May 14, 2008 > Redevelopment - boom or bust?
Redevelopment - boom or bust?
Part V: Debt: Play now, pay later
This is the fifth chapter reprinted with permission from Redevelopment: The Unknown Government, A Report to the People of California published by Municipal Officials for Redevelopment Reform (MORR). Ninth Edition, September 2007.
Redevelopment agencies are debt machines that have amassed nearly $81 billion in statewide bonded indebtedness.
By law, a redevelopment agency can receive property taxes only after it has first incurred debt. Property tax increment revenues may only be used to pay off outstanding debt. Debts may be in the form of bonds, accounts payable to developers or reimbursements to cities for operating expenses.
Part V: Corporate Welfare
The consultant has found blight. The lawyers have drawn up the papers and defended the agency from suits. The bond brokers have created the debt to be paid by the tax increment that will surely flow.
Now should be the time to begin eliminating blight, as required by state law.
In reality, very little is ever heard again about blight. Redevelopment agencies are driven primarily by creating new revenue. Since most cities with redevelopment have little or no real blight anyway, creating new government revenues become their prime goal. They do so in two ways:
Debt: As we have seen, an agency incurs debt to be paid by future property tax diversions. In this way, it can perpetuate its own activities indefinitely by continuing to borrow.
Sales Tax: By promoting commercial development, a redevelopment agency tries to stimulate new sales taxes that benefit the city's general fund.
By state law, a city's sales tax share is 1% of all taxable purchases. Sales taxes are site-based. If you live in Sacramento and buy a car in Folsom, all of the sales tax share from the car will go to Folsom, none to Sacramento.
Sales taxes account for an average of 26% of city general fund revenues, so cities have long been motivated to attract retail development. City officials and chambers of commerce have touted their location, city services and access to markets. New department stores and auto dealers have long been greeted with ribbon cuttings and proud announcements in the local paper.
Redevelopment has escalated this to a new level.
With redevelopment, cities have the power to directly subsidize commercial development through cash grants, tax rebates or free land. Spelled out in a Disposition and Development Agreement (DDA), a developer receives lucrative public funding for projects the agency favors. Some receive cash up front from the slae of bonds they will never have to repay. Others receive raw acreage or land already cleared of inconvenient small businesses and homes. They purchase the land at a substantial discount from the agency. Sometimes it is free.
Redevelopment subsidies are not distributed evenly. Major developers, NFL team owners, giant discount stores, hotels and auto dealers receive most of the money. Small business owners now must face giant new competitors funded by their own taxes.
Public funds are also used for glitzy new entertainment centers open only to the affluent, replacing perfectly good private facilities at great cost.
L.A.'s Staples Center (tax subsidy: $50 million) moved the Kings and Lakers out of Inglewood, leaving the Forum empty. As part of a new Highland/Hollywood Mall (tax subsidy: $98 million) the new Kodak Theater stole the annual Academy Awards ceremonies from the historic Shrine Auditorium, which had long hosted the event at no public cost and held twice the capacity.
Redevelopment has accelerated the centralization of economic power among ever-fewer corporate chains at the expense of locally-based independent businesses. Asserts Larry Kosmont of Kosmont & Associates, a veteran redevelopment consultant and prominent CRA member, "Costco, Wal-Mart and other sales-tax generators are king of the highways and will get whatever they want."
An Orange County Register study showed Costco receiving over $30 million in subsidies in Orange County alone, extrapolated to $300 million statewide. Wal-Mart has gotten over $1 billion in public handout nationwide, with an estimated $100 million in California.
This costly distortion of the free enterprise system is justified as the only way to boost local sales tax (ending "blight" has by now, been long forgotten). Yet, if new developments are justified by market demand, they will be built anyway. If not, they will fail, regardless of the subsidies.
Pro sports also profit from lavish subsidies. The Raiders got $7 million from Irwindale just for opening negotiations on a new stadium site (never built). In 1995, the Raiders returned to Oakland, lured by $94 million in public subsidies. The Chargers have gotten $134 million in seat guarantee pay offs courtesy of San Diego taxpayers.
L.A. politicians have been decidedly cooler to the hefty subsidies demanded by the NFL for an expansion team, which ultimately went to Houston. So, the nation's second largest media market has no pro football team. Few Angelenos seem to care.
Redevelopment agencies spend $4.6 billion annually, mostly to subsidize purely private economic activity. Money needed for classrooms goes to Costco. Instead of building hospitals, agencies build Wal-Marts. Instead of paying for emergency rooms and libraries, agencies pay NFL owners and car dealers.
Redevelopment has become a massive wealth-transfer machine. Cash and land go to powerful developers and corporate retailers, while small business owners and taxpayers must foot the bill.