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Item 1.9 - State Dept of Finance Determination – Auth of the State Transfer of Smith Judgment FundF t�llH «! f\ THE, DATE: City of Poway COUNCIL AGENDA REPORI December 2, 2014 APPROVED APPROVED AS AMENDED ❑ (SEE MINUTES) DENIED ❑ REMOVED ❑ CONTINUED Resolution No. TO: Honorable Mayor and Members of the City Council Honorable Chairman and Members of the Housing Authority Honorable Chairman and Members of the Successor Agency to the Poway Redevelopment Agency FROM: Daniel Singer, City Manager /Executive Directorz,d INITIATED BY: Scott Edwards, Director of Administrative Services* Andrew White, Finance Manager 4,>� SUBJECT: State Department of Finance Determination — Transfer of Smith Judgment Fund Summary: By this report, the City Council is asked to authorize a transfer of approximately $2.9 million from the Smith Judgment Fund (Smith Fund) to the Successor Agency Fund. The State Department of Finance (DOF) has directed the Smith Fund to be used to pay enforceable obligations of the former Redevelopment Agency. The City disagrees with this determination and has initiated litigation, City of Poway, et al. v. Cohen, et al., Superior Court for the County of Sacramento Case No. 34- 2013 - 80001923. A transfer is requested at this time for cash flow purposes only. Since its determination, the DOF has partially withheld Redevelopment Property Tax Trust Funds ( RPTTF) from the Successor Agency. The RPTTF would have been used to retire approved enforceable obligations, and it is now necessary to use the Smith Fund to meet all approved obligations on the Recognized Obligation Payment Schedule (ROPS) 14 -15A, as well as future ROPS. This action ensures sufficient funding is available to complete the December 2014 debt service payment on the tax allocation bonds. Recommended Action: It is recommended the City Council authorize the transfer of the Smith Fund (Fund 429) to the Successor Agency Fund (Fund 720) for the payment of enforceable obligations. It is further recommended the transfer be authorized under protest of the State Department of Finance' actions and determinations concerning the Smith Fund. 1 of 7 December 2, 2014 Item # 1,01 State Department of Finance Determination — Transfer of Smith Judgment Fund December 2, 2014 Page 2 Background: The Smith Fund was created in 1995 after the Smith Judgment was entered by the San Diego County Superior Court. The Judgment is related to an action challenging the 1993 amendment to the Redevelopment Plan for the Paguay Redevelopment Project Area, in which the City and former Redevelopment Agency (RDA) were named as defendants. The Smith Judgment required the RDA to allocate 2% of its gross tax increment funds (beginning in fiscal year 2000 -2001 and through the life of the redevelopment project) for distribution to non - profit housing entities for specified housing uses including capacity building, predevelopment costs, and affordable housing outreach and education. In March 2011, the RDA transferred all rights, interests, and obligations under the Smith Judgment (including the Smith Fund) to the City as part of an Amended and Restated Cooperation Agreement. Since that time, the City has administered the Smith Fund pursuant to its obligations as a defendant in the Smith Judgment. The City has also fulfilled the RDA's obligations under the Smith Judgment as required by the Cooperation Agreement. In February 2012, the RDA was dissolved by operation of law. Prior to dissolution, the City elected to be the Successor Agency to the Poway Redevelopment Agency (Successor Agency), which is a legal entity existing separate and independent of the City. At the same time, the Poway Housing Authority (Housing Authority) was designated as the entity responsible for performing housing functions previously performed by the RDA. As required by Assembly Bill No. 26 and Assembly Bill No. 1484 (collectively "Dissolution Act "), the Successor Agency submitted two Due Diligence Reviews (DDR) to the DOF that reported funds available for distribution to taxing entities as well as all RDA assets transferred to the City between January 1, 2011 through June 30, 2012. This included the Smith Fund, with a balance of $2,846,518 as of January 15, 2013. The DOF's initial review of each DDR confirmed the Smith Fund is restricted by the terms of the Smith Judgment and is not available for distribution to other taxing entities. The DOF's review also directed the Smith Fund to be moved from the City to the Successor Agency for administration. The City disagreed with the determination to move the Smith Fund to the Successor Agency and sought to transfer the Smith Fund to the Housing Authority. The transfer was approved by City Council resolution and confirmed by Oversight Board resolution in August 2013. Upon review of the Oversight Board's action in August 2013, the DOF reversed its prior determination and directed the Smith Fund to be used to pay for approved ROPS obligations. The City utilized the Meet and Confer process to discuss the DOF's reversal and present its position. The City contended the Smith Judgment is an enforceable obligation and, based upon the restricted uses (i.e., housing) of the Smith Fund, it should be transferred to the Housing Authority for administration. The DOF disagreed with the City's position and has directed the Smith Fund to be used to pay for enforceable obligations, including the City's debt service on tax allocation bonds. The attached letter from the DOF, dated April 7, 2014, includes this determination. 