History of the Hercules Redevelopment Agency
The Hercules Redevelopment Agency (the “Former Agency”) was dissolved pursuant to Part 1.85 of Division 24 of the California Health and Safety Code (the “Dissolution Act”) and was superceded by the Successor Agency to the Hercules Redevelopment Agency (the "Agency"). The Former Agency and the County entered into an agreement, dated as of November 23, 1983, as amended on June 5, 2001 (the “Pass-Through Agreement”), providing, among other matters, for the allocation and payment of certain tax increment revenues from the Former Agency’s Dynamite Redevelopment Project Area to the County.
On June 1, 2005, the Former Agency and the County entered into a Subordination Agreement (the “Original Subordination Agreement”) pursuant to which the County agreed to subordinate its rights to receive tax increment revenue payments under the Pass-Through Agreement, in order for the Former Agency to be able to pledge such tax increment revenue to long-term bonded indebtedness. This has been and continues to be a standard practice in the issuance of tax allocation bond financing. The Former Agency issued its Hercules Merged Area Tax Allocation Bonds, Series 2005 in the amount of $56,260,000 (the “2005 Bonds”) and pursuant to the Original Subordination Agreement, the County’s payments under the Pass-Through Agreement were subordinated to payments due under the 2005 Bonds. This means that if the available revenue was not sufficient to pay both the debt service and the pass-through payments, then the debt service payments would be made first prior to paying pass-through payments to taxing entities. The Former Agency subsequently issued its Hercules Merged Area Tax Allocation Bonds, Series 2007 (the “2007 Bonds” and, together with the 2005 Bonds, the “Bonds”) on parity with the 2005 Bonds; however no amendment of the Original Subordination Agreement was entered into in connection with the 2007 Bonds
Ambac Bond Insurance Litigation
The 2007 Bonds and the 2005 Bonds were each insured by a municipal bond insurance policy ( the “Policies”) issued by Ambac Assurance Corporation (“Ambac”). Due to significant and persistent declines in assessed value within the Hercules Merged Project Area, the Bonds were placed into default, and Ambac subsequently made payments pursuant to the Policies to bondholders as a result of the default. Pursuant to the Indenture, dated as of August 1, 2005, by and between the Former Agency and The Bank of New York Trust Company N.A., as supplemented and amended (the “Indenture”), Ambac had the right to declare all of the principal and interest due on the Bonds to be accelerated. The Agency and Ambac were parties to litigation in the Contra Costa County Superior Court in connection with the default on the Bonds (Case No. CIVMSN 12-0182) and agreed to settle such litigation pursuant to an Amended Settlement Agreement, which required as one of the conditions precedent to its effectiveness, among other conditions, that the Agency enter into an Amended and Restated Subordination Agreement. The County and the Agency entered into the Amended and Restated Subordination Agreement in 2014.
Potential Refunding of Tax Allocation Bonds
Since 2014, the Agency has worked diligently to improve its financial condition. In addition, municipal bond rates remain at historical lows making it an excellent time to refund existing bonds for cost savings. Today's action would authorize the subordination of pass-through payments to the anticipated 2022 tax allocation refunding bonds planned by the District. As previously stated, this is a common practice to provide investors assurance that debt service will be paid prior to other obligations.
It is important to note that with the dissolution of redevelopment agencies in California, any debt service savings from the Agency would be returned to taxing entities through the Redevelopment Property Tax Trust Fund (RPTTF) rather than being kept by the Agency, so it is in the interest of agencies governed by the Board of Supervisors to allow for the subordination of pass-through agreements. This allows for the issuance of the bonds resulting in a reduced debt service payment in future years, which yields more net revenue to pay those pass-through payments.
Estimates of net present value (NPV) savings over a period of 20 years to agencies governed by the Board of Supervisors through future distributions of residual RPTTF allocations due to the anticipated debt service savings, include:
Taxing Entity |
Anticipated NPV Savings |
County General |
$2,848,693 |
West CC Healthcare |
306,286 |
County Library |
298,956 |
CC Flood Control |
35,078 |
Flood Control Z-8 |
2,699 |
Flood Control Z-8A |
4,366 |
Co Water Agency |
7,147 |
Total |
$3,503,225 |
The Acknowledgement of Subordination will not be executed and it is unclear whether the Agency would be able to move forward with issuing the refunding bonds. In the case that the Agency does move forward, it would result in less than anticipated debt service savings because investors will require and additional rate premium due to a subordination of pass-through payments not being in place.