City Faces Critical Questions on Redevelopment in the Midst of Uncertainty

In the wake of the California Supreme Court’s decision to uphold 2011 legislation that dissolves redevelopment agencies in California, while striking a voluntary payment arrangement to allow redevelopment to continue, the City of Davis faces critical questions that it must resolve by January 13, even as the drop-dead date of February 1 presents continuing uncertainty.

The city faces two critical choices – it must choose whether to serve as the successor agency upon dissolution of the Redevelopment Agency, and make the determination whether to retain the housing assets and functions of the Redevelopment Agency.

According to the city staff report, “AB1X 26 designates the City as the successor agency, unless the City elects not to serve as successor agency. The election not to serve as the successor agency must be made by City Council resolution.”

Continues the staff report, “The City should also be aware of certain potential risks involved in electing to be the successor agency, including not receiving reimbursement for administrative costs that exceed the City’s budget, not receiving reimbursement if there are insufficient tax increment funds to cover higher priority costs, and defending lawsuits brought against the City, as successor agency, at its own cost.”

At the same time, “the City should also know that pursuant to AB1X 26, each of these potential risks are subject to the statutory limitation on successor agency liability to the amount of property tax received by the successor agency and the value of assets transferred to the successor agency.”

AB1X 26 allows a City to retain the assets and functions of the redevelopment agency, rather than transmit them to the successor agency, the staff report continued.

For example, they cite, “In March 2011, the Agency transferred its real estate assets to the City, including the former DACHA homes and the property at 3rd and J Streets. AB1X 26 contains a provision allowing such transfers to be challenged by the State, and potentially undone.”

As a memo from Brent Hawkins, who works at Best, Best and Krieger, the firm that employees nominal city attorney Harriet Steiner, argues, “Each community with a redevelopment agency must decide whether or not to serve as successor agency for liquidation of the assets of its redevelopment agency and paying off the redevelopment agency’s debts.”

The city has until January 13 (Friday) to adopt a resolution electing NOT to serve as the successor agency.

In addition, “Each community with a redevelopment agency must also decide whether or not to retain the housing assets and functions previously performed by the redevelopment agency. If the community elects to retain such housing functions and assets, all rights, powers, duties and obligations, excluding amounts on deposit in the Low and Moderate Income Housing Fund, shall be transferred to the community.”

Successor agencies would be required to continue to make payments on redevelopment obligations, maintain reserves required by redevelopment agency bond documents, dispose of assets as directed by the oversight board, enforce all agency rights for the benefit of taxing entities, wind down the affairs of the redevelopment agency, oversee “development of properties, until the contracted work has been completed or the contractual obligations of the redevelopment agency can be transferred to other parties,” among other things.

It becomes rather clear that the city council, which already acts as the redevelopment agency, would want to retain these powers.

The larger questions, however, remain up in the air.  City Manager Steve Pinkerton spoke to the Vanguard about the future of redevelopment and the challenges that lie ahead.

“There are so many subplots to the whole redevelopment issue that there will be a lot of things we’re talking about that,” he said.  “If we don’t get some sort of legislation passed there’s going to be a lot of interesting interaction between the city and the county on that very issue.”

The end of the pass-through agreement he said, is really just “the tip of the iceberg.”  “There’re so many complicating factors,” he said.

One of the critical questions will be how agency assets will be disposed of.

“We’re all hoping this doesn’t happen next,” he said.  “I don’t think anyone wants to go through a complete unwinding of redevelopment.  I know a lot of people want to change it, but the unwinding would be just a disaster.”

Many believe that there will likely be another round of compromise to try to prevent the need to completely unwind redevelopment.  Mr. Pinkerton agrees with this, but cautions, “My fear is that it won’t happen in a timely manner.  So we can end up starting the unwinding before we get to put it all back together again.”

One of the critical timelines is that, over the next three weeks as the legislature gets back to work, they put off the February 1 date after which the agencies are dissolved.

“That’s the critical date right now,” he said.

As Columnist Dan Walters explained, the rise of redevelopment coincided with the adoption of Proposition 13, because it allowed the cities to retain property taxes at a much higher rate for redevelopment projects.  Under normal conditions, they would have to share these diminishing revenues with counties, schools and special districts.

As Mr. Walters writes, “Within a few years, the number of local redevelopment agencies had doubled, and ‘project areas’ had tripled. In 1988, voters enacted another measure, Proposition 98, to guarantee school financing, and that complicated matters further.”

Proposition 98 was passed due to the loss of property tax revenue as the result of Proposition 13, and required the state to use general fund monies to make up for shortfalls in funding to schools.

Writes Mr. Walters, “That has had the unintended consequence of forcing all state taxpayers to subsidize local redevelopment agencies’ off-the-top diversions of property taxes.”

“Local redevelopment agencies more than doubled their indebtedness, from $47.9 billion to $101.8 billion, between 2000 and 2010,” Dan Walters explains.  “That’s required ever-higher property tax diversions (topping $5 billion a year) and therefore more indirect subsidy payments to schools from an increasingly stressed state budget.”

In short, Dan Walters argues that “something had to give” with the state subsidizing schools at $2 billion per year, and the cities were able to pass a ballot measure in order to protect redevelopment funds from state seizures during the economic crisis.

That decision pushed the state to the breaking point, leaving them, Mr. Walters argues, with “only one avenue to recapture the money – abolishing redevelopment altogether.”

The cities – led by the League of California Cities and the Redevelopment Association – screwed up.

The legislature pushed through a compromise that allowed redevelopment agencies to continue to operate if they transferred about $1.7 billion in property taxes to schools.  While some cities agreed to this arrangement, the League of Cities, joined by major cities, sued the state and lost big-time.

Not only did the Supreme Court rule that the state had the power to disband redevelopment, they ruled that the compromise itself was a violation of Proposition 22, and invalidated it.  So now the state can dismantle redevelopment and the compromise is disbanded.

As noted critic Steven Greenhut put it, “Ironically, it was the strategy pursued by these redevelopment supporters that led to the agencies’ demise.”

He argues, “Redevelopment officials resorted to distortions that were easily debunked by the Legislative Analyst’s Office and, ultimately, to an embarrassingly flawed legal strategy. When push came to shove, the RDA house of cards simply crumbled.”

As notes, “To get around the ban on diverting redevelopment funds, Gov. Brown signed into law AB1X 26, which ended redevelopment agencies. His argument: It was no diversion if the agencies are shut down, and because RDAs are technically state agencies, the state has the full authority to shut them down.”

This was an argument that the Supreme Court would make as well, granting the state legislature the power to shut done state agencies.

While the current terms call for the dissolution of Redevelopment by February 1, a bill sponsored by Senator Alex Padilla and Assemblymember Luis Alejo would extend the deadline for redevelopment agencies’ dissolution from the current February 1 date to April 15.

That would do two things – first it would give cities and RDA’s a reprieve and in the longer term it would give the legislature a chance to pass legislation that would form a compromise.

Now that the Court has laid down the law, perhaps the League of Cities and the Redevelopment Association will work harder to find the kind of compromise all sides are looking for – a way for the state to get revenue, a way to reform the way redevelopment is done, and a way to keep the best aspects of RDA, the means by which to convert blight into new opportunities for economic development.

—David M. Greenwald reporting

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