Economic Development Tools in a Post-redevelopment World

• Jurisdiction: California,United States
• Citation: Vol. 34 No. 1
• Publication year: 2016
• Author: Kevin Reisch and Brian Fish
• topic: Business of Law,Contracts,Tax Law,Civil Procedure,Real Estate

Economic Development Tools in a Post-Redevelopment World

Kevin Reisch and Brian Fish

Kevin Reisch

Kevin Reisch is a Chief Deputy City Attorney in the San Diego City Attorney's Office. Kevin oversees the Economic Development Section, which handles a wide variety of matters related to redevelopment dissolution, affordable housing projects, and economic development programs, such as assessment districts, parking districts, and financial incentives, grants, and loans for local businesses. Before joining the public sector in 2009, Kevin worked in the private sector for fourteen years, specializing in land use and real estate matters.

Brian Fish

Brian Fish is a land use and real estate development partner in the San Diego office of Dentons US, LLP. Brian assists public and private clients with California Environmental Quality Act ("CEQA") compliance, coastal permitting, planning and zoning issues, Subdivision Map Act ("SMA") processing, Williamson Act issues, and prevailing wage analysis. In addition, Brian appears before administrative agencies and handles litigation at the trial court and appellate court levels with respect to entitlements, CEQA, SMA, and other land use and real estate-related matters. Prior to law school, Brian was a planner with the City of San Diego and a community development specialist with the San Diego Redevelopment Agency.

I. INTRODUCTION

Within days after assuming office in January 2011, Governor Jerry Brown turned the world of local economic development on its head when, in an effort to help alleviate a massive State budget crisis, he announced his intention to eliminate all redevelopment agencies ("RDAs") in California. This politically astute proposal— perhaps best described by the adage "desperate times call for desperate measures"—proceeded down winding political and legal paths over the next year, ultimately leading to the dissolution of all RDAs in California (approximately 400 agencies) effective February 1, 2012.

In hindsight, the sudden demise of redevelopment does not seem too shocking. For decades leading up to their elimination, RDAs faced strong criticisms alleging, among other things: ineffectiveness of the redevelopment model in leveraging taxpayer dollars for public benefit, abuse of eminent domain authority, and misuse of public resources by favoring politically powerful developers at the expense of others. For the Governor and the California Legislature, these criticisms, coupled with harsh fiscal realities, ultimately outweighed the benefits and successes of RDAs in creating jobs and developing infrastructure, affordable housing, and public amenities such as parks and playgrounds. Initially, following the dissolution of RDAs, those interested in local economic development in California had few options. But in the past three years, new legislative mechanisms have revived some redevelopment-like tools, albeit in a much more tempered fashion aimed at addressing the perceived past abuses and problems.

This article describes the legal parameters governing the past, present, and future of economic development in California. It starts by explaining the demise of RDAs and the main obstacles encountered by municipalities in winding down redevelopment. With that history as a guide, this article outlines the limited legislative substitutes and other mechanisms that exist to promote local revitalization efforts in the post-redevelopment era. Due to the large number of complex topics, this article provides a relatively broad overview of each area.

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II. THE RISE AND FALL OF REDEVELOPMENT

A. The Emergence of Redevelopment

The Legislature enacted the California Community Redevelopment Act in 1945 to remedy deteriorating conditions in many municipalities after World War II.¹ In 1951, the Legislature enacted the California Community Redevelopment Law ("CRL"),² superseding the Community Redevelopment Act. The key innovation of the CRL was a new financing tool known as tax increment financing. This tool enabled locally-controlled RDAs to receive and spend a portion of local property tax revenue that would otherwise have been allocated to school districts, special districts, counties, and others. The RDAs used this tax increment revenue to eliminate blight in a geographic area known as a redevelopment project area by financing the construction of capital improvements, such as streets, streetlights, parks, and libraries.³ The CRL also required each RDA to deposit at least twenty percent of its tax increment revenue into a dedicated fund for use solely to increase, improve, and preserve the local community's supply of low- and moderate-income housing.⁴

Starting in the 1970s, municipalities began to employ redevelopment more frequently, due in large part to an RDA's ability to collect substantial tax increment revenue, spend this revenue without significant restrictions, and assemble land for new projects. By early 2011, approximately 400 municipalities had formed an RDA to administer one or more redevelopment project areas within their geographic territory.

