Bakersfield city staff got a final answer from the state on Wednesday about whether the city can keep getting property tax money to pay off certain contested redevelopment debts.
The answer was no.
That means the city will likely be on the hook for the largest of those debts: $17 million for bonds used to build the Rabobank Arena.
City Manager Alan Tandy said the city will look at legal recourse to reverse the decision on the arena debt, at least.
Representatives from the state Department of Finance didn't return a call seeking comment Wednesday afternoon, but the four-page letter they sent to Bakersfield Finance Director Nelson Smith details their reasons for blocking the debts.
Since state legislators ended redevelopment late last year, auditors have been combing through lists of debts the redevelopment agencies took on to build projects. They have to validate each debt in order for the successors to the agencies -- in Bakersfield's case, the city itself -- to keep getting property tax money to pay off the debts. That's how redevelopment agencies were funded, too.
But the state Department of Finance has challenged $28 million in redevelopment debt and related funds for Bakersfield, saying they aren't valid redevelopment "obligations." On Wednesday, they held up their challenge to $25 million of that total, changing their stance only on one $3 million item.
The city and state have been debating the issue for months, and city staff met with the state auditors to argue their case in late October.
Much of the state's opposition to the debts had to do with the timing of related agreements. Bakersfield administrators have argued that the laws outlining how redevelopment debts are to be paid off are unclear and contradictory.
The Rabobank Arena is a redevelopment project dating back to 1997. The redevelopment agency agreed in 1997 to repay the city $17 million through property tax funding. But the state argued that that original 1997 debt had already been paid off by 2007, and a subsequent refinancing of that debt didn't include a reimbursement agreement between the redevelopment agency and the city.
The $17 million debt will be broken up over 10 years, amounting to a $1.7 million hit to the general fund each year. The general fund, which pays for general city services like police and firefighters, is $184 million this fiscal year.
"The most egregious finding ... is the arena debt," Tandy said. "That, we think, is wrongfully denied."
"It's small, but it's significant," he added. "When we measure how much our sales tax (revenues) will go up next year based on our projections, this negates about two-thirds of the anticipated growth."
Put another way, that amount of money would pay for perhaps 15 new police officers, he said.
Another item the state is blocking is $3.6 million in loans from the city to the redevelopment agency. The department has said loans between redevelopment agencies and the cities that created them are, for the most part, not valid to be repaid with property taxes.
Not all of the contested items are actually debts. Some are funds the city would get for two unbuilt housing projects: low-income veterans housing on 20th Street and the Courtyard low-income senior housing on the Mill Creek development. That amounts to $4.2 million in property tax money the city would've continued to get for those projects if the state didn't block those items.
Tandy said that means the city will have to find new ways to fund those projects. City staff have said Bakersfield is obligated to finish those projects.
The state changed its stance on one item, $3.1 million in Housing and Urban Development money allocated to the city. Bakersfield made a loan of that money to the redevelopment agency. That was supposed to be paid back with property tax funds. The backup security for the loan, however, was Community Development Block Grant funding the city gets. If the state hadn't reversed itself on this item, the city would've had to use those grants to pay the loan to HUD instead of using them for projects like affordable housing assistance.
According to the letter from the Department of Finance, this is the state's final decision on Bakersfield's list of debts and payments for the first six months of 2013. Each six-month list goes through an approval process.
But Tandy said he didn't think the state was likely to change its opinion on the arena debt with the next go-around.