Editor’s note: This article was updated on Dec. 19, 2012.
Nearly a year after the state Supreme Court upheld a law abolishing redevelopment agencies, California cities are still adjusting to the evaporation of a revenue stream that had flowed steadily for decades. Many have begun to slash budgets in frustrated resignation, but a few, like Santa Clara, intend to keep on fighting.
Mayor Jamie Matthews and the Santa Clara City Council sent a letter to constituents late last month warning that “very soon, the State of California will likely issue a report demanding that [the city] transfer more than $300 million.” The letter describes the potential annual loss as equal to what it takes to run the police department for half a year, or the city’s library system for a full year.
It asks residents to sign on, literally, in support of unspecified future steps to try to retain the money.
City Attorney Ren Nosky said the letter was a preemptive strike, aimed at alerting the public to a municipal crisis before it fully materializes. Nosky said the mayor and council decided that, despite media coverage, most residents were unaware of the potential impacts.
Some residents, including high school teacher Karen Hardy, found the letter itself to be puzzling. “Most people didn’t understand what [city leaders] were talking about. They had no contextual idea,” Hardy said. “I’ve never seen the mayor send something out like that, ever.”
Santa Clara Plays Fair, a community group that formed to oppose the new San Francisco 49ers football stadium project, sent out an email to its members questioning the wisdom of public funds being spent to tell citizens about the impending loss of public funds.
Council member Pat Kolstad said the council wanted to make sure citizens understood a problem was looming that could be “overwhelming to the city,” adding that the letter has garnered an outpouring of support from residents. “Citizens have been writing in saying, ‘Anything we can do to help you overcome this decision, we’d be happy to volunteer,'” he said.
The council has to wait until the state officially decides which assets to reclaim before it can decide what to ask from residents in terms of support, according to Kolstad. He said a decision on whether to take legal action against the state will also wait until the city has a clearer picture. If Santa Clara does sue, Nosky said, it would challenge the state’s right to reclaim redevelopment agency property that was transferred to city possession in 2011.
(UPDATED, Dec. 19: An audit conducted by the city’s Finance Office suggests the state will seek to reclaim all the assets identified in the letter, totaling more than $300 million and including properties transferred back to the city.)
State legislation dissolving redevelopment agencies, effective February 1, 2012, included detailed provisions for how the money would be reclaimed, starting with liquid assets held by the agencies — basically, cash. The next step would involve the state taking back non-liquid assets, such as land holdings, said Gary Ameling, Santa Clara’s director of finance. City officials focused on the potential loss of funds from these properties in the letter to constituents.
Ameling said Santa Clara will be hit harder than most cities because of the approach it took to redevelopment. Here’s why:
- Under the now-defunct system, redevelopment agencies had to meet goals for turning underutilized land into economically useful properties. Most cities facilitated the process by buying land with agency money and donating it to developers, according to Ameling. (Redevelopment agencies reaped the benefits of additional property taxes that came from the land’s value being enhanced, a process known as tax-increment financing.)
- Santa Clara, instead, entered into agreements with developers who already owned land that could be used for redevelopment. The site was then conveyed to the agency at either low cost or no cost. In exchange, these agreements stipulated that future lease revenue would go to the city — first to pay off any expense of purchasing the land, and then to bolster the city’s general fund.
According to Ameling, Santa Clara used this strategy since the 1980s, and, until now, it had several advantages.
First, lease income from redevelopment properties gave the general fund a consistent stream of annual revenue — the 13 million dollars the letter warns would be lost to the state.
Also, by giving land to the redevelopment agencies, the city protected itself from liability, Ameling noted. If the California’s Great Adventure Theme Park were cited in a legal action, for example, the redevelopment agency would be the “first line of attack,” saving the city the costly headache of potential lawsuits, he said.
“It was a really smart way to go about reaching multiple goals,” Ameling said, citing the ability to meet both the redevelopment agency’s state-driven goals and Santa Clara’s redevelopment targets. “We created an on-going stream of revenue into our city’s general fund, which could then help to support general government services.”
When Gov. Jerry Brown announced the plan to dissolve redevelopment agencies in January 2011, he stated that any transactions regarding redevelopment properties after June 2011 would be null and void if the legislature passed the law. In other words, despite the city’s current control of these properties, they were transferred too late to elude the complex and intricate redevelopment law, City Attorney Nosky said, explaining the state’s position.
Some of the money the state reclaimed would come back to the Santa Clara community through state-funded agencies such as the Santa Clara County school district, but Nosky said that amount would be “fractional” compared to the funds lost.
If Santa Clara opts for a lawsuit, it would not be alone among California municipalities. According to the California League of Cities, there are several cities with outstanding suits against the state.
