Monday, February 18, 2019

California's Redevelopment Agencies: The Bad Idea That Won't Die

California's Redevelopment Agencies: The Bad Idea That Won't Die

Assemblymember David Chiu, D-San Francisco, has pushed bills to bring back California's infamous Redevelopment Agencies. (AP Photo/Rich Pedroncelli)ASSOCIATED PRESS

California’s redevelopment agency idea just won’t go away.

In 2011, the state’s 400 agencies (RDA) were shuttered by then-Governor Jerry Brown following negative press and budgetary shortfalls caused by the recession. But as public coffers refilled again due to California’s economic boom, legislators have explored ways to bring RDAs back. Assemblymember David Chiu, who represents the eastern half of San Francisco, has proposed multiple bills that would allow an alternative version of RDAs. And in his latest proposed budget, newly-elected governor Gavin Newsom called to expand Enhanced Infrastructure Financing Districts (EIFD), which are a close cousin. If these alternative RDAs gain traction, it is important that they avoid the mistakes of previous ones, which were riddled with waste and eminent domain abuse.

California’s RDAs were first founded in 1945 as an effort to combat urban blight. They functioned through tax increment financing: after designating a certain area as blighted, the agency issued debt and gave that money to developers to build within the area. As property-tax revenues rose, the RDAs got that increase – aka the “increment” – to pay off the bonds. The idea behind the program was that, because the redevelopment generated more property tax receipts, it deserved this increment. Meanwhile, the rates designated for core services would remain frozen.

After decades of operation, this funding model proved to be a pipedream, as projects under-performed and these agencies wound up consuming 12% of property taxes statewide.

One of the main failings was with affordable housing, which consumed one-fifth of RDAs’ budgets. Like many affordable housing programs, this money wound up getting spent inefficiently. According to a 2010 Los Angeles Times report, at least 120 municipalities combined to spend $700 million in housing funds without producing a single unit, as many instead spent 6-figure sums on “planning and administration.” In other cases, cities spent over $800,000 per affordable unit. The Times found that "many projects face inexplicable delays…Land ostensibly set aside for affordable housing was in some cases turned over to commercial developers, raising questions about whether cities ever intended to build the housing in the first place.”

The RDAs’ commercial development side had similar problems. Money was often spent for projects that were slow to develop, and made little sense anyway: $17 million to refurbish a municipal golf course in Palm Desert; $2 million on land confiscation for a museum on Catalina Island; $5.4 million to renovate part of a restaurant and bar complex in Sacramento.

But the worst thing about RDAs was the eminent domain. Using the blight designation, which could be determined seemingly at whim, RDAs used “extraordinary powers”, in the words of a state senate committee, to confiscate property. The practice got further legal justification in 2005, when the U.S. Supreme Court ruled in Kelo v. City of New London that private property could, in fact, be seized and transferred for private uses.

Thanks to California’s RDAs, there was plenty of money for this. For example, the city of Cypress took property owned by the Cottonwood Christian Center to use for retail development. After a prolonged legal battle, both the church and retail were allowed to coexist on the property. In Lancaster, Costco threatened to leave if the city didn’t condemn the 99 Cents Only store that competed with it in the same shopping center. Following a lawsuit, the city finally gave Costco land in a public park.

And other eminent domain examples abounded. Writing in City Journal, Steven Greenhut noted the irony of how the policy was used for housing, in particular. To build affordable housing, existing homes were often demolished. But because the construction process was so slow, this new housing wasn’t built, creating an even worse shortage than before.

“The RDAs’ diverted funds and failed promises are reason enough to get rid of them,” wrote Greenhut. “But their abuses of property rights are the last straw.”

In 2011, state controller John Chiang concurred after auditing 18 RDAs. He found that the agencies had stripped $40 billion from public education, causing a bailout from the state's general fund; that every RDA audited was found to have reporting deficiencies; and that some weren't appropriately tracking their debt.

For these reasons, Governor Brown ended them in 2011 – a decision that proved to be half-hearted. In 2014, he signed legislation to allow EIFDs, the entities that Governor Newsom wishes to increase funding for. The policy allows cities to continue issuing tax increment financing for projects, although it is more focused on core infrastructure than RDAs were.

The policies promoted by Chiu, however, are more like a Redevelopment Agency 2.0 effort. The assemblymember has jumped on California’s affordable housing crisis as a reason to bring them back, designating more of the revenue for affordable units. Early last year, he proposed a bill that died in committee. After Newsom’s election, he’s proposed a new bill – AB 11 – that, according to the fact sheet, “allows cities and counties to create affordable housing, and infrastructure agencies to fund affordable housing and infrastructure projects using tax increment financing.” To avoid the previous problems, the bill would mandate stronger oversight. As Chiu wrote by email:

The past abuses of redevelopment were substantial, but AB 11 is not a replica of the former redevelopment agencies. Our bill requires that affordable housing funds be spent in a timely manner and has robust reporting requirements. This new financing tool focuses on building sustainable, affordable communities and has safeguards in place to prevent fraud, abuse, and displacement.

Chiu's optimism seems unfounded. The governments of California, at city and state level, remain riddled with waste and abuse. If the examples from the RDAs aren't convincing enough, just consider two recent trends - the state has been unable to solve its pension crisis, despite these costs having driven several cities into bankruptcy; and it was unable to build high-speed rail (which itself spurred the condemnation of 300 homes) because of cost overruns resulting form poor oversight of contractors.

The state's governing culture has been eroded by special interests, and the RDAs, said Greenhut, were no exception, fielding an army of lawyers, consultants and politically-connected developers. A new crop of RDAs that require additional oversight will - whether Chiu intends this or not - be a sop to the bureaucracy that performs the work.

Perhaps even worse is the notion that RDAs are needed to produce affordable housing in California. As housing analysts - including myself - have mentioned exhaustively by now, high home prices there result from a chronic, government-created housing shortage. Thanks to zoning, environmental review, and other regulations, there's a limit on how much housing can be built, and significant expenses added to each new unit. The answer is not to redirect scarce property tax revenue into politicized agencies that require vast oversight just to perform their work. It's to let developers build - including the state's many affordable housing developers, who already have a variety of state and federal subsidies they can leverage.

No, the new RDAs appear to be a slightly less bad version of the old RDAs. They're an idea that needs to remain just that.

Scott Beyer owns a media company called The Market Urbanism Report, and is traveling the U.S. to write a book on reviving cities. His Twitter handle is @sbcrosscountry.

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