State Money Count Will Likely Doom Redevelopment, Housing Revival

Timothy L. Coyle
Consultant specializing in housing issues

Leave it to government to convolute and stupefy something as simple as basic arithmetic.  Yet, stupefying is how a reasonable person could describe a system that’s been used by Sacramento for years to account for the ebb and flow of state revenues into and out of the state treasury.  Indeed, this “new math” has led to the undoing of California’s only economic development and urban revitalization – and housing – financing tool.  It’s called redevelopment.

Only government could create an accounting (or “counting”) system whereby a net new dollar earned – even after all the bills for the year have been paid – is not considered by the state to be new or additional at all.  Instead, that dollar becomes, says the law – and, correspondingly, say the covetous bean counters at the Capitol – an obligation payable to the state.  

Granted, the state’s math isn’t something it created on its own.  It evolved with the convergence of two legendary ballot initiatives – Proposition 13, the measure approved by California voters in 1978 to limit property taxes; and Proposition 98 which, passed in 1988, instituted a guarantee that a fix percentage of the annual state budget – roughly 45% – would be reserved solely for K-14 public education.  It’s essentially the combination of these two well-intentioned policies that have so affected normalcy and reason when it comes to accounting for state income and outgo.

When Proposition 13 passed, it was expected that the size and cost of government would shrink correspondingly with a newly diminished local revenue pie.  It didn’t, of course, so in 1979 the Legislature created new accounts and funding pots to, with other tax dollars, cover the cost of remarkably unrestrained growth in local services – beyond the requisite firefighting, law enforcement and teaching – sowing the seeds of the coming new math.

But, less than 10 years later, school teachers and other associated education groups said the state’s reimbursement of cities and counties was underfunding schools.  How is still a mystery.  Arguing that state per-pupil funding levels comparing poorly to other states, California’s education community won the day as Proposition 98 passed, albeit barely.  Prop 98 said no matter what the fiscal or economic situation – and no matter how it may affect other state interests – public education was to receive nearly 50% of annual state revenues, every year.

By 1990, not only was state government allocating substantial sums to cities and counties every year to keep them afloat – keeping faith with its post-Prop 13 commitment to them – it was doing so with its General Fund virtually cut in half, thanks to Prop 98.  Remarkably, the ensuing (annual) fiscal train wreck has been largely ignored or, more likely, hidden from public scrutiny.

To overcome the income/outgo mismatch, the state over the years has invented assorted schemes and financing gimmicks, among them the poaching of local redevelopment dollars.

What is redevelopment?  Authorized in 1945, redevelopment was to be the state’s principal economic development tool.  It makes improvements to non-performing property to generate higher property tax, to the benefit of almost everybody.  To many, particularly those with more locally based perspectives, redevelopment has been an unmitigated success.  As recently as 2010, the state’s 400 redevelopment agencies generated over $5 billion in new property tax revenue, a billion dollars of which went into funding affordable housing.  That year, nearly 18,000 affordable housing units were produced as a result of redevelopment funding and throughout its history redevelopment has been a reliable if not prolific job creator.

As such, it is and has been a net tax revenue producer.

But, thanks to the 1979, post-Prop 13 handiwork of the Legislature the state recently had first dibs on redevelopment’s billions, not the localities that produced them.  Ultimately, applying its “new math”, the Legislature and the Governor determined that it wasn’t worth keeping redevelopment open for business and they shut it down.  Critics of the action, and there are many, argue that state government shot itself in both feet:  first, new math or not, more tax revenue is better than less of it and cutting off a reliable source of property tax revenues helps no one; and secondly, pulling the plug on redevelopment job creation is, at least, bad timing.

Affordable housing advocates say that with the loss of redevelopment there was nothing left to systematically finance new low-income housing development.  They use the loss of redevelopment to justify all sorts of prescriptive housing legislation like, for example, a bill that would prohibit housing owners from converting their properties for five years or ones that would mandate affordability discounts on new housing construction.

As more and more of us know, the real housing problem is supply.  We need a dedicated production tool – at least for affordable housing.  Until someone does something about the state’s new math, redevelopment won’t soon be making its regular, beneficial contribution toward that goal.

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