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Current RDA Mess Has Many Fathers – Starting With Voters

If Californian voters dislike the public agency feeding frenzy unleashed by the redevelopment agency (RDA) shutdown, they have only themselves and California's referendum system to thank.

In 1945, the state legislature passed the California Community Redevelopment Act, allowing cities and counties to create agencies (RDAs) for addressing “urban blight.” Six years later, voters passed Prop. 18, instituting tax increment financing for RDA projects.

“Tax increment” is additional property tax generated by new development. RDAs received100 percent of tax increments, keeping whatever wasn't needed to pay off bonds. This diversion reverted to normal distribution to schools and other public agencies only when the RDA project was closed – which could be decades in the future or never. In the meantime, funding for services and infrastructure to support growth lagged behind.

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But RDAs weren't widespread until after 1978, when voters passed Prop. 13, capping real estate taxes.

Now public agency finances were a zero-sum game, with each agency wrestling for a bigger share of a fixed pie. Via RDAs, cities could grab a bigger slice of that pie. Unsurprisingly, RDAs doubled after Prop. 13, and by 2011 they diverted almost $6 billion from local services statewide.

“Thanks to redevelopment agencies, California residents have yet to experience the results of their ill-thought-out decision,” wrote Lauro Alonso Parra in a 2012 paper examining the impact of the 2011 RDA shutdown. RDAs were “founded as a way to cover up the loss of funding after Prop. 13 ÷ In essence, they were run by desperate city officials, prompting new ways to make up for their tax revenue loss.”

If local services – notably, schools – were underfunded, the state stepped in with a subsidy. Fontana, for example, put 70 percent of the city into RDA projects, and left it to Sacramento to pay for its schools.

Over time, RDA “obligations” expanded in questionable ways, according to a 2010 audit by then State Controller John Chiang. Palm Desert's RDA spruced up a private golf resort, while Pittsburgh's RDA gave the City's general fund a $16.6 million gift for unspecified future projects. Bell – California's poster child for municipal malfeasance – transferred $1.2 million of RDA affordable housing set-asides into slush funds for city officials.

Examples like these fed the resentment of county agencies and school districts.

In 1994 Governor Pete Wilson attempted to make up schools' revenue losses with the first of several ERAF (Educational Revenue Augmentation Fund) levies on RDAs.

The ERAF payments increased tensions between RDAs and the state, and led to 2010's Prop. 22, a constitutional amendment prohibiting the state from taking or redistributing RDA tax increment as well as local sales and use tax revenue. Voters passed Prop. 22 and elected Jerry Brown governor, even as Brown proposed shutting down redevelopment to help close a $26 billion structural budget deficit.

The state legislature gave Brown his wish with ABx26, which abolished RDAs. Then they offered RDAs a life jacket with ABx27, allowing cities and counties to keep their RDAs if they shared the tax increment with the state.

Because discussion of a possible RDA shutdown prompted agencies to transfer RDA assets, or make them disappear into new debt and projects, the law voided bond sales, asset transfers, expenditures and development projects initiated after January 2011. Such transactions could be “clawed back.”

Brown signed the law in July. The California Redevelopment Association and League of Cities immediately filed lawsuits claiming both laws were unconstitutional because they violated Prop. 22.

This litigation proved more decisive in abolishing RDAs than the new laws. The court upheld the RDA shutdown, but struck down the provision for RDA continuation because the payments it required were exactly the kind of levies prohibited by Prop. 22 – the worst possible outcome for the very people who brought the lawsuits.

Dissolution transferred all RDA assets, income and debts to “successor agencies” – typically the city that created the RDA – to unwind operations under the supervision of Oversight Boards representing the local taxing entities. Because every debt that doesn't have to be paid and asset that can be acquired means more money for the taxing entities, and fewer subsidies the state must provide, there's built-in incentive to broadly define assets and narrowly define obligations.

Another new law, AB 1484, expanded the reach of clawbacks into city sales and use taxes if the cities didn't pay up what the state Department of Finance thought they owed. The League of Cities was more successful in challenging this, with the court ruling that this was clearly unconstitutional under Prop. 22.

While there's no guarantee of long-term benefit from the RDA shutdown after the one-time cash infusion, one revenue stream, though, seems assured: that of lawyers. Over 100 lawsuits have been filed in the wake of dissolution. The state has won most of them so far, but recently Emeryville won a suit over whether an RDA development agreement “re-entered” by the Successor Agency was a valid obligation.

After four years of distraction, expense and rancor, and as RDA dissolution litigation continues to wind through the courts with no end in sight, last September California came full circle. Brown signed a new law allowing cities and counties to create Enhanced Infrastructure Financing Districts (EIFDs) funded by property tax increments, albeit with some differences. Voters must approve bond issues, taxing entities must approve property tax diversions, and education funding must be maintained.

As Winston Churchill famously said, “You can always count on Americans to do the right thing – after they've tried everything else.”

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