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Solimar Research

Forget Redevelopment, Prop 13 Is The Real Issue

Feb 24, 2011

Proposition Thirteen.

There, I said it. But I'm not the only one uttering those words during the ongoing discussion of the State of California's enormous budget gap. Just maybe, we can no longer ignore the elephant in the room.

The state's fiscal problems are as big as an elephant, and the reasons for them are legion. But, make no mistake, the largest contributor to those problems -- by far -- is the system created by and in reaction to Prop 13.

One of Gov. Brown's proposals for solving the budget deficit is the elimination of local redevelopment agencies. Doing this, according to the administration, would result in $2 billion in additional property tax revenue for schools meaning the state would not have to "backfill" $2 billion to the districts. The governor's proposal has triggered intense debate about the value of redevelopment. It's a debate that is probably worthwhile, but not in the hothouse environment of the state budget debate. The real issue is not the effectiveness of redevelopment, it's the fact that cities and counties turn to redevelopment because it's one of the very few tools they have to boost revenues and invest in their communities' infrastructure, economic well-being and housing stock.

Approved in 1978, Proposition 13 set the property tax rate at 1% of assessed value, limited increases to 2% annually, and prohibited re-assessments except when property is sold. Before Prop 13, cities, counties, school districts and every other local government agency set their own property tax rates. After Prop 13, those same cities, counties, school districts and other agencies had to share the same pie a pie that was suddenly two-thirds smaller. The State of California did what seemed like the responsible thing and bailed out the locals. Nowadays, 70% of the state's general fund is composed of payments to other government agencies, primarily school districts and counties. Proposition 98, passed in 1986, ensures that schools get a certain percentage of the state's general fund.

In other words, what we used to pay for directly with property tax is now funded by the state, which gets most of its money from income taxes. It's not a wash by any means.

For 30 years, as state budget deficits have come and gone, we ignored the system that voters imposed and the consequences from it. That silence seems to be ending.

During recent testimony before the state Senate Governance and Finance Committee, state Treasurer Bill Lockyer noted that Proposition 13 triggered the debate about which levels of government are "stealing money" from other levels. That debate raged during last year's campaign over Proposition 22 (which seeks to protect local revenues) and over the governor's proposal regarding redevelopment. This is all because we don't pay for many local government services and public works directly.

Jean Ross, of the advocacy group California Budget Project, said during the same hearing that while most states pay for education at the local level, Propositions 13 and 98 transferred most of the responsibility for funding schools to the state. This is important because it reflects California's disconnected system, in which no average citizen can follow the money from tax payment to service provided.

Not only did Proposition 13 spur the change in how schools are funded, it caused redevelopment project areas to expand enormously, because redevelopment emerged as the only way cities and counties could capture increased property tax revenues, Marianne O'Malley, of the Legislative Analyst's Office (LAO), explained. The LAO says this redevelopment expansion is bad public policy, but it recognizes that Prop 13 is the cause.

I recently spoke with Elizabeth Patterson, the mayor of Benicia. Her 161-year-old city does not have a redevelopment agency, but she understands the appeal of having one. Redevelopment has been cities' response to the disproportionate way that property taxes are distributed in light of Prop 13, she said.

I know, I'm repeating myself. I'm doing so because I'm overjoyed that people are talking about Proposition 13. Few people are urging reforming it, but the first step toward recovery is admitting you have a problem.

The fiscal issues faced by the state and by local government are systemic. Those issues will remain no matter what happens with redevelopment, because redevelopment agencies are barely a fly on the elephant's butt.

Paul Shigley