HomeMy WebLinkAbout06 RESPONSE TO 6-22-12 GRAND JURY REPORTQTY O
AGENDA REPORT
MEETING DATE
TO:
FROM:
SUBJECT:
SUMMARY
OCTOBER 16, 2012
JEFFREY C. PARKER, CITY MANAGER
SUCCESSOR AGENCY
Agenda Item 6
Reviewed:
City Manager f
Finance Director ., /A
RESPONSE TO JUNE 22, 2012 ORANGE COUNTY GRAND
JURY REPORT - "THE DISSOLUTION OF REDEVELOPMENT"
Pursuant to California law, the City of Tustin has prepared a response to submit to the
Presiding Judge of the Orange County Superior Court regarding the June 22, 2012
Orange County Grand Jury Report entitled "The Dissolution of Redevelopment: Where
Have We Been? What Lies Ahead ? ".
RECOMMENDATION
It is recommended the City Council approve the response to the Orange County Grand
Jury Report entitled — "The Dissolution of Redevelopment: Where Have We Been?
What Lies Ahead ?" and authorize the Mayor to sign and send the response to the
Presiding Judge of the Orange County Superior Court.
FISCAL IMPACT
No fiscal impact.
BACKGROUND
In September 2011, the 2011 -2012 Orange County Grand Jury initiated a study of
Redevelopment to identify what worked well and what did not work well in the Orange
County Redevelopment community. With the California State Supreme Court's
December 28, 2011 decision on the constitutionality of ABX1 26, the study's focus
changed. The new focus is on the dissolution of the redevelopment programs,
management of the transition, and encouraging local planning for whatever new
program might take its place. In June 2012, the Grand Jury completed their work and
on June 22, 2012, issued a report entitled "The Dissolution of Redevelopment: Where
Have We Been? What Lies Ahead ?" (referred to herein as the "Report"). The full text of
the Report is attached hereto as Attachment 1.
October 16, 2012 — Agenda Report
"The Dissolution to Redevelopment"
Pg. 2
In the Report, the Grand Jury identified ten Findings from their study of Redevelopment.
The City of Tustin was required to respond to the first three (3) Findings and they were
as follows:
• As of the date of dissolution of redevelopment (February 1, 2012), all city
operated redevelopment agencies, except Mission Viejo and Seal Beach, were
exceeding the administrative costs limits of 5% of the tax increment distributed
related to the ROPS as authorized by ABX1 26.
• Of the agencies surveyed, only Costa Mesa and Santa Ana reported having a
citizen involvement committee along the line of a Project Area Committee as
authorized by Section 33385 of the Health and Safety Code.
• Historically, external oversight over redevelopment has been missing or
ineffective in monitoring redevelopment agency compliance and performance.
The newly formed oversight boards offer a potential to improve on that record by
providing critical evaluation of existing projects and management of the
successor agency debt.
As to each Grand Jury finding, the responding entity is to indicate one of the following:
(1) The respondent agrees with the Finding; or
(2) The respondent disagrees wholly or partially with the Finding, in which case the
response shall specify the portion of the finding that is disputed and shall include
an explanation of the reasons thereof.
In the City's response to the Report (Attachment 2), the responses acknowledge
agreement with the Findings but clarify that the Tustin Community Redevelopment
Agency was in complete compliance with California Community Redevelopment Law,
Health and Safety Code Sections 33000, et seq. governing Redevelopment at the time.
In addition, responses to Finding 1 and Finding 3 detail how the Successor Agency to
the Tustin Community Redevelopment Agency is currently addressing the concerns
raised by the Report.
Based on their investigation of Redevelopment Agencies, the Grand Jury made six (6)
Recommendations. Tustin was required to respond to four (4) of the six (6). They were
as follows:
• All successor agencies should review administrative costs to ensure compliance
with the limit of five percent of the tax increment or less as required by ABX1 26
and develop a plan to reduce these costs to three percent of the tax increment
received or less in 2012 -2013. If these percentages fall below $250,000, the
agencies are allowed to claim the higher amount.
October 16, 2012 - Agenda Report
"The Dissolution to Redevelopment"
Pg. 3
• Successor agencies and oversight boards should review the Recognized
Obligation Payment Schedule (ROPS) with a view toward limiting the range of
projects and obligations thereby retiring the enforceable obligation debt as
quickly as possible.
• Successor agencies and oversight boards should critically review the ROPS to
evaluate the need for debt owed to the city.
• Successor agencies and oversight boards should critically review the ROPS to
evaluate the need for incentive payments to commercial entities.
As to each Grand Jury Recommendation, the responding entity shall report one of the
following actions:
(1) The Recommendation has been implemented, with a summary regarding the
implemented action;
(2) The Recommendation has not yet been implemented, but will be implemented in
the future, with a time frame for implementation;
(3) The Recommendation requires further analysis, with an explanation and the
scope and parameters of an analysis or study, and a time frame for the matter to
be prepared for discussion by the officer or head of the agency or department
being investigated or reviewed, including the governing body of the public agency
when applicable. This time frame shall not exceed six months from the date of
publication of the Grand Jury report.
(4) The Recommendation will not be implemented because it is not warranted or is
not reasonable, with an explanation therefore.
In accordance with ABX1 26 Dissolution requirements, the Successor Agency has
implemented the Recommendations identified in the Report and acknowledges such in
the City's response. Staff will be available to answer any questions the City Council
may have.
Craig
ram M
evelopment Agency
Attachments: Attachment 1 - "The Dissolution of Redevelopment Where Have We Been? What Lies
Ahead ?"
Attachment 2 - City of Tustin Response to the Grand Jury Report
ATTACHMENT
2011 -2012 Orange County Grand Jury Report
"The Dissolution of Redevelopment: Where Have We Been? What Lies Ahead ?"
The Dissolution of Redevelopment in Orange County
THE DISSOLUTION OF REDEVELOPMENT:
Where Have We Been? What Lies Ahead?
"The end of RDAs earlier this year represented a major change in California
finance. Over time, ,schools and other local governments will receive significantly
more property tax revenues - and fcwer,funds will be reserved for redevelopment
purposes. While the process,for unwinding these complex agencies',financial
affairs will be lengthy, it likely will launch important civic debases about the use of
local property leer revenues and the role ofgovernment in promoting economic
development and providing affordable housing "
California Legislative Analvst's Office
b'ebruary 17, 2012
'As the decree to kill redevelopment takes effect, the Capitol is buzzing with
efforts to bring it - or something like it, or some .substitute - back. "
Dan Walters
Sacramento Bee Columnist
February 13, 2012
SUMMARY
On February 1, 2012, all redevelopment agencies in California were dissolved and a transition
process for managing their financial affairs began. Prior to February 2, 2012, Orange County
Redevelopment Agencies received over $400 million annually in property tax revenues and had
debt obligations exceeding $2 billion. This 2011 -2012 Grand Jury report provides information
on operational and performance data for each of the 24 city- operated agencies in the county.
Included is the debt contained in the city's respective lists of enforceable obligations,
representing the amounts that must be paid before the projects are complete. The dissolution
legislation (ABXI 26)1 contains very specific instructions on winding -down this complex
financial system. The current legislation has created new responsibilities for the County Auditor -
Controller as well as the Board of Supervisors.
Since redevelopment agencies per se no longer exist, few findings or recommendations related to
the operational data will be discussed herein. The 2011 -2012 Grand Jury presents this
information primarily to help in understanding the scope and complexity of the system. Since
there will be very little new development, many issues are no longer relevant. The findings and
recommendations will, therefore, focus primarily on issues facing the cities during the transition
and preparing for whatever replacement system might be in the future. Included topics are:
• The lack of effective oversight over redevelopment programs in the past;
• The need for proactive planning to prepare for a "new redevelopment" program including
suggestions for a different redevelopment model;
Assembly Bill ABX 1 26, passed 6/28/2011 in an Extraordinary Session, dissolved Redevelopment Agencies in Calimmia.
2011 -2012 Orange County Grand Jury Page I
The Dissolution of Redevelopment in Orange County
• The need to recognize fatal errors made with respect to the recently dissolved
redevelopment program and suggestions for modification in planning for possible
replacement programs; and
• The need for formal policies and procedures for citizen involvement in redevelopment
and a non - judicial method for handling complaints and disputes.
Currently at least three bills are making their way through the legislative process. In addition to
clarifying the language in the dissolution legislation (ABXI 26), the bills recently introduced
appear to represent an effort to continue with at least the low- income housing side of
redevelopment. It is expected this part of redevelopment will continue to operate, not only in
continuing projects under way, but may also fund new low- income housing projects where funds
are currently available to the successor agencies.
PURPOSE
In September 2011, this 2011-2012 Orange County Grand Jury study was initiated as an effort to
identify what worked well and what did not work well in the Orange County Redevelopment
community. At that time, redevelopment in California had been dissolved by ABX 1 26 enacted
by the State Legislature on June 28, 2011. A companion bill, ABXI 27, gave the agencies the
option of continuing to operate if they agreed to pay the state a substantial amount of money in
2011 and lesser amounts in 2012 and beyond. Most of the cities with redevelopment agencies
had already made the decision to pay and continue in the redevelopment business. Ilowever, the
California Redevelopment Association (CRA) and League of California Cities challenged both
ABX 1 26 and ABXI 27 as unconstitutional and the legislation was placed on hold pending
decision by the California Supreme Court.
