Three years after redevelopment agency dissolution, the State Legislature is considering a number of options to fill the funding & authority gap.

The dissolution of California’s 400+ Redevelopment Agencies in 2012 dramatically affected local governments’ ability to fund projects to alleviate blight and facilitate urban renewal. Municipalities and real estate developers should consider keeping tabs on legislative efforts to fill the funding gap.

California’s Redevelopment Agencies were part of the civic landscape for nearly seventy years. Under the Community Redevelopment Act (1945), cities & counties declared specific “project areas” as blighted and in need of urban renewal. The growth in property tax revenues in the project area could be directed toward that area’s Redevelopment Agency (RDA), to be spent on development projects to improve urban blight and encourage economic development. Although the program was initially limited in scope, changes to school funding and property tax policies in the 1970s encouraged local governments to direct increasing amounts of property tax revenue toward Redevelopment Agencies. As a result, the percent of statewide property tax revenue received by RDAs increased from 2% in 1977 to 12% in 2008.

In the 1980s and 1990s, RDAs funded a number of high profile, successful projects (for example, San Diego’s Horton Plaza and Gaslamp Quarter were both RDA projects.) Despite successes, Redevelopment Agencies were increasingly criticized for being “honey pots” serving the interests of commercial developers. Criticism reached its peak in 2010 after a publicity surrounding a series of redevelopment failures and extravagant projects.

Two-part legislation was passed in 2011 that would have dissolved redevelopment agencies but allowed individual RDAs to continue operating if they made certain payments to the state to assist in funding schools. A series of court cases challenging the legislation had the unanticipated effect of upholding the first law but striking down the second, which effectively shut down the RDA system. As of February 1, 2012, California’s 400+ RDAs formally ceased to exist and began transferring funds and responsibilities to the ‘successor agencies’ responsible for servicing their remaining debt obligations.

The most noticeable immediate impact of the dissolution has been a reduction in the number of new affordable housing units entering the market. Experts calculate the net loss at between 4,500 and 6,500 affordable housing units annually.

Although it was not the only source of funding for low-income housing projects, the RDA system played an important role in providing late-stage funding to see projects through to completion. Without this safety net, projects are more likely to fail and developers are less likely to pursue low-income housing projects in the first place. In addition, because the RDA program was particularly effective at encouraging the cleanup of environmentally contaminated lands, the dissolution of the program has both economic and environmental impacts.

In the absence of Redevelopment Agency funds, local governments have a limited and challenging set of options to encourage redevelopment. These include:

  • Infrastructure Financing Districts (IFDs)
  • Community Facilities Districts (CFDs)
  • Assessment Districts and Business Improvement Districts
  • Statutory Development Agreements.
  • Specific Plans (EIR Exemptions for Conforming Developments)
  • Federal New Market Tax Credit Program
  • Public Private Partnerships
  • Community Controlled Nonprofit Economic Development Corporations

The major obstacle presented by many of these options is that they require a 2/3 majority vote of the qualified electorate in order to go into effect. In addition, the entire system is set up around assessing special additional taxes rather than granting tax abatements to projects that have successfully alleviated urban blight or contributed to urban renewal. Cities are authorized to provide property tax exemptions only in very specific circumstances outlined by the state legislation – and few of these relate specifically to redevelopment.

At present, legislative efforts to address these challenges remain limited. There was a flurry of legislation proposed in the aftermath of the 2012 court decision, but efforts have slowed in recent years as specific legislative proposals have been met with increasing resistance from the Governor. There are several legislative proposals in the current session, however it is unclear if any of these proposals will even make it to the hearing phase, much less have a chance at being Chaptered into law. Senate Constitutional Amendment 5, for example, would reduce down to 55% the existing 2/3 majority vote for special taxes – but a similar proposal in 2013 failed to make it out of the Senate Appropriations Committee.

We are monitoring a number of legislative proposals and will continue to advise our clients on their likelihood of success as the legislative landscape continues to evolve.