California’s latest attempt to escape from its low tax / no revenue straightjacket
by Rosalea Barker
If there’s one thing Governor Jerry Brown learned from his time as Mayor of Oakland, it seems, it’s how to conduct a gun-to-the-head shakedown for cash. At least, that’s the impression you get from reading the comments of some current mayors this week in support of the League of California Cities’ and California Redevelopment Association’s petition to the state Supreme Court asking for an injunction against two of the budget measures proposed by Brown in January, and passed by the state legislature in a modified form, in June.
Not that it’s pocket change—the measures are projected to (kinda) recoup to the state $1.7 billion in tax revenue lost to local redevelopment agencies, who now can only stay in existence if they, shall we say, “donate” their money to local school, fire, and transit districts—thereby saving the state from having to provide those funds. Although it’s the local city and county jurisdictions that have to make those donations, the payments are apportioned according to RDA revenues and the money used to make them will inevitably come from the RDAs’ tax increments, according to the petition, available here.
AB1X 26 (i.e. the “Dissolution Bill”) prescribed strict limits on what redevelopment agencies may do between its effectiveness date and October 1, 2011, when all redevelopment agencies will be legally dissolved unless the legislative body (city council or county board of supervisors) enacts an ordinance pursuant to AB1X 27 (i.e. the “Continuation Bill”) committing itself to make payments to school districts and special districts (the “Continuation Payments”).
A brief—and taxing—history
Redevelopment agencies are the child of the WWII population boom in the Golden State – which at that time was home to many industries vital to the war effort but was short on housing stock, commercial properties, and the infrastructure to support them. In 1945, the California Community Redevelopment Act allowed cities and counties to establish redevelopment agencies to tackle urban blight (“substantial, prevalent adverse physical and economic conditions”) that hampered development and expansion within a community.
The agencies were set up as hybrid institutions in that they operate a state-authorized program by implementing it through local governments. They have to follow the state legislative guidelines reflecting the intent of the law, and also be guided by any local authority that chooses to call one into existence. (Unlike, say, transit agencies, whose board members are elected by voters, the boards of redevelopment agencies are appointed by the local authority, and council members often appoint themselves to them—a situation ripe for claims of kickbacks and corruption.)
In 1951, California’s tax laws were changed to allow for tax increment financing, a way of using projected increases in taxes to finance current improvements, and the 1952 CA Community Redevelopment Act authorized the distribution of “tax increment” to agencies, with the goal of making projects self-supporting. The difference between the tax valuation of a project area prior to redevelopment and the area’s increased tax valuation after improvement goes to the agency.
Essentially, the agency makes a profit at the expense of other entities that would normally benefit from increased property tax revenues—school districts, special districts, counties, and the state itself, which is saddled with the extra burden of being required to make up for the loss of tax funds going to K-12 education. When voters approved Prop 13 in 1978, limiting how much property tax could be increased each year—and then only when property changed hands—an even bigger constraint was placed on funding for state and local entities.
Another of Prop 13’s requirements forces local governments and schools to get a two-thirds vote to increase taxes or issue bonds, but because redevelopment agencies rely on tax increment financing, that requirement doesn’t apply to them. So, until this month, with the bang of a gavel, a city council could reconvene as a redevelopment agency, sell bonds to the state or federal government, take property by eminent domain, and capture tax dollars for civic projects, all on a simple majority vote. Little wonder the agencies have many critics, who also have often valid concerns about the nature of the projects and whether the money was spent according to the spirit of the law.
A case in point
As cities began losing their tax base after Prop 13 passed, it became obvious to some that the solution was to use the redevelopment agency model to compensate. The only problem was that an area had to be declared “blight” before it would qualify, and for tiny, toney Indian Wells in Southern California’s Coachella Valley—where Presidents and First Ladies retire—that was a sticking point. Indian Wells (1990 pop. 2,600; average age 62) had kept its financing going by charging its residents fees for infrastructure far in excess of what it cost to maintain it and provide services. In fact, the city made so much profit on its fees that it put it in an account “whose interest was expected to finance city services in perpetuity”, according to a case study in Making Government Work.
But in 1980, the Gann Initiative was passed by California voters, prohibiting cities from charging far greater than the cost of services—even if they were willing to do so, as was the case in Indian Wells—and requiring them to spend down their accumulated “fee” funds within 10 years. Indian Wells mysteriously developed a bad case of near-insolvency almost overnight, and “the desperate city dusted off a 1945 law, formed a redevelopment agency, and declared one of the wealthiest and most beautiful spots on earth a blighted community.”
At the time, the legal description of “blight” was expansive—basically, any impediment to investment by the business community, such as the lack of basic infrastructure. And what basic infrastructure did the Indian Wells redevelopment project area—an undeveloped stretch of pristine desert—lack? Why, flood control, of course! The project’s intention was to attract a high-end resort to the blighted area, and in order to do this, the city felt compelled to build a 36-hole luxury golf course. (Well, I suppose the irrigation needed to create a golf course might create a need for flood control if the sprinklers got out of hand.)
The golf course and resort were duly built, bringing in millions of dollars of revenue to Indian Wells and creating hundreds of low-end jobs that were filled by workers who had to travel from as far away as 40 miles because, obviously, they couldn’t afford to live in Indian Wells. Nor were they wanted as residents, as became obvious when the city fulfilled the 1976 mandate added to the CCRA (that 20 percent of tax increment go to affordable housing in the project area) by building “senior housing”.
The case before the California Supreme Court
But that was then and this is now. The nub of the case going to the state Supreme Court is that the two measures that were enacted as part of the June budget are unconstitutional because in last November’s election, voters passed Prop 22. Known as the Local Taxpayer, Public Safety and Transportation Protection Act once it passed by a majority vote of the people, Prop 22 was designed to “close loopholes to prevent taking local taxpayer funds currently dedicated to cities, counties, special districts and redevelopment agencies” by amending the California Constitution.
Figures produced by the Yes on 22 campaign showed that over the two-year fiscal period ending in June 2011, the state had raided redevelopment agency coffers to the tune of two billion dollars. Oakland, the third-ranked city in the list—after Los Angeles and San Diego—had lost $49.5 million. Even Indian Wells lost $11.5 million. The two bills enacted as part of the budget will “effectively require redevelopment agencies to pay $1.5 billion this fiscal year and $400 million each year thereafter to schools, transit districts, and fire districts”, according to the petition to the Supreme Court.
Most redevelopment agency projects are far less controversial than the one in Indian Wells in the 80s. More typical are the kinds of mixed-use transit-oriented projects that provide housing, business premises, community facilities, and easier, safer access to public transit systems like BART, here in the Bay Area. RDA funds are supplemented by money from sponsors—both commercial and not-for-profit—and state and federal funds, such as those for historic preservation or infrastructure.
If you think about that list of money sources, you’ll immediately realize why the loss of redevelopment agency funds will be the last straw for projects that were supposed to create jobs, revitalize neighborhoods—both commercial and residential—and improve local community infrastructure. Since the financial collapse of 2008, commercial sponsors have dried up or withdrawn from current projects; not-for-profits have seen their donation bases shrivel and have similarly left the field; and state and federal funds? Not bloody likely!
The Brown Administration is confident the Supreme Court will dismiss the petitioners’ claim that its actions are unconstitutional and will allow the “ransom” legislation to go into effect. Ironically, Brown celebrated his election as Governor from the stage of the Fox Theater in Oakland, whose redevelopment agency invested $50 million in equity and loans for its renovation.