A judge last week dismissed a lawsuit that accused Montebello officials of inappropriately borrowing from its redevelopment agency.
The courts found on Aug. 31 the lawsuit filed by a local businessman had no merit, since the city had paid back the funds by the end of the Fiscal Year, according to a city press release.
Businessman Ara Sevacherian sued to stop the city from transferring funds from the redevelopment agency on the grounds that such a transfer was illegal.
Officials say with this lawsuit out of the way, they can now comfortably pursue a $3.9 million short-term loan by the middle of September. The city estimates it will run out of cash by November, and doesn’t expect to receive its next infusion of revenue until early 2012.
The cash flow problem facing the city this year is nothing new. Last year, Montebello borrowed $17 million from its redevelopment agency in order to pay its bills.
But unlike this year, the city was also dealing with the effects of several years of overspending. By the end of the year the city could only pay back $3.5 million of what it owed the redevelopment agency, potentially putting the city in a legally vulnerable position.
In previous years, city officials hid the extent of the city’s financial problems. Former interim city administrator Peter Cosentini stated in a report released in March of this year, that even though the city had negative cash balances for years, former city finance staff moved money around to “zero” out shortfalls because they felt they could not show “negative cash balances” to independent auditors.
In May of this year Montebello escaped its financial bind when financial strategists hired by the city came up with a debt swap scheme that allowed the city to assume responsibility for payments on a 1990 redevelopment agency bond in return for canceling out its loan.
Before the decision was made to assume the 1990 debt, the finance director pleaded with the city, saying the city would be able to avoid selling off “valuable assets,” and “luckily… thank God that we have this opportunity.”
But the city will again feel the effects of the accumulated deficit in 2014 when it is scheduled to start paying back the bond debt.
Meanwhile, another lawsuit filed by Sevacherian, in which he accuses the city of bailing out on the purchase of several properties, is ongoing.
Soon after four of five current council members assumed their seats, the council voted unanimously to undo the property purchase with Sevacherian, along with several other last minute actions taken by the “lame duck” council in November 2009.
The city says it has a legal defense against this second lawsuit, but says there is a “moderate chance” the city’s redevelopment agency will be found liable for “damages and attorney’s fees, which could be material.”
Earlier this year, in the midst of settlement talks, the city momentarily considered purchasing several properties owned by Sevacherian. The matter was never taken up by the council in open session, even though internal memos and staff reports recommended the purchase without giving any particular reason for why the purchase would be beneficial to the city.
The dismissal of Sevacherian’s challenge to the city’s redevelopment borrowing is being hailed by city officials as one less blemish the city must explain away as they face potential lenders in a “hostile” financial market.
Interim City Administrator Larry Kosmont says the court decision in favor of the city “validates what we have done as having been done appropriately.”
As part of their pitch to lenders, they have also taken steps toward keeping Montebello’s redevelopment agency intact even as state lawmakers work to dismantle agencies across the state.
Redevelopment agencies have been criticized for benefiting developers more than blighted communities, with critics saying the money should be spent on schools and other public services handled by the state.
But those opposed to the shutdown of redevelopment agencies say funds have indeed benefited blighted communities and boosted economic development, and that state lawmakers are just looking for another way to balance their own ailing budget.
Montebello is looking to its redevelopment agency revenue, which allows a city to take a higher percentage of property taxes, for capital to make the kind of financial investments that might signal to lenders that they are likely to make good on their short term loan.
But for the privilege of keeping its redevelopment agency, allowing the city to enter new project agreements, the city council on Aug. 24 agreed to provisions of Assembly Bill X1 27 that include “paying to play” to the tune of $5.7 million, plus $1.4 million every year thereafter.
The money will come out of the 2011-2012 Housing Set Aside Tax Increment and the 2011-2012 Tax Increment. According to a staff report, the fee to the state will nevertheless “negatively impact the Redevelopment Agency’s ability to pursue redevelopment programs and activities designed to eliminate blight and enhance the City’s economic base.”
“In a lot of ways it’s bad news. We won’t get as much redevelopment money as we did in past years,” said Interim City Administrator Larry Kosmont.
But “some is better than none,” and Kosmont thinks the city can get “maybe one good deal a year” with what’s left of the redevelopment funds.
The council, on a 3-1 vote, approved preserving its redevelopment agency at the Aug. 24 city council meeting.