Cal-Tax Urges Redevelopment Agency Reforms

June 2004


Cal-Tax Commentary

Cal-Tax Urges Redevelopment Agency Reforms

By The Cal-Tax Staff

The California Taxpayers’ Association has called on the Schwarzenegger Administration and the Legislature to support essential reforms to the state’s subsidy for redevelopment agencies (RDAs) and their use of the taxpayer dollars.

Although the original goals of RDA legislation were well-intended and many RDA activities have resulted in revitalized communities, Cal-Tax believes a large portion of RDA dollars is being wasted and even misused on activities far outside the original intent of the legislation. (Editor’s Note: Cal-Tax commissioned a white paper, California Redevelopment Agencies – Policy and Fiscal Reforms, that outlines in more detail a pattern of what we believe is a waste of public dollars and an abuse of the original intent of the RDA concept. The paper was written by April Manatt and Steven Spears of The SAER Group.)

Since half of all RDA dollars are property tax dollars intended for schools and are now subsidized by the state general fund, Cal-Tax believes the Schwarzenegger Administration and the Legislature have a very real interest in how these dollars are used and should move aggressively toward RDA reforms.

RDAs are funded with 100 percent of the property tax revenue growth within redevelopment project areas. In other words, all property tax growth is assumed to result from RDA activities and benefits only the RDA project areas. The number of designated RDA project areas has grown so much in recent years that, in 2002, total property tax revenue flowing to RDAs amounted to an incredible $2.5 billion. Of course, absent RDAs, these property tax dollars would have been shared with other local government entities, including local schools, the county, other cities and special districts. In fact, schools would have received over half of all these dollars.

With the Proposition 98 guarantee, however, the state general fund makes up any loss of property tax dollars that would have gone to schools. This means each year, the state subsidizes RDA activity with about $1.4 billion in state general fund dollars – making the state the largest equity partner in RDA activity in California. Over the last five years, the state’s subsidy of redevelopment has amounted to $5.1 billion and has grown by about 10 percent each year. Obviously, the Administration and the Legislature have a large and ongoing stake in what is happening in these RDA project areas and should make sure these dollars are spent in such a way as to maximize the benefit to local communities.

Unfortunately, RDA funds are being wasted and misused. For example, according to an audit conducted by the California Department of Housing and Community Development, in fiscal year 2002-03 over 100 RDAs were not in compliance with housing set-aside requirements – not setting aside enough money for affordable housing. Between 1996-97 and 2000-01, RDAs destroyed 4,207 housing units and replaced them with only 2,756. And, in fiscal year 2001-2002, of the approximately $2.5 billion in statewide RDA dollars, only $695 million was spent to build, rehab, acquire, and subsidize housing. That’s because many RDAs spend exorbitant amounts of money on administration and other ineffective activities. Many RDAs spend over 50 percent of their funds on “administrative” costs year after year. Some RDAs have engaged in new development (as opposed to redevelopment) activities and some even have attempted to go into direct competition with private-sector businesses to provide utility services already readily available in the community.

Cal-Tax believes RDAs receive a multibillion windfall each year that should be returned to the other local government agencies, including schools, that share the ordinary property tax dollar. In 1998, the Public Policy Institute of California (PPIC) conducted a study of 38 projects within RDA project areas around the state to determine the effectiveness of RDA activity. In “Subsidizing Redevelopment in California,” PPIC reported: Of the $78 million in tax increment revenues generated in the project areas, $38 million would have occurred without any redevelopment activity. Using PPIC’s logic, over half of the annual statewide RDA property tax revenue, or about $1.4 billion, is a windfall to these agencies that should be returned to other local agencies in the community. Since half of these funds would be returned to local schools, the state general fund would see a savings of about $700 million or more annually.

While RDAs are providing a benefit for blighted urban areas in some cities and counties, the lack of oversight for RDA activities is generating controversial practices. Priorities must be realigned and RDAs must be reined in with specific goals to incentivize RDAs to concentrate their efforts on the truly important needs of the community, such as affordable housing and public transportation infrastructure that gets people to their jobs. We should eliminate RDA projects that duplicate services already provided by the private sector, impose condemnation on successful businesses, and develop projects that focus on producing sales tax revenues. Finally, RDAs should not be allowed to keep windfall property tax revenues. RDAs should only receive property tax dollars resulting from new construction within the RDA. Property tax increases resulting from change-in-ownership reassessments and the automatic 2 percent annual assessment growth should be allocated to schools and other local agencies to accomplish their program goals in the community.