April 30, 2008 > Redevelopment - boom or bust?
Redevelopment - boom or bust?
Part III: Tax Increment Diversion
This is the third chapter reprinted with permission from Redevelopment: The Unknown Government, A Report to the People of California published by Municipal Officials for Redevelopment Reform (MORR). Ninth Edition, September 2007.
Once a redevelopment project area is created, all property tax increment within it goes directly to the agency. This means all increases in property tax revenues are diverted to the redevelopment agency and away from the cities, counties and school districts that would normally receive them.
While inflation naturally forces up expenses for public services such as education and police, their property tax revenues within a redevelopment area are frozen. All new revenues beyond the base year can be spent only for redevelopment purposes.
In 2006, this revenue diversion was just over $4.1 billion statewide. This means nearly 12% of all property taxes were diverted from public services to redevelopment schemes. Even with modest inflation, the percent taken has roughly doubled every 15 years.
Total acreage under redevelopment has nearly doubled in the past decade, with more than 1.2 million acres tied up in tax increment diversions.
If redevelopment were a temporary measure, as advocates once claimed, this diversion might be sustainable. Once an agency is disbanded, all the new property tax revenues would be restored to local governments. Legally, agencies are supposed to sunset after 40 years, but the law contains many exceptions and is easily circumvented. Tougher sunset legislation is needed to close agencies at a pre-determined date. Only then will property tax diversions end and the funds restored to the public.
Counties are the biggest losers with over $514 million in annual revenues lost to redevelopment agencies. Los Angeles County alone has lost over $2 billion in general fund revenues since 1990 to redevelopment diversion. These are funds desperately needed to keep open public hospitals, staff emergency rooms, stack library shelves and fully fund law enforcement.
Santa Clara County CEO Peter Kutras has labeled these losses "fiscal eminent domain" and has called for County oversight over redevelopment activities.
Currently proposed legislation gives County Boards of Supervisors oversight on future redevelopment area expansions, extensions and amendments in order to help recapture the counties' lost share of these revenues. Such oversight is essential to stop the continued bleeding of revenues needed for essential public services.
School districts are theoretically protected under Proposition 98, but often must sue to force "pass-through" agreements to restore part of their lost revenue.
Saddled by its heavily indebted and now defunct Riverwalk plan, the Garden Grove Redevelopment Agency reneged on $2 million owed to local schools, until threatened litigation restored the funds.
In 2002, the Placentia-Yorba Linda Unified School District successfully sued the Yorba Linda Redevelopment Agency to recoup up to $240 million in lost property tax revenues. With $775 million in indebtedness, the agency had diverted school funds to build golf courses and shopping centers.
Faced with lost property taxes, school districts have slapped steep building fees on new residential development, thus passing the burden of redevelopment onto new homeowners and homebuilders.
Tax increment financing also impacts municipal budgets by diverting city revenues into redevelopment agencies. That part of the tax increment that would have gone to a city's general fund is lost and can now be used only by redevelopment agencies. Thus, there is now money to build auto malls and hotels but less for police, fire fighter and librarians. Cities cannot use redevelopment money to pay for salaries, public safety or maintenance, which are by far the largest share of municipal budgets.
Redevelopment boosters claim the agency is entitled to keep the tax increment because it was created by agency activity itself. The exhaustively researched Subsidizing Redevelopment in California by Michael Dardia (Public Policy Institute, San Francisco, 1998) disproved this. Thorough analysis showed property tax diversions to be a net loss, and do not "pay for themselves" with increased development.
Advocates also claim that redevelopment agencies do not raise new taxes. While narrowly true, the agency tax increment diversions starve legitimate government functions of necessary revenues, thus pressuring tax increases to make up the shortfall.
In 2000, the bipartisan Commission on Local Governance for the 21st Century, San Diego Mayor Susan Golding, released its report, Growth Within Bounds. The commission specifically cited the negative impact of tax increment financing, noting that "This financing tool has steadily eaten into local property tax allocations that could otherwise be used for general governmental services such as police and fire protection and parks."
Tax increment financing is a growing drain on funds intended for public needs. It has confused and distorted state and local finance, resulting in a Byzantine maze of diversions, augmentations, pass-throughs and backfills that have short-changed both our schools and city services. These property taxes - $4.1 billion annually - must be recaptured from private interests and restored to the public interest.