Published by Municipal Officials for Redevelopment Reform (MORR), through a grant from the Fieldstead Institute, Irvine, CA.
City Councilman, City of Fullerton
Fullerton, CA     Ph.: (714) 871-9756
Any part of this book may be reprinted for public education purpose
For additional copies, call, write or FAX:
Municipal Officials for Redevelopment Reform (MORR)
214 N. Yale Ave., Fullerton, CA 92831
PH.: (714) 871-9756     FAX (714) 992-6627
Web Page: www.redevelopment.com
Table Of Contents
Preface to the Second Edition
1. The Unknown Government
2. Blight Makes Right
3. Tax Increment Diversion
4. Debt: Play Now, Pay Later
5. Corporate Welfare
6. Predatory Redevelopment: Sales Tax Shell Game
7. The Myth Of Economic Development
8. Eminent Domain For Private Gain
9. The Redevelopment Establishment
10. What You Can Do
11. Reclaiming Redevelopment Revenue
When first published in October, 1996, Redevelopment: The Unknown Government was intended to be a concise, user-friendly guide for both concerned citizens and elected officials. The tremendous response has surpassed our most hopeful expectations. Requests have come from every corner of California, quickly exhausting our initial printing of 3,000 and our reprinting of 5,000 copies in May, 1997.
From the State Capitol to the city halls, from news reporters to civic leaders, Redevelopment: The Unknown Government has become an influential resource for fiscal reform.
Of course, the redevelopment establishment is not pleased. The California Redevelopment Association's monthly newsletter created the caustic acronym "RUG" in referring to Redevelopment: The Unknown Government, but they cannot ignore its influence. Their only factual criticism has been the claim that we exaggerated redevelopment debt by including outstanding interest with principal. Only principal should be considered, they say, when looking at redevelopment debt. Our text and graphs, however, make it clear that our figures include both principal and interest, with numbers lifted directly from the State Controller's Office.
The CRA's comments have, however, caused us look at debt in a new way. While long-term interest payments will consume an ever-greater share of property taxes, the principal alone could be paid off from existing agency assets. Avoiding future interest, debts of all agencies could be paid off now, thus freeing up property taxes for real public needs.
The Second Edition's major change is a new chapter--Chapter 11--which proposes to pay off redevelopment debt by liquidating assets, and freeing $1.5 billion in annual tax increment for public schools and local government. Property taxes now subsidizing commercial development would fund our children's education and public safety.
In addition, graphs have been updated and the latest redevelopment bills in the legislature have been added. New Tables VIII, and IX have been added to show the impact of using redevelopment money for public education. A more concise bibliography has also been added.
Through its publications and conferences, Municipal Officials for Redevelopment Reform (MORR) has helped enable citizens to challenge redevelopment power, and emboldened public officials to look beyond narrow special interests to see a broader public constituency. Our next semi-annual conference will be October 10, 1998, at the San Francisco Airport Westin Hotel. Call 714-871-9756 for details.
Many thanks to State Controller Kathleen Connell, who provided much of the information in this book through her office's annually published reports. Thanks to Michael Dardia of the Public Policy Institute, whose Subsidizing Redevelopment in California (1998) is an exhaustive analysis of the true cost of redevelopment. Special thanks to Sacramento Bee columnist Dan Walters and Riverside Press-Enterprise investigative reporter Dave Danelski, for making redevelopment more understandable to the general public.
Thanks, too, to the many friends and supporters whose insights, dedication and encouragement have made this book possible.
Redevelopment thrives on public ignorance. Both lay people and elected officials are often intimidated by the complexity of redevelopment law, its specialized jargon and mind-numbing financial figures. Redevelopment is, however, easy to understand, if presented in an organized way and using plain English. From understanding comes knowledge. From knowledge comes power-the power to change.
| ||Chris Norby|
| ||Fullerton, CA|
| ||July, 1998|
There is an unknown layer of government in California, which few understand.
This unknown government currently consumes 8 percent of all property taxes statewide, $1.5 billion in 1997. It has a total indebtedness of over $41 billion.
It is supported by a powerful Sacramento lobby, backed by an army of lawyers, consultants, bond brokers and land developers.
Unlike new counties, cities and school districts, it can be created without a vote of the citizens affected.
Unlike other levels of government, it can incur bonded indebtedness without voter approval.
Unlike other government entities, it may use the power of eminent domain to benefit private interests.
