Economics

The $6 Billion Scam

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

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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 (tcavanaugh@reason.com) is a senior editor at reason.

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  1. Good morning, Suki.

    1. Suki, Suki, Suki, Suki, Suki, Suki boo!

  2. When I see “public-private partnerships”, I know that its going to cost me an arm and a leg since both the “public” and “private” part work together to maximize the cost while minimizing their responsibility. When things go wrong, the “public” blames the “private” and the “private” blames the “public’ and then steal more money from the taxpayers to “fix” what they had caused. The more you confuse everyone about who is responsible the more likely that nobody will end up being responsible.

    1. The more you confuse everyone about who is responsible the more likely that nobody will end up being responsible.

      Let me be clear.

      I will take responsibility.

      1. *** NOT !! ***

  3. “Redevelopment” agencies & projects just scare away regular businesses that would otherwise be interested in doing something in the area. Nobody wants to spend a lot of money and time researching a location when a bunch of bureaucrats are likely to step in and screw them over at the last minute, or worse, AFTER they have already set up shop.

    1. I think the Mafia might have a good opportunity to providing bona fide (extralegal) protection, instead of “protection” — they would just whack any bureaucrat who thinks about dicking you over like that.

      1. And cost the unions money? Who do you think runs them? Not to mention if one of their own gets whacked the government would actually do something. Don’t mess with the bigger gang.

  4. “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.”

    I take it that this is a joke of some sort.

    1. If you can’t laugh at nuclear holocaust, what can you laugh at?

    2. surprise, we live in a coarse world. i agree with what i believe you’re saying, never will the atomic-bombing of civilians, or troops, be funny.

      1. Teach them about nuclear power and they will bomb themselves!

  5. “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.”

    Poor form! The crew wasn’t responsible. It was Truman’s call!

    1. Truman was an Illuminati maybe?

      1. Truman certainly did illuminate a few things…

    2. That was poor form regardless of who was responsible.

      1. It was brilliant. Could’ve picked a better time for it though …

        1. Can I borrow that line?

  6. Let me know when Brown does something worthwhile like cut welfare, cut public employees, cut public employee pensions.

    1. Do you REALLY want to see welfare cut? Do you REALLY want to give the poorest Americans a really GOOD reason to break the law and commit burglary and robbery to feed their children in a time when there simply are not enough jobs to go around, when homelessness is at an all time HIGH? Think about it…

      1. Hell yeah! We are eating dogfood as it is!

  7. On a semi-related topic… I’ve recently read several articles speculating what would remain standing here in Portland if there were to be a Cascadian Fault earthquake.

    Only one bridge over the Willammette would remain usable and probably only one bridge over the Columbia. Every single public school building would be unusable.

    Meanwhile, I think about all the boondoggles the city government has spent my money on. There is the aerial tramway (no, seriously) that connects a failed public-private residential and commertial development with a university complex. There is the streetcar (again, I’m being serious) that provides zero service that isn’t already provided by much cheaper busses. Actually, it does provide the service of snarling traffic during construction and most likely will snarl traffic during operation.

    The total cost to taxpayers (at all levels) probably runs over $100million, and yet, I’ve not heard of a single dime being spent to make sure our bridges will survive an earthquake.

  8. My post was marked as spam by a third-party spam filter. No hyperlinks, no email addy’s, nothing indicating why it triggered the spam filter.

    1. If they move to sell them quickly, they might be able to plug that hole in their budget. Too bad they’ll just take the money for that new city hall they “need.”

  9. The city councils can transfrer the property into their own names for all I care. Kill tax increment financing and this waste, fraud, and abuse is unfunded.

  10. I will be pretty impressed if Brown can swing this. The state will still be fucking doomed though.

  11. City planning and redevelopment schemes have a record of hubris, excess, waste, failure and misery that dates back at least to the Roman Emperor Nero. Jonathan Meades makes a strong case for Urban Regeneration being a cult impervious to both facts and criticism in a memorable rant in the second episode of his BBC show Abroad Again. I recommend it highly, as it is the only sort of relief likely to be available from the ongoing plague of government sponsored blight.

