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Far-Reaching Impact of California Redevelopment and Its Unwinding

Santa Clara’s Northside Library isn’t the only casualty of the unwinding of California redevelopment.

In Milpitas, school, public park and low-income senior housing projects have been delayed by controversy about RDA assets. That city also had to layoff its Parks & Recreation Director, a 23-year city employee. Riverside County had to lay off 36 employees. And a Roseville mixed-use, affordable housing development is indefinitely stalled.

Redevelopment had a far-reaching impact on California in its 50-year life, and shutdown promises to have equal, if not greater, impact.

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In 1945, the state legislature passed the California Community Redevelopment Act, allowing cities and counties to establish local agencies (RDAs) to address “blight.” Six years later, Californians voted for tax increment financing to make RDA projects self-supporting.

Tax increments are the additional property taxes generated by redevelopment projects. RDAs collected 100 percent of tax increments, retaining whatever wasn’t needed to pay off bonds. While at some point tax increments revert to normal distribution, financing and refinancing often pushed that date decades into the future.

Santa Clara used redevelopment bonds to fund infrastructure development in the 1960s and 1970s on the city’s Northside – making the city’s 101 corridor attractive for high-tech businesses, one of the most important investments leading to Santa Clara’s healthy business-to-business sales tax base.

Prop 13 Fuels RDA Incentives and Questionable RDA “Obligations”

In 1978, Proposition 13 capped real estate taxes, fixing property values at 1975 levels and capping annual assessment increases to 2 percent.

Rather than growing a bigger pie to meet growing needs, local finance was now a squabble among public agencies to grab a bigger share of a fixed pie. RDAs offered cities one path to a bigger slice of that pie – the tax increment. Unsurprisingly, RDAs doubled after Prop 13, and when the program was ended, there were 425 RDAs holding nearly $30 billion in debt.

If local services – notably, schools – lost so much funding they couldn’t operate properly, 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 find money for local schools.

Over the years, RDA “obligations” expanded to include all kinds of questionable spending, according to State Controller John Chiang’s 2010 audit.

L.A.’s RDA diverted buckets of money out of affordable housing – nearly $1 million in 2010 alone – into unspecified “overhead.” Palm Desert used RDA money to spruce up a four-star private golf resort. Pittsburgh’s RDA gave $16.6 million to that city’s general fund for unspecified future projects, losing interest that properly belonged to the RDA.

And no discussion of municipal malfeasance would be complete without an example from Bell, Calif., whose RDA transferred $1.2 million of affordable housing funds into slush funds for city officials.

The End of RDA in Sight, Asset Transfers Abound and CRA Outsmarts Itself

In 2011, faced with seemingly-intractable state budget deficits, Governor Jerry Brown proposed shutting down RDAs, and returning real estate, cash, and revenue to county taxing authorities to help close California’s $25 billion deficit. The RDA shutdown legislation (ABx26) passed in 2011, with a companion bill (ABx27) allowing cities to continue redevelopment if they paid a premium to compensate the county’s taxing authorities.

Because discussion of a possible RDA shutdown prompted agencies to transfer RDA assets and income, or otherwise make them disappear into new debt and projects, the law only recognized RDA debt, asset transfers, and development projects initiated before July 2011.

The legislation precipitated a lawsuit by the California Redevelopment Association. The California Supreme Court’s decision represented the worst possible outcome for RDAs: the RDA dissolution was upheld while the law permitting continuation of the program under new auspices was struck down.

After confusion arose about the unwinding process, the legislature ostensibly offered clarification in AB1484. The new law actually clarified little, but did offer counties tempting access to municipal sales tax revenues if they deemed the former RDA was uncooperative in turning over assets and revenue streams.

Asset Feeding Frenzy Unleashed

RDA unwinding was overseen by a new public entity: an RDA “successor” agency oversight board made up of two members of the former RDA and five members of county agencies – the same ones that lost money when tax increment funding bypassed normal property tax distribution.

In what diverse media outlets were united in calling a “money grab,” former County Finance Director Vinod Sharma took a very narrow view of former RDA obligations that had to be paid, and a very broad view of former RDA assets the county was entitled to appropriate. Ultimately, final decisions will be made by the state Department of Finance – or the courts.

Santa Clara was hit particularly hard because its RDA was asset-rich. Not just an agency for fostering civic improvement, Santa Clara’s RDA was also – entirely legally and openly -the city’s leasing agency; allowing the city’s property leasing to be run as an publicly-owned business, similar to the city’s electric utility. From 2004 to 2009, Santa Clara’s RDA generated a $23 million surplus (on $232 million in revenue) for other city projects.

The arrangement whereby the title to indisputably city-owned property was transferred – not sold – to the RDA reduced city liability, and increased leasing flexibility as well as the terms for hiring contractors, Santa Clara Mayor Jamie Matthews told the Weekly in 2012. Also, it ensured that enterprises on city property were private businesses – the city wouldn’t be operating hotels or amusement parks.

County’s $340 Million Invoice

Now the county is demanding $340 million in Santa Clara real estate as part of the RDA dissolution. One example is California’s Great America, purchased with city funds in 1983 to prevent its sale to a developer. The city retained the land and subsequently sold the amusement park.

Another example is land that’s home to the Santa Clara Convention Center, Hyatt Regency Hotel, Techmart office building and part of Great America’s parking lot.

In 1965, Santa Clara’s electric utility bought 180 acres of land at Great America Parkway and Lafayette St. Two decades later the city bought 65 acres of that land from the electric utility for the hotel-convention center complex, which was subsequently transferred to the RDA.

RDA revenue also financed Santa Clara’s affordable housing programs. From 1990 to 2011, the RDA financed $143 million in affordable housing, former City Manager Jennifer Sparacino told the Weekly in 2011.

Recent furor over Santa Clara County’s court order halting completion of the city’s long-planned and virtually-complete Northside library – constructed with city RDA revenues going back more than five years – has brought new scrutiny of the legislature’s RDA shutdown.

San Jose Councilman Kansen Chu, a 2014 candidate for a state legislature seat representing Santa Clara, says that what was billed as reform is itself in dire need of reform.

“I think it was a bad decision to abolish redevelopment. Many cities used redevelopment money in the right ways to make a difference for their cities. You don’t ‘throw away the baby with the bathwater.’ We should reward cities that do the right things.

“Right now I’m trying to work with the leadership [in Sacramento] to create a new redevelopment structure that will give the state more oversight,” he continues. “That’s going to be one of my top priorities if I’m elected. A situation like this [the Northside library] is a tragedy.”

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The Mlnarik Law Group, Inc.

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