The City of Oakland released its staff report (included here at the end of this post) to accompany its upcoming July 7th Special Oakland City Council Hearing. The Oakland Staff Report is massively disappointing, and shows that Oakland Mayor Libby Schaaf’s staff does not understand the proper way to execute the project. In making the simple complicated, Oakland City Administrator Edward D. Reiskin, Interim Assistant City Administrator Betsy Lake, and Howard Terminal Project Manager Molly Maybrun, and their consultants, have proven that.
The fact is, the City of Oakland must help the Oakland A’s find a developer partner to drive the construction of $2 billion worth of new development at Howard Terminal (ballpark plus other buildings) in the base-year (or two years off of it) of tax increment financing revenue collection.
That’s the only way to assure the growth of a desired TIF revenue level of money to be able to pay the A’s and finance Oakland community projects. Otherwise, the not-yet-formed Oakland Financing Authority would wind up owing Kaval $50 million because it would be short the $455 million in infrastructure costs due to a bonding capacity of just $400 million. If we plan for a $2 billion worth of new development target, then we get a bond capacity of $808,705,677.18 and $1,268,705,677.18, respectively (using my Howard Terminal Spreadsheet you can use here), and with respect to taxing agency involvement, which the City of Oakland can negotiate (there’s no law against that). All of that can be done in a private activity bond issue plan, and without going the complicated “overlay” district approach.
I make such a bold assertion for these reasons.
First, City of Oakland Does Not Understand Tax Increment Financing; Here’s The TIF Revenue To Expect From Howard Terminal
First, The City of Oakland Staff Report, all 22 pages of it, mentions the words “tax increment financing” or “TIF” only once on page 4. Moreover, it makes a giant mistake in presenting “tax increment financing” when Reiskin, proving he has a much better head for transportation projects than redevelopment projects (after all, he came to Oakland after an eight-year-stint running the San Francisco Municipal Railway, and overall has a background that focuses on transit-oriented projects), wrote this:
In addition to State and Federal transportation funds, the primary mechanism contemplated to fund these improvements is a form of tax-increment financing known as an IFD. IFD stands for “Infrastructure Financing District” and is sometimes also called an EIFD, or “Enhanced Infrastructure Financing District.” IFDs were originally created by the State legislature in 2014 and have been amended and expanded over the years since. Although an IFD and an EIFD have slightly different rules under State law, they are very similar, and the terms IFD and EIFD are often used interchangeably. An IFD is governed by a Public Financing Authority (PFA) comprised of representatives from each participating taxing entity. The PFA is tasked with adopting and implementing a detailed Infrastructure Financing Plan for the district.
Well, Mr. Reiskin’s “the primary mechanism contemplated to fund these improvements is a form of tax-increment financing known as an IFD”. First, “Infrastructure Financing District” is not a “form” of tax-increment financing. And that’s where the City shows how confused it is about the whole deal. Tax-Increment Financing, by its nature, calls for a district of some kind – in other words, boundaries determined by the government that contain property, AKA buildings owned by people and companies who have agreed to be within the lines drawn by the government. Tax-Increment Financing is a public financing method, and not to be presented as defined by one type of district.
In the Howard Terminal case, the Oakland A’s will be the sole private owner of that property – no one else. Any empty land there beyond the ballpark itself, is owned by the A’s. The Oakland Athletics can be master developer, and work deals with other private developers where they take lease revenue from the land deal. See? None of what I just told you is in Ed Reiskin’s report.
As the sole private owner of the ballpark, the Oakland A’s must pay an annual property tax. If we assume the ballpark and one main development are completed, and the value of those is $1 billion or $2 billion, and the assessed value rate of growth is 4 percent annually, then we can make our tax increment financing revenue estimates from there. Using the Howard Terminal Spreadsheet, let’s take $1 billion, or $1.078 billion, as the estimate for the project, and put that in cell B134 of the spreadsheet.
What we get, and not presented in the City of Oakland Staff report, is this:
1. Without base-year taxing agency revenue that continues to be paid to Oakland Unified School District, City of Oakland, County of Alameda, BART, AC Transit, and East Bay Municipal Utility District, and assuming 4 percent annual rate of growth in assessed value, that comes to a total of $808,705,677.18 over a 45-year bonding period as allowed by current California law governing Enhanced Infrastructure Financing Districts, or EIDF’s.
2. With the base-year taxing agency revenue that’s collected by the Oakland Financing Authority (as I choose to call it), and after negotiations with Oakland Unified School District, City of Oakland, County of Alameda, BART, AC Transit, and East Bay Municipal Utility District, where each one gets some form of payback in targeted financing help for their projects. That comes to a total of $1,268,705,677.18 over the 45-year bonding period.
