Background:
California Redevelopment Agencies were first authorized in 1945. The idea is (and was) to fix up blighted, decaying, and forgotten areas, which will in turn raise the value of surrounding property taxes, which will in turn create more tax revenues for everyone.
How California Redevelopment Agencies Work, in a very simple nutshell:
Redevelopment agencies are entities created to make the initial investment to enable redevelopment, and they are allowed to take a portion of future tax increases (created by the increase in taxes due to the increase in value caused by the work) to pay for the initial investments. Its a solution to the classic chicken and egg problem. You believe you’ll make more money in the future if  you invest money today. But you don’t have any money today to invest. So you create the redevelopment agency to issue bonds or other debt instruments, and create a future revenue stream that will provide investors with a level of certainty that their investment will be paid back and they’ll make a little bit of money in the process.
So why is this a California budget issue?
Redev agencies are guaranteed a cut of the future incremental tax increases (take your basline property taxes, the amount that the area currently generates in its blighted condition. Subtract this from the amount of taxes that will be generated when the area is redeveloped and you have your incremental tax increase. Roughly, in a nutshell). And it is that money (the incremental taxes) that Jerry Brown would like to have back, thank you very much, to help balance the budget.
Is this a good idea?
Depends on who is talking. Some feel that these agencies are an inefficient and costly way to achieve development goals, and that there are better ways to accomplish redevelopment in California. Others feel that there is a multiplier effect from the work that has created hundreds of thousands of jobs and additional forms of revenue for the state, and that to eliminate them is a very short sighted and ultimately destructive activity that will come back to haunt California budgets in the future.
Incremental Tax Revenues, California Redevelopment Agencies
Stay tuned for more of my thoughts about this, and what it could mean for San Francisco real estate.
Cities (City of Agoura Hills for instance) are not just fixing up blighted, rundown or forgotten areas. Cities are getting into the construction business and building low income housing on unimproved property (lease program)with these redevelopemnt funds which in essence lowers property values lowering the tax base which appears to contradict the essence of the program. And I’m not talking about building in blighted rundown or forgotten areas. In a time when you can buy homes for half of what it cost to build why are cities doing this. Seems like bad economic sense.
Max – interesting point. I’ll definitely have to look into that, it does seem like the agencies suffer from “mission creep” and have expanded beyond their original intent. It also seems as though they can be slush funds to funnel projects to politically connected developers…
Redevelopment agencies do much more than just buy up blighted sites and sell them to home builders. I have worked on redevelopment agency-funded projects that included a new library, widening of a freeway overcrossing which opened up a new area to commercial development (read: increased tax base), and many other examples.
BTW, what is wrong with construction of new housing on redevelopment agency-owned or -funded land when those projects mainly serve low income households which would not be able to enter the market on their own? I have also participated in many redevelopment agency-funded low income or sweat equity housing projects which have opened the door to home ownership or rentals to people who whould not have been able to make it some other way.
I believe that Governor Brown’s targetting of redevelopment agencies is simply a grab for the pot of money that those agencies are sitting on. Many redevelopment agencies are too small to start projects with a bang, so they have to accumulate funds for a couple of years before they can leverage them or otherwise turn them into a viable project. This is a grab for those unused funds, plain and simple. It is the epitome of “Sacramento knows best!”