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FROM: DIRECTOR OF FINANCE AND INFORMATION TECHNOLOGY DATE: March 7, 2006 SUBJECT: FY05-06 MIDYEAR FINANCIAL REPORT Staff Coordinator: Kathryn Downs, Deputy Director of Finance and Information Technology RECOMMENDATION Receive and file the attached midyear financial report, inclusive of the annual tax increment study in accordance with Resolution No. RDA 90-24. EXECUTIVE SUMMARY Midyear Budget Review The Municipal Code requires that a midyear review of the Redevelopment Agency’s (RDA) annual budget be presented to the RDA Board. In general, staff anticipates projected fund balances at June 30, 2006 will be equal to or greater than the original FY05-06 budget estimates. Summaries of RDA debt and RDA fund balances are presented as follows:
BACKGROUND It is important to understand that the FY05-06 midyear projections are based upon Staff's analysis using trend comparisons with previous years and reports provided by the County and other agencies. In the following paragraphs, discussion and analysis about revenues and expenditures of the RDA is presented. If no mention is made of certain revenue sources or program expenditures, it merely indicates that there is nothing significant to report at this time and that anticipated results are not expected to materially deviate from the FY05-06 budget. County Bond Debt and Annual Tax Increment Study In 1987, the City and RDA entered into the Horan Settlement Agreement with the County of Los Angeles and various property owners. The Agreement required issuance of $10,000,000 in County bond debt to finance landslide abatement activities in the Abalone Cove area of the Agency. Soon after the bond issuance, the Agency Board approved Resolution No. RDA 90-24. The resolution requires an annual tax increment study to review the adequacy of tax increment revenues to satisfy any County debt obligations. In accordance with the 1990 Board resolution, staff has performed the FY05-06 annual tax increment analysis. In 1997, the RDA Board approved a Memorandum of Understanding (MOU) agreeing to restructure the $10,000,000 County bond. At that time, the RDA made a lump sum payment of $4,545,000 and issued tax increment bonds for the balance of $5,455,000. Of the $4,545,000 paid, $2,000,000 was provided from tax increment revenue accumulated in the Debt Service fund for retirement of the $10,000,000 County bond debt. The balance of the payment was provided by a $1,545,000 loan to the Abalone Cove fund from the General fund of the City and the use of $1,000,000 in Abalone Cove fund balance reserves. The terms of the MOU require the RDA to make scheduled tax increment bond principal and interest payments through the year 2028. The MOU payment schedule requires semi-annual graduated principal payments that began in FY04-05. The payments will increase an average of 2.5% each year until the scheduled payments are made in full. These debt payments will be paid solely from the tax increment received by the RDA. Excess tax increment revenue over the bond principal and interest payments due is used to repay the $3,111,400 of deferred interest attributable to the original County bonds paid off as part of the 1997 restructuring. The County and RDA have agreed to allow the County to intercept (escrow) the available tax increment revenue until the entire obligation (tax increment bonds and deferred interest) owed the County is satisfied. In the event the debt owed the County is satisfied prior to the end of the Agency’s legislated ability to collect tax increment to repay debt in 2034, tax increment revenue will be available for repayment of loans made to the RDA by the City. The loan from the City to the Abalone Cove fund as part of the 1997 bond restructuring reached $2,690,954 ($1,658,262 principal plus accrued interest of $1,032,692) at June 30, 2005. In addition to the $77,200 principal advance authorized by City Council with adoption of the FY05-06 budget, staff estimates that approximately $180,000 of interest will accrue on the loan balance during FY05-06. Therefore, the loan balance owed the City for Abalone Cove activities is expected to be about $2,948,154 ($1,735,462 principal plus accrued interest of $1,212,692) at June 30, 2006. Since approval of the MOU, tax increment revenues have always exceeded the scheduled interest and principal payments on the tax increment bonds. Based on the FY05-06 tax increment estimates discussed later in this report, staff is confident that tax increment revenue will exceed budget and fully satisfy the interest payments due the County in the coming year. Tax increment revenue has