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HomeMy WebLinkAbout1991-05-01 - AGENDA REPORTS - REDEVELOPMENT (2)CITY OF SANTA CLARITA I N T E R 0 F F I C E M E M O R A N D U M TO: Mayor Boyer and Members of the FROM: George Caravalho, City Manager DATE: May 1, 1991 SUBJECT: Redevelopment Study Session The City of Santa Clarita formed a Community Redevelopment Agency in 1989, and was initially intending to embark upon a redevelopment project selection process and the pursuit of the adoption of redevelopment. A Request for Proposals for consultant firms, to implement the 10 - 12 month process of developing a redevelopment plan provided an excellent response; but no selection was made at that time. The circumstances surrounding redevelopment plan preparation and. adoption have become more difficult in the most recent past, including substantial challenges by other taxing jurisdictions, tightened requirements for project approval, increased requirements to address low and moderate income housing needs, et cetera. A Community Redevelopment Agency Feasibility Report was previously distributed to City Council for the purpose of evaluating the merit of proceeding with a redevelopment program. In addition, the following explanation of redevelopment financing provides a hypothetical example of how tax increment financing might work in a redevelopment project. Tax Increment Financing Defined Redevelopment activities are typically supported through tax increment financing. Tax increment is somewhat complicated but in its simplest form it is the difference. in total property tax collected from within the redevelopment project area in each year after its designation, and the property tax collected from within that same area prior to itsdesignation as a redevelopment project area. The assumption is that property improvements undertaken by the redevelopment project will cause an appreciation in value from its pre -redevelopment designation value. This difference, or "increment", is the financial base that the redevelopment authority can utilize and engage in a wide range of financing programs. Agenda Item: -� MEMORANDUM Redevelopment May 1, 1991 Page 2 As an example, assume that the assessed valuation (AV) of a project area was $1 billion at the time of designation, and also assume that the AV of that area in a given year after designation as a project area is $1.2 billion. Given California's constitutional property tax rate of one percent of the tax increments in that year would amount to: ($1,200,000,000 - $1,000,000,000) X..01 = $2,000.000 Current AV - Base AV X Tax Rate Tax Increment Aeency Debt Financin¢ Tax increments may only be drawn while the agency has outstanding debt which a redevelopment agency incurs to further its activities. The debt can take form in a broad range of public financing alternatives.including: o Leverage tax increments by issuing tax allocation bonds. o Agree to use tax increments either directly or indirectly to make payments on certificates of participation or lease revenue bonds. o Serve as a conduit to finance qualifying private parties in single-family homes or multiple -family housing units. o Redevelopment agencies are also empowered to issue limited tax bonds secured by sales taxes collected within a project area and bond anticipation notes with a maturity of up to five years. The sale of all debt obligations of a redevelopment agency may be authorized by resolution adopted by the governing boards of both the agency and its parent political subdivision (the City of Santa Clarita), and no community -wide vote is required. All expenses related to the furtherance of the agency's redevelopment goals, including its establishment, are eligible expenditures, for the use of tax.increment funds. Redevelopment Fantasy Example As an example of how a redevelopment project would work out, a fantasy example has been developed. This example shows a projection of tax increment revenue that would be generated by a redevelopment project given the following assumptions. Column One It is assumed that the redevelopment project area has a base year assessed valuation of $400,000,000 (at the time the redevelopment project area was established). Further, it assumes an annual assessed valuation growth rate projected at four percent. MEMORANDUM Redevelopment May 1, 1991 Page 3 Column Two The gross increment revenue is obtained by subtracting the base year assessed valuation from the current year valuation, and applying a one percent tax rate to the incremental difference. Column Three It is assumed that the City currently receives about six percent of property tax revenue generated by the total valuation of the.City. Column Four Some amount of "pass-through" of the gross tax increment revenue to affected taxing agencies (i.e. County, schools, et cetera), is required in order to alleviate any financial detriment cased by the formation of the redevelopment project. This is an. negotiated subject. A worst-case assumption of 50 percent of the gross tax revenue being passed through is used in this example. Column Five Currently 20 percent of the annual tax increment revenue funds must be allocated to increasing, improving, or preserving the supply of low and moderate income housing. However, proposed legislation, Assembly Bill AB 315 being offered by Assemblyman Friedman recommends increasing the allocation of tax increments to the housing set-aside to 50 percent. "Exhibit A" assumes that the housing set-aside remains the same at 20 percent, while "Exhibit B" assumes a 40 percent set-aside. Column Six The potential.net gain to Santa Clarita is the difference between the tax increment revenue projected to -be received by the redevelopment agency (Column Four), and the amount of tax revenue that the City would normally receive (Column Three). Note that (Column Six) includes the housing set-aside as a potential gain to the City. Funds earmarked for housing would be unavailable for financing commercial revenue projects. See Attachments A and B It is recommended that City Council receive and review the Community Redevelopment Agency Feasibility Report, and to provide direction to staff with regard to a redevelopment program for the City of Santa Clarita. MH:dls:155 4/19/91 SANTA CLARITA 90.91 $416,000,000 $0 50 (41) RDA EXAMPLE SO SO 2 EXHIBIT A (1) (2) (3) (4) f5) (6) EXAMPLE OF GROSS INCREMENT CITY'S EXISTING NET RDA PORTION 20% MOUSING POTENTIAL FY ASSESSED VALVA- REVENUE ' PORTION OF CROSS OF GROSS SET-ASIDE NET GAIN TIDN GRC)TN (4%) (A.V.•LASE)*.01 REVENUE (6%) REVENUE (SOX) ( C4 -C3 ) base 89.90 $400,000,000 T 90.91 $416,000,000 $0 50 $0 SO SO 2 91.92 5432,640,000 $326,400 519,584 $163,200 765,280 $143,616 3 92.93 5449,945,600 $499,456 $29,967 $249,728 S99,891 5219,761 4 93.94 S467,943,424 $679,434 $40,766 5339,717 $135,887 8298,931 5 94.95 8486,661,161 8866,612 551,997 $433,306 $173,322 8881,309 6 95•96 SS%,127,607 $1,061,276 $63,677 $530,638 $212,255 8466,%1 7 96.97 8526,37;,712 $1,263,727 $75,824 5631,864 $252,745 $556,040 8 97•98 $547,427,620 $1,474,276 888,457 $737,138 S294,8S5 $648.682 9 98.99 5569,324,725 $1,693,247 ,101,595 7846,624 $338,649 $745,029 1Q 99.00 $592,097,714 81,920,977 $115,259 $960,489 $384,195 S86S,230 11 00.01 $615,781,623 $2,157,816 $129,469 81,078,908 $431,563 5949,439 12 01.02 7440,412,887 $2,404,129 $144,248 $1,202,064 $480,826 $1,057,817 13 02.03 5666,029,403 82,660,294 $159,618 $1,330,147 $532,059. 81,170,529 14 03.04 $692,670,579 52,926,706 $175,602 $1,463,353 $SSS,341 11,287,751 15 04.05 $720,377,402 $3,203,774 $192,226 $1,601,887 5640,755 $1,409,661 16 05.06 $749,192,4% $3,491,925 $209,515 $1,745,962 $698,385 $1,536,447 17 06.07 $779,160,198 $3,791,602 5227,496 81,895,801 $758,320 81,668,303 18 07.08 7810,326,606 S4,103,266 5246,196 52,051,633 7820.653 51,805,437 19 08.09 S842,739;670 $4,427,397 1265,644 52,213,696 ROSS, 479 $1,948,OSS 20 09.10 5876,449,257 04,764,493 5285,870 $2,382,246 7952,899 $2,096,377 21 10.11 $911,507;228 $5,115,072 $306,904 $2;5570536 $1,023,014 12,250,632 22 11.12 $947,967,517 $5,479,675 $328,781 $2,739,838 $1,095,935 $2,411,057 23 12.13 6985,886,217 $5,858,862 $351,532 82,929,431 $1,171,772 52,5771899 24 13.14 $1,025,321,666 $6,253,217 $375,193 $3,126,608 $1,250,643 $2,751,415 25 14.15 51,066,334,533 86,663,345 5399,801 $3,331,673 91,332,669 $2,931,872 26 15.16 81,108,%7,914 $7,089,879 $425,393 $3,5440940 11,417,976 23,119,547 27 16.17 51,153,347,430 $7,533,474 $452,008 53,766,737 $1,506,695 $3,314,729 28 17.18 $1,199,481,328 57,994,813 5479,689 83,997,407 11,598,967 $3,517,718 29 18.19 $1,247,460,581 $8,474,606 $508,476 $4,237,303 $1,694,921 73,728,827 30 -19.20 $1,297,359,004 $8,973,590 $538,415 $4,486,795 $1,794,718 $3,948,380 31 20.21 71.349,253,364 $9,492,534 $569,552 $4,746,267 .