2 of 7 December 2, 2014 Item # `,of State Department of Finance Determination — Transfer of Smith Judgment Fund December 2, 2014 Page 3 Findings The City continues to disagree with the DOF's determination and has initiated litigation, City of Poway, et al. v. Cohen, et al., Superior Court for the County of Sacramento Case No. 34- 2013 - 80001923. Unfortunately, resolution will not occur prior to the City needing the Smith Fund for retiring enforceable obligations. Up until this point, the Successor Agency has been able to pay all approved ROPS obligations without use of the Smith Fund. Due to the DOF partially withholding RPTTF, the City anticipates the Smith Fund must be used as early as December 2014 to cover debt service on the tax allocation bonds. Accordingly, in order to pay all approved obligations listed on ROPS 14 -15A as well as future ROPS, the Smith Fund must be transferred to the Successor Agency at this time. It is recommended the transfer be completed under protest of the DOF's actions and determinations. Fiscal Impact: If approved, the Smith Fund (Fund 429) will be transferred to the Successor Agency Fund (Fund 720) for the payment of enforceable obligations on the Recognized Obligation Payment Schedule, as required by the State Department of Finance. Environmental Review: This item is not subject to environmental review. Public Notification: None. Attachment: A. State Department of Finance Letter, Dated April 7, 2014 3 of 7 December 2, 2014 Item # k -° ENT 4� W 1111 n o � �c DEPARTMENT OF EDMUND G. BROWN JR. ■ GOVERNOR Oq {�FCRa�P F' N A N C 91 5 L STREET N SACRAMENTO CA E 95B 1 4.3705 ■ WWW.DDF.CA.00V April 7, 2014 Mr. Andrew White, Finance Manager City of Poway 13325 Civic Center Drive Poway, CA 92064 Dear Mr. White: Subject: Recognized Obligation Payment Schedule Pursuant to Health and Safety Code (HSC) section 34177 (m), the City of Poway Successor Agency (Agency) submitted a Recognized Obligation Payment Schedule (ROPS 14 -15A) to the California Department of Finance (Finance) on February 28, 2014 for the period of July through December 2014. Finance has completed its review of your ROPS 14 -15A, which may have included obtaining clarification for various items. HSC section 34171 (d) defines enforceable obligations. Based on a sample of line items reviewed and application of the law, the following do not qualify as enforceable obligations for the reasons specified: Item Nos. 42 and 247 -- Contracts for Legal Services totaling $20,000. Although enforceable, the types of services requested totaling $20,000 are considered general administrative costs and have been reclassified. Item No. 14 — Judgment Case No. 667691 in the total amount of $13,804,600. Previously, the Agency was required to set aside funds to be used on types of projects listed within the judgment. The judgment states the Agency is to set aside the funds for the life of the redevelopment project. However, with the passing of ABx1 26 and AB 1484, the Agency is no longer allowed to enter into contracts pursuant to HSC section 34177.3 (b). Since there are no current projects specified or in progress that obligate the Agency, there is no enforceable obligation tied to this judgment. Therefore, this item is not an enforceable obligation and not eligible for funding. During our review, which may have included obtaining financial records, Finance determined the Agency possesses funds that should be used prior to requesting Redevelopment Property Tax Trust Funds (RPTTF). Pursuant to HSC section 34177 (I) (1) (F), RPTTF may be used as a funding source, but,only to the extent no other funding source is available or when payment from property tax revenues is required by an enforceable obligation. The Agency provided financial records that displayed unused funds in the amount of $2,246,712 that had been retained in the All Other Funds and Accounts Due Diligence Review. 4 of 7 Attachment A December 2, 2014 Item # 1,01 Mr. Andrew White April 7, 2014 Page 2 Therefore, with the Agency's concurrence, the funding source for the following item has been partially reclassified to Reserve Balances in the amount specified below: Item No. 2 — 2001 Tax Allocation Bonds in the amount of $2,246,712. The Agency requests $2,838,282 of RPTTF; however Finance is reclassifying $2,246,712 to Reserve Balances. This item is an enforceable obligation for the ROPS 14 -15A period. However, the obligation does not require payment from property tax revenues and the Agency has $2,246,712 in available Reserve Balances. Therefore, Finance is approving RPTTF in the amount of $591,570 and the use of Reserve Balances in the amount of $2,246,172 totaling $2,838,282. During the review of Oversight Board Resolution No. OSB 13 -003 Finance identified $2,846,518 plus accrued interest in