The city of Bakersfield could see a $17 million hit to its general fund over time and the snuffing out of two housing projects after state auditors decided to block repayment of about $28 million in redevelopment debt and related project funding.
The state said in May it would disallow repayment of $8 million in redevelopment loans for Bakersfield projects. This adds to that figure.
It's all fallout from the decision by state legislators and the governor to shutter the roughly 400 redevelopment agencies across California. Gov. Jerry Brown argued that the property tax money redevelopment agencies had been getting would be better spent on schools and police.
Since then, the state Department of Finance has been combing through lists of debts the agencies had on their books. It has been deciding whether the entities overseeing lingering redevelopment business should continue collecting property tax money to pay those bills.
Bakersfield and many other California cities have been battling the Department of Finance over which of those debts are "enforceable obligations" and therefore should be repaid with property tax money. That's how redevelopment worked before the agencies were closed -- redevelopment agencies received a portion of property taxes, called tax increments, to do projects.
Bakersfield's entire outstanding redevelopment debt -- now standing at $96 million -- is separate from the city's finances. But in general, the debt the state is questioning is tied to loans or other agreements between the city and the former redevelopment agency, so if those debts aren't approved, it would hit the city's finances.
The biggest chunk of redevelopment debt the state is blocking payment of is $17 million for bonds used to build the Rabobank Arena, a redevelopment project dating back to 1997. The redevelopment agency agreed in 1997 to repay the city that money through property tax funding.
According to a letter from the Department of Finance to Bakersfield Finance Director Nelson Smith, debts from agreements between a city and the redevelopment agency it created aren't enforceable obligations.
But Bakersfield administrators say the new laws governing repayment of redevelopment debt are unclear and inconsistent. They'll appeal the state's decision and argue in part that the same laws specifically allow repayment of redevelopment bonds with property taxes, Smith said.
"They are interpreting the law incorrectly in our opinion, or not applying the correct section of the law," Smith said of the state's decision on Bakersfield's redevelopment debt.
"The state of California is taking one section of the new law that's saying all agreements between the city and the agency are null and void," Smith said. "We think there are other sections of the law that are just as applicable."
Representatives from the Department of Finance weren't available for comment Tuesday.
If the city can't convince state auditors to reverse themselves, the city would have to take on the arena debt itself. That would mean a $1.7 million hit to its general fund, which pays for general city services like police and firefighters, each year for 10 years. In the current fiscal year, the general fund totals about $184 million.
Also as a result of the state's decision, two redevelopment housing projects the city had planned to finish will come to a halt. Unlike with the arena, the state isn't blocking the repayment of debt, but instead new money to build those two projects.
That money -- $3 million for construction of low-income veterans housing on 20th Street northeast of the federal courthouse and $1.2 million for Mill Creek Courtyard, low-income housing on the Mill Creek development on S Street south of the Amtrak station -- is the amount of tax increment funding the redevelopment agency would have gotten for those two projects had redevelopment not ended.
With the end of redevelopment, state authorities said cities couldn't start new redevelopment projects. Although land has been bought and cleared for the two low-income housing projects, construction hasn't started on either.
City administrators argue Bakersfield is obligated to finish those two projects because it agreed to build 261 units of affordable housing in exchange for $10.8 million from the state Department of Housing and Community Development. That money has been spent on projects such as the streetscape improvements on Q Street. If it can't fulfill that promise, the city could be forced to repay the $10.8 million, city administrators have argued.
But the state Department of Finance, in its letter to Smith, said the city doesn't have a development agreement in place for the veterans project and only recently entered into an agreement for the Courtyard project, long after that was allowed.
In July, city councilmembers approved making a $4 million loan to Chelsea Investment Corp. to take over the Courtyard project, which stalled when the original developer couldn't get financing for it. Because the redevelopment agency isn't part of that agreement, the $3 million the city is arguing for isn't an "enforceable obligation," state auditors said.
"They just categorically are saying that these (projects without development agreements in place) are not eligible for the tax increment (funding)," said Ryan Bland, community development coordinator for the city. But state auditors are ignoring the details specific to Bakersfield's housing obligations, he added.
"We're saying we do have to contractually fill that ... housing requirement," he said.
The 20th Street veterans housing project would be delayed long-term or cut completely, and the Courtyard project could proceed only if the city finds $1.2 million in substitute funding for the project, City Manager Alan Tandy said in a memo outlining the state's decision.
The city plans to appeal the state's decision, but, Tandy said in his memo, that process is "blatantly unfavorable to appellant cities."