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California State Controller John Chiang today announced that the cities of Milpitas and Morgan Hill illegally tried to convert hundreds of millions of dollars of real estate, cash and investments that were required to be turned over to the State of California after Governor Jerry Brown and the State Legislature passed Assembly Bill 1x 26, terminating all municipal redevelopment agencies to help cover a $25 billion budget shortfall. Before the Controller’s audits, the state had collected less than $400 million of the $3 billion they expected from the state’s 400 community redevelopment agencies. The State Controller’s charges against two small towns are a home run for the state, but are a financial nightmare that will pound cities and counties across the state.
Under the new state law, all redevelopment agencies were required to cease operations by February 1, 2012 and transfer their assets and liabilities into a “successor agency” under the direction of an independent oversight board. The new agency would then sell their assets, pay-off their existing obligations, and then transfer the cash to their county auditor-controller for distribution to schools and other local agencies. To make sure cities and counties that sponsored the redevelopment agencies didn’t grab the assets, the law made any retroactive transfers after January 1, 2011 illegal.
Despite full knowledge of the law’s prohibitions, many of the redevelopment agencies’ sponsors converted the assets for their own use. In response, the Controller began conducting 14 initial audits and announced the following results for the first two audits:
Morgan Hill transferred $88.6 million to the City and $19.8 million to their Morgan Hill Economic Development Corporation (MHEDC). The City of Morgan Hill created the MHEDC and transferred the assets in March 2011, three months after Assembly Bill 1x 26 effective date. The Controller’s review also found that the city council sat as the MHEDC Board when the transfers were made.
Milpitas transferred $96.9 million directly to the City directly and $50.2 million to the Milpitas Economic Development Corporation (MEDC). The Controller’s audit established that the MEDC was established by the City Council two months after Assembly Bill 1x 26 effective date and the Board members were city council members. The Milpitas also failed to transfer an additional $87.6 million of redevelopment assets to their successor agency, and requires that these assets also be transferred to the successor agency.
Following the audit, California State Controller John Chaing artfully stated:
“As redevelopment agencies complete their wind-down, I hope that this provides an opportunity for local economic development to be re-imagined with a greater emphasis on measurable performance, efficiency and accountability.”
When it comes to imagination, the size of the charge backs against Milpitas and Morgan Hill far exceeded the dreams of the California Department of Finance’s, who had estimated that all 27 redevelopment agencies that paid only $6.7 million owed the state another $129 million. At the time, Richard Keit, spokesman for San Jose, had complained bitterly about the Department of Finance’s initial estimate that the termination of his city’s redevelopment agency would result in a $39 million bill:
“It’s already gone. The state Department of Finance knows we don’t have the $39 million — that we weren’t hiding it. It was all committed and now expended.”
Assembly Bill 1x 26 gives California finance officials the power to intercept municipal tax monies from cities and counties, but California Finance Director Ana Matosantos sent a letter last month to the 27 local governments saying the state would not withhold sales tax revenue or seek a penalty until September. But now that audits indicated the state will score higher cash, Finance Department spokesman H.D. Palmer warned:
“We hope that we’ll be able to resolve any differences between these successor agencies in an amicable manner. That said; those tools were put into place to ensure that schools and cities and counties get the property tax that they are owed for that period.”
Investors, like Warren Buffett, are dumping California’s municipal bonds after the state’s sales tax revenue nose-dived by 33.5%. With California now in survival mode, the state is going to pound their cities and counties for every penny they can get.
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