Monday, January 17, 2011

Governor Brown’s Budget Proposal – Issues for Economic Development

Today's post was authored by Bill Anderson, City of San Diego Director of City Planning and Community Investment, and Immediate Past Chair of the APA Economic Development Division.

California Governor Jerry Brown unveiled his budget proposal. It is a combination of budget cuts, restructuring, and a proposal to the voters to extend for another five years existing taxes that are due to expire. His proposal would close a projected $25.4 billion budget gap ($8.2 billion this fiscal year and $17.2 billion next fiscal year), with budget cuts covering almost half ($12.5 billion), and tax extensions ($12 billion) and other measures ($1.9 billion) covering the other half. He also would shift several responsibilities from the State to local jurisdictions, purportedly including some revenue to go with the new responsibilities. Many of these proposals, especially continuation of existing temporary taxes, would have to be approved by the voters in a special election, perhaps this June.

The Governor’s budget includes three actions important for planners and economic developers:

  1. Eliminate Redevelopment Agencies
  2. Eliminate State Enterprise Zones
  3. Add a provision that would allow voters in local jurisdictions to approve funding for economic development activities with a 55 percent majority vote.
If passed, it would dramatically affect how community revitalization and redevelopment is done in California. The Administration’s rationale also presents opinions that have been debated by economic developers, planners, academics, and the public for decades.

Eliminate Redevelopment

Redevelopment and its tax increment is one of the primary economic development tools in California for funding affordable housing, infrastructure, and planning in designated areas to ameliorate blight. In California, tax increment is collected from a redevelopment project area, formed in accordance with Redevelopment Law. At least 20 percent of the tax increment must be spent on affordable housing. Since 1993, almost 100,000 low and moderate income housing units have been built. A portion of the tax increment is distributed with other taxing jurisdictions, such as counties and school districts, while most is spent by the Redevelopment Agency on allowed redevelopment activities, such as land assembly and infrastructure, but also economic development, rehabilitation programs, fa├žade improvement programs, and planning within the redevelopment project area.

The Governor proposes the elimination of Redevelopment agencies by July 1st, 2011. He proposes to replace them with a shell structure so that existing debt and contractual obligations would be honored, but new obligations would be prohibited. Surplus Affordable Housing Set-Aside funds would be transferred to local housing agencies. Unencumbered tax increment funds would be distributed to other taxing agencies.

The Governor argues that tax increment is money that would otherwise go to cities, counties, school districts, and other agencies. These agencies generally have accepted redevelopment activities, and have agreed to forfeit a share of property tax increment with the expectation that revenues will be greater in the long run once redevelopment project areas have completed their purpose and expire.

However, now is a time when most agencies have significant budget deficits and are cutting basic services. Since the adoption of Proposition 13 in 1978 (when Jerry Brown was last Governor), the State has backfilled school district budgets, which creates a strain on the State budget. The Administration estimates that elimination of Redevelopment agencies would save the State budget approximately $1.9 billion.

The premise is that most jurisdictions cannot afford to relinquish revenue to redevelopment agencies, no matter how important the redevelopment activity, and that much of the tax increment generated is from economic activity that would have occurred in the region anyway, if not within the redevelopment project area. Redevelopment advocates, on the other hand, argue that most of the tax increment revenue, and other derived local taxes such as sales and transient-occupancy taxes from redevelopment project areas, would not have occurred if it were not for redevelopment and its investments. The California Redevelopment Association estimates that in a typical year, statewide redevelopment project areas contribute $40 billion in economic activity, and $2 billion in state and local taxes, and over 300,000 private and public sector jobs, annually. Of this annual amount, $19 billion in output and 171,000 jobs are associated with new construction of buildings and infrastructure.

The Governor counters that because tax increment is generated from an area rather than an individual project, much of the tax increment is from general property inflation or appreciation, rather than from direct redevelopment activities. Advocates for redevelopment say that redevelopment investments lift value of surrounding properties as well and, therefore, it is appropriate to capture some of the tax increment derived, even if it is from appreciation.

There are almost 400 redevelopment project areas in California, with major success stories, including our own Downtown San Diego where $1.5 billion in public investment has leveraged $12.8 billion in private investment, an 8.4:1 ratio. This proposal will be complex to implement, even if it is supported, and if adopted, it will face legal challenges. There are questions as to whether the Legislature can disband Redevelopment Agencies (which are technically state agencies), or if it requires a constitutional amendment and voter approval. California voters approved Proposition 22 just last November which prohibited the State from taking local funds, including funds from redevelopment agencies. However, if the State eliminates the agencies all together, is this prohibition even relevant?

Enterprise Zones

Enterprise Zones give certain tax benefits to businesses located within a zone. It’s an economic development tool to encourage businesses to locate and expand within certain geographic areas covered by the zone. The new administration argues that while this is a benefit to these areas, there is limited evidence that they generate new economic activity statewide – that they are simply a transfer of economic activity which the state subsidizes, and often is economic activity that would have occurred within the state anyway. I remember hearing this argument from some of my professors in graduate school almost 30 years ago. The Administration estimates that elimination of Enterprise Zones would make over $900 million available to local governments.

Voter-Approved Economic Activity

This part of the proposal has not received as much attention yet, but it could be significant in the future. Currently, special activity bonds and taxes require a two-thirds vote of the public within the local jurisdiction. The Governor’s proposal would allow voters in a local jurisdiction to direct some of their fiscal revenue to economic activities they choose, such as community development and redevelopment in another form. It’s not definitive if this could be a dedication of current fiscal revenue, tax increment, sales taxes, new property tax overages, special taxes, or other voter approved mechanisms. The reduction of voter approval thresholds from two-thirds to 55 percent is significant. Many initiatives to fund special activities have received more than 55 percent voter approval, but failed because of the difficult challenge of convincing two-thirds of the voting public to approve funding. There is almost always one-third of the public opposed to any public expenditure. Tailored economic development strategies pitched to the voters for funding may become more common.

The Governor has made a bold proposal. He admits hard choices and painful cuts of programs that he supports, but the budget proposal is specific and allows the public to debate and come to grips with their priorities. Clearly, the Governor’s priority is K-12 Education, which was largely spared. In isolation, these proposals might not survive. Any reluctance to extend taxes that are due to expire will put pressure to cut even more than what the Governor proposes. Since elimination of these important economic development programs are part of the Governor’s comprehensive budget package, there is the risk that they will be supported, especially given the State Budget’s dire circumstances. Many Californians are generally supportive of the Governor’s desire to direct more decision-making and revenue to the local level, closest to the people, but the elimination of Redevelopment agencies, which are formed locally and governed locally, subject to State laws, seems to be a contradiction. The argument by the Governor tends to place a lower priority on geographically-targeted economic development programs that, as he asserts, transfers economic activity within the State and a region, rather than create new economic activity for California.

This, of course, depends on the type of activity. Investments in infrastructure that support tourism and industry do indeed create export-oriented economic activity for the State of California. But even if it didn’t, even if it was just a transfer, isn’t the revitalization of blighted areas of California, and investment that supports innovative developments (such as transit-oriented development) and affordable housing good public policy and a long term benefit? If so, are Redevelopment and Enterprise Zones necessary tools? Some states, such as Arizona and Washington, prohibit tax increment financing and still do economic development, but Redevelopment is so ingrained in the way California funds its place-based economic development activities, if the Governor’s proposal becomes law, the economic development tool box will need new tools.