This unknown government provides no public services. It does not educate our children, maintain our streets, protect us from crime, nor stock our libraries.
It claims to eliminate blight and promote economic development, yet there is no evidence it has done so in the half century since it was created.
Indeed, it has become a rapidly growing drain on California's public resources, amassing enormous power with little public awareness or oversight.
This unknown government is Redevelopment.
It is time Californians knew more about it.
State law allows a city council to create a redevelopment agency to administer one or more "project areas" within its boundaries. An area may be small, or it can encompass the entire city.
These project areas are governed by a redevelopment agency with its own staff and governing board, appointed by the city council.
Thus, an agency and city may appear to be one entity. Often city councils appoint themselves as agency members, with council meetings doubling as redevelopment meetings. Legally, however, a redevelopment agency is an entirely separate government authority, with its own revenue, budget, staff and expanded powers to issue debt and condemn private property.
Out of California's 471 cities, 359 have created redevelopment agencies. No vote of the residents affected was required. No review by the Local Agency Formation Commission (LAFCO) was done.
Californians often confuse redevelopment with federal "urban renewal" projects typical of large eastern cities of the 1940s-'60s. Sadly, the methods and results are often similar. Yet redevelopment is a state-authorized layer of government without federal funds, rules or requirements. It is entirely within the power of the California legislature and voters to control, reform, amend or abolish.
All a city need do to justify creation or expansion of a redevelopment area is to declare it "blighted".
This is easily done. State law is so vague that most anything has been designated as "blight". Parkland, new residential areas, professional baseball stadiums, oil fields, shopping centers, orange groves, open desert and dry riverbeds have all been designated as "blight" for redevelopment purposes.
To make a finding of blight, a consultant is hired to conduct a study. New redevelopment areas are largely driven by city staff, who choose the consultant with the approval of the city council. Consultants know their job is not to determine if there is blight, but to declare blighted whatever community conditions may be.
Blight has been discovered in some of California's most affluent cities. Indian Wells, a guard-gated community with an average $210,000 household income, has two separate redevelopment areas.
Understandably, many homeowners fear an official designation of blight will hurt property values. Small property owners fear redevelopment's use of eminent domain. Building permits can also be denied if an applicant does not conform precisely to the redevelopment plan. So, local citizen groups often challenge the blight findings in court. Others are challenged by counties and school districts which stand to lose major property tax revenue if a new redevelopment area is created.
Recent state legislation has tightened definitions of blight, particularly those involving open and agricultural land. Yet, enforcement is lax, legal challenges costly and most agencies were already created long before recent reform attempts.
Once the consultant's blight findings are ratified, a city may create or expand a redevelopment area. Voter approval is never asked.
Citizens can force a vote by gathering 10% of the signatures of all registered voters within 30 days of the council action. Where this has occurred, redevelopment nearly always loses by wide margins (rejected in Montebello by 82%, La Puente by 67%, Los Alamitos by 55%, Half Moon Bay by 76%, for example).
The requirements to force a vote are difficult to meet, however. In the vast majority of cases, a popular vote is never held. Rather, the consultant's findings of blight are quickly certified. A law firm is then retained to draw up the paperwork and defend against legal challenges.
A growing number of law firms specialize in redevelopment. Like the consultants, they are members of the California Redevelopment Association, a Sacramento-based lobby. They are listed in the CRA's directory and advertise in its newsletter. Their livelihood depends on the aggressive use of redevelopment and increasingly imaginative definitions of blight.
To eliminate alleged blight, a redevelopment agency, once created, has four extraordinary powers held by no other government authority:
Once a redevelopment project area is created, all property tax increment within it goes directly to the agency. This means all increases in property tax revenues are diverted to the redevelopment agency and away from the cities, counties and school districts that would normally receive them.
While inflation naturally forces up expenses for public services such as education and police, their property tax revenues within a redevelopment area are thus frozen. All new revenues beyond the base year can be spent only for redevelopment purposes.
In 1997, this revenue diversion was just over $1.5 billion statewide. This means 8% of all property taxes was diverted from public services to redevelopment schemes. Even with modest inflation, the percent taken has roughly doubled every 15 years. At current trends, redevelopment agencies will consume 64% of all statewide property taxes by 2040!
