State Controller Slams Hercules in Redevelopment Review

The Hercules Redevelopment Agency is more than $10 million in the red and might not be able to survive financially or to meet its bond debt in the foreseeable future using redevelopment revenue alone, according to findings by the State Controller’s office, which reviewed the operations of 18 redevelopment agencies around the state. 

In a report released today, the Controller also notes that the agency misappropriated housing funds and “raised numerous concerns that stemmed from financial dealings of several key former employees.”  The report does not name anyone specifically, but it does note that the deals are being investigated. 

“These matters are beyond the scope of our review,” the report noted, going on to say they “are being investigated at several levels.” 

The state review comes at a time when would like to do away with redevelopment, a controversial tool that allows cities and counties to capture increased property tax revenues resulting from new development and use that money for purposes other than typical general fund expenses like parks, police and basic city services.  

And Hercules, which owes the state education fund about $6 million in back taxes, is looking like a poster child for the governor’s cause.  It is the first of the 18 agencies statewide to receive specific scrutiny in the “scope” section of the report with an analysis of its affordable housing headlined, “Allegation of Improprieties at Hercules Redevelopment Agency.” 

A lobbyist was paid $38,400 from Hercules redevelopment funds, including
$9,600 that was charged to the housing funds, even though it had no direct
connection to work on low- to moderate-income housing, the report states.
It notes that the agency spent $19,200 in housing funds for code
enforcement, which is also not directly related to affordable housing.

The report goes on to say that the RDA’s Operating Special Revenue Fund had a deficit of a little more than $8 million, and the Affordable Housing Special Revenue Fund was almost $2.2 million in the hole. 

Several agencies, including Hercules, failed to make mandatory payments to the Supplemental Educational Revenue Augmentation Fund (SERAF).  As a result, it says the state’s general fund had to expend more than $40 million just to meet minimum funding levels for schools in 2008-09. 

Moreover, the report notes that redevelopment revenue in Hercules, including tax increments, will not be sufficient to pay bondholders in the “foreseeable future.” Hercules met its payment to bondholders last month by borrowing money from the city’s investment funds. 

The city notes in a recent report that Standard & Poor’s lowered the rating of the agency’s 2005 and 2007 tax allocation bonds last year from an “A” to a “BB,” which is the equivalent of junk bond status.  Those two bonds together are more than $116 million, more than $40 million of which the Hercules RDA has spent on land. 

Hercules notes that it has been “unfairly singled out” in the state review, which highlights allegations of “improprieties at the redevelopment agency as well as the disclosure in its independent auditor’s report about ongoing concern.”

“We are quite certain that each Agency has its own issues, and are concerned that this section of the report singled out Hercules for issues not substantiated in the review,” the city said in its defense. 

All of the 18 redevelopment agencies reviewed had reporting deficiencies.  In every case, their “independent auditors failed to identify major audit violations and did not include all required information in the audit reports,” the report said.

Redevelopment, as it was originally envisioned in the years after World War II, is intended to allow cities and counties to eradicate “blight” by placing blighted, rundown or vacant industrial neighborhoods in designated tax areas and using eminent domain to acquire those areas through condemnation. The idea is that what comes after ought to be better and produce more tax revenue and jobs than what had come before.

But the state review illustrates that various cities have used a broad brush to paint areas as “blighted,” and none of the agencies reviewed shared a consensus as to what defines a “blighted” area.

“Coronado’s redevelopment area covers every privately-owned parcel in the city, including multi-million dollar beachfront homes,” State Controller John Chiang said in a press release this morning. “In Palm Desert, redevelopment dollars are being used to renovate greens and bunkers at a 4.5 star golf resort.” 

As recently as last year, Hercules had considered annexing the rolling hills of Franklin Canyon under the same statutory authority.  That proposal is expected to be discussed at tomorrow night’s City Council meeting.