increased an average of 7.7% annually since FY00-01. The County has projected tax increment to increase 4.8% from FY04-05 to FY05-06. If the recent trend of tax increment revenue continues in the future, adequate monies will be available to pay all scheduled principal and interest on the $5,455,000 bond as they come due. As of June 30, 2005, the Agency has accumulated $314,937 of tax increment in excess of annual debt service payments, which will likely be applied to the remaining $2,468,906 deferred interest component of the 1997 bond restructuring ($3,111,400 original deferred interest debt net of $642,494 excess tax increment applied at June 30, 2005) during FY05-06. DISCUSSION PORTUGUESE BEND FUND Background The Portuguese Bend landslide area projects are financed by loans from the General fund of the City. The loans have always been made with the knowledge that the available RDA tax increment revenue may not be sufficient to pay both the County bond debt and the City loans funding Portuguese Bend landslide projects. However, a loan accounting is maintained in order to provide a mechanism for the City to receive some repayment should the available tax increment some day exceed the debt owed to the County. Even if the loan mechanism did not exist, it would be necessary to finance these projects with General fund monies. The Portuguese Bend loan balance owed the City as of June 30, 2005 was $10,026,477 ($4,320,552 plus accrued interest of $5,705,925). No additional loans are expected during FY05-06, as operating activities for the Portuguese Bend fund are being financed with the carryover of unreserved fund balance amounts from FY04-05 and prior. However, it is estimated that additional interest of $672,000 will accrue on the loan balance during FY05-06. As a result, the loan balance owed the City by the Agency for Portuguese Bend activities is expected to be about $10,698,477 ($4,320,552 principal plus accrued interest of $6,377,925) as of June 30, 2006. Expenditures FY05-06 expenditures budgeted within the Portuguese Bend fund are entirely for administrative costs including membership for the Abalone Cove Landslide Abatement District and the Klondike Canyon Landslide Abatement District. Staff does not expect that FY05-06 expenditures will materially deviate from budgeted amounts. Projected Portuguese Bend Fund Balance, June 30, 2006 The ending unreserved fund balance in the Portuguese Bend fund is projected as follows:
The FY05-06 budget originally projected the ending unreserved fund balance to be $283,237. As shown above, the estimated June 30, 2006 fund balance is calculated as $333,013. The favorable variance of $49,776 is primarily due to FY04-05 additional interest earnings and permanent savings for FY04-05 administration, engineering, and attorney costs. ABALONE COVE FUND Projected Abalone Cove Fund Balance, June 30, 2006 The ending fund balance in the Abalone Cove fund is projected as follows:
The FY05-06 budget originally projected the ending Abalone Cove fund balance to $870. As shown above, the estimated June 30, 2006 fund balance is calculated as $5,410. The favorable fund balance variance is entirely due to FY04-05 expenditure savings and interest earned on the unspent fund balance. The fund balance must be spent to construct facilities within the Abalone Cove area of the RDA. A project has not yet been identified to utilize the remaining fund balance; but Staff will report to the Agency Board when a project is identified. Due to the amount of the remaining fund balance, a future construction project will likely require a General fund supplement from the City. DEBT SERVICE FUND Background The Debt Service fund is used to account for the accumulation of tax increment revenue dedicated for the repayment of principal and interest. Prior to the restructuring of the County bond debt at the end of 1997, the RDA had accumulated approximately $2,000,000 of tax increment revenue and interest earnings in the Debt Service fund. The full $2,000,000 was paid to the County upon restructuring the bond debt. As discussed previously, the tax increment bonds and deferred interest debt will be repaid solely from the tax increment revenue received by the RDA. The County and RDA have agreed to allow the County to intercept (escrow) the tax increment revenue until the semi-annual tax increment bond principal and interest and the deferred interest debt owed the County is paid in full. Although the custody of future tax increment revenue will remain with the County using the intercept procedures, the funds remain the property of the RDA until paid in accordance with the terms of the