WATSONVILLE — The Watsonville City Council approved a contingency plan Tuesday should the city have to repay $4.6 million to the State Department of Finance.
If the city loses a lawsuit against the state, Watsonville will enter into a cash flow loan where the Water Fund lends cash to the General Fund to pay the state, and the General Fund would pay interest to the Water Fund.
The Council approved the plan with a 6-1 vote. Councilwoman Nancy Bilicich dissented.
The issue began in 2006 when the city made a loan from its general fund to the Redevelopment Agency, which, according to Administrative Services Director Ezequiel Vega, was used to build the Civic Plaza, the adjacent garage and the community rooms in the library.
The Watsonville Redevelopment Agency paid the loan back in 2011, but that was the same year when Gov. Jerry Brown dissolved the state’s 390 redevelopment agencies.
The state argued that the repayment of the loans was not valid due to the timing of the payment but should be a valid obligation to be paid in the future by the city's Successor Agency.
The city disagreed, filing a lawsuit against the Department of Finance, the State Controller’s Office, the State Board of Equalization and the County-Auditor Controller.
The city is one of 400 other similar lawsuits against the state, Vega said.
A preliminary hearing will be held on Nov. 26, after which the city will have a better indication of where it stands in the lawsuit, according to Vega.
"We do believe we will be successful in the lawsuit," he said. "Right now we are just preparing for the worst-case scenario."
Because the original loan was given to the Redevelopment Agency by the General Fund, Bilicich said she would rather see the repayment "taken out of the General Fund."
She also said she was concerned about using the Water Fund to pay for something not related to a water project.
"I think this is how we get into trouble," Bilicich said. "We take it out of one pot to take care of another. I don't like the mixing of the fees."
If the payment was made through the General Fund, Vega said it would be left with "very minimum cash reserves," something that City Manager Carlos Palacios echoed.
"If we use the General Fund at this time, our funds would be very low, and that is not prudent," Palacios said.
The Water Fund, according to Vega, currently has $8.2 million in cash, whereas the General Fund averages about $5.3 million.
Also during Tuesday's meeting, the City Council agreed to apply for an $860,000 Urban Greening Project Grant under the Safe Drinking Water, Water Quality and Supply, Flood Control, River and Coastal Protection Bond Act of 2006.
Should the city receive the grant in February, the funds will be used toward building a new trail at Upper Struve Slough and another that connects Rolling Hills Middle School with Melwood Court, said Murray Fontes, principal engineer. The grant would also be used for two community gardens, habitat restoration and planting trees on Main Street between Rodriguez Street and Auto Center Drive.
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