California Redevelopment Agencies Decry State Budget's ‘Take of Funds'

As we do this interview, Governor Arnold Schwarzenegger's newest proposal to close the state budget deficit would shift $228 million per year in property tax revenue from redevelopment agencies to schools. What is the status of the governor and Legislature's budget negotiations as it relates to this measure?

The Senate Democrats have made a proposal to balance the budget, which in some ways mirrors the governor's proposal and includes the taking of redevelopment funds for three years. The Senate Republicans have made a proposal that also includes the taking of three years of redevelopment funds, plus an additional $349 million of housing funds already held by redevelopment agencies. The Assembly Democrats have decided to put forth the same package as the governor, which includes the three-year taking of redevelopment funds. To summarize, there are at least four proposals on the table, all of which would rely on the use of redevelopment funds for at least three years for a minimum of $675 million, with an additional take of housing funds in one proposal.

The cumulative loss to redevelopment agencies would equal about $675 million. What will be the impact on the missions and priorities of redevelopment agencies if this were to be adopted by the Legislature?

The impact on redevelopment agencies is much larger than what it appears, for several reasons. One reason has to do with it being portrayed as only a 5 percent cut. While it might seem modest compared to cuts in other programs, the 5 percent is misleading because agencies have relatively little discretionary money available. That's because they must, by law, set aside 20 percent of their funds for housing. They must pass money through to schools and other taxing entities. The project areas at most agencies have rather large indebtedness in the form of bonds, which must be repaid out of those same funds. Some agencies have contractual obligations for various ongoing projects. The discretionary money that is left tends to be a very small portion of their available funds.

Let's say, for purposes of the example, that it's 15 percent of their annual funds. If you take another 5 percentage points of that, it really means a cut of one-third of their discretionary money that they might need to put toward new projects.

Secondly, this is a bad investment for the state. We know from our studies that redevelopment funds act as a substantial economic driver in the overall California economy. Since the state itself has no official economic development program, we're the state's only economic development program. When redevelopment funds are invested, they are matched with private funds to make a larger transaction. Then, those funds turn again in the economy and people are put to work, they pay taxes, and it makes the economy go.

If you think about the cut as $675 million being matched by another seven to one ratio of private investment, you're really taking away a potential investment in local communities of $675 million times seven, or $4.7 billion. When that kind of investment is lost in the overall economy, the taxes are lost as well. A $675 million take of redevelopment revenues will cost the state $466 million in lost taxes. That deal doesn't make any sense.

Last week, Dan Walters of the Sacramento Bee wrote an article claiming that "The rub is that the State Constitution requires that any losses of property taxes to schools must be back-filled from the state general fund, an indirect state subsidy for redevelopment estimated at $2 billion a year. It's simply irrational that state funds should underwrite auto malls, big box retailers and other projects that local official's favor." What is your response to this traditional critique of redevelopment?

My response is that there have been laws in place since 1993 that limit the use of redevelopment funds for auto dealers and big box retailers. Mr. Walters simply ignores that reforms have occurred over the years that either prohibit or greatly limit those kinds of investments. Under Proposition 98 the state must back-fill property taxes that go to redevelopment agencies that would otherwise go to schools, and so that part of his column is correct.

Again, redevelopment investments are building the economy. Agencies are simultaneously providing pass-through payments to schools, and they are also producing taxes for the state. If you view redevelopment investment in a micro way, then Mr. Walters is correct. But if you view it from a macroeconomics standpoint, as I do, you'll understand that we're growing the economy in ways that make sense: by using those dollars for infill investment, for new infrastructure that's badly needed, and for those kinds of investments that will forestall sprawl and shorten the time it takes and the miles traveled by people getting from their homes to work.

All of these are good investments for California. To look at just the narrow issue of school funding is to miss the other advantages that redevelopment funding provides.

What do you mean by redevelopment investments helping the state deal with its other problems, such as reducing vehicle miles traveled and so forth?

Redevelopment, by its very nature, is focused on redeveloping areas that have already been developed as opposed to stretching the borders of our urban areas and building on green fields. Redevelopment could be seen as one of the state's priorities for fulfilling the promise of AB 32, which is landmark legislation to address global warming, by using redevelopment to foster infill development, transit-orientated development, and green building, all of which would reduce vehicle miles traveled and consumption of natural resources. That, in turn, reduces sprawl, which in turn stems climate change. We are one of the solutions to making AB 32 work.

