Despite the ax falling recently on California’s 400 redevelopment agencies, officials paved the way for the groups to wind down their business and we expect that debt service will continue to be paid.
Last week, the state Legislature and governor dissolved the state’s redevelopment agencies (RDAs) in an effort to free money to fill budget holes. New local panels, overseen by a seven-member statewide board, are responsible for disposing of the agencies’ assets and paying existing bond debt.
The changes in payment procedures should not affect the basic credit quality of the vast majority of bonds issued by redevelopment agencies. The legislation passed by the California legislature (ABx1 26), and affirmed by the state Supreme Court, directs “successor” agencies to comply with, and enforce, existing obligations of the defunct RDAs in accordance with their contractual terms. Successor agencies, in most cases, will be the unit of local government that established the RDA.
The law, which abolished redevelopment agencies effective Feb. 1, 2012, contains extensive detail on how the obligations of RDAs should be handled going forward. Oversight boards are to be appointed, and county auditor-controllers will disburse funds. Once the kinks are worked out and procedures are established, revenues pledged to former RDA bonds should flow through to bondholders as originally intended.
Rating agencies confident going forward
The rating agencies have issued statements indicating they also expect bond covenants and payment schedules to be observed as the new system of RDA bond administration is implemented. The greatest risk exists in the implementation stage, as timing issues are worked out, and differing interpretations of the legislation are reconciled.
Already, legislation is making its way through the California legislature to fix inconsistencies in the original law.
As in the past, we expect the underlying credit characteristics of each bond issue to continue to be the best indicator of credit quality in the future. We believe the rating agencies have been on top of the issues they rate.
At this time, we are confident that the procedures for administering the former RDA bond issues will ensure that revenues designated for principal and interest payments will be paid in a timely manner. Ultimately, as in the past, the growth or decline in assessed values will determine ongoing credit quality of affected bonds.