Wednesday Dec 19 2012
Rocklin cleans up bad debt
By: Jon Brines, Placer Herald correspondent
City seeks state approval for bailout loan from county
The city of Rocklin has finally reached a deal that would take care of some bad debt pulling down its municipal bond rating. Before leaving office last week, Mayor Brett Storey indicated he was dismayed by how long it took to get the issue resolved.
“We followed the law,” Storey said. “We did nothing wrong, yet the citizens are paying a penalty on some aspects and the bank was, too.”
Rocklin has insufficient funds to repay an approximately $2.7 million bank line of credit, secured by housing set-aside funds and assets, which is currently due. The city was tripped up last year by California legislation to eliminate redevelopment agencies, forcing the city into default with Bank of America in January. The law, AB 26X, bars cities from refinancing the debt into municipal bonds.
Bank of America officials have been extending the deadline to give the city and the state a chance to fix the problem, but had their attorney draw up a threatening letter earlier this year. This summer, the chaos forced Fitch Ratings to downgrade the former Rocklin Redevelopment Agency bonds to BBB+, which is just above a non-investment grade. They deem the “outlook negative.”
An Oct. 13 letter from the State Department of Finance spelled out the problem, declaring the debt a “non-enforceable obligation” putting Rocklin in a bad way.
Rocklin Chief Financial Officer Kim Sarkovich told the city’s Oversight Board last week that when the bank kept extending the deadline it made the state think it wasn’t an enforceable obligation because the bank was not pulling its rights to escalate the penalizing interest and other penalties for being in default.
“By doing that, the (state) came back and said according to (the law), the successor agency can not extend the debt,” Sarkovich said. “We came back and said, ‘The successor agency, (the city), never extended the debt. Bank of America extended the due date because they’ve been trying to work with us.”
The bank could have cost taxpayers a lot more money if it had charged default interest of an additional 2 percent and additional fees up to 4 percent, according to Sarkovich.
City Manager Rick Horst said the city maintains a good relationship with Bank of America officials.
“Bank of America has been very good,” he said. “They’re good because of their relationship with us, not the state.”
In a meeting late last month, Rocklin officials finally convinced the state to back down.
“They have reversed their decision,” Sarkovich said.
But before city officials could high five each other, they still had to satisfy the debt, which meant getting a bailout loan from the Placer County Treasurer.
“We’re now back to the table and working on a loan with them,” Sarkovich said. “We should start getting loan documents drawn up.”
The city would use the loan to pay off the debt. The note would be issued by Placer County and repaid from a portion of annual property tax revenue, subordinate tax increment revenues, over the next decade or more.
“It is another obligation that the defunct Rocklin Redevelopment Agency has to pay off,” said Oversight Board Chair Jerry Mitchell. “It does not come out of the city of Rocklin’s (funds).”
The red tape doesn’t stop there. The city won’t be out of trouble until the State Department of Finance approves the financing deal. That’s expected to be finalized in the next few weeks.
Borrowing from the county could turn out to be a win for Rocklin taxpayers, as default interest and penalties from Bank of America would be higher.
“We’re looking at a 3 percent interest rate (with the county),” Sarkovich said. “That’s what we’re discussing. The default rate (with Bank of America) would be 4 percent plus penalties and interest for being in default and non-payment.”
Storey indicated Rocklin taxpayers got caught in a bad situation over the dissolution of more than 400 redevelopment agencies statewide.
“This is, as it always has been, a state grab for money,” he said. “There were definitely redevelopment agencies that abused the system in the state, which is why the Legislature and the governor went after it. But they’re penalizing those of us who actually put the stuff to use. We didn’t have money in the bank, we had it in loans (and property). That was the whole purpose – to try to clean your town up ... and make it attractive.”
Rocklin opened the original $5 million credit line with Bank of America in 2008 to help fund affordable housing projects. The Rocklin Redevelopment Agency used about $4.83 million to fund low- and very low-income housing projects, including construction of a 156-unit low income multi-family housing project at Whitney Ranch Apartments, rehabilitation of 94 low-income multi-family housing units at Placer West and Shannon Bay Apartments and the rehabilitation of 264 units at Vicara at Whitney Ranch.
The city estimates about 70 additional Rocklin homeowners were given money to rehabilitate privately owned residences.