$1,895,507 $4,176,715 32 21.22 $1,403,223,499 $10,032,235 8601,934 $5,016,117 82,006,447 $4,414,183 33 22.23 11,459,352,439 $10,593,524 $6350611 15,2%,762 92,118,705 $4,661,151 34 23.24 $1,517,726,536 811,177,263 $670,636 $5,588,633 22,235,453 $4,917,997 35 24.25 $1,578,435,598 511,784,356 $707,061 $5,892,178 $2,356,871 $5,185,117 36 25.26 $1,641,573,022 $12,415,730 8746,944 26,207,865 $2,483,146 $5,462,921 37 26.27 $1,707,235,942 813,072,359 $784,342 $6,536,180 12,614,472 $5,751,838 38 27.28 $1,775,525,380 $13,755,254 $825,315 $6,877,627 $2,751,051 $6,052,312 39 28.29 11,846,546,395 $14,465,464 5867,928 $7,232,732 $2,893,093 $6,364,804 40 .: 29.30 $1,920,408,251 $15,204,083 $912,245 $7,602,041 $3,040,517 $6,689,7% 41 3031 S1,99T,224,581 $15,972,246 $958,335 $7,986,123 13,194,449 $7,027,788 42 31.32 82,077,113,564 716,771,136 51,006,268 58,385,568 S3,354.2Z7 57,379,300 43 3233 $2,160,198,107 $17,601,981 $1,056,119 58,800,991 53,520,396 $7,744,872 46 3334 $2,246,606,03/ 878,466,060 21,107,964 59,733,030 93,693,212 $8,125,067 45 34.35 $2,336,470,273 $19,364,703 $1,161,882 $9,682,351 $3,872,941 $8,520,469 TOTALS 2323,322,271 $19,399,336 $161,661,133 $64,664,454. $142,261,799 4/19/91 ROTA CLARITA (4%) ROA EXAMPLE EXHIIIT B FY (1) EXAMPLE OF (2) GROSS INCREMENT (3) CITY'S EXISTING (4) NET RDA PORTION (S) 40% HOUSING (6) POTENTIAL ASSESSED VALVA- TION GROWTH (4X) REVENUE (A.V.•BASE)0.01 PORTION OF:GROTS OF GROSS SET-ASIDE - NET WIN REVENUE (6%) REVENUE (SOX) ( C4.$3 ) bass 89.90 8400,000,000 1 90.91 4416,000,000 $0 90 t0 2 3 91.92 92.93 8432,640,000 "49,945,600 $326,400 $499,456 $19,584 $163,200 $130,560 (143,616 4 93.94 4467,943,424 6679,434 $29.967 $40,765 $249,728 $339,717 $199,782 $271,774 6219 761 5 6 94.93 95.% $486,661,161 8866,612 $51,997 $433,306 $346,645 8298 951 8381,309 7 96.97 8506,127,607 $326,772,712 $1,061,276 91,263,727 $63,677 4530,638 8424,51a. "",%I a 97.96 9547,427,620 $1,474,276 $75,824 880,457 $631,864 1737,138 $505,491 $589,710 $536,040 9 10 98.99 99.00 $569,324,725 $1,693,247 S1010595 sm'614 $777,299 ""'m 9745,029 11 00.01 $392,097,714 $615,781,623 $1 $2, 57,8 $129,669 84863,126 12 01.02 1640,412,887 $2,404,129 $144,248 $1,61078.908 $1,202,064 4961,652 $949768,391 ,430 $1,057,817 13 14 02.03 03.04 4666,029,403 12,660,294 $159,618 (1,330,147 $1,064,118 $1,170,529 13 04.05 $692,670,579 8720,37/,402 82,926,706 43,203,$74 8173,602 $192,226 $1,463,353 $1,170,682 81,287,731 16 05.06 $749,192,498 $3,497,925 $209,515 81,601,887 $1,745,962 11,281i5f0 $1,396,770 $1,409,661 31,536,447 17 18 06.07 07.08 8779,160,198 1810,326,606 $3,791,602 $4,103,266 $227,496 $1,05,801 $1,516,641 41,668,303 19 08.09 5842,739,670 44,427,397 4246,196 $265,644 52,051,633 $2,213,698 $1,641,306 $1,805,437 20 09.10 8876,449,257 $4,764,495 4285,870 52,382,246 (1,770,954 $1,903,797 41,948,035 52,096,377 21 22 10.11 11.12 4911,507,228 1947,967,517 85,115,072 $5,479,675 $306,904 82,557,536 $2.046,029 52,230,612 23 12.13 8985,886,217 $5,858,862 632a,781 (331,332 42,739,878 52,191,870 $2,01,037 24 13.14 $1,025,32t,666 $6,253,217 $373,193 $2,929,431 63,126,608 $2,343,545 12,501,287 $2,577,699 $2,751,415 25 26 14.15 15.16 $1,066,334,533 $6,663,345 1399,801 $3,331,673 52,665,338 32,931,872 27 16.17 81,1080987,914 $7,089,879 $425,393 $3,544,940 92,835,952 $3,119,347 Za $1,153,347,430 $7,533,474 $452,008 $3,766,737 13,013,390 $3,314,729 29 17.18 $1,199,481,328 $7,994,813 1479,689 $30997,407 $3,197,925 $3,517,718 30 18.19 19.20 $1,247,460,561 $1,297,359,004 $8,474,606 $508,476 $4,237,303 43,389,642 $3,724,627 31 2021 $1,349,253,364 $81973,590 $9,492,534 $538,415 $369,552 $4,486,795 44,746,267 $3,569,436 $3,797,013 13,948,380 $4,176,715 32 21.22 $1,403,223,499 $10,032,233 1601,934 $5,016,117 $4,012,894 84,04,183 33 22.23 $1,459,352,439 $10,593,524 $635,411 $3,296,762 $4,237,410 $4,661,151 34 23.24 11,517,726,536 611,177,265 $670,636 55,588,633 . $4,470,906 $4,917,997 33 24.25 $1,578,435,598 311,784,356 $707,061 $31892,178 84,713,742 $5,185,117 36 25.26 51.641,573,022 $12,415,730 1744,944 $6,207,565 44,966,202 45,462,921 37 26.27 11,707,235,942 $13,072,359 $784,342 $6,536,150 85,228,944 $5,751,838 38 39 27.28 28.29 $1,775,525,380 $13,735,254 $023,315 56,877,627 $5,502,102 $6,052,312 40 29.30 $1,846,546,395 51,920,408,251 $14,465,464 415,204,083 3867,928 3912,245 47,232,732 $5,786,186 $6,364,804 41 30.31 $1,997,224,581 $$5,972,246 5958,335 57,602,041 $7,966,123 46,081,633 $6,383,898 56,689,7% $7,027,788 42 31.32 $2,077,113,564 $16,771,136 $1,006,268 $0,385,568 86,708,454_ $7;379,700 43 32.33 R,160,19a,t07 $17,601,981 et,a56,119 $8,800,991 $7,040,792 $7,7",872 44 33.34 $2,246,606,031 118,466,060 i1, 107,964 $9,233,030 67,386,424 $3,125,067 43 34.35 $2,336,470,273 $19,364,703 91,161,862 39,662,351 $7,745,881 $8,520,469 TOTALS $323,322,271 819,399,336 $161,661,135 $129,328,908 (142,261,790 COMMUNITY REDEVELOPMENT AGENCY Feasibility Report January 1991 Prepared by the Department of Community Development CITY OF SANTA CLARITA COMMUNITY REDEVELOPMENT AGENCY FEASIBILITY REPORT TABLE OF CONTENTS Paae I. Purpose of Report . . . . . . . . . . . . . . . . . . . . 3 II. Current Status,of.Santa Clarita Redevelopment Agency . . . . . . . . . . . . . . . . . . . 3 III. Evolution of Redevelopment Agency Activity . . . . . . . . 3 IV. Redevelopment in the 1990!s and Beyond . . . . . . . . . . 5 V. Development Problem Definition . . . . . . . . . . . . . . 6 A. Infrastructure Financing . . . . . . . . . . . . . . 6 B. Land Assembly . . . . . . . . . . . . . . . . . . . . 6 C. Market Stimulation . . . . . . . . . . . . . . . . . 7 VI. Considerations in the Use of a Redevelopment Authority . . . . . . . . . . . . . . . . . 7 A. Real Estate Development Vitality . . . . . . . . . . 7 B. Property Values . . . . . . . . . . . . . . . . . . . 8 C. Stimulating Investment . . . . . . . . . . . . . . . 8 VII. Potential Challenges to Redevelopment Agency Formation . . . . . . . . . . . . . . . . . . . . . 9 VIII. Conclusions . . . . . . . . . . . . . . . . . . . 10 IX. Recommendations . . . . . . . . . . . . . . . . . . . . 11 APPENDICES. . . . . . . . . . . . . . . . . .... . . . . . . 12 -i- CITY OF SANTA CLARITA COMMUNITY REDEVELOPMENT AGENCY -FEASIBILITY REPORT Executive Summary and Recommendations The purpose of the report is to evaluate the merit of proceeding forward with the development of a redevelopment plan for the City of Santa Clarita. The report discusses the evolution of redevelopment programs historically and into the 1990's. In addition, the development problems that Santa Clarita faces and their match to the redevelop- ment tool are discussed. Key issues critical to the success of a redevelopment agency as well as potential limitations and constraints in the establishment of a redevelopment. agency are identified. A. Report Conclusions I The City's first priority should be to meet the development needs of the community. The use of the redevelopment agency tool and •its process should be driven by that priority. In its use of redevelopment the City should focus on a new product development versus urban renewal. I A redevelopment program established in today's environment should not be viewed as a potential source of revenue to the City. 0 There are no other comparable economic development tools available that offer the financial packaging alternatives that a redevelopment agency does. s Current applications of the redevelopment tool are much more constrained than the broader interpretations of recent history. 0 Predictable property value increases are critical to the success of tax increment financing. ■ If the City's goal is aggressive economic development, it will require the use of economic incentives, because of development industry restructuring and changing economic market conditions. -1- City -County negotiations will be a critical threshold issue to the establishment of a redevelopment plan and the fiscal value of any redevelopment project to the city. Although the redevelopment tool is currently the most attractive tool available, its previous strengths have been substantially constrained, making it much less lucrative and entrepreneurial than in its previous application. Its value will need to be measured against its ability to create enhanced future property values, and on the merits of potential negotiations between taxing entities impacted by tax.increment financing and the City. B. Recommendations Develop list of strategic development goals/projects. Reduce list through marketplace/ fiscal feasibility analysis. Reduce list further by screening against redevelopment eligibility, County negotiation opportunities. a Determine merit of proceeding with formal redevelopment plan around existing development projects. a If merited, develop redevelopment plan and proceed with negotiations with the County. -2- CITY OF SANTA CLARITA COMMUNITY REDEVELOPMENT AGENCY FEASIBILITY REPORT I. Purpose of Report In light of changing circumstances surrounding the establish- ment of new redevelopment agency programs, staff has been directed to evaluate redevelopment's applicability in Santa Clarita, prior to proceeding with the next step of actually developing and adopting a redevelopment plan. This evaluation focuses on the broader issues and is not intended to provide a site-specific feasibility analysis. The report provides an overview of Community Redevelopment Agency activity in California, identifies key issues that City Council will need to address, and presents some specific recommendations for consideration. II. Current Status of Santa Clarita Redevelopment Agency In 1989, Santa Clarita City Council, acting pursuant to State law, created a Redevelopment Agency ,for the City. Shortly thereafter, intending to implement a process for establishment of a redevelopment plan and program, the City circulated a request for_ qualifications and proposals for redevelopment consultant services. The process for redevelopment plan adoption is lengthy and is described in Appendix A of this report. No action was taken in response to the request