available funds that should be used to offset the need for RPTTF. In Finance's December 5, 2013 letter, the Agency was directed to request these settlement funds prior to requesting RPTTF on the ROPS. Therefore, the funding source for the following items has been reclassified to Other Funds in the amount specified below: Item No. 3 — 2003 Tax Allocation Bonds in the amount of $2,661,475. The Agency requested $2,661,475 of RPTTF; however, Finance is reclassifying $2,661,475 to Other Funds. This item is an enforceable obligation for the ROPS 14 -15A period. However, the obligation does not require payment from property tax revenues and the Agency has $2,661,475 in available Other Funds. Therefore, Finance is approving the use of Other Funds in the amount of $2,661,475. Item 4 — 2007 Tax Allocation Refunding Bonds in the amount of $185,043. The Agency requested $603,079 of RPTTF; however, Finance is reclassifying $185,043 to Other Funds. This item is an enforceable obligation for the ROPS 14 -15A period. However, the obligation does not require payment from property tax revenues and the Agency has $185,043 ($2,846,518 - $2,661,475) in available Other Funds. Therefore, Finance is approving RPTTF in the amount of $418,036 and the use of Other Funds in the amount of $185,043 totaling $603,079. Any accrued interest earned on the settlement funds should be accounted for in the Agency's ROPS 14 -15B report of cash balances and used to fund obligations prior to requesting RPTTF. Pursuant to HSC section 34186 (a), successor agencies were required to report on the ROPS 14 -15A form the estimated obligations and actual payments (prior period adjustments) associated with the July through December 2013 period. HSC section 34186 (a) also specifies prior period adjustments self - reported by successor agencies are subject to audit by the county auditor - controller (CAC) and the State Controller. The amount of RPTTF approved in the table below includes the prior period adjustment resulting from the CAC's audit of the Agency's self - reported prior period adjustment. The amount of RPTTF approved in the table on the next page includes excess prior period adjustment (PPA) of $ 2,378,340. The current approved RPTTF is insufficient to allow for the PPA of $ 3,973,978 to be fully expended during this ROPS period. The Agency should apply the remaining funds prior to requesting RPTTF on future RODS. 5 of 7 Attachment A December 2, 2014 Item # 1.1 Mr: Andrew'Whte" April 7, 2014, Page 3 Except for the items denied in whole or in part as enforceable obligations or for the items that have been reclassified,'Finance i not objecting to the remaining items listed on your'ROPS 1`4 15A. If you disagree with the; Mr. Andrew White April 7, 2014 Page 4 ve Cost Cap, Calculation Total RPTTF`for non- administrative obligations Percent allowed pursuant to -HSC section 341.71 (b) Total RPTTF< allowable for :. administrative obligations The greater of 3% or $250,000 Total RPTTF administrative obligations- after Finance. adjustments 301,200 Administrative costs. in excess of the cap $ (51,200 Please refer to the ROPS 14 -15A schedule that was used to calculate the approved RPTTF amount: http://www.dof.ca:gov/redevelopment/ROPS `. Absent a Meet and Confer, this is Finance's final determination related to the enforceable obligations reported on your ROPS. for July 1, through December 31, 2014. This determination only applies; to items where funding was requested for the six -month period. Finance's determination is effective for this tune period only and should not be conclusively relied. upon for future periods. All items listed on a future ROPS are subject to a subsequent review and may be denied even if it was or was not denied on this ROPS or a. preceding BOPS. The only exception is for those items that have received a Final and Conclusive determination from Finance . pursuant to HSC section 34177.5 (i). Finance's review, of items that have received a Final and Conclusive determination is limited to confirming the scheduled payments as required by the obligation. The amounl..available from the-RPTTF is the same a. "s the. amount of °property tax, increment that was available prior to enactment of ABx1 26 and AB 1484. This amount "is not and never "was an unlimited funding source. Therefore, as a practical matter; the ability to; fund'the items on the ROPS with property tax is limited to the amount of funding available to the>successor agency in the RPTTF. To the extent proceeds from bonds issued after December 31, 201`0 exist and are not encumbered by an enforceable obligation pursuant to HSC section. 34171 (d), HSC section 34191.4 (c) (2)_(B) requires these proceeds be used to defease the bonds or to purchase those same outstanding bonds on the open market for cancellation. Please direct inquiries to Wendy Griffe, Supervisor or Jenny DeAngelis, Lead Analyst at (91,6) 445 -1546. Sincerely, JUSTYN HOWARD Assistant Program Budget Manager cc: Ms. Ashley Jones, Senior Management Analyst, City of Poway Mr. Jon Baker, Senior Auditor and Controller Manager, San Diego. County California State Controller's Office 7 of 7 Attachment A December 2, 2014 Item # k.01