$3M cut to Modesto's budget possible

Modesto faces cutting more than $3 million from its financially stressed general fund after getting bad news from the state.

The California Department of Finance recently notified the city that it can't use property tax revenues to make two debt payments totaling $3.27 million on behalf of its former redevelopment agency. If that decision holds, the city would have to look to its general fund to make the payments.

But City Manager Greg Nyhoff said he is very confident the Department of Finance will reverse its decision. Modesto officials met with the department Monday to appeal the decision.

If that does not happen, Nyhoff said it would be a severe blow to the general fund, which pays for public safety and parks and recreation and has plummeted in the recession from about $120 million to about $102 million since 2007.

"It would have a tremendous impact on us," he said. "Those monies will have to be paid out of the general fund."

Cities and counties formed redevelopment agencies to eliminate blight and spur development. The agencies were funded by a portion of the property taxes generated within their boundaries. They issued bonds to raise large amounts of money to do high-impact projects. And they used their property tax revenues to pay off the debt.

When the state abolished redevelopment agencies in February, it required cities and counties to set up what are called successor agencies to pay the debts of their former redevelopment agencies. The successor agencies receive property taxes, and the Department of Finance approves their payments.

In Modesto's case, the Department of Finance is not allowing a $1.936 million payment for debt issued to build Modesto Centre Plaza in the late 1980s and a $1.329 million payment for debt issued to build Tenth Street Place and its parking garage in the late 1990s.

Modesto's successor agency owes about $48 million on the debt for Tenth Street Place, the parking garage and Modesto Centre Plaza. The agency will be making the $1.936 million payment until 2023 and the $1.329 million payment until 2034.

Debt structure cited

The Department of Finance allowed the payments made this year. The next payments, which are the ones the state is denying, are due in the spring.

In his October denial letter, a Department of Finance analyst wrote that because Modesto's redevelopment agency had not pledged property tax revenue but other types of revenue to pay off the debts, the state would not approve the $3.27 million payments.

But that's an incorrect analysis of how Modesto structured the debt, said Laurie Smith, administrative services officer for the city's Community and Economic Development Department.

She said while the financing for the Modesto Centre Plaza, Tenth Street Place and the parking garage was complicated, it was a common financing method used at the time, and the city pledged its redevelopment property taxes for the debt.

"Our position is tax increment (redevelopment money) is pledged, period," Smith said.

Modesto officials presented Department of Finance officials with additional information regarding the debt financing at their Monday meeting in Sacramento.

"We think we have a great case and great documentation that says they will end up paying those obligations," Nyhoff said.

Modesto expects a decision by Dec. 15.

Nyhoff said if the department does not approve the payments, "we will take a good, hard look at whatever legal options are available to us."

Any reductions to the general fund could have a direct impact on basic services. About two-thirds of the $102 million general fund pays for police and fire operations. Ten percent pays for the Parks, Recreation and Neighborhood Department.

The Stanislaus County auditor-controller's office releases the property tax revenues to the successor agencies based on approvals from the Department of Finance.

Todd Filgas, the office's property tax manager, said Modesto is the only jurisdiction in the county that faces having large payments disallowed by the state.

"Other successor agencies, if they have had issues," Filgas said, "they are significantly smaller amounts, in the tens of thousands of dollars if that."

Bee staff writer Kevin Valine can be reached at kvaline@modbee.com or (209) 578-2316.