NEWS ANALYSIS
By Marty Richman
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 RDA those critical items were barely
addressed.
NEWS ANALYSIS
By Marty Richman
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 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.
As will become clear from the financing discussion, 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 usually many years later. Interest costs add significantly to that debt; the total with interest from June 2010 to 2035 will be $79 million 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.
One problem is that much of the RDA debt payments are back-loaded; spend now, pay later – and the later the better. For example, the $8 million bond issue of 2009 has interest costs of an added $7.3 million. Payments started at only $640,000 a year, but jump dramatically to $3.3 million a year in 2016. The $35 million 2003 bond with an added $26 million in interest has similarly back-loaded payments. In fact, the payments will go on for 10 or 12 years after the RDA stops funding new projects.
The taxes that secure the bonds are a portion of the future property taxes from 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. With some important exceptions, the majority of non-housing funding is supposed to go to improve that RDA area.
To complete the basics, the financing cycle is that the RDA issues bonds to investors. The RDA takes the bond proceeds and uses some of them for RDA projects. The repayment cycle works as follows: The property owners in the RDA area pay property 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 RDA money is diverted. 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. Additionally, the state has shifted some RDA funds to support education. These are called “educational revenue augmentation funds” or ERAF for short.
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, principle and interest is $3.4 million. Administrative expenses are $1.3 million, with statutory and other payments of $2.9 million and an ERAF payment of $917,000 million. Remember, the debt service amount will jump dramatically in a few years. By 2016 it will be $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 some 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 ending balance of $6.8 million to go forward, but there are some significant expenses coming up including $5.4 million for the Fire Station and West Gateway. The projected RDA ending balance in FY 2011-12 is forecasted as $1 million and less than a million for the three years following.
Understand 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 it at a depressed value driving the tax base down. Too little attention has been paid to the long-term portions 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 to do a detailed and ongoing analysis of short- and long-term economic impacts of RDA projects that have been completed, or are in progress or in planning.
