Hercules Redevelopment Agency Uses 'Creative Accounting' in Land Transfers to City

The Hercules Redevelopment Agency, which has that the state is questioning its continued solvency, paid off a chunk of its debt this month with an Atlas-sized shrug.

In a move intended to keep the state from grabbing its last remaining assets, the redevelopment agency transferred — at cost — $33.7 million worth of real estate to the city’s coffers. And the land was valued not at current market rates but at what the city paid for it two to four years ago.

If the real estate transfer survives state scrutiny, it would also serve to repay the lion’s share of the redevelopment agency’s $45.8 million debt to the city’s taxpayers. But it raises an interesting valuation question for taxpayers, who are, in essence, being repaid for city “advances” to the redevelopment agency with properties that might or might not be worth what they appear to be on paper.

“Many agencies have excess tax increment to pay off bondholders,” said city Finance Director Liz Warmerdam. “In our case, we’re upside down.”

The redevelopment agency is operating with more than a $10 million deficit. In addition to the $34.9 million of “advances,” the agency has borrowed $10.9 million from city funds to meet its debt to bondholders, former interim City Manager Charlie Long said.

Long, who advised the city on the transfers, said it was an attempt to work out something “fair” for taxpayers in light of Gov. Jerry Brown’s announced intention to do away with redevelopment agencies.

A first bill in that direction failed to get enough votes last week to pass the state Assembly, but the looming threat of what’s perceived to be a state asset grab has many cities still scrambling to find creative ways of retaining control of money and land.

In the case of Hercules, there’s nothing left but land. Two tax allocation bond issues in 2005 and 2007 generated $116 million in cash for the redevelopment agency, which has used more than $50 million of that money to buy land.

Four of those parcels (interactive map) were deeded to the city this month to repay part of the money the city has advanced the redevelopment agency in recent years. With one exception, they read like a string of broken promises to taxpayers:

• Victoria Crescent: 6.5 acres that was supposed to have been a shopping center to serve residents in Victoria by the Bay. It was purchased by the agency in 2009 for $3.4 million.
• Wal-Mart, also known as Parcel C: 17 acres at the end of Linus Pauling Drive that cost the redevelopment agency $13.9 million plus legal costs in two separate lawsuits with the retailer. Today, it's a vacant lot.
• Sycamore Crossing: 11 acres between Sycamore and San Pablo avenues that was to have been a housing and commercial centerpiece, to mirror Sycamore North. It was purchased by the agency for $14.5 million in 2007.
• Yellow Freight: 3.5 acres on Highway 4. It was purchased in 2009 for $2 million with the intent of moving the Caltrans yard there from its location in the New Town Center development. The land was outside the city limits, which raises a complicated set of questions about whether the purchase was handled properly. The upshot is that the city is in negotiations to lease the property for $12,000 a month to Oak Harbor Freight Lines Inc. under a proposed three-year contract. That money would go not to the faltering redevelopment agency but to the city’s coffers.

The creative accounting behind the redevelopment agency’s repayment of its debt to the city is not typically what’s seen in inter-agency transfers of property, and it raises questions both about how the property was valued and the designated use of bond funds.

Consider Sycamore Crossing, for example. The redevelopment agency paid developers $14.5 million for that property in the summer of 2007, a time when land values were generally higher than they are today.

Because no new appraisals have been done, taxpayers are essentially taking the vacant land back at the same price – as a $14.5 million “payment” on those loans advanced to the redevelopment agency.

Long said the land swap can't be viewed as a private party transaction for two reasons. First, he characterizes the deals as “related party transactions” in which the business of the redevelopment agency holds a mutual benefit to the city’s taxpayers. Secondly, he says the “advances” the city made to the agency in years past were not really loans because much of the money was used to pay for projects like the new library and the construction of Refugio Valley Park.

Some of the projects – almost $9 million for the wastewater treatment plant and some $2.3 million for the teen center – are not even in a redevelopment area, raising questions about why the agency would have paid for projects outside its purview. City spokeswoman Michelle Harrington points out that these public projects are a benefit to the redevelopment area.

State law is exacting when it comes to spending redevelopment money on projects outside a the defined project area, and the city resolutions approving these expenditures addressed that in a limited way in 2009 and 2007, saying that the projects were “of direct benefit to the agency.”

Given the possibility these transfers might ultimately be reversed by the state, it’s likely that the more significant question with these redevelopment agency transfers will be their sticking power.

Laila Kearney contributed to this report.

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