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AGENDA BILL Agenda Item No. 7(A) Date: December 19, 2011 To: City Council of the City of El Cerrito From: Lori Treviño, Redevelopment Manager Hilde Myall, Senior Project Manager, Housing Dwayne Dalman, Senior Project Manager, Economic Development Subject: Confirming the Intent to Make the Opt-In Payment for the Voluntary Alternative Redevelopment Program ACTION REQUESTED Staff is requesting the City Council adopt a Resolution confirming its intent to make the opt-in payment for the Voluntary Alternative Redevelopment Program (VARP) and its authorization of staff to make the payment on January 15, 2012, contingent on the State Supreme Court ruling that the State’s abolition of redevelopment agencies and its establishment of the VARP are both constitutional. BACKGROUND On July 29, 2011, the State enacted AB1x26 and AB1x27, which dissolves redevelopment agencies in California and provides for an alternative program that cities can elect to participate in. That participation requires an opt-in payment in FY2011-12 and annual payments thereafter, which in the case of El Cerrito would be $1,847,232 in 2012, about $500,000 in FY2012-13, and escalating annually thereafter. The California Redevelopment Association, League of California Cities and other plaintiffs challenged the legislation as unconstitutional in violation of Proposition 22. The California Supreme Court issued a stay of both pieces of legislation, with the exception of those sections that put redevelopment agencies into suspension, until the court issues a decision on the case, anticipated no later than January 15, 2012, the date on which the first half of the FY2011-12 opt-in payment is due. The Agency is currently in suspension and the City has taken the actions required under the portions of the legislation that are not stayed, as well as the actions required to opt into the VARP, contingent on it being ruled constitutional by the Court. Specifically, on September 19th, the City Council adopted a resolution expressing non-binding intent to participate in the VARP and conducted the first reading of an ordinance conditionally electing and implementing participation by the City and the Agency in the VARP. The City Council and Redevelopment Agency Board adopted resolutions approving and authorizing execution of an Agency Transfer Payment Agreement between the City and the Agency to fund the opt-in payment. On October 3rd, the City Council conducted the second reading on the contingent opt-in ordinance and it was subsequently enacted as Ordinance No. 2011–04. ---PAGE BREAK--- Agenda Item No. 7(A) Page 2 Although no additional action is required by the City Council to opt into the VARP, contingent on the Court ruling, staff wishes to present a summary of redevelopment activities and financial projections under the VARP and to confirm the City Council’s intent to make the VARP payment. ANALYSIS Each year, the Agency staff prepares a ten-year projection of the Agency finances for inclusion in the Annual Budget. When preparing the Agency’s FY2011-12 Budget, there were too many unknowns regarding the Agency’s financial situation to complete a useful analysis. Staff has now been able to prepare a baseline projection for financing economic development, redevelopment and affordable housing activities under the VARP. For the purposes of this Report, staff is providing a six-year projection, which is the timeframe in which the ability to fund projects and programs would be most restricted by the VARP payments. Several Agency obligations end in the fifth and sixth year, so the VARP payment would be less restrictive going forward. For the purposes of this analysis, revenue and expense projections for the Agency and the El Cerrito Municipal Services Corporation (MSC) have been combined. Should the Agency be dissolved and the VARP be found unconstitutional, implementation of Agency projects and programs will depend on the defensibility of its Cooperation Agreement with the City and the MSC. That scenario is not covered by these projections. REVENUES The Agency receives about $5 million annually in tax increment, split 80 percent for redevelopment and 20 percent for affordable housing. (This is down from a high of nearly $5.6 million in FY2007-08.) Graph 1 shows the revenue and split through FY2016-17, which are based on a three percent underlying growth in assessed values and no new development. ‐ 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Redev Hsg Redev Hsg Redev Hsg Redev Hsg Redev Hsg Redev Hsg 11‐12 12‐13 13‐14 14‐15 15‐16 16‐17 Thousands Redevelopment & Housing Funds by Fiscal Year Graph 1: Agency Revenues 2011‐12 thru 2016‐17 Excluding Interfund Loan Payments Sale of Assets Interest Rental Income Tax Increment ---PAGE BREAK--- Agenda Item No. 7(A) Page 3 Not included are repayments of loans and advances between the Agency’s two funds, as they do not represent revenue to the Agency, but rather cash flow between its two funds. The anticipated payment to the Municipal Services Corporation (MSC) from Property Development Corporation for the right