How the End of Redevelopment Hits a City’s Bottom Line

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Most Orange County cities need to slash the amount of property tax-increment revenue — the money that funded their now defunct redevelopment programs — that is used to pay administrative costs, the county grand jury concluded in a report on the demise of redevelopment agencies.

Gov. Jerry Brown last year pushed hard to eliminate more than 400 redevelopment agencies across the state as a way to plug the state’s daunting budget deficit.

Brown ultimately got his way, and as of Feb. 1, the agencies as we have known them were dead. They have since been replaced by so-called “successor agencies,” many of which have been mired in disputes with the state over the details of dismantling the previous entities.

The grand jury had been preparing a report exploring the successes and failures of redevelopment in the county. But during the study, the state Supreme Court nixed redevelopment altogether. So the grand jury instead released a report that is largely a primer on the history and complexity of these once powerful and often controversial public financing tools.

Cities and counties used redevelopment agencies to clean up blight. The agencies worked by going into debt, many times by issuing public bonds, to finance development projects that were supposed to revitalize run-down parts of town. Tax increment — the increase in property tax revenue that was generated as property values rose because of the development — would be captured to pay off the debt.

But opponents of redevelopment often harshly criticized the agencies for siphoning tax money that would otherwise have gone to other government districts, including public schools. There are also many stories of the agencies becoming hotbeds of corruption and abusing powers like eminent domain, which allowed the agencies to usurp private property and give it to developers.

In the grand jury’s examination of redevelopment and the challenge of ending it, the report reveals a troubling statistic.

A few cities had been using large portions of their tax increment revenue to pay for administrative costs. Among the highest in fiscal year 2010-11 were Placentia at 67.8 percent, Fullerton at 55.5 percent, Irvine at 24.2 percent and Westminster at 23.8 percent, according to the report.

The justification is that employees who work on redevelopment issues should be compensated with redevelopment funds. But some insiders at city halls have grumbled that this approach is an accounting ruse to avoid using general fund revenues, which have shrunk as the recession took its toll.

Paying employee salaries with redevelopment dollars is having stark consequences for Westminster. With the end of redevelopment, the city was left with a projected $10.5-million deficit,  the prospect of laying off dozens of employees and possibly raising fees for city services.

“It was not a good idea to use redevelopment dollars to subsidize a lot of our staff’s salaries,” Westminster Councilman Tyler Diep told the Orange County Register in April.

Under the redevelopment dissolution bill, cities may continue to receive tax increment revenue for those projects which are deemed “enforceable obligations,” essentially debts that were incurred before redevelopment was axed.

But according to the report, the bill also requires cities to reduce the portion of tax increment used for administrative costs to less than 5 percent, unless the costs fall below $250,000. Of the 24 redevelopment agencies in Orange County, only Mission Viejo and Seal Beach were in line with this requirement as of the redevelopment dissolution date, the report states.

Here is a summary of other findings and recommendations in the report:

  • The state Legislature will likely opt to continue the low-income housing programs funded by redevelopment. Cities and counties should plan for this and influence the Legislature’s shaping of new bills.
  • Only Costa Mesa and Santa Ana had citizen involvement committees to oversee redevelopment projects.
  • Redevelopment agencies had lacked effective oversight. Successor entity boards required by the dissolution bill give cities the opportunity to provide effective oversight of tax increment-funded projects.
  • The state Department of Finance and State Controller’s office were tasked with reviewing 422 agencies’ submissions to continue funding projects that are enforceable obligations. The grand jury believes that “this is not a viable concept. Effective oversight needs to be objective, transparent and locally administered.”
  • Garden Grove had mixed success with its redevelopment agency. The city successfully transformed a seedy district just south of Disneyland into a classy hotel district. But the city also unfairly seized a downtown parking lot that had been funded by local businesses and intended to sell it to a developer. After being tied up in litigation for about two years, market conditions changed, and the developer no longer wanted the property.
— ADAM ELMAHREK

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