California's redevelopment agencies got their start in 1945, when the state legislature authorized their creation to combat urban decay. At the time, politicians nationwide touted urban-renewal projects as a way to jump-start development in impoverished inner cities. Today, many urbanists recall these projects as a national travesty, a failed experiment in top-heavy government and liberal social engineering that obliterated neighborhoods, eroded property rights, gave developers downtown land on the cheap, uprooted city dwellers, and exacerbated urban problems.
The California law lets a city establish a redevelopment agency, governed by a board appointed by the city council—though in almost every case, the board members and the council members are one and the same. (A county, too, can create an RDA, through its board of supervisors.) The agency's first task is to find urban blight. As a state senate committee explains it, "Before redevelopment officials can wield their extraordinary powers . . . they must determine if an area is blighted." But the definition of blight is very broad: it can include not just unsafe buildings but also "incompatible land uses," stagnant property values, either excessive urbanization or insufficient urbanization, and lack of modern infrastructure. So if a redevelopment agency wants to redevelop a particular area, it will find a definition that suits that area; and once it issues a blight finding, the courts will rarely rebuke it.
After blight is found, the agency can start using those "extraordinary powers." For instance, Michael Dardia explained in a 1998 report for the Public Policy Institute of California, RDAs "can assemble property for sale to private parties and can use eminent domain if necessary to acquire private property that they want to sell, often at a discount, to a private developer." They can also offer incentives to that developer, subsidizing the construction of stadiums, hotels, auto malls, and retail stores, to take some common examples.
To pay for these subsidies, an RDA employs a novel mechanism called "tax-increment financing." First, the agency issues debt—unlike city governments, it isn't required to hold a public vote first—and bestows the borrowed money on the developers of its choice, who proceed to build within the designated "project area." As property-tax revenues in the area rise, state law gives the RDA the entire increase in revenues; the agency deserves it, the thinking goes, for making the stagnant area revive. The agency uses that tax increase, called the "increment," to pay off its debt. This arrangement allowed RDAs to amass nearly $30 billion in debt by the end of the 2008–09 fiscal year, according to the state controller's latest numbers.
Whole article. One interesting thing about the tax-increment funding mechanism is that by relying on tax assessments for investment it makes redevelopment projects viable only in areas that weren't distressed in the first place. That's why the Community Redevelopment Agency of Los Angeles pays so much attention to Hollywood and Downtown – where, until recently at least, business was thriving – and ignores South L.A., where it has a bunch of condemned lots sitting fallow. Greenhut points out that Old Town Pasadena (where I've had my own experiences with the helping hand of government) is a perfect example of a place that would have revived on its own without taxpayer largesse, and wasn't very run-down to begin with.