City Manager Blog - Scott Barber

City Manager

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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