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The Case for Why Redevelopment Must Go

Feb21

To hear mayors, council members and bureaucrats from throughout California screech and squeal about Gov. Jerry Brown’s call to shut down redevelopment agencies in favor of schools, the elderly and disabled, you’d think Krusty had proposed bulldozing Main Street.

As John Shirey, executive director of the California Redevelopment Association, put it the other day:  “I must be clear: we are stridently (sic) opposed to the governor’s proposal to abolish redevelopment and our singular goal is to defeat this proposal that will destroy hundreds of thousands of jobs and billions in economic activity.”

Strident, indeed. Hysterical, overwrought and hyperbolic, too. Seldom have we witnessed such widespread, collective urban self-centeredness coupled with apparent disregard for the social fabric.

There’s no way to know for sure, but it appears redevelopment agencies have already done what they can to hoard their loot by slapping together and hastily approving projects that would consume the same $1.7 billion in property taxes that Brown’s budget would use to keep from having to make further cutbacks to schools and social services as the state struggles with a $27 billion deficit.

San Diego officials are cooking up a plan to sequester $4 billion for a Charger’s football stadium and Los Angeles is trying to lock up $1 billion and other panicky RDAs are scheming to do the same.

Their bet is that Brown won’t sue them to recover those funds (even if the agencies are on shaky legal ground) because he won’t want all of those mayors and city officials opposing a June ballot measure to approve his budget by extending $12 billion in taxes and fees adopted two years ago.

How that will play out politically remains to be seen. But we don’t have to wait to understand the debate.

Needs in conflict: As long-ago urban affairs reporters, Calbuzz saw the powers of redevelopment used positively, to help revitalize urban areas in desperate need of infusions of investment. So we get that there are good arguments for the continuation of redevelopment, which are being blasted out to media and policy makers by the coalition to “Stop the State’s Redevelopment Proposal” (although we do wonder how much redevelopment money they’re spending on lobbying).

But California is facing a budget crisis of historic proportions that at least two and possibly three previous governors and their concurrent legislatures refused to own. And Brown has concluded that the interests of schools, widows and the disabled should have first call on funds that – according to the best, most objective studies – do little to expand California’s collective economic health when they are funneled into redevelopment agencies.

He’s right.

Redevelopment law allows cities (and counties, but they use it less) to declare a geographic area “blighted” and in need to revitalization. The property taxes in that redevelopment area are frozen and any new property taxes generated above that base may be used to purchase land, build streets and sewers and subsidize development in the project area.

The tax increment above the frozen base can be guaranteed as a source of funds to pay interest on bonds sold on the open market. This is called tax increment financing and it is a hugely powerful tool for urban investment because of its ability to leverage vastly more money at one time than is generated by the flow of property taxes annually.

There are some 400 active redevelopment agencies throughout California diverting more than $5 billion a year away from schools, counties and special districts and into the coffers of those agencies. The economic theory that argues for the process echoes Reaganesque trickle-down: by generating construction jobs, sales taxes and other activity in the redevelopment area, the rising tide is said to lift all boats and the region around the project area is expected to benefit. Like giving tax breaks to the wealthy is supposed to help the middle class.

Spinners for the RDAs argue that redevelopment activities support 304,000 jobs annually, including 170,600 construction jobs; contribute over $40 billion annually to California’s economy in the generation of goods and services, and generate more than $2 billion in state and local taxes in a typical year.

Moreover, since the law requires 20% of the tax increment to be dedicated for low- and moderate-income housing, the RDAs argue that eliminating redevelopment will significantly undermine efforts to provide homes for those who otherwise cannot afford it.

A close look at the numbers: But the most thorough and academically sound study of redevelopment we’re aware of, by Michael Dardia of the Public Policy Institute of California, found in 1998:

After correcting for local real estate trends, the author finds that redevelopment projects do not increase property values by enough to account for the tax increment revenues they receive. Overall, the agencies stimulated enough growth to cover just above half of those tax revenues. The rest resulted from local trends and would have gone to other jurisdictions in the absence of redevelopment.

A study by the non-partisan Legislative Analyst’s Office recently concluded as much and more.

While redevelopment leads to economic development within project areas, there is no reliable evidence that it attracts businesses to the state or increases overall regional economic development. Instead, the limited academic literature on this topic finds that—viewed from the perspective of an entire city or region—the effect of this program on property values is minimal. That is, redevelopment may cause some geographic shifts in economic development, but does not increase the overall amount of economic activity in a region. [emphasis added]

The independent research we reviewed found little evidence that redevelopment increases jobs. That is—similar to the analyses of property values—the research typically finds that any employment gains in the project areas are offset by losses in other parts of the region. We note that one study, commissioned by the California Redevelopment Association, vastly overstates the employment effects of redevelopment areas.

Redevelopment agencies receive over $5 billion of tax increment revenues annually. Lacking any reliable evidence that the agencies’ activities increase statewide tax revenues, we assume that a substantial portion of these revenues would have been generated anyway elsewhere in the region or state.

For example, a redevelopment agency might attract to a project area businesses that previously were located in other California cities, or that were planning to expand elsewhere in the region. In either of these cases, property taxes paid in the project area would increase, but there would be no change in statewide property tax revenues.

