The principle behind the Hollister RDA
– the Redevelopment Agency – is simple: It is a way to borrow
money against future property tax increases and use it, primarily,
to revitalize deteriorated or blighted areas. The object of the
revitalization is to encourage and attract private sector
investment that otherwise would not occur.
The principle behind the RDA – the Redevelopment Agency – is simple; it is a way to borrow money against future property tax increases and use it, primarily, to revitalize deteriorated or blighted areas. The object of the revitalization is to encourage and attract private sector investment that otherwise would not occur.
It is that last part, initiating and sustaining private sector investment that is the key to a successful redevelopment program. It is also the least understood, least evaluated and most often overlooked part of the program. During this week’s extensive staff briefing to the Hollister City Council on the status and accomplishments of the Hollister RDA those critical items were barely addressed.
The California Redevelopment Association also claims redevelopment activities create jobs, expand business opportunities, provide housing for families most in need, help reduce crime, improve infrastructure and public works, and cleanup of environmentally threatened areas. Since public funding is involved, the simple soon gets very complex; everyone wants a piece of the pie, the pie is in the hands of the politicians and no one wants a piece of the bill.
It will become clear from the financing discussion that we must make a distinction between short-term and long-term economic impacts. Most significant RDA projects have positive short-term economic impacts; however, they are usually financed with long-term debt; if we do not realize long-term positive economic impacts to offset the cost, the system is not sustainable and the tax base deteriorates. The physical plant soon follows and blight returns.
Like every other borrowing scheme, RDA funding accrues debt in the present against promised payments in the future; the RDA bond debt was $45.5 million as of June 30, 2010. RDAs typically use tax allocation or revenue bonds as the borrowing instrument and they pay a debt service with interest to retire those bonds many years later. Interest costs add significantly to the debt; with interest the total with repayment from June 2010 to 2035 will be $79 million, even if we never issue another bond. That money has to come from long-term economic development or the property owners will not be able to make the tax payments needed to retire the bonds.
Another problem is that much of the RDA debt payments are back-loaded like a mortgage balloon payment; spend now pay later – the later the better. For example, the $8 million bond issue of 2009 has an added interest cost of $7.3 million. While debt service payments on that bond started at only $640,000 a year, they will jump dramatically to $3.3 million a year in 2016. The $35 million 2003 bond issue has an added $26 million in interest payments and is similarly back-loaded. In fact, the debt service payments will go on for 10 or 12 years after the RDA stops funding new projects.
The payments that redeem the bonds come from a portion of the future property taxes collected in the RDA area. That portion, which is anything above a pre-RDA baseline, is called the tax increment. The formula can be complex but the important point is that a map exists showing the area limits and it is properties within that area that will repay the debt provided, of course, they can afford it. With some important exceptions, the majority of non-housing funding is supposed to go to improve the designated RDA area.
To complete the basics, the financing cycle is that the RDA issues bonds to investors. The RDA takes the bond proceeds uses some of them for RDA projects, but some goes off for other things. The repayment cycle works as follows; the property owners in the RDA area pay property higher taxes based in the increased value some of which goes to the RDA that then services the debt with interest, eventually retiring the bonds.
What is the catch? One is that the RDA is betting the improvements and the private sector investments will raise the property values and associated taxes enough to offset the cost of the investment and the interest. Additionally, much of the tax increment is diverted and some goes into overhead such as the cost of administration. State law forces agencies to set aside 20-percent the gross tax increment for affordable housing. Hollister’s RDA also supplies 29-percent of the gross tax increment for statutory payments as well as payments to the Hospital District, the County Water District and San Benito County. The state has shifted some RDA funds to support education. These are called “educational revenue augmentation funds” or ERAF for short. Therefore more than 50-percent of the tax increment does not go directly to economic development.
The expenses and diversions really add up. For FY 2010-11 the Hollister RDA tax increment is $9.9 million. The housing set aside is $2 million, the debt service, principal and interest, is $3.4 million, administrative expenses are $1.3 million, statutory and other payments $2.9 million and an ERAF payment of $917,000. Remember, the debt service costs will jump dramatically in a few years; by 2016 the cost will about double to $6.2 million a year.
A sharp-eyed observer will note that the combined expenses and obligations were $10.4 million exceeding our tax take of $9.9 million by $500,000. Luckily, we currently have $9.2 million left in the bank from earlier years leaving $8.6 million for projects. However, there are plans and commitments for most of those funds. They are $500,000 to start Fire Station 1 and the West Gateway Streetscape, $240,000 for annual rotating programs and $1 million for ongoing projects. That leaves an end of year balance of $6.8 million to go forward, but there are some significant expenses coming up next year including $5.4 million for the Fire Station and West Gateway. The projected RDA ending balance in FY 2011-12 is forecasted as only $1 million and less than a million for the three years following. There will be little left to spend, but lots of payments to make.
Understanding the short-term impact of a project such as rehabilitating and expanding a commercial building is simple. Money spent on materials, labor and services has an immediate effect on jobs and property values raising taxes. However, if the property remains empty or underutilized there will come a time when the owner cannot pay those increased taxes and they may have to sell the property at a depressed value driving the tax base down. Too little attention has been paid to the long-term economics and the requirement for private investment. Communities must constantly be on guard against the RDA becoming a politically driven shush-fund that looks like free money and the only way to do that is do a detail and ongoing analysis of short- and long-term economic impacts of RDA projects that have been completed, are in progress or in the planning stage.
The bottom line – you still can’t get something for nothing. Money borrowed today for redevelopment must be paid back tomorrow with interest; therefore, it’s critical that the redevelopment projects generate sufficient economic benefits to repay the back-loaded loans. Every dollar that diverted into overhead and other statutory programs that do not generate an adequate economic return will be just that much harder to pay back; it’s like going on vacation and putting it on the credit card because you can’t afford it – you’ll have a great time until the bill comes due.
Marty Richman is a Hollister resident. Check out his columns here.
