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HomeMy WebLinkAboutRDA BOND REFUNDING 03-07-94AG N RDA NO. 3 ," ~.,..~., 3-7-94 Inter-Com ~TE: FEBRUARY 28t 1994 TO: FROM: SUBJECT: WILLIAM A. HUSTONt EXECUTIVE DIRECTOR TUSTIN COMMUNITY REDEVE ~~,~, AGENCY RONALD ~ TREASURER 1987 AND 1991 TAX ALLOCATION BOND REFUNDING RE COMMENDAT I ON: Direct staff to proceed with the recommendation of the Agency's Fiscal Consultant to refund both the 1987 and 1991 Tax Allocation Bond issues and extend the maturities not to exceed the year 2026. . · FISCAL IMPACT: By extending the maturities of the bonds, the annual debt service will be substantially less than the current debt service and, the Agency will maximize it's options to leverage future tax increment under current AB 1290 limitations. DISCUSSION: .Staff met with the Agency's financing team and reviewed the proposed refunding options. The review was focused on whether or not it made sense to refund both the 1987 and 1991 bonds and the Potential impact of AB 1290 on the refunding. On October 6, 1993, Governor Wilson signed AB 1290 (Isenberg). AB 1290, enacted as Chapter 942, took effect on January 1, 1994, and was sponsored by the California Redevelopment Association ("CRA"). Entitled the Community Redevelopment Law Reform Act of 1993, the bill includes the most sweeping changes in the Community Redevelopment Law in years. The changes will affect both existing project areas and new plan adoptions and include modifications to the definition of blight, the termination of fiscal review committees and time limits on all project areas, the repeal of authority to receive sales tax revenues and a "death penalty" for agencies which do not spend their housing funds. The bill also includes specific authority for commercial rehabilitation loans and assistance to manufacturing facilities and provides options for agencies in meeting their inclusionary housing requirement The Agency's Financial Consultant, Diane Hadland from Katz Hollis, has thoroughly analyzed AB 1290 and its impact on the Agency. Her attached memorandum details her analysis and explains why, under this new legislation, the Agency needs to look beyond the immediate desire for present value debt service savings. Page 2 March 1, 1994 Tax Allocation Refunding After discussing Katz Hollis' analysis of AB 1290, the financing team agreed that to limit the current refunding to the term of the 1989 bonds would significantly reduce the amount of tax increment the Agency can receive after the year 2004. AB 1290 limits the Agency's ability to issue new debt to twenty years from adoption of the Redevelopment Plan or January 1, 2004, whichever is later. No new Tustin Agency debt may be issued after 2004. It also limits the receipt of tax increment to 2026, ten years after the close of the RDA Plan which is currently 2016 for the Town Center Project Area. Because of general economic conditions the near term growth in the project is expected to be minimal. In order to maximize future capitalization we can either wait for accelerated growth in the project or we can reduce current debt service obligations thereby freeing tax increment dollars for future debt service. Katz Hollis' analysis .indicates that the difference between a 22 year bond issued in 2004 and a 30 year bond is about $2 million in bond proceeds. Under AB 1290 its in the best interest of the Agency to maximize the use of tax increment over the next 10 years. The surest way to accomplish this is to reduce the use of current tax increment for debt service. While the Agency has not finalized any one course of action at this time, our fiscal consultant is making us aware of new limitations under AB 1290 which effectively limits the Agency's planning horizon to the next 10 years. Because this is a new and complex issue a representative of the financing team will be available at the Agency meeting to answer questions in more detail. RAN: ls Attachment a: refundng.bnd KatzHollis MEMORANDUM TO: FROM: Ron Nault, City of Tustin Diane Hadland, Katz~ol~l'is SUBJECT: PROPOSED BOND REFINANCING DATE: March 1, 1994 The Agency is considering the refinancing of currently outstanding bonds in the Town Center Redevelopment Project to effect interest rate savings resulting in lower annual debt service requirements. Legislation passed in 1993, Assembly Bill (AB) 1290, restricts redevelopment agency actions in many areas. The purpose of this memorandum is to summarize certain aspects of AB 1290 and how this law may impact the nature of the Agency's decision on refinancing. Background Information on AB 1290 AB 1290 represents a sweeping reform of the proactive use of redevelopment in California and contains pro~sions that modify many of the requirements applicable to redevelopment agencies. The most important of the act's provisions that relate to the incurring and repayment of debt with tax increment are those setting forth time limits on the establishment of debt, the effectiveness of the redevelopment plan and the receipt of tax increment from a project. Other major components of AB 1290 include: 1) modification of the definition of blight to be used in qualifying an area for the use of redevelopment; 2) elimination of the authority for agencies to make payments to taxing entities as a means of alleviating fiscal detriment caused by the use of tax increment in an area; 3) prohibition on agency funding of the construction of city hall and a requirement that funding of any other public improvement be preceded by a finding that the improvement will eliminate blight; 4) a requirement that agencies adopt five-year implementation plans that specify the activities to be undertaken and how such activities will contribute to the elimination of blight; 5) restrictions on the ability of agencies to assist the development of sales tax generating facilities on vacant land; and 6) modification of some of the provisions relating to the annual statement of indebtedness that must be filed with the County for each redevelopment project; 5849.tus 030 ! 