The expectation at that time was that the Supreme Court would either grant or deny the CRA
petition on both bills. To the surprise of many, this did not happen. The bills, enacted by the
legislature as severable, were in fact separated. The court decision on December 28, 2011
supported the state's ability to dissolve redevelopment through ABX 1 26 and denied the means
to bring it back on a "pay to play" basis through ABX 1 27.
The 2011 -2012 Orange County Grand Jury explored the legislative events leading to the
dissolution of redevelopment in more detail later in this report beginning on page 18.
What began as a study to examine redevelopment in Orange County, with a view toward
addressing problems, has changed focus because of the recent court decision. The new focus is
on the dissolution of the redevelopment programs, management of the transition, and
encouraging local planning for whatever new program might take its place.
The revised purpose is threefold:
• Identifying the major problems that led to the legislation terminating redevelopment;
• Assessing the management responsibilities of successor agencies, oversight boards, and
County offices in winding down redevelopment projects; and
• Proposing a planning effort by local government to prepare for a likely legislative effort
to introduce a new version of redevelopment in the state.
2011-2012 Orange County Grand Jury Page 2
The Dissolution of Redevelopment in Orange County
METHODOLOGY
In addition to a county - operated agency, the redevelopment agencies in twenty -four cities in
Orange County were dissolved on February 1, 2012. All of these cities were asked to participate
in two surveys to determine certain facts and make statistical comparisons among agencies.
To understand the legal and financial complexities of redevelopment, particularly with respect to
"tax increment funding," staff from the Auditor- Controller's Office and the County Assessor
were interviewed for their perspectives on various aspects of redevelopment.
Other information for the report was obtained from:
• Redevelopment report published by the State Controller dated December 31, 2010:
• Redevelopment report published by the State Controller dated November 2, 201 1;
• Interviews with redevelopment staff from the County's Community Resources
Department;
• Interviews with redevelopment staff from the cities of Brea, Buena Park, Garden Grove
and Westminster: and
• Various documents included as references in this report.
BACKGROUND AND FACTS
On February 1, 2012, Redevelopment Agencies (RDAs) in California were dissolved. Now a
transition process is in place to begin unwinding the complex financial affairs of these agencies.
Given the scope of their resources and obligations, this transition will take time. Prior to
February I, 2012, redevelopment agencies in Orange County were receiving nearly $400 million
annually in property tax revenues and had debt obligations exceeding $2 billion.2
What is Redevelopment?
Simply stated, redevelopment is a method of financing city or county improvements by
borrowing money (normally through tax allocation bonds) to finance a project in an area that has
been declared "blighted," usually by a consultant hired by the city. The debt is paid with "tax
increment revenue" that represents the difference between property taxes assessed prior to the
development project (the frozen base value) and taxes assessed after the improvement. 'This `tax
increment" goes to the Redevelopment Agency as revenue. The debt on construction projects
can run for long periods of time; thus the increase in assessed value and taxes collected can be
substantial. Since the shared tax rate is frozen at the level when the project area was developed,
all tax increases for the life of the project theoretically go to the Redevelopment Agency. This
results in a loss of revenue for schools, community colleges, the county and special districts. To
address this problem, many redevelopment agencies prior to 1994 negotiated "pass- through
payments" to those tax supported entities as compensation for the potential loss in revenue. In
1994, legislation was introduced requiring RDAs to make pass- through payments in amounts
determined by a defined formula.
2 Chiang, John - .Stale Comfroller's Annual Report, November 3, 201 [,page 146
2011 -2012 Orange County Grand Jury Page 3
The Dissolution of Redevelopment in Orange County
How is a Project Area Created or Expanded?
The usual first step is for the city or agency to hire a consultant to conduct a study to determine if
an area suffers from physical and economic blight. Critics allege that State law is vague on the
definition of blight so that almost anything can be considered blighted. The law3 defines "blight"
basically as one or more of the following conditions
• Physical blight such as buildings that have deteriorated or are unsafe for persons to live
or work;
• Economic blight such as depreciated or stagnant property, abnormally high business
vacancies, abandoned buildings, residential overcrowding or an excess of businesses that
lead to problems of public safety and welfare.
• Blight applicable to areas for closed military bases such as the Marine Corps Air Station
at El Toro.4
A more complete legal definition of blight can be found later in this report beginning on page 5.
A Brief History of Redevelopment
In 1945 during the aftermath of World War II, the California Legislature authorized the
formation of community redevelopment agencies as a way to alleviate urban decay. The
Community Redevelopment Law was intended to help local governments revitalize "blighted"
communities.
During the 1950s and 1960s, not many cities established redevelopment agencies. The project
areas were small, typically less than 100 acres. The modest beginnings were somewhat
controlled by the competing interests for property tax revenues, particularly from schools and
community college districts that normally receive about half of any property tax increase.
Community interest in education therefore served as a fiscal check on redevelopment expansion.
Then two things happened. First, passage of SB 90, the Dills bill in 1972 that guaranteed each
school district an overall funding level from local property taxes and state sources combined.
This meant that if there was a funding shortfall at the local level, the state would "backfill" to
meet the guaranteed funding level. The second was the passage of Proposition 13 in 1978 that
significantly constrained local government's ability to raise property taxes. These measures did
not, however, change local authority over redevelopment. With less revenue raising authority,
cities saw redevelopment as a way to generate additional funds through tax increment revenue.
No longer were project areas limited to small sections of communities. Cities now adopted areas
consisting of hundreds or thousands of acres frequently including farmland or other large tracts
of vacant land. By 2009, approximately 12 percent of property tax revenues were going to
redevelopment agencies. The state's costs to backfill K -14 districts now exceeded $2 billion
annually.'
3 § 33031, subdivisions (a) and (b) of the Health and Safety Code
'See Health and Safety Code Sections 33492 et. see
5 O'Malley, Marianne, Legislative Analyst's Office — Fehruar , 2012
201 1 -2012 Orange County Grand Jury Page 4
The Dissolution of Redevelopment in Orange County
Revenue Shifts to Schools
In the early 1990s, the state used the annual state budget process to require RDAs to shift part of
their revenues to schools. The funds were deposited into countywide accounts referred to as
"ERAF" (Educational Revenue Augmentation Fund) or "SERAF" (Supplemental Educational
Revenue Augmentation Fund). These shifts in funds occurred nine times between 1992 and
2011. Concerned over these perceived "raids' on "their" redevelopment funds, the
redevelopment community joined forces with those objecting to the state dipping into local
transportation funds and sponsored Proposition 22. This initiative, approved by voters in
November 2010, limited legislative authority over redevelopment and prohibited the state from
requiring RDAs to make the supplemental shift of funds to the schools over and above the
required pass - through payments. This proposition later served as the basis for the California
Redevelopment Association's court challenge to ABX l 27.
ANALYSIS
Redevelopment's Reputation
The subject of redevelopment has a polarizing effect. To rind a balanced perspective regarding
redevelopment is difficult as most of those who articulate the subject have a bias favoring their
point -of -view. A case in point is a publication. "Redevelopment: the Unknown Government" f
originally published in 1996 by "Municipal Officials for Redevelopment Reform" (MORR).
This report is singularly critical of redevelopment and offers a set of arguments as perceived by
the "anti- redevelopment' group.
Definition of Blight
According to the MORR report, "all a city needs to do to create or expand a redevelopment area
is to declare it blighted. This is easily done. State law is so vague that most anything can be
designated as blight. "
"To make a finding of blight, a consultant is hired to conduct a sturdy. New development areas
are largely driven by city stcffls, which choose the consultant with the approval of the city
council. Consultants know their job is not to determine f there is blight, but to declare blighted
whatever community conditions may be.
0
The legal definition of blight is contained in § 33031, subdivisions (a) and (b) of the Health and
Safety Code. These conditions, as described by statute, are summarized as follows:
• The existence of buildings in which it is unsafe or unhealthy for persons to live or work;
• The presence of conditions that prevent or substantially hinder the viable use or capacity
of building or lots; and
6 Municipal Officials for Redevelopment Reform (MORR), Rederelopmenr_ Tire Unknown Uovemrneru
' ]bid
2011-2012 Orange County Grand Jury Page 5
The Dissolution of Redevelopment in Orange County
• The existence of subdivided lots that are in multiple ownership and whose physical
development has been impaired by their irregular shapes and inadequate sizes, given
present general plan and zoning standards and present market conditions.
Subdivision (b) of the same code describes conditions that cause blight. These include:
• Depreciated or stagnant property values;
• Impaired property values due in significant part, to hazardous wastes on the property
where the agency may be able to use its authority;
• Abnormally high business vacancies, abnormally low lease rates, or an abnormally high
number of abandoned buildings;
• A serious lack of necessary commercial facilities that are normally found in
neighborhoods;
• Serious residential overcrowding that has resulted in significant public health or safety
problems;
• An area with an excess of bars, liquor stores, or adult - oriented businesses that has
resulted in significant public health, safety, or welfare problems; and /or
• An area with a high crime rate constituting a serious threat to the public safety and
welfare.
