Redevelopment 101: A bucket half full

There is a lot of talk about changes to redevelopment agencies in the state and the impact those changes will have on development projects in Sacramento.

To get a better idea of how redevelopment agencies work from a fiscal point of view, Sacramento Press has put together a “redevelopment primer” to make it easier to understand where the money comes from, where it goes and how the city benefits from redevelopment funding – and how it doesn’t.

“It all starts with property taxes, guaranteed school funding from Proposition 98, and state redevelopment law,” said Peter Detwiler, a consultant with the state Senate Governance & Finance Committee.

FIRST, WHAT IS A REDEVELOPMENT AGENCY?
Cities and counties set up redevelopment agencies to eliminate blight by paying for public and private improvements and economic development.

According to a report from the state Legislative Analysts Office, the use of redevelopment has improved many areas through the revitalization of downtown and historic districts and improvements in public infrastructure.

This creates economic growth, provides affordable housing and adds value to properties and neighborhoods, increasing property taxes and bringing revenue to cities, counties, special districts and schools.

HOW IS IT FUNDED?
Property taxes don’t just fund schools – they also provide revenue for cities, counties and special districts, such as water districts, utility districts or waste disposal.

When property values rise in a redevelopment area, so do the property taxes collected. The distribution of that money is calculated using formulas established by state law, and it is not divided equally.

As soon as a redevelopment agency is formed, the distribution changes. Instead of the increased property tax amount flowing out in its usual proportions to cities, counties, schools, and special districts, their shares are fixed, and redevelopment takes the rest – the growth – off the top.

That “growth” is the incremental tax increase, and it is the prime source of funding for redevelopment agencies.

HOW DOES IT SPEND MONEY?
When a redevelopment agency forms a development project, it leverages the projected amount of tax increment it will receive with bonds to finance the project.

Eric Rasmusson, a Sacramento lobbyist who specializes in housing issues, said to “think of a redevelopment bond as kind of a mortgage.”

A mortgage is secured by a house. On a home loan, the bank gives money up front on the risk that the value of the house will go up – and that the homeowner will make the required payments.

“A redevelopment bond is secured by the expected tax increment (revenue from property value increases) that a project will earn over the next 40 years,” Rasmusson said, “and the bond money finances the project.”

The bondholder loans on the risk that a development project will, in fact, raise property values and revenue – and that the agency will make the required payments.

When a redevelopment area experiences growth and the redevelopment agency collects revenue from that growth, the agency then uses those funds to pay the debt on bonds and to finance more projects.

WHAT IS THE CONNECTION TO SCHOOL FUNDING?
Schools are funded by property taxes. When Californians passed Proposition 98 in 1988, they established a constitutional obligation for the state to fund schools to a certain level.

Proposition 98 spending for schools is determined by a formula outlined in the state constitution, and it equals approximately 45 percent of the state general fund revenues each year.

Let’s think of school funding as a big steel bucket.

Imagine two faucets over the bucket. One faucet is “property tax,” the other is “state general fund,” and water (money) flows from those faucets into the bucket.

Since schools are primarily funded by property taxes, the property tax spigot is turned on first.

“School districts get, on average, about 52 cents of every property tax dollar, based on state formulas,” Detwiler said.

Property taxes are based on home and land value, and California has been suffering from a severely impaired housing market, so the property tax spigot doesn’t always fill the bucket to the top, he said.

When that happens, the state general fund spigot takes over to fill the bucket to the constitutionally guaranteed level. The less property taxes there are to fill the bucket, the more the state general fund has to make up.

Last year, the state general fund spigot poured out $3.2 billion for school funding in California.

At the same time, the state budget included cuts to everything from health and human services to transportation and parks.

WHAT FUNDING PROBLEMS DO REDEVELOPMENT AGENCIES CREATE?
If redevelopment agencies are collecting the incremental growth from increased property values in a redevelopment area, that money is not going to cities, counties, special districts – or schools.

Think of it as a hole in the bottom of our school funding bucket: Schools get some of the property taxes for a redevelopment area, but not as much as they would receive if their allocation level wasn’t frozen by the redevelopment agency.

Redevelopment agencies may help create growth, but they do not share the revenue from that growth.

IS THAT ALL?
Not quite.

A recent study showed that increases in property tax revenues are not solely due to redevelopment agencies.

“When redevelopment agencies do good things, property values rise,” Detwiler said. “But some of that was going to rise anyway.”

The study, conducted by the Public Policy Institute of California, concluded that about half of the growth from property value increases was going to happen anyway, and half is attributable to redevelopment agencies.

