As expected, the budget proposed today by Gov. Jerry Brown calls for the wholesale elimination of redevelopment agencies.  This dramatic move would free up roughly $5 billion in annual tax increments that redevelopment agencies control and would redirect those increments to fund a range of local services. 

The proposal has set off what will likely be an ongoing debate over the value of redevelopment as it has been implemented in the 59 years since California voters approved a constitutional amendment allowing the use of tax increment financing to combat blight. 

While the governor described the proposed budget as "a tough budget for tough times," redevelopment officials have already launched their counter-offensive. John Shirey, executive director of the California Redevelopment Association, called the proposal " smoke and mirrors that will bring little financial gain for the State, but will cause widespread and significant economic pain in communities throughout California." 

The proposed budget's chapter on Tax Relief and Local Government includes a wide-ranging indictment of redevelopment. The budget offers the following reasons, among others, why redevelopment fails to live up to its promise: 

  • Because redevelopment agencies keep the incremental monies that are generated within redevelopment, even tax increases that stem simply from inflation or property value increases--rather than direct agency intervention--end up in agency coffers. Meanwhile, the base tax that is distributed to other recipients remains the same and loses real value over time. The budget claims that over time, the increment kept by agencies can "dwarf" the base tax revenue that goes to local services like schools. 
  • According to a 1988 study by the Public Policy Institute of California,  "fewer than one?quarter of the (redevelopment) projects came close to being responsible for the property taxes they received. These projects were also the ones with the most vacant land." 
  • Redevelopment agencies have failed to develop affordable housing, which is supposed to consume 20 percent of agencies' income. Instead, many agencies have built up large balances. 
  • In the aggregate, redevelopment agencies do not create a net increase in development. Development that occurs in redevelopment project areas would have occurred elsewhere in the state.

The budget lists the following relative detriments of the diverting the tax increment: 

  • Diversion of tax increment not only diverts a total of $5 billion from other taxing agencies but also creates a complicated system by which the state must "backfill" and compensate K-14 schools at a cost of approximately $1.8 billion annually.
  • Local services such as law enforcement and emergency response rely largely on property taxes and local sales taxes. While the former is expected to stabilize, the latter is expected to take years before returning to pre-recession levels. 

The budget proposes the following steps to disbanding redevelopment agencies and redistributing their tax increments: 

  • By July, existing agencies would be disbanded and their debts would be gradually retired by local successor agencies. 
  • Starting in 2012-13, the amount of tax increment remaining after paying pre-existing depbts and contractual obligation would be distributed to cities, counties, and K-14 schools in amounts proportionate to their share of the base countywide property tax. The net gain for these entites is estimated to be $3 billion annually. 
  • Monies left in agencies' coffers that are earmarked for low- and moderate-income housing would be shifted to local housing authorities for the same purpose. 
  • Fund future local economic development projects via a 55-percent voter approval for limited tax increases and bonding against local revenues for projects that are currently done by redevelopment agencies. 

This announcement comes on the heels of what redevelopment officials considered a disastrous year. In May a judge upheld a 2009 law ordering the transfer of $2.01 billion in tax increment from agencies statewide to help fund schools. Agencies were then ordered to pay $1.7 billion of that payment, with the rest due this year. 

"Without decisive action, the state's severe budget problems will persist, threatening economic recovery, job growth, public education and the quality of life in California," said Gov. Brown in a statement. "The adoption of this budget will position the state to lead the country as it slowly recovers from the Great Recession."

Redevelopment officials contend, however, that the current system and the use of tax increments can stoke that recovery. "The State and local governments have very few tools to stimulate the economy, but redevelopment is the exception," said the CRA's Shirey in a statement.  "Redevelopment is already a locally-governed service which generates hundreds of thousands of jobs."

The governor's spending plan assumes that all statutory changes to implement budget actions will be adopted by the legislature in March, allowing the necessary ballot measures to be put before the people at a June special election. 

Please visit CP&DR for continuing coverage of this proposal and reactions from around the sate.