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Even with Dissolution Underway, Redevelopment Continues to Evolve

Bill Fulton on
May 16, 2012

Against all odds, redevelopment isn't quite history yet in California. Some projects continue. Most cities are engaged in a long wind-down process that is consuming considerable time and attention. And the state legislature is considering a variety of options to revive redevelopment, or at least get it back on life support.

The current activity falls into four categories. First, there is the winding down of old redevelopment projects and disentanglement of municipal and RDA resources and staff. Second, there are the looming negotiations between the "successor agencies" (mostly the cities) and the "oversight committees" (controlled by schools and counties) over which projects can continue and how much property tax increment can be devoted to those activities. Third, some cities are attempting to cobble together alternative strategies to promote urban development. And finally, there are the surprisingly active attempts by the legislature to bring redevelopment back in some form.

The wind-down of the old agencies has been painful for cities because redevelopment had become so deeply embedded in the structure and budget of almost every municipality in the state. Although redevelopment agencies were technically separate entities and, in a few cases such as Los Angeles, operated as such in the vast majority of cases, these agencies were a seamless part of the city government. The City Council served as the redevelopment board, the city manager served as executive director, and so forth.

Although this integration made sense in terms of operational efficiency especially for smaller cities the real reason was financial. By integrating the RDA into the organizational structure, the city could use redevelopment funds to pay for personnel and activities that would otherwise have to come out of the general fund. Not only were redevelopment personnel paid for by redevelopment funds, so were many other staff. City managers and community development directors were often paid partly out of redevelopment funds. Public works engineers would charge their time to redevelopment projects. In Oakland, 17 police officers were being paid out of redevelopment funds. Thus, disentangling redevelopment from regular city operations has been difficult for many cities. 

So too has the process of determining which activities can continue. At first, the redevelopment establishment assumed that all activities could continue so long as they were funded with bonds that had already been issued. But the California Department of Finance soon issued strict guidelines saying that just because the RDA had floated bonds, that didn't mean the activities could continue. In many cases, the Department of Finance suggested, design contracts should be terminated mid-stream and bonds should be "defeased" (backed by other city assets rather than RDA assets) or paid off.

AB 1X 26 called upon the sponsorship entity to make a choice to designate itself as the successor agency to oversee the wind-down. Most cities did so, though a few including Los Angeles did not, meaning Governor Brown had to appoint a panel to serve as the successor agency. In most cases, successor agencies are currently trying to figure out how to persuade everybody else in the process to take a broad view of which obligations should be honored and, therefore, which redevelopment projects can continue to move forward. This process is likely to take two forms negotiation and litigation. 

On the one hand, successor agencies will likely press hard to persuade oversight committees that everybody will be better off financially in the long run if promising RDA projects are allowed to proceed. Even if the oversight committees buy this argument, however, the Department of Finance will be looking over everyone's shoulder and could reverse an oversight committee's decision.

On the other hand, there is little question that California will see a raft of litigation over this issue in the next couple of years. Cities will argue that the county auditor and oversight committee didn't properly accept their list of enforceable obligations; they will also argue that they can't defease the bonds. It will be quite a while before all this gets sorted out in court. So redevelopment personnel may have been laid off, but redevelopment consultants and lawyers will do just fine.

Meanwhile, cities are scrambling to find ways to keep doing redevelopment projects in the absence of the redevelopment law. First out of the gate was the inner-ring Los Angeles suburb of Alhambra, which adopted a local ordinance that gave the city many powers the redevelopment agency formerly held, including the power to buy and sell land for economic development purposes and provide financial assistance to developers. Many of Alhambra's ideas involve taking activities the city was already involved in community development block grants and disposing of surplus property, for example and using those activities in a focused way to continue redevelopment projects. Other cities are likely to follow suit, using sales-tax rebates more aggressively, donating city-owned land to projects, and so forth.

Perhaps most surprising, however, has been the amount of activity in the legislature on the redevelopment front. Whether Governor Brown signs any bills is an open question, but both houses of the legislature have been actively pursuing redevelopment proposals. 

Few legislators who voted on the redevelopment package in 2011 actually expected redevelopment to be killed. They thought they were voting on a complicated workaround to take more funds away from redevelopment agencies and still conform with Proposition 22, the 2010 ballot initiative sponsored by the cities and redevelopment agencies designed to create a firewall between the state and redevelopment funds. Still, the fact of the matter is that the RDAs had no friends in 2011 and they do have some friends in 2012.

Legislation has dealt with three issues. The first is affordable housing. When redevelopment was killed, there was $1.3 billion in uncommitted affordable housing money sitting in RDA accounts. It seems likely that the legislature will pass and the governor will sign legislation allowing cities to keep this money to use for affordable housing. (Update: The governor's May revise appropriates this funding.)

The second issue is the other assets that were held by RDAs when they went out of business. RDAs had at least $2 billion in cash in the bank, plus most likely billions more in real estate assets. Many cities claim the real estate isn't very valuable, but it's hard to know for sure; the Los Angeles Community Redevelopment Agency had 400 properties in its portfolio. Darrell Steinberg, the head of the state senate, has proposed allowing cities to keep the assets as an endowment for future redevelopment activities. In theory this is a viable idea after all, the fight in the legislature was over the ongoing flow of property tax revenue, not the assets but either the legislature or the governor may well decide to lay claim to the money to balance the budget.

The third issue is believe it or not bringing back the tax-increment financing system in some form. A variety of ideas have been floating, most notably allowing cities to do tax-increment financing with city and county property tax funds so long as counties agree to the idea. In theory, this too should be a viable idea, since it does not touch the property tax revenue that flows to schools. (The state must backfill property tax revenue lost to schools out of the general fund). Governor Brown has said that he would consider any redevelopment proposal that does not affect the state general fund, but it may be that 2012 is just to soon to bring back tax-increment financing. Brown may want to wait till the redevelopment carcass is colder.

One thing is sure: government involvement in building urban infrastructure and subsidizing urban development is likely to return in California in some way. The state's entire policy apparatus, including the regional planning law Senate Bill 375, points in that direction. And Governor Brown has been supportive of the policies. The question is whether or how soon bringing back some limited form of redevelopment will be politically acceptable.

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