San Jose RDA borrows to pay its state bill

Silicon Valley/San Jose Business Journal
Sharon Simonson
Published: May 2, 2005
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The San Jose Redevelopment Agency is borrowing $21.4 million to make a state-mandated payment to support California schools.

The agency's so-called Educational Revenue Augmentation Fund payment is exceptionally high this year because of the state's fiscal woes. Last year, the RDA annual payment to ERAF was only about $10 million, and in some years the agency has had to pay nothing at all.

But as part of the state's efforts to balance its own budget this fiscal year, it has required the state's approximately 350 redevelopment agencies to make a collective payment of $250 million to the school fund. Each agency's payments under the plan are based on how much in property taxes it collects proportional to the total property tax collections of all RDAs statewide. San Jose is the largest RDA in the state.

It is the only new debt that the San Jose agency will issue this year and, if all goes as expected, it will be next year as well, says David Baum, RDA finance director. The agency has more than $1.5 billion in outstanding debt. It uses debt to finance its capital projects.

The new debt has a term of 10 years and carries an interest rate of less than 5 percent, excluding the cost of issuance. The agency will have annual payments of $2.5 million or less to retire it, city documents show.

"It was a cheap form of financing, and it makes it more affordable," Mr. Baum says.

The city's RDA was one of only eight RDAs statewide to have issued debt to pay its bill, says James Hamill, lead program manager for the California redevelopment Association ERAF program, which was created by the state legislature as part of the $250 million plan.

At least one debt-rating agency, Moody's Investors Service, has raised concerns about the San Jose agency's finances, saying that it lacks sufficient cash flow to service its debt and maintain its current operations and other obligations. That warning, issued last year, does not take into account the debt issued to finance the ERAF payment.

While the agency expects to re-pay the ERAF debt itself, the security for the loan is a first lien on the city of San Jose's property tax revenue, according to city documents.

The agency's annual property tax revenue, which is largely drawn from assessments on business equipment and commercial buildings in North San Jose, has fallen precipitously since the 2002-03 fiscal year, when it reached its peak of nearly $190 million. Property taxes are by far the agency's largest source of revenue.

Commercial buildings in North San Jose have become increasingly vacant, lowering their values and thus the property tax revenues they produce. The city itself now estimates that a third of the 42 million square feet of commercial property in the area is obsolete and will never again be used for its intended purpose.

This year, the San Jose RDA expected to receive about $149 million in property tax revenue. It projects an additional 1.6 percent fall this year.

However, Mr. Baum says he has gotten no solid word so far from the county assessor's office on what to expect for taxable property valuations for the upcoming fiscal year.

The assessment roll, the official list as prepared by the county assessor of all taxable property countywide, is closed July 1. The assessor's office releases the assessment roll total immediately thereafter.

"They (the assessor's office) are always interested in telling us about significant projects coming on line, and right now it's mostly housing projects," Mr. Baum says. "But in the past couple of years, it's been a little surprising to all of us, including them, that (assessed) values have dropped like they have. It seems like they are just scrambling to create the roll and that it's not until everything is in that they will know" exactly what is happening.

Despite the tough times, Mr. Baum says he believes better days are just around the corner. "We've had five straight quarters of sales tax increases," he notes, "and we feel we're bottoming out and we're going to bounce back."
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