The budget crisis in Sacramento has led Gov. Gray Davis to propose a wide-ranging set of spending cuts, tax increases and revenue shifts — including reductions in redevelopment funds and tax revenue allocated to cities and counties — that could have a significant effect on land use planning. Although the Davis administration does not appear to be making deficit-reduction proposals based on their land use implications, there is no doubt the recommendations would have a major impact on the state's growth if they were implemented. As is usual when Sacramento bleeds red ink, local governments are lobbying to protect their funding. The Davis administration has put forth proposals that would cost cities and counties at least $5.1 billion during a 17-month period beginning this month. And the reductions would increase over time under the governor's plan. The Legislature's Democratic leadership, however, appears willing to challenge the governor and to protect the largest sources of local government funding at stake. No one pretends to know how the budget will play out. As of late January, $8 billion separated the Department of Finance's and the Legislative Analyst's Office's estimates of the budget deficit. "We're really early in this," one Capitol aide emphasized. "You're going to see a lot of proposals. It [the size of the deficit] sort of creates an opportunity for real change." Among the Davis budget proposals that could affect planning and development are: • Requiring local redevelopment agencies to pass through property tax increment to schools. This administration proposal would shift about $1.3 billion annually — about half of all redevelopment property tax increment in California — from redevelopment agencies to schools, according to the California Redevelopment Association (CRA). • Eliminating the state's "backfill" of vehicle license fees to local governments. In 1998, the state cut vehicle license fees (VLF) — which go to cities and counties — by two-thirds. But the state backfilled the local revenue loss with state general fund money. Eliminating the backfill would cost cities and counties about $3 billion annually. Assembly Speaker Herb Wesson (D-Culver City) has proposed returning licensing fees to their 1998 level. But there could be strings attached to the money, such as requiring a local government to have a certified housing element or meet housing production goals. • A new reliance on revenue from American Indian casinos that could lead to dramatic increases in the size and number of casinos. • Elimination of state general fund support for transportation projects. This proposal would essentially kill the Transportation Congestion Relief Program that the governor himself introduced to great fanfare in 2000 — and would throw into limbo more than a 100 projects for which money had earlier been promised. • Elimination of the Williamson Act backfill to counties. At least some counties would likely discontinue the program, which provides property tax breaks to landowners who agree not to develop agricultural land. While interest groups are protecting their turf during what is expected to be a prolonged budget battle, just about everyone agrees that the size of the deficit forces difficult choices. "It would be nice to know how he arrived at the cuts he suggested," said Sande George, lobbyist for the California Chapter of the American Planning Association. "Some of these things seem odd." The size of the deficit Since he was re-elected in November, Davis has repeatedly emphasized the budget deficit's scope. The governor and the Department of Finance have lumped together the current budget year deficit with the projected 2003-04 fiscal year gap, an unusual approach that magnifies the problem. In December, the governor pegged the two-year deficit at $34.6 billion — compared with the LAO's estimate of $21.1 billion released only one month earlier. Most of the state general fund pays for education and social services. So, if the governor's estimate is correct, the Legislature could eliminate every state program, including the prison system and the universities, and still not balance the books, according to the California Budget Project. Republicans charged that the governor inflated the size of the deficit in an attempt to make tax increases more appealing, a charge the Democratic governor has denied. In mid-January, the LAO reviewed the governor's budget and boosted its estimate of the two-year deficit to "the $26-plus billion range." The LAO, however, downplayed the difference. "Regardless of which baseline is used," the LAO report states, "it is extremely important that the Legislature take timely and meaningful action to address the budget shortfall, which by any standard is extremely daunting, and will only get worse if left unaddressed." This deficit is unusual because California is not in a major recession, said Fred Silva, an analyst with the Public Policy Institute of California. State budget deficits of the early 1990s, early 1980s and throughout the 1930s were directly tied to general economic distress. There are three ways to solve the problem — raise taxes, cut spending and carry a debt. The administration has proposed all three, with the