MOU. Therefore, tax increment revenue earned and used to pay the interest and principal on the tax increment bonds and the accumulated deferred interest debt continues to be reported in the Debt Service Fund. The Debt Service fund also acts as a pass through entity for recording accrued (unpaid) interest on the loans between the RDA and the City. Revenues Staff anticipates the Agency’s FY05-06 gross tax increment revenue will exceed the FY05-06 budget of $615,800 by about $10,000. Approximately $626,000 (80%) will be recorded as revenue in the Debt Service fund, while the remaining estimated $156,500 (20%) is required to be recorded in the RDA Housing Set Aside fund. Of the total FY05-06 allocation, about $133,000 (17%) will be directed to the County Fire District. Therefore, the County will intercept about $493,000 of net tax increment revenue during FY05-06. Expenditures Los Angeles County Fire Protection District In accordance with the terms of an agreement with the Los Angeles County Fire Protection District, the Agency is required to pay 17% of its gross tax increment to the Fire District. While these pass-thru monies are remitted directly by the County to the Fire District, the Agency is required to recognize both the tax increment revenue and expenditure in its accounting records. Each year that the Agency’s tax increment exceeds budget, the corresponding expenditure for the 17% pass-thru amount will also exceed the budget. Based on current expectations, total Debt Service fund expenditures are projected to exceed the budget for pass-thru expenditures by about $2,100. Staff expects to request a budget adjustment at fiscal year-end when the exact additional pass-thru amount is known. County Bond Debt As stated previously, the terms of the 1997 MOU with the County require the RDA to make scheduled tax increment bond principal and interest payments through the year 2028. Per the debt service schedule accompanying the 1997 MOU, FY05-06 principal and interest payments are $15,000 and $272,125, respectively. The FY05-06 budget was based upon the debt service schedule and is adequate for these expenditures. City Loans Total FY05-06 interest expense for City loans is currently estimated at $852,000 ($672,000 for the Portuguese Bend loans and $180,000 for the Abalone Cove loans, as noted above). Staff expects the FY05-06 budget of $707,875 will not be adequate for City loan interest expense, and will request a budget adjustment at fiscal year-end when the exact additional interest amount is known. Projected Debt Service Fund Balance, June 30, 2006 Staff expects FY05-06 tax increment revenues to exceed FY05-06 debt payments to the County. Any remaining fund balance at June 30, 2006 will be available to pay future bond payments, as well as the $2,468,906 remaining balance of the deferred interest debt component of the 1997 bond restructuring. RDA HOUSING SET-ASIDE FUND Revenue California Redevelopment law requires 20% of all gross tax increment be segregated in a "housing set-aside" fund for the development of low and moderate income housing. Total tax increment revenues are expected to exceed budget during FY05-06, with the portion attributable to the RDA Housing Set-Aside fund projected to reach about $156,500, which is about $2,600 more than budget. Expenditures In FY99-00, the RDA purchased land with $702,392 of Housing Set-Aside monies and entered into an exclusive negotiating agreement (ENA) for the development of a multifamily senior apartment project. It was anticipated that this project would satisfy the City’s very-low, low and moderate-income housing obligations as identified in the City's General Plan Housing Element. At the August 21, 2001 RDA meeting, the Board decided not to extend the ENA in order to analyze other potential alternatives, including an affordable housing project, for the subject site. Projected Housing Set Aside Fund Balance, June 30, 2006 The ending unreserved fund balance in the RDA Housing Set-Aside fund is projected as follows:
The FY05-06 budget originally projected the ending RDA Housing Set-Aside unreserved fund balance to be $1,166,737. As shown above, the estimated June 30, 2006 fund balance is calculated as $1,192,768. The favorable fund balance variance is entirely due to additional FY04-05 tax increment and interest earnings. CONCLUSION Except as discussed previously in this report, projected revenues should approximate budget and estimated expenditures should be equal to or less than the FY05-06 budget in all funds of the RDA. Respectfully submitted, Dennis McLean Director of Finance and Information Technology Reviewed, Les Evans Executive Director |
