn't come cheap.
When selling a bond, redevelopment agencies incur a debt that must be repaid with interest. The onslaught of bonds early this year outstripped demand and pushed interest rates higher. General concern over government finances and unrealized predictions of a municipal bond market collapse further inflated interest rates.
As a result, two-thirds of bonds issued by redevelopment agencies earlier this year carried interest rates above 7 percent, a larger proportion of high-interest bonds than during any other similar period since the early 1990s, treasurer's data show.
Residents will ultimately pay the price, since higher payments on debt service will limit funds available for urban improvements.
"It was a modern-day gold rush," said state Treasurer Bill Lockyer. "The cottage industry that runs and works around redevelopment agencies panicked."
Redevelopment officials, in the main, say they had no choice but to sell the bonds in a hurry.
Gov. Jerry Brown proposed eliminating the agencies in January in his state budget. Subsequent legislation gave the agencies until Oct. 1 to pay a significant portion of their annual property tax proceeds to the state to avoid death.
The League of California Cities and the California Redevelopment Association filed suit in July, asking the state Supreme Court to block the plan. The court's decision is due by mid-January.
Because of the legislation and ensuing litigation, redevelopment agencies aren't issuing new bonds; the bonds sold earlier this year could be their last.
In the meantime, projects funded by the bonds already under way can continue, but those that haven't started are on hold, pending the court's decision.
"Our biggest fear was that redevelopment agencies would be killed or that our ability to issue bonds would be denied. And we'd be done," said Jason Behrmann, city manager in Galt, where the redevelopment agency in February issued about $6 million in new bonds. "Our choice was to stop, and not move forward. Or to push forward."
The type of bonds sold by Galt, often called "tax increment bonds," are secured by property tax growth. Tax increment bonds, excluding refinancings, were the sole focus of The Bee's analysis. Here's how they work:
Say property in a redevelopment district garners $10 million in property taxes when a redevelopment agency forms. Year after year, that money will go to the county, cities and other public entities where the district is located. But as property taxes grow in the district to, say, $12 million, most of the incremental $2 million gain flows to the redevelopment agency.
That extra money can be used to secure bonds. And as money from the bonds is spent on improvements, the value of property, ideally, grows and produces more tax income.
Credit ratings agencies play a role in the process, evaluating the ability of redevelopment agencies to make payments. They usually give tax increment bonds for redevelopment lower ratings than other bonds because property values can decline, said Paul Rosenstiel, a former state deputy treasurer and current principal at De La Rosa & Co., an investment banking firm.
Standard & Poor's, a principal rating agency, rated 63 of the 80 bonds issued by California redevelopment agencies earlier this year, deeming them investment grade but giving more than half a rating of A- or worse. An A- is seven levels below the top AAA rating S&P gives to the safest investments.
Galt officials sold bonds rated BBB+ by Standard & Poor's, a less than stellar grade that helped push the agency's total interest costs to 9.7 percent on the $6 million in new debt, state treasurer's data show.
Davis, with two separate bond issues totaling $18 million, garnered a solid A+ rating from Standard & Poor's, as the city is deemed to have a strong capacity to repay. Even so, the city will pay effective rates of 7.1 percent on one $13.3 million issue and 8.4 percent on $4.7 million on another.
Folsom, the other local redevelopment agency that took part in the rush, earned an A- rating from Standard & Poor's on $21.4 million in new variable-rate bonds, only slightly better than the grade the agency gave Galt bonds.
"We felt it was our only opportunity to keep the money from the redevelopment agency within Folsom and use it for Folsom projects," said Jim Francis, Folsom's finance director.
Those projects include downtown redevelopment, completion of a Sutter Street renovation and work in the central business district.
For its part, Galt plans to use bond money on a corridor that extends from the existing Civic Center to an Old Town railroad property. The city will plant grass, trees and shrubs; acquire aging buildings and vacant properties for retail development; install a parking lot next to a future train station; and make street improvements.
Davis wants to use its bond money to build a parking garage and a hotel/conference center.
While Davis, Galt, Folsom and others could conceivably refinance their new bonds at better rates in the future, Lockyer, the state treasurer, said issuing so many high-interest bonds so fast could hurt taxpayers.
The bonds were sold as the market reeled from a prediction by noted Wall Street analyst Meredith Whitney of large-scale municipal bond defaults. Also, property values were falling and cities were already dealing with large deficits.
"The average interest rate was about one percentage-point higher than historic rates, and that was in a low-rate environment," Lockyer said. "The result was taxpayers incurring greater debt."
The long term fate of the bonds is now in the hands of the state Supreme Court.
Without intervention, the state's plan, requiring agencies to "opt in" by making annual payments to the state, could hamstring local agencies, eventually forcing them to defer and eliminate projects, said Jim Kennedy, interim executive director for the California Redevelopment Association.
Projects at agencies that don't "opt in" are set to be administered by successor agencies guided by an oversight board. Those agencies could choose to eliminate all the bond projects – or keep them all on track.
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