Kim Kilkenny

California was the first state in the country to allow no-fault divorces, legalize medical marijuana, and ban trans fats. Now, it has become the first to abolish its redevelopment agencies.

Faced with a massive budget shortfall, Governor Jerry Brown signed two bills into law last year. The first dissolved all redevelopment agencies and required them to turn over their property tax revenues to the state. The second allowed agencies to continue operation if they paid the state a portion of their property tax revenues each year. The California Redevelopment Association and other entities challenged both bills. On December 29, the California Supreme Court upheld the first but struck down the second as unconstitutional. By February 1, agencies must turn over their assets to successor agencies that will wind down projects with enforceable obligations for commitments already made.

Critics of redevelopment hailed the decision, citing insufficient oversight of how redevelopment funds have been applied, an overuse of eminent domain, and a need to divert money to education and public safety. In the development community, the loss is acute.

Cynthia Parker
Tyrone Rachal

“This is the poster child for unintended consequences,” says Kim Kilkenny, chairman of Centre City Development Corp., a nonprofit corporation that implements downtown redevelopment on behalf of the city of San Diego. “Many of the projects we were moving forward on aren’t going to happen now, depending on how enforceable obligations are defined. So, affordable housing, public parks, fire stations, and other public infrastructure are going to take a serious hit.”

Affordable housing developers in particular depend on redevelopment agencies. “We are very concerned about the lack of affordable housing funds this will create,” says Cynthia Parker, president and chief executive officer of BRIDGE Housing, a nonprofit organization in San Francisco. “We have about 30 projects that include redevelopment money, and last year we spent a fair amount of time getting commitments in place as part of the enforceable obligations of the agency. So we have plenty of work that will be started in the next two years. But beyond that, everything becomes quite murky.”

“This will have a chilling effect on public/private partnerships,” says Tyrone Rachal, senior development manager of tax allocation districts at the Atlanta Development Authority. “This is one of the worst things that you can do in an economy that needs job creation. Right now in California, the primary tool that the public sector has to be an effective partner is gone.”

Future brownfield development in the state becomes uncertain as well. The Polanco Redevelopment Act provided redevelopment agencies with procedures for cleaning up hazardous materials and gave the agencies and subsequent property purchasers immunity from liability. “What concerns me is that it’s hard enough to develop any project—greenfield or brownfield,” says Frank Fuller, a principal of Field Paoli Architects in San Francisco. “A developer who wants to build a project in an urban area needs the right parcel and help from the city to complete it in time for the market. Without redevelopment agencies, how do you assemble a site, clean up toxins, and build infrastructure?”

Frank Fuller
Libby Seifel

Cities have few alternatives to redevelopment. “There are mechanisms by which public improvements can occur,” says Kilkenny. “The trick is identifying funding sources. It is exceedingly difficult to generate new revenues when we are in a recession.”

Infrastructure financing districts (IFDs) are one possibility, allowing cities or counties to issue bonds to pay for public works projects and use property tax increment revenues to pay back the bonds. “But most cities in California receive only a small share of property taxes that could be dedicated to bond repayment, after excluding property taxes from educational districts,” says Libby Seifel, president of Seifel Consulting, a real estate consulting firm in San Francisco. “And right now, if 12 or more registered voters reside within the proposed district, approval from two-thirds of all voters in the district [is required].”

Complicating matters further, a proliferation of lawsuits is likely, especially given the short time frame. A senate bill under consideration would extend the handover deadline from February 1 to April 15. “There are complicated issues to resolve related to bonds and contractual obligations, including obligations to employees and their unions,” says Seifel. “A number of agreements and projects are jeopardized. More legal guidance and time [are] needed to work out the implementation details.”

Is there a bright side? “Maybe,” says Rachal. “I hope that public redevelopment agencies around the country see the California example and really evaluate how they are using their tools to make sure they use them in a responsible manner, so that this doesn’t come to their states.”