PART 1
Last week, I participated as the alternate for Mayor Chuck Reed on the oversight board for the Successor Agency to the Redevelopment Agency (SARA). The primary focus of the meeting concerned the approval of a one-year extension to the existing Letter of Credit (LOC) with JP Morgan bank. This extension had already been passed by the City Council, but it was still up to the SARA Oversight Board to approve the extension as well.
Back in 1996 and 2003, the council, acting as the Redevelopment Agency (RDA), issued a total of $119 million in variable rate bonds—this does not include the millions in fixed-rate bonds issued during the same time period. The city then entered into a LOC arrangement as an insurance measure to guard against the higher interest rate trigger inherent in variable rate bonds. The LOC approval enabled the council to borrow even more money. The annual fee for this LOC is $2.4 million, and the only way to avoid this annual fee is to come up with the $90 million required to pay off the remaining balance on the bonds. The final payment of these bonds is scheduled for 2032, which will be a continuing challenge for future city leaders.
Unfortunately, we have little leverage in negotiation with the bank and are beholden to its terms. Just as excessive debt can reduce a person’s individual freedom, the same is true in municipal finance: Onerous debt obligations can impede the ability of government to provide vital community services.
In the event that the city were to default on the LOC, the general fund would be on the hook for at least a decade to cover the full annual debt payments on the convention center and fourth street garage, which is currently $18.7 million. In addition, JPMorgan would charge an 11.5 percent penalty on the outstanding balance, further compounding the problem. JP Morgan, understanding the inherent risk involved, presently holds $5 million of San Jose SARA funds in escrow should there be a default. The bank is also listed second on deed of eighteen city properties that could be sold. This form of collateral was negotiated in a prior LOC extension.
PART 2
The other item discussed at the same meeting concerned the fact that State Controller John Chiang had informed city officials that the SERAF loan is not an enforceable obligation. If this is the case, then the RDA tax increment cannot be used to repay the source of the funds borrowed.
Once again in 2011, the state grabbed money from RDA agencies statewide. Cities were allowed the flexibility to use housing funds to make the SERAF payment. At the time, I stated that we should utilize all funds from the housing department in order to make the payment, since funds were available at that time. The option was either to create more non-tax paying affordable housing developments, or fund economic development projects for companies that employ residents and pay taxes, such as Brocade, Maxim and SunPower. For me, the choice was clear—without tax revenue, we can not employ police officers or pave roads.
However the rest of the council disagreed with me, and decided instead to put the general fund at risk by borrowing $10 million in commercial paper instead of using available housing funds to make the SERAF payment. Another way of looking at it is the council voted to borrow money to provide more affordable housing instead of funding future police and roads. At the time of the council vote, there was more than $10 million available from the Housing Department to borrow without putting the general fund at risk. I wrote about how I was the only no vote on this item back in May 2011.
Back in December 2009, I sat through another borrowing binge to the tune of $25 million. A proposal from my council colleagues passed, which allowed for the borrowing of $25 million at a time when housing funds were available to cover this amount. On this occasion Mayor Reed and Councilmember Pete Constant joined me in voting “no.”
If the State Controller’s finding stands, approximately $52 million would now be dedicated to paying down the RDA debt, and sooner than currently anticipated. A consequence of this, however, is that the housing department would not be repaid the $42 million that was borrowed, and the general fund of San Jose would not be repaid for the $10 million issued in commercial paper. Inevitably, litigation may be required to resolve this issue, and the future policy direction will depend on a vote from the council.
If we do go down the route of litigation, I would be satisfied with a judgment that protects the general fund and its $10 million, and allows the remaining $42 million to be dedicated towards paying down the RDA debt. This debt reduction would also help the general fund in a future fiscal year.
By attending meetings such as SARA, I am able to hear firsthand about the issues of the day and analyze the information that is shared. This is what led me to find a way to save the general fund $10 million: After my article was published on San Jose Inside, city staff reversed their original decision, and I’m happy to announce the General Fund was spared $10 million as a result.
But what will happen this time?
Pierluigi Oliverio is a councilmember for San Jose’s District 6.
No offense, but you need to practice getting to the point. Your article is almost too convoluted to follow.
I agree with what I think you’re saying though.
Wow. Looking at that picture of Pierpont it’s hard to imagine he was ever the cute, adorable bairn of loving parents. Such a severe visage!
But anyway, I disagree with Mr. Randall. If you want Twitter explanations from your politicians then you can expect Twitter governance. Some things are just plain complicated and take effort to understand. But understanding is crucial.
Though difficult to follow, especially for non insiders like most of us, Pierluigi’s description of the financial arrangements entered into by the City with OUR money are inciteful and revealing. And it IS complicated. Even for those who are involved in it. Making the effort to explain what’s going on is educational to both the public and to Mr. Oliverio because explaining something to someone is the best way of clarifying it in your own mind. So whereas most San Joseans would prefer to be talked to like children, there are those among us who appreciate being treated like grownups.
Good on ya’, Pierluigi. Keep telling us what goes on. Don’t dumb it down for anybody!
OK.
What is a SERAF? Apparently there is a SERAF loan that either the City owes or is owed money on. I’m guessing it’s the latter, but I’ll let you explain it to me.