for qualifications. However, in 1990, the City contracted with Economics Research Associates to prepare an overview in -the area of revitalization and redevelopment as a component of the Economic Development Element of the City of Santa Clarita's proposed General Plan. As additional background, excerpts of the draft Economic Development Element addressing the concept of a Community. -Redevelopment Agency are included in Appendix B. III. Evolution of Redevelopment Agency Activity The Community Redevelopment Law was adopted by the California State Legislature in 1952 as a local government tool to eliminate blight conditions and to revitalize deteriorating areas in communities throughout the state. The foundation of redevelopment agency legislation in California is derived, in part, from the original urban renewal programs of the 1950's which, through the power of eminent domain, allowed a public agency to take private property for the public purpose of eliminating blight. Similar to State enabling legislation for Downtown Development -3- Authorities (DDA) across the nation, California Redevelopment Agencies also have the power to initiate tax increment financing) which allows the agency to receive property tax revenues and subsequently creates a base to provide innovative public financing. California redevelopment agencies appear to be a mixture of urban renewal programs and Downtown Development Authority programs aimed at revitalizing areas of urban blight. However, the tremendous growth in the number of redevelopment agencies in California following Proposition 13 suggests that redevelopment legislation was viewed primarily as a financial tool, rather than a land use planning and development tool. In fact, for redevelopment agencies established in earlier years, tax increment redevelopment financing, in combination with a strong and growing California economy, proved to be an extremely attractive revenue source. While the California Constitution prohibits cities from incurring an indebtedness in any one year exceeding their- revenue for that year, redevelopment agencies are specifically not included under this provision. In fact, the creation of debt is basic to the redevelopment process. .Specifically, a redevelopment agency is entitled to property tax increment revenue only if it is actively involved in undertaking redevelopment activities and creating debt. The discovery of the redevelopment agency as a financing tool, launched significant growth in the level of redevelopment activity throughout California. Furthermore, not only was redevelopment actively expanding growth in volume, but there was also a fundamental shift in the scope of eligible projects to be undertaken, and more "innovative,' financial applications of economic incentives with private developers. Thus, use of the redevelopment agency as a financing tool caused a shift- from the original urban physical blight revitalization, to economic incentive development. Consequently, the "face" of redevelopment projects changed: 1. Large scale, expansive projects were designed to maximize tax increment financing. 1 Tax increment financing is a financial -method which "freezes" all tax revenues currently being derived by all taxing agencies in a project area at the point that a redevelopment agency's plan is adopted. Those tax.revenues continue to be paid no matter what else happens. As the redevelopment of the project area proceeds, new development causes the value of the property inside the area to increase. The increase above the "frozen" base - amount (known as the increment), is returned to the redevelopment agency to implement its project. -4 2. Instead of limiting projects to geographic boundaries of existing urban acreage, large, vacant, non -urban, undeveloped areas were packaged as redevelopment projects. 3. Rather" than repackaging existing obsolete retail products, new economic and real estate products, such as new shopping centers or new auto malls became the redevelopment projects of the eighties. 4. "Deal making" and economic blight, rather than physical blight, received the greatest emphasis. 5. Very innovative and expansive interpretations of "blight" justified the redevelopment projects of choice. This innovative, deal -making phase has led to the current, more restrictive interpretation of the redevelopment legisla- tion and consequently, a "reigning -in" of redevelopment agency activities. Counties and other taxing entities suffering from significant revenue losses because of the transfer of the tax increment revenues to redevelopment agencies, have pushed for legislative changes in Sacramento and initiated an aggressive program of increased litigation against expansion of redevel- opment activities. The legal arguments have been over the expansive definition of blight, the purposes of specific redevelopment projects, or the necessity of redevelopment in the presence of active private development. Additionally, a provision of the Community Redevelopment Law (CRL) requires that 20% of the tax increment set aside be committed to improving -and increasing low and moderate.income housing as a fundamental purpose of redevelopment.activity programming. IV. Redevelopment in the 1990's and Beyond While redevelopment authorities have been extremely successful development tools in California under the concept of aggres- sive interpretation and application, the equally aggressive efforts to delete and constrain the expansion of new redevel- opment activities can be expected to reduce the value of such activities. Therefore, a new redevelopment program cannot be expected to show similar levels of financial returns to a community as previously established redevelopment agencies have. The trend in the immediate future, according to redevelopment professionals, is toward further retrenchment in the application of the redevelopment concept. While existing programs will continue to demonstrate successful development and financial value, expansions and new start-ups will be constrained and less productive. -5- V. Development Problem Definition Generally, because Santa Clarita is a relatively new city, it would be inappropriate to characterize it as being dominated by redevelopment or revitalization issues. This is not to say that there are not areas in the City that could be documented as being economically obsolete or physically blighted. How- ever, unlike older, more mature cities, where the main empha- sis is to redevelop old product into a higher economic use, Santa Clarita's immediate economic opportunity, that .which will bring the greatest long-term value to the community, is new product development. At a later point in time, it will be advantageous to stimulate recovery of older properties that are less competitive. However, the current challenge facing Santa Clarita, is defining ways to effectively utilize a redevelopment agency to stimulate new, nonexistent strate- gic development products such as: large scale retail products like a factory outlet and/or a power center; an industrial park or a civic/governmental complex; a hotel, restaurants, performing arts and conference center. Basically, Santa Clarita needs to begin the new product development business as.opposed to repairing obsolete product offerings. To determine whether.the redevelopment tool is appropriate, it is important.to first define the development problems and opportunities facing Santa Clarita. There are at least three major problem areas that a redevelopment agency could address, in light of the new product development orientation. A. Infrastructure Financing One major problem area facing the City that the redevel- opment agency tool can potentially address is the need to finance major public infrastructure investments such as road system improvements, bridges, public landscaping, etc. Financing of infrastructure is an appropriate and common use of redevelopment agency financing. To be eligible, improvements.can only be implemented within a specifically defined redevelopment agency project boundary area. B. Land Assembly Land assembly is another problem area that must be confronted. Currently, major retail development is restricted by the limitations in available and useable acreage, dictated by the Santa Clarita topography. Much of the recent commercial retail development had been characterized by smaller strip commercial development. Redevelopment agencies have the authority and power to acquire, develop, sell, or lease land. Land banking and the use of eminent domain are two very different, but effective ways of using redevelopment agency capabilities -6- to address the land assembly issue. However, there are potentially significant political problems associated with the use of eminent domain in the context of land assembly.' Some redevelopment agency projects have willingly given up their eminent domain authority in order to receive the required community approval to implement the redevelopment project. C. Market Stimulation Finally, if the City of Santa Clarita is to compete for its share of economic growth and investment, and it elects to strategically encourage specific development activities to the benefit of the larger community, it must consider the useof incentives to stimulate the market. A redevelopment agency, with a solid tax increment financial base in place, provides a broad range of opportunities for