FresnoBee.com News Blog: City Council may dig into RDA's past

The Fresno City Council has added another item to this Thursday's agenda: Should the three members of the council's Finance and Audit Committee become old-fashioned muckrakers?

If the council votes yes, here's my suggestion: Since Ida Tarbell is dead, hire Ron Chernow as the committee's special investigator.

That's because the committee is headed into the financial territory blazed by Standard Oil and the young John D. Rockefeller Sr. They'll need a guide to the 19th century era of Robber Barons, self-dealing and the amazing leverage of interlocking corporate combinations. Chernow wrote a superb biography of Rockefeller, the top baron of all time, called "Titan." Chernow is still alive.

The council on Thursday will discuss two items concerning the Finance and Audit Committee.

1.) Should Council President Clint Olivier appoint a council member to be the committee's chairman? If so, the chairman would select two more colleagues to serve on the committee. City Manager Mark Scott also would choose someone from the executive side of City Hall to serve as the committee's secretary.

2.) Should the committee then go about the task of figuring out the "how" and "why" of the $59 million debt allegedly owed by the former Redevelopment Agency to the City of Fresno.

If the council votes yes on both items and the committee takes its charge seriously, we may see quite a show for City Hall watchers. The investigation would be full of numbers and percentages and legalisms. For those reasons, the investigation would have little or no interest to the average consumer of news.

But, based on my e-mail, there are about 13 people out there who find the former Fresno Redevelopment Agency and the political world it lived in for 55 years to be fascinating stuff. The Finance and Audit Committee's investigation, should it be on the up-and-up, would be heaven for that baker's dozen.

Here's the backstory.

Gov. Jerry Brown and his legislative allies spent much of the past year trying to kill the state's approximately 400 redevelopment agencies. The state has big money problems. It also has big financial obligations to services such as education and public safety.

Brown wanted the RDA's property taxes to go to schools and public safety. This would reduce the state's obligations to schools and public safety. That would improve Sacramento's finances.

The RDA's fought back in court and lost. By law, redevelopment agencies were to be dead and buried by Feb. 1. Of course, death is never easy -- especially when it's sudden. This rule applies to RDAs. The reason: all but the smallest agencies would have many outstanding contracts and debts when Feb. 1 rolled around.

The Fresno Redevelopment Agency wasn't the state's biggest RDA. But it was a pretty darn big.

To unwind the affairs of 400 RDAs, the state decided each RDA by Feb. 1 would transition into a "successor agency." This successor agency would be responsible for closing out the now-defunct RDA's affairs.

There would be a chain of command to this process. The successor agency would do a ton of work, but it would have almost no power. Its every decision would be reviewed by a seven-member "oversight board." Most of the members of the oversight board would be appointees from government and quasi-government entities that would gain financially when the RDA's were finally gone for good.

And above the oversight board stands the state Finance Department. When you think state Finance Department, think Jerry Brown.

So, on Jan. 26, the Fresno City Council met to begin City Hall's journey on this unusual path. Since 1997, the council also sat as the governing board of the Fresno Redevelopment Agency.

That's right -- the RDA and the City Council (in essence, City Hall) are one and the same thing. But more on that later.

The council on Jan. 26 decided that the successor agency to the Fresno Redevelopment Agency would be the City of Fresno.

About a week ago, I wrote a blog in which I questioned whether this decision compromised the city's sovereignty. After all, a staff report had said the successor agency would be at the beck-and-call of the oversight board. How could a proud charter city like Fresno be at the beck-and-call of anything other than the voter?

A council member called me to say I had misunderstood the council's action. Yes, the council had designated the "City of Fresno" as the successor agency, the council member said. But the "City of Fresno" in this situation wasn't the 500,000 people and 105 square miles that constitute the physical reality of California's fifth largest city, he said.

Instead, "City of Fresno" in this situation was merely a legal stratagem to comply with state law. The term didn't refer to the real City of Fresno, the council member said.

The council member added that the official name of the successor agency of this make-believe City of Fresno is "Successor Agency."

If I understood the council member correctly, every noun in what he told me is completely meaningless. That's government, I told myself.

The council on Jan. 26 also decided how the actual work of unwinding the RDA would get done. The council contracted with the Fresno Revitalization Corporation to perform that chore. The Revitalization Corporation was created by the City Council in the early 1990s because the council wasn't happy with the work being done by the RDA.

In essence, the council some 20 years ago decided that having two government agencies doing a bad job is better than one.

