The city of San Jose expects to spend 20 to 30 years paying off the $3.9 billion debt its recently dissolved redevelopment agency incurred, said Richard Keit, the city’s managing director of redevelopment. Until the debt is paid off, funds previously intended for redevelopment can’t be distributed to school districts and colleges, as the state had promised.
Last month, the state dissolved redevelopment agencies across California. Governor Jerry Brown signed the legislation last summer in an attempt to help balance California’s budget. The law promises to distribute money that had gone to the redevelopment agency to schools, community colleges and special districts that provide services like sewage treatment, fire protection and street lighting.
But first San Jose and the other districts must pay off their debts. When Brown signed the bill last year, no one was talking about this.
California redevelopment agencies incurred debt to function, and depending on the city, that debt could take longer to pay off than expected.
In the meantime, San Jose, like other cities, must follow several steps to comply with the bill.
Cities must create successor agencies for the redevelopment agencies. Those agencies will be responsible for all debts, obligations, assets and contracts the redevelopment agency previously held.
On Jan. 24, San Jose’s city council confirmed that the city would become the successor agency. One of the responsibilities is to produce a payment schedule, detailing debt payments over the next six months. Every six months, a new schedule must be created. Payment amounts may change based on revenue resulting from previous redevelopment projects and fluctuations in the city’s budget.
Ninety-two percent of San Jose’s total debt — $3.9 billion — is held in bonds. The city’s first payment schedule focuses on these bonds, obligating 82 percent of the repayments on bonds alone. From January to June, the city has proposed paying $217 million in debt relief
In its best years, Keit said the agency brought in roughly $205 million a year from property tax increases. “Now, we think with the economy improving we’ll be at around $185 to $190 million for the next few years.” When that money runs out, the payment schedule will slow down with it. “We expect to pay this off for the next 20 or 30 years,” he added.
The money earned from redevelopment projects is used to pay off the debt incurred from building them. The San Jose Convention Center, Children’s Discovery Museum and Guadulupe River Park were all city redevelopment agency projects. The city issued tax allocation bonds and and made the payments through the increase in property taxes. But without an agency, no projects will be funded, and there’s not enough money to balance the debt. Still, without debt, redevelopment agencies couldn’t have operated.
“Redevelopment agencies are not supposed to exist if they don’t have debt,” said Bill Ekern, community development director for Redwood City. Redevelopment agencies targeted areas of blight in their city and then took out tax allocation bonds through the city to fund the redevelopment itself. By making these neighborhoods more appealing, agencies hoped private businesses would come to the area, and property taxes would increase. A portion of the increased property-tax revenue went back to the agency and was then used to pay off the bonds as well as to start new projects. A percentage of that revenue also went to projects in affordable housing. For San Jose, that allotment was 20 percent.
A system that relied so much on a fluctuating California economy can lead to record debt, Ekern said, despite the caution that is supposed to be brought to each decision. “There would always be that question ‘Can you really afford to issue the next round of debt’ because the next round of debt is predicated on continued growth in property taxes,” Ekern said.
He explained that California’s redevelopment growth slowed down greatly due to the 2007 recession. He used to work for San Jose as the redevelopment agency’s director of special projects. San Jose suffered from it more than most cities because the city was in the middle of funding several large-scale projects, he said. In comparison to Redwood City, Ekern said the city had already finished the “big aggressive projects and was already reaping the benefit,” adding that Redwood City was “very lucky.”
“Sometimes you get these blips, you get these huge economic swings that are bound to happen once in a lifetime,” he added.
At a city council meeting last October, Mayor Chuck Reed spoke negatively about the end of redevelopment agencies. “There is no doubt local government is losing its most important and most powerful tool for job creation and the creation of housing, particularly affordable housing,” the mayor said, adding that it was a “bad move, bad idea, bad policy and a bad impact.”
Mayor Reed isn’t the only mayor in California who’s upset. The mayors from the ten largest cities in California, or the “Big Ten,” signed a letter that detailed the negative result of losing redevelopment agencies. Addressed to Darrell Steinberg, president pro tempore of the California State Senate, and John Pérez, Speaker of Assembly for California, the letter called the redevelopment bill a “poorly constructed idea that is disastrous for the state and its residents.”
Despite the negative comments from city officials at all levels, Ekern said much of the blame falls on the redevelopment agencies themselves.
“In California we’re all essentially competing for the same pot of money which is property tax revenues,” he said, “but the pie wasn’t growing fast enough to stay with everybody’s needs.” Because of this, “anything that relied on property taxes is now in retrograde. I think agencies continued to think ‘this will pass, we’ve got law on our side. We’re going to be able to stand our ground,’ and I just think it was short sighted. I think we blew it over a decade.”