End Redevelopment 'Luxury'?

JAN. 31, 2011

By WAYNE LUSVARDI

We live in a virtual age of images that sometimes doesn’t reflect reality. Redevelopment agencies across the state are blitzing newspapers with online images of a group of elderly persons in a senior citizen housing project watching TV that purportedly would never have been built without redevelopment.  The inference is that shutting down redevelopment agencies is going to cut your aging mom or dad off from affordable senior housing, along with no apple pie and no more watching baseball.

In other words, those who would lose their livelihoods if redevelopment agencies were shut down are spending your tax dollars on ads that want you to believe it is the end of the American Dream that could only be brought to you by redevelopment.  No mention is made that about 95 percent to 98 percent of affordable housing is provided by the private sector.

Instead of the end of the American Dream, would closing down redevelopment be the end of the American Nightmare of eminent domain? Would it be the end of redevelopment agencies buying land at a low price, up-zoning it for a use many times what it was bought for, and cutting the land-owner out of the higher price?  Would it be the end of demolishing mom and pop stores and family businesses and replacing them with huge shopping centers with large chain stores likely to employ union workers? Would it be the end of “low-ball” real estate appraisals that do not address whether the highest use of the property is the same as the proposed public project?

While Pasadena’s Old Town and San Diego’s Gaslamp District are often pointed to as successful examples of redevelopment, today many malls and hotels have high vacancy rates and upscale restaurants are holding on and barely making it due to the prolonged recession. Many retail establishments have fled malls for older commercial buildings with lower rents. Many of the mom and pop restaurants are long gone that previously provided “good cheap eats.” So many local residents don’t eat out any longer because they can’t afford to.

As one online cartoon depiction of redevelopment portrays it: King Kong is lying dead in middle of a commercial street with a crowd around him. One bystander says:

“It wasn’t those airplanes that did it. It was all those darn cupcake places that killed the beast.”

All those now vacant former cupcake places aren’t likely to be shown in promotional photos trying to convince you to keep redevelopment agencies in business despite the fact that large scale commercial development in California is effectively dead for the next 10 years.

The state Legislative Analyst’s Office’s review of redevelopment concluded that there is “no reliable evidence that redevelopment agency’s improve overall economic development in California,” except perhaps to shift jobs from one city or county to another.

Sure, redevelopment agencies create jobs but only at the expense of locating elsewhere. But we are no longer able to afford what is essentially a job- shifting program that is producing no jobs during a long-term recession.

A 1998 study conducted by the Public Policy Institute of California concluded that increased property values in redevelopment districts did not justify the amount of lost property taxes spent on such projects.

Redevelopment agencies are so desperate to find a new mission that Larry Kosmont, a noted planner and publisher of the annual Cost of Doing Business Survey has proposed a shift into “green redevelopment.”  Such green redevelopment would be anything but sustainable. Instead it would need to depend on federal stimulus funds and other subsidies that have now mostly run out.   No one in the media asks the hard question: Would it be better to keep redevelopment agencies alive with deep green subsidies or keep public schools funded?  In a recession we have to make tough choices.

Redevelopment is a luxury public good.  It thrives during real estate bubbles but has little or no purpose in a prolonged economic recession. California has been on an upward real estate escalator for so long that redevelopment agencies have forgotten that their mission is cyclical and is dependent on a growing middle class with buying power. Redevelopment isn’t a Ponzi scheme as long as it is conducive to growing a middle class that can sustain the upscale establishments in such projects.  But the growth of the middle class has been eclipsed by the recession and the underlying lack of growth of two-parent families who form the bulk of taxpayers in California.

Ironically, redevelopment builds affordable and market-rate housing that tends to be occupied by singles, childless couples and single-parent families located in dense non-family oriented zones, not two-parent family housing in child friendly neighborhoods that are needed to connect the economic life cycle of young borrowers and older investors that sustain the stock and bond markets and Social Security and CalPERS pension fund.

Redevelopment agencies are sitting on billions of dollars of property tax cash flow, reserves and assets derived from property tax increment funds with no projects to undertake while schools and public safety agencies are looking at budget shortfalls.  The state Legislative Analyst states that redevelopment agencies divert $5 billion of property taxes per year that would otherwise go to local government, of which only $300 million, or only 6 percent, goes to schools. The state general fund has to backfill $2 billion to schools lost from property taxes that goes to redevelopment. Redevelopment comprises 12 percent of all the property taxes in the state.

Gov. Brown’s proposal to phase out redevelopment will shift 36 percent of funds that are recirculated back into affordable housing and infrastructure today into use by cities, counties and schools, thus liberating about $2 billion in other state funds to be used elsewhere.  A summary of Gov. Brown’s phase out of redevelopment is shown below:

Gov. Brown’s proposed redevelopment phase out

(Source: WSJ)

	2010	2011	2012
Bondholder’s and other debt	42%	42%	42%
Recirculate property taxes for more redevelopment such as affordable housing and infrastructure	36%	33%	0%
Goes to schools, cities, counties	22%	25%	58%

It will be a hard sell to get the public to agree to continue redevelopment when there are no monies for public schools. It will also be a hard sell to tell property owners that they must vote to impose on themselves an added school parcel tax to fund public schools while redevelopment agencies are sitting on $1.7 billion of property taxes that are not going to public schools, cities and counties today.

