San Jose Issues Tax-Increment Bonds--And a Dare to State Lawmakers
Here's a man-bites-dog story to top them all: The biggest redevelopment agency in the state may put itself out of business unless the state Legislature comes to the rescue.
The San Jose Redevelopment Agency collects almost $175 million per year in property tax increment. That is by far the most of any redevelopment agency in California. It's 7% of the overall state redevelopment total. It's 50% more than the gigantic Los Angeles Community Redevelopment Agency.
Like other big redevelopment agencies around the state, the San Jose agency has been in business for decades. It's long been known as one of the most aggressive redevelopment operations anywhere – working in industrial areas, the downtown, and the neighborhoods. It has funded one of the state's most innovative and respected affordable housing programs. A few years ago, San Jose maximized its flexibility in redevelopment by combining all of its project areas into one big project area, so that all the tax increment flows into one place. But now there's a problem.
Beginning this year, old redevelopment agencies that want to keep collecting their property tax increment past the existing cutoff date must start anew in finding "blight" in their project areas. Under the terms of SB 211, a bill carried by Sen. Tom Torlakson, chair of the Senate Local Government Committee, and signed by Gov. Gray Davis, these agencies also have to use the tighter definition of blight contained in the 1993 law that reformed redevelopment. This requirement means that agencies must make a legal finding that most of the project area is afflicted by both physical and economic blight – not just one or the other, as used to be the case.
In a remarkable public admission, Susan Shick, the executive director of the San Jose Redevelopment Agency, has acknowledged that her agency cannot make the new blight finding. Most of the tax increment scattered in the 13-square-mile "merged project area" comes from industrial areas that are now thriving. (Indeed, the industrial areas account for about 95% of the Redevelopment Agency's domain.) Without a change in state law to assist San Jose, the tax-increment spigot will be turned off in San Jose – which both Shick and Mayor Ron Gonzales have said will mean an end to the city's affordable housing programs, among other things.
All this may not seem like such a big deal, given the fact that it will be a while before the tax increment dries up. Even if San Jose is unable to make the blight finding, the city will probably be able to funnel tax increment to the agency until 2019. But in the world of redevelopment, 2019 is right around the corner. The reason is that redevelopment is a debt-driven business. Deals are planned and executed based on cash derived from bond issues. The bonds are usually issued for 20 or 30 years and the revenue stream to pay them back usually comes from the property tax increment the redevelopment agency receives.
Under the Torlakson bill, if the redevelopment agency could make the blight finding, San Jose could funnel tax-increment to the agency for an additional 10 years – to 2029. But the agency has publicly admitted it cannot make that finding. So for the moment, San Jose has to gamble that Wall Street investors will be willing to buy bonds for which there is no certain revenue stream in the "out" years.
In fact, San Jose is scheduled to test the market on January 8, when the agency will issue $350 million in bonds scheduled to mature in 2033. Most of the bond proceeds will go for a large downtown library, a downtown parking garage, and the "Strong Neighborhoods" initiative, which is one of Gonzales's highest priorities.
How can San Jose issue bonds that mature in 2033 when the redevelopment agency acknowledges that – under current law – it can't collect property tax increment after 2019?
There are a lot of reasons. Among other things, the redevelopment agency does have other sources of revenue. But the main reason may be that San Jose is gunning for a special exemption from the Torlakson bill – perhaps not in 2002, but sometime over the next few years.
As the deadlines in the redevelopment law loom closer, several of California's largest cities have gone to the Legislature seeking such exemptions. San Francisco obtained certain exemptions in a bill passed in 2000. Oakland and Sacramento went to the Legislature last year seeking similar exemptions – which was one of the reasons Torlakson pushed the idea of "triggers" in his across-the-board legislation. But SB 211 is not likely to be the end of the matter. The big cities will probably return to the Legislature in the future.
In San Jose's case, the city appears to be trying to strengthen its case in front of the Legislature. San Jose has an undeniable record of achievement in redevelopment – focused on downtown revitalization, construction of public facilities, and well-funded affordable housing programs. Admitting that they cannot meet the blight trigger in the Torlakson bill — and issuing more debt at the same time — will put more pressure on legislators to give the city an exemption.
Also, Gonzales and other leaders in San Jose have cleverly lined up the support of the Santa Clara County Board of Supervisors. Counties are typically the most vocal opponents of redevelopment, because much of the property tax increment funneled to the redevelopment agency is diverted from the county's general fund.
Last spring, however, Gonzales made a redevelopment deal with Jim Beall, the chairman of the Santa Clara County Board of Supervisors. Under the agreement, San Jose agreed to build approximately $200 million in capital facilities for the county between 2001 and 2014 – including, possibly, a new county health center and facilities improvements in mostly poor, unincorporated county "islands" around San Jose. The city also agreed to devote 20% of its capital funds to the county from 2015 to 2063 – assuming the redevelopment agency is still around at that time. The deal turned the county from a potential enemy into a probable supporter of a legislative exemption for San Jose.
One of the problems with redevelopment has always been that blight is in the eye of the beholder. For the first time ever, one of those beholders has blinked and admitted that blight doesn't exist. Such an admission may create an historic opportunity to re-examine the real purpose of redevelopment – and of the blight finding – in stimulating investment in California's existing urban areas. Maybe the Legislature should take advantage of that opportunity, rather than simply succumbing to intense pressure to create a loophole for one admittedly admirable city redevelopment effort.