Gov. Jerry Brown targets California’s redevelopment agencies for extinction

One of the most ambitious — and risky — features of Gov. Jerry Brown’s proposed $119.6 billion spending plan is eliminating California’s 425 redevelopment agencies. The Democratic governor contends the agencies, first authorized in 1945, are ineffectual and siphon off more than $5 billion in property taxes annually that could be given to cities, counties and schools to pay for other services.

Redevelopment agencies see the issue differently. 

     “This budget proposal to eliminate redevelopment is more budget smoke and mirrors that will bring little financial gain for the state but will cause widespread and significant economic pain in communities throughout California,” said John Shirey, executive director of the California Redevelopment Association in a statement. “It’s another gimmick that will likely result in extensive litigation.”

Redevelopment agencies, whose lifespans are typically 40 years, were created to combat blight in cities and counties. Areas would be placed under the jurisdiction of the agency, which would then sell bonds to help finance improvements such as new commercial opportunities or public works.  Twenty percent of redevelopment agency efforts are required to be devoted to creating affordable housing. 

The improvements made within the redevelopment zone would, in turn, increase the value of the land, boosting the amount of property taxes paid. The difference between the previous property tax level and the higher level is called the “increment.” That increment is the revenue stream used to pay off the bonds.   As of mid-2008, the state controller estimated 41 percent of the tax increment revenue redevelopment agencies received was used to pay off bonds or other debt. 

Statewide, some 37 percent of local property taxes supports public schools, 25 percent goes to counties, 18 percent to cities and 12 percent to redevelopment agencies.  “Cities, counties, special districts and K-14 schools are losing billions of dollars in property tax revenues each year to subsidize redevelopment,” Brown said in his 178-page budget summary, released January 10. 

The state, which under the terms of Proposition 13, divvies up property taxes, is also losing money.  Every $1 in property tax that redevelopment agencies receive reduces by a like amount the local property tax revenue that can be sent to schools, increasing the state’s financial obligation to schools by billions each year. 

Brown wants to phase out the existing agencies and create new entities which would pay out $2.2 billion the old redevelopment agencies would have received to eliminate debt service and other contractual obligations.  After that, the money would go to local governments.

When the debt of the old agencies is paid off, some $3 billion would remain, Brown estimates. Of that, $1.1 billion would be paid to those entities that provide services within the redevelopment zone such as police or sheriff deputies and schools.  A one-time payment of $210 million would be given to cities and counties.  The remaining $1.7 billion would relieve the state of $860 million in operational costs for trial courts and $840 million in costs for Medi-Cal, the state’s health care program for the poor. 

Brown backs a constitutional amendment that would allow local voters to increase local taxes to pay for economic development on a 55 percent vote rather than two-thirds.  Shirey counters that Brown’s idea is harmful to the state economy.

     “Redevelopment contributes tens of billions of dollars to our economy and is responsible for more than $2 billion in state and local taxes each year,” Shirey said. “It makes no sense to kill this economic engine.”

According to Shirey’s association, redevelopment agencies support 304,000 full and part-time jobs annually and increase the state’s construction sector output by $19 billion. 

With some reservations, the state’s Legislative Analyst supports Brown’s “dramatic” idea.

     “The state’s costs associated with redevelopment has grown markedly over the last couple decades, yet we find no reliable evidence that this program improves overall economic development in California,” the analyst writes in its preliminary examination of Brown’s budget issued January 12. 

However, the analyst notes there are “many legal, financial and policy issues,” lawmakers must sort through in approving the Democratic governor’s proposal.   Brown may also have underestimated the amount of debt owed by redevelopment agencies, the analyst says.

     “Our initial review indicates that the annual cost to pay these debts could be $1 billion or more higher than the administration assumes,” the analyst writes. “If our initial review is correct, this would reduce the funds available for other purposes.”

For example, the analyst says, the Legislature may not be able to use $1.7 billion for Medi-Cal and trial court costs and still pay the $1.1 billion to entities providing services within existing redevelopment areas.  Fearing redevelopment agencies could increase their debt and contractual obligations while the Legislature grapples with the complexities of the issue, the analyst urges lawmakers to quickly pass a bill preventing redevelopment agencies from doing just that.

Brown himself has a set a speedy budget timetable, seeking statutes in place by March 1 that enact the $12.5 billion in spending reductions he seeks to erase half the estimated $25.4 billion budget shortfall that will accrue if he and lawmakers do nothing over the next 18 months.  

The state and redevelopment agencies have been feuding for years. Shirey says the state has taken property tax revenue from the agencies nine times.  Most recently, Gov. Arnold Schwarzenegger seized $2 billion in tax increment funds from redevelopment agencies, using the money to reduce the state’s obligation to schools.  The California Redevelopment Association sued, but a Sacramento superior court judge said because the money was earmarked for school districts within the boundaries of redevelopment zones, the state action was legal. 

As part of his shifting of responsibility for economic development to local governments, Brown would also eliminate the state’s 42 enterprise zones which offer a variety of tax benefits to businesses located within the zone, such as credits for sales taxes paid and hiring more employees.  Under Brown’s plan, the tax benefits would cease starting in the 2011 tax year, generating $343 million in savings for the state during the current fiscal year and $581 million for the fiscal year beginning July 1.