What would life be like in California without redevelopment?
This is not a question that most cities, planning consultants, or urban developers in California have ever wanted to ask. But now Gov. Jerry Brown has forced the issue. Cleverly skirting the long-standing legal skirmishes over whether it's constitutional to take money away from redevelopment agencies, Brown has proposed simply abolishing the entire system, which can be accomplished via statute. The redevelopment establishment – accustomed to head-on assaults on its revenue but not its reason d'etre – never saw this one coming. "Shell-shocked" is far too kind a term to describe their current state.
To be sure, killing redevelopment would create a major disruption for the people who work in the redevelopment establishment – redevelopment agency employees, lawyers, consultants, bond underwriters, and others who have devoted their life to the intricacies of the California redevelopment system. Some would lose their jobs or, at the very least, a lot of their income; some would keep doing what they're doing now; and some would adapt to the new world. For these folks – who, frankly, make up a significant portion of the audience for this publication – the prospect of a world without redevelopment is pretty scary. But what else would happen?
The main thing that would happen is that California's tax-increment machine would come to a halt. Some projects would continue to move forward for those redevelopment agencies that still have a lot of bond revenue. But new activity would cease, and gradually cities would have to figure out how to attract real estate development – and build public infrastructure – in priority areas without using the funds available from tax-increment. On the one hand, it would create a more level playing field; on the other hand, it could place priority locations with expensive problems – brownfields, downtowns with small parcels – at a significant disadvantage compared to greenfield sites.
Over the decades, redevelopment has been idealized as a highly effective tool to "save cities" and demonized as an evil plot by which big government and big developers squeeze the little guy. At different times in different cities, of course, it has been both. In recent years, however, redevelopment has increasingly been about one thing only: Cities capturing property tax increment dollars.
Though complicated as a technical process, redevelopment in concept is pretty simple. It relies on finding one condition – blight, whatever that is – in order to obtain unusual powers of eminent domain and capture the lion's share of future increases in property tax revenues (otherwise known as tax increment).
Eminent domain used to be a big deal – the only way to remove the hold-out brake-shop owner from blocking construction of your convention center – but the truth is it's rarely used these days. Fire-breathing redevelopment opponents have scared cities out of using it much. What cities are really after is the property tax increment.
In a post-Proposition 13 world, it is the only way that a city can increase its share of the property tax pie. By unilaterally declaring an area "blighted" and creating a redevelopment project area, a city that typically receives about 15% of property tax revenue can capture – even today – about 65% of new revenues. (Older project areas still get close to 100% of this "tax increment".) In other words: Find blight and most of the future tax revenues in an area belong to you, not to the county and the school district. The state gets involved because, under court cases governing equalization of school funding, the state must replace all school funds lost to redevelopment.
Is it any wonder that blight, as redevelopment wags like to say, is in the eye of the beholder? Is it any wonder that cities have pursued redevelopment as aggressively as possible in the three decades since Proposition 13 outlawed any increase in property tax rates? Is it any wonder that California uses tax-increment financing far, far more than any other state? And it is any wonder that the redevelopment establishment has had to play a defensive game in Sacramento – giving up tax-increment and flexibility inch by inch – since the last time Jerry Brown was governor?
But other than redirecting property tax revenue from counties and school districts to a city's redevelopment fund, what is the endgame? The redevelopment establishment is fond of referring to redevelopment as California's largest economic development program – and they're right. As Brown's proposal has reminded everyone, redevelopment is a multibillion-dollar-a-year economic development program. But is it meant to generate a net increase in economic activity? Or is it meant to direct real estate development into specific, preferred locations – to combat poverty, for example? The redevelopment establishment uses both of these rationales depending on the situation, and in fact redevelopment is used for both these purposes – and many more besides.
This has always been the big question about redevelopment in California. Tax-increment financing is an extremely flexible local funding tool. And part of the reason that it's so popular – and used in so many different ways, some legitimate and some not – is that it's just about the only tool cities have. This flexibility has always been the appeal of redevelopment to local officials. It's also what drives Sacramento finance nerds crazy about it.
And therein lies the dilemma. On the one hand, redevelopment is the only game cities have to play – and those that play it well can show dramatic results. On the other hand, if you're the governor of California and you're going to put several billion dollars a year into economic development, would you pick this? A hodge-podge of subsidizes for both affordable and market-rate housing, big sales-tax generators such as retailers, some industrial development, hotels, and whatever else each city around the state thinks is important?
The good thing about the current debate is that, after decades of attack-and-retreat skirmishing between Sacramento and the redevelopment establishment, Jerry Brown has finally called the question. For the first time in six decades, California has the opportunity to re-examine redevelopment's goals and purpose. After all, Brown is doing something more than just calling for the end of redevelopment. He has almost also promised "a new tool" for local governments to pursue economic development.
But that moment could be squandered in the heat of the moment. The default solution would be more of the same: the redevelopment establishment again coughs up some more tax increment and gives up some flexibility, in exchange for continuing to exist. This is just an extension of what's been happening for years.
On the other hand, Brown could try to use his leverage to force more fundamental changes that make redevelopment more useful and politically sustainable without doing away with it completely. For example, California could adopt a more targeted tax-increment program, aimed at specific situations such as transit-oriented development and brownfields. And such reform could do away with the blight finding, which has little more that a façade for decades.
Yes, there would be a lot less flexibility for cities and redevelopment would be a smaller program under this kind of reform. But it would bring California in line with other states. Priority locations would still qualify for a break. And redevelopment abuse would be much less likely – making it a less juicy target for Sacramento year after year and, for that reason, a tool that cities know they'll have. That would be a real step toward a sustainable California – not just fiscally but politically as well.