To the extent that a redevelopment agency receives property tax revenues without generating an overall increase in taxes paid in the state, the agency reduces revenues that otherwise would be available for local agencies to spend on non-redevelopment programs, including law enforcement, fire protection, road maintenance, libraries, and parks. [emphasis added]

The bottom line: In other words, despite the good arguments that RDAs make about the enormously positive local impacts of redevelopment – San Jose’s downtown and its northern industrial area are excellent examples – the evidence suggests that there’s a huge cost to the state (which has to back-fill funds that otherwise would have gone to schools) and little benefit or a substantial cost to counties and special districts.

We’re not even getting to other issues, like the fact that the only “blight” a lot of redevelopment areas had before they were made projects was pear blight, and the fact that there’s virtually no oversight of how redevelopment funds are spent (and millions is spent outside the law’s intent  to subsidize flagging city budgets and improve stable neighborhoods). That’s just piling on.

Gov. Brown’s budget would ensure that RDAs will receive enough money to cover the debt service on bonds they have already issued  (although the structure of the agencies that will make those payments still must be worked out).

But in an era when California is faced with draconian cutbacks to higher education, schools, parks and public safety, the diversion of property taxes to redevelopment agencies is a luxury the state can no longer afford.


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There are 7 comments for this post

  1. avatar OC Progressive says:

    Great piece, although discussing tax increment financing is a great way to clear a room or ensure that nobody finishes reading the story.

    I often compare redevelopment to money laundering. Cities get only a tiny fraction of property taxes, but 100% of hotel taxes and a penny on every dollar of taxable sales. So they hire a consultant to declare “blight”, borrow a pot of money against future taxes, then use that money to give incentives to big box retailers, auto malls, hotels, and developments like convention centers or stadia that will fill up restaurants, bars and hotels.

    Some RDA money goes back to cover the salary of the city manager, economic development director, code enforcement, public safety, et cetera, and city overhead for administering the redevelopment agency, laundering other peoples’ taxes into city general fund revenue.

    The affordable housing needs massive subsidies, is available to only tiny niches of the population who have just the right amount of assets and income, and comes encumbered with a heavy bureaucracy that needs to manage affordability for 45 years.

    There are jobs that are created in the process, but it is just so damned inefficient, and local governments historically do a craptastic job of negotiating for developers and a poor job of anticipating economic trends. And of course the developers play cities off against each other to see which city can negotiate the worst deals for the taxpayers.

  2. avatar OC Progressive says:

    And despite all the flaws with redevelopment, there is a real need for some similar program for very real infrastructure programs like converting closed military bases and reclaiming large brownfield sites. But the elastic definition of blight, and the lack of auditing of redevelopment has been a goldmine for consultants and local elected officials who are trying to steal more money fair and square without raising taxes or having voters approve bonds.

  3. avatar 4oceans says:

    Would be so nice to see Shirey and his comrades have to get real jobs and fend for themselves in the real world instead of dining at the public trough and living like kings on the taxpayer’s nickels. Isn’t it about time the ReDe Frat cease with the endless keg parties? Haven’t they helped themselves enough already? This pattern the last month of seeking to commit future billions only underscores the entire putrid scam…..

  4. avatar kentlewan says:

    I tend to agree with the author(s) in terms of bloated RDA projects sucking needed money from other services and therefore his argument carries some weight.

    However, Oakland Auto Row revitalization as an example of a “good RDA project” is certainly not comparable and is much more cost-efficient (and worthy) than the San Diego Chargers new football stadium!

    So I would advocate for reforming RDA, not for disbanding it/ them.

    I think CA created a good thing in RDA, but not enough laws and governance to control them. So, predictably, they were abused.

    This story of a good idea gone bad is similar (in my opinion) to proposition 13, which, when you read the historical background (check wikipedia), is a proposition that seemed to make sense at the time. However, it was poorly thought out, had loopholes like the inheritance clause (allowing wealthy home owners to transfer their property in the family without a reassessment) and allowances for “sham” commercial property owners to hold to their property even though they do not use it. This led to a hollowing out of our state’s school budgets.

    So I think RDA is not the biggest problem, but Prop 13 is. Both laws need reform. Especially Prop 13.

    • avatar chrisfinnie says:

      Perhaps I have a nasty, suspicious mind. But watching politics for any length of time can do that to a person. However, I don’t think the flaws you cite in proposition 13 were accidental at all. And I don’t have to look it up because I remember it. It was sold as a way to keep retired people from losing their homes. It was years before the people who voted for it found out about the 2/3 rule, or the fact that it applied to corporations. But I believe those were the real reasons it was written, and the rest was just for cover. The people who saved the most money don’t care what it did to public schools. They can afford private. So they got what they wanted. And the rest of us got screwed.

  5. avatar NEDonn says:

    Agree with kentlewan, but would take it a step further. The combination of Serrano v Priest, props 98 and 13 has our communities in CA beholding to Sacramento for funding for just about everything. RDA’s for the most part has been an over used means to recover taxes monies for local communities with very little oversight.
    It might be time for Californians to have a real conversation about a constitutional convention and get back to square one.

  6. avatar Moderate Democrat says:

    Plenty of good Redevelopment projects can be cited, along with the bad ones.

    For this argument to gain traction, just how much more money would schools get instead instead of local Redevelopment agencies needs to be calculated and promoted. When this becomes Redevelopment versus local schools and we know just how much $$ to compare, then we got a real debate going on.

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