94/sc KatzHollis Mr. Ron Nault City of Tustin March 1, 1994 Page 2 Proposed Bond Refinancin~ The Agency currently has two tax allocation bond issues outstanding for the Project: $8,060,000 Tax Allocation Refunding Bonds, Series 1987 and $13,100,000 Subordinate Tax Allocation Bonds, Series 1991. The Series 1987 Bonds mature in 2006 and the Series 1991 Bonds mature in 2016. At current interest rates, the Agency's investment banker, Stone & Youngberg believe that somewhat modest present value savings (3% to 5%) may be achievable for both bond issues if they were to be refinanced. Once the bond issues are refinanced, Federal Tax Laws would prohibit an additional advance refimding. As a result, the Agency could not refinance its obligations for another eight to ten years. Given general economic conditions, tax increment revenue growth in the Project has been slow over the last few years. As a result, the majority of the annual tax increment revenues received by the Agency for the Project are required to be utilized for debt service on the bonds. While some reduction in annual debt service could occur with a refinancing, the reduction is likely to remain in the 3% to 5% range as long as the bonds are refinanced to the same term. As near term growth in annual tax increment revenues are projected to remain minimal, the majority of tax increment revenue will continue to be utilized for debt service if the bonds are refinanced to the same term. As the majority of revenues generated by the Project are already committed, at least until 2006 (when the 1987 Bonds mature), the Agency's ability to capitalize revenues for future redevelopment programs will be severely restricted. As mentioned above, AB 1290 further restricts the Agency's ability to utilize revenues for redevelopment efforts by imposing various time limitations on redevelopment project areas. The Plan for the Project, which currently ends in 2016, probably cannot be extended because of the stricter plan amendment provisions of AB 1290. In addition, the act restricts the Agency's ability to incur debt. Previously, debt could be incurred by the Agency for the Project any time prior to 2016. With the passage of AB 1290, the Agency cannot incur any debt for the Project past 2004. Finally, the Agency can no longer receive any tax increment revenue to repay debt past 2026. While prior law did not specify whether or not an agency could repay debt past the end of the Plan, the "consensus" legal opinion was that an agency could repay debt past the end of the Plan and that there was no time restriction on such repayment. Thus under previous law, the Agency probably could have issued bonds in 2016 with a 30 year repayment term. Under AB 1290, the Agency's last chance to issue bonds will be 2004: the maximum allowable repayment term for bonds issued in 2004 would be 22 years. The restriction on the issuance long term debt significantly restricts an entity's ability to leverage revenues. For instance, given annual revenues of $1 million and a 6.0% interest rate, approximately $13.8 million could be raised under a financing with a 30 year term while only $12.0 million could be raised if the repayment term were shortened to 22 years. This represents a +_. 15% reduction in financing capacity. The time limitations imposed by AB 1290 severely restrict the length of time the Agency can incur debt (from 22 additional year to 10 additional years) and restricts the Agency's ability to fully capitalize revenues within the shorter time frame. It is our opinion that these restrictions should trigger a rethinking of the Agency's position via implementation of the redevelopment plan and current financing policies. As discussed above, the Agency's current bonds mature in 2006 (1987) and 2016 (1991). If the bonds were refinanced with an extended term (e.g., 2026), annual debt service savings would be substantial. Because the KatzHollis Mr. Ron Nault City of Tustin March 1, 1994 Page 3 Agency would be paying interest for a longer period of time, the present value savings would probably be minimal. In this specific instance, however, present value savings can be a misleading indicator because if the Agency does not have debt to repay it will not receive any tax increment revenues. Once the Agency no longer receives tax increment from the Project to repay debt, those property taxes will be distributed to the County, the City and a number of other taxing entities. The City's share of those taxes in 1993-94 would be approximately 13 % as opposed to the Agency's share at 100%. Currently, the Agency has no debt in place with which to capture tax increment revenues available from 2016 to 2026. If the proposed refinancing occurs with a term substantially shorter than 2026, it will be difficult, if not impossible, for the Agency to capture thc tax increment revenues available after the bonds mature but prior to 2026. For this reason, we recommend that if the Agency elects to refinance the bonds at the current time to capitalize on the current favorable interest rote environment, that the term of the bonds also be extended. Because of the loss of flexibility to the Agency's redevelopment efforts in the Project, we cannot recommend at this time that the Agency refinance outstanding bonds to existing terms.