City Manager Blog - Scott Barber

City Manager

Pledged Assets in the Public Realm

Pledged Assets

If you have experience in finance or just look up online the definition of “pledged assets”, you will note that typically a pledged asset (real estate) is an asset for which an encumbrance against the property is recorded for the benefit of the lender for the purpose of securing a debt; the lender maintains its right to possess the asset until the debt is paid in full or the lease expires, but never takes ownership of the asset.  Pretty standard stuff when you think about this.

So, how does this apply to the City of Riverside, you might ask?  I’ve attached a list of City Assets that have been pledged as a part of various financings that the City has undertaken- the list is 29 assets and as you can see, we have a number of very important facilities that have been pledged.  The obvious question that comes to mind based upon the standard definition of “pledged assets” is this: If the City defaults on these payments, are we going to lose a Fire Station or two??

Fortunately, the bottom line answer for public entities (like the City of Riverside) in this regard is “no” because the California Constitution doesn’t allow for it. The assets are pledged as a security enhancement for the lender, but due to the limitations of the State Constitution, the lender may only access the property for the term of the lease.  The lender’s specific remedies involve taking possession of the property and reusing it for another purpose, but include only limited facility modifications and reuse for a different purpose… and the property returns to the City at the end of the defined lease term. There is no provision that would “hand the keys” over to a third party permanently.  And given the importance of these facilities, the City is very motivated to make certain we make all of our payments. 

Events

If you don’t subscribe to “15 Favorite Things to Do”, I highly recommend that you consider it (you can sign up at www.inlandarts.com); just a couple of great items from this-

  • Terrific Exhibit: 2012 UCR 1st and 2nd Year MFA Exhibit at the Riverside Arts Museum;
  • Riverside Reads Farewell to Manzanar at the Riverside Public Library

Have a look at the website for more details… and stop by downtown Riverside this weekend for the “Show and Go” car show (May 4th, 5th and 6th).

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Is the Fox Theater at risk of being sold due to the end of Redevelopment?

This question has recently come up, and the short answer is “no”.  The Redevelopment Agency purchased the old Fox Theater and then transferred the property to the City, many years prior to AB26.  The City took control of the property so that we could use our design/build process to conduct the renovations.  The agency has not had control of this property for years- so it is not on the list of properties that the City transferred to the the Successor Agency because all of the RDA’s involvement on this project (as I have already stated) pre-dated AB26 and the deadline that the State Controller recently established for the return of transferred properties, which was January 1, 2011.  The Fox is safely in the hands of the City and not at risk.

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Update on the City’s Finances- Redevelopment wind-down

If you’ve looked at the Press Enterprise recently (see http://www.pe.com/local-news/riverside-county/riverside/riverside-headlines-index/20120420-riverside-state-says-no-to-some-redevelopment-debts.ece) or attended recent Council meetings, you’ve probably read or heard that the State Department of Finance (DOF) has identified twenty-four items from our Recognized Obligation Payment Schedule (ROPS) as potentially not “enforceable obligations”.  As alarming as this is- the total dollar amount is $157 million out the $1.57 billion on the ROPS, I believe it is important for Riversiders to know the facts about this from City Hall.

Question: Because the DOF has stated that some of the loans between the City and the former Redevelopment Agency are not enforceable obligations, does that mean that these loans were illegal when they occurred?

Absolutely not- the DOF is not stating in their document that these loans were “illegal”; what they are saying is that AB 26 legislates that loans between the former agency and the city that took place more than two years after the formation of the agency are invalidated.  If you think about it, does that make any sense?  Changing the rules after the fact is just plain wrong and cities throughout California will be taking this issue up with Sacramento… and our Legislature sees this problem as well, as evidenced by AB 1585, which passed the Assembly by a supermajority and is now in the hands of the State Senate.  This bill would correct this huge error in AB26.

Question: Why would the City engage in “interfund or interagency” loans?

The City’s Charter provides us the authority to loan money from one fund to another (see City Charter Sec. 1110); governmental accounting rules and the Government Finance Officers Association all provide guidance for interfund loans.  There are several advantages to interfund loans: they carry an interest rate equal to the City’s pooled investment rate, thereby ensuring that the lending fund does not suffer any economic penalty for making the loan.  Also, this interest rate is usually less than an external borrowing interest rate, thereby saving the city additional interest charges and the fees associated with the issuance of debt to an outside party.  Just for additional clarification, interfund and interagency loans for the City of Riverside basically function in the same way- we loan money from one of our funds to another.  Because the former Redevelopment Agency was a separate legal entity, those loans can be termed “interagency” loans but function the same as any interfund loan.  As stated in our appeal letter to DOF regarding our ROPS, invalidating these loans between our former RDA and various City funds puts all of us at risk- these loans were legal when we entered into them and invalidating them creates a financial imposition on Riverside’s ratepayers.  This is wrong and has to be corrected.  I will keep you updated as we move through this process.

Question: Does the end of our Redevelopment Agency have an impact on the financing of the Hyatt Place hotel?

The financing of the Hyatt Place hotel is likely going to be a separate blog article from me, because, quite frankly, it’s one of the more complicated financing deals that I have seen and I believe that the level of detail needed to explain it is worthy of another article.  However, it is important in the context of our wind-down of Redevelopment to point out that as a part of the Hyatt Place financing, the Redevelopment Agency was placed between the City and the Hyatt Place Developer.  Fortunately, the Redevelopment Agency’s guarantee of the Hyatt Place funding was placed on our ROPS and was approved by the DOF.  This extra layer of insulation is helpful to us- and speaking of insulation, I have heard a couple of public comments on the Hyatt, and one point I do want to clear up here is this- the City didn’t loan the Hyatt $1.5 million as has been stated a couple of times by speakers during public comment. When the City issued debt to provide financing to the developer, $1.5 million was included in the financing and was placed in the Certificates of Participation (COP) debt service reserve fund as security in the event of a default; the developer also placed $1.5 million of his own funds in a second “reserve fund” held by the city as additional security against a default.  An additional $2 million was included in the original financing to make the debt service payments during construction.  The construction funds, costs of issuance, reserve fund and funds borrowed to make the early debt service payments will all be repaid by the developer and are in no way being funded by the City.  The recently completed hotel serves as collateral for the loan agreement between the developer and the former Redevelopment Agency to protect against any default by the developer.  As I mentioned, I’ll blog about the overall Hyatt Place financing in the future to assist everyone with a complete understanding of what took place.

-Thanks again, Riverside, for reading my blog and providing me with the opportunity to bring this information to you.

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