While the law seems clear as to what constitutes blight, it has not always been followed or
enforced in application. According to the State Controller, "legislation has amended the
meaning of redevelopment over the years to meet California's diverse needs. In addition to
rehabilitating blighted areas by making property available for new development, various
legislative proposals have asked redevelopment agencies to provide shelter for the homeless,
establish day care facilities for children, deal with hazardous wastes, fund fire protection, ensure
notification of industrial plant and base closures, and fund pension liabilities, Although not all
of these requests have become law, the Legislature has permitted redevelopment agencies to
engage in these various activities. Redevelopment activities for example, have included
providing flood control measures, financing housing for low - income families, assisting in the
construction of sports arenas, and operating amusement parks. "8
The overall result of these influences is that, although a well - defined definition of blight exists;
little effort is made to control compliance. Redevelopment agencies have been able to justify
projects that have little or no relationship to addressing blight. According to the State Controller,
ignoring blight as a requirement has not only been allowed, but often is encouraged by the
Legislature.
8
Chfmtg, John, State Controller 's dnnm] ReporC November 2, 2U I I. page sry
2011 -2012 Orange County Grand Jury Page 6
The Dissolution of Redevelopment in Orange County
Use of Eminent Domain
"Eminent Domain" is the power of local, state or federal government agencies to take private
property for "public use" so long as the government pays "just compensation." The government
can exercise its power of eminent domain even if the owner does not wish to sell his or her
property. Under the California Constitution, property and business owners are entitled to have
just compensation determined by ajury.9
Concerns abort the use of eminent domain in redevelopment were reinforced by the U.S.
Supreme Court decision in Kelo v. City of New London (2005) — in which the court held that
taking private property for the purpose of private development (as part of a redevelopment
project) satisfied the constitutional "public use" requirement. Following this decision, in the fall
of 2005, the California Legislature held a series ofjoint hearings on redevelopment reform and in
2006 passed several bills to reform redevelopment practices in the state. Of these, SB 1206
(Kehoe) narrowed the statutory definition of "blight," contained provisions to increase state
oversight of redevelopment and made it easier to challenge redevelopment plans through
litigation.
Among Orange County redevelopment agencies, eminent domain is a little used practice and has
not been a significant problem. Where used, it is considered a last resort or in tact is welcomed
by the property owner as the most desirable method of disposing of the property. Out of the 24
agencies surveyed, eight reported that they have eminent domain powers and three have used
eminent domain to acquire property in the last five years.
Operational Data
The information in the following section is based on responses to two surveys sent to the city
RDAs, plus information from the reports from the State Controller dated November 2, 2011 and
May 1, 2012. Two of the charts, Tax Increment and Administrative Costs, contain data for fiscal
2010 -2011. The remaining charts are for fiscal year 2009 -2010. The purpose is to provide a
comparison among agencies and identify strengths, weaknesses and potential problem areas
during the transition period.
the Cali fomia Gminent Domain handbook, www.eminentdomain. net
2011-2012 Orange County Grand Jury Page 7
The Dissolution of Redevelopment in Orange County
Tax Increment Revenue
The major source of revenue for the former Redevelopment Agencies has been the tax - increment
revenue representing the increase in property taxes collected from the frozen base prior to
adoption of the redevelopment plan.
Figure I (below) displays the amount of tax - increment revenue for each former RDA. The
amounts range from a high of $51,433,689 in Santa Ana to a low of $2,228,383 in Seal Beach.
The average amount for all is $ 16,027,585.
Figure 1 —Tax Increment Revenue"'
Tax Increment 2010 -2011
M®
Ana".o
47.0400M
Brsa
24.500.I1Hi
(luau Pad
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rmba told+ 20.705.201
Total Debt
Although debt has a negative connotation, it is an inherent part of redevelopment. Agencies
must have had debt in order to qualify for tax increment revenue.
10 Based on Grand Jury survey Number Iwo and State Controller's Report published 5/1/2012
2011-2012 Orange County Grand Jury Page 8
The Dissolution of Redevelopment in Orange County
Figure 2 (below) shows that three cities, Anaheim, Irvine and Westminster each have
redevelopment debt in excess of $I billion each. An additional three cities, Orange, Santa Ana,
and Yorba Linda each have debt in excess of $500 million. It is expected that all of these will
take many years to pay the debt and will, therefore, continue to draw tax - increment revenue until
all debt is paid.
Irvine is a unique RDA in that none of the debt is because of a bond issue. Their indebtedness is
owed to a private party, Heritage Fields, the developer of the property within the Orange County
Great Park redevelopment area. Special provisions exist where the property under development
is a former military base subject to provisions beyond the Community Redevelopment Law.
The status of the debt and determination as to the existence of an enforceable obligation will be
made by the Department of Finance.
Figure 2 — Total RDA Debt 12
Total Indebtedness
0 500.000.000 1.000.000000 1500000,000 2.000,000.000
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12 John Chiang, State Controller's Report, November, 2011
2011-2012 Orange County Grand Jury Page 9
The Dissolution of Redevelopment in Orange County
Annual Debt Payment
Figure 3 (below) shows that the city of Santa Ana has the highest annual debt payment,
exceeding $30 million. Anaheim follows with an annual payment of over $20 million. Brea and
Irvine annually pay over $15 million each with Huntington Beach and Tustin annually paying
over $10 million each.
In the case of Irvine, the total annual payment is for interest, since that is what is currently due.
Figure 3 — Annual Debt Payments 13
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Tax Increment Diversion and Pass - through Payments
Another argument in the MORR report is: "Once a redevelopment project area is created, all
property tax increment within it goes directly to the agency. This means all increases in property
tax revenues are diverted to the redevelopment agency and away from the cities, counties. and
school districts that would normally receive them.” 14
While this may have been initially true, there have been a number of changes requiring the
agencies to share tax increment revenue with school districts, community college districts,
special districts, and the county. Prior to 1994, terms of "pass- through" payments between the
RDAs and the above tax supported entities were negotiated, usually as settlements of disputes
13 Supra, Chiang
14 Municipal Officials Im Redevelopment Reform (MORR), Redevelopment: Uwe Unknown Cnremment
2011 -2012 Orange County Grand Jury Pagc 10
The Dissolution of Redevelopment in Orange County
over contested legality of a proposed project area. These negotiated pass- through payments
sometimes provided the County and special districts 100 percent of the tax revenue they would
have received without redevelopment. In these cases, the only tax - increment revenue retained by
the RDA was the school districts' and cities' share. Since the state backfilled any schools
shortfall, no pressure was exerted from that source to check the growth of redevelopment.
In 1993, the legislature passed AB 1290 (Isenberg). This bill eliminated the RDA authority to
negotiate pass - through payments, replacing it with a statutory formula to establish the amounts.
The bill added school districts and community college districts as recipients of the distribution.
The amount each agency receives is based on its proportionate share of the I percent property tax
rate in the project area.
Figure 4 (below) shows the total pass - through payment for each agency and the proportion paid
to each of the receiving agencies.
Figure 4 — Pass- Through Paymentsj5
Pass Through Payments
0 2.000 ON 4 ON 000 61100.000 8 NO D00
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2011-2012 Orange County Grand Jury Pagc I I
The Dissolution of Redevelopment in Orange County
The 24 city operated redevelopment agencies paid a total of $72,969,397 to the County of
Orange, school districts, community college Districts and special districts. Figure 4 shows the
distribution of the various pass- through payments made.
The total amount represents a little over 18% of the total tax increment. The major portion of
these payments, 48 %, was to local school districts.
Figure 5 (below) shows the distribution of pass- through payments excluding those made to the
Educational Revenue Augmentation Fund.
Figure 5 — Distribution of Pass- Through Payments16
Pass Through Payment Distribution
■COmW ■City •S<h..1DKWkt1 •COnm(4", +SYn Mskkh
Distribution of Pass- Through Funds:
Figure 5 shows the distribution of the total pass- through amount paid by city operated RDAs to
the various tax supported entities. The distribution of the $72,969,397 in payments is as follows:
16 Supra, Chiang
2011-2012 Orange County Grand Jury Page 12
The Dissolution of Redevelopment in Orange County
• Local School Districts 48% or $35,025,311
• Orange County 19% or $13,864,185
• Special Districts 13% or $ 9,486,022
• Host City 12% or $ 8,756,328
• Community College Districts 08% or $ 5,837,552
Figure 6 (below) shows the pass through payments as a percent of the tax increment revenue.