packaging financial incentives which can be used to attract private investment. The need for incentives is a problem area that will become increasing- ly more critical in the face of the current dramatic restructuring of the real estate development industry, and the general economic recession affecting California and the nation. The diminishing opportunity to use federal and state funding as incentive programs, and the non-existence of other comparable alternative means of. achieving incentives in the ways that a redevelopment agency can, points to the merit of a redevelopment tool: VI. Considerations in the Use of a Redevelopment Authority Redevelopment activity, through its tax increment financing, is fundamentally a "property value creation" vehicle. The important question is whether, as the result of its investment in the redevelopment process, the City can reasonably expect to "create property value" and subsequent revenues and value to the City. If it cannot, then it should not be in the redevelopment business. Current issues which must be addressed in answering this important fundamental question include: real estate development vitality, general property value health, and stimulating investment in a slow economy. A: Real Estate Development Vitality One issue is the vitality and viability of the real estate development industry. Because of the impact of the Savings and Loan crisis and the subsequent regulatory activities throughout the financial community, there is a current restructuring of the real estate development side of the real estate industry. This is being reflected in some fairly substantial down -sizing in industry activities resulting from a lack of project financing. -7- B. Property Values Another critical issue is the potential property value enhancement. The creation of property value assumes a strong local economy. Californians, up until last year, have seen enormous (some would argue artificially inflated) property value increases in comparison to other states. If property values fall, the ability of tax increment tfinancing to produce revenue will also fall. For example, tax incrementfinancing established in some Colorado redevelopment projects are near default, not because of a poorly conceived use of tax. increment financing, but because -of the.dramatic effect of the energy industry's down -sizing throughout the state's economy, the energy industry being a major employment base in Colorado's economy. Redevelopment activity is premised on the utilization of tax increment financing and the creation of enhanced property value. Much of the substantial success of redevelopment projects in California has been as a direct result of the enormous property value increases in. California. The strength and success of any future redevelopment tax increment financing projects will.be directly related to the general and project specific rate of property appreciation. Trends in property apprecia- tion in California have changed significantly over the past twelve months. Because of those trends, like the Colorado redevelopment.projects, it is clearly possible in the use of tax increment financing, for a redevelop- ment project to end up a fiscal failure. C. Stimulating Investment A slower economy mandates greater incentives to stimulate development. To the extent that the City desires to stimulate, and to a lesser extent direct, the private market's investments .in specific development projects, incentives will be required. The entrepreneurial oppor- tunities and authority inherent in redevelopment agencies made them clearly the best single vehicle for packaging - locally -controlled incentives toward the attraction of private investment. Despite the greater limitations and constraints placed on the redevelopment agencies today, there is- no realistic alternative for achieving the same goal. The basic issue is whether and to what extent City Council feels the competitiveness, or weakness, in the development market or the City's specific development objectives warrant the use of incentives. If the City's -8- goal is aggressive economic development, it will need to use economic incentives. VII. Potential Challenges to Redevelopment Agency Formation As mentioned previously, Los Angeles County in the post Proposition 13 era, has pushed to halt or minimize the expan- sion in establishment of new redevelopment agency programs as a means of reducing County revenue losses resulting from tax increment financing of redevelopment agencies. The County policy regarding City redevelopment projects. is to require a full "pass through" on all County revenues. Although the exact agreement is negotiated between:the City and County, the County's position is that it must receive its full proportionate"share of all the property taxes that would have occurred within a Community,Development Agency project area had there been.no project." A copy of the Los Angeles Board of supervisors policy relating to negotiations for City Redevelopment projects is.attached as Appendix C. In addition to the negotiations with the County over the level of tax increment pass-through, the redevelopment plan adoption process affords several opportunities for challenge of a redevelopment plan by'the County. a The, project must meet eligibility tests of being "blighted" and,"predominantly.urbanized." A fiscal'review committee composed of one representative from each affected taxing agency can be. convened "to identify the fiscal effects of the redevelopment plan upon the taxing entities and to suggest ways in which any financial burdens.could be alleviated." 1. If the redevelopment plan provides for tax increment financing, a report including the reasons for selection of the project area, a description of the conditions in the project area, an assessment of the economic feasi- bility of the -project, a description of the project to be undertaken and how such projects will alleviate the conditions in the project area must be prepared. These, and other areas, are potential targets of scrutiny, attack and possible litigation on the part of the County. According to other redevelopment professionals, it would not be inappropriate to characterize the County's direction to be one of aggressive diligence in their scrutiny of new redevel- opment projects. Santa Clarita should expect the same and should view negotiations with the County as a significant threshold issue in determining whether to continue pursuing a redevelopment plan. -9- VIII. Conclusions First and foremost, economic development activity should be driven by the needs and opportunities of the Santa Clarita community and the .City Is development -policy. The redevel- opment agency tool should only be used to the extent that there is merit to achieve those opportunities and goals. An informed and reasoned decision regarding the establishment of a new redevelopment program will require that the City prepare a preliminary assessment of potential risk and a more focused economic strategy given the current.economic climate. With that in mind, the. following conclusions are offered for consideration. a The City of Santa Clarita should view redevelopment agency activity -as a tool for encouraging significant new strategic economic development, rather than the urban renewal of older existing product. Given the implemen- tation and operation investment cost of a redevelopment agency, smaller scale projects are less likely to provide a justifiable return to the City. Establishment of a redevelopment agency should not be motivated by the perception of its significance as a revenue source to the City. The new interpretation and application of the redevelopment legislation has signi- ficantly changed the "face" of redevelopment, eliminating its once lucrative status. Predictable property value increases. are critical to the success of tax increment financing. The redevelopment agency concept embodies excellent opportunities for packaging innovative public and private development projects and incentives, particularly -in its financial capabilities. In light of the development industry's restructuring, and the slowing economy the ability to employ incentives will be particularly important. i There are no comparable alternatives currently available that might be substituted for a redevelopment agency.as an economic development incentive packaging tool. I The.success and value of a redevelopment agency program in Santa Clarita will be driven predominately by the negotiations between the County of Los Angeles and the City. If the City cannot achieve sufficient value from its projects following these negotiations, then redevelopment agency will not warrant sufficient merit to proceed. The City -County negotiations will be a critical threshold.issue to a redevelopment agency. -10- IX. Recommendations Because of the potential fiscal risk and the imminent likeli- hood of a County legal challenge to the establishment of a redevelopment authority, the City must be committed to investing time, energy and the fiscal resources necessary.to meet the significant challenges presented in establishing and implementing a redevelopment agency program. The following recommendations outline an action plan aimed at assessing the risks and creating a focused economic develop- ment strategy as a prerequisite to proceeding with the estab- lishment of a redevelopment plan. Develop a list