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California Redevelopment Association v. Matosantos:The End of Urban Renewal in California and Lessons for the Northwest

Since the 1950s, urban renewal agencies (or “redevelopment agencies”) were authorized by legislative action and created to improve blighted conditions and form a funding source used to encourage local economic revitalization. As other government services lost their sources of funding by initiatives enacted to freeze property tax rates, such as Oregon’s Measure 5, limiting increases in property taxes for cities as well as for school district budgets, and by Measures 47 (1996) and 50 (1997) capping annual increases in property taxes to 3%, urban renewal agencies have been a target for charges of exacerbating the problem caused by an already reduced ability to raise taxes.

To carry out redevelopment plans, these agencies may acquire real property, dispose of property by lease or sale without public bidding, clear land and construct infrastructure necessary for building on project sites, and undertake certain improvements to other public facilities in the project area. While redevelopment agencies have used their powers in a wide variety of ways, in one common type of project the redevelopment agency buys and assembles parcels of land, builds or enhances the site’s infrastructure, and transfers the land to private parties on favorable terms for residential and/or commercial development.

Redevelopment agencies generally cannot levy taxes. Instead, they rely on tax increment financing. Under this method, those public entities entitled to receive property tax revenue in a redevelopment project area (the cities, counties, special districts, and school districts containing territory in the area) are allocated a portion based on the assessed value of the property prior to the effective date of the redevelopment plan. Any tax revenue in excess of that amount—the tax increment created by the increased value of project area property—goes to the redevelopment agency for repayment of debt incurred to finance the project. In essence, property tax revenues for entities other than the redevelopment agency are frozen, while revenue from any increase in value is awarded to the redevelopment agency on the theory that the increase is the result of redevelopment.

Based on the active initiative process in the 1990s, the general concern for urban renewal advocates in Oregon was that voters would limit the reach of redevelopment efforts through further initiative efforts. However, given the California Supreme Court’s December 29, 2011 decision in California Redevelopment Association v. Matosantos, urban renewal agencies across the country may be in dire straits at the hands of the state’s elected leaders who are now searching for all available funding to continue operation of other government services like health and safety programs. In a time when most developers cannot obtain financing, urban renewal agencies represent an easy target.

California has even more stringent caps on property tax increases than Oregon under its Proposition 13 adopted by voters in 1978. Further, it has mandatory requirements to fund education at a certain level. In an attempt to meet its financial responsibilities to schools and provide other government services, under the leadership of Governor Brown, the 2011 Legislature amended the state’s redevelopment law setting forth the process for winding down and dissolving redevelopment agencies to put an to end urban renewal fundraising. Unlike Oregon, California’s urban renewal laws required that 20% of redevelopment funds be used for the development of affordable housing. Nonetheless, state audits and oversight reports frequently concluded that a significant number of redevelopment agencies took actions that had the effect of reducing their housing program productivity, including: maintaining large balances of unspent housing funds (a recent Department of Housing and Community Development’s report indicated that the agencies collectively had an unencumbered balance of more than $2.5 billion); using most of their housing funds for planning and administrative costs, and spending housing funds to acquire land for housing, but not building the housing for a decade or longer. Given the redevelopment agencies’ empire building by caching housing funds and carrying large balances, these agencies were ripe for poaching by the state government to help solve its financial woes.

In Matosantos, the California Supreme Court upheld the 2011 amendments by determining that the enabling legislation did not grant an absolute right to an allocation of property taxes to redevelopment agencies. Further, the court found redevelopment agencies are solely a statutory creation and not a constitutional creation. Therefore, what the legislature creates, it is free to dissolve.

As with so many trends that move north from California to Oregon, those dependent on urban renewal in Oregon should closely study the predicament of redevelopment agencies in California. Those redevelopment agencies are at this very moment lobbying in Sacramento trying to save urban renewal before the State acts on the court’s decision.

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