Lockyer: RDAs Entering Into Bad Deals

FEB. 14, 2011


Immediately following Gov. Jerry Brown’s budget proposal in January, the Legislative Analyst’s Office published an Overview of the Governor’s 2011-2012 Budget. As is often the case with the LAO, the analysis appears largely supportive, but reading deeper into the detail, analysts express significant reservations, specifically warning of one potential danger area with Brown’s proposal to eliminate the state’s 425 redevelopment agencies.

The LAO recommended that the Legislature take immediate action to pass “urgency legislation” as soon as possible, “prohibiting redevelopment agencies from taking actions that increase their debt.”

But the Legislature has not yet done this.

The LAO expressed concern that if redevelopment agencies were aware they were doomed, they would initiate many new projects before the cuts could be formalized, “increasing their bonded indebtedness and contractual obligations” — which would make future deficit reduction that much harder to achieve.

The LAO was right – redevelopment agencies throughout the state have been approving projects at record speed, increasing bond indebtedness and state obligation, in order to put off the inevitable.

The governor has said that his proposal to eliminate redevelopment agencies is to ensure that more of Californians’ property tax revenue is used for K-14 education. But the proposal is being met with heavy pushback from cities and counties, as well as from the California Redevelopment Association.

Californians pay more than $45 billion in property taxes annually. And a very large portion of the property taxes is redirected to redevelopment agencies in cities and counties, for development projects within specially designated redevelopment areas.

Critics argue that redevelopment redistributes tax dollars, allowing government to subsidize development projects that would be built by private developers, resulting in a reduction of the money available for public schools, city and county services, and even often replaces independent small businesses with big box stores, chain retail businesses and auto malls.

Supporters of redevelopment argue that it gets rid of blight, and refurbishes key areas of cities, as well as providing low-income, affordable housing.

Pending any urgency legislation or decision to oppose or support Brown’s proposal, the Senate Governance and Finance Committee held a hearing last week about the potential consequences and benefits, seeking answers to four questions:

What did the governor propose for redevelopment agencies?

What questions should legislators ask before acting on that proposal?

What are the consequences of eliminating redevelopment agencies?

What are the feasible alternatives?

At the hearing, State Treasurer Bill Lockyer said he is in support of Brown’s proposal and called redevelopment agencies “vampire agencies sucking blood from everyone around them.” Critical of the unilateral shift of money pulled away from local governments into development projects, Lockyer also expressed criticism of the mad rush by the agencies to get new development projects on the books. “Bad deals are being made. They are quickly selling bonds with unconsciously high interest rates,” said Lockyer.

According to the treasurer, the governor’s budget “provides long-term, increased revenues to local agencies and governments,” and is merely a question of spending priority. Lockyer asked the committee how it serves the state to use local property taxes to prompt inter-regional shifting of economic activity? However he added, “We have yet to find any local government people to admit it is a waste of money.”

Lockyer recommended ending redevelopment agencies and starting all over again. “It would be the prudent, smart, and efficient way to do it… It is better to reinvent,” he said.

Prior to the hearing, the LAO released a report to the Legislature that concluded that redevelopment agencies should be eliminated “because they do not significantly enhance the California economy.”

And, the LAO was concerned with a lack of detail available surrounding the  proposed elimination of the agencies, and noted an even greater problem – redevelopment debt costs are not widely known.

LAO general government director, Marianne O’Malley, said that 12 percent of all property taxes are designated for redevelopment – about $5.7 billion. Of that, 58 percent goes to general redevelopment projects, 20 percent goes to affordable housing projects, and 22 percent is shared by counties, K-14 schools, special districts and cities.

The LAO report states that local governments could and should use “alternative tools” to finance economic development locally, and that revenues should be treated as property taxes only because “doing so avoids further complicating the state’s K-14 financing system or providing disproportionate benefits to K-14 districts in those counties where redevelopment was used extensively.”

The California Redevelopment Association, a government-funded group that advocates for statewide redevelopment agencies, is opposed to Brown’s proposal, and claims that more than 304,000 jobs will be lost if the redevelopment agencies are eliminated.

But the LAO report refutes this claim emphatically. “We find the methodology and conclusion of CRA’s report to be seriously flawed. In our view, it vastly overstates the economic effects of eliminating redevelopment and ignores the positive economic effects of shifting property taxes to schools and other local agencies,” reported the LAO.

Michael Cohen, Department of Finance chief deputy director, said that cities could continue with local economic development, but finance it through tax increases. The finance department proposed putting future redevelopment projects to a local vote, requiring only 55 percent of voters to approve tax increases to pay for development projects, instead of the two-thirds vote threshold currently required to pass taxes. Cohen explained that property taxes would not be increased, but the local vote would instead be used to approve an increase in sales and gas taxes to pay for local development projects.

A Senate staff employee in the hearing audience commented that much ado was being made about lowering the vote threshold to 55 percent to pass local taxes for redevelopment. “There’s no vote currently needed at all for redevelopment projects,” he said. “Don’t people realize that redevelopment agencies have been operating for decades spending millions of dollars without a vote of the people?”

Predictably, John Shirey, the director of CRA, and Bill Bogaard, League of California Cities vice president, testified at the hearing, opposing the elimination of redevelopment agencies. “I think the proposal is unconstitutional,” Shirey said.

“That’s a weak argument,” said Dave Titus, chief of staff for Assemblyman Chris Norby, R- Fullerton. “We spoke to Finance Director Anna Matosantos who said there is no unconstitutionality at all with the proposal.” Titus said, “According to Matosantos, it’s within the legal limits to eliminate an agency.”

Shirey defended redevelopment agencies because the agencies spearhead the cleanup of contaminated land. “No developer would do this himself,” said Shirey. But that’s not entirely accurate.

Paul Petrovich, a Sacramento developer, has invested more than $40 million into his Curtis Park Village development project, currently home to the unsightly, Union Pacific railyard located behind Sacramento City College. Petrovich has hauled most of the contaminated soil offsite already, at a cost exceeding nearly $20 million. And he has done it under the watchful eye of the Department of Toxic Substances Control. “If developers want the land badly enough, the incentive to manage the cleanup is strong,” said Petrovich, “and they’ll do it without redevelopment money.”

The LAO’s report also found, “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. The independent research we reviewed found little evidence that redevelopment increases jobs… the research typically finds that any employment gains in the project areas are offset by losses in other parts of the region.”

Jean Ross, executive director of the California Budget Project told the committee, “I am not opposed to continuing local development, but am concerned about state subsidies of the activity in absence of control.”

Ross said that under the current structure, redevelopment agencies have little control and no checks and balances. “During this budget crisis, they are making decisions that otherwise wouldn’t be made,” Ross said. “Redevelopment does not pay for itself. It’s a program that is not performing.”

Also critical of a lack of transparency, the LAO reported, “Redevelopment agencies lack some of the key accountability and transparency elements common to other local agencies. Specifically, unlike other local agencies, redevelopment agencies can incur debt without voter approval.”

Titus agreed. “In more than 30 years, redevelopment agencies have never had to seek voter approval for any of the spending they’ve done. A 55 percent vote is substantially better than the way it has been.”

The full report from the LAO here.

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