Sound public policy lies somewhere between the extreme choices of eliminating redevelopment or accepting the status quo.
On January 10, California governor Jerry Brown announced his proposal to dissolve all community redevelopment agencies by this July 1 to help close California’s $26 billion–plus budget deficit through fiscal year 2011–2012. That proposal unleashed a firestorm of opposition from the many cities and redevelopment agencies it will affect, as well as the California League of Cities and the California Redevelopment Association (CRA).
Numerous charges and countercharges followed—from questioning the effectiveness (or ineffectiveness) of redevelopment in California to a general reexamination of the state’s redevelopment process and extensive allegations of redevelopment abuse, including a study by the state controller attempting to document that alleged abuse. For their part, cities and community redevelopment agencies have taken preemptive steps to commit, sequester, or otherwise shelter their assets and prospective tax increment revenues from diversion by subsequent state legislation.
If the governor’s proposed elimination of redevelopment agencies, as implemented through the Budget Trailer Bill known as A.B. 101, passes, virtually all redevelopment activity will be immediately suspended, except for discharge or payment of existing obligations. Redevelopment agencies would be barred from incurring new obligations or modifying existing agreements and would begin operating immediately as caretakers to comply with preexisting “enforceable obligations.” Among other provisions, the legislation provides that:
- Effective July 1, a successor agency would be created in each local jurisdiction to take over the operation of the terminated redevelopment agency. Subject only to preexisting obligations, the successor agency would liquidate existing agency assets and transfer the proceeds to the county auditor-controller for that county to distribute like other property tax revenues.
- In fiscal 2011–2012, the state would receive a projected $1.7 billion in former tax increment revenues as a result of the elimination of redevelopment agencies and redirect those revenues to pay for trial court and Medi-Cal costs, with a small distribution to cities and counties. Subsequently, taxing agencies would receive these revenues to the extent they are not required for payment of preexisting redevelopment agency obligations.
The governor’s proposal has engendered a political and public policy response, identification of legal issues associated with the proposed changes, and preemptive actions by redevelopment agencies to secure their right to use future tax increment revenues and retain existing assets.
Public Policy Response
A June 2009 study, “The Impact of Fiscal 2006–07 Community Redevelopment Agency Activities on the California Economy,” commissioned by the CRA and prepared by Time Structures Inc., reveals some of the benefits of redevelopment activities. Among its conclusions:
- Redevelopment activities supported over 300,000 full- and part-time jobs and generated over $40 billion in total direct and indirect economic activity in 2006–2007.
- Redevelopment construction increased state income by more than $22 billion.
- Redevelopment is the second-largest source of funds for affordable housing in the state (after the federal government). It also plays an important role in public infrastructure construction—streets, water and sewer lines, parks, libraries, sheriff stations, fire stations, and other facilities. If it is eliminated, the state’s infrastructure deficit will worsen.
- Economic development is a priority for other states. If California fails to prioritize those expenses, it will lose more jobs. Redevelopment is necessary for job generation, which is the ultimate solution to the budget crisis.
The legislature’s Legislative Analyst’s office argues that the CRA-commissioned study was based on imprecise data measuring construction activity and impacts that were not created by redevelopment, and that there is no way to measure what would have happened without redevelopment. The office concludes that the true net impact of redevelopment on the economy cannot be measured: if other public agencies had access to those resources, they also would have generated jobs, construction projects, and economic activity.
Legal Concerns
The CRA’s legal counsel has identified several potential violations of the California Constitution that would result if the governor’s proposal is adopted. Among those are the following:
- Proposition 22, approved by voters last November, among other things prohibits the state from directly or indirectly requiring redevelopment agencies to use their tax increment revenues for the benefit of the state in general or any state agency. By eliminating redevelopment agencies and redirecting their assets and revenues to other accounts and entities to support state programs next year— trial courts and Medi-Cal—the governor’s proposal is a direct violation of Proposition 22.
- If implemented, the governor’s proposal could result in potentially significant bondholder litigation due to the impact of that legislation on the ratings, marketability, and, ultimately, value of the redevelopment agency debt held by bondholders.
The immediate elimination of redevelopment agencies seems precipitous, and perhaps dangerous. Although the governor is under intense pressure to address the deficit and undoubtedly sacrifices will be required in many programs, it is clear that redevelopment serves a broad and unique function in helping the state achieve goals in the areas of infill or urban development, smart growth development patterns, affordable housing, and infrastructure and public facility funding.
Reforming redevelopment and prioritizing its functions are appropriate, but to eliminate one of the few—and arguably most important—tools to achieve these goals seems highly questionable from a public policy perspective. Although parties may disagree over the exact measurement of the direct and indirect impacts of redevelopment, clearly redevelopment funding supports a large number of jobs, particularly in the vulnerable construction industry.
It is worth noting that once projects in the pipeline are disrupted, it may be very difficult, if not impossible, to resurrect them should the legislature subsequently realize that it has overstepped. Many of these projects take years to assemble in terms of site control, entitlements, and multi-jurisdictional financial assistance and equity funds, and they often cannot be resuscitated once disrupted. The vacuum that would be left in affordable housing production is a particularly troubling concern at this time.
Rightly or wrongly, given the legal arguments identified by the CRA and its representatives regarding the governor’s proposal and the range of preemptive actions the agencies have taken in response, eliminating the CRA seems certain to result in extensive litigation. Consequently, the governor is unlikely to achieve the funding objectives that were the justification for eliminating the agencies, and the beneficial effects of redevelopment will have been jeopardized with no offsetting material benefit.
In the current economic environment, there is insufficient funding for the full range of projects in which redevelopment agencies have historically engaged. The state necessarily needs to focus on and preserve only the most essential functions of those agencies, including provision of affordable housing, remediation of blighted urban locations to allow infill development, and delivery and enhancement of local infrastructure.
Redevelopment agencies need to engage in serious and critical self-examination in order to evolve and thereby more effectively respond to today’s needs. Such evolution could include a regional focus that minimizes inter-jurisdictional competition over retail sales uses and the fiscalization of land use—the attempt by local jurisdictions to lure tax revenue–generating businesses such as retailers at the expense of other land uses that may have more long-term benefit. It may also be beneficial to broaden the objectives and permitted uses of redevelopment funds beyond the current real property–focused model to include more non-property-based approaches to economic development, including small business targeting and assistance and job training strategies.
Sound public policy lies somewhere between the extreme choices of eliminating redevelopment or accepting the status quo. Hopefully, the legislature will put away the hatchet and pick up the scalpel before serious and, in some cases, irreparable damage is done to this important sector of the California economy.
