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.

Redevelopment Update

Poway Blog has been on a bit of a hiatus while I attended to some family matters. But that doesn't mean that nothing has been going on during the last few months or that I haven't been paying attention.

One of my special areas of concern has been, and continues to be, redevelopment. As many of you may know, redevelopment plays a major role in many land use and budget decisions in Poway. It also has a huge impact on school financing and the state budget. Last January, newly elected Gov. Jerry Brown proposed eliminating redevelopment agencies in California. This kind of blew me away. I had been a critic of redevelopment for many years. I even wrote a letter to Arnold and sent it to him and all of the state legislators in June, 2009, suggesting that Arnold grab some money from the magical redevelopment agencies to balance the state budget. But I never dreamt that anyone would call for the demise of the goose that kept laying those golden redevelopment eggs.

Brown's plan to snuff out redevelopment agencies met a lot of resistance. With a few rare exceptions, GOP legislators were opposed, although technically. redevelopment doesn't line up with their supposed "values". Redevelopment is big government, intrusive government, secret government, with the power of eminent domain and, um, did I mention the excessive borrowing aka deficit spending ? There were also a few Democrats who couldn't really sign off on ending redevelopment, so the California legislature devised a way for redevelopment agencies to rise from the ashes and continue to borrow money and spend it on development projects. The catch was that they had to give billions of dollars to the local schools and local agencies, like fire departments, that are funded with property taxes. Considering that redevelopment agencies have stolen diverted billions of property tax dollars from schools for years, it seemed a pretty reasonable compromise. But the redevelopment agencies wanted it all. They went for broke. They sued the state.

Both the redevelopment agencies and the state agreed to have the case go directly to the state's supreme court. The court has agreed to decide the case before January 15th, when the first batch of payments from the redevelopment agencies are due to be turned over to a local authority that will distribute the money to local schools and special districts.

On October 10th, the California Supreme Court heard oral arguments in the case which is named CRA v Matosantos. The amicus briefs for each side are posted on the CRA's website. The ones that support the redevelopment agencies, claiming that the state cannot dissolve them or reconstitute them for a ransom, are: Association of California Cities, Orange County; City of Irvine; Long Beach; Public Interest Law Western Center, San Bernardino County, Southern California Coalition, CRA/LA, Riverside County and ABAG (Association of Bay Area Governments). With the exception of the Public Interest Law Western Center, each of these is, has, or represents a redevelopment agency.

The groups that filed amicus briefs in support of the state's position are: Affordable Housing Advocates (a San Diego group that advocates for affordable housing); California Professional Firefighters; Center for Constitutional Jurisprudence (an Orange County group from Chapman Univ School of Law); California Teachers Association; Los Angeles USD; MORR- Chris Norby, and Santa Clara USD. The groups supporting the state's position represent school districts, firefighters, affordable housing advocates, the Center for Constitutional Jurisprudence (a conservative group concerned about the abuse of eminent domain) and MORR (Municipal Officials for Redevelopment Reform).

The redevelopment agencies sued the state , claiming that both ABx-26 which dissolved redevelopment agencies and ABx-27, which allowed for the new alternative redevelopment agencies that voluntarily paid a ransom to the local schools, were unconstitutional. They claimed that the voters passed Prop 22, which forbids the state from grabbing any of their redevelopment money. From the comments at the supreme court hearing, it appears that the justices seem to lean toward the position that the state has the right to abolish redevelopment agencies, that ABx-26 is constitutional.

The question then becomes, "Is ABx-27 constitutional - can the state make the redevelopment agencies give a share of their diverted property taxes to the schools in order to continue to exist?" If the answer is yes, then the redevelopment agencies lose and the state wins the case. But what if the courts find ABx27 unconstitutional? This is where it gets really interesting.

Justice Joyce L. Kennard suggested that the agencies' challenge of both laws could backfire. She said the court could find the abolition constitutional but the revenue-sharing law invalid, a prospect that an attorney for redevelopment agencies called the worst possible outcome.

If the court finds ABx-27 unconstitutional, then everything would revert back to ABx-26 and the redevelopment agencies would all be dissolved. Redevelopment in California would be no more. And it would be because of this court case and Prop 22, a sneaky voter initiative that redevelopment agencies pushed to get on the ballot and passed in 2010.

Justice Marvin R. Baxter observed that it would be ironic if Proposition 22, which redevelopment agencies had promoted, ended up requiring the court to overturn the compromise and cut the lifeline that the revenue-sharing law provided. Baxter also appeared dubious that the proposition gave the agencies "perpetual existence."

Deputy Atty. Gen. Ross C. Moody, representing the state, agreed that the agencies may have miscalculated in suing to overturn both measures.

"The redevelopment agencies took a gamble on this lawsuit," Moody said

Remember, the redevelopment agencies did not have to file this lawsuit. They chose to. They are not accepting the lose, lose position. Redevelopment agencies are now arguing that ABx-26 and ABx-27 cannot be considered separately, that they are intricately woven together.

The back-and-forth in the San Francisco courtroom seemed to hint that the justices are grappling less with whether the Legislature has the power to abolish RDAs -- a power that the Court seems poised to uphold -- and more with whether the budget provisions that dissolve and then reconstitute RDAs are, as the attorney for the locals argued, "joined at the hip."

The redevelopment agencies are now arguing that comments from some legislators indicated that they only voted for ABx-26 because there was also an ABx-27. Therefore, if either one is unconstitutional, they both are. But that argument seems particularly weak, since the laws actually say that they are separate.

Legislators wrote language stating the two are separable -- a point raised in a pointed exchange led by Justice Goodwin Liu. "How could it be any clearer?" said Liu after reading the relevant passage from the legislation.

This is all good news, hopeful news, for redevelopment watchers. The sad part is that the taxpayers are paying for both sides of this court case. The sadder part is that all 5 of Poway's council members strongly support the redevelopment agencies' case and the diversion of property tax funds from PUSD and special districts.

The California Supreme Court expects to rule on the constitutionality of ABx26 and ABx27 by mid-January 2012.