of potential strategic development projects for the City drawing upon City council, staff and the draft General Plan. Narrow the list of specific projects through a prelimi- nary marketplace/fiscal feasibility analysis of various economic development projects, to define and focus viable economic opportunities/direction that the City should pursue. The feasibility analysis would also serve, in part, toward the completion of an Economic Development Strategy for the City which is a separate, but -related City objective. Pretest the remaining projects under existing Redevelopment Law eligibility including blight and urbanized area definitions, tax increment fiscal viability, community support, and the likelihood of successful pass-through negotiations with the County. I Develop a conclusion of the merits of proceeding further in the next formal steps toward the actual establishment of a redevelopment plan/program for the City. ■ If merited, develop redevelopment plan and negotiate with affected taxing entities. -11- APPENDICES -12- Appendix A Excerpts from draft Economic Development Element of the City of Santa Clarita General Plan, as prepared by Economic Research Associates, regarding Community Redevelopment., Page ED. 14-17 The new City of Santa Clarita formed a community Redevelopment Agency in -1989 and was initially intending to embark upon a redevelopment project selection process and the pursuit of adoption of. a redevelopment plan. The circumstances surrounding plan preparation and adoption have become more difficult in the most recent past, including substantial challenges by other local taxing jurisdictions which will fight. vigorously to protect what they consider to be their share of tax increments generated within project area boundaries. Thus, it is entirely appropriate that Santa. Clarita prepare itself strategically for the long and involved process of documenting and processing the redevelopment project and all negotiations necessary thereto. The financing circumstances. which are part and parcel of any appropriate revitalization program •the City may select have changed during the past five years and are expected to continue to change• quite radically during the current decade. Chief characteristics of these financial and funding circumstances are as follows: All American cities have witnessed the decline of federal funds both categorical and as block grants for conduct of revitalization activities. i€ At this time, the City of Santa Clarita projects that it may receive roughly $237,000 per year in community development block. grants, a value which is likely to decline. 9 ThereAs. far more and growing dependence upon the use of tax -increment financing for redevelopment projects. I In the year ending June 30, 1989, some $936 million of tax increments were utilized by redevelopment agencies in the State of California. Those tax increments now represent more than 57 percent of total annual revenues which flow to redevelopment agencies for their many and quite expensive revitalization activities. In Los Angeles County alone, some $316 million were allocated to more than 221 projects in 61 of the 86 cities in the county. In other words, Los Angeles County accounts for 34 percent of all tax increments paid over in the state. The City should note that the County of Los Angeles itself operates a number of modestly successful redevelopment projects and understands the processes and procedures for stimulating economic development in this manner. ■ The 1986 Federal Tax Reform Act, which became effective four years ago on January 1, 1987, has fundamentally changed the way in which we use tax-exempt bond proceeds to finance redevelopment activities. We have shifted back to the funding of public infrastructure in -1- redevelopment projects as the primary.use for such tax exempt bond proceeds, and at the same time have shifted away from direct subsidies to private developments because use of such bond proceeds will be illegal. Thus, if redevelopment agencies wish to use bond proceeds to subsidize.private projects, those bonds must be especial- ly organized and be offered as taxable instruments. - During the same time, the state of California Legislature has substantially tightened the requirements which all cities utilizing redevelopment tax increments are required to observe regarding the production of low and moderate income housing in their communities. it is now no longer sufficient to simply find that the proposed redevelopment project will not cause the relocation of substantial numbers of low and moderate income house- holds. It is the burden of proof upon the community to demonstrate that there is no need for low and moderate income housing within the entire community that is the primary focus. € It is important to note that the tax -increment redevel- opment financial technique is far and away the most superior long term and growing financial tool which the City of Santa Clarita does not now possess. Thus, it will be well worthwhile for the City's specific strategic economic development planning to diligently but carefully pursue the formulation of redevelopment projects in the appropriate locations which can best benefit .from the application of this _complex but results -generating process. a During the past six years, with the onset of greater environmental understanding regarding cumulative problems of wastes and toxic .leakage, it has become commonplace for landowners, developers, and others to frequently and persistently seek redevelopment agency financial assis- tance as the convenient money supplier to help with the costly cleanup so that such sites. can become certifiably buildable again. It will not be appropriate for Santa Clarita to consider any such participation until after all legal remedies have been exhausted and all other sources have been tapped to their fullest in attempting to cure problem sites of these historic and continuing problems. As a rule of thumb, the City of Santa Clarita should expect that it will have roughly the same experience as other Los Angeles County cities in adopting redevelopment projects which require the negotiation of tax -increment splits with all of the other taxing jurisdictions. This probably means that the City and its Agency can expect -2- to receive something between 25 and 35 percent of all tax increments after a difficult, complex negotiating process to define cooperative relationships for tax -increment pass-throughs with all of the local school districts, with the County of Los Angeles, and the several other special districts which have been dependent upon property taxgrowthas their primaryrevenue source for provision of services. When considering the possible spectrum of alternative revitaliza- tion programs it will be appropriate, to approach these choices from the following perspectives: I Santa Clarita may ultimately have one or more redevelop- ment projects; the City should plan to create them for operation over the long term, which means a life span of 25 to 45 years. This is necessary in order to assure all property owners of the likelihood that all properties within a project area will be brought up to the standards defined in the Redevelopment Plan. It is also appropri- ate to have such a life cycle in order to pay off all bonded indebtedness which may be issued by the Redevelop- ment Agency. Finally,.it will take the first four to seven years before tax -increment flow is substantial enough to really use the funding techniques which are most appropriate for redevelopment agencies. I Before embarking upon a redevelopment planning program, it is urged that the City h old a number of workshops in order to begin the important educational processes which will make the longer term adoption activities easier for everyone to understand and for all of the processes to be reasonably well discussed. For the most part, the consultant believes that the use of redevelopment and revitalization techniques in Santa Clarita, as defined in this revitalization component, primarily deals with nonresidential.. properties. The Housing Element of the General Plan will describe other issues concerning delivery of housing occupancy oppor- tunities. Therefore, the' options described in this component deal primarily with business activity retention and assistance in stimulating appropriate changes of property and building occupancies as well as concepts for adaptive use in older centers of the far-flung City of Santa Clarita. -3- Appendix B Outline of Redevelopment Plan adoption. Community Redevelopment Agency Association, Introduction of Redevelopment Seminar III Text, September, 1987, Ontario, California. Page I7 -I10 H. A on of Redevelopment-pl A redevelopment project area is an area of the community established by adoption of a redevelopment plan within which the redevelopment agency is authorized to use its powers. The first step in adopting the redevelopment plan is for the legislative body of the city by resolution to designate a "survey area" (Section 33310). The planning commission then cooperates with the agency in selecting a project area from the survey area. (Section 33322.) The project area must be blighted as previously discussed. (Sweetwater Valley Civic Association v. City of National City, (1976) 18 Cal.3d 270, held golf course which was economically profitable was not blighted.) It must also•be "predominantly urbanized" such that not less than eight percent (803) of the privately owned property has. been developed for urban uses, is characterized by poor parcel configuration or is an integral part of an area developed forurban uses. (Section 33320.1*3.) The area within the project may be noncontiguous if blighted or necessary for effective redevelopment, but the inclusion of property solely to obtain tax increment revenue is not proper. (Section 33320.2; also see Recus v. City of Baldwin Park, (1977) 70 Cal.App.3d.968.) The agency and the planning -commission then -cooperate in drafting a preliminary redevelopment plan (Section 33323), which is a short plan with little- detail. The actual redevelopment plan is then drafted by the agency and presented to the,planning commission: (Section 33356.) This plan must conform with the general plan of the community, and must contain certain elements required by Sections 33330, lt sec. These include: a legal description of the project area (Section 33332); an open space and street -layout; limitations on the type, size, height, number and proposed use of all buildings; the number of dwelling units; and property specified for public. purposes (Section 33333); the proposed method of financing the redevelopment (Section 33334); agency authority to sell or lease property (Section 33035); adequate safeguards that redevelopment will be carried out pursuant to the plan (Section 33336(a)); provisions. for controls and restrictions or covenants running -with the land sold or leased for private use (Section 33336(b)); nondiscrimination clauses (Section 33337); covenants, conditions and restrictions prescribed by the legislative body (Section 33338); and provisions for participation by property owners Where an asterix (*). is indicated 'beside a section number in the text, it indicates that the _section only applies to redevelopment plans or .to .areas added to a plan by amendment after 1976 unless otherwise indicated. Section 33320.1 became applicable January 1,.1984: I-7 or alternative plans for redevelopment if owners fail to participate (Sections 33339, 33340, 33345). However, possibly the most significant elements of the redevelopment plan, specified in Sections 33333.2 and 33334.2, include: 1. A limit on the total tax increment to be received by the agency. 2. A time limit to establish agency debt. 3. A time limit not exceeding twelve (12) years to commence eminent domain actions. 4. A limit on the amount of bonded indebtedness.which can be outstanding at one time. If a redevelopment project area contains a "substantial" number of low- to moderate -income families which will be displaced .by the development, a project area committee must be formed out of residents and existing community organizations. (Section 33385.) If such displacement will not occur, then the agency is only required.to consult with residents and community -organizations and provide them with a copy of the plan. The redevelopment plan must be submitted to the committee before :it is submitted to the legislative body. (Section 33347.5.) The agency, at the direction of the legislative body, consults with the committee on.matters relating to .planning or provision of. residential facilities or. replacement housing for those displaced by project activities, or on other policy matters which affect the residents of the project area. The consultation period lasts throughout the preparation of the redevelopment plan and.for a three-year period after its adoption, subject to one year extensions approved by the legislative body. (Section 33386.) Funding for a project area committee is provided for by the legislative body. (Section 33388.) After receipt of the preliminary plan, the agency is required to provide a description of the project area to county assessor -and to each affected taxing entity. (Section 33327.) Within sixty to.ninety (60-90) days the county officials shall deliver to the redevelopment agency and affected taxing entities a report on the assessed value of taxable property, the assessed value in the project area in prior years, the amount of tax revenue to.be derived from each taxingentity, and related information. (Section 33328.) After receiving this report, if the redevelopment plan provides for tax increment financing, the redevelopment agency must prepare a preliminary report specifying the reasons for selection of the project area, a description of the conditions in the project area,an assessment of the economic. feasibility of- the project, a description of the projects to be undertaken, and how. such projects will I-8 alleviate the conditions in the project area. (Section 33344.5.) If' the redevelopment plan .includes tax increment financing, within fifteen (15) days after receipt of the above report, any affected taxing entity may call for the creation of a fiscal review committee, composed of one representative from each affected taxing agency. (Sections 33353, 33353.1.) Within fifteen (15) days after receipt of the notification, the redevelopment agency shall commence consultations with the fiscal review committee to identify the fiscal effects of the redevelopment plan upon the taxing entities and to suggest ways in which any financial burdens could be alleviated.. (Section 33353.3.) The committee must hold a hearing not.less than twenty-five (25) nor more than forty (40) days following- receipt of the plan and shall complete the hearing within fifteen (15) days after commencement. (Section 33353.4.) Within thirty (30) days thereafter, the committee shall report to the agency on whether the plan will have a beneficial effect or burden on any taxing entity, and recommend actions to alleviate 'or eliminate the financial burden. (Section 33353.5.) After the redevelopment plan has been processed: in accordance with the above proceduresit may be presented to the redevelopment agency and the legislative body, generally at a joint public hearing. (Sections 33348, 33351, 33355, 33356.) The hearing must be noticed by publication once a week for four (4) successive weeks prior to the hearing in a newspaper of general circulation, be mailed, certified, return receipt requested, to each property owner at the address shown on the equalized assessment roll, and to each taxing entity. (Sections 33349, 33361.) The three (3) essential documents considered at the hearing are the redevelopment plan itself,.the environmental. impact report, and the report to council. The .report to council includes a description of the conditions in the area, the reasons for selecting the project area, a description of the projects to be undertaken, the method of financing, documentation of consultation with the project area committee, if any, a determination of conformity with the general plan, the report of the fiscal review committee and the agency's response, a neighborhood impact report, and a method or plan for relocation, including the dwelling units to be destroyed, persons to be displaced, dwelling units to be rehabilitated or constructed, and timetable. (Section 33352.) The redevelopment agency must be very careful to make an adequate record at the hearing to support the findings necessary to adopt the ordinance: The contents of the ordinance are described in Section 33367. The agency must .1 I-9 present facts to support the findings and not merely restate the required findings. There must be "substantial evidence" to support the findings, but the court will not exercise its independent judgment to reweigh the evidence. (in re Redevelopment plan for Bunker Hill, (1964) 61 Cal.2d 21; Sanguinetti v. City Council, (1965) 231 Cal.App.2d 813.) When the redevelopment plan is adopted by ordinance pursuant to Sections 33365 and 33366, it is ,thereafter subject to challenge only by 'filing of a referendum petition filed within thirty (30) days after adoption or by an in rem lawsuit filed within sixty (60) days after adoption of the ordinance pursuant to Code of Civil Procedure Sections 860, it sec. (Sections 33365, 33378, 33500, and -33501; See Card y_. Community R develoomenr Agency, (1976) 61 Cal.App.3d 570; Community Redevelopment Agency v. Sup rior Court, (1967) 248 Cal.App.2d 164.) Failure to timely bring such a challenge results in a conclusive presumption that the project area is blighted. (Section 33368.) After adoption, theagency must record a description -of the land within the project area and a statement that the plan has been adopted (Section 33373) and within thirty (30) days submit a copy of the ordinance to county officialsand each affected taxing entity (Section 33375). The redevelopment plan may be amended only after noticed public hearings by the agency and the legislative body. (Sections 33450, = sec.) Appendix C Los Angeles County Board of Supervisors Policy for Negotiating Community Redevelopment Agency Reimbursement Agreements. .