California Court Decision Ominous for Colorado

Last week, while much of the nation was on holiday, the California Supreme Court issued a bombshell decision that effectively shuts down that state’s 400 local redevelopment agencies.   It was a victory for Governor Jerry Brown, seeking to redistribute redevelopment funds to schools and basic services and help close California’s yawning $26 billion budget deficit.  It was a defeat for cities, effectively terminating the use of the state’s most valuable local economic development tool.   The California case is also very relevant to Colorado, as we appear to be moving down a similar path.

At issue was the use of tax increment financing (TIF) to assist in the redevelopment of commercial areas.  In California, TIF allows proceeds from increases in property taxes to be captured for investment within designated geographic districts.  The original intent of TIF was to cure blighted conditions within city centers.  It is a common tool, used in more than 40 states throughout the nation, including Colorado.  Since legislative authority was granted in California in the 1940s, many cities have seen dramatic improvements, including the revitalized downtowns of San Diego, Pasadena and Santa Monica.  Closer to home, examples of the use of TIF include the Denver Dry and Pavilions projects in downtown Denver, improvements at Stapleton and the revitalization of many smaller communities, such as Old Town Arvada.

A sequence of California voter-initiated constitutional amendments coupled with a pattern of TIF abuses culminated with last week’s decision.  The Court’s decision describes how Proposition 13, which limited property tax increases, and the subsequent Proposition 98, which created education funding mandates, created conflicting pressures on the state’s property tax.  As a result, local governments relied on TIF for uses well beyond their original intent.  Dubious projects were financed, ranging from big box stores on farmland to golf courses in desert resorts.  Cities expanded redevelopment districts to encompass most of their commercially zoned land, regardless of condition.  In other cases, TIF funds were used to fund city staff functions that had little to do with redevelopment. 

By early last year redevelopment was a ripe target for the new Governor.  Redevelopment agencies were capturing 12% of the state’s property tax, or more than $5 billion annually.  Jerry Brown masterfully orchestrated the politics, pitting the need to fund school, fire, police and basic services against the complexities of redevelopment.  The action to dissolve redevelopment was supported in polls by the vast majority of California voters.

The similarities in the chain of events in Colorado are strikingly similar to California.  We share the same voter-initiated constitutional constraints on our budget – TABOR which restricts revenue, and Amendment 23 that provides education funding mandates.   And while Colorado has been more disciplined in its use of TIF, we have our share of questionable projects such as Wal-Marts and other greenfield abuses. 

In a stroke of particularly bad timing, our headlines are now dominated by the mother of all Colorado TIF projects – Aurora’s planned Gaylord hotel.  With debatable economic benefits, Aurora plans to lard nearly $300 million in TIF and other special district revenue on out-of-state billionaires to build an all-inclusive resort.   While Gaylord opponents have rightfully been concerned about its impact on downtown and metro hotels, the project also holds the potential to trigger a California-style backlash against redevelopment itself.

Colorado’s civic, business and economic development leaders should take a close look at California’s redevelopment saga.  With increasing pressure to fix our own structural budget problems, the political winds could easily blow from the west, and redevelopment, one of our most powerful economic development tools, could also be at risk.  Now is the time for a recommitment to the responsible use of TIF and we should avoid the reckless abuses that contributed to their demise in California.