biggest emphasis on cuts. But the administration also proposes carrying over a deficit of $5.8 billion from this year to next. That is equal in constant dollars to the deficits that the state carried during the Depression, Silva noted. Redevelopment under fire The state's first move to get at redevelopment funding came during the early 1990s, when Sacramento ordered two shifts of redevelopment funds to schools. The shifts totaled $270 million over two years, but were not permanent. For the current fiscal year, lawmakers shifted $75 million from redevelopment agencies to schools. But the big hit is part of the mid-year budget adjustments announced in December, when the governor told redevelopment agencies to send all of their "unencumbered" housing funds to Sacramento. The Department of Finance said redevelopment agencies were holding $500 million in housing set aside money for which they had no plans. Redevelopment agencies and housing advocates cried foul, but the mid-year proposal was only the beginning. The administration's 2003-04 fiscal year proposal called for shifting $250 million of property tax increment from redevelopment agencies to schools, and increasing that amount every year (the administration did not define the period) until it reached the full amount diverted by redevelopment agencies from schools. "There seems to be another agenda here," said John Shirey, executive director of the CRA. "And I think the agenda is to considerably reduce redevelopment activity in California." Noting that the governor has asked for everyone to share the pain, Shirey said the proposed redevelopment changes "don't represent in any way a proportional share of the pain that I think probably has to be shared. It ends up taking half of the increment that redevelopment agencies currently receive." The proposal to take the redevelopment agencies' low- and moderate-income housing set aside money received a cool reception during budget hearings in the Legislature. The administration insisted that any housing money not encumbered — that is, legally obligated — as of December 1, 2002 was available for the state's taking. But redevelopment agencies conteded that most of the money in their low- and moderate-income housing accounts was designated for projects. Some of the money would not be legally encumbered, however, until the very end of the pre-construction process. As of January 15, redevelopment agencies had $632 million in low- and moderate-income housing funds, according to the CRA. Of that amount, $489 million has been committed to projects through binding agreements. Agencies have committed another $318 million without formal agreements — meaning the agencies have overcommitted by $175 million. "Redevelopment money is the first in and the last in," said Shirey, who noted that affordable housing projects take years to put together. The California Coalition for Rural Housing estimated that the administration's proposal would halt nearly 50 projects involving construction, acquisition or rehabilitation of about 1,650 units. Housing advocates argued that no constitutional basis exists for the state to take the money. And a briefing paper for a joint hearing of the Senate housing and local government committees suggested the administration's proposal actually rewarded communities that have dragged their feet on meeting their affordable housing obligations. The same briefing paper questioned the rationale for shifting tax increment to schools on a permanent and growing basis, and how local agencies would meet bond repayment obligations. "While some cities may still seek the eminent domain and bonding powers of redevelopment agencies, there would be little to no fiscal benefit to property tax increment financing if the schools' share permanently disappears. Community revitalization of California's most blighted neighborhoods would slow and deposits to L&M [low- and moderate income housing] Funds would drop drastically," the report states. The briefing paper presents a number of options, including a temporary moratorium on the expansion of redevelopment activities, extending redevelopment deadlines by a year to let agencies recoup a one-time shift, and requiring underlying cities or counties to guarantee an agency's bond payment. League of California Cities' spokeswoman Megan Taylor said the cuts to redevelopment make no sense when the governor's stated priority is "jobs, more jobs and even more jobs." Redevelopment, she said, "is one of the most important job-creation engines in the state." Vehicle license fees The state's backfill of VLF amounts to 5% to 25% of city and county general fund revenues. Eliminating the money is not an option, said leaders of the California State Association of Counties (CSAC) and the League of California Cities. "What this budget proposal is saying is that local programs are the lowest of priorities," CSAC Executive Director Steve Szalay said. The League and CSAC has found quick allies in the Legislature. Speaker Wesson and Senate Majority Leader Don Perata (D-Oakland) said the state must fulfill the promise it made in 1998, when Sacramento said the fee reduction would not harm local governments. However, at least some lawmakers see the situation