“It’s fair to say, then,” Detwiler said, “that the unearned half of revenue being captured by redevelopment agencies (from property value growth) should really belong to schools.”

Since the state is obligated to make sure the school funding bucket is full, it is in effect subsidizing redevelopment agencies for the unearned portion of revenue.

The question the governor asked Californians with the new budget was, “Can the state general fund afford this size of subsidy to redevelopment?”

The governor’s answer was “no.”

HOW DO WE PATCH THE HOLE?
The new state budget included legislation that eliminates redevelopment agencies in an effort to save the state nearly $1.7 billion dollars in “backfill” school funding obligations.

Under the new laws, redevelopment agencies can elect to remain in business by paying “continuation payments” that fund K-12 schools – reducing the amount of “water” flowing from the state general fund spigot.

Those continuation payments, however, must come from the city or county that has authority over the redevelopment agency. That means, if a city cannot afford the payments, it cannot afford its redevelopment agency.

Between a property tax spigot that runs low in a bad economy, and a state general fund spigot that is running dry, redevelopment agencies may be too big of a hole in the bucket.

Melissa Corker is a Staff Reporter for The Sacramento Press. Follow her @MelissaCorker.

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July 15, 2011 | 8:20 PM

This is going to be devastating for Tahoe Park. We have the Depot Park, 65th Street, Stockton Blvd. and Oak Park redevelopment area all surrounding our neighborhood. Expect the blight to continue once the Redevelopment Areas are eliminated.

July 18, 2011 | 5:38 PM

Tahoe Park’s problems have more to do with “Property Trolls”. Long ago, a few Investors bought strategic plots of land, and are positioned to leverage these Redevelopment funds for generations. These same investors also tend to sit on the Boards that make most of the community’s decisions. The same situation is happening in Oak Park, with the most blatant Troll also being the mayor. One has but to drive down Broadway or Stockton, where you will see the mostly vacant, and very derelict properties. They bought them cheap, let them rot, and then demand the redevelopment funds to “fix” the problem that they are the real cause of.

July 15, 2011 | 10:54 PM

It seems like a baby with the bath water approach. While it’s true that in some instances there may have been some growth in value without the redevelopment activity, it wouldn’t be true always. And in some areas, the lack of redevelopment may cause the “blight” to spread and the property values and tax revenues to diminish further, also reducing revenue for schools and causing the state to have to backfill more. It seems like what is needed is a more complex way of calculating how much of an increase in local property tax revenues go to an agency, with a formula that takes into account average property value fluctuations in a region, to ascertain to what extent values were changing even without redevelopment activity. But if you do something like that, you also have to accept that there may be times when redevelopment activity raises values/taxes during a period in which average values were diminishing – which would logically mean that the schools and/or the state would actually owe the redevelopment agency, not the other way around.

July 16, 2011 | 7:56 AM

Fantastic article. Melissa, you did a great job demystifying the complex process of redevelopment in California. Thanks!

July 16, 2011 | 9:46 AM

I can say that Peter Detwiler really knows the complexities of redevelopment and CA land use policy having been fortunate enough to have Peter as a professor in grad school and a second readerof my thesis. This is a great article for the Sacramento Press.

zen
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July 16, 2011 | 5:15 PM

There are some misleading statements in this article but generally a good piece. One thing though, wasn’t the 1400 R Street project a private project? I think CADA helped pay for some infrastructure but they are not technically a redevelopment agency.

July 17, 2011 | 4:08 PM

I’m not calling you out – just trying to learn more – what are the misleading statements and is there a better way to explain?

zen
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July 17, 2011 | 10:59 PM

Example. “That means, if a city cannot afford the payments, it cannot afford its redevelopment agency. ”

I believe the $1.7 Billion the State Office of Finance and Governor is using is from 2008. I am guessing they can’t afford them regardless because tax assessments have gone down and down since then. The Gov is using unattainable numbers to start.

Example 2:“It’s fair to say, then,” Detwiler said, “that the unearned half of revenue being captured by redevelopment agencies (from property value growth) should really belong to schools.”

Since the state is obligated to make sure the school funding bucket is full, it is in effect subsidizing redevelopment agencies for the unearned portion of revenue.”

This section all assumes a line of thinking that the tax increment funding belongs to schools because rise in tax assessments may or may not be attributed to redevelopment, but that is skewed line of thinking. Tax increment financing is not created or based on the what and why the incremental increases occur. The point is to create a revenue stream for redevelopment activities regardless if redevelopment is the cause such tax increases. Assessment increases have to happen without much redevelopment activity in the beginning in order to collect enough funds to initiate projects or bond for more funds. Its a spin to state those funds should be for schools.

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