press release from press conference today on budget (League of California Cities sponsored)

BUDGET DEAL CATASTROPHIC FOR CITIES, RELIES ON ENRON STYLE ACCOUNTING

 

The Legislature is poised to vote on a budget later this week, an ultimate “kick the can down the alley” plan, which puts California’s cities at grave risk. The plan put together by the Governor and legislative leadership attempts to close California’s $26.3 billion deficit with what can only be described as Enron-style accounting gimmicks. Included in its provisions are unconstitutional grabs of local gas tax and redevelopment funds as well as a Proposition 1A loan of property taxes to give the appearance of a balanced budget. Another mechanism attempts to leverage 40-year redevelopment plan extensions without required blight findings in exchange for giving a desperate state a 10 percent cut of the prospective financial benefits. 

 

Due to the lack of legislative transparency, none of the bill language has been made available in final form, and much of it continues to be drafted. Recent legislative practice on budget votes is to not release any language, not even legislative bill analyses, until after legislators have voted.

 

League staff has gathered the following information through conversations with key legislative staff and individual legislators, reviewing various memos leaked from legislative leadership, and by comparing notes with other lobbyists. However, it is important to note that the League has not seen the actual language of the budget

 

Unconstitutional Redevelopment Raids

 

A total of $1.7 billion is proposed to be taken from redevelopment agencies through the following two mechanisms:

1. A seizure of $1.350 billion in FY 2009-10, and then an additional $350 million in FY 2010-11. This proposal attempts to use the same mechanism that was rejected by Sacramento Superior Court, when the Court held that a proposed take of $350 million from redevelopment agencies for FY 2008-09, via AB 1389 of 2008, was unconstitutional. The Legislature has added new language in an effort to work around the court decision, but redevelopment attorneys believe this effort remains unconstitutional.
2. A separate effort to take an additional $1 billion in redevelopment funds for FY 2009-10. This proposal is also known as the “Lowenthal proposal,” because it originated with Senator Alan Lowenthal. It has the same unconstitutional flaws of other attempted redevelopment raids, but comes with several new twists. Redevelopment agencies would have broader authority to pay the money by borrowing their low and moderate income housing funds, and have the term of their redevelopment plans extended by one year the life too offset the impacts. Failure to repay the housing fund would permanently alter the agency’s low income housing ratio from 20 percent to 25 percent.   

 

City of Industry Redevelopment Securitization Proposal

 

What’s being called the “City of Industry proposal” has been shopped in the Legislature by a number of consultants and lobbyists in the past 18 months. The origins of this proposal can be traced back to the Industry’s desire to get an extension to the term of its redevelopment project area, combined with the state’s desperate need for cash. 

 

The crux of the proposal would give redevelopment agencies a 40 year extension to the term of their redevelopment project areas with no required finding of blight. In exchange, the state would be allocated a 10 percent stake in the additional funding that would be generated by that agency. If enough agencies “opt in” the state would then securitize the combined value of these multiple 10 percent stakes. This is projected to produce between $3-7 billion in increased revenues. The Industry proposal is extremely complex technically and numerous legal questions remain.

 

Failure of Industry Deal, Triggers Take of Local HUTA and Prop 1A Borrowing

 

As part of the budget agreement, a “trigger” will be drafted that states that if by Dec. 1, 2009, the Industry proposal otherwise fails or does not generate at least $3 billion for the state in FY 2009-10, the state would automatically raid the local portion of the Highway Users Tax Account (HUTA) and borrow property taxes under Prop. 1A. Legislative staff informed the League that due to expected legal and technical problems there is little chance of the Industry option working. The City of Industry proposal according to Legislative staff is merely a cover for the Prop. 1A loan and HUTA raid.  

 

If Prop 1A Borrowing is Triggered

 

If a Prop. 1A loan is triggered, the state will borrow approximately $1.8 billion in property taxes from local governments, approximately 8 percent of the property taxes received per local agency. The League has not seen final language. However, the Administration insists that the language will cover interest and issuance costs of an effort to securitize the state’s promise to repay. Prop. 1A’s provisions require that a loan of local property taxes be repaid within three years with interest. 

 

HUTA raid also triggered if Industry’ Redevelopment Extension Deal Fails

 

The state will take $986.3 million of city and county shares of HUTA in both FY 2009-10 and 2010-11 to pay for state transportation debt services. These gas tax funds will never be repaid. A false assertion is being circulated in the Legislature claiming that the HUTA raid will be mitigated by an additional allocation of Prop. 1B Local Streets and Roads funds. Further complicating the plan is the Legislature’s decision to exempt the 139 small cities that were not eligible to receive a second allocation of Prop. 1B funds. 

 

The HUTA raid was so unpopular in the Legislature that the leadership was forced to make it a majority vote bill, resulting in a 90 day waiting period before is takes effect. The League maintains that the raid is unconstitutional and is preparing a lawsuit. 

 

Next Steps

 

Once the budget language is available, the League will prepare a more comprehensive analysis. There are many other issues in the final state budget that cities will be interested in, including: the proposed elimination of the Integrated Waste Management Board, Prop. 42 payment deferrals, transit funding transfers, public safety issues and other matters. We will continue to report on these matters as more information becomes available.