By Mark Gutglueck
Rather quietly, a financing tool to replace redevelopment has emerged in California. Few if any municipalities, counties or public agencies have moved to create these new entities, so-called enhanced infrastructure financing districts, which are in many ways similar to the redevelopment agencies they are intended to replace.
Redevelopment agencies were formerly adjuncts to local governments which were chartered to reduce blight in local communities and generate economic development. Those redevelopment agencies were empowered to utilize money available from the state and federal government, otherwise obtain loans or financing, or to use their own authority to issue bonds, the proceeds from which were used to eliminate blight and build infrastructure. The improvements from this redevelopment activity would then, theoretically, result in an increase in the value of the property within those redevelopment agency project areas. The increased property tax revenue from those areas, referred to as tax increment, would be used to pay back the loans or debt service the bonds, that is, pay the bondholders.
In 2011, the state legislature at Governor Jerry Brown’s instigation passed legislation, ABX1 26, closing out the more than 400 municipal and county redevelopment agencies in California.
Brown asserted that there were recurrent abuses of the redevelopment system and that the money would be better utilized for public education and public safety programs.
After a three-year vacuum in which local cities and agencies lacked a spark by which to undertake infrastructure-building efforts that would create a circumstance in which businesses and housing could be readily developed, the legislature took up a piece of legislation, Senate Bill 628, which was intended to fulfill Brown’s statement four years ago that a reformed process of facilitating the construction of infrastructure and creating the circumstances in which development projects could be economically encouraged would be forthcoming.
On September 29, 2014 Brown signed Senate Bill 628 into law after both houses of the legislature had approved it on the last day of the 2014 legislative session.
2011’s ABX1 26 had taken from local governmental jurisdictions an easy process of creating assessment districts to cover the cost of redeveloping areas within those city’s or county’s bailiwicks. In some cases the cities and counties gave up on jumpstarting development through the creation of infrastructure altogether. In other cases, they sought to substitute in financing mechanisms such as Mello-Roos bonds, Marx-Roos bonds or the creation of community facility districts to pay for building streets, sidewalks, sewers, schools or such appurtenances to development. But Mello-Roos and Marx-Roos arrangements entailed votes of those to be assessed in ratifying the assessment districts, which would then require that residents or business operators in the district pay yearly assessments to debt service the bonds used to pay for the upfront creation of the infrastructure. Any home-, land-, or business-owners coming into the district in the future would be saddled with the assessments, even though they had not voted them in. For the creation of an assessment district to pass, a 2/3s vote of the residents in favor of the district creation was needed. Few approvals of such districts occurred in the 2011 to 2014 time frame.
Senate Bill 628, which was introduced by Senator Jim Beall (D-San Jose), authorizes municipalities and counties to create enhanced infrastructure financing districts, known by the acronym EIFDs, to fund infrastructure development and community revitalization. EIFDs can be created with greater ease than Mello-Roos or Marx-Roos districts and community services districts, not requiring a 2/3’s vote, but rather by an act of the county board of supervisors or a city council. Or they can be put into place, involving the issuance of bonds and the devotion of tax increment funding to pay down that bonded indebtedness, on the authority of a vote by the people in which it needs to pass, not by 2/3s, but rather by at lesser 55 percent of the electorate in the district to be created.
EIFDs can entail a bond payback period of up to 45 years from the date of the bonding approval, which is 15 years longer than traditional redevelopment agency bond debt retirement arrangements.
Senate Bill 628 also allows for the Enhanced Infrastructure Funding Districts to be utilized for a broader range of purposes than traditional bond funding mechanisms, including transit projects, low- and moderate-income housing, and environmental cleanup.
EIFDs are distinct from redevelopment agency bonding in one key respect. The tax increment devoted to cover redevelopment agency debt was diverted from education. That is, the property tax on property included in a redevelopment area was signed over entirely to the redevelopment agency. In the case of the Enhanced Infrastructure Funding Districts, any pre-existing property tax that is earmarked for schools will continue to go to that purpose. Nor can EIFDs divert property tax revenues from any non-consenting taxing entity within the jurisdiction of the district to be created.
There was opposition to Senate Bill 628 by some who argued that the restrictions on the Enhanced Infrastructure Funding Districts’ poaching property tax revenue from other overlying and pre-existing governmental districts was not strong enough. Those opponents have vowed to carry further legislation this year which will tighten restrictions on the diverting of pre-existing taxes to infrastructure projects slated to be defrayed by EIFDs.
While there has not yet been a rush by local municipalities and agencies to jump on the EIFD bandwagon, the San Bernardino Valley Municipal Water District appears to be ahead of the curve in considering how the tool could be used toward construction of water system improvements.
The San Bernardino Valley Municipal Water District, which serves as the watermaster for the Bunker Hill Basin, is the local agency dedicated to the importation of water. Its board members last month discussed how Senate Bill 628 might be brought to bear to create a district, perhaps involving other entities, which would provide financing for planned water improvements.
EIFDs Emerging As Potential Replacement For Redevelopment Agencies
By Mark Gutglueck