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Redevelopment agencies ascended into headlines after California Governor Jerry Brown suggested eliminating them in efforts to help balance his proposed fiscal 2012 budget. Redevelopment activities are an essential element contributing to the health of California’s local communities. They provide employment, clean up neighborhoods, reduce crime, make infrastructure improvements, restore contaminated land, and increase the supply of affordable housing. The futures for redevelopment agencies are unknown, but regardless of the actions taken in Sacramento, existing projects will be completed, and the funds used to make debt service payments are legally protected.

In 1945, the California Community Redevelopment Act was passed to help local communities address blight, and insufficient housing stock, particularly for low- and moderate-income individuals. In 1993 the Act was amended to focus redevelopment activities on predominately urbanized areas and on previously developed land. Under the Act, local governments can identify changes that would be beneficial to their communities, select blighted project areas that would be optimal for redevelopment, and propose redevelopment plans for the given project areas, subject to approval. A project area will remain active as long as there are social and economic benefits associated with the redevelopment activities, though state law places a maximum time period between 30 and 40 years. Once a project area is determined, a base assessed value is established. The property tax revenue generated from an increase in assessed value over the base value, often attributed to redevelopment activities in the project area, is the tax increment revenue used to service the outstanding debt of the agencies.

Redevelopment agencies benefit local economies, environments, and affordable housing. Project areas have numerous characteristics, but generally include areas that would not be economically feasible for the private sector to make improvements on their own. This may be due to contamination, inadequate infrastructure, or high crime rates. Redevelopment agencies have the ability to improve or rehabilitate land, streets, roads, sewers, parks, libraries, community centers, police stations and other public benefits that improve the quality of life in the communities. According to the California Redevelopment Association, in the fiscal year ended in 2007, California redevelopment agencies provided $40.8 billion in economic activity in the form of goods and services, and supported approximately 304k new full and part time jobs. Redevelopment agencies are required to set aside 20% of their tax increment revenues towards affordable housing, and according to the California Department of Housing and Community Development, have built or rehabilitated 78,750 affordable housing units since 1995.

Despite the public benefits of redevelopment agencies, California Governor Jerry Brown is proposing eliminating them. Proponents of Brown’s plan suggest that redevelopment agencies have been spending wastefully, and serve as a “public welfare” benefiting developers. They would prefer to redirect the funds to schools, healthcare, and courts. While wasteful projects have occurred, the majority of the projects serve an economic and/or social benefit to their local communities. Redevelopment agencies serve a vital role in local communities, and proponents of eliminating them should focus on reducing the isolated cases of abuse.

Existing redevelopment funds are legally protected. The following laws exist which will ensure that existing redevelopment debt will continue to be serviced by the intended funds:

  • Article XVI, section 16 of the California Constitution: created tax increment financing and requires it to be paid to redevelopment agencies.
  • Article XIII, section 25.5 of the California Constitution: passed as Proposition 22 in November 2010, prohibits legislation requiring the transfer of tax increment to the state.
  • State and Federal constitutional laws prohibiting legislation that may impair the obligation of contracts.

Sacramento can be unpredictable, but regardless of their actions, funds will continue to be available for the debt service of redevelopment agency bonds. A compromise between Sacramento and California’s redevelopment agencies is likely to be reached. The compromise does have a risk of impacting redevelopment agency projects and the issuance of debt moving forward, but it will not prohibit the servicing of existing debt, or existing redevelopment contracts. For further questions on redevelopment agency bonds, and to see how they may fit well into your investment strategy, take the time to discuss them with your Alamo Capital representative.

Billy Schmohl
Investment Information Coordinator

This report is prepared for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or service.  Market prices and other data may be obtained from outside sources and is not warranted as to completeness or accuracy. Any comments, statements and/or recommendations made herein are subject to change without notice, and may not necessarily reflect those of Alamo Capital.  Alamo Capital has no affiliation with any political party. Investing involves risk. Consult with a Financial Professional for additional information to determine the suitability of this or any other financial product or issue as it relates to your particular situation.