California's Crony Capitalism Problem

Gov. Jerry Brown and the redevelopment scam

In much of the country, the mere mention of the name, Jerry Brown, signifies the otherworldly nature of California politics. Many people in other states have come up to me and said something to this effect: "You Californians are so weird that, in tough economic times, you re-elected that retread from the 1970s."

Yet in this season of bill signings, vetoes, and elections, Gov. Brown has remained the last bulwark against the truly crazy left-wingers who run the Capitol. Brown has rejected union enrichment schemes, illegal-immigrant "rights" measures, and other nonsense. And, despite his troubling push for higher taxes, the governor vetoed all six bills that were designed to resurrect, in one way or another, the redevelopment process he killed last year.

Redevelopment is a land-use and tax scheme that blends Eastern-European-style central planning with American-style crony capitalism.

Started in the 1940s to provide local governments with a "tool" to fight urban blight, redevelopment morphed into a centralized planning system that obliterated property rights by giving City Hall expanded eminent-domain powers. Instead of fighting blight, city officials used the system to finance sales-tax-generating car dealerships, shopping malls, big-box stores, and hotels by showering subsidies on influential developers.

City councils, via their local redevelopment bureaucracies, gained the power to declare large areas of their cities "blighted" based on the widest-ranging set of criteria. Once blighted, a redevelopment project area was formed and all the "tax increment"—i.e., the growth in property tax revenue in that specific area—flowed to the locality rather than the county and state. Redevelopment agencies would float debt and use the added property tax money to pay off the bonds that financed the subsidies that were provided to developers, who built projects directed from City Hall.

The cities loved it because they would gain the sales taxes and bed taxes from the new projects and could micromanage development decisions. Developers profited by manipulating City Hall. Property owners got bulldozed and all the government intervention distorted the market, but since when has government ever cared about that?

I wrote about efforts to take church property and give it to Costco, plans to demolish an entire neighborhood of middle-class homes so that the city could market the land to a theme-park developer, and plans to give massive subsidies to billionaire developers. These were typical events, not aberrations. The subsidies led to the overdevelopment of shopping centers and other commercial projects.

After the U.S. Supreme Court's Kelo decision in 2005 allowing cities to use eminent domain on behalf of private developers, many states passed serious reforms that cracked down on the abuses. Not California, which eventually passed a fake reform sponsored by the League of California Cities and the California Redevelopment Association—the equivalent of allowing the lunatics to set the rules within the asylum.

But a funny thing happened. The economy soured and the redevelopment fiscal promises turned into fiscal liabilities. The state ran out of cash. Gov. Brown realized that he could find several billion dollars by shutting down these agencies, which operate locally but are creations of the state.

Ironically, Republican legislators who claim to care about free markets fought the governor on this one, addicted as their cities had become to redevelopment cash and as addicted as they had become to campaign contributions from subsidy-seeking developers. Democrats, who love the central planning aspects of RDAs, went along for the wrong reasons (more money for the state and to be loyal to their governor).

Victories are never permanent in government—especially a government run by people who recognize no limits on their taxing and regulating powers. The most brazen attempt to resurrect redevelopment was SB 1156, by Senate President Pro Tem Darrell Steinberg (D-Sacramento): "In order to more effectively address blight, the program shall be established to support development in transit priority project areas and small walkable communities and to support clean energy manufacturing through tax increment revenue. …"

Basically, it was redevelopment with a more limited focus and a few more safeguards. But Gov. Brown nixed this, and said in his veto statement: "This measure would likely cause cities to focus their efforts on using new tools provided by the measure instead of winding down redevelopment." He also pointed to the need for continued general-fund savings.

The governor remains focused on the money rather than the abuses, but a veto is a veto. The redevelopment community was livid. One pro-redevelopment writer argued that Brown's vetoes "add insult to injury," but the folks insulted and injured by the governor richly deserve this outcome. Small property owners—the victims of insult and injury at the hands of RDAs—should be happy.

Even when it looked like the new agencies would be resurrected, Assemblyman Chris Norby, the Fullerton Republican and longtime redevelopment foe, argued in a letter to RDA opponents that the new agencies would be a far cry from the old RDAs: "These IFDs [Infrastructure Finance Districts] have no power to forcibly take property tax increment from counties, schools or special districts."

In his view, there would be no "free money" for cities. They could use tax increment, but that money would come from their own general fund—an unlikely development.

Nevertheless, the new IFDs would have had eminent-domain powers and would have given new life to the redevelopment industry. No doubt, next year the same officials would be back again expanding the use of tax increment. It's far better to keep the lid on redevelopment and encourage these privilege-seekers to move on to other scams.

Brown is no dummy. He wasn't about to resurrect something he used so much political capital to kill. Obviously, he is no believer in limited government, so our victories this year may be fleeting. But things could be worse and the governor deserves great credit for standing his ground against the kings of corporate welfare.