State Battling Cities over Redevelopment Billions

Thursday, August 16, 2012

The state Legislative Analyst’s Office (LAO) warned the governor and lawmakers months ago that it wouldn’t be easy to wrest billions of dollars in redevelopment funds from cities after killing the local agencies in February.

The LAO was right. The governor expected to have collected $129 million for budget-strapped state coffers by now; it only has $6.7 million. On July 9, 400 cities were notified that they owed money to the state and if they didn’t pay up within a week, their tax revenues would be stopped.

California takes in about $45 billion in property taxes a year and up until this year about $5 billion of that ended up in the hands of tax-advantaged redevelopment agencies that gave local government direct access to scarce post-Prop. 13 revenues. In addition to the steady stream of money, redevelopment agencies also managed assets and financial obligations that take time to unwind.   

Resistance to Governor Jerry Brown’s push to end redevelopment was fierce last year. The agencies had been around since 1945 and over the years had been transformed into powerful instruments of local government. Agencies and cities sued to block the implementation of Assembly Bills 26 and 27―which together disbanded the agencies, but also allowed them an expensive way to retain part of their authority―and took their fight to the California Supreme Court.

They lost the fight and, to their dismay, saw the high court kill the option for them to stay partially in the game. Redevelopment appears to be effectively ended, although not everyone has given up the fight.

Bond insurer Syncora Guarantee filed a lawsuit in Superior Court in Sacramento on August 1 to block elimination of the agencies, claiming the move endangers bondholder investments. The insurer’s suit raises state and federal constitutional questions about contractural rights.

Redevelopment agencies had grown more controversial as the economy soured and revenues declined, with some questioning the types of projects being funded. A program that had been envisioned as a way for communities to fight blight was found to have no consensus definition of what constituted blight. Consequently money was used for questionable projects, including golf course renovations.

Agencies were regularly plagued by mismanagement, political manipulation and outright fraud. But they also finished countless projects that fulfilled the program’s mission and served communities well.

The first stage of redevelopment’s unwinding involves shifting $3.1 billion to schools. The administration set an early target of $685 million but the LAO is predicting it may get half that. Or a third. That would either put the state general fund on the hook for the money or the schools wouldn’t get it at all.

San Diego coughed up $89 million “under protest,” the Orange County city of Westminster paid $9 million, also “under protest,” and the tiny city of La Mirada returned $64,000.

But Stockton, which declared bankruptcy in June, is withholding $2.5 million. Fifteen other cities haven’t paid anything either. Some have no intention of paying. 

Mission Viejo ($2.6 million) and El Cerrito ($1.7 million) both claim the state has miscalculated their obligations and they don’t owe anything. They might be on to something. The city of Pittsburg paid $3.3 million, but got to keep $7.3 million when it proved the state had made a miscalculation.

–Ken Broder


To Learn More:

Bond Insurer Sues California over Development Agencies (by Tim Reid, Reuters)

Cities Refuse to Hand over Redevelopment Money (by Chris Megerian, Los Angeles Times)

State Duns Cities for Millions of Dollars (by Wyatt Buchanan, San Francisco Chronicle)

Cash-Strapped California Cities Repay Development Funds (by Ronald Grover and Jim Christie, Reuters)

Costa Mesa Reluctantly Agrees to Pay $1.4 Million in Tax Funds (by Christine Mai-Duc and Chris Megerian, Los Angeles Times)

The 2012–13 Budget: Unwinding Redevelopment (State Legislative Analyst’s Office)

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