Unless you’ve been living under a rock, you may have heard that California has both a major budget deficit and a new governor. One of the proposals to balance the California budget from our new Governor, Jerry Brown, (full disclosure, I voted for him) is to eliminate California Redevelopment Agencies. There have been quite a number of San Francisco projects that have been funded by these agencies, and until I heard about the budget proposal I had really never given much thought to what they are. And why eliminating them would be a good or bad thing. Based on the reading I’ve done so far, I can only surmise that I have a lot more reading to do, but here is a brief summary of what I’ve learned so far.
California Redevelopment Agencies were first authorized in 1945. The idea is (and was) to fix up blighted, decaying, and forgotten areas, which will in turn raise the value of surrounding property taxes, which will in turn create more tax revenues for everyone.
How California Redevelopment Agencies Work, in a very simple nutshell:
Redevelopment agencies are entities created to make the initial investment to enable redevelopment, and they are allowed to take a portion of future tax increases (created by the increase in taxes due to the increase in value caused by the work) to pay for the initial investments. Its a solution to the classic chicken and egg problem. You believe you’ll make more money in the future if Â you invest money today. But you don’t have any money today to invest. So you create the redevelopment agency to issue bonds or other debt instruments, and create a future revenue stream that will provide investors with a level of certainty that their investment will be paid back and they’ll make a little bit of money in the process.
So why is this a California budget issue?
Redev agencies areÂ guaranteedÂ a cut of the future incremental tax increases (take your basline property taxes, the amount that the area currently generates in its blighted condition. Subtract this from the amount of taxes that will be generated when the area is redeveloped and you have your incremental tax increase. Roughly, in a nutshell). And it is that money (the incremental taxes) that Jerry Brown would like to have back, thank you very much, to help balance the budget.
Is this a good idea?
Depends on who is talking. Some feel that these agencies are anÂ inefficientÂ and costly way to achieve development goals, and that there are better ways to accomplish redevelopment in California. Others feel that there is a multiplier effect from the work that has created hundreds of thousands of jobs and additional forms of revenue for the state, and that to eliminate them is a very short sighted and ultimately destructive activity that will come back to haunt California budgets in the future.
Stay tuned for more of my thoughts about this, and what it could mean for San Francisco real estate.