Watsonville Owes $1.8M; Bankruptcy Suggested

The word bankruptcy is being floated by Watsonville City Council Member Emilio Martinez, after the council learned that the state is demanding a payment of $1.8 million of funds previously slated for the city's Redevelopment Agency (RDA).

Following the abolition of Redevelopment Agency by state law ABX126 and 127 the city loaned $1.2 million from their general fund to a newly created Successor Agency they hoped would replace the RDA. This amount is unlikely to be repaid if the state also outlaws the successor agency.

These facts led Martinez to write that because “the city may not be able to recoup 1.2 million dollars it loaned to our Redevelopment Agency from our General Fund. The possibility of bankruptcy is not out of the equation” on his blog, the Watsonville Fishing Report, on July 16.

Ezequiel Vega, Watsonville's finance chief, said the consequences of the payment demand could be devastating for the city, a city of 55,000 people with an annual budget of about $33 million.

"If the city declared bankruptcy we would have to lay off all the workers and rehire only those [related] to basic safety such as police and fire fighters,” said Vega. “But we are trying to work this out so that the city doesn't have to make the payment, or in a way that is most favorable to the city.”

The payment was due July 12, and Wednesday was the day that the state had set to impose a late fee of $180,000. Vega said that the city has contacted the state about their desire to set up an agreement that doesn't negatively impact either party.

“Because we contacted them we hope we will not have a penalty,” Vega said. “We are also working to make sure [any payments] don't come from money in the general fund.”

Vega added that in local schools would not be effect local school funding, because the has no direct financial relationship with the city.

The saga involving redevelopment agencies has been ongoing since early 2011 when Gov. Jerry Brown began pushing two bills to snatch $4.8 billion from local municipalities in order to help fill what was a $20 billion deficit at the time. Cities and statewide responded by suing the state because local RDAs had many ongoing financial responsibilities to cover road and building construction among other projects.

The state won that court battle and .

The $1.2 million was a city loan from the general fund to the successor agency. Watsonville risks losing the investment if the state continues to demand the $1.8 million currently in question.

Watsonville is not the only local government in Santa Cruz County facing this issue. The City of Santa Cruz has paid back $4.5 million (with protest) and Scotts Valley wrote a check from its reserves for $748,601. However, the County of Santa Cruz is facing a $11.57 million bill that it can't cover, according to a report in the Santa Cruz Sentinel.

Statewide, there are about 400 Redevelopment Agencies that may be in the red. Two California cities have filed bankruptcy this summer and a third was set to vote on the issue Wednesday evening, though none were related to the loss of Redevelopment Agency money.

Despite Martinez's grim comment, Vega is holding out hope that the Watsonville will hear back from the state soon that says they are open to some negotiating, but says there is no deadline for a response.