As with so many trends, the use of tax-increment financing for redevelopment began in California. Since being created here in 1952, this vital aspect of redevelopment has spread to 48 other states. And yet if Gov. Jerry Brown's current budget proposal passes, it may very well die in the state where it was born.

It is not going quietly.

In the two weeks since Brown announced his intention to eliminate redevelopment in California as part of his proposal to cut the state's $24 billion deficit, what used to be a relatively obscure system intended to eradicate blight has been thrust into tumultuous debate.

Redevelopment agencies are taking aggressive steps to protect their funds – though it's not clear whether these steps will withstand legal scrutiny. And the California Redevelopment Association has gone into "campaign mode" to try to block Brown's proposal.

Mayors from the state's ten largest cities have met with Brown to plead their case, but so far Brown has not backed down. Meanwhile, a poll by the Public Policy Institute of California released Jan. 26 suggest that cities face an uphill battle: 66 percent of Californians favor the elimination of redevelopment.            At stake is $5 billion in redevelopment tax-increment funds currently controlled by redevelopment agencies, mostly associated with cities.

 The state's redevelopment agencies, led by the California Redevelopment Association, are insisting that the tax increment that they reap from redevelopment projects belongs to them. Their argument centers on the notion that redevelopment monies create significant positive externalities that other forms of state or local spending do not. These redevelopment advocates –say that up to 300,000 jobs and countless billions of dollars worth of development are in jeopardy.  

Despite the stakes, many redevelopment officials say that the governor's announcement caught them by surprise. Just two months after winning a major victory with the passage of Proposition 22, they find themselves scrambling to shore up both funds and public support.

 "We're both shocked and disappointed that there was no forewarning and no discussion with any of the interested parties before the governor released his budget," said Long Beach Redevelopment Agency Executive Director Amy Bodek.

 The proposal would shut down all 400-plus city and county redevelopment agencies and thousands of redevelopment project areas. Officials from every city in California have lamented the threat to both specific projects and their local economies. (Counties do not use redevelopment as much as cities do.) Projects that are in jeopardy include such high-profile projects as a new football stadium in San Diego, a new Oakland A's ballpark in San Jose or Fremont, museums, transit oriented developments, and infrastructure projects throughout the state.

Many agencies have gone so far as to approve new projects in the past two weeks in order to shield funds from a shutdown that would take place July 1 if the governor's proposal is enacted. The proposal makes it clear that the state will continue to honor existing obligations, via what the governor's proposal describes as "successor agencies."

The board of the Los Angeles Community Redevelopment Agency approved $930 million in new investments for over 200 planned projects Jan. 14. That figure includes $35 million for the recently unveiled Broad Art Museum on Grand Avenue and $50 million for an adjacent Frank Gehry-designed mixed use complex. It also includes $20 million for the highly publicized "Clean Tech Corridor," plus countless smaller projects that are slated to receive CRA investments of as little as $50,000. The Los Angeles City Council still must approve the projects. The San Francisco Redevelopment Agency is considering similar moves to support mega-projects such as as Hunters Point and Treasure Island, both of which would include thousands of units of housing.

The city council in Long Beach approved $1.2 billion in total obligations, including both ongoing and new projects. The San Jose Redevelopment Agency approved a more modest $58 million in new obligations – including funds for a new ballpark – while Fremont approved $140 million for the construction of its new BART station. The Culver City City Council even enacted a purchase agreement, worth $14 million, to transfer ownership of an existing municipal parking garage from the city to the redevelopment agency. The move would presumably get the garage on the agency's books and thus decrease the amount of funds that the state would be able to absorb and reallocate.

In Glendale, the city council approved a host of projects—including a library, football fields, and pedestrian improvements—worth a total of $480 million in tax increment, according to Philip Lanzafame, Chief Assistant Director of Community Development. The redevelopment agency is also supporting a highly publicized expansion of the Americana at Brand mall.

 "We entered into cooperation agreements with the city to obligate those projects that were included in our five-year implementation plan," said Lanzafame.

Long Beach's Bodek said that the threat of being shut down July 1 evinces a "misunderstanding" of how redevelopment projects work. She said that her agency reserves the right to continue entering into new contracts, especially on projects—such as a fire station currently under construction—that are already underway but may need amendments.

"We cannot afford to jeopardize those projects," said Bodek.

Though securing funds may seem like an underhanded move while the budget debate just gets started, Lanzafame said, "all the cities that are working on this strategy or similar strategies had been put in this position by Sacramento, because there had been very little conversation with local jurisdictions."

Many officials had in fact expected the Legislature to pass legislation preventing this rush to secure funds, but thus far none has materialized. Senate Pro Tem Darrel Steinberg has indicated that he favors a compromise between the governor and redevelopment agencies and is not pushing any such legislation.

In an initial report published the day after Brown released his budget proposal, the Legislative Analyst's Office warned that agencies would attempt to fast-track projects and therefore decrease the amount of tax increment that the state could recoup. The governor's budget estimates that once all other obligations are paid, the elimination of redevelopment will create a net gain of $1.7 billion for the state. Most of these monies will be returned to localities in the form of funding for schools and trial courts. 

CRA spokesperson Krista Noonan said that CRA does not have accurate records of what agencies are doing statewide. She said that CRA is telling agencies they can approve projects "that are all set and ready to go, but if you have future projects we've told them to hold off on those."

Indeed, that's far from the only thing that has eluded accurate record-keeping. Just about every aspect of the governor's proposal is at issue, ranging from the true value of the re-appropriated increment to the legality of the plan itself. Redevelopment officials argue that redevelopment is enshrined in the State Constitution and that Proposition 22 prevents the state from appropriating local redevelopment, and transportation, funds. The governor's office will likely argue, however, that redevelopment agencies exist only with the approval of the Legislature and governor and therefore can be eliminated.