By January 26, 2012, a Revitalization Corporation that had done nothing of consequence in many years (it had become just a shell entity) and a Redevelopment Agency with only five days to live found themselves located in the same second-floor suite of offices on Tulare Street. That made transferring RDA work and employees to the Revitalization Corporation very easy.

The council on Jan. 26 also created a board to run the Revitalization Corporation. That eight-member board consists of the seven council members and Mayor Ashley Swearengin.

Among its final pieces of business on Jan. 26, the council approved the Amended Enforceable Obligations Payment Schedule. This list contains the debts and obligations that City Hall believes are legitimate contracts from the former RDA that must be fulfilled before the governor can declare final victory.

The list is mandated by the same law that killed the RDAs.

Fresno's list has nearly $155 million in debts. Fresno City Hall was saying to the governor: You'll get your money, but not until we spend $155 million of it.

It's a safe bet that City Hall and the oversight board will have a few fights over this list.
You ask: What's this got to do with the City Council's Finance and Audit Committee?

Well, it turns out that $59 million of that $155 million are IOUs to the City of Fresno. And when I say City of Fresno, I refer not to a legal illusion but to the City of Fresno that has 3,100 employees and a general fund deficit measured in millions of dollars (sometimes tens of millions).

Redevelopment Agency Executive Director Marlene Murphey announced this $59 million RDA debt (which dates back to the 1950s, when the RDA was created) at the Jan. 26 council meeting. She mentioned it in passing. No one from the council asked questions about such a large and amazing debt.

It was dinnertime when Murphey mentioned the $59 million debt. The council had just finished listening to a 90-minute workshop on Sustainable Fresno. Council members asked question after question about things such as the glory of energy savings when you turn off lights in an empty room.

That $59 million debt? The council's attitude was "ho-hum." There were only 14 people in the audience at the time -- Greg Barfield, myself and a dozen RDA employees. My eyes got big at the sound of a $59 million debt. No one else stirred.

The idea of a huge RDA debt owed to City Hall is something of an urban legend among City Hall watchers. They had heard of its existence, but weren't sure of its size or origin. And they couldn't figure out why the City Council, which is constantly bemoaning the city's lack of money, didn't simply put on its RDA board hat and make the RDA send all that precious cash to City Hall's coffers.

The right hand pays the left hand. What could be easier?

Some of those City Hall watchers have called me over the years. I always told them: "I know nothing. I'll check it out later."

Jan. 26 was got me off my rear.

Last week, I started asking questions at City Hall and Revitalization Corporation headquarters. Everyone was very nice. But everyone was very busy, too. After several brief interviews, I still wasn't sure I understood the genesis of that $59 million debt.

Finally, on Thursday, I sent two e-mails to Council Member Lee Brand. Brand has more than 30 years experience as a businessman. He might be the council's top numbers-cruncher.

My first e-mail, sent early in the day, asked: The City Council/RDA board doesn't let a multi-million-dollar debt to City Hall remain unpaid year after year unless it serves a strategic purpose for the city and the public. What is that purpose?

In my second e-mail to Brand, sent early Thursday evening, I suggested an answer to that question.

My suggestion was this: The $59 million debt, due to the nuances of redevelopment law, enabled City Hall to self-deal in a way that kept (legally) millions of dollars in city hands and out of the hands of schools, Fresno County and special districts such as the local flood control district.

Brand and I met for an hour on Friday morning in his City Hall office. He handed me a seven-page, single-spaced report titled "Analysis of Redevelopment Enforceable Obligations." He said he had been up till midnight writing it.

It's a superb report. It should be a blueprint for the Finance and Audit Committee's investigation.

To a large degree, Brand's report confirmed my guess. Like John D. Rockefeller Sr., Fresno City Hall over the decades used a wholly-owned and operated subsidiary called the Redevelopment Agency to ensure that competitors for a narrow niche of property tax dollars -- schools, Fresno County, special districts -- were largely frozen out.

In an interview with one of the city attorneys, I used the terms "kickback" and "restraint of trade" to describe what might have been going on. The city attorney looked at me like I was nuts. I suspect he would've thought differently if the schools, Fresno County or a special district was funding his paycheck.

Redevelopment agencies are a post-World War II creation. The legislature passed the law authorizing the creation of RDAs. But a local legislative body -- usually a city council -- had to decide whether or not to actually create one.

Fresno's redevelopment agency was created in 1956.

