LOS ANGELES -- Recent California budget legislation that diverts a portion of redevelopment agency funds to school districts will not affect ratings on local tax increment bonds, according to Standard & Poor's Corp.

"The legislation clearly stipulates that existing indebtedness is protected," the agency said in comments that appear in today's edition of Credit Week Municipal.

Standard & Poor's said, however, that "redevelopment agencies will find their revenues available for ongoing activities squeezed to varying degrees by this transfer, as well as by requirements to spend money for low- and moderate-income housing."

Besides tapping redevelopment agencies, the state's recent budget-balancing effort included diversions of some property taxes from cities, counties, and special districts.

The legislation requires redevelopment agencies to transfer an amount equal to about 16% of their 1990-91 gross tax increment to a newly created education fund. That percentage is the same for all agencies, even for those that already divert some of their property tax revenues to schools and counties because of previous pass-through agreements.

Redevelopment agencies, which are mainly created by cities, work through specific projects to rehabilitate blighted areas and spur commercial activity.

Once a project area is formed, the existing property tax base is frozen. The incremental revenues generated above that base fund redevelopment activities, such as infrastructure upgrades, and secure tax increment bonds.

The state legislation protects existing debt service by making the transfer to schools subordinate to debt outstanding, Standard & Poor's noted.

A city or other parent entity must assume responsibility for the transfer if a redevelopment agency cannot meet the obligation due to existing debt or lack of available funds.

The transfer applies only to fiscal 1993, but many redevelopment officials worry the diversion could be extended in future state budgets, the rating agency noted.

A continuing reallocation of tax increments could slow or halt some redevelopment activities and possibly reduce new bond issuance, Standard & Poor's said.

The exact effects of the budget cuts "are still being sorted out," the rating agency said, adding that agencies are responding in different ways.

For example, most project areas for the Los Angeles Community Redevelopment Agency, which will lose $18 million overall, will meet the tax transfer from current tax increments, Standard & Poor's said.

But the stipulation facing the improvement agency in Walnut, Calif., "is an interesting example of how the transfer formula hurts certain agencies more than others," the commentary says.

The Walnut agency's annual gross tax increment receipts are about $12 million, but its net receipts are capped at $4 million because of a pass-through agreement with Los Angeles County. Since the tax transfer formula applies to gross revenues, the Walnut agency faces a $1.9 million obligation to the school fund, or 47% of net revenues.

"The agency has set reserves aside to make the payment, but is hoping the formula's application will be changed if the state decides to enact similar legislation again next year," Standard & Poor's said. "Walnut bondholders are protected through the county agreement, which stipulates that the pass-through is subordinate to indebtedness, and the new legislation's provision that bonded indebtedness is senior to the state payment."

Some local officials contend that state action, is an unconstitutional diversion of redevelopment funds, but they have cautioned that a legal challenge might invite state retribution focusing on tighter restrictions for such activities.

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