If redevelopment were a temporary measure, as advocates once claimed, this diversion might be sustainable. Once an agency is disbanded, all the new property tax revenues would be restored to local governments. Legally, agencies are supposed to sunset after 40 years, but the law contains many exceptions and is easily circumvented. Of 359 redevelopment agencies created by cities statewide, only four have ever been disbanded.
Finally, hard-pressed counties are well aware of the cost of this diversion, and often go to court to challenge new redevelopment areas. In 1994, the Los Angeles County Grand Jury released its exhaustive report on redevelopment, calling for more public accountability and citing its negative effects on county services. The Los Angeles County Fire Dept. stated that it lost $16 million to redevelopment diversions in 1994 alone.
School districts have also responded with lawsuits, sometimes forcing "pass-through" agreements to restore part of their lost revenue. They have levied new builder fees on residential development, thus passing the burden of redevelopment on to new renters and homeowners.
Cities themselves are impacted by redevelopment diversions. That part of the tax increment that would have gone to the cities' general fund (averaging 11%) is lost, and can now be used only by redevelopment agencies. Thus, there is now money to build auto malls and hotels, but less for police, fire fighters and librarians. Cities cannot use redevelopment money to pay for operations, public safety or maintenance, which are by far the largest share of municipal budgets.
It is troubling enough that redevelopment agencies divert property taxes from real public needs. But that is only part of the story.
By law, for a redevelopment agency to begin receiving property taxes, it must first incur debt. In fact, property tax revenues may only be used to pay off outstanding debt. Pay-as-you-go is not part of redevelopment law or philosophy.
Debt is not just a temptation. It is a requirement.
That is why redevelopment hearings inevitably feature three groups of outside "experts": the blight consultants, the lawyers, and the bond brokers who help the agency incur debt so it can start receiving the tax increment.
The bond brokers and debt consultants are easily located. They are listed in the California Redevelopment Association Directory. From city to city they phone, fax, travel and make presentations to sell additional debt. Naturally, redevelopment staffs are supportive. More debt means job security and larger payrolls.
Currently, total redevelopment indebtedness in California tops $41 billion, a figure that is doubling every five years (Table II).
Debt levels vary widely among agencies, but all must have debt to receive the tax increment. Table III shows those cities with the highest total redevelopment indebtedness. Debt levels have no relation with actual blight, as many affluent suburban towns have higher indebtedness than older urban-core cities.
Table IV shows outstanding indebtedness per-capita.
This is the amount of per-capita property taxes that must be paid to cover the principal and interest of existing debt. This amount must be diverted from the cities, counties and school districts before these redevelopment agencies can shut down and restore the property taxes to those entities.
One would expect that if redevelopment agencies had been successful in eliminating "blight," they would now be scaling back their activities and reducing debt. In fact, redevelopment indebtedness is growing rapidly, draining investment money that could have gone to buy other government bonds or into the private sector.
There are two reasons redevelopment debt is so attractive: First, redevelopment agencies may sell bonded debt without voter approval. Unlike the state, counties and school districts, the debts need not be justified to, or approved by, the taxpayers. A quick majority vote by the agency is all that is needed.
Second, bond brokers love to sell redevelopment debt. The commissions are high and the buyers plentiful. Since the debt is secured against future property tax revenue, they are seen as secure and lucrative. If an agency over-extends, then surely the city's general fund will cover the debts.
Most agencies project that ever-rising property tax increments will cover future debt service. During the 1990s, however, much of California's commercial and residential real estate declined in value. Property owners sought and received lower assessments, creating a crisis for those agencies banking on ever-rising property taxes. Some cities raided their general funds to service redevelopment debt.
Legally, it is unclear whether the state or individual cities are liable to bail out actually bankrupt agencies, but the expanding bubble of redevelopment debt must be a concern to all.
Redevelopment agencies typically issue new bonds to pay off existing ones, thus rolling over and compounding interest payments. This cannot go on indefinitely. Eventually, all existing debt must be paid with real tax dollars. Every dollar that must pay for this debt is a dollar that will not be spent on police, education and other pressing public needs.
