CITY COUNCIL 4.12
City of Watsonville
Finance Department
MEMORANDUM
DATE:
March 31, 2015
By marcela.tavantzis at 3:15 pm, Apr 07, 2015
TO:
Marcela Tavantzis, Interim City Manager
FROM:
Ezequiel Vega, Administrative Services Director
SUBJECT:
Joint Resolution Authorizing a City/Successor Agency Fifth Loan
Agreement in an amount not to Exceed $150,000 for Enforceable
Obligations, Administrative Expenses and Project Related Expenses
AGENDA ITEM:
April 14, 2015
City Council/Successor Agency
RECOMMENDATION: It is recommended that the City Council and the Successor Agency to
the Redevelopment Agency of the City of Watsonville adopt the attached resolution authorizing
the Interim City Manager, on the behalf of both the City of Watsonville and the Successor
Agency to the Redevelopment Agency of the City of Watsonville, to Execute a Fifth Loan
Agreement for Enforceable Obligations, Administrative Costs and Project Related Expenses in
an amount not to exceed $150,000 to become effective only upon approval by the Oversight
Board and the California Department of Finance.
DISCUSSION: ABX1-26, which was enacted by the State legislature on June 27, 2011 and the
subsequent decision rendered by the California Supreme Court in the Matosantos case, called for
the dissolution of all redevelopment agencies in California as of February 1, 2012. As a result,
the Watsonville Redevelopment Agency ceased to exist and the City elected to serve as the
Successor Agency to its dissolved redevelopment agency (“Successor Agency”). The dissolution
legislation established new county-wide funds called Redevelopment Property Tax Trust Funds
(RPTTF) wherein what was formally called tax increment is deposited by the County. County
Auditor-Controllers then distribute to Successor Agencies only that amount needed to meet
Successor Agency California Department of Finance (DOF) and Oversight Board approved
enforceable obligations and administrative expenses with any balance remaining being
distributed to the affected taxing entities.
AB 1484, adopted in June 2012 as clean-up legislation to ABX1-26, allowed cities to loan funds
to their successor agencies for enforceable obligations, administrative costs and project related
expenses. Collectively, this legislation specified that litigation expenses are not administrative
expenses and, as such, are thereby considered project related expenses.
The City and the Successor Agency have previously entered into four loan agreements wherein
the City has advanced funds to the Successor Agency. The first of these loans provided an
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advance of funds necessary in order to meet enforceable obligations due during the second ROPS
cycle. The second loan was required in order to fund costs associated with the preparation of a
legislatively mandated due diligence review that was required to be prepared by independent
outside auditors and the third loan was required to fund litigation expenses against the California
Department of Finance primarily regarding DOF’s disagreement with the due diligence review
results. The first and second loans have now been fully repaid and full repayment of the third
loan is anticipated shortly.
The fourth loan was required to fund litigation expenses associated with another lawsuit against
DOF (City of Watsonville, et al. v. California Department of Finance, et al., Sacramento County
Superior Court Case No. 34-2014-80001910) relative to differing interpretations of what
constitutes a loan pursuant to redevelopment dissolution law. On January 16, 2015, the Superior
Court ruled primarily in favor of the Successor Agency in this lawsuit and found that two public
improvement reimbursement agreements in the combined total amount of $4,429,220 entered
into between the City and its former redevelopment agency in 2006 relative to partial funding for
development of the Civic Center Plaza project were in fact loans and were eligible to be
reinstated.
DOF has now filed its notice of intent to appeal this trial court decision which necessitates the
need to enter into a Fifth City/Successor Agency Loan in order to advance monies to defend this
appeal. In order to seek reimbursement for associated appeal litigation expenses, it is necessary
for the City to enter into a Fifth Loan Agreement with the Successor Agency in order to advance
funds to the Successor Agency for these appeal litigation related expenses. After Oversight
Board approval, these expenses can then be included on Successor Agency’s ROPS which are
then forwarded to DOF for consideration. Assuming DOF approval, the City can then receive
reimbursement for litigation expenses from future RPTTF distributions to the Successor Agency
from the Auditor-Controller.
It should be noted that DOF has, subsequent to our successful litigation efforts at the trial court
level, included a provision in their proposed budget trailer bill that would include a new
definition of loan to specifically exclude reimbursement agreements, such as our Public
Improvement Financing Agreements, from being eligible for reimbursement and proposes that
this new definition be applied retroactively. This is a blatant attempt by DOF to legislatively
reverse the trial court decision and also appears to represent a clear acknowledgment by DOF
that current law does not support its interpretation that reimbursement agreements are not loans.
This proposed budget bill was not well received by the Assembly Budget Subcommittee and is
scheduled to be considered by the Senate Budget Subcommittee on April 9, 2015. However, if
the budget trailer bill, as it is currently drafted, is ultimately adopted, the need to proceed with an
appeal or to defend the appeal would be negated and further litigation and litigation related
expenses would be suspended.
Additionally, DOF has also included language in this same proposed budget trailer bill that
would now classify litigation associated expenses as administrative expenses rather than as
project related expenses. If this provision is ultimately adopted by the State, repayment of these
litigation related City/Successor Agency loans would have to come from the Successor Agency’s
administrative allowance (presently $250,000 per fiscal year from RPTTF) rather than from a
separate new allocation from the Redevelopment Property Tax Trust Fund. Accordingly, the
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City/Successor Agency loan could still be repaid from RPTTF but the City may have to absorb
other Successor Agency administrative expenses currently funded through RPTTF.
FINANCIAL IMPACT: Approving the City/Successor Agency Fifth Loan Agreement in an
amount not to exceed $150,000 provides the City the ability to get reimbursed for actual
litigation costs currently funded through the City’s risk management fund from future allocations
of RPTTF received by the Successor Agency together with interest of up to $1,500 to be earned
at the Local Agency Investment Fund (“LAIF”) rate, contingent upon approval of the Oversight
Board and the California Department of Finance.
ALTERNATIVES: The City Council and the Successor Agency could elect not to approve this
City/Successor Agency loan, but doing so would make it impossible for the City to be
reimbursed for these redevelopment dissolution appeal litigation expenses.
ATTACHMENTS: None
cc:
City Attorney/Successor Agency Counsel
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