R Sheet on Redevelopment Revival in California


Steven Greenhut
Resident Senior Fellow and Western Region Director, State Affairs
Nick Zaiac
Former Associate Fellow

Key Points

Redevelopment agencies were created in the 1940s to fight urban blight, but morphed into a way for local governments to divert property tax dollars from traditional services.

These agencies routinely abused eminent domain by taking private homes and businesses and giving them to developers who promised tax-generating projects.

Gov. Jerry Brown shuttered the agencies in 2011 as he sought to fill a budget hole.

Last year, Gov. Gavin Newsom cited fiscal concerns in vetoing SB 5, which would have tapped $2 billion a year and increased affordable housing earmarks to 50 percent.

A similar bill, SB 795, has been introduced this year. Given recent economic concerns, lawmakers should reject this latest redevelopment revival.

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In the midst of nationwide concerns about festering slums, California in the 1940s created redevelopment agencies to give local governments creative financial tools to battle urban blight. This system quickly morphed into a financial gimmick that localities used to fund projects that often had little to do with urban renewal. It primarily became a means to bolster their general funds, allowing them to divert property taxes from traditional public services—like schools and police and fire departments—to fund development projects that created sales-tax windfalls.

Here’s how the process worked: Redevelopment agencies used a technique called “tax-increment financing” to pay for improvements in project areas targeted for new development by city officials. The local agency would first find “blight” in a specified area. It would then sell bonds—without public approval—to pay for infrastructure and land acquisition for the proposed new development. Finally, the agency would collect the “tax increment”—an increase in property taxes levied after project completion—to pay off the bond debt. The agencies were required to spend 20 percent of the proceeds on affordable housing projects.

Unfortunately, the standards for state-required blight findings were broad enough to invite abuse. Redevelopment officials became remarkably creative in the search for blight. For instance, one rural vacation town declared its downtown area blighted because of excess urbanization—a claim so questionable it earned a rare court rebuke. The agencies’ blight reports virtually always justified the proposed project. Once an agency found blight, it gained broad powers to subsidize agency-picked developers and seize property through eminent domain. Some agencies turned entire cities into blighted redevelopment areas. The process became an egregious example of crony capitalism.

Redevelopment proponents often point to the revival of Old Town Pasadena, the San Diego Gaslamp Quarter and some other now-bustling areas as examples of the system’s value, but those areas are outliers (and ones likely to redevelop on their own, given their prime locations in upscale cities). Typically, agencies preferred to fund big-box stores, movie theaters, hotels and other attractions that would provide sales and bed taxes. The bonds funded the projects, the new property-tax revenues paid off the bonds and the cities lured commercial developments that would provide them with discretionary funds—i.e., money they could use any way they chose. This was a prime motivator for cities that long claimed to be strapped for cash.

Under redevelopment, tax-increment proceeds came out of the budgets of counties where these cities were located. Redevelopment also siphoned cash from public schools. But the state was required to backfill those dollars under Proposition 98, which guarantees schools approximately 40 percent of the state’s general fund revenue. In the midst of the 2011 budget-deficit crisis, then-Gov. Jerry Brown shut down the state’s 400-plus redevelopment agencies as he searched for revenues to plug a massive budget hole. By that time, redevelopment agencies had diverted 13 percent of California’s property taxes as part of the backfilling process.

In a 2005 decision, the U.S. Supreme Court allowed cities to take private property for a public “benefit” in addition to public “use.” Public benefits are wide-ranging and can include anything that arguably would benefit a locality, whereas public uses are restricted to publicly owned facilities such as roads and courthouses. After that ruling, many other states—at the court’s encouragement— reformed their property seizure laws. California passed only a superficial reform, leaving property owners in peril as long as redevelopment existed – or if it comes back in a similar fashion.

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