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State, Cities Still Wrangling Over Billions in Redevelopment Money

| February 19, 2014
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Attorney Leah Castella and Brentwood City Manager Paul Eldredge chat in front of Brentwood's Community Center. (Cyrus Musiker/KQED)

Attorney Leah Castella and Brentwood City Manager Paul Eldredge chat in front of Brentwood’s Community Center. (Cyrus Musiker/KQED)

Walk down First Street in Brentwood, a farm and bedroom community 55 long road miles east of San Francisco, and you can see a model example of what local redevelopment agencies once could accomplish in a commercial district.

“Our vacancy rate prior to the project was basically 40 percent, and now we’re around 5 percent,” says City Manager Paul Eldredge.

Small businesses have flocked back to this downtown since the city put power lines underground, redid the sidewalks and  planted trees. A block away, redevelopment and city funds paid for a new community center and park. This was all legitimate redevelopment spending, a project finished in the spring of 2012.

“We’ve always played by the rules,” Eldredge says. “And I would go as far to say Brentwood has been the Boy Scout of redevelopment.”

That may be, but Brentwood is also an example of what a messy process it’s been for California to shut down redevelopment agencies and redistribute their funds.

Redevelopment agencies were a hugely popular way for cities to fix up so-called blighted neighborhoods, by capturing the neighborhood’s current and future property tax revenue and using it to finance new commercial and residential development.

However, Gov. Jerry Brown and the Legislature voted to abolish the agencies in 2011 to help close the state’s budget deficit, because the agencies also shortchanged county and school funding, leaving the state to make up the difference. But agencies in dozens of cities, Brentwood included, transferred billions of dollars to city accounts to protect them from redistribution by the state.

‘We’ve always played by the rules. Brentwood has been the Boy Scout of redevelopment.’Paul Eldredge,
Brentwood city manager

In Brentwood the figure was $19 million to cover services and contracts the city managed for the redevelopment agency. “A lot of times the city would front the money,” says attorney Leah Castella, “based on funding commitments made by the redevelopment agency.”

Those transfers came after the governor proposed killing the agencies, but before they were dissolved.

“And the state is claiming,” Castella says, “that those repayments are invalid. That they are entitled to claw that money back, therefore leaving Brentwood, the city, on the hook for making up the difference for the cost of the improvements.”

So, Brentwood sued the California Department of Finance, which is handling the redevelopment audits, in Sacramento Superior Court. The city argued the state is violating Proposition 22, the 2010 voter-approved measure that prohibits the state from raiding local sales and property taxes, just like those transferred in Brentwood.

“The purpose of Prop. 22,” Castella says, “was to prohibit exactly what the state is trying to do here. Which is to disrupt the fiscal planning of local agencies.”

Judge Allen Sumner agreed with that aspect of Brentwood’s argument in a tentative ruling issued late last year.

Brentwood is just one of about 150 cities that made similar transfers before their redevelopment agencies were dissolved, so Sumner’s ruling raises the question of who controls more than $3 billion in redevelopment funds.

Attorney William Ihrke is handling a number of similar lawsuits. “In most of those cases, the funds had actually been spent, and in some of the cases I worked on, the projects had been completely built,” he said.

Ihrke and other attorneys involved in these cases say the law was sloppily drafted. And Ihrke has filed an even more radical court challenge for a group of cities, including Cerritos (Los Angeles County), arguing that the Legislature needed a two-thirds majority to kill redevelopment because the dissolution process creates a mechanism for redistributing property tax revenues.

But H.D. Palmer, a spokesman for the state Department of Finance, defends the law and the dissolution process — and he says not all judges are siding with cities.

“We have situations where two different judges are looking at the same body of law, and coming down on two very different positions,” he said.

And sometimes even the same judge will issue seemingly conflicting rulings. Judge Sumner ruled in January that Redwood City can’t claim $10 million it had committed to give, in 1990, to the Legal Aid Society of San Mateo County for affordable housing.

Sumner ruled the agreement did not qualify as an “enforceable obligation” for the redevelopment agency.

If you’re wondering where the funds are going, Palmer says, they’re not flowing into some bank account in Sacramento. “That money is allocated to schools, and cities, and counties, and special districts. So the money does not come to Sacramento, it stays locally, and it comes with no strings attached.”

By June of next year, schools could get up to $4 billion in redirected redevelopment funds.

But Palmer warns that court challenges are threatening those payments and the state’s carefully balanced budget.

“There is a potential risk of about $3 billion, depending upon which way the courts end up going on this.”

Back in Brentwood, Eldredge, the city manager, stands by a playground built with redevelopment funds. And, like Palmer, he says he worries about what comes next. “You know you have this black cloud hanging over your head. And it really precludes you from doing some long-range forecasting and planning, because you have to take into account that you might lose this fight.”

That black cloud might linger over California cities and state finances for years, as the cases work their way through the courts.

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About the Author ()

Cyrus Musiker is the Evening News Anchor at KQED Public Radio. But he also worked for a decade in the wine industry in Massachusetts, New York City, San Francisco, and Napa Valley. Cyrus sold wine retail and wholesale in New York, supplying Roederer Crystal and French Burgundies to celebrities in the Hamptons who didn’t appreciate how good they had it. He moved west in 1978, and worked as a cellar rat shoveling pomace, and pumping over for some of Napa’s best winemakers. He also did public relations and wine tours at Robert Mondavi Winery in Oakville. Cyrus has traveled and tasted through Champagne, Burgundy, Beaujolais, and the Rhone Valley, and up, down, and sideways in California’s great wine regions. His one great regret in life is not buying land in Yountville when he lived there in the late 1970’s, when vineyards were “just $15,000/acre.” Cy’s most memorable wines—a 1904 Lafite Rothschild at a Heublein tasting in Boston in the late 70’s, a Nuits St. George “Les St. Georges” 1953 with Henri Gouges in his cellar in the Cotes De Nuits. Reach Cyrus Musiker at cmusiker@kqed.org.
  • John Q Publiq

    I learned something here. I thought this was merely ‘extra’ money that Brentwood had. I thought widening sidewalks with ‘extra’ money was imprudent. If the vacancy rate is indeed that much improved, and if the city planners were clever enough to keep that money by moving it, then they are certainly much smarter than I.