State, Cities Still Wrangling Over Billions in Redevelopment Money

Walk down First Street in Brentwood, a farm and bedroom community 55 long road miles east of San Francisco, and you can see a model example of what local redevelopment agencies once could accomplish in a commercial district.

“Our vacancy rate prior to the project was basically 40 percent, and now we’re around 5 percent,” says City Manager Paul Eldredge.

Small businesses have flocked back to this downtown since the city put power lines underground, redid the sidewalks and  planted trees. A block away, redevelopment and city funds paid for a new community center and park. This was all legitimate redevelopment spending, a project finished in the spring of 2012.

“We’ve always played by the rules,” Eldredge says. “And I would go as far to say Brentwood has been the Boy Scout of redevelopment.”

That may be, but Brentwood is also an example of what a messy process it’s been for California to shut down redevelopment agencies and redistribute their funds.

Redevelopment agencies were a hugely popular way for cities to fix up so-called blighted neighborhoods, by capturing the neighborhood’s current and future property tax revenue and using it to finance new commercial and residential development.

However, Gov. Jerry Brown and the Legislature voted to abolish the agencies in 2011 to help close the state's budget deficit, because the agencies also shortchanged county and school funding, leaving the state to make up the difference. But agencies in dozens of cities, Brentwood included, transferred billions of dollars to city accounts to protect them from redistribution by the state.

In Brentwood the figure was $19 million to cover services and contracts the city managed for the redevelopment agency. “A lot of times the city would front the money,” says attorney Leah Castella, “based on funding commitments made by the redevelopment agency.”

Those transfers came after the governor proposed killing the agencies, but before they were dissolved.

“And the state is claiming,” Castella says, “that those repayments are invalid. That they are entitled to claw that money back, therefore leaving Brentwood, the city, on the hook for making up the difference for the cost of the improvements."

So, Brentwood sued the California Department of Finance, which is handling the redevelopment audits, in Sacramento Superior Court. The city argued the state is violating Proposition 22, the 2010 voter-approved measure that prohibits the state from raiding local sales and property taxes, just like those transferred in Brentwood.

“The purpose of Prop. 22," Castella says, "was to prohibit exactly what the state is trying to do here. Which is to disrupt the fiscal planning of local agencies.”

Judge Allen Sumner agreed with that aspect of Brentwood’s argument in a tentative ruling issued late last year.

Brentwood is just one of about 150 cities that made similar transfers before their redevelopment agencies were dissolved, so Sumner’s ruling raises the question of who controls more than $3 billion in redevelopment funds.

Attorney William Ihrke is handling a number of similar lawsuits. “In most of those cases, the funds had actually been spent, and in some of the cases I worked on, the projects had been completely built,” he said.

Ihrke and other attorneys involved in these cases say the law was sloppily drafted. And Ihrke has filed an even more radical court challenge for a group of cities, including Cerritos (Los Angeles County), arguing that the Legislature needed a two-thirds majority to kill redevelopment because the dissolution process creates a mechanism for redistributing property tax revenues.

But H.D. Palmer, a spokesman for the state Department of Finance, defends the law and the dissolution process -- and he says not all judges are siding with cities.

“We have situations where two different judges are looking at the same body of law, and coming down on two very different positions," he said.

And sometimes even the same judge will issue seemingly conflicting rulings. Judge Sumner ruled in January that Redwood City can’t claim $10 million it had committed to give, in 1990, to the Legal Aid Society of San Mateo County for affordable housing.

Sumner ruled the agreement did not qualify as an "enforceable obligation" for the redevelopment agency.

If you’re wondering where the funds are going, Palmer says, they're not flowing into some bank account in Sacramento. “That money is allocated to schools, and cities, and counties, and special districts. So the money does not come to Sacramento, it stays locally, and it comes with no strings attached.”

By June of next year, schools could get up to $4 billion in redirected redevelopment funds.

But Palmer warns that court challenges are threatening those payments and the state’s carefully balanced budget.

“There is a potential risk of about $3 billion, depending upon which way the courts end up going on this.”

Back in Brentwood, Eldredge, the city manager, stands by a playground built with redevelopment funds. And, like Palmer, he says he worries about what comes next. “You know you have this black cloud hanging over your head. And it really precludes you from doing some long-range forecasting and planning, because you have to take into account that you might lose this fight.”

That black cloud might linger over California cities and state finances for years, as the cases work their way through the courts.