�./ ��rCHIEF 3DXII-iISTRATIVE OFFICER _ COCti'TY OF LOS_a:vGELss ADOPTED 1.7 MALI Of .GMIN If TRA CION LOS ANGELES+ LIFORN11 9:OIE 9T1O1 --BOARD OF SUPERVISORS COuhn OF LOS ANGELES September 11 :1984 g 6 DEC 18 1984 CCMMUN:: RE:E7ELOPMcN: 'CARD :0 -MER -- July 3, 1984. VSPSV Z• .T< J.M. .n—• LARRY J. MONtEILN :Ngaw.N =`��-sS EXECUTIVE OFFICER_ - .a r JG.Ua;,w wuNC 7 E:E'.M.n e:CtiAE6: .N'CNCv•tr -- Develop written Policy for negotiating CAA reimbursement agreements. -- Recommend legislation to reduce the diversion of Property tax revenues. ?RO?OSED POLIC': -- Full reimbursement to county. -- Defer receipt of increment under specific circumstances. -- NO deferral of increment needed to cover new costs. -- No deferral of Tire Protection Districts' share. -- County and Agency to share in low- and moderate -income nousing. -- No plan amendments without county approval. -- Ex6lude county -owned property -- If tax rate changes, county to receive its share. LEGISLATIVE PROPOSALS -- Support legislative policy guidelines which place limits on CRA's. -- 1985-86 Legislative Program as proposed. RECOMMENDATIONS -- Adopt negotiation policies. -- Adopt legislative policy guidelines. -- CAO report back on CRA legislative reform package for 198546 program. ?EC:imb 22c CHIEF ADMINISTRATIVE OFFICER COUNTY OF LOS ANGELES cp• In `' 713 HALL OF ADMINISTRATION ; LOS ANGELES CALIFORNIA 9001= J L� 974.1 lot September 11, 1984 MARRV A +UFFORO C- EF A�MINISTPATIVE OFFICER MEMEERS OF TME SCAPO HONORABLE'BOARD OF SUPERVISORS County of Los Angeles 383 Hall of Administration Dear Supervisors: COMMUNITY REDEVELOPMENT AGENCIES DEANE DANA CHAIRMAN PETER SCHASAApM KENNETH HAHN EDMUND EDELMAN MICHAEL 0 ANTONOVICM On July 3, 1984, following discussion of several agenda items concerning Community Redevelopment Agencies, members of your Board expressed concern regarding the growing diversion of County tax revenues to fund community.redeve— lopment projects. Your Board ordered this office and County Counsel to develop a written policy for negotiating redevel— opment project reimbursement agreements and to recommend legislation to reduce the diversion of property tax revenues from the county. Community Redevelopment Agencies (CRA's) were authorized by the State Constitution and.statutes in the 1950'3 to provide a funding mechanism to revers'e.the deterioration of "blighted" areas and make them economically viable. Under current law, CRA's are easy to establish, are relatively independent, and have broad powers. By creating a CRA, a city can legally divert basically all property tax growth for decades, to finance redevelopment of "blighted" public and private facilities. The value of these projects to the local community is not an issue. The issue is that they are financed by diverting revenue from the county and other jurisdictions rather .than being directly financed by the city through assessment districts, increased fees and taxes, or redirection of existing municipal revenues. Furthermore, although a city's property tax .growth is also diverted to its CAA, the city benefits directly from the increased sales and business taxes that development usually brings, as well as from being able to use the diverted property taxes for city improvements. The county, on the other hand, loses its share of -property tax growth but has no decrease in its service responsibilities and receives no fiscal benefit from the resulting revenue growth. Moreover, since the county has no independent revenue raising authority, Board of Supervisors -2- September 11, 1984 it is unable to replace•the.property tax revenue which is lost to the CRA. Although CRA's may argue that the county will ultimately benefit from their redevelopment efforts, the fact that the county may be deprived of its share of tax increment for 40 or more years during the life of the project effectively excludes.the county from sharing in the benefits, if any. Finally, some members of the State Legislature are attempting to address certain social problems --such as the shortage of low- and moderate -income housing or the cleanup of hazardous waste sites --through CRA tax increment.diver- sions. To the extent that CRA project costs are increased to achieve .these social goals, more property taxes will be diverted from county programs, further eroding countywide services. Social needs such as these should be addressed, and funded, directly by the Legislature. In 1978 the Board of Supervisors adopted a 13 -point policy regarding the county's negotiations with CRA's. This policy provides the basis for our negotiation posture today. (Attachment I). In 1981 additional CRA policies were recommended to the Board by this office (Attachment II). However, the cities expressed such strong objections to this proposed policy letter that it was returned to this office to reach agreement with the cities on the various issues. Such agreement could never be reached. Attachment III is a summary of the negotiating policies this office recommended to your Board in 1978, 1981, and in this letter. Attachment IV is a summary of the county's legislative program recom- mendations contained in the three Board letters. I. BACKGROUND Legislative History Tax increment financing has..been available as a method of funding community redevelopment activity since 1952. Widespread use of tax increment financing throughout the county began in the early seventies. To address the expanding use of tax increment financing, the Board of Supervisors supported legislative reform requiring greater accountability and tighter controls on CRA activities, and closer scrutiny of each CRR project. These efforts resulted Board of Supervisors -3' September 11, 1984 in the -passage of the Montoya reform legislation in 1976. .which, along with Hoard policy adopted in 1978, resulted in the negotiation of reimbursement agreements with cities to at least partially relieve the adverse fiscal impact of their projects on the county.and special districts. Article XIII A, added to the State Constitution in 1978, fixed the ad valorem property tax rate at a maximum of 1% of assessed market value. This property tax rate limit removed the ability of affected taxing agencies to recover their CRA property tax revenue losses through a tax rate increase, and put areaall competition xwith athe crespective redevelopmentoaect gency for the future incremental growth in property tax revenues. anis year the State Legislature passed AB 203 (Hannigan), which will become effective January 1, 1985. It somewhat tightens the definition of blight and requires specific project goals. Although it prevents the county from claiming fiscal detriment solely on the basis of loss of tax increment, it does permit a claim of detriment based on the loss of tax increment that would have been received without the CRA's efforts. This is basically the position from which we are presently negotiating agreements --that the county is generally entitled to its full share of the tax increment because it would have occurred somewhere within the county without the specific CRA project. Grand Jury Review The 1983-84 Grand Jury included CRA's.as one of the areas of concern to be studied by their independent auditor. Their report, issued in July of this year, recommends greater accountability and fiscal responsibility on the part of CRA s, the establishment of an oversight agency, and a more specific definition of blight. Current Status of CRA- Pro lects There are currently 165 community redevelopment projects (including five county projects) active in Los Angeles County. The assessed valuation of all property located in these project areas represents 9.65 of the entire assessed valuation throughout the county. The dramatic growth in the number of projects in the last 10 years, and the fiscal impact this has had on county revenue, is summarized below and detailed in Attachment V. Board of Supervisors -4- September 11, 1984 Revised GROWTH OF CRA'S AND TAX INCREMENT LOSSES F Fiscal Number of Annual Revenue Loss to County Year Protects (In Millions) 1974/75 63 $ 11.7 1975/76 22.1 1976/77 87 .1977/78 42.0 1978/79 94 32.8 1979/80 112 39.3 1980/81 116 53.6 1981/82 127 64.4 1982/83 149 78.5 1983/84 165 92.5 Si County's Tax Increment Loss as 5 of Total Property Tax Revenue to County 1.05 1.75 2.0% 2.85 4.65 4.35 5.15 5.55 6.35 7.05 nee January 1 of this year, 11 communities have adopted new plans, or expanded old ones. Several others are in various stages of plan development. Without some type of intervention, the number of redevelopment projects will continue to grow and the county's participation in property tax revenue -growth will continue to decline. In 1978 the county began reviewing CRA project proposals and negotiating reimbursement agreements with the, agencies to alleviate some of the fiscal impact of the projects. Of the 165 projects in existence, -the county has negotiated full or partial reimbursement agreements with 62 of them. As a result of this effort, $4.6 million in tax increment funds were reimbursed by CRA's to the County General Fund and Special Districts in 1982-83, and $5.4 million was reimbursed for 1983-84. In addition, many of the agreements recently negotiated call for repayment, at a future date, of, some or all of the county's deferred share of increment. Attachment VI is a listing of a11:CRA agreements, a summary of their terms, and the tax increments paid to each in 1983-84. II. PROPOSED NEGOTIATION POLICIES In our efforts to negotiate agreements with redevelopment agencies, this office has endeavored to obtain full reimbursement of the tax increment which would normally accrue to the county. When full reimbursement has not been feasible, we have obtained agreements which provide for partial reimbursement. Adoption of the following negotiation policies by your Board will provide this Office with clear direction as we meet and negotiate with CRA's when new