The only way to avoid these ballooning interest payments is to stop issuing new debt and pay off existing principal as soon as possible. Chapter 11 explains exactly how this could be done.
|Top 10 Cities by Total Redevelopment
(Includes principal and interest of all outstanding debt)
| || || |
|Top 10 Per-Capita Redevelopment
Indebtedness by City
(Includes outstanding principal and interest)
| ||City/Agency||Population||TOTAL Redevelopment
|37,382.|| ||Indian Wells||3,100||115,886,139.|
|14,368.|| ||Sand City||200||2,873,567.|
|SOURCE:California State Controller's Office; Fiscal Year 1993-94|
The consultant has found the blight. The lawyers have drawn up the papers and defended the agency from suits. The bond brokers have created the debt, to be paid by the tax increment that will surely flow.
Now should be the time to begin eliminating "blight," as required by state law.
In reality, very little is ever heard again about blight. Redevelopment agencies are driven primarily by creating new revenue. Since most cities with redevelopment have little or no real blight anyway, creating new government revenues becomes their prime goal. They do so in two ways:
Debt: As we have seen, an agency incurs debt to be paid by future property tax diversions. In this way, it can perpetuate its own activities indefinitely by continuing to borrow.
Sales tax: By promoting commercial development, a redevelopment agency can claim to be stimulating new sales taxes that benefit the city's general fund. In this way, it tries to justify itself to the citizenry and council members who usually double as agency directors.
By state law, a city's sales tax share is 1% of all taxable purchases. Sales taxes are site-based. If you live in Sacramento and buy a car in Folsom, all of the sales tax share from the car will go to Folsom, none to Sacramento.
Cities have long been motivated to attract sales tax generators. City officials and chambers of commerce have touted their location, city services, and access to markets. New department stores and auto dealers have long been greeted with ribbon cuttings and proud announcements in the local paper.
Redevelopment has escalated this to a new level.
With redevelopment, cities have the power to directly subsidize commercial development through cash grants, tax rebates, or free land. Spelled out in a "Disposition and Development Agreement" (DDA) a developer receives lucrative public funding for projects the agency favors. Some receive cash up front from the sale of bonds they will never have to repay. Others receive raw acreage or land already cleared of inconvenient small businesses and homes. They purchase the land at substantial discount from the agency. Sometimes it is free.
Redevelopment subsidies are not distributed evenly. Favored developers, giant discount stores, hotels and auto dealers receive most of the money. Small business owners, already burdened by regulations and taxes, now must face giant new competitors funded by their own government.
Redevelopment has accelerated the centralization of economic power among ever-fewer corporate chains at the expense of locally-based independent businesses. Certain large retailers such as Costco, Home Depot, and Walmart provide valuable service and have every right to compete. But are they entitled to government subsidies?
This costly distortion of the free enterprise system is justified as the only way to boost local sales taxes (ending "blight" has, by now, been long forgotten). Yet, if new developments are justified by market demand, they will be built anyway. If not, they will fail, regardless of the subsidies. Redevelopment has resulted in a vast over building of vacant commercial space stimulated more by tax subsidies that by actual consumer demand. As cities become more predatory, financial "incentives" are needed not just to attract new businesses, but to keep long-time retailers from moving away to neighboring cities. Large retailers routinely play one city off against another for the greatest pay-off. Wasteful bidding wars among cities escalate.
Particularly avaricious are professional sports franchises. Teams ranging from the San Francisco '49ers to the Lake Elsinore Storm have demanded new publicly-financed stadiums. Anaheim, Los Angeles, Inglewood, Oakland and San Diego have also committed vast sums of redevelopment money for new facilities demanded by franchise owners.
In Major League Losers (Basic Books, 1997), economist Marc Rosentraub shows that the tax dollars lavished on professional sport teams and stadiums never produce the payoff promised by their promoters, but are a net drain on municipal budgets and local economies.
Redevelopment has become a massive wealth-transfer machine. Cash and land go to powerful developers and corporate retailers while small business owners and taxpayers must pay the bill.
A drive north on the Santa Ana Freeway from Disneyland toward L.A. reveals the chaos redevelopment has wreaked. There is the Buena Park Auto Square, built around dealerships lured from nearby Fullerton. Just north is the old Gateway Chevrolet site. Where did it go? Just across the county line to La Mirada, which lured it from Buena Park with its own publicly-financed auto mall (on land conveniently designed as "blight").
Still further north is another auto mall in Santa Fe Springs, with numerous long-vacant parcels waiting for the dealerships that will never come. To the west is Cerritos, who's giant redevelopment-funded "Auto Square" became a pioneer in auto dealer piracy, draining off dealerships-and sales tax revenue-from its neighbors. Nearby Lakewood lost so many car dealers that its city manager labeled Cerritos the "Darth Vader of cities."