Redevelopment agencies have created a media myth that if they are closed down their monies will go to the state instead of local government and schools.  This is not so. Sure, if a city does not have a redevelopment agency then its share of affordable housing funds would have to go to the county housing authority.  But that doesn’t mean that the state is necessarily grabbing local property taxes. The California Legislative Analyst reports that Brown’s proposal to shut down redevelopment would reallocate $1.7 billion from redevelopment agencies to local government, of which $840 million would go to Medi-Cal payments to local hospitals and doctors and $860 million to local trial courts.

California government has gotten into providing so many luxury goods and services during the past real estate bubble that it now sees them as essential public services:

• Million dollar public arts projects as part of redevelopment ($1.1 million alone for a controversial Andy Warhol like artistic statue of a top hat in Pasadena’s historic Civic Center. $150,000 has already been spent on the proposed project but has been opposed by historic preservationists).

• Open space acquisition and development of green belts and wetlands to enhance the values of homes in upscale residential developments financed through $19 billion of euphemistic water bonds in a declining real estate market.

• $3 billion for dubious stem cell research as a full-employment act for bio-medical personnel while Medi-Cal and Worker’s Compensation Funds are broke and its Unemployment Fund is accruing $500 million in interest in loans from the Federal Government.

The affordable housing scam

Another area where government has gotten into the business of providing luxury public goods is “affordable housing” as part of redevelopment projects. By statute, 20 percent of property taxes generated by redevelopment projects must go to providing low-and-moderate income housing. It used to be that affordable housing was defined as older, obsolescent housing stock far from community services. Due to redevelopment, affordable housing has been redefined as luxury housing with gyms, spas and pools in upscale mixed-use developments built on pricey commercial land near light rail stations. 

The term affordable housing should not be confused with Section 8 rental and other direct housing subsidies to those residing in existing private sector housing.

Redevelopment provides luxury “affordable housing” several ways.

One way is to divert the redevelopment property taxes away from public schools and first responders to build low-income housing projects. Because redevelopment does not pay its fair share of public services and schools, California’s original redevelopment law was changed so that at least a portion of property taxes from redevelopment go to local municipalities. But many cities just pocket the property taxes for salaries and retirement packages for city hall employees and don’t pass much along to public schools.

Another way redevelopment builds housing is by using city “inclusionary housing” ordinances where typically one out of every five newly built units is dedicated as “affordable.” The prices or rents of the four other units are raised to provide a write-down for low-income buyers or renters. In other words, inclusionary housing inflates the price and rents of new built housing to subsidize affordable units. When an economic recession hits, those overpriced units are likely to suffer a steeper drop in price.  Redevelopment is a localized economic bubble.

By the way, cities that use redevelopment to lure sales taxes don’t want to build housing for the poor, so they find ways to get around the mandate by providing housing for young professionals and the elderly rather than for the poor.

Redevelopment demolishes older affordable housing and diverts homebuyers from older housing stock into upscale luxury housing then markets itself as the solution to a problem it inadvertently co-created. Redevelopment agencies tout that for every affordable housing unit built that about four market rate units are built.  What they don’t tell you is that state affordable housing mandates are how redevelopment is forced onto largely built-out wealthy communities where residents don’t want the added traffic congestion.

Such mandates are typically artificial as most communities already have a supply of older affordable housing, which is mostly home to newer, lower-income immigrants. What inclusionary housing does is provide affordable housing in upscale luxury developments so that upscale singles, couples and single parent working families don’t have to live in older, oftentimes rundown neighborhoods. Along with phasing out redevelopment, the state’s affordable housing mandates should be suspended.

Housing bubble provides affordable housing

The Dr.HousingBubble.com Web site indicates there are 71,449 distress housing auctions scheduled in California as of January 2011. This does not include the shadow inventory of upside down housing where the loans exceed the market value, which has been estimated to be 50 percent of all homes sold in California from 2003 to 2008.  Trulia.com, a real estate data service, is now reporting that it costs less to buy a home in Fresno than rent.  There is plenty of affordable housing coming into the market and it is lowering the value of market-rate housing.  Affordable housing is a secondary goal of redevelopment. But redevelopment agencies have no real housing mission in a falling real estate market with a glut of affordable market housing.

If California cities and school districts want a visual image of where all their revenues went that resulted in gaping budget deficits they need look no farther than all the glossy brochures of unsold and unrented newly built housing in their community, much of it with redevelopment.  My guess is that if a city has a $100 million hole in their general fund budget that they will find about that much in overbuilt unsold and unrented new housing in their community as a result of the deflating of the real estate bubble. The hole in municipal budgets is not due to stingy property tax payers under Prop. 13, but is self-created due to the housing development mania of the recent past.

Pensions and pay drive redevelopment

It is not merely the lucrative pension and benefit packages for government employees that have created the huge gap in future pension fund obligations.  It is the sheer number of government employees who never should have been put into the CalPERS pension system.  Redevelopment is not a core function of government as are police, fire, water and public works. Redevelopment agencies should have initially put employees on long-term employment contracts and 401/k plans instead of into the CalPERS system. But labor and discrimination lawsuits precluded doing such.

The same holds true for large wholesale water agencies where armies of engineers with no water projects are waiting for the next funding cycle. City planners are another cyclical function that should never have been put into the state pension system.  But politicians wanted to buy votes. Now the pension system is unsustainable. California doesn’t need affordable housing as much as it needs affordable government. Cutting redevelopment agencies will cut back on personnel. Fixing the pension problem will reduce the need for cities to use redevelopment to constantly bring in new revenue to backfill escalating employee costs.

Redevelopment is a luxury public good, not the necessity portrayed by self-interested redevelopment officials. Perhaps that’s another reason the governor made his proposal.