as a chance to put teeth in the housing element law for the first time. Until now, the VLF backfill has been 100% discretionary revenue for local governments. But Sen. Joseph Dunn (D-Santa Ana) suggested tying VLF allocations to a city or county's adoption of a housing element certified by the state Department of Housing and Community Development. Sen. Tom Torlakson (D-Pittsburg) proposed that 25% of VLF revenue be based on adoption of a valid housing element. In the future, even more of the VLF revenue could be tied to housing element compliance, as well as to affordable housing production, Torlakson suggested in a January 15 memorandum to other lawmakers. Cities and counties spent the last two years successfully fighting a Dunn bill to link revenues to housing policies and production. "The last thing we need is one more string attached to a fund," said CSAC President and Sonoma County Supervisor Tim Smith. "We can't ignore other services, such as public health and safety." Gambling on the future A major new tax contained in the proposed 2003-04 budget is a $1.5 billion levy on Indian casinos. Currently, tribes with casinos pay about $100 million into a fund that goes to tribes without casinos and for other purposes, according to the LAO. The Department of Finance has proposed a tax similar to those in New York and Connecticut, where the state gets up to 25% of the profits from slot machines. The proposal arises while the administration is starting to renegotiate the three-year-old gaming compact with the tribes. A deal might be possible because tribes want the state to lift the existing cap of 2,000 slot machines per casino. During a speech in mid-January, Davis said he "would not be rigidly opposed to lifting the cap." Slot machines are the big money makers in casinos, so tribes have chafed at the 2,000-machine limit. Raising the ceiling could result in bigger casinos. It is unclear whether the state could get $1.5 billion without allowing more casinos. Under the current compact between the state and the tribes, local government has no land use regulatory authority over the casinos. That, too, could be subject to renegotiation. In the area of transportation, the administration has proposed major reductions this fiscal year and next. The biggest cut is in the Traffic Congestion Relief Program (TCRP), which provides general fund support for transportation projects. The administration proposed cutting the TCRP by $100 million this fiscal year and $1.6 billion during 2003-04. In response to the proposals, the California Transportation Commission in December suspended all allocations except for safety, emergency and seismic projects "to provide an opportunity for the Commission to work with interested parties to develop appropriate action." The newsletter Political Pulse reported that all light-rail and freeway projects are in jeopardy. The budget does provide money to complete an environmental impact report on the proposed high-speed rail system, but the administration proposes rolling the High Speed Rail Authority into the Caltrans bureaucracy. While the cuts to transportation have big price tags, the elimination of $39 million in Williamson Act subventions could have greater land use implications. Under the Williamson Act, owners of agricultural land get property tax breaks if they agree not to develop their property for 10 years. Under the "Super" Williamson Act, the tax breaks are greater for a 20-year assurance of no development. Some counties also offer the tax breaks for protection of open space. The state backfills the lost property tax to counties. Elimination of the backfill, which was proposed last year, would force some counties to drop the Williamson Act program at a time when both Democrats and Republicans say they want to protect farmland, said Brian Dahle, president of the Regional Council of Rural Counties and a Lassen County supervisor. Moreover, Williamson Act contracts are good for 10 years, or 20 years in the case of the Super Williamson Act. Even if a county cancels a contract, the county still loses property tax for the rest of the contract period, Dahle said. "There is no way we are going to be able to come up with the money," he said. "That's really crucial to us." The APA's George questioned how the Williamson Act cut could match last year's AB857, which made protection of farmland a state priority. During his state of the state speech, Davis promised to speed the spending of bond funds. But analysts say the administration will not necessarily put more money into the system because the proposed budget uses bond funds to offset general fund reductions in numerous programs ranging from farmworker housing to roads to environmental restoration. Contacts: John Shirey, California Redevelopment Association, (916) 448-8760. Sande George, California Chapter, American Planning Association, (916) 443-5301. Fred Silva, Public Policy Institute of California, (415) 291-4450. Supervisor Tim Smith, California State Association of Counties, (707) 565-2241. Supervisor Brian Dahle, Regional Council of Rural Counties, (530) 251-8333. Legislative Analysts Office website: Department of Finance state budget website: California Budget Project website: