After Redevelopment: A Proposal for a New Economic Development and Revitalization Program

If you Google the words ‘after redevelopment’ you will come up with about 27,400,000 results. While the number of results is a little misleading, it’s not entirely surprising. Redevelopment, as it was practiced in California prior to 2011, was characterized by the use of the tools made available to redevelopment agencies under the Community Redevelopment Law of the State of California[1] to carry out the local economic development, housing, and land use aspirations of nearly 400 disparate communities throughout the State. With the dissolution of redevelopment agencies, the question now being asked is: How will municipalities be able to accomplish these objectives without these tools ‘after redevelopment’? 

Background.

Redevelopment, including the mechanism that paid for it called ‘tax increment financing’, was a mid-century response to the decline and stagnation of urban areas following the Great Depression of the 1930’s and the lack of investment in private development and public infrastructure during World War II. In the post-war years, as federal funding for urban renewal and development first became available and was then reduced, cities in California came to rely on tax increment financing for redevelopment as a principal instrument of economic development, first as a supplement and, ultimately, as a substitute for such federal initiatives as the Urban Renewal Program[2], the Urban Development Action Grant  Program (“UDAG”),[3] the Economic Development Administration Program (“EDA”)[4], and similar federal grant programs.

Redevelopment agencies were granted broad powers to address conditions of blight in redevelopment project areas. These included, among others, the authority to do (and incur debt to pay for) all of the following: (1) adopt long-term redevelopment plans for project areas determined to be ‘blighted’ and exercise governmental powers to implement those plans; (2) purchase property in redevelopment project areas (including using the power of eminent domain when necessary) and provide for relocation, clearance, hazardous materials removal and remediation and site preparation for new development; (3) transfer ownership of these sites to private developers, by sale or ground lease, without public bidding, for the value of the property after taking into consideration applicable market constraints and the covenants and conditions of development imposed by the agency (which, typically, would be less than the cost incurred by the agency to assemble, clear and prepare the property for development); (4) provide for public improvements, including parks, open space, street improvements, utilities, and other publicly owned facilities that provide benefit to the redevelopment project area; and (5) exercise a broad array of powers to provide funding for the development of affordable housing, typically in conjunction with other governmental programs, bond proceeds and/or conventional bank loans, and (since the establishment of the program as part of the Federal Tax Reform Act of 1986) Low Income Housing Tax Credits.

These activities were funded primarily through tax increment financing, which was authorized by article XVI, section 16 of the state Constitution and section 33670 of the Health and Safety Code. In authorizing the formation of redevelopment agencies and tax increment financing, the Legislature did not grant to redevelopment agencies the power to tax. Rather, through this financing mechanism, the Legislature offered local decision-makers the opportunity to borrow against the anticipated future increase in property tax revenues in the project area.[5]

Cities and counties have used redevelopment in a variety of ways. Recent notable examples[6] include:

• Marina Gateway Revitalization (former brownfield site), National City;
• Industrial Wastewater Treatment Facility, Victorville;
• The Strand mixed use development, Huntington Beach;
• Uptown Area Residential Development, Oakland;
• Payton-Grismer Revitalization project, Burbank;
• Mill Creek Linear Park, Bakersfield;
• Lafayette Library and Learning Center, Lafayette;
• Contra Costa Centre Transit Village, Contra Costa County; and
• West Hollywood Gateway. 

These projects reflect the many ways that different cities and counties, through their redevelopment agencies, have applied the broad powers and tax increment financing made available under the CRL to their particular circumstances to remove blight and create economic development, housing, and jobs in their communities. AB1x 26 dissolved redevelopment agencies and ended the use of tax increment financing for all new activities.

Proposed Post- AB1x 26 Legislation.

In the aftermath of AB1x 26, there is much discussion of what to do next, and it may be instructive to look at legislation that has been introduced.  These bills may be organized generally in a few categories: (1) AB1x 26 clean-up bills; (2) amendments to the Infrastructure Financing District law; and (3) a new paradigm for post-redevelopment economic development.

The most significant of the AB1x 26 clean-up bills is AB 1585 (Perez). This bill would amend AB1x 26 to transfer the unencumbered balances of LMIHF (which some have estimated may be as much as $2 billion, statewide) to the successor housing agencies for affordable housing purposes rather than to the taxing entities for their general purposes. It also contains numerous other policy and technical cleanups to AB1x 26. As of this writing, the Assembly has passed the bill with a 58-7 vote and sent the bill to the Senate, where it has been referred to committee. The one-time availability of this source of funding for affordable housing would certainly be welcomed by affordable housing advocates and most municipalities, but it is not seen as a permanent revenue source for affordable housing to substitute for the 20% housing set aside in the CRL. Other clean-up bills[7] would also make changes to AB1x 26, but do not provide for a comprehensive new set of economic development tools in the wake of the dissolution of redevelopment agencies.

Numerous bills[8] propose to provide an alternative to redevelopment by amending the Infrastructure Financing District (“IFD”) Act[9]. The IFD law was enacted in 1990 as a means for municipalities to finance public infrastructure for new development projects in non-blighted areas through a form of tax increment financing. However, the IFD law requires the consent of the taxing entities whose share of property tax increment is to be made available to the district (Government Code Section 53395.19). Due to this opt-in requirement, and other substantive and procedural requirements, the existing IFD law has rarely been used in California[10]. Legislative proposals that have been introduced to date attempt to make it easier to use this mechanism, but these bills would still largely limit the use of IFD financing to funding publicly owned infrastructure, and would still require the affirmative approval of each taxing entity in order to include that taxing entity’s share of property tax increment in the district. At this point, even with the amendments being proposed, it appears that IFDs would still remain limited in their usefulness.

Finally, a spot bill, AB 2144 was introduced on February 23, 2012 by Assembly Speaker John A. Perez, and amended in committee to revise portions of the IFD law and change the name of infrastructure financing districts to ‘infrastructure and revitalization financing districts’. This bill would significantly expand the scope of eligible activities, authorize the establishment of districts within or overlapping with the territory of redevelopment project areas and former military bases, but, as currently drafted, would retain some of the existing limitations on IFDs (such as the opt-in requirement of Government Code Section 53395.19 and the requirement in Government Code Section 53395.4 that eligible facilities and services must be in addition to and not supplant existing facilities and services in the territory of the district). 

However, AB 2144 also contains a statement of intent which could suggest a new paradigm for economic development legislation. It declares the intent of the Legislature to enact legislation ‘that establishes long-term, targeted programs that provide local governments with tools and resources for specified purposes, including, but not limited to, public infrastructure, affordable housing, economic development and job creation, and environmental protection and remediation, in a manner that encourages local cooperation and includes appropriate protections for state and local taxpayers.’ The language of AB 2144 suggests an intention to restore to local governments something like redevelopment, but not redevelopment as we knew it before 2011. While AB 2144, as currently drafted, would only begin to tackle the difficult task of establishing a viable replacement for and successor to redevelopment, this proposed statement of legislative intent suggests a new approach to funding economic development and revitalization that merits serious consideration.

A New Paradigm.

(a.) Call it something else. This is not an original idea[11], but for better or for worse, the term ‘redevelopment’ has gotten a bad rap and needs to be retired. Similar to the way AB 2144 would change ‘infrastructure financing districts’ to ‘infrastructure and revitalization districts,’ call it ‘economic development and revitalization’ or something similar. Call it anything but ‘redevelopment’. 

(b.) Much of the skepticism about redevelopment concerned whether redevelopment project areas actually qualified as ‘blighted areas’ under the CRL.[12] There was never a bright line between an area that qualified as blighted and one that did not. This resulted in numerous (and costly) legal challenges by taxing entities and others to the validity of proposed new redevelopment plans[13]. Moreover, the definition of ‘blight’ evolved over the years and became focused primarily on the physical conditions of buildings[14], to the exclusion of many other conditions that might justify the need for focused economic intervention in an area. A proposed new approach to this issue would be to simply replace the concept of physical ‘blight’ with new criteria that are objective and quantifiable, such as the income or employment characteristics of the households who live in the impacted area. For example, eligibility for inclusion in a new economic development and revitalization area could be based on the percentage of residents in the area whose income is less than the poverty level, or the unemployment level of the proposed district compared to the rest of the county in which it is located, or the state, or some combination of these and/or other similar criteria. Moreover, it may be appropriate to also include a requirement that an area, once included in the program, must re-qualify on a periodic basis (say, every ten years) for continuation in the program, as well as limiting the effectiveness of the district, and the agency’s powers to incur and repay debt, to definitive periods of time, similar to the CRL.