Brand in our Friday interview described a Fresno Redevelopment Agency that from 1956 until 1997 (when Fresno went to the strong-mayor form of government and the RDA became a creature of the City Council) was nothing more than a department of City Hall. There was no difference on the organization chart between the RDA and, say, Public Works.

Starting in 1956, Brand said, City Hall began using the RDA and its unique funding mechanism to fix Fresno's decaying neighborhoods.

At the heart of a redevelopment agency's business model was debt and tax increment.

The agency issued debt, perhaps a bond, to get the money necessary to fund a project in a rundown part of town. The project, be it an apartment complex or a factory, raised the value of a property that might have been weeds. Nearby businesses might also see their property value rise.

The difference between the property tax on the weed-infested site and the property tax on a site with a factory is called increment. The redevelopment agency received 80 cents of every dollar of increment. The agency had to spend 20 cents of each dollar of increment on affordable housing. The remaining 60 cents of each dollar of increment could be spent for other blight-removal projects. The money also could be spent on contractual obligations such as debt.

The 20 cents of each increment dollar that didn't go to the redevelopment agency was divided among the city, the county, schools and special districts. Out of every dollar of increment, they would get about 5 cents each.

But the key to this business model was debt. Without it, the agency couldn't receive -- or "capture," in RDA lingo -- the increment. You need debt to capture increment. You need increment to pay debt. A perfect circle.

This RDA business model was quite a boon to the city. City Hall was capturing 85 cents of each increment dollar in blighted neighborhoods on the upswing -- 80 cents for the RDA, 5 cents from the four-way split of the remaining 20 cents.

The county, schools and special districts, themselves always hunting for more money, were left with a measly 5 cents each from each increment dollar.

Of course, there's always a catch. If the redevelopment agency paid off its debt and finished its work in a blighted neighborhood, then the split for each increment dollar reverted back to the original formula for dividing property taxes -- in essence, 25 cents each for the city, the county, schools and special districts.

Officials at the city, the county, schools and special districts aren't fools. They know how the government-funding game works and they keep track of how taxes are divided among their competitors for public largesse.

RDA supporters are fond of saying a rising tide lifts all boats. This certainly was the case with the real-world effects of increment.

As Brand noted, it's one thing for the county, schools and special districts to divide $10,000 of property taxes generated on 10 acres of weeds in a non-RDA project area -- $2,500 each.

It's equitable ... but it's not much money.

It's another thing for the county, schools and special districts to get one/twentieth of $1 million of property taxes generated on 10 acres with a brand new factory located in an RDA project area -- $50,000 each.

That's most inequitable ... but that's still a real nice payday thanks to the magic of redevelopment law.

The catch for the county, schools and special districts was that, as long as the factory's neighborhood continued to struggle with blight, they would continue to get only $50,000 each in this hypothetical scenario.

But if the neighborhood, called a project area, reached a point of no blight, then the redevelopment agency would have no work there. The formula for dividing that $1 million of annual property taxes on the factory site would revert back to the formula of one-fourth each for city, county, schools and special districts.

And that $50,000 payout for county, schools and special districts would jump to $250,000 each.

That's the kind of equity that brings smiles to the faces of folks at the county, schools and special districts.

The city, of course, hated such equity. Its incentive was clear. Make sure it kept finding blight in project areas. Make sure it kept a sizable debt. Make sure it capture every increment dollar it could.

In a nutshell, the city's incentive with RDA law was to make sure equity with the county, schools and special districts never materialized.

The incentive for the county, schools and special districts was less clear -- they reaped a reward from rising property values, but might wait forever for a project area to be declared blight-free. They might wait forever for a return to a more equitable sharing of property taxes with the city.

For decades, cities and their redevelopment agencies prevailed in this tug-of-war between worthy but conflicting public interests. Then came the most severe most severe economic downtown since the Great Depression. "Everyone's screaming for money," Brand said. That gave Brown the political opening he needed to kill the agencies.

All in the name of fairness, of course.

According to Brand, it was this web of interlocking incentives and conflicting interests that explains how Fresno City Hall embarked in 1956 on a path that led a $59 million debt to itself.

In the beginning, Brand said, the RDA had no debt. Therefore, it captured no increment.

The city had many redevelopment needs but didn't want to issue general obligation bonds to fund the projects, in part because this type of bond requires voter approval.

The city decided lease-revenue bonds were the way to go. The city had a plan, and enlisted the help of the RDA to implement it.

