California Feels Pinch of Unfettered "Redevelopment"
California has never really had a rational redevelopment program. By designating an area of the city as “blighted,” the city could exercise eminent domain. More importantly, any increase in tax revenue from “redevelopment” in these areas goes directly to the city, rather than the state. In theory, this offers an incentive to cities and developers—who often split increases in tax revenue with the city, to help redevelop blighted areas.
In practice, however, cities have used “redevelopment” to siphon away tax revenue from the state. Often cities designate luxury neighborhoods as “blighted” in order to capture tax revenues. Further, cities may form unholy alliances with developers, as the City of Hercules did with a luxury home builder. Hercules now shares tax revenue with this developer while the state loses out entirely.
The California Supreme Court will likely finish off economic redevelopment once and for all when it rules in January 2012. This is a good move not only because it will help the state with its budget crisis, but also because it will prevent eminent domain from being used in “blighted” areas to benefit private developers at the expense of property owners.
Redevelopment is a controversial tool allowing California cities to capture increased property tax revenues resulting from new development and use that money for purposes other than typical services like education and public safety.
Created in the years after World War II, it is intended to allow cities to eradicate “blight” by placing rundown or vacant industrial neighborhoods in designated redevelopment tax areas and using eminent domain to acquire those areas through condemnation. The idea is that what comes after ought to be better and produce more tax revenue, jobs and affordable housing than what had come before.
In practice, however, redevelopment agencies throughout the state have stretched the intent of the law, using a broad brush to paint areas as “blighted,” according to a March report by California State Controller John Chiang.
When an area of a city is placed into a redevelopment zone, its tax collections are essentially frozen at a base level, and any tax increment that results from new development accrues not to the state but to the locality. In some cases, developers are awarded a portion of the new tax money as a payment. Hercules, for example, pays about $1.8 million a year in tax increment to the company that developed Victoria by the Bay, an area of upscale homes on a former refinery site.
In an attempt to eliminate redevelopment, California Gov. Jerry Brown and lawmakers struck a deal that would have required cities to dissolve their redevelopment agencies or to turn over a portion of their tax increment proceeds to the state. But the billion-dollar industry has powerful advocates, some of whom have sued to stop the plan. The California Supreme Court agreed last week to take up their arguments, and a ruling is expected by mid-January.