B. Redevelopment as the State's Rainy Day Fund

Following the passage of Propositions 13 and 98, and at least in part due to the diversion of local tax revenue to RDAs, the State was forced to dedicate an increasing share of its general fund to support school districts.⁵ Shortly thereafter, when the State faced a large budget shortfall, the Legislature would "raid" RDA coffers for the benefit of the Education Revenue Augmentation Fund ("ERAF"). These raids varied in amounts depending on the severity of the budget crisis.⁶ The loss of many billions of dollars to the ERAF stifled the ability of RDAs to budget for and carry out redevelopment activities. Numerous municipalities and statewide advocacy organizations, led by the California Redevelopment Association and the League of California Cities, reacted to the ERAF shifts by promoting the passage of Proposition 22. Approved by nearly sixty-one percent of voters in November 2010, Proposition 22 amended the California Constitution to prohibit the enactment of any new state legislation that directly or indirectly diverts certain local funds, including tax increment revenue, for the State's benefit.⁷

C. Increasing Criticisms of Redevelopment

Although RDAs achieved many successes, some questioned the wisdom and effectiveness of using taxpayer dollars to stimulate local economic development and encourage private investment, activities that might have occurred even without public subsidies. Others pointed out the actual or perceived abuses of redevelopment, such as dubious findings of economic or physical blight in areas many would objectively describe as affluent; the awarding of valuable public subsidies to developers as the result of perceived political favoritism or cronyism; inadequate public accountability and transparency; the use (or threatened use) of eminent domain to acquire real property for otherwise privately-sponsored redevelopment projects; and the diversion of tax revenue away from core public services, such as schools, police, and fire protection. These criticisms played a major role in the eventual demise of RDAs.

D. The Elimination of Redevelopment

Municipalities may have won the battle with the State on the redevelopment front in the form of Proposition 22, but they ultimately lost the war. In January 2011, the State faced a projected budget deficit of greater than $25 billion. Due to an array of economic and political forces, tax increases were not an option to address the budget deficit. And, in light of Proposition 22, the Legislature could not continue its historical practice of shifting tax increment revenue to the ERAF as a short-term budget fix. Under these constraints, Governor Brown proposed eliminating RDAs altogether and reallocating all remaining tax increment revenue (after the payment of existing redevelopment obligations) to local taxing entities, including cities, counties, school districts, and special districts. Based on initial estimates, the Governor's financial advisors thought the elimination of RDAs would return several billion dollars per year of property tax revenue to local taxing entities, much of which would accrue to the State's benefit by reducing its funding obligation for school districts under Proposition 98.⁸

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The Governor's proposal in early 2011 to eliminate RDAs faced a number of political and legal challenges. In March 2011, a bill that would immediately eliminate RDAs failed to obtain the necessary two-thirds supermajority of votes in the Legislature.⁹ In June 2011, the Legislature enacted a twin-bill scheme, including Assembly Bill X1 26 ("AB 26") to eliminate RDAs, and Assembly Bill X1 27 ("AB 27") to allow each RDA to continue its existence in exchange for so-called "voluntary" annual payments for the State's benefit, similar to the mandatory ERAF shifts in prior years.

The California Redevelopment Association, the League of California Cities, and other municipal entities quickly filed a lawsuit challenging the constitutionality of both AB 26 and AB 27. After taking the unusual step of allowing the parties to bypass the trial and lower appellate court levels, the California Supreme Court issued a ruling that represented the worst-case scenario for RDAs. The Court upheld AB 26 on the basis that the Legislature had created RDAs by statute and likewise could eliminate them by statute. The Court also (i) invalidated AB 27 on the basis that it violated Proposition 22's prohibition against reallocating RDA funds; (ii) determined that AB 26 could be implemented without AB 27 due to a statutory severability clause; and (iii) judicially modified certain statutory deadlines in AB 26 to reflect the four-month delay caused by the lawsuit.¹⁰ As a result, all RDAs dissolved effective February 1, 2012.

III. THE WINDING DOWN OF REDEVELOPMENT AFFAIRS

A. Overview of Key Players and Their Roles

Under AB 26 and subsequent legislation (collectively the...