What’s interesting is that the City Staff report writes this on the same page 4:
When an IFD is established, the district’s existing “base-year” level of property tax revenue is fixed. Then, as assessed values and property tax revenues grow over the years due to new development, the additional (also known as “incremental”) property tax revenues over and above the fixed base year revenues are used to help finance infrastructure and affordable housing needed to support the new development project. Based on a current assessed value of the Waterfront Ballpark District site of approximately $29.5 million, the City today receives about $73,000 per year in property taxes from Howard Terminal. Over the next 16 years, if the proposed Project is built out, that assessed value is expected to grow to $7.6 billion, a more than 250-fold increase, with a corresponding increase in the City’s share of property tax revenue of more than $11.5 million each year.
But note that Ms. Lake writes “if the proposed Project is built out, that assessed value is expected to grow to $7.6 billion” – but then she does not present any estimate for the tax increment revenue from that, nor does she explain why she did not include it. Is the City of Oakland staff that lacking or are they trying to hide TIF Revenue from the Oakland community? Either way, it’s not a good look at all.
That leads me to this….
Second: The City Of Oakland Staff Is Confused By IFDs and CFDs, The District Shape Issue, So Avoids The Tax Increment Revenue Question, Let Alone The Private Activity Bond Issue Option
The Reiskin / Lake Staff Report then goes on to explain why there should be an “overlay” Community Financing District on the Infrastructure Financing District. Here on page 4, they write:
IFDs are generally paired with a geographically coterminous Community Facilities District (CFD), also sometimes known as a “Mello Roos District,” formed pursuant to the California Mello Roos Community Facilities District Act of 1982. When a CFD is created, the property owners within the district agree to impose a “special tax” on their property, over and above regular property taxes. The special tax would apply only to the Howard Terminal site, and no property owner outside of the Project site would be subject to it. The special taxes are collected by the County tax collector and because they are considered secure revenue, investors will lend against that revenue. When paired with an IFD, CFD bond issuances are generally timed and sized such that the incremental revenues captured by the IFD are adequate to service the CFD debt without additional cost to the property owner. This structure (CFD bonds backed in part by IFD revenues) has been used successfully by each IFD that has issued debt to date statewide, and is recommended by Staff for the following reasons:
1. An IFD over the project site (as illustrated on Attachment 3) would utilize those incremental tax revenues that would not exist “but for” the Project to pay for critically needed infrastructure, open space and affordable housing that will broadly benefit the City and region, in addition to the Project.
2. CFD bonds are non-recourse to the issuing entity (the City), which means they don’t put the City’s General Fund at risk or increase base property tax rates, either in the district or elsewhere in the City.
3. CFD bonds are issued regularly and are well accepted by the debt markets.
Folks, it doesn’t take all of that to result in a bond issue that, if it were to default, would be paid for by the developer. If the tax increment financing district includes just the A’s land, and starts with the privately-owned ballpark, guess what the resulting TIF revenue winds up being? It’s the source for something called a “private activity bond.”
A “private activity bond”, for the A’s purpose, is, this:
Qualified private activity bonds are bonds issued for a private purpose or to a facility that the government has an interest in subsidizing. 10 The Code did not prohibit the issuance of tax- exempt bonds for sports stadiums because the private purpose was still a qualified use for private activity bonds. And from Ameritrade January 2020: There’s also a third type of muni called a private activity bond. It’s sold on behalf of a municipality but for the benefit of a private entity such as a sports team. Each bond offering comes with its own set of riders, clauses, and potentially unique risks, which are all spelled out in the prospectus.
And then there’s this private activity bond consideration:
For municipal security to be considered a PAB, it must meet two conditions set out in Section 141 of the Internal Revenue Code.
The first condition is that more than 10% of the proceeds must be used for a private business project and that at least 10% of the payments of the principal or interest comes from property used for private business use.
Secondly, a PAB requires “the amount of proceeds of the issue used to make loans to non-governmental borrowers exceeds the lesser of 5 percent of the proceeds or $5 million, which is the “private loan financing test,” according to MSRB.
So, in our example, tax increment revenue would be $808,705,677.18 and the amount spent as the A’s subsidy would be at the low end $455 million – that’s 56.2 percent of the total TIF revenue used that would be used as a direct subsidy for infrastructure for the A’s ballpark. So, any bond issue created based on that $808 million revenue stream and used to pay the $455 million would have bond proceeds much greater than the 10 percent test mark for private activity bond issues.
That, folks, is a true private activity bond issue situation, if there ever was one. (The State of California’s Debt Financing Guide should be considered our private activity bond guide, and it’s here.)
Guess what? Since the A’s President Dave Kaval is talking about being paid back by the Oakland Financing Authority (as I call the not-yet-created , should-have-been-formed last year organization to collect TIF Revenue and make and float the bonds), and for up-front infrastructure payments he plans to make, the Oakland Athletics become the receiver of a loan that would, indeed at $455 million, exceeds the lesser of 5 percent of the proceeds or $5 million, which is the “private loan financing test,” according to the Municipal Securities Rulemaking Board.
