On Point: In a TIF
A few weeks ago I did a post on all the debt the city carries, which led to a comment about redevelopment debt and how it works. I asked for more information, because a lot of questions have been raised about how redevelopment debt incurred for the proposed Alameda Point development could impact the city, and frankly, it bothered me that I couldn’t offer good answers.
City officials have said they could go to the market for up to $184 million in bonds to help cover some costs of the development – money that would be paid back with property taxes generated by the Point development. But SunCal’s less-that-perfect track record of completing developments in recent years has some folks concerned that the city will get stuck with tens of millions of bond payments and a half-finished development. They’re also worried that the financing scheme could have a real, material impact on the city’s finances.
Over the past few weeks, I’ve been asking around about this to get a clearer picture of how it all works. And it sounds like the answers to those two questions are “probably not” and “maybe.”
Here’s what I got:
The state’s redevelopment law does not specify a limit on the amount of debt that can be incurred for any given redevelopment area formed after 1994 (like Alameda Point). That’s actually governed by the bond market, which has a set of underwriting criteria it uses to decide whether it will issue bonds in the amount the redevelopment agency wants.
Among other things, the market folks basically want to see that the agency can more than pay its debt before bonds are issued. And that means the redevelopment area has to be generating property tax revenues to pay off the debt before bonds can be issued.
So how does that happen? The developer fronts the money for water and sewer pipes, roads and all the other things the bond money could be used for, and the redevelopment agency uses the bond money to reimburse the developer after work is done – and after tax money starts coming in.
The city’s base reuse manager, Debbie Potter, told me in an earlier conversation about redevelopment that the city’s redevelopment agency, the Community Improvement Commission, probably wouldn’t go to the market for bonds until they are six or seven years into Point development.
Typically (and in our case, historically), the bonds are secured only against new property tax revenues generated by the redevelopment. So if the development doesn’t generate the kind of tax revenue that was expected, bond holders can’t go after, say, the city’s general fund for repayment.
In a January letter to Development Services Director Leslie Little, the city’s bond counsel, Paul Thimmig, explained the impact a redevelopment bond default would have on the city’s finances. Per Thimmig:
Based on a careful review of the Bond Documents for each of the CIC’s public debt obligations, it is clear that each respective debt issue is not a general obligation of the CIC, but a limited obligation payable solely from the respective Tax Revenues pledged to the specific debt obligation and amounts held in the specific funds created for the respective debt obligation. The City of Alameda is in no way contractually obligated to pay any of the CIC’s public debt obligations, and all of the Official Statements (for the agency’s current bond issues) explicitly so state.
As to the amount of debt the CIC can carry on the Point development, as I said earlier, they can only get what they are able to prove they can repay. That said, city staff can only estimate how much that will be (and they’ve said their estimates are conservative). In a report summarizing the potential impacts of the proposed Alameda Point plan, city staff say the project could require more debt than planned.
Then there’s the question of whether the debt could affect the city’s finances in general. The city technically doesn’t carry the debt; the CIC is a separate entity. The city doesn’t draw from its general fund to pay redevelopment debt off. And city leaders have maintained that the development project has to be “fiscally neutral,” meaning that it doesn’t cost the city money out of its general fund to build or maintain it.
That said, the bulk of the tax money generated by the redevelopment efforts – about 60 percent – could be used for a period of several decades to administer the agency and debt service, on development costs that some feel should be covered by private money instead of future tax dollars. (Others argue that those future tax dollars wouldn’t exist if the money wasn’t invested in development efforts; Alameda Point, for example, isn’t even on the tax rolls yet.)
About 11 percent of Alameda’s property taxes are collected in redevelopment areas, according to the Fiscal Sustainability Committee’s just-released long-range financial forecast, which also says the CIC is holding $66 million in debt in those areas (apparently they can hold up to $210 million per the redevelopment plans, and can take up to $691 million in taxes).
Per the report:
While (redevelopment debt) doesn’t affect current tax collections, it prevents the city from realizing future ad valorem increases. Tax increments flow to bondholders and are unavailable for public services.
By the time the bonds are paid off, the two redevelopment areas they were pulled for will have been in existence for 50 years.
I’ll have more on this as the process evolves. In the meantime, feel free to drop your questions below.