This article comes to us courtesy of California Watch.
More than 400 redevelopment agencies were officially shuttered yesterday, leaving a trail of uncertainty - and a potentially staggering debt load.
Across the state, cities and counties have loaned more than $4 billion to their redevelopment agencies over the past few decades, but according to the law governing how agencies will be dissolved, they may not be able to recover that money.
Until the Department of Finance reviews each agency's plan to pay off existing debts and obligations in late April, it is unclear how much of the money will be returned to cites and counties.
That has put the city of Hercules - which has been footing some of its agency's bills - in a tough spot. Ambac Assurance Corp., which provided financial guarantees for some of the redevelopment agency's bonds, filed a lawsuit against the city on Monday, claiming the city had illegally transferred funds from its redevelopment agency into city coffers.
The city's redevelopment agency defaulted on a $2.4 million bond payment due yesterday. If Ambac wins its case, it could force the city into bankruptcy, said Steve Duran, Hercules' city manager since October. (His declaration filed in the case is available here.)
Despite the uncertainty about redevelopment agencies' future, the city decided to cover the bond obligations in August. Because there is no chance the redevelopment agency will be able to fully cover its debt obligations from the share of property taxes it collects, Duran said the city cannot keep throwing money away.
Cities around the state loaned money to their redevelopment agencies as a way to avoid the costs associated with borrowing from private investors. If the loans are voided, cities and counties might have to tap their general funds to make up for the money they expected from loan repayments. Many of these loans saved taxpayer money, said Dan Carrigg, legislative director of the League of California Cities.
Subsidizing bond payments to keep an agency afloat is somewhat unusual, Duran said.
"Some people will say you should never subsidize city redevelopment money with bond payments; it's just something you don't do," he said. "In hindsight, people would say that, and I would say they're probably right."
The Hercules Redevelopment Agency has been criticized in the past for misspending redevelopment money, including paying $38,400 to a lobbyist and giving six-figure mortgage loans to some employees of the city, according to the Contra Costa Times.
The California Redevelopment Association and League of California Cities have been working with the Legislature to find a way that cities can recoup some of the money, but haven't gotten much traction.
"At a minimum, loans made prior to Jan. 1, 2011, prior to when all the dissolution discussion started to occur, should be recognized as valid and enforceable debt that should be repaid by the successor agency to the local government that made the loan," said Jim Kennedy, interim executive director of the California Redevelopment Association. "There's no reason that I'm aware of that would suddenly turn valid debt into worthless debt simply by virtue of state legislative action."
Kendall Taggart is an investigative reporter for California Watch, a project of the nonprofit Center for Investigative Reporting. Find more California Watch stories here.