February 1, 2012

What Killed Redevelopment?

Alternately titled: It's the math, stupid!

It's official. All 400+ redevelopment agencies in California are dissolved as of today, February 1, 2012. A last minute court case to keep redevelopment alive fizzled. The pleas and threats from the redevelopment crowd did not convince the state legislature to keep redevelopment on life support for a few more months, so they could figure out a way around the eventual demise.

In the last few weeks, the pro-redevelopment faction tried their best to talk it up, point to their successes and to blame the state for "grabbing their money". If I could have $100 from every reporter or politician who claimed, in a news article, that redevelopment money was now going "to be sent to Sacramento", I think I could afford to buy some distressed ex-redevelopment property at fire sale prices. The real reason redevelopment had to end, wasn't, as Bob Emery said, because our "dysfunctional state government finds it necessary to dismantle an institution that works, and creates jobs, to try to stop the financial hemorrhaging of their own making." The real reasons redevelopment had to die is because of voter-passed propositions, the nature of exponential growth, and greed.

Redevelopment agencies first got their start in California in 1945. The whole idea was to give cities and counties a tool to tackle urban blight in the post war years. In 1952, new legislation allowed redevelopment agencies to finance projects with tax increment. Tax increment is the increase in property taxes from the tax value on the day a redevelopment agency is created. Suppose the property tax for a vacant parcel of land was $100 in 1983 when Poway created their redevelopment agency. Some time later, if someone built a million dollar home on that parcel, the new property tax would then be around $10,000/yr. When the owner of the parcel paid his/her $10,000 property tax to the county, the county would send $100 of their tax to the schools, cities and county and send the $9,900 tax increment($10,000-$100) to Poway's redevelopment agency. The school district would have gotten a little less than half of that $100.

There weren't very many redevelopment agencies in California until the voters passed Proposition 13 in 1978. Prop 13 put a lid on soaring property taxes in the state. After Prop 13, cities looked everywhere and anywhere for a new revenue stream. Tax increment money started to look very attractive.

Once cities jumped on the redevelopment bandwagon, the abuses began. Poway's redevelopment area was created in 1983. It was comprised of 8200 acres of so called "blighted" land, 75% of which was undeveloped. It doesn't take a math whiz to realize that the tax increment on vacant land is going to jump after something is built on it. Poway's redevelopment acreage wasn't urban and it wasn't blighted, but it did provide a revenue stream for the fledgling city.

Post Prop 13, redevelopment agencies popped up everywhere. As the tax increment started rolling in, the impact was noticeable, particularly for schools. Since most of the growth was in the redevelopment area, most of the new taxes went to the redevelopment agency. In Poway, new homes were built in Rancho Arbolitos, Old Coach, Bridlewood, and other areas within the redevelopment area. The students who moved into those homes went to PUSD schools, but most of the property taxes their parents paid went to the redevelopment agency. When the industrial park was built, those new property taxes also went to the redevelopment agency and the schools were left with many new students but no increase in revenue to pay for them. Although Poway was perhaps among the more brazen with the amount of acreage, particularly undeveloped acreage that they put in their redevelopment area, they were by no means the only redevelopment area to capitalize on diverting property taxes that would normally go to the schools.

By 1988, the schools were really feeling the pinch. The California voters passed Prop 98, which required that the state backfill the funds that redevelopment was taking from the schools. Talk about unfunded mandates! There was nothing in Prop 98 that explained where the state was supposed to get this money, save for a little bit of lottery funds. The backfill money to fund the schools came from the state's general fund , which is derived from things like income tax and sales tax revenue.

Last year, redevelopment agencies were diverting 15% of all property taxes in California. Here is where the exponential growth comes in. Don't bail, I promise I will make it easy. Look at the "graph". The thing to notice about the graph is that the red line starts slowly climbing uphill, then it seems to curve and shoot upwards. That graph is the classic exponential growth graph. This graph represents the growth of a population over time, but a graph of how much tax increment the redevelopment agencies diverted from the schools (and other local taxing entities) over time would look similar. It starts out slow, but once it gets rolling along, it zooms upward. Redevelopment agencies currently divert 15% of all the property taxes in the state. In Poway, it is 50%. Eventually, redevelopment agencies would consume almost all of the property taxes in the state. The system would collapse way before that, in fact, it is collapsing now. There is no way that the state could continue to backfill that kind of money. Where would the state get that kind of revenue? They can't print it. It is irresponsible for public officials to be so blind to the reality of how impossible it would be for the state to come up with the billions of dollars that redevelopment sucks up.

The state tried to be reasonable and demanded that redevelopment agencies give back to the schools some of the diverted tax increment. Here is where the greed comes in. The cities wanted no part of it. They wanted it all. The redevelopment agencies helped to fund Prop 22, a voter measure advertised as "keeping local money local". When they approved Prop 22 in 2010, most voters had no idea that Prop 22 meant that the redevelopment agencies would continue to take a larger and larger share of property taxes, leaving the schools dependent upon the state to replace larger and larger amounts of diverted funds.

The state really had no choice. They had to discontinue the redevelopment program because it was sucking up all of the property tax money. The only option was to allow the redevelopment agencies to continue if they voluntarily agreed to cough up $1.7 billion for schools. The California Redevelopment Agencies sued the state. The California Supreme Court decided that the state could discontinue the redevelopment program but that they could not ask the redevelopment agencies for voluntary payments that were really not voluntary. The voluntary payments violated Prop 22. In the end, it was the redevelopment agencies own proposition, Prop 22, and their greedy brinkmanship that did them in.

There are so-o-o-o-o many lessons to learn from this redevelopment saga. If and when somebody comes up with some new tools for cities to use to spur economic development, I certainly hope that we don't have to make the same mistakes all over again.The sad thing is that we the people are the city, we are the state, we are the school district. We pay taxes so we can provide for common services. The people who represent us on the city level failed to care that funding for our schools was impossible with Prop 22. They didn't care about us, they cared about getting the biggest share of revenue they could get. They were incapable of looking at the big picture. And they failed to understand the math.


Anonymous said...

Those redevelopment funds also led to irresponsible spending by the City of Poway in a variety of ways such as the lights at Pomerado, Meadowbrook and Arbolitos. With an excess of unaccounted for money they threw their money around without much thought except to a small minority. Our children DO NOT need to be out after dark night after night. They should be at home with their families. Maybe this will fuel the need to vote out these greedy people at city hall. Wake up people!!!!

powayblog said...

Redevelopment definitely changed the decision making process at city hall. In the beginning of our cityhood, what was "best" for Poway was synonymous with what was best for the residents and our vision of what we wanted the community to be. Over time that changed to how can the city maximize the revenue stream, without regard for the consequences. Redevelopment projects didn't need voter approval and that the redevelopment debt could be easily financed and endlessly refinanced.
And, yes, lots of people wanted a piece of that redevelopment pot of money.

And there were lots of things that were wrong with redevelopment. And I mean ideologically wrong. This post doesn't really address that, it was simply meant to show that it was mathematically impossible for California to keep on truckin', or at least educating, given the propositions that were passed and what redevelopment morphed into.