If you want to see what is wrong with public discourse on the subject of urban redevelopment, take a look at an on-line piece entitled California’s Redevelopment Wars, By Richard Frank, former California Deputy Attorney General, and now a faculty member at the UC Boalt Hall School of Law. In taking on the subject of the controversy that is raging in California over our new governor’s proposal that redevelopment agencies in the Golden State be abolished to save the public over $3 billion, Mr. Frank purports to tell us how redevelopment operates. Ready?
“[T[he goal is to revitalize urban areas that have become blighted or otherwise run down. The fiscal means of doing so is known as tax increment financing. When an area is deemed blighted, its property tax base is frozen. Once it is redeveloped and property values (hopefully) rise as a result, local governments and schools continue to receive only the level of property tax revenues that they did before the area was declared blighted and redeveloped. The excess property tax revenues go to the local redevelopment agencies, providing funding for future projects.”
But something is missing in this description, isn’t it? How does the redevelopment agency get the seed money to start the redevelopment project? How does it acquire the to-be-redeveloped land?
Mr. Frank forgot to cover that little item. But the answer is clear: the redevelopment agency gets its grubstake by selling bonds and using the proceeds to acquire the to-be-redeveloped land – usually, but not necessarily, by eminent domain. Then – and here comes the first hit on the public treasury – it razes the acquired land and conveys it to the redeveloper for less than the public cost of acquisition (known in the redevelopment business as “land writedown”), or hands it over to the redeveloper for free. Thus, in the notorious Kelo case, the redevelopment plan called for the city of New London to convey a 91-acre waterfront parcel to the redeveloper for 99 years at $1 per year. That may be a hell of deal for the redeveloper, even if in the Kelo case it did no good to anyone – the project failed – but it has consequences. One of them is that all that new tax money envisioned by Mr. Frank’s description of the process has to be used to pay interest on the bonds and eventually to pay them off. Not only that, but redevelopment deals often provide for large tax abatements – in Kelo, The Pfizer pharmaceutical company got a deal from the city, whereby it would have to pay only a fraction of its property taxes until 2012. So those touted new taxes are often diverted to the redevelopers’ pockets. If you want an insight into the avalanche of money that cities lavish on favored companies, check out Jim Dwyer, Companies We Keep, and Pay For, N.Y. Times, May 16, 2010, at p. MB1.
So where were we? Oh yes. The money. So what happens is that the new tax revenues coming from the increased values of the redeveloped properties do not go to the usual municipal taxing authorities for police and fire protection, schools, sanitation, etc. No sir. That money goes in the first instance into the pockets of tax-exempt redevelopment bond holders, who these days collect over 5% tax-free, even as U.S. treasury bonds eke out a couple of percent in interest that is then subject to taxation by Uncle Sam, thus giving the holders of federal treasury paper a return of zip while holders of redevelopment bonds are cleaning up. Actually, if you take inflation into account, the return on short-term federal paper is less than zero.
Then, after the redevelopment bondholders get their cut, what’s left of the money often goes, not back to the municipal taing authorities, but – as Mr. Frank correctly tells us – for new redevelopment projects. So once a redevelopment project is created, it never closes. One result has been a steadily rising mountain of bonded indebtedness by state redevelopment agencies. Municipal Officials for Redevelopment Reform (MORR), a watchdog group, reports that the total bonded indebtedness of California redevelopment agencies has skyrocketed from $5 billion in 1985 to $82 billion in 2006, and counting. See MORR’s annual report, Redevelopment: The Unknown Government (2007) at p. 12. If you want the gory details you can get them from the California State Controller in his Community Redevelopment Agencies Annual Report.
Finally, to be fair, we note that Mr. Frank recognizes that all is not well in California redevelopment land:
“If California Governor Brown ultimately succeeds in his effort to abolish the state’s redevelopment industry, it will be due in significant part to the self-inflicted wounds administered by redevelopment agencies. If they are to have any chance of survival, the state’s redevelopment leaders will have to get their heads out of the sand and submit to at least a reasoned discussion over the relative value of redevelopment agencies in a fiscally-challenged era.”
Of course, to do that, redevelopment agencies would have to have a case to offer that could stand the test of financial soundness and elementary moral precepts subscribed to by the society in which they function. But they lack such a case. The sad fact is that redevelopment has grown from a poorly thought-out do-gooder effort to clear slums over a half century ago, into a shadowy racket that at its best loots the public treasury and abuses property owners whose land it seizes to feather the nests of politically well-connected redevelopers, while blatantly undercompensating its rightful owners. And that is something that the people have grown too smart and too well informed to buy any longer. As Honest Abe Lincoln put it: You can fool some of the people all of the time, and you can fool all of the people some of the time, but you can’t fool all of the people all of the time. And when the likes of Richard Frank speak of redevelopment’s “self-inflicted wounds” and allow as how redevelopment agencies need to get their heads out of the sand and “make a case” for the legitimacy of their continued existence (which so far they have not attempted to do), it’s time to shut them down and put all the money they waste to better uses.
Follow up. Don’t miss an op-ed, in the Los Angeles Business Journal, Jan. 31, 2011, at p. 46, entitled Time to Chase CRAs Out of Town, by Charles Crumpley, Editor. The title says it all, but do read it. Our favorite quote:
“[O]ver the years [redevelopment agencies] have evolved into corrupt little political fiefdoms that muck up the works and don’t do much good.”