A Small Step Toward "Redevelopment 2.0"? Gov. Brown's Proposal to Expand the Use of Infrastructure Financing Districts

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Over two years have passed since Gov. Jerry Brown and the California Legislature dissolved the 400-plus redevelopment agencies throughout the state and ordered them to wind down their operations and finances, with the goal of funneling more money to the state general fund and local taxing agencies.  In the interim, several lawmakers have introduced legislation to create new forms of redevelopment (sometimes called “Redevelopment 2.0”), such as “infrastructure and revitalization financing districts” and “sustainable communities investment authorities.”  The Governor has vetoed or threatened to veto all of the proposed replacements on the basis that the creation of a new redevelopment tool is premature, and the focus should first be on completing the dissolution of the former redevelopment agencies (RDAs).

Now that much of the wind-down of the former RDAs is nearing completion, Gov. Brown appears to be more amenable to begin addressing some form of replacement for the dismantled RDAs.  The Governor’s 2014-2015 budget includes a proposal to revise and expand the use of Infrastructure Financing Districts (IFDs).  This proposal, however, appears to be only a small step toward full Redevelopment 2.0. 

IFDs are not new – they have been a part of California law since 1990.  As a development tool, IFDs are similar to redevelopment in that they allow local governments to fund public infrastructure and development through tax increment financing.  Unlike redevelopment, however, projects funded by IFDs require a public approval (currently 2/3) of the voters living in the district in order to establish a district and authorize debt.  IFDs have rarely been used, largely due to the public vote requirement and the fact that the area of the IFD could not overlap with a redevelopment area. 

The Governor’s proposal would reduce the 2/3 voter threshold, allow overlap with a redevelopment area and would expand the types of projects eligible for funding in the district.  More specifically, the Governor’s proposal includes the following:

1.     Expands the types of IFD projects from a relatively small list of traditional infrastructure projects to include brownsfield restoration and other environmental mitigation, military base reuse, urban infill, transit priority projects, affordable housing and facilities housing providers of consumer goods and services; the projects need not be publicly owned or operated.

2.     Permits cities and counties that meet certain criteria to create IFDs and issue related debt, contingent upon obtaining 55 percent voter approval (lowered from 2/3 voter approval).

3.     Permits new IFD project areas to overlap with project areas of the former RDAs; however, any debt or obligation of the new IFD would be subordinate to any and all enforceable obligations of the former RDA.  (With the Governor’s signing of AB 471 (Atkins) in February 2014, the prohibition against forming a district within an existing redevelopment area has already been lifted.)

4.   The current IFD prohibition on diverting property tax revenues from K-14 schools would be maintained and approval must be obtained from the counties, cities and special districts that would contribute their revenue.

Under the Governor’s proposal, a city or county could take advantage of the new tax increment financing tool only if all of the following conditions are met:

1.     The Successor Agency (SA) for the former RDA has received a “Finding of Completion” from the State Department of Finance (DOF), required by the RDA dissolution statutes, and which is obtained after the SA has remitted all of the unencumbered assets of the former RDA to the county auditor-controller for distribution to the other local governmental entities.

2.     The city or county is in compliance with all of the audit findings and directives of the California State Controllers’ Office with regard to the former RDA.

3.     Any and all outstanding issues between the state and the SA and the state and the city or county that created the former RDA have been resolved either through settlement or through final determination by a court of law, including all appeals. 

Although the use of expanded IFDs has some support among legislators, many redevelopment advocates have expressed concern that because the proposed new IFDs still require the 55 percent voter threshold, they may not be as useful or effective as redevelopment.  Also, some cities and counties that are engaged in litigation with the state over a multitude of issues pertaining to the dissolution of the former RDA (over 180 cases have been reported) must settle or forego their legal claims to take advantage of the new IFD as proposed by the Governor.

California’s nonpartisan Legislative Analyst’s Office (LAO) has recommended that the legislature adopt the Governor’s proposal to expand IFDs, but with certain changes.  First, the LAO has noted that the Governor’s proposal to lower the voter-approval threshold may conflict with provisions of Article XVI of the California State Constitution requiring cities and counties to obtain 2/3 voter approval prior to issuing long-term debt.  To avoid this problem, one LAO recommendation is that IFDs be created as separate legal entities, distinct from the cities and counties that created them, with autonomous governing boards.  This would allow the issuance of infrastructure bonds without voter approval.  The IFD would then more closely resemble the former RDAs.   The LAO has also questioned the part of the Governor’s proposal that imposes conditions regarding RDA dissolution on a city or county before it can create an IFD.  The LAO does not consider it appropriate to deny the use of an economic tool to a local government to respond to infrastructure and economic needs simply because that local government is in a dispute with the state regarding some aspect of RDA dissolution.

As the winding down of the former RDAs continues to its conclusion, new legislation creating expanded IFDs and other economic development tools will be introduced and debated.  The future and the face of “Redevelopment 2.0” will evolve and crystallize over the next years(s).  Noted industry groups, such as the Urban Land Institute (ULI), are calling on California’s leaders to fill the void created by the demise of the RDAs.  In December 2013, the San Francisco District Council of ULI, in conjunction with the ULI district councils in Los Angeles, Sacramento, Orange County and San Diego, issued a 22-page report, “After Redevelopment; New Tools and Strategies to Promote Economic Development and Build Sustainable Communities,” recommending a broad range of tools to achieve those goals.  A summary of the report is beyond the range of this article, but the full report can be found at http://sf.uli.org/uli-in-action/california-wide-land-use-reform/.  To what extend Redevelopment 2.0, in any of the forms proposed by the Legislature or the Governor or as recommended by ULI, will fully and effectively replace the former RDAs remains to be seen.

 

Topics:  Economic Development, Infrastructure, Jerry Brown, Public Projects

Published In: Elections & Politics Updates, Finance & Banking Updates, Tax Updates, Zoning, Planning & Land Use Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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