Court to Redevelopment Agencies: Drop Dead! (Or, It's TKO for TIF in CA)

Happy Holidays to all and best wishes for a great new year! I've been on blog hiatus (blogatus? blogcation?) but simply had to report this piece of news. Two days ago the California Supreme Court put a huge lump of coal in the Christmas stocking of California's very naughty redevelopment agencies, issuing an epochal (or perhaps apocalyptic) but not entirely surprising decision that puts an end to redevelopment in the state of California, probably the state where redevelopment has hitherto been most popular. As of 2008, there were 395 redevelopment agencies in California, holding $12.9 billion in assets in 759 redevelopment zones. Now, after the court's ruling, they are all history. The court upheld a state law abolishing all California redevelopment agencies, and struck down a compromise bill that would have permitted redevelopment agencies to stay in business if they shared some of their tax revenue with other local government agencies, mostly school districts. Forlorn city leaders are already predicting all sorts of doomsday scenarios for cash-strapped California cities. Critics of redevelopment such as the Institute for Justice, are, as you can imagine, more pleased with the result. They must take especial delight in knowing, as I explain below, that redevelopment agencies basically brought this plight on themselves. Critics will be less pleased to learn that redevelopment is almost certainly not really dead, and will likely be back in a form hardly less objectionable to its critics than the original. According to this great recap from California Planning & Development Report (an excellent resource, by the way), this lawsuit was never about the merits of redevelopment itself, but was just the beginning of a complex negotiation over who is going to control the prized redevelopment money.

Much more below...

Redevelopment in California

California redevelopment in a nutshell: a local government agency known as a "redevelopment agency," which is usally just the city council of a given city, declares a part of the city to be "blighted" and hence in need of redevelopment. The blight designation enables the agency to declare the area a redevelopment zone, which gives the agency two hugely significant powers: one, the power to condemn property in the zone by eminent domain; and two, the power to float tax-free bonds to finance the redevelopment, secured by the "incremental" property tax revenue that the redevelopment of the area is supposed to generate. This tax increment is earmarked to pay debt service on the bonds and otherwise to refurbish the redevelopment zone. Hence, "tax-increment financing" (TIF).

The "Blight that's Right"

As many of you know, redevelopment has had its critics. Eminent domain, and specifically the use of eminent domain to facilitate redevelopment, has probably faced the loudest and most successful criticism -- criticism that crystallized in the opposition to the U.S. Supreme Court's widely reviled decision in Kelo v. New London. From a basic fairness standpoint, critics have asked whether government should be able to take your property and give it to someone else (usually, a wealthy real estate developer) simply because government thinks it can make a better use of the property than you can. This is an especially powerful argument because government agencies have so frequently failed to make good use of the properties they have condemned.  Many high-profile redevelopment projects, including New London's, have been abyssmal failures even on their own terms -- failing to bring in the jobs and tax revenue they promise and often leading to further deterioration of the area. And even though landowners are compensated for the fair market value of condemned property, they are not compensated for the property's sentimental or "subjective" value. Then there is the impact of eminent domain on existing neighborhoods, many of which have been gashed or detroyed by redevelopment, and the fact that minorities and the poor have disproportionately faced displacement to make way for redevelopment projects.

The "blight" component of redevelopment law has also been criticized. The blight standards in California are vague and easily manipulated, and redevelopment agencies often seek "the blight that's right" -- an area that can plausibly be called "blighted" but is sufficiently economically healthy that it has reasonable prospects for revitalization and the increased tax revenue to pay off the bonds.

Follow the Money, People

These are all legitimate, perhaps compelling, criticisms of redevelopment in California. But don't be deceived: they had absolutely nothing to do with why the state sought to abolish redevelopment. Instead, the dispute was all about who controls the redevelopment money, and where that money goes. One of the more controversial aspects of TIF is that, because it earmarks the incremental tax revenue to be funnelled back into the TIF district, it thereby enables municipalities to make sure that property tax revenue does not go to other local governments that would ordinarily be entitled to a piece of that revenue, including counties and school districts. (Thus explaining why many county leaders are ecstatic about the court's ruling). For California cities, this is an especially important feature of TIF because of something called Proposition 13, which drastically limits the pool of property tax revenue available to local governments. As the court noted in the ruling, Proposition 13 led to an intensified zero-sum struggle between California municipalities for "their slices of a greatly shrunken pie." TIF gave cities a way of keeping this "shrunken pie" all to themselves, rather than having to share "slices" with other local governments. Needless to say, cities thus had a great incentive to use TIF specifically for this purpose, rather than to engage in actual redevelopment. And because the only limitation on the use of TIF is the "blight" finding which, as I said, is extraordinarily manipulable, cities went bonkers with TIF. Indeed, there have been instances in which cities have designated their entire downtown, even their entire city(!) as a redevelopment zone simply in order to protect their tax revenue against redistribution to other local governments.