to the Hill Street Parcel is included in FY2011- 12. The Agency’s revenues rely on underlying changes in the real estate market, and the Agency can influence the growth of its revenue stream by pursuing new development, whether on privately- or MSC-owned properties. While the decline in tax increment revenue since FY2007-08 had already highlighted the need for near-term disposition and redevelopment of Agency-owned property, the impact of the State takeaways since that time has heightened its importance. As such, also included in the projections is an anticipated sale of the Mayfair Block for development in FY2016-17, a necessary assumption for the Agency to maintain sufficient cash to continue its activities, should property values in the Redevelopment Project Area not rebound in the next few years. The City will be more able to pursue development if it opts into VARP. (Under the VARP, it may be advantageous to return ownership of MSC-owned vacant land to the Agency, an action staff would evaluate, if necessary.) EXPENSES Graph 2 shows the distribution of Agency expenses for redevelopment and housing, excluding debt service, pass-through payments, and inter-fund loan repayments, so that the City Council can see the expenses over which it has influence or discretion and the impact of the VARP payment on discretionary resources. VARP payments consume a significant amount of Agency resources, nearly forty percent of FY2011-12 annual revenues and about ten percent thereafter. When Agency obligations are excluded from that calculation, the VARP consumes nearly all of the Agency’s discretionary revenue for FY2011-12 and the Agency can only continue ‐ 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 Thousands Agency Expenses 2011‐12 thru 2016‐17 Discretionary & VARP VARP Payment Indirect Program & Overhead Note Payment Projects Operations & Programs Personnel ---PAGE BREAK--- Agenda Item No. 7(A) Page 4 operations going forward by using the assignment fee being paid by Property Development Centers to make the VARP payment. Making the FY2011-12 payment may require some use of affordable housing funds as permitted by AB1x27 in order to maintain positive cash flow in all funds through FY2016-17, a decision the Council may need to consider in the spring. Note that the projected expenses assume that legislation similar to SB450, which would have limited the amount of housing set-aside funds that could be used for administrative expenses, will be passed in the next year or two, so projected overhead paid to the City’s General Fund is dramatically reduced. For the purposes of this projection, the one-time payment of the Valente note is included in FY2016-17, given that it would be required under the assumed sale of the properties on the Mayfair Block. By taking these various actions to preserve cash flow, the Agency is able to keep the small remainder of available resources for economic, redevelopment and affordable housing projects and programs. PRIORITY ACTIVITIES As most fully described in the MSC’s and Housing Division’s FY2011-12 Annual Budgets, the following are projects and programs that staff will be able to undertake assuming this baseline revenue through FY2016-17, as it pursues the goal of encouraging investment along the San Pablo Avenue corridor. They include: Collaborating with Planning staff on completion and adoption of the San Pablo Avenue Specific Plan, based on the transit-oriented development standards and design guidelines identified as enabling development feasibility Collaborating with the Building & Planning Division in facilitating economic development opportunities and transit oriented development projects Implementing the Del Norte TOD Strategy and San Pablo Avenue Specific Plan, in particular initiating predevelopment activities for transit-oriented development of MSC-owned properties and other transit-oriented sites Continuing to work with owners of key properties on San Pablo Avenue for potential development, redevelopment or other improvements to their properties Continuing to develop and implement business marketing programs, including updating brochures and website content to support local businesses Continuing implementation of the City’s business attraction and retention programs to provide shopping and dining opportunities for residents and visitors, and to bolster economic development efforts and City revenues Collaborating with Planning, Environmental Services, and Engineering staff on parking standards and programs Coordinating with Pleasantown Motion Picture Company on completion of tenant improvements to the Cerrito Theater as provided in the Cerrito Theater Lease Agreement ---PAGE BREAK--- Agenda Item No. 7(A) Page 5 Funding a small portion of the loan to Eden Housing for pre-development activities of an affordable housing project at 10860 San Pablo Avenue and negotiating a disposition and development agreement for transfer of the property Developing an inclusionary housing ordinance Continuing to monitor affordable housing in El Cerrito for compliance with existing agreements Continuing funding of City activities in support of redevelopment project and programs, as well as overhead expenses Various projects have been put on hold because of resources being directed towards the VARP payment. Should property values increase at a greater rate than the baseline three percent growth assumed (whether through a return in growth of the Prop 13 inflation factor, turnover of properties, or new development) or other funding sources be secured, the Agency will be able to restore previously funded projects, or add new projects and programs. Those include: Pursuing an increased number of development projects with Agency participation, whether financial or other forms of assistance and incentives, through disposition and development agreements, loan agreements, or owner participation agreements Reinstating funding of the Commercial Rehabilitation Loan Program with priority given to the southern end of San Pablo Avenue around the Cerrito Theater and El Cerrito Plaza Shopping Center Fully funding the Agency’s loan commitment to Eden Housing for its senior housing project Fully funding the loan commitment to Resources for Community Development for Ohlone Gardens housing project Performing an inclusionary housing study, design and implement an inclusionary housing program Providing funding to owners of Unreinforced Masonry Buildings to assist in their compliance with the URM ordinance Should the City Council wish to reprioritize redevelopment, economic development, and affordable housing projects and programs, there will be an opportunity to do so during the upcoming FY2012-13 budget process. FINANCIAL SUMMARY Graphs 1 and 2 summarized the projections of revenue and expenses shown in detail in Table 1 below, along with the cash flow that would result. The projections rely on assumptions that allow the Agency to retain a positive net cash flow during the next six years while maintaining the limited projects and programs described above. ---PAGE BREAK--- Agenda Item No. 7(A) Page 6 Table 1: El Cerrito Redevelopment Agency FY2011-12 thru 2016-17 Cash Flow under Voluntary Alternative Redevelopment Program (Shown in Thousands) 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 Redev Hsg Redev Hsg Redev Hsg Redev Hsg Redev Hsg Redev Hsg Cash Starting Balance $1,099 $118 $836 $63 $273 $104 $147 $70 $116 $56 $215 $21 Tax Increment, Rent & Interest 4,086 1,005 4,275 1,052 4,437 1,092 4,610 1,134 4,785 1,178 5,043 1,241 Sale of Assets 1,850 - - - - - - - 1,710 - - - Net Transfers (Loan (406) 406 (181) 181 194 (194) 244 (244) 63 (63) 245 (245) Funds Available $5,529 $1,411 $4,093 $1,233 $4,631 $898 $4,853 $891 $6,557 $1,115 $5,288 $996 Debt Service & Fees 1,368 603 1,418 594 1,464 606 1,517 597 1,600 837 1,688 604 Pass-Thru & Fees 979 12 1,066 13 1,121 13 1,185 14 1,249 14 1,342 15 Note Payment 288 - 288 - 288 - 288 - 1,738 - - - VARP Payment 1,447 400 471 - 508 - 563 - 602 - 644 - Projects 141 47 - 200 - - - - - - - - Personnel 306 91 313 146 321 149 329 153 337 157 346 161 Operations & Programs 266 99 266 100 266 63 276 41 276 42 276 42 Indirect Program & Overhead 996 214 850 140 825 100 800 100 750 100 750 100 Funds Required $5,792 $1,467 $4,672 $1,192 $4,794 $932 $4,958 $906 $6,553 $1,150 $5,046 $922 Net Cash Balance $836 $63 $257 $104 $110 $70 $42 $56 $121 $21 $457 $95 Highlighted on the table are revenues that Agency activities may be able to influence and expenses the Agency would have the discretion to change over the next six years. They are as follows: While tax increment revenue growth assumes a baseline three percent growth, staff will pursue development activities, which if successful, would increase assessed values in the Project Area. Staff will pursue disposition and development of the Mayfair Block in the near term. That disposition and retiring the related note are assumed in FY2015-16, necessary to maintain a positive cash flow in that year and the following. Assumed in FY2011-12 is the use of $400,000 in housing funds for the initial VARP payment. This is an allowable use of housing funds for the first VARP payment only. At this time, it is assumed for cash flow purposes. As revenue, expense, and cash flow projections are refined, should use of housing funds still appear necessary, staff will return to the City Council to consider the necessary findings prior to the end of the fiscal year. Projects in the cash flow projections include 1) $141,000 to completion of tenant improvements to the Cerrito Theater underway in the current fiscal; 2) $47,000 to fund a small portion of the loan to Eden Housing for pre-development activities; and 3) $200,000 to fund a portion of the loan to Eden Housing for the entitlement process, including architecture, environmental review, and Planning and Building fees. Note that those fees would cycle back to the City’s General Fund. The Agency may wish to change priorities and fund other efforts. ---PAGE BREAK--- Agenda Item No. 7(A) Page 7 Lastly, highlighted are the budgeted amounts for personnel expenses; operations, (for example, consulting contracts, property management, and work supplies); programs listed above, and funds transferred