County Inches Toward Paying $30 Million RDA Stadium Obligation
At the Aug. 1 meeting of the Santa Clara RDA Successor Agency Oversight Board, the board approved a resolution to pay a $30 million commitment by the defunct RDA for the new stadium in the 2016 Recognized Obligation Payment Schedule (ROPS) – or earlier, pending negotiations with the 49ers stadium company (StadCo).
City voters approved the commitment of redevelopment agency funds -not the city’s general fund – for the stadium construction in June 2010. More than a year later, the state legislature shuttered California’s redevelopment program, while authorizing the “successor agencies” to pay off RDA obligations.
In 2012, the Santa Clara Successor Agency Oversight Board – made up of five Santa Clara County appointees and two city officials – charged that the contract with the 49ers stadium company (StadCo) was not a legitimate obligation as defined by the RDA shutdown legislation.
However, in two separate rulings, two Sacramento Superior Court judges ruled that it was. Failing to enforce it, Judge Alan Sumner wrote in March, potentially violated both the California and United States Constitutions, which prohibit the Legislature from passing laws “impairing the obligation of contracts.”
Board Wants IRS Opinion on Using Santa Clara RDA Bond Proceeds
Most of last week’s two-plus hour Oversight Board meeting was occupied with a discussion of whether $35 million in unspent proceeds from 1999 and 2011 bond sales, rather than property tax revenue, could be used to pay the stadium obligation.
Proponents of this idea – including Santa Clara Unified School District Board President Christine Koltermann – seemed to think that this approach would be advantageous for county taxing agencies. However, $30 million would be subtracted from the total available to taxing entities regardless of where it came from.
In fact, using the bond cash could end up costing taxing entities more – possibly a lot more. That’s because it’s unclear if tax-exempt bond proceeds can be used for a purpose different from that for which they were sold and still remain tax-exempt. An IRS ruling would likely be needed. And that could open up a can of very expensive worms.
“The IRS will want to know how come the money wasn’t spent…in 14 years [the 1999 bonds],” explained David Walton of Jones Hall, Santa Clara’s tax counsel. “That may generate an audit…and that’s a risk I wouldn’t advise you to take.” Penalties and fines would come out of the successor agency’s funds, he explained, and could add up quickly.
First, the IRS will charge an $18,000 filing fee. On top of that would be $15,000 to $25,000 in legal costs. And that might be just the start.
“Because they’re tax-exempt bonds, they have, in effect, a federal subsidy,” Walton continued, “and the IRS will calculate the lost revenue for the time the bonds were not being used for their stated purpose and apply a 28 percent tax rate. Then they [calculate] present value [on] that back to the closing date…It can be a huge amount of money…that leaves a fraction of the bond proceeds, but you still have to repay the bond holders.
“If you’re trying to preserve these assets for taxing entities,” he concluded, “one of the goals would be not to give it to the IRS.”
In the end, the board voted to get an IRS opinion on using just the 2011 bond proceeds ($25 million) to pay the stadium obligation.
Tortuous Logic for Default
At least one member of the oversight board hasn’t completely given up on the possibility of defaulting on at least part of the $30 million stadium obligation.
The newest appointment to the board, retired county executive Michael McInerny, posed a series of loaded questions with the ostensible object of demonstrating that that the bonds under discussion were high risk investments, and that the city’s own financial model “proved” that the projected income stream would be some $2 million less than was needed to pay the debt.
Santa Clara Finance Director Gary Ameling disputed that inference.
“The projection states very clearly that the average assessed value growth over the past 15 years…was 4.8 percent, at [which] there would have [also] been tax increment monies to fully pay off this obligation,” said Ameling. “None of us know today how much tax increment would have been available.”
However, he continued, “the stadium itself is generating a lot of interest in the Bayshore North project area, and there are a number of developers looking to do fairly substantial projects that will go to increase tax revenues from the area, that will benefit all of us as taxing entities.”
The $30 million stadium commitment is less than a tenth of about $340 million in Santa Clara real estate, lease revenues, and cash that the county is trying to appropriate in the RDA wind-down. These assets make Santa Clara a rich target for the county, unlike San Jose whose RDA assets were principally debt.
The county’s position is that the assets were held by the RDA as a result of what have been characterized by Deputy Santa Clara County Attorney Lizanne Reynolds as “funky” agreements intended to improperly divert revenue from other local agencies.
The next meeting of the Oversight Board is Friday Aug. 16 at 2 p.m. in the Santa Clara City Hall Chambers.