The plan was this:

The RDA would issue the lease-revenue bonds. The RDA didn't need voter approval for such bond deals. A mere nod of the head from City Hall was sufficient.

Money from the bonds would build the project in question. The city would then lease the project from the RDA. The city's lease payments would provide the RDA with money to pay bondholders.

The city won -- it got a much-needed project built. Through the lease, it also got the use of a project at a fair price.

The RDA won -- it got debt. There also was increment to be captured since the project increased property values.

The bondholders won -- they got paid in full and on time.

The city's Municipal Yard at G and Divisadero streets north of downtown, built in the 1970s, was to be financed in just such a manner.

But, Brand said, something went wrong with this financing plan for the Muni Yard and other projects. Instead of sending lease payments to the RDA so the RDA could pay bondholders, the city paid the bondholders directly.

Then the city went one step further. The city required the RDA to sign a deal with the city. In this deal, the RDA promised to repay the city for the money the city had paid to holders of the RDA's bonds.

In other words, the city dipped into its wallet to buy the Muni Yard, then wanted someone to refill its wallet while it kept the Muni Yard. (Rockefeller and Standard Oil did much the same thing to the railroads in the 1870s.)

And who was that someone to make the city whole when it bought something it wanted? The RDA.

But if the RDA and City Hall were one and the same thing, then who suffered by such an arrangement? Wasn't such a deal just a churning of city dollars between city departments?

It would have been harmless churning if the RDA, when increment started coming in, had immediately repaid the city. But the RDA didn't do this. The RDA didn't do this because City Hall didn't want to be repaid.

City Hall wanted the increment for more debt and more blight-removing projects. That was a worthy mission.

City Hall also wanted to put off as long as possible the day when the division of each dollar of increment reverted back to 25 cents each for city, county, schools and special districts. City Hall wanted to put off as long as possible the day that the county, schools and special districts were longing for.

So, the city back in the 1950s and 1960s and 1970s said to the RDA: Instead of paying us, you can owe us.

The debt started to grow. It was all done by contract, although Brand said the contracts sometimes were nothing more than handwritten promises on the back of what must have been the closest piece of scratch paper.

And the RDA was charged interest on its growing debt. When the interest rate in America was high, Brand said, the RDA was charged a similar rate. That means the interest rate in those crazy days of the late 1970s and early 1980s approached 20%.

The projects kept coming and the RDA's debt to the city kept growing. The city kept collecting 85 cents of every increment dollar to fulfill its charge of fixing blighted neighborhoods.

The county, schools and special districts kept waiting for that day when RDA project areas would finally run their course and, instead of getting 5 cents of each increment dollar, they'd go back to getting 25 cents of each dollar of all property taxes.

What the city and RDA did was legal, Brand said, but it was an "abuse" of redevelopment law. He said there should have been firm deadlines, not subject to repeated extensions, on the life of a project area. He said this would have been more fair to the county, schools and special districts.

City Hall and the RDA changed strategies in 1997 when the city went to a strong-mayor form of government, Brand said. The agency focused less on bond debt and relied almost exclusively on saved cash to fund projects, he said.

Brand said the RDA was well-run from 1997 to its dissolution.

But the fact remains that the City Council on Jan. 26 went on the record as saying it believes the $59 million RDA debt to the city is legal, legitimate and payable in full. Council members said the $59 million debt is among the enforceable obligations that they will fight to see honored.

If the Fresno City Council is successful, the $59 million (most likely paid over the course of many years) would come from the tax increment that, since Jerry Brown's legal victory, is now divided 25%-25%-25%-25% among the city, county, schools and special districts.

In other words, to answer the question above -- who suffered when the city required the RDA to repay (or kick-back) the money that the city spent for the purchase of a project the city wanted? -- might very well be: Fresno County, Fresno County's schools, Fresno County's special districts.

Several city council members at the Feb. 2 council meeting wondered if the city should sue to enforce the $59 million in contractual debts between the RDA and the city. The state law that killed redevelopment agencies also rejected City Hall-RDA debt such as Fresno's $59 million.

I asked Brand on Friday: In light of how the $59 million debt was created, perhaps city officials should be worried about someone suing them.

Maybe the county or the schools or one of the special districts, channeling the spirit of Ida Tarbell, might look at that $59 million debt and the financial harm it might have done over the years to their mission, and think: Restraint of trade.

Brand said it's probably too late in the game for the city to be sued. I think I saw him cross his fingers.

Source: http://fresnobeehive.com/news/2012/02/city_council_may_dig_into_rdas.html

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