to the City’s General Fund for indirect expenses and overhead, all of which the Agency Board can adjust to reflect any changes in priorities. POTENTIAL DISSOLUTION Should the Supreme Court ruling instead result in dissolution of the Agency, the City will become a Successor Agency under AB1x26, per a City Council Resolution already adopted, and funding of the Agency’s discretionary budget would be at serious risk, if not eliminated. While the City’s Redevelopment Plan was adopted by ordinance and would continue to exist, its implementation was assigned to the MSC by way of the Cooperation Agreement. The City Council would need to evaluate the extent to which it would want to defend the Cooperation Agreement for continuation of redevelopment and economic development activities, and also to pursue tax increment funding, which would be subject to the review of the Oversight Committee and the discretion of the County Auditor-Controller for distribution. All Agency-owned properties but one were conveyed to the MSC for redevelopment purposes. Despite the conveyances being to a private corporation, under dissolution the State still might try to claw back those properties, in order to sell them and transfer the proceeds to other taxing agencies. Therefore, the City Council might also face a decision whether to defend those conveyances, should the State decide to pursue the properties. Should dissolution occur, the City would need to decide whether to take over the Agency’s affordable housing projects and programs or allow them to be assigned to the Housing Authority, as provided by AB1x26, and staff would return with a resolution for the City Council’s consideration. Under dissolution, the property conveyed to the City for affordable housing development would not be at risk of State take back, but no further funding would be anticipated for City participation in a project on the property. CONCLUSION The State’s attempt to eliminate redevelopment agencies and require cities to pay to participate in future revitalization efforts is misguided and illegal. Voters have repeatedly sought to end State raids of local government funds, of which this is just another example. However, should the Supreme Court rule the legislation constitutional, the City Council has already decided to participate in the State program, though under protest, by adopting the required ordinance. While the City Council needs to take no further action to opt into the VARP, staff is asking for reaffirmation of the decision to opt in and make the first VARP payment on January 15, 2012. There would be a reduction in revenue available for projects, programs, personnel, operations, and the General Fund transfer for indirect expenses and overhead. However, opting in would enable the Agency to continue with projects and programs that, although scaled back, are valuable to the community. It would enable the Agency to continue to pursue development projects that revitalize San Pablo Avenue and increase revenues to the Agency and City. ---PAGE BREAK--- Agen~a Item No. 7(A) Under dissolution of the Agency, whether resulting from a City Council decision not to make a V ARP payment or from imposition of agency dissolution by the Supreme Court, the Agency and the City's General Fund would suffer significant revenue losses over many years; possibly eliminate all redevelopment, economic development, and affordable housing efforts; and require the City to -actively and forcefully defend the MSC Cooperation Agreement and property conveyances, should it wish to continue implementation of its Redevelopment Plan. LEGAL CONSIDERATIONS The City Attorney and Agency Counsel have reviewed this report and the attachments. Reviewed by: Scott Hanin City Manager & Executive Director Attachments: 1. Resolution of the City Council of the City of El Cerrito Reaffirming its Prior Actions Taken Pursuant to Health and Safety Code Section 34193(b) to Elect and Implement Participation in the Voluntary Alternative Redevelopment Program Payment Plan Pursuant to Part 1.9 of the California Community Redevelopment Law PageS ---PAGE BREAK--- Agenda Item No. 7(A) Attachment 1 RESOLUTION NO. 2011–XX RESOLUTION OF THE CITY COUNCIL OF THE CITY OF EL CERRITO REAFFIRMING ITS PRIOR ACTIONS TAKEN PURSUANT TO HEALTH AND SAFETY CODE SECTION 34193(b) TO ELECT AND IMPLEMENT PARTICIPATION IN THE VOLUNTARY ALTERNATIVE REDEVELOPMENT PROGRAM PAYMENT PLAN PURSUANT TO PART 1.9 OF THE CALIFORNIA COMMUNITY REDEVELOPMENT LAW WHEREAS, pursuant to the California Community Redevelopment Law (Health and Safety Code Section 33000 et seq.; the “Redevelopment Law”), the City Council (the “City Council”) of the City of El Cerrito (the “City”) adopted the Redevelopment Plan for the City of El Cerrito Redevelopment Project Area by Ordinance No. 77-17, on November 28, 1977, as amended by Ordinance No. 80-13, adopted on December 15, 1980; as amended by Ordinance No. 89-5, adopted on July 10, 1989; as amended by Ordinance No. 94-4, adopted on July 25, 1994; as amended by Ordinance No. 2004-3, adopted March 1, 2004; as amended by Ordinance No. 2005-01, adopted March 21, 