Figure 6 — Pass - through Payments as a Percent of the Tax Increment 17
Pass Through Percent
arabeim - 10 73s,
area
Buena Palk � 8 704
Costa Stew 0000'
Cypress 26.58'
%ountaic Valley 12.541,
Pollerton - 6.99,
Game, Glove 22.8216
�unongton Beach 12.81k
he 20.001,
_a Habra 10.201,
.a Palma 42.1lt,
,ake turps[ 2`1 7
Miss." Viejo 46011,
Orange 22.241x
ola,ent. 10.2010
San pememe
can )uan Capa.ano 2894@
Santa Ana 18 -]810
Seal Beach 0.001,
Stanta 19.584
Tustin 11.04}
Westmireter 18.2?%
vorba Inch, 41,90^
,Average 18.291E
Figure 6 shows pass - through payments, by city, as a percent of the tax increment. Mission Viejo
has the highest ratio at 46.01% followed by La Palma at 42.11% and Yorba Linda at 41.9 %.
Two cities (Costa Mesa and Seal Beach) have no pass- through payments.
While some pass - through amounts are negotiated, most are statutorily mandated. The average
pass - through amount percentage of tax increment for all 24 cities is 18.29%
12 Supra, Chiang
2011-2012 Orange County Grand Jury Page 13
The Dissolution of Redevelopment in Orange County
Administrative Costs
Another common criticism of redevelopment agencies is the high administrative cost. Orange
County has a wide variance among RDA's. As illustrated in the graph shown in Figure 7
(below), the costs, expressed as a percentage of the tax increment revenue, range from a low of
two percent for Mission Viejo to a high of over 67 percent for Placentia followed by Fullerton at
approximately 55 percent.
While certain agencies had a problem with extremely high administrative costs, most agencies
were under 30 %, and the overall average for all agencies was under 14% for FY 2010 -201 1 .
The dissolution legislation (ABX1 26) introduced, for the first time, a limit on the amount of
administrative costs. During the remainder of 2012, such cost is not to exceed five percent of the
tax - increment distributed related to the approved BOPS, but not less than $250,000. The limit
for next year and beyond is three percent of ROPS approved tax increment but not less than
$250,000.
Figure 7 — Administrative Costs 18
Percent Administrative Costs 2010 -2011
61,111MAdnNn
Anallenn - 10.38n
Brea
116p,
&muGuY 1771.
lua. Me+. 15 U0`.
rypm+l � 8.1105.
Gountahl Valley 18 18-.
fullermn SS 1ti' +
Gr den Groee � 81�
Mlwnnptnn 6..111 12 bP+.
hvhw 21181.
laH.hu 12701.
L.P.W. - 1. ]]'e
UFe Porest 11781.
Mt++uw V;Wu 2. sa`e
oran�,. 10 02 1"0
Vlxeltb 07 77,
San Clnnalt. 0 3me
Sao Bml+: ryl+bxw 7274
SMIUA.I. 612.
%..I Beuh 200,
Umlton 15 M.
lu,hn 11 110,.
Wnnnbnte 23. 81�e
Y.rh. Wd. 1931,
18
Supra, Survey Number Two and Chiang
2011-2012 Orange County Grand Jury Page 14
The Dissolution of Redevelopment in Orange County
Housing Set -Aside
Redevelopment law requires that at least 20 percent of the tax increment revenue be set aside for
the purpose of funding housing programs, primarily for low income families. Some agencies
were required to set aside higher amounts. The Anaheim Redevelopment Agency, for example,
extended some of the project areas and was required to set aside 30 percent of the tax increment.
Figure 8 (below) shows the percent of the tax increment set aside for each city operated agency.
Figure 8 — Housing Set -Aside
0 W. 20.00.4, 40.00'4' 60. ow" 80. ooh, 100.00rr. 120.00' *.
Anaheim .
Brea
Buena Park ="Omu"�
Costa Mesa rmmm=mmT
Cypress
Fountain Valley
Fullerton
Garden Grove
Huntington Beach
Irvine P �
La Habra
La Pahna
Lake Forest rte.
Mission Viejo
Orange !`M�
Placentia
San Clemente
San loan Capistrano r�l
Santa Ana r �
Seal Beach P �
Stanton r�i
Tustin
'evestminster
Yorba Linda �.
■ Percent
Required
Most cities are at or very near the 20% requirement for housing set- aside. Mission Viejo and
Tustin are substantially over the requirement. All others are over, at, or within a percentage
point of the requirement which may be due to minor reporting differences.
Citizen Involvement and Review
One of the grand jury survey questions was to determine if the responding agency had a formal
mechanism or process for citizen involvement in redevelopment planning. Of the twenty -four
agencies surveyed, only Costa Mesa and Santa Ana indicated they had such a process. Most of
the remaining agencies described the usual city council approach of posting agendas of meetings
2011-2012 Orange County Grand Jury Page 15
The Dissolution of Redevelopment in Orange County
on the internet and allowing public comments (usually three minutes) pertinent to the agenda
item.
CASE STUDIES
Case Study 1 — A Successful Redevelopment Project
The city of Garden Grove, through their firmer Redevelopment Agency, has completed several
successful projects. The most significant of these are those included in the development of
Harbor Boulevard, just South of Disneyland. For many years, this corridor had a reputation as
the "seedy side" of the tourist district south of Disneyland. Because of the redevelopment
projects, according to city officials, drugs and prostitution are less of a problem. In place of the
previously existing blight, there are 11 world -class hotels that generate nearly $12 million in
annual hotel tax revenues for the City and that have created approximately 2,000 jobs. The hotels
included in these project areas include:
• Hilton Hotel
• Embassy Suites
• 1lampton Inn
• Marriott Suites
• Hyatt Hotel
• Sheraton Hotel
• Crown Plaza Hotel
• Candlewood Hotel
• Holiday Inn Express
• 1lomewood Suites
• Residence Inn
All Garden Grove projects combined produce approximately $27 million in tax increment
revenue. Bond debt payments are approximately $6 million with another $6 million shared with
schools and other local tax supported entities by way of pass - through payments.
In spite of the fact that Redevelopment Agencies have been dissolved, these projects and the
pass - through payments will continue as "enforceable obligations" under management of the
Garden Grove Successor Agency and Oversight Board. Payments will be allocated from the
Redevelopment Trust Fund by the County Auditor - Controller. Under the dissolution law (ABX1
26) any remaining tax increment funds will be allocated to local schools and other tax supported
entities under the general distribution formula.
2011-2012 Orange County Grand Jury Page 16
The Dissolution of Redevelopment in Orange County
Case Study II — A Not -So- Successful Redevelopment Project
The Grove Street Project in Garden Grove however, is another story. The redevelopment plan
was to sell a large parcel of property, used as a parking lot for the Main Street businesses, to a
private developer for construction and sale of market -value condominiums. On January 22,
2007, the Main Street Business Association filed a petition for a Writ of Mandate in the Orange
County Superior Court in an attempt to block the sale. The court judgment denied the writ, and
the case was appealed. Although the city won the case on appeal, the entire process lasted about
two years. By that time, the real estate market had changed to the point that the developer has
thus far not chosen to exercise the option to purchase the property.
The central issue in this matter was a question of the city's right to convey the property to a
third -party. Originally, in 1953, the downtown business and property owners formed a Special
Benefits District under the State's Streets and Highways Law. It was for the express purpose of
acquiring and improving parking lots for the use and benefit of local merchants. Since Garden
Grove was not yet an incorporated city, the district was created by the County of Orange and, as
the legislative body, title to the property was held by the County. A parking commission was
established at the same time to act on behalf of the business and property owners. By mutual
consent, the property owners taxed themselves by the highest amount allowable by law to create
a Property Acquisition Fund. This was done to finance the purchase of additional parcels of
land. Eventually the group acquired and improved six lots to provide parking for downtown
businesses.
In 1956, Garden Grove incorporated and title to the parking lots passed from the County to the
City.
After the litigation, on July 28, 2009, the city dissolved the parking district including the Parking
Commission. It took possession of the remaining parking lots and diverted the parking district
property tax assessments directly into the city's general fund.
Recently, the City sold the parking lot parcels to their redevelopment agency for $2.3 million but
the developer has not exercised the option to purchase, so the property remains with the
successor agency. This is an example of the type of transaction that will be audited by the CPA
firms under contract to the County under the direction of the County Auditor - Controller. If
supported by the audit information, the obligation can be included by the Successor Agency in
the Recognized Enforceable Obligation Schedule (RODS) and transmitted to the Department of
Finance for approval.
While the courts have ruled that the city owns and can dispose of the property as it chooses, an
ethical question remains. The parcels were purchased by property and business owners in
downtown Garden Grove. Since the creation of the Special Parking District, these owners, by
mutual consent, have paid a property tax assessment on the parking lots for the express purpose
of acquiring, improving and maintaining adequate parking for the downtown merchants. Their
2011-2012 Orange County Grand Jury Page 17
The Dissolution of Redevelopment in Orange County
financial investment in this property would seem to have given them a significant voice in the
future use or disposition of the property.
Analysis of the Garden Grove Case Studies
The Harbor Boulevard hotel development projects provide a good example as to how
redevelopment can work to the benefit of the community without diverting property tax money
from other tax supported agencies.
The Grove Street Condominium Project may be a case of overreaching on the part of the City.
