The $6 Billion Scam

Jerry Brown's plan to kill community "redevelopment" is fiscally smart, morally right, and probably doomed.

At what point does a public institution move beyond mere self-interest or ineffectuality and become actively evil? Two proposals in California Gov. Jerry Brown's 2011–12 austerity budget provide a useful comparison.

With his plan to ax the state's system of "enterprise zones" and related tax credits, Brown wants to do away with a program whose history of failure can be charitably blamed on bad luck or miscarried good intentions. But by trying to kill the state's 425 redevelopment agencies (RDAs), the governor is taking on—and robustly criticizing—a gang of thugs whose activities closely resemble those of a criminal enterprise.

Brown has plenty of reason to cut both entities. The state faces a $25 billion deficit during the next two years, and both programs are enormous money losers. By eliminating enterprise zone tax breaks (which include hiring credits, interest deductions, special treatment for sales taxes paid, and a credit for employees who earn wages within a given area), the governor expects to make an additional $343 million available in the 2010–11 budget and $581 million in 2011–12. The savings to state and local governments from deep-sixing redevelopment funding are expected to be even greater: an estimated $5 billion to $6 billion during the same period. 

That's the budget-hawk reason for eliminating these programs. But the much more important reason, which Brown's 2011–12 budget summary explains in surprising detail, is that both are manifest failures even on their own very forgiving terms. 

Enterprise zones create few jobs and almost never increase hiring for the poor local residents they are supposed to help. The budget summary cites a 2005 legislative analyst's finding that "EZs have little if any impact on the creation of new economic activity or employment." In the kind of misallocation language you'd expect to find in a classical economics textbook rather than a government document, the summary also notes that the few increases in hiring or business "are not generally a result of new activity, but, instead, from the shift of activity into a zone that otherwise would have occurred elsewhere." This anemic shifting of value comes at an enormous cost. A 2002 report from the W.E. Upjohn Institute for Employment Research found that enterprise zones cost state and local governments a whopping $60,000 for every job created in a given zone. 

But while enterprise zones merely produce shoddy results, California's redevelopment agencies actually destroy cities. Brown's budget summary not only proposes eliminating all the state's RDAs by July but spends several pages detailing their vices. "Most development in RDAs is shifted from elsewhere in the state," the governor notes. "The private development that occurs in redevelopment project areas often would have occurred even if the RDAs were never established. There is little evidence that redevelopment projects attract business to the state." 

Because economic growth tends to happen in spite of public action, and because RDAs tend to be most active in those parts of town where members of the mainstream media don't live, the abysmal record of redevelopment is not always clear. But the acres of south Los Angeles wasteland generated by the Community Redevelopment Agency of Los Angeles (CRA/LA), the state's largest and wealthiest RDA, are a grim testament to failure. The agency's Normandie 5 Redevelopment Project has generated zero development. Its 107-acre Watts Project area, which has been in effect since 1968, boasts nothing but a Food 4 Less that hardly required government help to come into being. The massive $163 million Marlton Square project has stagnated, unbuilt, for nearly 20 years as a shady developer with friends in City Hall looted taxpayer funds. The two-block project area at the corner of Vermont and Manchester Avenues is a vacant lot. So is the long-fallow Central/Slauson project, where the CRA used eminent domain to shut down a metal works that was the only functioning business in the area. You'd need to go back to the crew of the Enola Gay to find a group of Americans responsible for creating so much vacant urban space.

There are many reasons for the failure of redevelopment. Part of the blame lies with the tax-increment funding structure that depends on property tax assessments and thus ensures that the least money will be available in neighborhoods where it is most needed. Part is due to a bidding and deal-making process that is about as straightforward as your intestines. Maybe the most important factor is the tendency of public-private partnerships to attract the worst elements of society: union goons, neighborhood activists, reverends, public-trough developers, political appointees, city planners, and so on. The Marlton Square project came close to breaking ground in 1999 under the legendary Lakers point guard and successful developer Magic Johnson—until itinerant local politician Mark Ridley-Thomas forced Magic out and turned the project over to a developer with a history of bouncing checks and cheating on his taxes, who went on to make millions of city dollars vanish before going bankrupt.

True to its criminal nature, the CRA/LA has responded to Jerry Brown's proposal by breaking the law. After the governor's budget plan came out in mid-January, the agency called an emergency meeting, in violation of a state law that requires three days' public notice before a government agency holds a vote. (The meeting was called with less than 24 hours' notice, and as far as I can see, it was never announced on the agency's website.) Although a few local gadflies showed up to provide town hall theater, the board ended up voting to turn $884 million in development project funds (counting all assets and projects, that figure may end up topping $1 billion) over to the city, to be rolled over into a new redevelopment organization that would hire existing CRA staffers.

From the outside, this exercise in institutional self-perpetuation looks like a fraudulent conveyance, a swindle to protect $1 billion in assets from the state government. The really sad thing is that it might not even be necessary. While redevelopment agencies are hated by taxpayers and by the residents of any area unlucky enough to be "served" by them, they have plenty of friends in the Democratic Party, which controls the California legislature. The proposal to nix the RDAs may already be dead by the time you read this. That is all the more reason to give credit to Jerry Brown for bringing the idea up, and for explaining why it's long overdue. 

Tim Cavanaugh ([e-mail]) is a senior editor at reason.