  12. When I read something like I wonder how much is just stupidity and how much really is criminals using the government Soprano style to set themselves up.

    I know, I know, all government is criminal. I disagree with that though, and believe a police/military force and legal system the only legitimate functions of government.

    So assuming my minarchism to be true, I really wonder how much of this is criminals using politicians to funnel money their way as opposed to just idiots thinking they are doing good?

    1. Organized crime can’t exist without a corrupt government.

  13. Pretty surprised JBrown’s actually doing something worthwhile, I thought he was just going to screw us further.

  14. Good first step, but it’s just a drop in the bucket.

  15. “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.”

    What about Robert Moses? LBJ? Detroit?

  16. TIF districts are an example of why libertarians should be against tax “breaks”.

  17. I remember watching some type of documentary about gangs in LA, and the gang CRIPS actually started out in the community redevelopment racket. Actually, their name is an acronym for community revolution in progress

    http://www.rapdict.org/Crips

    BTW Colors was an awesome movie

    1. From wikipedia:

      “The original name for the alliance was “Cribs,” a name narrowed down from a list of many options, and chosen unanimously from three final choices, which included the Black Overlords, and the Assassins. Cribs was chosen to reflect the young age of the majority of the gang members. The name “Cribs” generated into the name “Crips” when gang members began carrying around canes to display their “pimp” status. People in the neighborhood then began calling them cripples, or “Crips” for short.[12] A Los Angeles Sentinel article in February 1972 referred to some members as “Crips” (for cripples).[1] The name had no political, organizational, cryptic, or acronymic meaning, though some have suggested it stands for Common Revolution In Progress”

      1. And you BELIEVE a site noted for misinformation?

        A PROUD Libertarian and supporter of http://www.CATO.org
        And a PROUD Founder of http://www.MECA.org

        1. You really believe that RapDict.org is a better source of information than Wikipedia? Seriously?

  18. I’m surprised Brown is doing what he’s doing. I’m impressed that he’s doing more than “cutting vaste.”

    1. Then you don’t know Jerry Brown. I loved in Oakland during the Brown years and it was the best leadership that formerly corrupt city had every known! Under Mayor Elyhu Useless things were “business as usual” and the City Police’s “Oakland Raiders” terrorized the public. Jerry cleaned up the cops, mopped out city hall from one end to the other and tried his damnedest to clean up the school board!

      Like I said… you don’t know Jerry.

      A PROUD Libertarian and supporter of http://www.CATO.org
      And a PROUD Founder of http://www.MECA.org

  19. Yeah those neighborhood activists and reverends are definitely the worst elements of a society. Way worse than drug dealers, rapists, murderers, mobsters, etc.

    1. They are usually the same guys

  20. The CRA/LA is corrupt to the core and its capo is Garcetti. Even after fraud has been uncovered, Garcetti stands with the crooks. One, however, has to admire a Boss who stands behind his henchmen when the going gets tough. Who said there is no honor among thieves?

  21. The time has come to follow Wisconsin and recall the GOP who support the CRA’s.

  22. I loved and worked and was active in Oakland for over 20 years and saw nothing good come from the RDAs. Nothing but graft, corruption and lost homes and businesses have been the result of their unholy crusade to remake the poorest areas. They are responsible for more homelessness than any 3 other causes added together! They are a blight on the American landscape! KUDOS to Gov. Bron for at least having the courage to say what is right and what is real!

    A PROUD Libertarian and supporter of http://www.CATO.org
    And a PROUD Founder of http://www.MECA.org

  23. great posting. I like to read it.

  24. Last quote heard from Toni’s dad after abruptly leaving for good upon hearing that his wife was pregnant with their one and only child.

  25. I am surprised I agree with Government Brown on this one. CRA is a scam and should be shut down.

  26. expression within the boundaries of the subject of logic is very smooth beautiful

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