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Extracted from Consolidated Report

This investigation was originally published as part of a larger consolidated report containing multiple investigations. View the consolidated PDF for the complete document.

Santa Cruz County Grand Jury • 2001-2002

An Investigation of the City of Capitola Redevelopment Agency Reimbursement Loan Agreement

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Findings 20 findings

F1 Page 68
Regardless of non-existent time cards, whether unavailable due to inconvenience or oversight, the City is obliged to apply for and receive an accurate and honest reimbursement. 2001–2002 Santa Cruz County Grand Jury Final Report An Investigation of the City of Capitola Redevelopment -11 Agency Reimbursement Loan Agreement
F2 Page 66
Time and performance records are currently unavailable to confirm reimbursement amounts.
F3 Page 66
The City has not applied for full reimbursement of its RDA expenses since 1995– 1996.
F4 Page 66
The Capitola City Council, by a unanimous vote on December 13, 2001, adopted a Loan Agreement to receive reimbursement from the Capitola RDA for administrative expenses.
F5 Page 66
The eligible years for reimbursement have been limited, as the City Council chose to forego the expenses and interest incurred during 1995 and 1996. This was due to concerns, conclusions and a legal opinion referencing the statute of limitations and the eligibility of the City to collect on all past expenses.
F6 Page 66
The Capitola City Attorney and General Counsel offered several legal opinions that addressed the statute of limitations and the need for documentation. Included was the statement urging the Council to be aware of: “…surprises through the revival of claims that have been allowed to slumber till evidence has been lost, memories have faded, and witnesses have disappeared.” “That a creditor who has been especially slow in asserting its rights must not be allowed to profit by that delay.”
F7 Page 66
The method for reimbursement for the target years 1997 – 1998 through 2000 – 2001 is to be the flat fee of 15% of the adjusted net tax increment. Definition: The net tax increment equals the total of the gross tax increment revenues of the RDA, less the exempted pass through agreements of the County, Fire, Library, and Special Districts. This resulting total is the net tax increment upon which the 15% flat fee deduction for administrative expenses is calculated. After this, 20% of the original gross tax increment is deducted for the set- aside for affordable housing. A final, major deduction accounts for accumulated debt service. The following Table offers a calculated example of a 15% flat-fee administrative reimbursement amount and its erosive effect on the balance remaining for “capital projects.” The figures reported are for 2000–2001 Actual, as derived from: Redevelopment Agency — The Source & Use of Funds, Years: 2000–2004, Table 1 2001–2002 Santa Cruz County Grand Jury Final Report An Investigation of the City of Capitola Redevelopment -9 Agency Reimbursement Loan Agreement 2000-2001 Actual Gross Tax Increment $1,675,000 Minus the 2000-2001 Pass-Through Agreements -600,900 Total of the Net Tax Increment (NTI) = 1,074,100 15% of the N.T.I. for Flat-Fee Administrative Fee -161,115* Minus 20% of the Gross T.I. for Housing Set-Aside -335,000 Minus the listed amount of 2000-2001 Debt Service -382,200 Minus the listed amount for Professional Services -57,600 Total Example Amount Remaining for “Capital Projects” = 138,185† Reported amount spent on “Capital Projects” for 2000– 2001 zero — no entry *Example calculation only. The amount for 2000-2001 as shown in Figure 1 Exhibit A to the adopted Loan Agreement is 139,117. The difference is due to the difference between Actual and Early Calculated projections. †In this calculation, the total amount remaining for “capital projects” represented as a percentage of the Gross Tax Increment is only 8.25%.
F8 Page 67
These reimbursement amounts for 1997–2001 have been developed as a loan, with a structured amount of simple interest that currently ranges from 5% to slightly over 6%. A. Fifteen percent of this figure for the years 1997 through 2001 equals: $539,213. B. An additional $78,815 has been added to that amount for accumulated back interest. For specifics, see Exhibit A at the end of this report. C. These amounts are to be paid, “as funds are available,” as determined by the City Council, over a period “not to exceed twenty-five years.”
F9 Page 67
The original draft of the Loan Agreement stated that the amounts owed from 1997 to the present were to be considered estimates. This draft recommended the use of time cards for a two-year period in order to measure and to confirm the accuracy of the fifteen percent flat fee. (This original draft is dated: Sept. 26, 2001 as a report by senior city staff to the Oct. 11, 2001 meeting of the City Council). This provision was deleted from the adopted agreement.
F10 Page 67
In a separate and earlier report from June of 2000, General Counsel emphasized against, “…vague documentation, especially given the contractual provision that the City periodically invoice the RDA and keep accurate records of its costs.” Refer to the originating 1981 Agreement.
F11 Page 67
The current City Manager estimated the various percentages of total time allocated to the RDA by city staff. These specifics have been detailed for review by the City Council: A. A tabulation of all direct and overhead costs of the City were listed, since a portion of those expenses were deemed attributable to maintaining the offices of the RDA. 2001–2002 Santa Cruz County Grand Jury Final Report -10 An Investigation of the City of Capitola Redevelopment
F12 Page 68
All of the above information is part of the progress report; the “well documented” case, to quote the City Attorney, developed by city staff to justify two important decisions: A. To decide how the City was to obtain past reimbursement without any written records. B. To determine what percentage of the net tax increment the City could expect to adopt.
F13 Page 68
The normal range with flat-fee, percentage based reimbursements for similar agencies, as suggested by a redevelopment official, is in the range of five to fifteen percentage points, provided that it is supported by legitimate documentation.
F14 Page 68
There remains dissent within the Finance Committee regarding the use of a flat-fee reimbursement schedule instead of time cards.
F15 Page 68
A new time-keeping system for payroll purposes is being procured for all of City Hall. However, its use is not being prepared for monitoring the time and performance costs of administering the RDA.
F16 Page 68
It is the City Manager’s responsibility to provide to the City Council, a balanced budget for its approval.
F17 Page 68
The RDA is required to have its annual report audited by the City, and its annual Statement of Indebtedness approved by the County Auditor.
F18 Page 68
The County Auditor, who chose to approve the report, reviewed the 2000–2001 Statement of Indebtedness. In this instance, the auditor chose to send an annotated copy of this report to the State Finance Department for further review. The State Finance Department has the authority under state statute SB1711 to sue a redevelopment agency, but has no active monitoring system to review a Statement of Indebtedness.
F19 Page 68
The County Auditor disbursed the tax increment funds for 2000–2001 to the Capitola RDA.
F20 Page 68
The 2001–2002 Statement of Indebtedness is due for submission on September 30, covering the year inclusively through June 30th, 2002. Conclusions

Recommendations 5