A new state law that governs how Crescent City's now-defunct redevelopment agency pays back its loans may result in gradual rate increases for local water customers.

Assembly Bill 1484, which was signed by the governor in June, changes the law that eliminated redevelopment agencies statewide in February and affects the repayment of two major local loans, including one from the city's water fund to the redevelopment agency.

The other obligation this law would affect is a loan the city took out of funding set aside for low- to moderate-income housing to pay the state's Supplemental Education Revenue Augmentation Fund (SERAF) in 2010, said Crescent City Finance Director Ken McDonald.

The redevelopment agency must pay off its SERAF loan before it can begin paying the water fund loan, McDonald said.

McDonald and City Manager Eugene Palazzo gave a presentation before the Crescent City Council and Del Norte County Board of Supervisors Tuesday.

AB 1484 also stretches out the amount of time it will take for Crescent City to dissolve its redevelopment agency, City Manager Eugene Palazzo said.

Crescent City became the successor to the redevelopment agency in January, assuming all of its assets, liabilities and debts. The successor agency is overseen by a seven-member board that includes the mayor, the county superintendent of education, the dean of the local College of the Redwoods campus, a member of the Crescent City Harbor District, the county and a private citizen, Palazzo said.

"When this first rolled out we had a plan to get everything paid off in four to five years and just close the successor agency and walk away from it," he said. "With this new 1484 law that came into effect it changed the whole game and now we can't do that. We need to stretch it out over the next 20 years."

Before any payments can be made on the city's water fund loan or its SERAF loan, it must receive a finding of completion from the California Department of Finance, according to a city staff report. The earliest a finding of completion can be obtained is in the spring of 2013.

The finding of completion would be based on an audit, which would show the amount of cash assets that are available from the redevelopment agency to all entities that receive property taxes including the city and the county.

"No payments can begin until that happens and it can't be until 2013-14," McDonald said. "Once we start making SERAF loans then we can start making payments on the water loan."

McDonald estimated that the SERAF loan would be fully paid back in 2020-2021.

Because the redevelopment agency won't be able to pay back the water loan until the SERAF loan is paid off, the money that the water fund would have received will no longer be there, McDonald said. The city may have to increase water rates to pay for capital improvement needs, he said.

The water fund currently has a balance of nearly $1 million in cash and $120,000 in receivables, McDonald said. The RDA loan represents at least 50 percent of the accounts receivables, he said.

"Our estimate is not until 2021 will we be able to start making water loan payments," McDonald said. "That's a good eight years from now with no interest, no principle, no nothing."