California's redevelopment agencies are pondering their next step after a court ruling that forced them to give $2.05 billion to the state in early May. The state's redevelopment association plans to appeal the ruling by Sacramento County Superior Court Judge Lloyd Connelly � but most of them had to write big checks back to their county treasurer on May 10 to comply with the ruling.

The Third District Court of Appeals ruled against the California Redevelopment Association's request for a temporary stay on making a potentially devastating transfer of would-be redevelopment intended to ease the state's $20.7 billion budget deficit. California's redevelopment agencies were forced to hand over a collective $1.7 billion on May 10, with another payment of just over $300 million slated for next year.

At least three agencies -- in Monrovia, Placentia, and Richmond -- have refused to make their assigned payments. They either consider the payment a bad investment and are willing to accept penalties in exchange for being able to continue with their projects or because they simply do not have the funds.

This is the ninth such transfer of funds in recent memory but the others were "modest" by comparison, according to John Shirey, executive director of the California Redevelopment Association. In some cases, the giveback represented between one-third and one-half of their tax increment.

The $2.05 billion price tag came about through legislative negotiations and has been divvied up according to agencies' tax increments -- regardless of the agencies' indebtedness, operating expenses, or project pipelines.

The result is that some agencies are feeling more pain than others. The San Francisco Redvelopment Agency cut a check to the state for $28 million. The San Jose Redevelopment Agency paid $62.9 million of an annual tax increment of roughly $200 million. Lora Kutka, chief financial officer of the Fresno Redevelopment Agnecy, said that her agency's payment of $6.7 million represents roughly half the agency's net tax increment. Agencies have stated that the transfers will consume their operating budgets and "cripple" redevelopment--and the job and economic growth that is supposed to accompany it. 

In the aggregate, the transfer will affect countless projects that are already underway, and the lack of funds may mean that agencies cannot dedicate time and expense to the planning of new projects that would, in turn, create more tax revenue when complete. The CRA contends that each dollar that a redevelopment agency spends generates up to $13 in economic activity.
Moreover, affordable housing  will suffer considerably.

"We expect about a $630 million shift will move away from the low- and moderate-incoming housing fund," said Julie Spezia, executive director of advocacy group Housing California. "That equates to 8,400 homes and almost 10,000 jobs statewide. We're really concerned that this sweep is happening at a really poor time and is going to hurt the state's economy and revenue overall."

The funds will go the state's Supplemental Educational Revenue Augmentation Fund and will be earmarked for K-12 schools that serve or are located in the respective redevelopment project areas from which funds have been culled. In its legal challenge, the CRA contended that the transfer of funds violated Article XVI, Section 16 of the State Constitution, which provides for the local reinvestment of tax increments generated through redevelopment activities.

Connelly, who had ruled in favor of a challenge to a similar proposed transfer last year, disagreed and ruled that the transfer was constitutional so long as the funds served the areas from which they were gathered. Connelly is former mayor of Sacramento and state legislator.

The transfer was mandated last year in Assembly Trailer Bill ABX4 26, which arose from negotiations between Governor Arnold Schwarzenegger and legislative leaders.

Whether the size of the represents an appropriate sacrifice or an egregious imposition is a question for the legislature.
"I don't think there's a single metric for that," said Marianne O'Malley, principal fiscal analyst in Legislative Analyst's Office. "Ultimately it's the job of the legislature to look at all the needs of California and figure out a way of funding them. I think those are policy calls that we elect legislators to do."

Some agencies, such as San Francisco, consider themselves lucky to be able to weather a storm that was foreseeable only as soon as a year ago. 

Although the impact on this year's projects and operating budgets are bound to be significant throughout the state, Shirey said that the long-term implications of the ruling that authorized the transfer are profoundly troubling.

"What Judge Connelly ruled is that the legislature can define redevelopment to be whatever it wants to be, and under that kind of sweeping nod to the legislature, what it could mean is that the legislature starts using redevelopment for any purpose that it wants," said Shirey. "Every year will be open season on redevelopment by the legislature and the governor, and redevelopment agencies will never have any ability to do long-term planning."

In the short term, agencies are coping in a variety of ways. Fortunate ones such as the San Francisco Redevelopment Agency, are financing their transfers through bonds and therefore has avoided, for the time being, cuts to any projects.

"We are in a very fortunate position relative to a lot of our sister agencies in that our debt coverage ratio allows us to finance the payment to the state," said Fred Blackwell, executive director of the San Francisco Redevelopment Agency, of his $28 million payment. "It's a one-time deal for us. We didn't want to forego stuff that was already in the pipeline, but it's not sustainable."

Other agencies, however, are turning to far more drastic measures, especially given that most, if not all, are seeing lower tax increments because of the recession. Most commonly, they are cutting back on infrastructure improvements, which, unlike the development of commercial projects, do not hold the promise of generating property tax revenue.

"We had to basically cut our budget in half from where we were earlier in the year, plus the double-whammy of the economy being in the shape it's in," said San Jose Redevelopment Director Harry Mavrogenes.

"On a project-specific basis, we have to ask, what's the upside?" said Ontario Redevelopment Director John Andrews. "That future upside is increment revenue, as opposed to a project where it's a traffic signal improvement or curb and gutter improvement. It's going to create for some more difficult choices." Andrews said that he would be having some "difficult conversations" with existing and potential project partners.

Despite these hardships--and the fact that it has pledged to file an appeal--the CRA advised its member agencies to pay their share of the SERAF as of the May 10 deadline even though it believes that the decision is unconstitutional.

"We did recommend to everyone that they make those payments," said Shirey.  "We did that because we follow the law. As result of the court's decision and the previous action taken by the state, that is the law. We're not going to engage in the hypocrisy that the state engages in by not following law."

The firms that refused to pay said they simply didn't have enough cash to write the check.
"For us to pay the $3 million ransom to the state, we would have to borrow money," said Monrovia City Manager Scott Ochoa of what he called the Monrovia City Council's "principled stand" against taking money from other city programs. "If these deals mature, we'll sell our holdings, generate proceeds, and with that be able to pay the obligation to the state, however distasteful that might be."

In Monrovia, major projects such as Station Square, an 80-acre, 700-unit transit-oriented development near a future light rail station, might have to be put on hold if the agency pays the SERAF before it can raise more cash.

"If the state is not above paying out IOU's, I don't see why they should be above accepting IOUs," added Ochoa.
In Richmond, officials say that they were simply tapped out.

"It's not because we're saying �we don't like what you did,'" said Richmond Community and Economic Development Director Steve Duran. "We're in a financial situation where we don't have any money to pay."

These agencies that refuse to pay are subject to a so-called "death penalty" detailed in ABX4 26 that prevents them from undertaking any new projects until the transfer is paid.

Regardless of the SERAF's impact on the state's agencies, many are questioning why local funds should be sacrificed for the sake of a problem for which they blame Sacramento.

"Given the state that the California budget is in, everybody should be expected to share the pain," said Blackwell. "On the other hand, I think that redevelopment agencies were disproportionately affected in a negative way. Many in the Legislature end up looking at development and land use activities and comparing them to things like health and safety and come to the conclusion that economic and redevelopment activities are more expendable."

"I think it's short-sighted," he added. "In times like these, redevelopment agencies are often the only real local stimulus tools that local governments have."

While last year's court victory temporarily retained what the CRA considers the sanctity of local funds, it actually set the stage for a careful crafting of ABX4 26 that eliminated the clauses that concerned Judge Connelly last year in such a way that the legislature was able to blur the historical distinction between a tax increment and the rest of the property tax pool. Last year's ruling was, thus, a Pyrrhic victory for redevelopment agencies.

"What the judge did when he ruled in our favor the last time around was basically to provide a roadmap for the legislature on how to do the taking in a way that was constitutional," said Blackwell. "And they followed that roadmap to a T."

In effect, what the legislature decided � and what Connolly endorsed � was the legislature's ability to decide how to spend increment money within the project area, at least with regard to schools.

"In terms of redevelopment, the agencies effectively modify the allocation of the property tax, and some revenues that otherwise would go to cities, counties, special districts and schools go to the redevelopment agency," said O'Malley of the LAO. This interpretation squares with what some consider to be the state's legitimate claim to all property tax funds.

"I am of the belief that you can't separate the state budget from local government. You need to look at the totality of public services," said Jean Ross, executive director of independent watchdog group the California Budget Project. "In the whole series of policy decisions made since the voters passed Prop 13, they really have intertwined state and local government finance."

The redevelopment community, however, considers even the transfer to local schools to be an affront to the spirit of redevelopment law. And they say that the legislature is simply taking advantage of redevelopment agencies' ready access to funds.

"We view the issue as one of constitutionality," said Shirey. "We're not saying that we're worse off or better off than any function or entity that's having money cut, or having money stolen from us, as we are. This money is going to schools that are in redevelopment project areas, ignoring the fact that schools have nothing to do with the redevelopment purpose."

The legislature's rationale, however, contends not only that schools conform to the definition of redevelopment but in fact have their own implicit economic value that may or may not be equal to that of the projects that redevelopment agencies support.

"The fundamental question isn't would reducing redevelopment have an effect, but would preserving schools funding have an effect too?" said O'Malley.

While those effects play out in the coming months, the CRA is hoping to address its concerns for the fate of long-term planning through a legal appeal and a ballot measure that has qualified for the November ballot which is intended to reaffirm the use of tax increment funds for redevelopment and prevent such future transfers.