By shifting $1.7 billion from redevelopment agencies to state programs and schools, the state budget signed this week by Gov. Schwarzenegger could halt numerous redevelopment projects for years to come, according to the agencies and housing proponents. The tax increment shift could also mean the end for some redevelopment agencies.

"This amount is so huge that it really, for most agencies, amounts to 100% or more of their discretionary spending," said John Shirey, executive director of the California Redevelopment Association (CRA). "The numbers are of such great magnitude, inevitably what it means is that some agencies will go out of business."

Some redevelopment agencies have already identified projects that may halt because of the state's tax increment maneuver, such as rail yards re-use adjacent to downtown Sacramento and affordable housing development in downtown Los Angeles.

The CRA has vowed to file a lawsuit challenging the constitutionality of the tax increment shift. The organization won a lawsuit over a similar shift earlier this year.

From the viewpoint of local planning and development, the redevelopment tax increment shift is arguably the most important part of the 2009-10 state budget. The budget does not contain a shift of gasoline sales tax revenue away from local governments, a proposal that appeared certain to pass until the last minute. The budget also does not contain a 30- to 40-year extension of local redevelopment authority in exchange for the state getting a slice of future tax increment. Backed by the City of Industry, the redevelopment tax increment "securitization" plan passed the state Senate but died – for now – in the Assembly.

The budget does borrow $1.9 billion of local government property tax revenues (8% of total), which the state is required to pay back with interest within three years. The budget included only 80% of Williamson Act subventions to make up for property tax revenues the counties lose through the agricultural protection program. However, at the last minute Schwarzenegger cut all but $1,000 of the subventions.

The state has shifted money away from redevelopment agencies numerous times in recent years. In April, however, a Sacramento County Superior Court judge ruled that a $350 million shift from redevelopment agencies to schools in the 2008-09 state budget violated the state constitution because there was no guarantee the money would be used for redevelopment purposes (see CP&DR Redevelopment Watch, June 2009). Lawmakers and the administration say they solved the legal flaw with the creation of "supplemental revenue augmentation funds" (SRAF) in each county. Money contributed to the SRAF would fund courts, prisons, Medi-Cal service, hospitals and schools. But the money would be spent only in redevelopment project areas or for services to people who live in project areas or redevelopment-assisted housing. The budget calls for redevelopment agencies to transfer $1.7 billion to their county SRAF by May 1, 2010, and another $350 million in 2011. In exchange, redevelopment agencies may extend project area sunset dates by one year.

Shirey, however, said the language in the budget bills does not change the fact that the tax increment in question is legally obligated to fund debt payments and redevelopment projects.  "We intend to sue the state just as we did a year ago when they tried to take $350 million," he said.

Any agency that fails to make its mandatory SRAF payment would be subject to the "death penalty," meaning the agency would have to cease nearly all activity except for the retirement of existing debts. An agency may borrow money from its low- and moderate-income housing fund, but the money must be repaid within five years or else the low-mod housing set-aside jumps from 20% to 25% for the remainder of the project area. The state is permitting agencies to suspend all required low-mod allocations for the 2009-10 fiscal year. An agency may also borrow money from other sources to make its SRAF payment.

Republican lawmakers and the administration in recent years have eyed the hundreds of millions of dollars sitting in redevelopment agencies' low-mod housing funds. However, agencies say nearly all of the money is earmarked for projects that await other funding before they may be built.

Officials with the Los Angeles Community Redevelopment Agency said the shift of $71 million away from the agency threatens to halt at least seven projects, including affordable housing development in Hollywood and downtown, a shopping center in Reseda and a shopping center overhaul in Watts.

"The gutting of the CRA-LA budget will mean that we will not be able to complete millions of dollars of redevelopment projects in Los Angeles, resulting in a loss of 2,300 construction jobs and a loss of $360 million in private investment," said Cecilia Estolano, the agency's executive officer.

The Sacramento Housing and Redevelopment Agency would be required to give up $16.8 million this fiscal year. The hit would prevent the agency from starting any new projects and could imperil several high-profile projects, according to Deputy Executive Director Lisa Bates. Among the projects in jeopardy is rail yards reuse, a project that recently won $83 million in Proposition 1C funding and was expected to get $50 million in redevelopment assistance.

San Jose Redevelopment Agency Assistant Executive Director John Weis said the required shift of $75 million over two years would force his agency to borrow money in order to keep existing projects on track, which the agency did a few years ago to make an $18 million ERAF payment.

The big loser in all of this will be affordable housing, predicted Christine Minnehan, a lobbyist with the Western Center on Law and Poverty, because the only money many agencies have available to make SRAF payment is in low-mod housing funds. "A take of this level is going to decimate the housing piece of redevelopment," she said, noting that redevelopment tax increment provides the sole permanent source of funding for affordable housing development in California.

The Industry proposal would have permitted agencies to extend their redevelopment project area sunset dates by up to 40 years without renewed blight findings. In exchange, the state would receive 10% of agency tax increment. The argument in favor of the plan was that the extensions would be voluntary, and if enough agencies signed up, there would be no forced SRAF transfers and there might be no need to borrow the $1.9 billion from local governments. The plan did pass the Senate but never came up for a vote in the Assembly for reasons that remain unclear.

The CRA strongly opposed the Industry measure, which surfaced as ABx4 27 during the wee hours of the July 23-24 budget marathon. "It takes redevelopment money and spends it on non-redevelopment purposes," Shirey protested. That is unconstitutional and it would invite more state and public opposition to legitimate redevelopment activity in the future, he insisted.

Minnehan agreed the Industry proposal would "completely undercut" the point of redevelopment, and San Jose's Weis said the proposal would have been worse than what the state did pass.

"Do I think it's dead? No I don't," Shirey said of the Industry proposal. "They have a whole army of high-powered lobbyists, including four former legislators."

The immediate focus of many redevelopment agencies now appears to be CRA's coming lawsuit over the tax increment shift. Shirey said labor unions have also offered to lend assistance, because they fear the loss of tens of thousands of construction jobs as redevelopment projects are halted.

The Williamson Act subventions lie on the other end of the urban development spectrum. The Department of Finance has targeted the subventions for years. Under the Williamson Act, agricultural property owners receive a tax break by agreeing not to develop their property for 10 years. The program costs counties $35 million to $40 million annually, an amount the state backfills. The budget contained money for 80% of subventions, or about $28 million. But the governor "blue penciled" the amount down to $1,000, saying the money is needed for a prudent general fund reserve.

John Shirey, California Redevelopment Association, (916) 448-8760.
Christine Minnehan, Western Center on Law and Poverty, (916) 442-0753.
John Weis, San Jose Redevelopment Agency, (408) 535-8500.
California Redevelopment Association website.
Department of Finance state budget summary.
Legislative Analyst's Office, 2009 Budget Package.