Dan Walters: Redevelop in state, but set tight limits

California adopted redevelopment as a tool for improving its urban ambience just after World War II, and for more than 30 years, it was nothing more than an ancillary local government activity.

But when voters in 1978 adopted Proposition 13, the landmark limit on property taxes, redevelopment boomed because it let cities retain property taxes from their redevelopment projects, rather than share the revenues with counties, schools and special districts.

Within a few years, the number of local redevelopment agencies had doubled, and "project areas" had tripled. In 1988, voters enacted another measure, Proposition 98, to guarantee school financing, and that complicated matters further.

Proposition 98, among other things, requires the state to make up any shortfalls of property taxes to schools. And that has had the unintended consequence of forcing all state taxpayers to subsidize local redevelopment agencies' off-the-top diversions of property taxes.

According to the state controller's office, local redevelopment agencies more than doubled their indebtedness, from $47.9 billion to $101.8 billion, between 2000 and 2010.

That's required ever-higher property tax diversions (topping $5 billion a year) and therefore more indirect subsidy payments to schools from an increasingly stressed state budget.

As its finances became more complex, too, redevelopment evolved from a tool to clean up urban blight into a way for cities to subsidize private development – thus practicing crony capitalism. Local officials sidestepped the Legislature's efforts to curtail misuse.

With indirect state subsidies approaching $2 billion a year, something had to give, especially after cities mounted a successful ballot measure drive in 2010 to protect – or so they thought – redevelopment funds from state seizure.

The unintended consequence of that measure, Proposition 22, was to leave the state with only one avenue to recapture the money – abolishing redevelopment altogether – and that's exactly what Gov. Jerry Brown and the Legislature did last year. Subsequently, however, they backed away a bit, decreeing that the 400-plus redevelopment agencies could remain in business if they transferred $1.7 billion in property taxes to schools.

Some cities complied, but they also sued the state. Last week, the state Supreme Court ruled that abolishing redevelopment is within the state's power. It also decreed, however, that the escape clause is illegal because – irony of ironies – it violates Proposition 22.

City officials are now reduced to begging Brown and the Legislature to reinstate redevelopment in some form.

It should be reinstated, but with very tight limits that would restore its original purpose of dealing with blight – and without subsidies from the state treasury.