Court Ruling is ‘Death Blow’ for California RDAs, Win for State Officials and Schools

With only three days left in 2011, the California Supreme Court ruled that the state had the right to abolish the redevelopment agency (RDA) program, which Governor Brown did in June, but not to set up a smaller program that required RDAs wanting to stay operational to make payments to schools and other public programs. Here’s an excerpt from an article on SFGate, the website of the San Francisco Chronicle:

The California Supreme Court dealt a death blow to the state’s decades-old redevelopment program, ruling today that state lawmakers did have the authority to eliminate the economic development program, but striking down a law that would have allowed the agencies to exist in a smaller form.

The ruling is the worst-case scenario for cities and other proponents of redevelopment, who had sued the state over two bills approved by lawmakers and signed by the governor. Under those laws – AB26 and AB27 – the state’s 390 redevelopment agencies would cease to exist unless they agreed to pay $1.7 billion this year and $400 million in future years toward schools and other agencies such as special fire districts.

Today, the high court ruled that AB26, which eliminated the agencies, was legal; but they said that AB27, which would have forced the agencies to make payments to schools and other public programs if they wanted to continue to operate, was not legal under state law.

The court’s decision is a relief for state leaders, who counted on that money to plug the state’s budget shortfall this year and in the future.

This topic is covered in our 340-page Expanded and Revised 2012 AEC Market Guide to California, which we released this month. 

The section on the RDA controversy includes detailed data about the state’s $8 billion RDA program and the ramifications of the court’s much anticipated decision.

A panel discussion of the San Francisco chapter of the Urban Land Institute (ULI) reflected the worry of RDA backers.

As reported in Urban Land magazine, Fred Blackwell of the San Francisco RDA said large, long-term projects such as the Transbay Transit Center, Mission Bay, and the Hunters Point Shipyard transformation would “simply not get off the ground.”

Moderator Zane Gresham, an attorney at Morrison Foerster (New York, NY), said, “These funding issues for smart urban development and redevelopment are one of many problems facing the state, and policy makers are hard-pressed for solutions. What are the choices? It’s a series of trade-offs and every constituency should be weighed in those choices. Clearly, the challenge that this presents for affordable housing, for economic development, for infrastructure development really can’t be overstated.”

The article adds, “What does that mean for San Francisco? Half of the city’s RDA budget goes toward affordable housing, said Blackwell. If RDAs are abolished, some 1,400 affordable housing units that have not been committed would be in jeopardy.”

During our interviews for the 2012 Market Guide to California, we spoke with a Mission Viejo city official who said they were counting on redevelopment funding, in some form anyway, for two major projects. “We have plans in place for two large low-to-moderate income housing facilities that we hope to pay for with help from the state’s Redevelopment Agency’s Low and Moderate Income Fund,” said the official.

Faced with a choice between forfeiting the funding or paying a fee to remain viable, the city “opted in” — at a cost of $1.82 million for fiscal 2012 — and moved ahead as if the funds would be available. Now it is possible that the redevelopment money may never find its way to these projects.

According to the Orange County Register, Mission Viejo Mayor Dave Leckness said, “We’re paying $1.8 million to protect $12 million,” referring to redevelopment funds already dedicated to the two projects mentioned above.

The Visalia Times-Delta reported that the city of Visalia and Tulare County were set to pay more than $1 million each in redevelopment funds for fiscal 2012, while the city of Tulare would have handed over more than $500,000 to keep its redevelopment program alive.

The paper reported:

Visalia City Manager Steve Salomon said the decision was expected but added that the ruling will also mean cities will need to get creative to redevelop blighted areas. “We may have to use new tools to help improve areas of the city,” he said. “There were very real things that this money helped with. We won’t be able to do as much as we did before.”

While SFGate is correct that the Supreme Court’s decision is a “relief” for the state on one hand, it is likely troubling on the other because the state now needs to address the billions of dollars in projects that were depending on the RDAs and are suddenly in absolute limbo.

Most likely, the state and the California Redevelopment Association (which represents RDAs across the state) will attempt to negotiate a compromise that helps the state achieve its fiscal goals, while keeping the program alive in some form.

It’s safe to say, though, that the court’s ruling solidifies that the state has the upper hand.

The redevelopment program has been a lightning rod for controversy after audits revealed questionable use of redevelopment funds, including for the upgrade of a luxury golf course, travel junkets, lobbyists and commercial developments that some argued are inconsistent with the program’s mission.

Often overlooked in this discussion of the value of redevelopment programs is that the issue pits RDAs against the interests of public schools. As the Supreme Court wrote in its opinion filed December 29, 2011:

Tax increment financing remains a source of contention because of the financial advantage it provides redevelopment agencies and their community sponsors, primarily cities, over school districts and other local taxing agencies. Additionally, because of the state’s obligations to equalize public school funding across districts and to fund all public schools at minimum levels set by Proposition 98, the loss of property tax revenue by school and community college districts creates obligations for the state’s General Fund.

The effect of tax increment financing on school districts property tax revenues has thus become a point of fiscal conflict between California’s community redevelopment agencies and the state itself, a conflict manifesting in the current dispute.

So as it relates to the AEC industry, the ruling may be a blow for residential developers, particularly those that work on affordable housing and urban renewal. But architects, engineers and contractors whose target markets include public schools and community colleges may find the pipeline for school projects a little fuller. (We repeat may, because the state has shown no inclination to use the newfound funds for anything other than offsetting its deficit problems.)

This is only one of the fascinating and evolving issues addressed in our 340-page 2012 AEC Market Guide to California.  

The report assesses the outlook across 40 individual markets and subsectors heading into 2012. When feasible, the report breaks down the markets by major metropolitan area and geography. It also includes a section we call “12 for ’12,” which looks at a dozen major issues expected to affect the California AEC industry in 2012. In addition, the report provides a summary view of the national and state economic outlook, a review of legislative action and other political factors influencing the industry. The links and resources section is nearly 50 pages alone.

If you’re interested in ordering the book, click on the link to the right and order through our secure PayPal site.

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