Drive any stretch of freeway in San Diego, Los Angeles, Santa Clara or other urban counties and you'll see redevelopment-funded auto malls, with their hopeful reader boards and carefully graded-and vacant-dealer sites. They're a product of a bitter fiscal free-for-all, as cities coax each other's dealerships away with ever-sweeter giveaways.
Car dealers, of course, are loving it. They no longer have to make a profit from mere customers. They can now play one city off against another for cheap land, tax rebates and free public improvements. You can't blame them. But you can blame the laws that encourage this shell game.
The same pattern is repeated with department stores, discount chains, home improvement centers and even sports franchises (the Los Angeles Redevelopment Agency has committed a $60 million bond to lure the Lakers and Kings from Inglewood). Corporate decisions once based on market forces are now determined by which city's redevelopment agency will cut the best deal.
The California Redevelopment Association encourages developers to expect public handouts. On June 11, 1998, the CRA and the International Council of Shopping Centers co-hosted a conference bringing city officials and developers together to promote "public-private partnerships," i.e., public subsidy of private development. The Long Beach confab ended with a "Meet the Cities Deal-Making Reception" where developers could feel out public officials for generous hand-outs.
Some cities are winners. Some are losers. Some are just able to stay even. Per-capita sales tax revenues vary widely among cities. Even for the winners, however, there are pitfalls. A major new retailer will, after all, draw many customers away from existing businesses within the same city. Later, it may hold the city hostage, threatening to move away unless even more subsidies are provided.
Is this good public policy? Is it good economics?
The problem is not limited to California. It is part of a troubling national trend by which states outbid each other to attract new industry. The "economic incentives" often bear little relation to the benefits realized. When considering plant location, foreign companies now routinely play one state against another for the biggest subsidy package. A Ford Foundation-sponsored conference on "The Economic War Among the States" was held in Washington, D.C., on May 21-22, 1996, on this problem, with an economic truce being proposed among the states. Such leadership is needed here to halt California's own redevelopment revenue wars.
It is ironic that, just as we encourage former Soviet-block countries to privatize their anemic state-run industries, we increasingly entangle our local and state governments in subsidizing private business, all in the name of "economic development" policies that have repeatedly failed elsewhere.
"Economic Development" is a common cliché among city governments and redevelopment agencies.
It refers to a belief that tax subsidies to selected private businesses can stimulate the local economy. It assumes that the free enterprise system alone is inadequate. It presumes that government planners can allocate resources more efficiently than can the free market.
The legal purpose for redevelopment remains the elimination of blight. All economic development activities must pay lip service toward that goal. Behind this façade, redevelopment has subsidized giant retailers, luxury hotels, golf courses, stadiums and even gambling casinos.
Has redevelopment succeeded in reducing true blight? By what objective standard can this be measured?
Any definition of blight must include depressed local economies and pockets of poverty. If redevelopment is working, then surely poverty is being reduced and the general standard of living improving.
Is there any evidence this is happening? Are residents of cities with redevelopment better off compared to residents of cities without redevelopment?
Are the 359 cities that have created redevelopment agencies any better off than those 102 cities that have not? If redevelopment is eliminating blight, then certainly comparisons between such cities could prove it.
If redevelopment was improving local economies, then such a comparison would show greater personal income growth in cities that do have redevelopment relative to those cities that do not.
Table V is a comparison of combined average income growth among all cities with redevelopment and those without it, between the years 1979-89. As can be seen, there is no correlation between redevelopment activity and personal income growth.
Table VI directly compares five pairs of cities of similar size, region and economic level. Again, there is no correlation between growth rates and redevelopment activity.
Both Tables V and VI demonstrate that cities without redevelopment either match or actually exceed those cities that do, in terms of personal income-growth.
There is no evidence to show that all the billions spent on redevelopment has done anything to improve the lives of people in those cities. There is no evidence that redevelopment is a positive factor in the elimination of blight.
SOURCE: United States Census Bureau, State Controller.
|Personal Income Growth Comparison
Cities With and Without Redevelopment
|(A Region-by-Region Per-Capita Income
Growth Survey among|
Cities of Comparable Size and Socio-Econmomic Levels, 1979-1989)
Los Angeles Basin:
|SOURCE: U.S. Census Bureau, State Controller's Office|