plans are proposed and old plans are expanded. As a matter of equity, the same policies shall apply to county CRA.projects to the extent permissible by law. Board of Supervisors -5- September 11, 1984 Prior to entering into CRA negotiations, it is recommended that county staff explore with the sponsoring jurisdiction other means of financing their proposed projects, including formation of benefit assessment districts, allocation of existing state, county or city funds, etc. This would place the county in the position of helping cities resolve their specific problems without a corresponding detrimental impact on the county's revenue base. If other financing methods are not adequate to fund the needed projects, the following CRA negotiation policies are recom- mended: 2. county shall be reimbursed its full share of a tax increment that would have occurred within ect area had there been no oro.ieet. Section 33012(b) of the Health and Safety Code, as amended by Chapter 147 -of 1984 (AB 203 -Hannigan) effective January 1, 1985, permits reimbursment for.tax increment which could reasonably have been expected -to be received if the redevelopment project had not been established. However, the law does not preclude the county from negotiating reimbursement for all of.the growth as opposed to "normal" growth. CRAzs generally argue that the county is entitled to nothing or, at the most, the tax increment that would have occurred through the inflationary 2% growth permitted by Proposition 13. Viewed from a countywide perspective, much of the development occurring in CRA project areas would occur somewhere within the county if there were no.CRA.. Thus, unless.an agency can demonstrate that the benefits from their redevelopment activities would not.have occurred somewhere in Los Angeles County, the county's full share of the tax increment would constitute "normal growth" which the county could reasonably expect to receive without the redevelopment project. Such a deferral is, in fact, an interest-free loan, thus both need and the ability to repay the -county should be clearly identified. The amount of the deferral is considered a debt of the agency, and is so designated on their statement of indebtedness. Board of Supervisors 3• 4. 5. 6. -6- September 11, 1984 It is difficult to attribute to specific. projects an increase in the costs of most services provided by the county (courts, health, elections, etc.). In the event a county services can be directly tied to a project, however, state law (Chapter 147, 1984 -Hannigan) provides for reimbursement additional costs. development of the welfare, n increase.in specific Statutes of - for the All redevelopment requires fire protection services, and fire protection costs cannot be held at a constant level for the 30 or 40 -year life of a project. Since 1978 it has been Board policy not to defer reimbursement of the Fire Protection Districts' full share of the increment. Acknowledging the.need for low- and moderate -income housing in the county, and the advarrtage to the county of increasing the supply of such housing, if the agency sets aside its pro rata share of the increment the county will agree.to contribute. its pro rata share. If any amount of the county's increment is beingdeferred, the county's pro rata share of the housing set-aside will reduce the county's deferred amount by that amount and, therefore, will not be required to be repaid. Although all proposed project amendments must follow the same legal process as new plans, this provision in our agreements will ensure our position in the event that the county wishes to oppose a future plan amendment. included in a oroiect W This will permit the county to maintain control over the use of its own property for the life of the project. Board of Supervisors -7- September 11, 1984 7. The county shall be reimbursed its share of any tax increments attributable to increases in the oronerty Although Proposition 13 has the effect of limiting the ad valorem tax rate to one percent of assessed market value, if this should change the county should share in any increased property tax assessments. Your Board routinely adopts a resolution to this effect with each new CRA project. Change from Current Policies The above policies do not represent a major change from this office's current negotiating posture. Currently we endeavor to obtain full reimbursement of the tax increment which would ordinarily accrue to the county. If full reimbursement is not feasible, we seek partial reimbursement where we believe this to: be in the best interests of the county. The above policies, therefore, generally reflect this office's current negotiating posture.However, adoption of the above policies would strengthen our negotiating position. In the event of a conflict between a CRA's final position and the above policy, this office,. will advise your Board as to the differences, the CRA's final proposal, and our recommendations. If the CRA has presented a compelling argument for an exception to the above policy, we will present the argument in our report to your Board. In the absence of a compelling argument, we will recommend that your Board oppose the project at the public hearing and, if necessary, file a lawsuit in opposition of the plan. III. LEGISLATIVE PROPOSALS Legislative Policy Guidelines The county has clearly been financially disadvantaged by the proliferation of CRA's. CRA project areas now account for almost 10% of the countywide assessed valuation and areexpanding at a steady pace. This erosion of the county's share of.the property taxes constricts the county's ability to finance services to the county's entire population. To reverse this trend, it is recom- mended that the Board adopt the following,general legislative policy guidelines regarding CRA's: -- Oppose any expansion of the scope or authority of CRA's; Board of Supervisors -8- September 11, 1984 -- Oppose any proposals to address other social problems through CRA tax increment diversions; -- Oppose any liberalization of the justification for the for- mation of CRA projects (e.g.: an expansion of the definition of blight); -- Favor appropriate actions that will stimulate the completion of projects and return their areas to the tax roll; and -- Favor the formation of a state authority whose function is to oversee the financial practices of CRA's. Recent Legislation A. number of CRA bills have been considered by the State Legislature this year. These bills are summarized in Attachment VII for your information. Proposed Legislation There are several legislative concepts that we believe should be analyzed and developed into a comprehensive CRA reform package for the Board's 1985-86 Legislative Program: 1. Limit scope of CRA projects to a reasonable level -- Establish a limit'on the percent of a county's assessed valuation included in CRA's, above which CRA activity within a county would only be permitted with the express consent of the county. -- Set a limit on the percent of a jurisdiction's territory that can be included in a CRA. -- Set limits on a jurisdiction's use of CRA tax increment financing based on the availability of other revenue sources (such as benefit assessments, sales tax and property tax). 2. Narrow the definition of blight -- Establish better definitions of blight, such as the federal UDAG eligibility standards. 3. -Establish a state oversight authority -- CRA.financial activities. -should be audited on a statewide basis to ensure that reported debt is legitimate before tax increments are allocated. Board of Supervisors -9- September 11, 198;4 -- Financial transactions between CRA's and their sponsoring agencies should be periodically reviewed for propriety. u. Terminate CRA projects as quickly as possible Limit CRA project life to 25 years or less, except where prohibited by existing bond obligations. -- Require cities to use tax increment from lucrative project areas to support necessary redevelopment in new or amended projects before using additional tax increment as_a source of revenue. -- Require a CRA to pay off its debt as quickly as . possible by insisting the agency: use all or part of the city's increasedsales tax revenues from within the project to pay for the CRA's debt; use the existing benefit assessment authority of CRA's to pay for its debt. We will include specific reform proposals as part of the legislative package that our office will'submit for Board approval for the 1985-86 Legislative Session. Summary Adoption of the above county negotiation policies, and develop- ment of the above legislative proposals, will protect the county'j future property tax growth and, correspondingly, the level of countywide services. IT IS, THEREFORE, RECOMMENDED THAT YOUR BOARD: 1. Adopt the above negotiation policies and instruct this office and County Counsel to seek reimbursement agreements that reflect these policies; 2. Adopt the above legislative policy guidelines; and Board of Supervisors -10- September 11,'1984 3. Instruct this office to .report back to the Board on recommendations for a CRA legislative reform.package for inclusion in the County's 1985-86 Legislative Program. Very truly yourlsst , HARRY L. HUFFORD Chief Admidistrative'Officer HLH:GAR PEC:imb 22:a Attachments cc: Executive Officer Board of Supervisors County Counsel Auditor -Controller Legislative Representative Community Development Commission