I have decided to use today’s blog to give a general overview regarding the management of the City of Fontana’s long-term debt. This is not intended to be a technical accounting discussion, but rather an overview regarding the long-term implications of the existing debt to the community.
At the risk of oversimplifying, two broad categories of debt will be discussed within this blog: Bonded Debt and Developer Debt.
Bonded Debt (about $600 million) is fully amortized debt, meaning that it will be completely paid off during the term of the bonds. This type of debt is similar to a house mortgage. Money is borrowed, an interest rate is assessed based upon market conditions and the strength of the credit and there is a schedule of payments that will completely pay off the debt over time, usually 30 years.
Most of the bonded debt is issued by the Fontana Redevelopment Agency (RDA) (about $400 million) or by Community Facilities Districts (CFD) (about $145 million). Debt issued by the RDA is repaid from property tax revenues collected by the RDA. These are not new taxes, higher taxes, or additional assessments; the funding for this debt comes from the basic property tax that all property owners pay.
CFD Debt is repaid from assessments made against property. This obligation can only be created through a vote of the property owners which often takes place during the construction of new developments. Individuals who buy into developments with bonded CFDs must be notified of the added assessments prior to purchasing the property. The current City Council’s policy regarding bonded CFDs is that they will not approve the creation of new CFDs unless there is a significant community benefit that can be identified. The existing CFD debt for Hunters Ridge and Walnut Village will be fully paid off in 2015. The Village of Heritage bonded CFD will be retired in 2017. When these bonds are fully paid, the collection of assessments from the property owners will also cease.
Both RDA and CFD bonded debt is typically issued to pay for the cost of construction of regional back-bone infrastructure. This infrastructure typically includes roads, sewer and storm drain construction. Another significant safeguard for such debt is that the debt is an obligation of the RDA and/or the CFD. It is not a debt of the city nor is it backed by the general fund. Should a default occur on such debt, the recourse of the bond holder is only against the assets of the RDA or CFD. Each RDA project area and CFD is a separate legal entity so the debt does not have recourse against other residents within the City of Fontana, even under a default.
All of the current RDA and CFD bonded debt obligations are in the black, meaning that there is sufficient revenue being generated within those districts to pay for both the principal and interest payments as they become due. When feasible, the RDA and CFD debt is refinanced to take advantage of lower interest rates. When such refinancing takes place, the term of the debt is not extended and any savings that results from the CFD refinancing is usually passed on to the property owners in the CFD district. Many property owners in the City who live in CFD districts have benefitted from such a restructured refinancing in the past.
A look at revenues and expenditures in the Fontana Redevelopment Agency shows annual revenues of about $100 million and total bonded debt service of $32 million. The surplus of revenues over expenditures in RDA is used for a variety of purposes including low-income housing (required by State law), pass-through financing to other entities such as the fire department and schools, and to pay for capital projects such as roads, sewers, storm drains, parks, libraries, economic development, and administration. Many of the new facilities and community improvements constructed over the past few years have, at least in part, been accomplished with contributions from the surplus of RDA revenues over debt service.
Developer Debt (about $200 million) was created to repay a developer for infrastructure they built in connection with the construction of the Southridge Village. In the 1980’s, a developer approached the City Council with a plan to construct a 10,000 unit housing development in South Fontana. As you might imagine, there was a great deal of infrastructure needed to support the proposed development. The City of Fontana did not have the money to build the needed infrastructure for the proposed development. As such, the developer proposed, and the city agreed to a plan that would require the developer to pay for all of the required infrastructure for the project and in exchange, the City would reimburse the developer over time for the cost of the infrastructure from the property tax revenue it received from the Southridge Development through its Redevelopment Area (Jurupa Project Area).
The unusual aspect of this agreement is that the millions of dollars invested by the developer of the Southridge Village accrues interest at a rate of 15 ½ % per year. Admittedly, while this seems to be an excessive interest rate in today’s market, I am told that this was a market based rate of interest at the time the transaction was negotiated, nearly 30 years ago.
Over time, the interest accrued has been adding to the debt since it has and will continue to grow much faster than the RDA’s ability to repay the debt. Therefore, on paper, this debt continues to grow significantly. For example, 15 ½ % on a debt of $200 million is $31 million. Regardless of the growth of the amount owed, however, the obligation to repay the developer does not change. The repayment is limited to the amount of property tax revenue taken in by the Jurupa Project Area of the Fontana Redevelopment Agency. When the Jurupa RDA Project Area goes away in the year 2033, the Fontana RDA will no longer collect taxes for this project and as such, will no longer have an obligation to pay on this debt.
At times there is discussion about the State Controller’s Report that lists Fontana with in excess of $2 billion of debt. This report calculates both principal and interest accrued over time. (For comparison purposes, this would be similar to an individual borrowing $300,000 to buy a house and then being told they owe $1 million when you add up the total of all payments being made over time.) The growth of the developer debt over time is primarily responsible for the numbers included in this report. Regardless of whether this developer debt grows to $2 billion or $20 billion, the obligation to pay on this debt remains unchanged. Categorizing this debt as a burden to future generations of Fontana residents is a misstatement of the facts generated from a lack of understanding of the nature of this debt.
Final Thoughts. The City of Fontana, like any City is focusing on the need to encourage economic development and to create jobs for the community. The basic building block for economic expansion is the construction of City infrastructure. The issuance of debt, when well managed, is a critical component to the completion of such infrastructure.
The City of Fontana’s debt is being well managed and represents a significant investment within our community. The City will continue to management its debt and has not nor will not create an environment that saddles the future residents with debt. This is the philosophy of this City Council and I am confident that it will continue to be the philosophy of future City Council’s as well.
If you would like additional information about the City’s debt structure or would like to examine the issues in more detail, please feel free to contact our Management Services Department at (909) 350-7671 to schedule an appointment. The financial records of Fontana are available to everyone and I am sure that staff would be happy to address whatever additional questions you may have.