We also expect that SB 375, by Senator Darrell Steinberg, will become law, and it will mandate significant changes in how we plan for growth and how development occurs in California. Again, redevelopment, by its very nature, will support SB 375 by continuing to clean up brownfields, investing in existing developed areas, and encouraging sustainable and walkable communities. These are all good things for California that we shouldn't sell down the drain with short-term budget fixes.

You've served as assistant city manager of Long Beach and city manager of Cincinnati; you know local government well. You have been in this position of executive director with the California Redevelopment Association for six years. What explains the way that the Legislature and governor are going about meeting this budget deficit and arriving at a budget? What's at risk in this process when it takes a two-thirds majority to reach consensus?

With the system that we have, which requires two-thirds of the Legislature to agree on a budget, the opposing ideological viewpoints of legislators almost guarantee impasse. Democrats don't want to make deep program cuts, and Republicans don't want to raise taxes. But when the deficit is as large as $15.2 billion, something has to give. When neither side wants to give, we look for things that are neither program cuts nor increased taxes. In our case that means it's easier to take local government funds than to swallow the bad medicine required to heal the state budget. We've become the easier alternative: Take local funds; that way you don't have to raise taxes, and you don't have to cut program funding.

Your website suggests that the impact on the ERAF allotments for redevelopment agencies around the state would be substantial. Can you elaborate on the impacts for Southern California redevelopment agencies?

The impact will vary by agency because they are able to tailor their expenditures to meet their local needs. The feedback we're getting is that many planned projects will have to be delayed or cancelled. We have some agencies that actually don't have the money available to make additional ERAF payments, and they're going to have to somehow borrow funds. Because they're already leveraged to the hilt, they don't have that 5 percent cut available. This is going to mean some hardship for local communities that won't see projects they have been hoping for, such as improved streets, new water lines, or community centers. Those plans will either be scaled-back or canceled.

How do you predict that this situation will be resolved?

If I could predict how it would come out, I suppose I would have put my solution forward a long time ago and we would have a budget by now. We're certainly hoping that legislators will see that a cut in redevelopment amounts to a penny-wise and pound-foolish approach to budgeting. Cutting redevelopment is shortsighted. This is the program that has the potential, at least to some extent, to put California's economy back on track again. I am hoping they will come to understand that it makes much more sense to leave redevelopment funds as they are.

There is also the possibility of a serious legal challenge to the state. It is unconstitutional to take redevelopment funds. The Constitution of California specifically says those funds must go to local redevelopment agencies. In 2004, this governor and the current director of finance told us that the Constitution protects redevelopment funds. They ought to live up to the word they gave us then, and if they don't, it's quite likely that there will be a legal challenge mounted against the state of California.

You've mentioned that the redevelopment agencies are focused on economic development in the state. Why has a state that once had such a vigorous economy and vigorous investment in infrastructure slumped now to where local governments and agencies are the only folks focused on economic development?

A lot of it has to do with the focus on the immediate as opposed to taking a long-term view as to where the state is headed. California is a big state; it's still growing in terms of population. It has lots of issues and problems, and so out of some necessity our leadership gets buried in the details of the present as opposed to planning for the future. We don't have a lot of programs focused on how California will grow in the future because we're trying to span gaps in the present. This state, once upon a time, put a lot of money into infrastructure that would encourage economic development, but we've become complacent and haven't understood for many years that our infrastructure is wearing out. We have to keep reinvesting in infrastructure in order to grow the economy in the future. It's a matter of perspective.

To conclude, let's refocus on eminent domain and the battles that have gone on in the state for much of the last decade. What is the status of the law and the politics of eminent domain as it exists today?

Proposition 98 did not fool the voters. They defeated it soundly in the June election. By the same token, voters saw the wisdom in Proposition 99, which would prohibit the use of eminent domain for single-family, owner-occupied homes, passing it by a two to one margin. From now on, redevelopment agencies won't be able to use eminent domain to acquire single-family homes for economic development purposes.

Let's hope that by the resounding defeat of Proposition 98, others will finally lay off that issue and let California get back to work addressing its real issues instead of these fabricated ones that have wasted a lot of time and money on two propositions, Props. 90 and 98. Clearly the voters have spoken.