S Randall,
Supplemental Educational Revenue Augmentation Fund (SERAF) easy google find. here is a link to one of the documents signed by the city http://www.sanjoseca.gov/DocumentCenter/View/12133
Bottom line the City of San Jose borrows way TOO MUCH money. Now that the economy has turned south and the city can no longer pay their debt, the elected officials then blame the employees for their woes. The problem as I see it is not an employee problem but a borrowing and corporate giveaway problem. PLO, Reed, Constant and the others ultimately is the problem.
JMHO
OK.
What does the following mean to someone that only had 4 years of college?
The other item discussed at the same meeting concerned the fact that State Controller John Chiang had informed city officials that the SERAF loan is not an enforceable obligation. If this is the case, then the RDA tax increment cannot be used to repay the source of the funds borrowed.
Through all the Grandstanding PLO is once again engaging in (everyone was for it but I was the courageous lone vote against…) and all the convoluted jibber-jabber it boils down to this:
San Jose’s RDA wanted to buy a bunch of land at a time when the price of land was at a record high – they has some money (RDA Tax increments) but that wasn’t enough so they issued bonds fixed rate and variable rate to raise enough money to cover what tax increments couldn’t cover. Variable rate bonds are great for the issuer (San Jose/RDA) when the rate of return is low and not so good when the interest rate increases (which is good for the investors).
To mitigate potentially wild fluctuations in the variable bonds interest the City wisely (?) purchased the LOC from JPMC so as to minimize costs to the General Fund. Why the General Fund and not the RDA Treasury? I guess if the RDA was still in existence then it would be liable but since Gov Moonbeam took the RDA away that leaves the City (you, me and other taxpayers) on the hook for the $4Billion in RDA debt that was eft behind???
So, what is PLO saying? He is saying that the cost of the LOC is expensive to continue paying ($2.4million this year) and the alternative to not paying for it is about a $90million dollar hit the to General Fund.
The missing part of PLO’s explanation is this: The land was purchased at the top of the market. The land was financed at high interest and outrageous associated costs – ALL done at a time when everyone including the CIty was riding the wave of having access to more money than we have now. The City continues to assert that there is NO Money and PLO is trying to tell us that the bill is coming due – while reminding us all that he had great courage and voted “no” a couple of year ago.
What is he really signaling? PLO is letting City employees know that because of his pet project “Measure V” there is no way in hell the City will offer any pay raises anytime soon!
Measure V just another way that PLO and the council of criminals have hamstrung their employees. Citizens on a daily basis have stated that, had they known what these measures were really about they would have either voted no or made an effort to be more informed of the lousy bag of goods the politicians have thrown on safety!
I’m glad that Oliverio brings this topic up again. I just don’t understand why more people don’t pay attention in regards to this topic. It is the elephant in the room that nobody wants to address. Even Mr. Oliverio. Im pleased that he was the only dissenting vote. What about the other votes. What about the vote to “inappropriately” transfer assets to shelter them from the state.
The truth of the matter is this: The RDA/SARA is in a world of hurt when it comes to it’s debt. In the tune of $2.3 billion. AND the General Fund is being used to pay off this debt/interest. All while I live in fear that my house might be the next on the growing list of home invasions. I blame the entire council with special attention to Mayor Chuck Reed and City Manager Debra Figone.
“Julia Cooper, acting finance director for the city of San Jose, and Arn Andrews, acting assistant finance director. For the fiscal year that began July 1, the city’s general operating fund budget included $16 million in outlays to service the debt on four line items where the city shares financial responsibility for repayment with the RDA successor agency, Andrews said. Those debts include $137.8 million owed on the city’s convention center, and $36.7 million owed on the Fourth Street Garage, Cooper said.”
“The amount of that deficit is not estimated to climb above $25 million a year, which is the maximum amount that the city’s general fund could legally be required to pay of the redevelopment successor agency debt.”
(http://news.theregistrysf.com/bond-expert-san-jose-redevelopment-successor-agency-insolvent-or-close/)
So Mr. Oliverio why don’t we just return the $138 million dollars that Controller Chiang says was inappropriately transferred and pay off the $90 million balance on the bond? This way we will free up the escrow money and they $2.4 million in yearly LOC fee.
This money belongs to the people, it belongs to the public safety, libraries and parks.
Foot Note:
I think it is important to note that RDA is now known as SARA (aka the successor agency). As Oliverio noted, the RDA was being overseen by the San Jose City Council and the Executive DIrector was Harry Mavrogenes (currently retired from the RDA making half as much, $150K a year as the Chief Deputy County Administrator in San Joaquin County). SARA has a chairperson by the name of Chuck Reed and an Executive Director by the name of Debra Figone. Just before or just after the RDA was being dismantled a new “Agency” was being developed and it was/is called the San Jose Diridon Development Authority (SJDDA). It’s main function was to allow the transfer of RDA land (stadium land) into it’s name. To shelter the stadium land form the grasp of the State. If you haven’t already guessed, the SJDDA as a chairperson by the name of Chuck Reed and an Executive Director by the name of Debra Figone. Over the years the RDA has given millions rebuild and annex the Fairmont (owned by Lew Wolff) and millions to Urban Markets (a McEnery company). They in turn hired Barry Swenson to build the San Pedro Square.