Property value decline keeps San Jose RDA from borrowing

Sharon Simonson
Published: August 30, 2004
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Burdened by steep declines in tax revenue and bound by a covenant with
existing bondholders, the San Jose Redevelopment Agency will be unable
to issue new debt this year.

The RDA's tax revenue has been especially hurt by a 27 percent decline
in the value of business personal property.

David Baum, the RDA's finance director, says initial indications are
that the agency's "tax increment" revenue on commercial property,
including business personal property, will be insufficient this year to
allow it to issue more bonds. "Tax-increment" revenue is the kind of
property tax the agency receives.

The agency issues debt to finance improvements citywide, focusing on
housing and retail projects in downtown and various neighborhoods and on
redevelopment of city industrial zones.

Under agreements with holders of $1.53 billion in existing senior agency
debt, the RDA cannot issue more like debt unless it can show that its
tax-increment revenue is sufficient to cover its required debt service
with $1.15 in revenue for every $1 in annual debt payments. With the
decline in revenue, the agency can no longer meet the $1.15 to $1 test.

Matthew Jones, an analyst with Moody's Investors Service, says the
agency is not in danger of being unable to repay its debt, noting that
it has "plenty of cash."

The agency began the fiscal year in July with a $216 million fund
balance, according to its budget.

Mr. Jones downgraded his rating on the agency's debt last year, however,
from A2 to A3. The debt remains investment grade. He said he did so
because the agency would have only enough tax-increment revenue to pay
its combined, annual senior and subordinated debt-payment obligations,
assuming its tax revenue did not fall more. In fact, its revenue is
expected to fall by $20 million this year compared to last.

The agency has other revenue sources, but its tax-increment revenue is
far and away its largest revenue stream.

Still, Mr. Jones says he has been taken offguard by events.

"We introduced the idea that there could be more declines (in reports
issued in December and April), but the magnitude of the (current)
decline is a bit more dramatic than anyone anticipated," he says.

Moody's hasn't yet decided what further actions to take, if any, he
says.

Standard & Poor's maintained its A rating in December. Calls to the S&P
analyst in San Francisco to learn if it were contemplating a change were
not returned.

The RDA has seen the taxable value of the commercial property on which
it draws its revenue fall by nearly $4 billion in the last two years to
$14.9 billion. At the peak of that property's value, in 2002, the agency
received $187.4 million in tax revenue. This year, it will take in only
$150 million.

The two years of consecutive declines in taxable value and tax increment
revenue are "unprecedented" for the agency and dictate its actions, Mr.
Baum says.

"Everything we do has to be financially prudent. Until tax (revenue)
goes up, we are always concerned about a future drop," he says.

The agency contemplated issuing $20 million in additional debt this
year. Late last year, it sold $135 million in new debt.

It is already conserving cash, Mr. Baum says, and it has refinanced $281
million in existing debt, allowing it to reduce required payments by $12
million over the next 18 months.

"The truth is, this year, we don't have a problem," he says.

After that, "we're looking for a bounceback," he adds.