Worst Possible Outcome for California Redevelopment

With timing that would make Ebenezer Scrooge smile, the California Supreme Court today issued a decision that takes the last gasp out of 50+ years of tax increment financing.  In an all or nothing decision that leaves nothing for redevelopment proponents, the Court upheld the constitutionality of eliminating all of California’s redevelopment agencies, while finding a compromise measure that would have left redevelopment on life support unconstitutional. 

For those of us monitoring the California redevelopment drama, change was expected; however, the  Court’s decision was striking and creates an ominous precedent for the remainder of the country.    At issue was the constitutionality of two pieces of legislation approved by the California legislature earlier this summer.   The legislature was reacting to Governor Jerry Brown’s intention to eliminate tax increment financing (TIF), California’s most useful urban redevelopment tool, to free up billions in revenue that could be rechanneled to schools and other basic services.  Two bills were passed -- AB 26 that dissolves redevelopment agencies, and AB 27 that created a “compromise” allowing redevelopment agencies to continue to function, but share much of their TIF revenues with other jurisdictions (popularly characterized as a “ransom”).  Redevelopment proponents throughout the state viewed the two bills as a package, and the vast majority of California’s redevelopment agencies were lined up to pay the “ransom” and live to develop another day.

The Supreme Court’s shocker is that it evaluated the two bills separately – AB 26 which ends redevelopment was upheld, while AB 27’s compromise was found to be unconstitutional.  In effect, the Supreme Court supported the Governor’s original intent and directed that all California redevelopment agencies be dissolved by this coming spring.   At the same time, the Court unexpectedly eliminated the Plan B approach to keep redevelopment in business.

The Court’s 53-page opinion is a useful read for community and downtown development practitioners nationwide.  In a methodical and easy-to-digest sequence, the Court explains the evolution of public policies that brought California to this point – including voter-initiated constitutional conflicts between property tax limitations, public school funding mandates and the tendency for local governments to increasingly rely on tax increment financing for economic development.  It’s a formula experienced by many states, including Colorado.

Ultimately, the Court’s rationale for dissolving redevelopment was simple – What the legislature giveth, the legislature can taketh away.   Redevelopment agencies were originally a creature of the state.  Their existence was not envisioned to be perpetual.  And now the State can decide that they have outlived their use.  It’s a concise argument that can be replicated by other states that face desperate budget shortfalls and are looking to liberate TIF obligated revenue.

Meanwhile, TIF proponents appear to be behind the curve once again in responding to this latest and perhaps final chapter in California’s Redevelopment Under Siege.  In a news release issued after the Court’s decision, the California Redevelopment Association announced that it would immediately work with the state legislature on a new reform measure.    That’s the same legislature that has already aligned itself with the Governor and approved redevelopment’s death knell.