Because the A’s stadium is to be privately-financed, and privately-owned, guess what? The TIF revenue is automatically going to benefit a private firm. There’s nothing to make this whole deal easier than looking at it as a private activity bond, rather than this legal contortionist crap of overlaying districts.
The Oakland Financing Authority floats a giant bond issue up-front, rather than the massively stupid idea of forcing the community to wait for monies to grow in future years when we may pass on. That’s why people do bond issues – to get up-front money from an anticipated revenue stream, rather than grow old waiting for it.
Then, in accordance with a spending plan done with the Oakland Community and the Oakland City Council, the Oakland Financing Authority can pay for the various projects to commence and pay back the Oakland A’s for their planned infrastructure spending of $455 million.
Where the City Staff is really confused is it does not get that it has to work with the A’s to plan specific projects beyond the infrastructure payments. It’s sources and uses: right now, we can say we have $634,352,838.59 in potential TIF revenue we can use for to the project as a bond issue – that’s 50 percent of the top-end of TIF Revenue of $1,268,705,677.18. That means the City of Oakland should get cracking on deals with the County, BART, OUSD, and AC Transit, and now. Otherwise, they get the low end.
The low end is 50 percent of $808,705,677.18 or $404,352,838.59 – at that, we would be short paying Kaval back his $455 million by $50,647,161.41 and well short of the total of $612 million in needed infrastructure improvements. While that could be paid by federal infrastructure financial assistance, it would be sweet to work on growing the tax increment financing revenue.
Oakland City Staff Must Focus On Howard Terminal Assessed Value Targets, Not District Shapes, Get Development Partners, And Start The Oakland Financing Authority, Now
We do that by working with the A’s to create the certainty that the project will be more than the ballpark. Right now, there’s no plan other than a pretty picture that says that the $12 billion or even the $7.6 billion, will happen – but the fact is we need $2 billion in new construction to start, including the ballpark
Thus, the City of Oakland needs to draw the involvement of a development partner (or two) with the A’s that can raise its own private financing and build a set of structures on The Oakland A’s Howard Terminal land and with the team as master developer (since they would own the property) – that would drive the up-front-new-assessed value to a level of $2 billion, rather than the $1 billion in ballpark cost we’re looking at now.
In short, the City of Oakland is going about this the wrong way. It’s forgotten how to do redevelopment, and this entire Oakland City Staff Report by Reiskin and Lake shows it. If we drive the up-front-new-assessed value to a level of $2 billion, then (using my spreadsheet which has common, standard, every-day-used TIF Revenue Math, we get the low end TIF revenue (assuming 4 percent rate of growth in annual assessed value) of $1,617,411,354.36, the high end revenue of $2,537,411,354.36, and bonding capacity of $808,705,677.18 and of $1,268,705,677.18, respectively.
(Bonding capacity is just a fancy way of saying we can get $808 million or $1.2 billion up-front, and via a private activity bond issue.)
If we take the low end of $808,705,677.18, that leaves $353,705,677.18 left for community spending and for infrastructure costs of $157 million beyond the $455 million. At the high end, we’re looking at $813,705,677.18.
At the high end of $1,268,705,677.18, we find $813,705,677.18 remaining after Kaval’s paid his $455 million. And we’re looking at a net of $656,705,677.18 for community projects.
A Private Activity Bond Issue Allows For Bond Proceeds To Be Spent On Services
As a private activity bond issue, there’s no restriction on “spending for services” unlike the standard Enhanced Infrastructure Financing District approach. The not-yet-formed as of this writing Oakland Financing Authority collects the TIF, pays the A’s, and then is free to take the surplus and give that to the Oakland Community – all in one, up-front, bond issue.
Indeed, if the City of Oakland just sticks to SB 293 Skinner, it can actually do that and because SB 293 Skinner was specifically designed to allow for community sharing. There’s nothing prohibiting a private activity bond issue from being the tool to use – indeed, it gives the City of Oakland and the Oakland A’s more spending flexibility.
Also, Oakland is not stuck with using just California Enhanced Infrastructure Development Financing Law, it can use Community Revitalization and Investment Authority Law.
The Community Revitalization and Investment Authorities (CRIAs) law (beginning with Section 62000 of Gov’t. Code) authorizes tax increment to be used in combination with the powers of former redevelopment agencies. A CRIA focuses on assisting with the revitalization of poorer neighborhoods and former military bases. While similar to redevelopment, a CRIA is more streamlined. Accountability measures are included to ensure that the use of the CRIA remains consistent with community priorities, and a 25 percent set-aside is included for affordable housing. Although an initial protest opportunity exists, no public vote is required to establish an authority, and bonds and other debt can be issued after a CRIA is established.
The 2014 enabling CRIA legislation is here, and is much simpler and without the restrictions of EIDF law. Indeed, I think its a better fit for Howard Terminal. In other words Oakland would form a CRIA to create the TIF district and form the subsidy spending plan in accordance with community and A’s objectives.
Take a look at Riverside, California’s CRIA:
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