Government Waste

Redevelopment Leaves Behind $30 Billion Debt, Hundred-Millions in "Other Expenditures"

Doomed agencies should sell off their property and disappear.

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There used to be a big functioning metal business here, until the Community Redevelopment Agency spruced the place up.

It turns out California's redevelopment agencies—which, I just love to keep saying, will be abolished in a week—have produced something beside corruption, poverty, and blight: The RDAs have also run up nearly $30 billion in debt that must be serviced by Golden State taxpayers. 

That's according to California Controller John Chiang in his most recent Community Redevelopment Agencies Annual Report [pdf].  

During the fiscal year ending on June 30, 2010, the state's 425 RDAs—urban renewal fiefdoms empowered by eminent domain and catering to political hacks, connected land barons, community organizers, and Chamber of Commerce flunkies—saw their property tax hauls get lighter by 4.5 percent, showing that the agencies failed in their specific purpose of redeveloping property in a way that ups its assessed value. Chiang writes: 

Total revenues decreased from $8.3 billion in the 2008-09 fiscal year to $8.0 billion in the 2009-10 fiscal year. Taxes and assessments, the largest revenue source, decreased from $5.7 billion to $5.5 billion, a 4.5 percent decrease. 

Unfazed by this drop in revenue, state RDAs increased spending by 16 percent over the same period: 

Total expenditures increased from $8.1 billion in the 2008-09 fiscal year to $9.4 billion in the 2009-10 fiscal year.  Interest expense became the largest expenditure in the year, remaining at the same level as the prior year total of $1.4 billion. 

Though interest payments are now the biggest line item, hundreds of millions of dollars of this spending is totally uncharacterized. On page 105 of the report you will find some $148.6 million in "Other Expenditures" listed for the Community Redevelopment Agency of Los Angeles (CRA/LA).

Mark Ridley-Thomas knows how to build buildings, as long as they're named after him.

This figure is especially striking when you consider that most of the expenses you would normally associate with redevelopment—such as administrative costs, planning, real estate purchases, rehab, disposal, relocation, construction, low/moderate-income housing subsidies, etc.—are all broken out in separate line items. 

Page 103 lists $1.6 million in Other Expenditures for the Vermont/Manchester Project. I have been covering this piece of property for years, and there has been no activity of any kind on this land since a portion of it was used to build a county welfare office in 2007. 

A spokesman for the controller's office says these expenditures are reported by the redevelopment agencies, which do not have to provide invoices or other documentation. [Controller Chiang's office provided more details after this article was published. See below.] I have a call in to the CRA/LA to find out what the agency actually spent $149 million on in a year, but given the imminent unwinding of the agency (which now handles media through contract spokesman after losing its regular PR staff), I don't expect them to have a reply. One former CRA/LA staffer is unable to guess at where all that money could have gone. 

Chiang's report came out in November, and in a recent story the Orange County Register's Teri Sforza highlighted the whopping debt redevelopment is leaving behind. From the controller's report: 

Total outstanding long-term debt increased from $29.4 billion in the 2008-09 fiscal year to $29.8 billion in the 2009-10 fiscal year.  Tax allocation bonds accounted for the largest portion of debt, remaining at the same level as the prior year total of $19.1 billion.

The former CRA/LA staffer suggests this debt is mostly a matter of accounting that will be handled by expanded "pass-through" payments the redevelopment agencies make to counties. But there is a way the RDAs could partially compensate the public for the value they have destroyed while making a sharp turn away from their history of grandiose mega-projects that destroyed communities, warped the state's civic life, and often produced nothing but vacant lots

The Broadway/Manchester Project, another CRA chef d'oeuvre that rivals Rick Caruso's Grove in elegance and curb appeal.

Most of the real estate titles in redevelopment project areas are owned by the redevelopment agencies themselves. The successor agencies of the RDAs should simply divide these properties into single lots and sell them without favor to individual buyers. This would bring in a windfall that would go a long way toward retiring redevelopment debt. It would also create an instant path to affordable real estate ownership in some of the state's most overpriced counties. 

Larry Kosmont, interim city manager for the city of Montebello, did not dismiss this idea out of hand in a recent interview, but he warned about the problems associated with a real estate fire sale held in a down market by the "dysfunctional family of public agencies" that will dispose of RDA assets. 

"Counties and cities have to come to some consent on a decision," he says. "So the result you get will be the lowest common denominator: whoever will take the land off their hands. Just subdividing [project areas] and selling the lots is a possibility. But who does the subdividing? You may have a piece that does not fit or is the wrong size or shape. These are not uncomplicated properties. In some cases they require additional assemblage, or they are contaminated, or there's a problem with access or zoning." 

Kosmont points to Montebello, which has about 20 pieces of property. "A lot of those may go for salvage value," he says. "They might be worth about $10 million in today's market. I'd doubt we'll get half of that." 

Montebello (page 106 of the controller's report) currently pays $1.4 million in interest per year. So selling all that property would not be enough to get the debt problem under control. But it would at least keep the city from sinking deeper into the hole. The beauty of selling something is that it then becomes the headache of another person who has willingly taken it off your hands. 

More important, selling off redevelopment properties in small lots would be the closest to "economic justice" these agencies have ever come. The truly fair solution would be to return all this land to its original owners, with compensation for lost value as well as pain and suffering. In the fallen world, that is not possible. But California, having taken the right step on redevelopment agencies, should now follow through by making sure the agencies' ill-gotten real estate is sold into private hands quickly, openly and without doing any more damage. 

Update: A spokesman for the state controller's office provides more detail on Other Expenditures: 

The "Other Expenditures" line includes pass-through expenses to section 33401, 33676, or 33607 of the Health and Safety Code, and all other expenditures for which account is not provided in the report.  For the Vermont/Manchester Project, other expenditures with the amount of $ 1,648,000 included Development Loans $ 1,000,000 + Educational Revenue Augmentation Fund (ERAF) payment 115,000 + Tax Increment Administrative Fees 19,000 + Pass-Through Expense to Health & Section code 33607 278,000 + Miscellaneous Expenses 236,000…

The $1,277,000 in the revenues section for the Vermont/Manchester project area is the gross tax amount apportioned by the county auditor to the redevelopment agency pursuant to section 33670 of the Health & Safety Code.  Yes, this amount is property taxes that allocated to the agency by project area.

Tim Cavanaugh is managing editor of Reason.com.