State Issues

Cities want to resurrect discarded funding source

Redevelopment funds were often spent by cities to demolish old or underused downtown buildings and replace them with more modern and appealing commercial developments.
Redevelopment funds were often spent by cities to demolish old or underused downtown buildings and replace them with more modern and appealing commercial developments. McClatchy News Service

“Redevelopment” funds were intended to be used as a powerful tool to clean up urban slums and elevate poor residents into America’s ever-expanding prosperity. But they haven’t worked out that way.

California’s version of redevelopment hinged on the notion of “tax increment financing.” Cities could deem certain neighborhoods “blighted,” then borrow money through bonds to improve them. The “increment” of increased property taxes generated by those improvements would then help pay off the bonds. Except few cities ever used the bonds at all.

Everything changed when voters passed Proposition 13 in 1978, imposing tight limits on property taxes collected by schools and local governments and making the distribution of revenues a zero-sum game.

With property taxes reduced, redevelopment became a way for cities to keep more of the property tax pot. So they expanded improvement zones and stretched the meaning of “blight” to the breaking point. Soon, they were selling bonds to subsidize hotels, auto malls, even golf courses to generate sales tax revenues which were then used to fund general services.

Unspent funds meant for housing would accumulate in city coffers, often due to local opposition to low-income projects. Some affluent cities were granted permission to spend low-income housing funds in other cities, so as not to disturb their richer residents.

Meanwhile, the interaction of redevelopment, Proposition 13 and Proposition 98, a school finance law passed in 1988, meant incremental property taxes being retained by cities not only kept them away from counties and other local governments, but also from schools. And that meant the state had to make up the revenue shortfall to school districts.

Ultimately, about 10 percent of the total property pot was being retained by local governments – $5-plus billion a year – and the state was compelled to give schools about $2 billion to backfill property tax losses.

Seven years ago, the Legislature and Gov. Jerry Brown abolished redevelopment and compelled cities to disburse the money and other assets to schools and local agencies.

Ever since, there have been efforts to bring back redevelopment in some form. Now, the state’s housing crisis has fueled a new push for redevelopment. And city officials say that if the state is forcing them to meet housing quotas, they need redevelopment agencies to generate funds.

But the same bugaboo that led to redevelopment’s demise – the shift of incremental property taxes – still looms. Whatever tax funds redevelopment might generate for housing would come from other local agencies and the state would be on the hook for losses to schools.

Gov. Gavin Newsom was asked about redevelopment when he introduced his new state budget. He quickly dashed any hopes for re-establishing the redevelopment program. “I think we are doing even more” than redevelopment would contribute to solving the shortage of housing, he said.

His rejection was coupled with a warning that if cities and other local governments didn’t meet housing quotas, they could see a loss of transportation funds. So it was a double whammy.

Dan Walters writes on matters of statewide significance for CALmatters, a public interest journalism organization. Email: dan@calmatters.org.

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