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California's Redevelopment Freeze

JUN 23, 2011 6:56pm ET
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SAN FRANCISCO — California lawmakers have placed the state’s local redevelopment agencies on death’s doorstep, but there may be a bigger problem looming.

If lawmakers follow through with the basic elimination of redevelopment agencies, that will spur a legal challenge from industry groups that could freeze economic development because of the financial uncertainties while the issue wades through the courts.

“We are going to freeze development over the next couple of years while we debate the merits of this legislation,” said Stephen Ryan, a tax and affordable housing attorney at Cox, Castle & Nicholson in San Francisco.

“That is in some ways a bigger negative than actually dealing with the RDA elimination itself,” he said.

Last week, lawmakers approved legislation to either eliminate or drastically curtail the agencies in trailer bills to implement the budget they sent to Gov. Jerry Brown.

Brown vetoed the budget last week. Now, the RDAs are in limbo as the trailer bills are on hold since they have yet to be sent to the governor’s desk.

The California Redevelopment Association, a lobbying group, said the trailer bills technically cannot be sent to Brown because the main budget bill has been vetoed. And if they are signed in their current or a similar form, the association said it will go to the courts to stop the elimination.

“We are waiting on the Legislature,” said Tom Hart, deputy director of the CRA. “We are ready for legal action.”

Proponents of RDAs claim that each year redevelopment supports more than 300,000 jobs, $40 billion in economic activity, and $2 billion in state and local tax revenue.

The agencies collect property tax increment to back bonds that fund economic development in blighted areas.

Redevelopment agencies have come under fire because the incremental tax revenue they collect is lost to the local agencies that would have received the revenue if the RDAs didn’t exist.

In the case of California’s school districts, the state makes up for any money that’s lost to redevelopment, making redevelopment a tempting target for a state government fighting chronic budget deficits.

The redevelopment bills were expected to reduce next year’s state deficit by $1.7 billion, and experts say the measures targeting RDAs will likely be revived or wrapped into another budget bill.

Brown, a Democrat, originally proposed eliminating redevelopment in the budget plan he announced in January, and the RDA elimination bills the Legislature passed last week are essentially the same, though they include a twist.

One of the two trailer bills, ABX1 26, would eliminate all California redevelopment agencies on Oct. 1. But the second bill, ABX1 27, allows an agency to continue to operate if cities and counties take certain steps, including remitting some revenues to school and special districts.

Together, the two bills effectively eliminate redevelopment agencies unless they turn over certain tax-increment revenues for local government use.

Ryan said this or similar legislation would likely leave economic development out in the cold, hurting businesses and agencies while stemming bond issuance as they wait for a legal resolution.

“Let’s just hope that something happens soon,” Ryan said. “People need a path forward whether it’s a good one or not.”

Proponents of redevelopment agencies have pushed other legislation this year offering milder reforms, but they have lost traction during the budget talks.

If RDAs are eliminated, they would be unable to issue any more bonds. However, bonds already approved should be safe.

Sussan Corson, an analyst at Standard & Poor’s, said the redevelopment agencies’ ratings should be stable or increase if they are unable to issue additional debt and the revenue stream used to pay debt service stays intact.

“It is unclear how things might change going forward,” Corson said, noting that nothing is certain until the legislation is signed.

Since Brown proposed the end of thew RDAs in his January budget announcement, the redevelopment agencies have rushed to approve projects and issue bonds.

So far this year, California agencies have sold $1.33 billion in tax-allocation bonds, after issuing only $1.18 billion in all of 2010, according to Thomson Reuters data.

Last week, California lawmakers passed a fiscal 2012 budget, beating a June 15 deadline to adopt a budget or face the loss of their pay.

Less than 24 hours later, Brown vetoed the spending plan, citing its billions in borrowing and legal maneuvers used to close a $9.6 billion hole.

The budget sent to the governor closed the gap using mainly one-time fixes and was passed by a simple majority, supported by the majority Democrats.

Brown has been unable to get enough minority Republicans on board to attain the two-thirds threshold needed to approve an election that would ask voters to approve extending temporary taxes, a linchpin of his budget proposal.

Dismayed by the governor’s veto, Democratic lawmakers have noted the importance of the redevelopment agency bills as part of the budget.

“We don’t know where you get back that $1.7 billion — $1.7 billion that cannot be made up with greater cuts to schools, universities and public safety,” Senate Speaker Pro Tempore Darrell Steinberg said during a press conference Wednesday.

Lawmakers have quickly gone back to the drawing board this week as it appears they will lose pay for every day the budget is late.

California voters passed a proposition last year requiring the Legislature to approve a balanced budget on time or get their pay docked.

State Controller John Chiang issued a determination Tuesday that the budget sent to Brown by lawmakers was not actually balanced, meaning legislators must go without pay until a balanced budget is passed.

Without the enactment of a balanced budget, the state cannot go forward with its annual multibillion-dollar revenue anticipation note sale over the summer that is used to shore up cash to pay for operations. That, credit analysts have said, would put pressure on the state’s credit rating.

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