The party’s over, but the hangover goes on for California’s redevelopment agencies . . . and the state’s development industry

The California Supreme Court slipped in an earthquake-of-a-decision just before the new year, effectively ending redevelopment and tax increment financing (TIF) in the state that invented it.  The case, California Redevelopment Association v. Matosantos, upheld the State Legislature’s power to eliminate redevelopment agencies.  The case also struck down a proposed money-sharing arrangement that would have permitted redevelopment agencies to pay-their-way back into existence.  Ironically, it was a proposition floated by redevelopment agencies and passed by voters to keep the State from raiding redevelopment coffers that nixed the latter deal.  Ken Stahl had a great post on this blog a couple days ago that lays out the details. 

I wanted to weigh in with some new year’s prognostication based on my experience in private practice in California.  My bet:  redevelopment returns in 2012, but with strings attached.  Here's why. 

Much of the coverage of this case has focused on the public side—in particular, noting that this was really a fight about money, and the byzantine cost-sharing arrangements between the State and its local governments that have arisen since Prop 13.  That is certainly true.  But let’s not forget the beauty of TIF:  it lets local governments obtain money today to pay for infrastructure improvements necessary to spur private development tomorrow.  Without TIF, especially in a post-Prop 13 world where local government funding mechanisms have been systematically hamstrung, it’s hard to imagine how California's local governments will be able to finance any—and I mean any—medium- or large-scale infrastructure projects.  The effect:  it’s hard to imagine how any—and I mean any—medium- or large-scale private development projects goes forward in California without TIF.  The loss of redevelopment agencies then, isn't just bad news for cities; it could mean substantial uncertainty, and potentially some very hard times, for the development industry in California. 

For instance, back in February, 2011, San Francisco’s Planning Director, John Rahaim, noted that without TIF, “the significant infrastructure needs of [San Francisco’s] large-scale projects could remain unmet and the ability to move forward with development in these areas would be questionable for the foreseeable future.”  Rahaim wasn’t just talking about any old project, he was talking about every single major project going on in San Francisco:  Treasure Island, the new Transbay Terminal, the massive UCSF project at Mission Bay and Lennar’s massive 500-acre, 12,000 home Hunter’s Point project, to name a few.  Rahaim gave the example of Treasure Island:  “without the proposed seismic stabilization of Treasure Island,” which was to be paid for with TIF, “meaningful development there is not possible.”  Rahaim’s warnings ring true for every city in the State.

Jeopardizing so much development would be a long-term disaster, and one I don’t believe the State, or any of its local governments, want to see come to pass in this economy.  That’s why I don’t believe redevelopment is dead in California, at least not for the long-term.  It's not just the governments that care; it's the development industry that cares, too.  Keep in mind that the be-header of redevelopment, Governor Jerry Brown, was once one of the most sophisticated users of redevelopment, and he surely understands its importance in California’s development economy.  As mayor of Oakland, Brown more than doubled the land mass of redevelopment areas in the city to lure developers; today, over half of the city’s land mass is in a redevelopment zone as a result of Brown’s efforts (well, it was until last week).

It is perhaps because the Governor understands redevelopment so well, that he is willing to take it on, be-head it for now, if only to put it back together again when the Legislature is in session, in a form that requires more revenue sharing, and more money for the State’s embattled school districts.

It will be interesting, too, to see if any other states decide to take on their redevelopment agencies in these cash-strapped times.  As Richard Briffault’s excellent article, The Most Powerful Tool:  Tax Increment Financing and the Political Economy of Local Government, 77 U. Chi. L. Rev. 65 (2010), notes, TIF began in California in 1952.  In 1970, there were just 26 TIF districts in California.  By the early 1990s, 56 percent of cities in the United States with population over 100,000 had used TIF; today, every state but Arizona authorizes TIF.  Surely other governors are watching how the redevelopment battle will unfold in California, and what it might mean for finances in their own states.

Stephen Miller