Early in the planning there is evidence to support the notion that the Downtown Business
Association was supportive of the concept of a market -value housing project located next -door to
the Main Street business district. In the early plan there were fewer homes and more space
dedicated to public parking. Then the project was expanded, and the number of public parking
spaces reduced in number causing the Association to withdraw support.
Once the lines were drawn and the lawsuit tiled the issue became, and continues to be, highly
contentious. Had there been some sort of citizen involvement committee to provide an element
of oversight to the Redevelopment Agency, it is possible that some accommodation could have
been made among the parties. Failing that, there would have at least been an effort at mediation
perhaps avoiding the need for a costly and time- consuming court action. As events unfolded
neither party gained. The Association lost the lawsuit but delayed the project. The City won the
lawsuit but the delay may have accomplished what the litigation could not.
This project is still in play. Depending on the results of the audit to be performed by July I,
2012, and the decision of the developer to exercise the purchase option, the project may yet go
forward.
How Redevelopment Ended
The Governor's budget for 2011 -2012 proposed dissolving the redevelopment agencies in the
state and using the property tax increment in the following order of priority:
1. Pay existing redevelopment debt and obligations (such as bonds sold to finance
development projects);
2. Continue the pass - through payments to schools and other local tax supported agencies;
and
3. Offset $1.7 billion of state General Fund costs.
Any remaining RDA funds would be allocated to school districts, community college districts
and special districts that serve the former project area.
In subsequent years, after debt, obligations and pass- through payments, redevelopment funds
would be allocated to local agencies based on their normal property tax shares.
2011-2012 Orange County Grand Jury Page 18
The Dissolution of Redevelopment in Orange County
The Governor's proposal introduced as SB 77, changed the distribution of property tax revenues,
and therefore required approval by a two - thirds vote of the Legislature. In March 2011 the bill
failed by one vote in the Assembly. The debate now focused on ways to allow RDAs to
continue, albeit with modifications and with ongoing funding provided to schools. The bill
followed existing statutory formulas related to tax allocations and thereby avoided the need for a
two- thirds vote for approval.
In June 2011 the Legislature approved, and the governor signed two bills:
• ABX 1 26 placed a freeze on all RDA authority to incur new debt, making loans or grants,
entering into new contracts or amending existing contracts, acquiring or disposing of
assets, or altering redevelopment plans. The bill also dissolved Redevelopment Agencies
and created a process for winding down their financial affairs.
• ABXI 27 allowed Redevelopment Agencies to opt into a voluntary alternative program
to avoid the dissolution included in ABXI 26. The bill included annual payments to
school districts: $1.7 billion in 2011 -12 and about $400 million in future years, to offset
the fiscal effect of redevelopment.
Shortly thereafter, the California Redevelopment Association (CRA) and the League of
California Cities tiled petitions with the California Supreme Court challenging both bills on
constitutional grounds.
On December 29, 2011, the court upheld ABXI 26 saying that the Legislature had authority to
dissolve entities that it created. However, the court found ABXI 27 unconstitutional because it
required redevelopment agencies to make payments to schools as a condition of continuing to
operate. They found specifically that this violated Proposition 22's prohibition against the state
requiring an RDA to transfer funds to schools or to any other agency.
The Transition Process
As of February I, 2012, redevelopment in California, as it was known in the past, is dead as far
as new projects are concerned. Now in place is a plan included in the legislation to wind down
the redevelopment projects using tax increment revenue only to pay down the debt obligations,
continue pass - through payments and cover limited administrative costs. The agencies have been
dissolved, and no new projects will be initiated. A last -ditch effort to delay the dissolution failed
in the Senate, and the agencies are now in the phase -out mode detailed by the legislature.
Successor agencies (usually the city council) will continue to administer existing projects until
completed and all indebtedness (bond and contractual) is paid.
Many of the property transfers that occurred after the legislation passed the bill will be reviewed
by the State Controller and could be reversed or at least tied up in litigation.
2011 -2012 Orange County Grand Jury Page 19
The Dissolution of Redevelopment in Orange County
Enforceable Obligations (EOPS and ROPS)
Both of these documents represent the list of future redevelopment expenditures. The first is the
Enforceable Obligation Payment Schedule (EOPS) that was required by ABXI 26 in August
2011. This includes payments for redevelopment bonds and loans with required repayment
terms but typically excludes payments for projects not under contract. Only the financial
obligations included on this list may be paid with revenues of the former RDA. The second is
the Recognized Obligation Payment Schedule (ROPS). The FOPS currently exists for all former
RDAs. The ROPS, completed by March 1, 2012, required approval by each Oversight Board, to
be certified by the Auditor - Controller and forwarded to the Department of Finance for approval
by April 15, 2012. Once approved, the ROPS will provide the County Auditor Controller with
the basis for distributing funds from the redevelopment trust fund.
Successor Agencies and Oversight Boards
ABXI 26 specifies, upon dissolution of Redevelopment Agencies, Successor Agencies must be
selected to oversee the former RDA affairs including paying down bond and other debt
obligations, and continuing revenue sharing with other tax supported entities. However, this is
not business as usual: Fach Successor Agency will have an Oversight Board to review decisions,
and the State Department of Finance will review to determine if the obligations are enforceable.
ABX l 26 also requires that an Oversight Board for the county and each city successor agency be
appointed and reported to the Department of Finance on or before May 1, 2012. The oversight
board will supervise the activities of the successor agencies and enforce "fiduciary
responsibilities to holders of enforceable obligations and the taxing entities that benefit from
distribution of property tax and other revenues."
Each oversight board will consist of seven members selected as follows:
• County Board of Supervisors
2 members
• Mayor
1 member
• County Superintendent of Education
I member
• Community Colleges
1 member
• largest Special District
I member
• Former RDA employee
1 member
Since 24 cities in Orange County have former RDAs, there will be a total of 25 oversight boards
operating until 2016. At that time, all will dissolve except the County Oversight Board which
will then oversee all successor agency actions in the County.
Housing Successor Agencies
In addition to the Successor Agencies described above, each former city and county RDA will
appoint a Ilousing Successor Agency to assume all affordable housing rights, powers, duties and
obligations of former RDAs. this responsibility may be retained by the community or
transferred to a local housing authority. The County has the option to retain the County as the
2011-2012 Orange County Grand Jury Page 20
The Dissolution of Redevelopment in Orange County
Housing Successor Agency or elect the Orange County Housing Authority (OCHA) as the
Housing Successor Agency.
Role of the County Auditor- Controller under ABX1 26
In the phasing out of the RDAs, the County Auditor- Controller has been assigned new oversight
responsibilities. A partial list of those responsibilities is presented here to illustrate the type of
oversight to the transition process that will be provided by the County through the remainder of
the current fiscal year.
The Auditor- Controller is required to audit each dissolved redevelopment agency's assets,
liabilities, and tax - sharing obligations and determine the amount and terms of indebtedness by
July I, 2012. The Auditor - Controller also certifies the initial Recognized Payment Obligation
Schedule (ROPS).
Upon the effective date of the legislation, the Auditor - Controller is required to determine the
amount of tax increment that would have been allocated to each redevelopment agency which are
deemed property taxes by ABX 1 26, and must deposit the amount in the Redevelopment
Property Tax Trust Fund. The Auditor - Controller administers the Trust Fund for the benefit of
the holders of Enforceable Obligations and taxing agencies that receive pass- through payments.
From February 1, 2012 to July I, 2012, after deducting administrative costs and after making tax
sharing (pass- through) payments, the Auditor- Controller allocates moneys from the
Redevelopment Property Tax Trust Fund to the Successor Agencies.
The Audits
On March 27, 2012, the Orange County Board of Supervisors approved contracts with two CPA
Firms to conduct audits of all 25 former Redevelopment Agencies in the County. These audits,
conducted under the direction of the Auditor- Controller, are required to be completed by July 1,
2012.
As set forth in state law, the purpose of the audits shall be:
"to establish each redevelopment agency's assets and liabilities, to document and
determine each redevelopment agency's pass- through payment obligations to other
taring agencies, and to document and determine both the amount and the terms of any
indebtedness incurred by the redevelopment agency and certify the initial Recognized
Obligation PavmentSchedule" [Health & Safety Code section 34182(x) (3) 1.
Following is the timeline for the audits:
• Board approval of contract - March 27, 2012
• Entrance Conference - To be determined
• Status Report - April 30, 2012
• Status Report - May 31, 2012
• Status Report - June 15, 2012
• Exit Conference - To be determined
• Final Reports - July 1, 2012
2011-2012 Orange County Grand Jury Pagc 21
The Dissolution of Redevelopment in Orange County
Upon receipt of the final reports, the Auditor - Controller will prepare and issue the Agreed -Upon-
Procedures Report and distribute to the State Controller by July 15, 2012.
What Does the Future Hold?
Termination of redevelopment in California was not intended or wanted by the State Legislature.
While dissolution of redevelopment was part of the governor's budget, the legislature did not
agree and passed ABXI 27. This was companion legislation to ABX1 26 and allowed city and
county agencies to continue redevelopment programs by paying an annual assessment to the
state.
