Council Poised to Protect Redevelopment Money Through Bond Issuance

Tonight the city council will vote on a staff recommendation that the Council/Davis Redevelopment Agency issue $4 million taxable bonds and up to $12 million in tax-exempt bonds for identified priority projects.

They also have the alternative, which would be to maximize the issuance of bonds, authorizing $16.6 million in bonds.

This action is occurring largely in response to the state threatening to close down Redevelopment Agencies (RDA’s) across the state.  Cities like Davis are taking out bonds to protect the assets that they have from raids from the state.

There are both advantages and disadvantages to both approaches.  The downside to only issuing bonds for existing projects is that the city would largely be stuck with those existing projects.  So those who are opposed to some if not all of the council/ RDA’s spending priorities are put into a tough position.

For instance, there is no project on Olive Drive that would enable to city to actually deal with real blight.  Most of the projects take money from South Davis and plug it into the Davis Downtown.

On the other hand, it might be possible to include a project for Olive Drive if the city maximizes its bond debt, but then there are problems and concerns about the city’s ability to service the bond through interest payments.

The upside of not maximizing the bond capacity is that, while it would allow for some continued annual revenue and ongoing flexibility, it would only do so as long as the tax increment revenue is available.

All of this is in response to the Governor’s proposal to eliminate redevelopment agencies.  In its response on February 1, the Davis City Council and Redevelopment Agency Board (comprised of the Davis City Councilmembers) “approved an amended Cooperation Agreement confirming the existing obligations and debt of the Redevelopment Agency. The City Council also approved a resolution in opposition to the Governor’s proposal.”

On February 15, the Board gave direction to proceed with the issuance of approximately $9 million in housing and $14 million in nonhousing bonds, for the following priority projects:

Staff adds a few notes to their staff report.  First, “the proposed sale of bonds for capital and economic development activities is consistent with the Agency’s financing plans, absent the Governor’s threat to eliminate redevelopment agencies. The borrowing does bear costs of issuance and interest obligations from future tax increment. The Agency’s cap on total tax increment means that borrowing at this time allows better financing terms and less complex financing structure than if the borrowing were deferred.”

Second, however, “staff would not likely be recommending housing bonds without that legislative discussion. As will be further discussed, staff recommends that the housing bonds not be authorized at this time, without draft legislation that would place constraints on future housing set aside obligations.”

They also note, “The recommended documents authorize up to $20 million in non-housing bonds and up to $12 million in housing bonds. Staff does not anticipate that the Agency would be able to borrow this much in the current market. Depending on the final interest rate at the time of sale, proceeds are likely closer to the $9 million in housing and $14-16 million in nonhousing bonds considered on February 15. Tax-exempt bonds would generate more proceeds, but bear much greater restrictions on use of funds.”

Moreover they note that borrowing is expensive.  A bond issuance that generates for instance $14 million will require $1.5 million to fund the debt service reserve, and $440 thousand in costs of issuance.  In addition, they note, “over half of the $1.5 million dollars per year in debt service would go to interest in the early years.”

“While borrowing is expensive, timely use of the bond proceeds on projects does not positively or negatively impact the expense of bonding. Bond investors do want to see active use of the bond proceeds, expecting activity on identified priority projects within the first five years of bond issuance,” they add.

The Agency has the option of issuing bonds with payments extending through 2037, the last year that tax increment can be collected (under current law).

Staff also recommends that the housing bonds not be authorized at this time, due in part to the fact that we have no idea how affordable housing programs will be treated under the Governor’s proposal, and it remains possible that housing programs would be protected even as the governor limits redevelopment for other functions.

Writes staff, “The high cost of financing, lesser risk of adverse legislative action, and time required to secure land-use entitlements and project matching funds lead staff to conclude that it is premature to issue housing bonds. Should circumstances change, staff would propose to return to the Agency board with the option to approve private placement bonds for the housing set-aside.”

We have also been led to believe there is a provision here that would transfer some of the redevelopment money to schools, though that plan has a good deal of opposition and we have not seen the specifics yet.

Taking the issue in isolation of broader statewide issues, it makes sense for the city to protect its money.  It also makes sense not to maximize the bond issuance, given concerns about interest rates.

However, we remain concerned that the current programs appear to have no plan to address truly blighted areas in Davis, and we speak mainly of Olive Drive, but there are other areas of concern as well.  Unfortunately, the timing of this proposal and the threat to the RDA means the city can really only respond by protecting current proposals.

—David M. Greenwald reporting