California Lawmakers Shock Redevelopment Agencies With $1B Funds Shift

SAN FRANCISCO — Redevelopment agencies around California got zapped this week when lawmakers rolled out their proposal to address the state’s $24 billion budget shortfall.

The final budget proposal that emerged from the Legislature’s Democratic majority proposes shifting more than $1 billion from redevelopment agencies — $350 million a year, starting for fiscal 2009, which ends June 30, and continuing for two more years.

It’s similar to a bill enacted last year in connection with the 2009 budget year, which shifted $350 million from redevelopment agencies.

Redevelopment agencies beat that back in court, winning a Superior Court decision in May, in which the judge determined that the shift violated the state constitution.

Redevelopment advocates have been expecting the state to rework that proposal and try again, but were blindsided by the scope of the shift that emerged only this week from the Legislature’s joint budget committee, according to John Shirey, executive director of the California Redevelopment Association. “This is a shocker to us,” he said.

He said the large scope of the new proposal could conceivably threaten the financial structure of some agencies.

“We only know that last year at this time, when the Legislature was contemplating just one year at $350 million, we had received some calls from agencies that said, 'We’ll figure out a way to manage a one-year hit if it becomes law, but if its more than that we’ll have problems meeting our obligations,’ ” Shirey said. “In some cases they were talking about bonded indebtedness, in other cases they were talking about contractual obligations they’d entered into with contractors or other entities involved in a specific redevelopment project.”

So far the proposal doesn’t exist in bill form, so Shirey said it’s hard to predict its exact impact. But if a fund shift passes, a lawsuit is likely, he added.

Redevelopment agencies are funded with tax increment financing. Property tax revenue produced from a redevelopment area is measured at the time of its creation, and incremental growth beyond that over time flows to the redevelopment agency, which typically uses the money to service debt issued to finance improvements in those areas.

The first proposal to try again to shift $350 million from redevelopment came from Gov. Arnold Schwarzenegger in his May budget proposal.

“We did some technical changes that we believe address issues raised in that court suit,” said H.D. Palmer, a spokesman for the governor. But the $700 million in additional shifts came out of the Legislature, and the governor hasn’t taken a position, Palmer said.

The redevelopment shift is but one part of a larger proposal the Legislature’s Democrats released Wednesday to counter the Republican governor’s proposals to balance the budget.

Their plan cuts fewer programs from the budget than Schwarzenegger’s, while calling for more one-time revenue tools, such as requiring higher tax withholding from independent contractors.

It also includes $2 billion in new taxes on cigarettes and oil production.

It appears to be the makings of a typical California budget standoff, in which majority Democrats try an often futile chase for Republican votes needed to supply the two-thirds majority needed to pass a budget.

But speaking to reporters Wednesday, Assembly Speaker Karen Bass and Senate president pro tempore Darrell Steinberg went to great lengths to dispute the idea that the Legislature will dally over the budget.

Both state Controller John Chiang and Treasurer Bill Lockyer have warned that a balanced budget with a healthy reserve is needed by June 30 in order to access debt markets for a cash-flow borrowing that will be needed in July to avoid a liquidity crunch.

There is an important distinction this year: the fiscal 2010 budget bill was formally adopted back in February, as part of a tax-hike and spending-cut compromise needed to balance the budget then.

So there is no single budget bill requiring a two-thirds vote, Bass and Steinberg said. They said their package would likely come up Monday or Tuesday, in several distinct pieces of legislation.

Spending-cut proposals can pass on a majority vote, though Bass said she hoped and expected to achieve two-thirds urgency votes that would allow actions to take effect immediately.

“How do you vote against cuts if you are the Republican Party that has voted for a cut strategy for many years?” Steinberg asked.

The tax increases would require a two-thirds vote, and Republicans have been adamant about not supporting them.

Without them, the budget could have a smaller reserve, something Lockyer has warned against, saying it would spook investors. But lawmakers could also revive a Schwarzenegger proposal that they have so far rejected: to borrow $2 billion in property tax revenue from cities and counties, to be repaid in three years.

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