Given the above, it stands to reason that there may be an effort to pass new legislation to bring
back some form of tax - increment financing.
While many examples of successful redevelopment projects exist in the county, there are also
examples of abuse and poor performance. The major problem identified by this study is three-
fold:
Lack of effective oversight;
Lack of local citizen input; and
Lack of a non - judicial means to settle disputes between the city or agency and the
citizens.
Primary Reason for Dissolution
The primary reason for the dissolution of redevelopment is the underfunding of school districts at
the local level. With the poor economy, it became increasingly difficult for the state to backfill
local school funding as required by SB 90 (the Dill's Bill). This gave the state little choice.
Either the RDAs had to contribute more to local school funding (which would have occurred
under ABX 1 27) or be dissolved.'9
Current Redevelopment Agency Oversight
Although there was no formal system of review or approval of redevelopment plans beyond the
agency and city (or county) that created it, the law provided for several oversight mechanisms.
Challenges can be brought against redevelopment agencies through litigation or through a
referendum process. In addition, the law required redevelopment agencies to report certain
activities to the California Department of Finance, the Department of Housing and Community
Development and the State Controller's Office.
A 1994 report by the Legislative Analyst's Office found that oversight of redevelopment agency
activities comes primarily through legal challenges or referenda initiated by three parties: 20
19 Supm, Legislative Analyst Office , February 2012
20O' Malley, Marianne, "Redevelopment after Reform d pre/immar, Look California 1.eg1slauve Analyst's Office, December, 1994
2011-2012 Orange County Grand Jury Page 22
The Dissolution of Redevelopment in Orange County
• Local taxing agencies including the counties, special districts, and school and community
college districts serving the redevelopment project area.
• The state, primarily the state Department of Finance.
• The public, which includes local residents and businesses.
Other than litigation (an expensive option for the general public) the only meaningful oversight
agencies have been the State Controller and Department of Finance. The State Controller
receives annual financial and operational data and has responsibility of enforcing the
Redevelopment Law (a seemingly impossible task given the breadth and scope of redevelopment
activities in the state.) For example, redevelopment agencies were required to file an annual
Financial report with the State Controller and with the Department of Housing and Community
Development. 21 Based on the RDAs' financial audit reports, the State Controller was required to
compile a list of agencies that appear to have major violations of the Community Development
Law. The law establishes a procedure for consultation between the State Controller's Office and
RDA, referral of the violation to the Attorney General, a court hearing, and the issuance of court
orders and fines designed to remedy violations.
Out of the 422 redevelopment agencies that existed during the 2004 /2005 fiscal year, the State
Controller's Office found 86 major violations based on the annual reports filed by the agencies.
Within the 86 violations, 51 (60 percent) were for failing to adopt an implementation plan,
thirteen (15 percent) were for failing to file an audit report and another eight (9 percent) were for
"administrative expenditures from the Low and Moderate Income I lousing Fund."
The Department of Finance and the State Controller will have an equal role in reviewing and
approving the ROPS (Recognized Obligation Payment Schedule) submitted. The following
statement appears on the Department of Finance web -site:
"We encourage redevelopment agencies and their successors to immediately begin work
on Recognized Obligation Payment Schedules (ROPS) and in organizing the oversight
board. Please, forward the names and contact information (as required by Sec. 34179 (h)
Jor the oversight board and the successor agency to the above e -mail address as soon as
possible. Please forward the ROPS and any supporting documents to the e-mail address
above. If documents are very voluminous, please call and we will discuss other delivery
options. "
"Department cif Finance and the State Controller have some overlapping responsibilities
and authorities under this statute. We intend to exercise them ,jointly to the extent
possible. Both Controller and Finance staff will be reviewing enforceable obligation
schedules and jointly determining which items to review in more detail and make
objections to. To the extent we are able to agree, we will provide joint determinations.
But both agencies reserve the right to take independent actions. "
"Agencies should expect to be contacted by phone and e -mail jbr more information and
to answer questions from Finance and Controller employees. We expect that field audits
may be necessary in some cases. "
" Califomla Health and Sallety Code Section 33379(6)(2)
2011 -2012 Orange County Grand Jury Page 23
The Dissolution of Redevelopment in Orange County
"The State Controller is authorized to recover its costs for activities under this statute
from redevelopment property tax. It is our intent to Jund their work from this source. "
The Grand Jury believes this means that effective oversight of over 400 agencies from
Sacramento is not a viable concept. Effective oversight needs to be objective, transparent and
locally administered.
What about the newly designed oversight boards currently in the selection process? They are
certainly at the local level. Perhaps too much so - it has been reported that some mayoral
appointments to their oversight board are serving city council members who are also on the
Successor Agency Board. Does this mean they will be overseeing themselves'? In this regard,
the future looks better. In 2016, there will be a single oversight board at the county level.
Project Area Committees
California redevelopment law provided for formation of project area committees to oversee plan
adoptions and a limited range of redevelopment activities. 2 This law was primarily to protect
low or moderate income persons living within a project area from being displaced through
eminent domain actions. However, the committees could also serve as advisory bodies to
redevelopment agencies to review plans and make recommendations. If a redevelopment agency
did not form a project action committee, it had to adopt a resolution making a finding that
formation of such a group is not required. A statement of the specific reasons why the project
will not displace a significant number of low- and /or moderate - income persons should support the
finding. If a project action committee was to be formed, the law contains a number of provisions
that required the agency to adopt procedures to publicize the opportunity to serve on the
committee and to assist with its formation.
The Next Phase of Redevelopment
Although Redevelopment Agencies have been dissolved, they have been replaced by "Successor
Agencies" and "Oversight Boards' with responsibility for managing existing redevelopment
projects until all debt obligations arc paid.
A Proposed Model for a Replacement System
Despite the generally poor reputation of redevelopment, Tax Increment Financing remains a
powerful tool for funding community improvements. In the event the Legislature passes a bill to
resume redevelopment in some form, a model is needed that ensures fair sharing of the tax
increment, provides effective oversight to the agencies selected to administer these funds,
includes a formal structure for citizen participation and a non -court method of conflict resolution.
The 2011 -2012 Orange County Grand Jury believes that it is likely that an offspring of
redevelopment is in the making and that it will soon be introduced in the foreseeable future. It
seems important, therefore, that local governments begin planning for such a program and
develop recommendations to the legislature as to the best possible elements for such a program.
23 California Health and Safety Code §33385 et. seq.
201 1 -2012 Orange County Grand Jury Page 2.1
The Dissolution of Redevelopment in Orange County
through the Grand Jury's research of the subject and interviews with members of the
redevelopment community, some ideas have surfaced that include the following:
• Eliminate "blight reduction" as a requirement for redevelopment or require compliance
with the legal definitions contained in the Health and Safety Code.
• Require a formal process for citizen participation and review through Project Area
Committees as authorized by §33385 Health and Safety Code.
• Plan for a single oversight agency or body at the County level and give that body
authority to require compliance with the law, policies and procedures.
• Use Project Area Committees as a first step to mediate citizen complaints and disputes
between agencies and property owners.
• Introduce arbitration as the next tier for settling citizen complaints and property owner
claims.
• Suspend use of eminent domain unless all reasonable alternatives, including arbitration,
have been exhausted and then, only with the concurrence of the county oversight board.
• Prohibit conveyance to a private party in those instances that justify the use of eminent
domain for public purposes.
• Develop formulas for revenue sharing that will ensure school districts, community
college districts, special districts and the county, share in the property tax revenue
because of a redevelopment project.
• Require a comprehensive performance audit on a bi- annual basis in addition to annual
financial audits.
Pending Legislation
There are currently several bills making their way through the legislative process. Following is a
summary of three of those bills providing examples of the nature of discussions taking place in
the State Assembly and Senate:
AB 1585 was introduced March 21, 2012, by Speaker Perez. This bill proposes some clean -up
language to the dissolution bill, ABXI 26, and proposes changes to the process of dissolving
redevelopment agencies. Included is a requirement that funds on deposit in the Low -and-
Moderate- Income Housing Funds remain with the entity that assumes the housing functions
rather than being distributed as property tax revenue. The bill proposes a total of 50 items
intended to correct or clarify a variety of issues related to the management of the dissolution.
SB 986 was introduced on January 31, 2012, by Senator Dutton. The bill allows successor
agencies to keep former redevelopment agencies' bond proceeds and enter into new enforceable
obligations funded by the bond proceeds. By letting successor agencies enter into new
enforcement obligations through 2014, SB 986 allows bond proceeds to finance former RDA
projects that would not otherwise be completed.
SB 654 was introduced January 31, 2012 by Senator Steinberg. This bill allows the host city or
county of a dissolving redevelopment agency to retain the funds on deposit in the agency's
housing fund and expands the types of agency loans from the host city or county considered
enforceable obligations.
2011-2012 Orange County Grand Jury Page 25
The Dissolution of Redevelopment in Orange County
In addition to clarifying the language in the dissolution legislation (ABXI 26) bills recently
introduced appear to represent an effort to continue with at least the low- income housing side of
redevelopment. It seems likely therefore that this part of redevelopment will continue to operate
not only in completing projects under way but also to fund new low- income housing projects.