(c.) Moreover, the new economic development and revitalization program should limit the total amount of property in a jurisdiction that could be included in such a district at any time. Counties and other taxing entities may have had a legitimate complaint that the percentage of property tax allocated to redevelopment agencies as tax increment statewide had become excessive.[15] The new legislation could include a limit on how much of the acreage in any one jurisdiction may be included in an economic development and revitalization district without the consent of the taxing entities. Once an agency adopted economic development and revitalization project areas representing that percentage of the jurisdiction’s acreage, it would not be empowered to expand or adopt any further project areas without the consent of the taxing entities until existing projects are retired.

(d.) Economic development and revitalization under this new program is proposed to be financed with the tax increment revenue from all taxing entities except schools[16], with no requirement that the participating taxing entities affirmatively opt-in. However, consistent with the intention stated in AB 2144 to encourage local cooperation, the new program should include some reasonable level of oversight by representatives of the taxing entities (perhaps similar to the Oversight Boards established under AB 1x26) and the State Department of Finance, to ensure that the agency’s proposed projects comply with the new law. One possibility would be to give to the Oversight Board the authority to approve or disapprove an agency’s 5-year implementation plan, with DOF veto power, and to limit the activities of an agency to those set forth in an approved implementation plan.

(e.) The new program would limit the use of tax increment only for specified activities within the new economic development and revitalization districts: 

1. Acquisition, remediation and re-use of brownfields and nuisance properties (as determined by the local jurisdiction) and closed military bases within the district (with a limited power to use eminent domain only for contaminated or nuisance properties);
2. Construction or payment for public infrastructure—parks, open space, public buildings (but not including construction or rehabilitation of the building used by a city or county as the seat of government), street and highway improvements, utilities, etc.)—if the infrastructure is within or adjacent to the district, or outside the district but primarily benefits the district;
3. Affordable housing anywhere in the jurisdiction, but subject to 20% set-aside, one-to-one replacement, 15% production requirement, a limit on how much may be spent on moderate income and senior housing, and a limit on how much may be spent on overall program administration (not otherwise allocable to a particular project). Change rental restrictions for Tax Credit or Federally-assisted projects to match the applicable federal requirement. Limit how much may be paid to a developer as a fee and/or overhead. Any funds not contractually committed within a statutory time limit, say, 5 years after deposit into the Low and Moderate Income Housing Fund (“LMIHF”) would be transferred to the State Housing and Community Development Department, or to the County in which the agency is located, for expenditure on eligible projects located within a given distance (say, 5 miles) from the project area that generated the funds. Any property acquired with LMIHF but not developed within a statutory time limit (say, 5 years after acquisition) would be sold and the proceeds returned to the LMIHF, supplemented by 80% funds to the extent necessary to reimburse the LMIHF for the original purchase price, with interest. 
4. Transit-oriented development meeting agreed-upon criteria. 
5. Rehabilitation and/or reuse of historic buildings, meeting the Secretary of Interior’s standards, and made subject to a façade easement to ensure proper upkeep and use of the property.
6. Rehabilitation of buildings to make them sustainable, subject to satisfying some degree of sustainability (say, LEED Silver), and made subject to long-term covenants to ensure proper maintenance and use of the sustainability features. 
7. Financial assistance for economic development focused on property-related costs and development or rehabilitation, as currently provided in the CRL, but with the overall project subsidy to not exceed a specified amount per anticipated new or retained job;
8. A new category of economic assistance that would not require development or rehabilitation: forgivable loans for attraction, expansion, and retention of industrial businesses, but with the overall project subsidy (land write-down, forgivable loans, reduced interest, grants, etc.) to not exceed a specified amount per anticipated new or retained job; and
9. Finally, include in the legislation a statutory limit on how much tax increment may be spent on agency administration over a 5-year period, subject to increase with the consent of the Oversight Board. The experience of some communities to date under the terms of AB1x 26 suggests that this limit might have to exceed 3% of the amount of tax increment allocated to an agency.

These proposals are just a place to start. A full discussion of what should happen ‘after redevelopment’ is needed to ensure that municipalities are given meaningful tools and resources to provide public infrastructure, affordable housing, economic development, job creation, and environmental protection and remediation.