2005; and as further amended by Ordinance No. 2006-10, adopted November 6, 2006 (the “Redevelopment Plan”); and WHEREAS, the El Cerrito Redevelopment Agency (the “Agency”) is responsible for implementing the Redevelopment Plan pursuant to the Redevelopment Law; and WHEREAS, as part of the 2011-12 State budget bill, ABX1 26 (the “Dissolution Act”) and ABX1 27 (the “Voluntary Program Act”; collectively, the “Redevelopment Restructuring Acts”) have been enacted to significantly modify the Redevelopment Law generally as follows: • the Dissolution Act immediately suspends all new redevelopment activities and incurrence of indebtedness, and dissolves redevelopment agencies effective October 1, 2011; and • the Voluntary Program Act, through the addition of Part 1.9 to the Redevelopment Law (“Part establishes a voluntary alternative redevelopment program whereby the Agency is authorized to continue to exist upon the enactment of an ordinance by the City to comply with the Voluntary Program Act, including payment of an annual remittance to the County Auditor-Controller (“Continuation Ordinance”); and WHEREAS, on August 11, 2011, the California Supreme Court (the “Court”) agreed to review the California Redevelopment Association and League of California Cities’ petition challenging the constitutionality of the Redevelopment Restructuring Acts and issued an order granting a partial stay on specified portions of the Redevelopment Restructuring Acts, as modified on August 17, 2011 (the “Stay”), including a stay of the provisions of the Voluntary Program Act; and WHEREAS, the City has enacted a Nonbinding Resolution expressing its intention to adopt the Continuation Ordinance; and ---PAGE BREAK--- Agenda Item No. 7(A) Attachment 1 WHEREAS, the City Council introduced a Continuation Ordinance at its September 19, 2011 meeting and adopted the Continuation Ordinance on October 3, 2011 as Ordinance No. 2011-04, conditioned upon the lifting of the Stay and the Court’s determination that the Voluntary Program Act is constitutional; and WHEREAS, Part 1.9 authorizes the Agency to enter into an agreement with the City whereby the Agency agrees to transfer a portion of its Tax Increment to the City in an amount not to exceed the amount of the City’s annual remittance to the County Auditor-Controller (“Agency Transfer Payment Agreement”); and WHEREAS, the Agency and the City entered into a Agency Transfer Payment Agreement on September 20, 2011, which provides that the Agency Transfer Payment Agreement is immediately binding upon the parties, but the operation of its terms will be conditioned upon the lifting of the Stay and the Court’s determination that the Voluntary Program Act is constitutional; and WHEREAS, the City Council hereby reaffirms that it has enacted Ordinance No. 2011-04 as of October 3, 2011, whereby the City elected to comply with Part 1.9, including the making of the Remittance Payments called for in Section 34194 of the Redevelopment Law in the event that the Supreme Court determines that the Voluntary Program Act is constitutional, and whereby the Agency will no longer be subject to dissolution and the other prohibitions and limitations of Parts 1.8 and 1.85 of the Redevelopment Law as added by the Dissolution Act which Ordinance is conditioned upon the lifting of the Stay and the Court’s determination that the Voluntary Program Act is constitutional. NOW THEREFORE, BE IT RESOLVED, that the City Council hereby reaffirms that it has enacted Ordinance No. 2011-4, whereby the City elected to comply with Part 1.9, including the making of the Remittance Payments called for in Section 34194 of the Redevelopment Law in the event that the Supreme Court determines that the Voluntary Program Act is constitutional, and whereby the Agency will no longer be subject to dissolution and the other prohibitions and limitations of Parts 1.8 and 1.85 of the Redevelopment Law as added by the Dissolution Act in the event that the Supreme Court determines that the Voluntary Program Act is constitutional. BE IT FURTHER RESOLVED, the City Council does not endorse the Redevelopment Restructuring Acts and is taking actions required by those Acts in protest. The Acts constitute another misguided and illegal State budget raid of local government funds that voters have repeatedly sought to end, most recently in November 2010 when an overwhelming 61 percent of voters supported Proposition 22, electing to stop State raids of local government funds, including redevelopment funds, which are generated and intended to be spent locally. The Acts will destroy economic development, affordable housing, and revitalization efforts in El Cerrito. The above and foregoing resolution was duly and regularly passed and adopted at a meeting by the City Council of the City of El Cerrito on the day of 2011 by the following vote: ---PAGE BREAK--- Agenda Item No. 7(A) Attachment 1 AYES: NOES: ABSENT: ABSTAIN: I certify that the foregoing is a true and correct copy of the original Resolution on file in the office of the City Clerk of El Cerrito. Cheryl Morse, City Clerk Approved: William C. Jones III, Mayor