FINDINGS /CONCLUSIONS
In accordance with Cal fornia Penal Code Sections §933 and §933.05, the 2011 -2012 Orange
County Grand Jury requires responses from each agency affected by the Findings presented in
this section. The responses are to be submitted to the Presiding Judge of'the Superior Court,
with a copy to the Grand Jury.
Because redevelopment agencies no longer exist, findings and recommendations in this report
will be limited to matters related to winding down the programs, oversight issues and otherwise
promoting the concept of local planning for the next, yet unknown, phase of redevelopment.
The 2011-2012 Grand Jury submits the following ten findings
Fl. As of the date of dissolution of redevelopment (February 1, 2012), all city operated
redevelopment agencies, except Mission Viejo and Seal Beach, were exceeding the
administrative costs limit of 5% of the tax increment distributed related to the ROPS as
authorized by ABXI 26.
F2. Of the agencies surveyed, only Costa Mesa and Santa Ana reported having a citizen
involvement committee along the line of a Project Area Committee as authorized by Section
33385 of the Health and Safety Code.
F3. Historically, external oversight over redevelopment has been missing or ineffective in
monitoring redevelopment agency compliance and performance. The newly formed oversight
boards offer a potential to improve on that record by providing critical evaluation of existing
projects and management of the successor agency debt.
F4. The Orange County Auditor Controller has an expanded role in managing the tax -
increment revenue. The implementation of ABXI 26 includes a requirement that all former
redevelopment agencies in the county be audited to determine the accuracy of the information
supporting agency claimed enforceable obligations. It has been determined that the County will
contract with external auditors to accomplish this task under the direction of the Auditor -
Controller.
F5. The Orange County Board of Supervisors has an expanded role in the management of the
transition of redevelopment. They have a responsibility to make appointments to all oversight
boards in the County. Ultimately, in 2016, there will be a single oversight board over all
successor agencies in the County. The Board is also responsible to approve and oversee the
external audit contracts to be managed by the Auditor - Controller.
201 1 -2012 Orange County Grand Jury Page 26
The Dissolution of Redevelopment in Orange County
F6. It is highly likely that new legislation will pass expanding the scope of the low to
moderate income housing programs and ultimately a replacement program for redevelopment
itself. Local governments should take a proactive approach in planning and shaping its return.
F7. Ending redevelopment changes the distribution of property tax revenues among local
agencies, but not the amount of tax revenues raised.
F8. Prior to the dissolution of redevelopment, some agencies encumbered debt to their cities,
thereby creating questionable enforceable obligations.
F9. Some former RDAs (such as Brea and Buena Park) have incentive payments to
commercial entities as enforceable obligations.
F10. The city of Garden Grove failed to adequately address citizen concerns in the pursuit of
development of the parking area on Grove Street, west of historic Main Street.
RECOMMENDATIONS
In accordance with California Penal Code Sections x'933 and §933.05, the 2011 -2012 Orange
County Grand Jury requires responses from each agency affected by the Recommendations
Presented in this section. the responses are to be submitted to the Presiding .Judge of the
Superior Court, with a copy to the Grand .fury.
Based on its investigation of City Redevelopment Agencies in Orange County, the 2011 -2012
Orange County Grand Jury makes the following six recommendations:
RI. All successor agencies should review administrative costs to ensure compliance with the
limit of five percent of the tax - increment or less as required by ABXI 26 and develop a plan to
reduce these costs to three percent of the tax increment received or less in 2012 -2013. If these
percentages fall below $250,000, the agencies are allowed to claim the higher amount. (See F1)
R2. Successor agencies and oversight boards should review the Recognized Obligations
Payment Schedule with a view toward limiting the range of prgjects and obligations thereby
retiring the enforceable obligation debt as quickly as possible. (See F3)
R3. The Orange County Board of Supervisors should appoint a committee to study possible
replacement programs for redevelopment and use legislative influence to help shape the next
generation of redevelopment in the likely event such a program is passed by the Legislature.
(See F6)
R4. Successor agencies and oversight boards should critically review the Recognized
Obligations Payment Schedule (ROPS) to evaluate the need for debt owed to the city. (See F8)
R5. Successor agencies and oversight boards should critically review the Recognized
Obligations Payment Schedule (ROPS) to evaluate the need for incentive payments to
commercial entities. (See F9)
2011-2012 Orange County Grand Jury Page 27
The Dissolution of Redevelopment in Orange County
R6. The city of Garden Grove should resume negotiations with the Downtown Business
Association to come to an agreement on the scope of the Grove Street Condominium Project
including the availability of a suitable number of convenient public parking spaces to meet the
needs of the downtown merchants. (See F 10)
REQUIREMENTS AND INSTRUCTIONS:
The California Penal Code §933 requires any public agency which the Grand Jury has
reviewed, and about which it has issued a final report, to comment to the Presiding Judge of the
Superior Court on the findings and recommendations pertaining to matters under the control of
the agency. Such comment shall be made no later than 90 days after the Grand Jury publishes
its report (filed with the Clerk of the Court); except that in the case of a report containing
findings and recommendations pertaining to a department or agency headed by an elected
County official (e.g. District Attorney, Sheriff, etc.), such comment shall be made within 60 days
to the Presiding Judge with an information copy sent to the Board of Supervisors. Furthermore,
California Penal Code Section §933.05 (a), (b), (c), details, as follows, the manner in which such
comment(s) are to be made:
(a.) As to each Grand Jury finding, the responding person or entity shall indicate one of the
following:
(I) The respondent agrees with the finding
(2) The respondent disagrees wholly or partially with the finding, in which case the
response shall specify the portion of the finding that is disputed and shall include an
explanation of the reasons therefore.
(b.) As to each Grand Jury recommendation, the responding person or entity shal I report one of
the following actions:
(1) The recommendation has been implemented, with a summary regarding the
implemented action.
(2) The recommendation has not yet been implemented, but will be implemented in the
future, with a time frame for implementation.
(3) The recommendation requires further analysis, with an explanation and the scope and
parameters of an analysis or study, and a time frame for the matter to be prepared for
discussion by the officer or head of the agency or department being investigated or
reviewed, including the governing body of the public agency when applicable. This
time frame shall not exceed six months from the date of publication of the Grand Jury
report.
(4) The recommendation will not be implemented because it is not warranted or is not
warranted or is not reasonable, with an explanation therefore.
2011-2012 Orange County Grand Jury Page 28
The Dissolution of Redevelopment in Orange County
(c.) If a finding or recommendation of the Grand Jury addresses budgetary or personnel
matters of a county agency or department headed by an elected officer, both the agency or
department head and the Board of Supervisors shall respond if requested by the Grand
Jury, but the response of the Board of Supervisors shall address only those budgetary /or
personnel matters over which it has some decision making aspects of the findings or
recommendations affecting his or her agency or department.
The City Councils of the cities listed on pages 31 and 32, as well as the Board of Supervisors and
Auditor - Controller, are required to respond to the findings and recommendations in this report,
as listed in the response matrices on pages 31 and 32.
