“All kinds of unknowns and uncertainties” characterize the maze of possible outcomes resulting from the elimination of the Morgan Hill redevelopment agency, according to city manager Ed Tewes.
As downtown development consultant David Heindel said, it’s “a tsunami followed by an avalanche.”
“There’s uncertainty everywhere,” added downtown property owner and developer Gary Walton.
Wednesday was the first day of what numerous city and state officials have called “a new era,” as the Morgan Hill RDA and about 400 others throughout California closed in accordance with a new state law that diverts their resources back to state and local services.
What follows next will be a whirlwind of efforts to sort out which of the RDA’s former assets belong to the city, county and state, as well as how to continue to finance at least some of the economic development and affordable housing activities the agency set in motion before its Feb. 1 demise.
A key gray area is the Morgan Hill Economic Development Corporation, which holds about $20 million worth of downtown property which the RDA purchased in 2008. The nonprofit corporation also holds about $4 million in cash to be spent on downtown improvements.
The city created the EDC and transferred the assets last year, shortly after the governor announced his plan to eliminate redevelopment agencies.
The state, along with the county oversight board created to redistribute RDA assets, could decide to reverse those transfers, take possession of the properties, sell them and divert the cash back to the general funds of the city, county, school districts and other taxing entities.
City staff, however, think the EDC actions can’t be “unwound,” Tewes said.
“The law requires the transfers of assets that occurred after Jan. 1 (2011) between the redevelopment agency and public entity to be reviewed by the state controller, and possibly reversed,” Tewes said. “That does not apply to transfers to a nonprofit public benefit company” such as the EDC.
That’s one interpretation of the law. How the state or county will interpret the law is anyone’s guess. Attorneys in Sacramento who have advised RDAs have called the state dissolution law “poorly written” and highly complicated, Heindel said.
The only thing the Santa Clara County counsel’s office knows so far is that the county will be required to complete an audit of each former RDA before July 1, according to deputy county counsel James Williams.
Complicating the matter even more is the fact that last week Stewart Title, a title insurance provider, said in response to the RDA dissolution that “any proposed real estate transactions involving a redevelopment agency are most likely not insurable at this time.”
Heindel called the future development of the properties “a very unsettled situation,” but he thinks that the EDC and city can still develop the properties in accordance with the Downtown Specific Plan if the state allows them.
“We’ve already made commitments, and we think we ought to be able to complete the work and not stop in the middle,” Heindel said.
Heindel and the EDC are currently negotiating with a potential developer on only one of the properties – Simple Beverages. Last week, the council acting as the EDC board voted to extend the exclusive negotiating period with developer Stephen Pace, in order to “finalize the project scope and design,” according to a city staff report.
Details of the possible construction project at the site are not available, but the city has indicated a desire to build an array of mixed-use residential, office and retail sites on the properties.
The EDC and developer City Ventures were in a similar negotiation period regarding the Royal Clothiers and Caltrain sites starting last year, which concluded in January.
Road construction contracts could be broken
Some of the payments for properties needed for the Butterfield Boulevard extension are under contract but still outstanding.
As are the remainder of contracts with the Morgan Hill Downtown Association and the Chamber of Commerce – for $17,800 and $44,250, respectively.
A number of contracts for outside consulting and legal services are still outstanding and listed as items to be covered by the new successor agency. These contracts are for services related to the city’s housing programs, Third Street Promenade consulting, Upper Llagas Creek flood control design, Tennant Avenue interchange engineering and the recreation center’s solar power project, among others.
All of these obligations are claimed by the city acting as the successor agency, the RDA’s state-mandated replacement. But it’s up to that agency’s oversight board to approve the payment of these obligations.
The state law allows the oversight board to break contracts already in place between the former RDA (now successor agency) and third parties. While that could include about $11.5 million remaining to be paid on the Butterfield construction contract, Tewes thinks that project is legally secure. At any rate, the contractor started working on the project last month and continued to do so as of Thursday morning.
The state law, Tewes said, allows bond proceeds to be used for the purpose stated in the original bond covenants. That applies in this case because the road extension was part of the 2007 bond issue. The same justification applies for the Santa Teresa Boulevard extension to connect Hale and DeWitt avenues, even though no contract has been signed.
The successor agency’s official list of enforceable debts and contracts, submitted to the county auditor-controller, lists more than $13 million in outstanding costs for that project.
RDA redistribution benefits questionable
While county staff think the dissolution of redevelopment will eventually result in a windfall of new revenues to its general fund, as well as that of the city itself, K-12 schools and colleges, the city disagrees.
While those taxing agencies will receive the property tax revenue formerly distributed to the RDA – about $23 million last year to the Morgan Hill RDA – the state is likely to reduce funding from other sources by an equal amount – at least when it comes to education – thereby keeping overall funding flat, Tewes said.
The county board of supervisors last month appointed county finance director Vinod Sharma and former CEO and Morgan Hill resident Pete Kutras to the oversight board. But county staff has suggested the supes reconsider those appointments.
After all the RDA’s debts and obligations are paid off – likely several years from now – county staff think that education, social services, indigent medical care, public safety and other “local priorities” will receive an additional $286 million in annual property tax revenue that until Wednesday was directed toward the nine RDAs in the county.
“The state’s decision to dissolve redevelopment agencies means that more local property tax revenue will go directly to schools, cities and the county,” said supervisor Mike Wasserman, who represents the county district that includes Morgan Hill.
County staff also noted that the board has cut more than $2 billion in service reductions in the past decade.
School districts in the county will receive an additional $143 million annually after the redevelopment debts are paid off, and the county will receive about $81 million, county staff said.
County CEO Jeff Smith said the use of tax dollars for redevelopment, which would otherwise have gone to the county and schools, was one direct reason for budget cuts over the years.
Tewes and council members, on the other hand, lamented the RDA’s demise at a recent meeting.
“Over 1,000 families have been assisted (by RDA funds) with rental and ownership housing,” Tewes eulogized last week. “Monterey Road improvements were initiated by the redevelopment agency in the early 1980s. In the last decade we invested quite a bit in public facilities. A great deal of the infrastructure of the city has been constructed with the assistance of (the RDA), including eliminating traffic bottlenecks. The agency has assisted countless businesses with loans and grants to improve store fronts and help make their business successful.”
In response to an earlier statement by Smith claiming that RDAs have outlived their “legislated purpose,” Tewes said the Morgan Hill agency has always behaved lawfully since its inception in 1981. He also noted that the county has benefited from the city’s RDA, which provided $7.5 million toward construction of the South County Courthouse.
“That project would not have been possible without the Morgan Hill redevelopment agency,” Tewes said.
- The Granada Theater and Downtown Mall building
- The Royal Clothiers building
- The local share of the Caltrain parking lot on ButterfieldBoulevard
- The former site of the Simple Beverages liquor store at thecorner of Third Street and Monterey Road
- An option to purchase the property that houses BookSmart andJesus restaurant
- A small vacant lot on Fourth Street
Expected new property tax revenue to local agencies, resultingfrom Morgan Hill RDA dissolution:* - County: $4.5 million
- City: $2.5 million
- School districts: $9.8 million
- Special districts: $1.5 million
- Total: $18 million
- Total expected from all nine former RDAs: $286 million
*Source: Santa Clara County
