Wednesday, June 11, 2009 | San Diego redevelopment could be about to undergo a massive involuntary redesign, depending on the outcome of behind-the-scenes negotiations ongoing between city officials and representatives from the Department of Housing and Urban Development.

The officials are trying to figure out what to do about more than $139 million in loans made to redevelopment project areas around the city over the last 40 years under the Community Development Block Grant program, a federal fund set up in the 1970s to provide grants for low- and moderate-income communities.

Federal auditors concluded last year that many of San Diego’s loans were not managed properly, never paid back and used primarily to help the city capture a greater share of tax revenue from the state, all which violate CDBG guidelines. The Office of Inspector General of HUD, which oversees the CDBG program, wants San Diego to clean up its act by forcing the project areas to pay back the $139 million, most of which federal auditors said should have been paid off years ago.

At this point there is no telling how the situation will be resolved. City officials say they will work things out without having to remake redevelopment in San Diego. But the HUD audit is emphatic about the transgressions, and the feds might be out of patience with municipalities that can’t follow the rules with grant money.

One possibility is that some redevelopment areas in the city could become essentially insolvent. More than a dozen of San Diego’s project areas have millions of dollars in outstanding CDBG loans and the cost of making payments on that debt would suck up most of the money they have available for administration and new redevelopment projects, city officials said.

However, other city neighborhoods in need of redevelopment might benefit. Up to $7.2 million would flow to the city each year if all the redevelopment project areas are ordered by HUD to start paying back the disputed loans, according to the HUD audit. This would provide a new revenue stream for future redevelopment projects in areas eligible for CDBG cash, said Janice Weinrick, deputy executive director of the San Diego Redevelopment Agency.

Weinrick said she will soon present HUD with a compromise payment plan that deals with each of the project areas affected in the city. The city is working hard to ensure that the project areas are able to pay back the loans while still remaining in business, she said.

“It wouldn’t be in any of our best interests if we suddenly had to stop economic development in a project area in order to pay back the CDBG debts,” Weinrick said. “We have to figure out a way to keep the engine running.”

But with so much debt on the books, it’s hard to see how the cash-strapped city could prevent several of the redevelopment project areas from essentially becoming organizations devoted exclusively to paying back their CDBG debt to the city, said Brian Trotier, the interim director of the Southeastern Economic Development Corp., which manages redevelopment in southeastern San Diego.

“There’s no way, over the remaining life of our project areas, we can pay off our bonds and the $51 million we owe the city in CDBG loans,” Trotier said of SEDC’s situation. “That would stop a large proportion of the current work we do and leave us very little cash flow to keep doing redevelopment.”

Project areas that owe money to the city in loans made with CDBG money include Linda Vista, Barrio Logan, City Heights, Grantville and the Naval Training Center.

The city has made 236 loans with CDBG money to these and other project areas since the 1970s but only fully collected on about 10 percent of those, according to the federal audit. The loans were set up primarily to make it look like the project areas were in debt, so the city could increase the amount of tax revenue it collected from the state, the auditors concluded.

The Linda Vista project area is one example of how the CDBG money was mishandled.

On Jan. 19, 1976, the Redevelopment Agency approved spending $150,000 to acquire a modest plot of land in Linda Vista. The investment was the first step in the agency’s effort to spruce up the neighborhood’s commercial core, and it was followed in February 1976 with further investments of $230,300 and $617,150.

Over the next few years, the Redevelopment Agency plowed more than $2.4 million into redeveloping Linda Vista’s commercial zone. It demolished blighted buildings, built a new shopping center, spruced up a neighborhood roller skating rink and built a new park running alongside Morley Street.

More than $800,000 of that money was lent by the city to the agency from its pot of CDBG money. But the agency never repaid most of that money, and for more than 30 years, the city charged interest on the debt. Gradually, the amount owed to the city by the Linda Vista project area ballooned to almost $8 million, $2.9 million of which is CDBG money.

The project area pulls in about $80,000 in tax increment money annually. Tax increment is the increase in tax revenue that’s generated within a redevelopment area after money is invested in that area’s redevelopment. In Linda Vista, the bulk of the tax increment income is generated by the businesses that were built and improved by the Redevelopment Agency in the 1970s using the CDBG money.

That $80,000 a year is in no way sufficient to pay off the project area’s CDBG debt to the city, said Maureen Ostrye, the Redevelopment Agency official who manages the Linda Vista project area. The agency will be left with a stark choice if it’s asked to pay off the loans, Ostrye said.

“That’s where the choice takes place,” Ostrye said. “How do we fulfill both obligations: Continuing to redevelop and paying off the city?”

How the project areas will strike that balance won’t be known until HUD makes a decision on how it wants the loans to be paid back.

The HUD officials have difficult decision to make, said Michael Jenkins, a redevelopment attorney and a former assistant director of San Diego’s Community and Economic Development Department. Giving the city a pass or being lenient about its previous transgressions could set a dangerous precedent, Jenkins said. But asking the project areas to immediately pay the money back could also set off a political firestorm if it leads to some areas essentially shutting down.

Jenkins said it’s anybody’s guess what HUD will decide to do. Over the past 40 years or so, the federal government’s approach to the CDBG program has oscillated depending on which political party held control of the White House, Jenkins said.

“When Republicans were in power, HUD tended to be very tight in enforcing the regulations. But when a Democrat is in the White House, they have tended to loosen the guidelines,” Jenkins said. “Right now, we’re in a transition, so I don’t know what will happen.”

Please contact Will Carless directly at will.carless@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.

Dagny Salas

Dagny Salas was web editor at Voice of San Diego from 2010 to 2013. She was an investigative fellow at VOSD from 2009 to 2010.

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