2011-2012 Orange County Grand Jury Page 29
The Dissolution of Redevelopment in Orange County
FINDINGS — RESPONSE MATRIX
Respondent
F1
F2
F3
F4
F5
F6
F7
F8
F9
F10
Anaheim
X
X
X
Brea
X
X
X
X
Buena Park
X
X
X
X
Costa Mesa
X
X
X
Cypress
X
X
X
Ft Valley
X
X
X
Fullerton
X
X
X
Garden Grove
X
X
X
X
Hunt Beach
X
X
X
Irvine
X
X
X
La Habra
X
X
X
Lake Forest
X
X
X
La Palma
X
X
X
Mission Viejo
X
X
X
Orange
X
X
X
Placentia
X
X
X
S. Clemente
X
X
X
SJ Capistrano
X
X
X
Santa Ana
X
X
X
Seal Beach
X
X
X
Stanton
X
X
X
Tustin
X
X
X
Westminster
X
X
X
Yorba Linda
X
X
X
Auditor - Controller
X
X
X
X
Board of Supervisors
X
X
201 1 -2012 Orange County Grand JurN Page 30
The Dissolution of Redevelopment in Orange County
RECOMMENDATIONS RESPONSE MATRIX
Respondent
RI
R2
R3
R4
R5
R6
Anaheim
X
X
X
X
Brea
X
X
X
X
Buena Park
X
X
X
X
Costa Mesa
X
X
X
X
Cypress
X
X
X
X
Ft Valley
X
X
X
X
Fullerton
X
X
X
X
Carden Grove
X
X
X
X
X
Hunt Beach
X
X
X
X
Irvine
X
X
X
X
La Llabra
X
X
X
X
Lake Forest
X
X
X
X
La Palma
X
X
X
X
Mission Viejo
X
X
X
X
Orange
X
X
X
X
Placentia
X
X
X
X
S. Clemente
X
X
X
X
SJ Capistrano
X
X
X
X
Santa Ana
X
X
X
X
Seal Beach
X
X
X
X
Stanton
X
X
X
X
Tustin
X
X
X
X
Westminster
X
X
X
X
Yorba Linda
X
X
X
X
Auditor - Controller
X
Board of Supervisors
X
X
2011-2012 Orange County Grand Jury Page 31
The Dissolution of Redevelopment in Orange County
APPENDIX — GLOSSARY OF TERMS
ABIX 26 Legislation Dissolving Redevelopment in California
Upheld by California Supreme Court on 12/28/2011
ABIX 27 Bill Intended to Allow Redevelopment to Continue on a
"Pay to Play" basis
Struck down by California Supreme Court on 12/28/2011
CRA Califomia Redevelopment Association
FOPS Enforceable Obligations Payment Schedule
ERAF Educational Revenue Augmentation Fund
MORR Municipal Officials for Redevelopment Reform
Pass - Through Payment from Tax Increment Revenue to other agency
RDA Redevelopment Agency
ROPS Recognized Obligations Payment Schedule
SERAF Supplemental Educational Revenue Augmentation Fund
Tax Increment Difference between property tax before and after redevelopment
2011 -2012 Orange County Grand Jury Page 32
ATTACHMENT
City of Tustin Response to the Grand Jury Report
October 16, 2012
Honorable Thomas J. Borris, Presiding Judge
Orange County Superior Court
700 Civic Center Drive West
Santa Ana, CA 92701
Re: Response by The City of Tustin to the June 22, 2012 Grand Jury Report
Your Honor,
The City of Tustin ( "City ") is responding to the June 22, 2012 Grand Jury Report entitled "The
Dissolution of Redevelopment: Where Have We Been? What Lies Ahead ?" (referred to herein as
the "Report"). Pursuant to California Penal Code Section 933.05(a) and (b), please find the
following responses to Findings F1, F2, and F3 and the Recommendations RI, R2, R4 and R5:
Findings of the Grand Jury
F1) As of the date of dissolution of redevelopment (February 1, 2012) all city operated
redevelopment agencies, except Mission Viejo and Seal Beach, were exceeding the
administrative costs limit of 5% of the tax increment distributed related to the ROPS as
authorized by ABX1 26.
City Response:
The City acknowledges that before January 1, 2012, the former Redevelopment Agency's
administrative costs exceeded five percent (5 %). Effective January 1, 2012 and in accordance
with California Health and Safety Code (HSC) Section 34171(a) & (b), the City acting as the
Successor Agency to the Tustin Community Redevelopment Agency ( "Successor Agency ")
has prepared administrative budgets that restrict the administrative cost allowances payable
from property tax revenues to five percent (5 %) for the period of January 1, 2012 through
June 30, 2012 and three percent (3 %) for the subsequent periods. Pursuant to HSC Section
341770), the Oversight Board of the Successor Agency to the Tustin Community
Redevelopment Agency ( "Oversight Board ") approved the administrative budgets for each
six -month period covered by the Recognized Obligation Payment Schedule (ROPS) as
follows:
a) March 13, 2012, the administrative budget for the First ROPS (January — June 2012);
b) April 10, 2012, the administrative budget for the Second ROPS (July — December
2012); and
c) August 28, 2012, the administrative budget for the Third ROPS (January —June 2013).
172) Of the agencies surveyed, only Costa Mesa and Santa Ana reported having a citizen
involvement committee along the line of a Project Area Committee as authorized by Section
33385 of the Health and Safety Code.
Response to June 22, 2012 Grand Jury Report
October 16, 2012
Page 2 of 4
City Response:
The City acknowledges a Project Area Committee (PAC) did not exist at the time of
dissolution. While a PAC was not in existence, the former Redevelopment Agency was in
complete compliance with the HSC as it related to Redevelopment and PACs.
173) Historically, external oversight over redevelopment has been missing or ineffective in
monitoring redevelopment agency compliance and performance. The newly formed
oversight boards offer a potential to improve on that record by providing critical evaluation
of existing projects and management of the successor agency debt.
City Response:
While the City agrees that local external oversight has been missing, the City Council acting
as the Redevelopment Agency provided effective monitoring of the former Redevelopment
Agency's compliance and performance. In addition, the former Redevelopment Agency
was subject to state external oversight through the submission of annual financial reports
and compliance reports to the California Department Housing and Community
Development. The newly formed oversight boards will provide local external oversight. In
accordance with HSC Section 34179, the City Council of the City of Tustin appointed two
members to the Oversight Board on March 6, 2012. The Orange County Board of
Supervisors, the County Superintendent of Schools, Chancellor of the California
Community Colleges and the Orange County Flood Control District (largest special district
by property tax share within the territorial jurisdiction of the former Tustin Community
Redevelopment Agency) appointed their representatives prior to the Oversight Board's first
meeting on March 13, 2012. Pursuant to HSC Section 34179(i), the Oversight Board is
fulfilling its fiduciary responsibilities to holders of enforceable obligations and the taxing
entities that benefit from distributions of property tax. In that regard, the Oversight Board is
critically evaluating existing projects and managing successor agency debt.
Recommendations of the Grand Jury
RI) All successor agencies should review administrative costs to ensure compliance with the limit
of five percent of the tax- increment or less as required by ABXI 26 and develop a plan to
reduce these costs to three percent of the tax increment received or less in 2012 -2013. If these
percentages fall below $250,000, the agencies are allowed to claim the higher amount. (See
Fl)
City Response:
The recommendation has been implemented. As noted above under F1, the Successor
Agency is complying with the administrative cost allowance limits required under Assembly
Bill 1X 26. In accordance with HSC Section 34171(a) & (b), the Successor Agency prepared
and operated under an administrative budget that restricted the administrative cost allowance
payable from property tax revenue to five percent (5 %) for the period of January 1, 2012
through June 30, 2012 and is currently operating under an administrative budget of three
percent (3 %) for the July 1, 2012 through December 31, 2012 period. Pursuant to HSC
Section 341770), the Oversight Board has approved the administrative budgets for each six-
Response to June 22, 2012 Grand Jury Report
October 16, 2012
Page 3 of 4
month period covered by the Recognized Obligation Payment Schedule (ROPS) and the
administrative cost allowances do not exceed the allowed limits.
R2) Successor agencies and oversight boards should review the ROPS with a view toward limiting
the range of projects and obligations thereby retiring the enforceable obligation debt as
quickly as possible. (See F3)
City Response:
The recommendation has been implemented. In compliance with HSC Section 34177, the
Successor Agency has prepared and submitted each ROPS for approval by the Oversight
Board. During the period of time represented by the three (3) ROPS (January 1, 2012 through
June 30, 2013), the number of enforceable obligations has been reduced as contracts are
completed and payments have been made. In the review of each ROPS and pursuant to HSC
Section 34179(i), the Oversight Board has been fulfilling its fiduciary responsibilities to
holders of enforceable obligations and the taxing entities that benefit from distributions of
property tax. In that regard, the Oversight Board is critically evaluating existing projects and
managing successor agency debt.
R4) Successor agencies and oversight boards should critically review the ROPS to evaluate the
need for debt owed to the city. (See 178)
City Response:
The recommendation has been implemented. The Successor Agency and Oversight Board are
critically reviewing each and every enforceable obligation, including debt owed to the City of
Tustin. Debt owed to the City and qualifying as enforceable obligations has been listed on the
ROPS and submitted to DoF. These enforceable obligations are in compliance with HSC
Section 34171(d)(2) as well as with page 3 of the ROPS III (January 2013 through June 2013)
instructions posted on DoF's website. As noted before, the Oversight Board is committed to
fulfilling its fiduciary responsibilities to holders of enforceable obligations and the taxing
entities that benefit from distributions of property tax. The Oversight Board has an obligation
to treat all holders of debt equitably, including the City.
R5) Successor agencies and oversight boards should critically review the ROPS to evaluate the
need for incentive payments to commercial entities. (See F9)
City Response:
The recommendation has been implemented. Prior to dissolution, the Tustin Community
Redevelopment Agency was not providing incentive payments to commercial entities. As a
result, the First, Second and Third ROPS approved by the Oversight Board and the First and
Second ROPS approved by the California Department of Finance ( "DoF ") did not list any
incentive payments to commercial entities as an enforceable obligation. The Third ROPS is
currently being reviewed by DoF. Unless there are amendments to the current legislation, the
Successor Agency cannot enter into new agreements that require incentive payments and, as a
result, cannot list incentive payments as an enforceable obligation on a ROPS.
Response to June 22,2012 Grand Jury Report
October 16, 2012
Page 4 of 4
Thank you for the opportunity to respond to the Grand Jury's Report. If you have any questions
regarding our response, please contact Jeffrey C. Parker, City Manager, at (714) 573 -3012 or Jerry
Craig, Successor Agency Program Manager, at (714) 573 -3121.
Sincerely,
John Nielsen
Mayor
cc: 2011 -2012 Orange County Grand Jury
Jeffrey C. Parker, City Manager
David E. Kendig, City Attorney
John Buchanan, Program Manager
Jerry Craig, Program Manager