The legislature did attempt to rein in this practice by requiring that a percentage of redevelopment money be funnelled to affordable housing, but an expose in the Los Angeles Times last year showed that cities routinely failed to fulfill this requirement. This was one of the precursors to the recent legislation killing off redevelopment agencies.

The other major precursor was, of course, the fiscal crisis that hit California in 2008. The state legislature obviously saw the treasure trove of redevelopment money as a way of dealing with its dire fiscal problems. Because redevelopment agencies are, like other local governments, state creatures, there was nothing to stop the legislature from simply taking redevelopment money to plug holes in its budget, and the state legislature made clear that's exactly what it intended to do.

Proposition 22: It Seemed Like a Good Idea at the Time

In response to the threats from the state, the League of California Cities qualified a measure for the ballot in November 2010 that would protect local redevelopment money from being forcibly redistributed by the state. The measure passed, but in an ironic twist, Prop 22 proved not to be redevelopment's savior, but its undoing.

In that same November 2010 election, a guy named Jerry Brown was elected governor. One of his first steps was to declare that if redevelopment agencies would not give up their money, then Brown would simply abolish the redevelopment agencies entirely. Although that would apparently go against the spirit of Prop 22, the measure did not explicitly say anything like: "Oh by the way, you can't abolish redevelopment to get our money either." The bill abolishing redevelopment agencies was passed, along with another, compromise bill that allowed redevelopment agencies to stay in existence if they gave up some of their money to other local governments.

The lawsuit that led to the recent decision challenged the constitutionality of both bills under Prop 22 -- the first because it would seem nonsensical for the Constitution to protect redevelopment money unless it implicitly protected redevelopment agencies from being abolished, and the second because it required forcible redistribution of redevelopment money in violation of the plain language of Prop 22. The outcome of the case was the nightmare scenario for redevelopment: the court held the first bill was consistent with Prop 22, and the second was not. As a result, redevelopment is dead!

What made Proposition 22 so stupid (I voted against it, for the record) was that despite all the real objections to redevelopment, there was no way in heckfire that the California governor or legislature would ever have done anything serious to curtail redevelopment as long as redevelopment moolah was flowing into the state's coffers. (and voters had already declined to enact a meaningful anti-Kelo measure at the ballot box, so the initiative was also off the table). Once cities severed the umbilical cord between redevelopment money and the state, redevelopment was no longer untouchable.

The King is Dead, Long Live the King! Wait, who's the king again? I'm the king. No, you're not. I'm the king!

The fact that the real debate here was over money, and not redevelopment, means that redevelopment is very likely not really dead. There is money to be made in redevelopment, especially by powerful lobbying interests like real estate developers and, of course, the cities. The state of California is in no position to be turning down an opportunity to make some money. In all likelihood, the legislature sees the court's ruling as a very big bargaining chip it can use to change the way redevelopment agencies do business so the state gets more money. It is noteworthy in this regard that the court's ruling was handed down a bit earlier than expected, giving the legislature time to mull its next move before the next legislative session begins at the start of the year.

It sure would be nice though, wouldn't it, if the state used this opportunity to seriously re-evaluate redevelopment on its merits? There is word that perhaps the state will tighten up the blight definition. How about actually enforcing the requirement that some redevelopment money go to affordable housing? How about some kind of audit into redevelopment's real costs and benefits? I suspect we won't get a real soul-searching evaluation of redevelopment, and redevelopment will be back in something like its original form.  But we academics exist in order to dream -- which is why we may be the next thing on the chopping block.  Happy Holidays!

Ken Stahl