Beyond the legal arguments lies a deeper, and seemingly intractable debate over the effectiveness of redevelopment. Almost all involved – including CRA Executive Director John Shirey – acknowledge that the state's dire fiscal situation requires shared sacrifice. However, redevelopment officials contend that the value of redevelopment to localities far outweighs the property tax revenues that are diverted from the state's coffers. They say the proposal is therefore "penny-wise and pound-foolish." (Also, redevelopment agencies have already surrendered more than $2 billion to balance the state's budget.)

But even this contention relies more on anecdotal evidence and casual studies than on a comprehensive, rigorous evaluation of redevelopment. State Controller John Chiang announced Jan. 25 that he would review 18 agencies statewide by mid-March (see InBrief).

Redevelopment has suffered some scathing critiques, most notably from both the Los Angeles Times and the Senate Office of Oversight and Outcomes in September, which found that many agencies were failing to produce affordable housing and were instead stockpiling the 20 percent of their tax increment that is supposed to go to affordable housing. More broadly, agencies have been accused of cronyism, overly liberal definitions of blight, and lack of transparency.

 "Are there abuses in redevelopment agencies in terms of a more expanded view of blight? Certainly," said Renata Simril, managing director at real estate services firm Jones Lang LaSalle and formerly a developer with Forest City Enterprises. "That's not an issue of all redevelopment agencies are bad. It's more of an issue of an appropriate….regulation and approval method."

Academically, the governor's proposal has stirred debate over whether redevelopment actually creates a net benefit statewide or whether its incentives and subsidies simply draw development into certain areas rather than others.

Redevelopment has vexed scholars mainly because, they say, it is almost impossible to design a study that filters out other variables and hones in on a causal relationship between tax increment spending and the economic activity that is associated with redevelopment. It is, in short, impossible to evaluate what would have been developed in the absence of redevelopment.

 "It's hard to do an in-depth study on a policy like redevelopment," said Jed Kolko, research fellow at the Public Policy Institute of California. PPIC's only major study of redevelopment came out in 1998 and did not find significant benefits from redevelopment. Studies in other states have been similarly inconclusive.

"The TIF area might grow or it might just be pulling growth from other areas," said Joan Youngman, senior fellow with the Lincoln Institute of Land Policy. "That's one of the concerns: If you're just moving development around instead of creating something new." Youngman also noted that much of the increase in TIF revenues are due to inflation, not proactive efforts to stoke development.

As well, even if redevelopment does legitimately create local multipliers that justify the investment of tax increment money, critics of redevelopment still note that when dealing with the statewide budget, everything is relative.

"I think you can say that (there are positive externalities) about almost everything, and certainly people do say that about other areas of the budget that are also slated for large reductions as well," said Jean Ross, executive director of the California Budget Project, a nonprofit watchdog organization. "We're looking at large cuts proposed to health programs that pull in, in some cases, 2-to-1 federal match. Those certainly have large multiplier effects."

This lack of certainty has meant that the debates over the governor's proposal fall largely along the lines of self-interest. City councils across the state have passed resolutions opposing the proposal while others – especially firefighters and teachers unions – have praised it as an appropriate windfall.

 "For the state continuing to subsidize a program that has mostly local benefits, it seems like a program that would be appropriate for realignment or shifting it down to the local level," said Mark Whitaker, senior fiscal and policy analyst at the Legislative Analyst's Office.

Counties are caught somewhere in the middle, according to Paul McIntosh, executive director of the California Association of Counties. Counties have frequently feuded with municipal redevelopment agencies over the fact that redevelopment can detract from county coffers.

 "There has been that natural rub and a great deal of skepticism on behalf of counties looking at cities that are using redevelopment….for projects that are, in the county's opinion, questionable redevelopment projects," said McIntosh. However, he also noted that 23 counties have their own redevelopment agencies, which the governor's proposal would eliminate alongside the city agencies.   

But the proponents of redevelopment argue that a statewide perspective is beside the point: redevelopment, they say, was designed as a catalyst for local development, especially in places that need it most desperately.

 "There is an inherent gap between the cost of construction and the rent that you can derive in those markets," said Simril.

 "Greenfield development is easier than infill development. Infill development requires incentives," said Chris Redfearn, director of the Graduate Program in Real Estate at USC. "There's a sense that agglomeration is more beneficial for society—that we all benefit from having cities organized in a certain way."

The nature of those benefits—or lack thereof—will likely be scrutinized in the coming weeks. Big-city mayors will be meeting with the governor to plead their case, and the Senate and Assembly budget committees will be holding hearings Feb. 3 and 7, respectively.

Contacts & Resources:

Amy Bodek, Long Beach Redevelopment Agency, (562) 570-6615

Jed Kolko, Public Policy Institute of California, (415) 291-4400

Philip Lanzafame, Chief Assistant Director of Community Development, City of Glendale, (818) 548-2005

Krista Noonan, Director of Communications, California Redevelopment Association, (916) 448-8760

Chris Redfearn, Director, USC Graduate Programs in Real Estate, (213) 821-1364

Jean Ross, Executive Director, California Budget Project, (916) 444-0500

Renata Simril, Manging Director, Jones Lang LaSalle, (310) 595-3660

Mark Whitaker, Senior Analyst, Legislative Analyst's Office, (916) 319-8335

Joan Youngman, Senior Fellow, Lincoln Institute of Land Policy, (617) 661-3016