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May 7, 2008 > Redevelopment - boom or bust?

Redevelopment - boom or bust?

Part IV: Debt: Play now, pay later
This is the fourth 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.

Redevelopment agencies are debt machines that have amassed nearly $81 billion in statewide bonded indebtedness.

By law, a redevelopment agency can receive property taxes only after it has first incurred debt. Property tax increment revenues may only be used to pay off outstanding debt. Debts may be in the form of bonds, accounts payable to developers or reimbursements to cities for operating expenses.

Debt is not just a temptation. It is a requirement.

That is why redevelopment hearings inevitably feature three groups of outside "experts": the blight consultants, the lawyers and the bond brokers who help the agecy incur debt so it can start receiving the tax increment.

The bond brokers and debt consultants are easily located. They are listed in the California Redevelopment Association Directory. From city to city they phone, fax, travel and make presentations to sell additional debt. Naturally, redevelopment staffs are supportive. More debt means job security and larger payrolls.

Currently, total redevelopment indebtedness in California is just under $81 billion, a figure that is doubling every ten years.

Debt levels vary widely among agencies, but all must have debt to receive the tax increment. Debt levels have no relation to actual blight, as many affluent suburban towns have higher indebtedness than older urban-core cities.

Indebtedness per capita is the amount of per capita property taxes that must be paid to cover the principal and interest of existing debt. This amount must be diverted from the cities, counties and school districts before these redevelopment agencies can shut down and restore the property taxes to actual public services.

If redevelopment agencies really were successful in eliminating "blight," they would now be scaling back their activities and reducing debt. In fact, redevelopment indebtedness is growing rapidly, draining investment dollars that could have gone to buy other government bonds or into the private sector.

There are two reasons redevelopment debt is so attractive. First, redevelopment agencies may sell bonded debt without voter approval. Unlike the state, counties, cities and school districts, the debts need not be justified to or approved by the taxpayers. A quick majority vote by the agency is all that is needed.

Second, bond brokers love to sell redevelopment debt. The commissions are hi8gh and the buyers are plentiful. Since the debt is secured against future property tax revenue, they are seen as secure and lucrative. If an agency over-extends, then the city's general fund will cover the debts.

Interest payments on bonds account for 20% of all costs - nearly $1.2 billion in fiscal year 2005-06.

Bondholders and their brokers are profiting handsomely from redevelopment debt while pocketing property taxes that should go to public services.

Bond brokerage firms are among the biggest financial supporters of the California Redevelopment Association. They pay hefty annual dues for its pricey lobbyists, sponsor the Annual CRA Conference and hold regional seminars instructing agency staff how to incur every more debt.

Redevelopment debt has mortgaged California's future by obligating property taxes for decades to come. $81 billion needed for future schools, infrastructure and public services has been committed to service redevelopment debts. $81 billion that should pay teachers and police officers is diverted to debt payments.

The only way to avoid these ballooning interest payments is for redevelopment agencies to stop incurring new debt, sell off existing assets and pay off existing principal as soon as possible.

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