REDEVELOPMENT AND EMINENT DOMAIN

By Ian Trowbridge

I oppose the taking of private property from individuals and small businesses to give to developers. In fiscal year 2005, the city's general fund lost $16 million in potential revenue from redevelopment projects that could have been used to fund public safety. Grantville redevelopment project is a mistake.

I oppose the taking of private property from individuals and small businesses to give to developers.

In fiscal year 2005, the city's general fund lost $16 million in potential revenue from redevelopment projects that could have been used to fund public safety.

Grantville redevelopment project is a mistake.

Plans to redevelop the Broadway Naval Complex are proceeding without public input.  That is wrong.

Plans to seize 188 homes by eminent domain in City Heights and destroy them to save the neighborhood is an Alice in Wonderland plan.  This project should rejected.

Summary

San Diego creates too many redevelopment districts by wrongly declaring communities blighted.  They mislead the public about the economic advantages of redevelopment districts and then cut deals that enrich developers at the expense of the public.

• Redevelopment districts reduce the property taxes paid into the city general fund.
• The use of eminent domain to take private property from small businesses and individuals to give to other private entities is gross governmental abuse of power.

Background

The use of eminent domain by local governments  to seize private property and transfer it to another private entity has been subject to widespread criticism since a recent controversial 5-4 decision by the Supreme Court. In the case of Kelo v. City of New London, the court ruled that municipalities have the right to determine what constitutes a "public purpose" for eminent domain seizure purposes -- even if that means taking privately owned real estate away from citizens and handing it over to private developers who promise to increase the local tax revenue base or increase employment.

The decision was assailed by dissenting Justice Sandra Day O'Connor as giving "disproportionate influence and power" to the well-heeled in America.

In California, legislators including Sen. Christine Kehoe are introducing bills to limit the powers of municipalities to seize private property by eminent domain.

Redevelopment by municipalities is managed through a Redevelopment Agency and is subject to California Redevelopment Law.  In San Diego the city council serves as the agency and has the authority to take private property by eminent domain. 

California Redevelopment law requires the finding that a location is "blighted" before it can be incorporated into a redevelopment area.  Blight is defined as adverse physical and economic conditions.  Adverse physical conditions include aging poorly maintained buildings, inadequate and obsolete infrastructure and unsafe building conditions.  Adverse economic conditions include vacant land or buildings, stagnant property values, hazardous waste and high criminal activity.

The cost of redevelopment is largely financed by "tax increment".  Tax increment is the increase in property taxes generated by  the redevelopment project. It is based on the assumption that a revitalized project area will generate more property taxes than were being produced before redevelopment. When a redevelopment project area is adopted, the current assessed values of the property within the project area are designated as the base year value. Tax increment comes from the increased assessed value of property, not from an increase in tax rate. Any increases in assessed property value,either because of change of ownership or new construction, will increase tax revenue generated by the property. This total increase in tax revenue is the tax increment that goes to the Redevelopment Agency. Except for the 20% of the tax increment for affordable housing that can be used anywhere, the funds generated by the  tax increment can only be used within the development project area.

A tax increment financing deal can involve political favoritism. For example, owning land in a redevelopment district can be a windfall, since the area will get special treatment from diverted tax revenues.

Developing a new mall that gets a tax increment subsidy can be a big advantage over a neighboring, existing mall that did not get a subsidy. Indeed, there have been several tax increment lawsuits alleging such "piracy."

Major problems with the application of Redevelopment Law are that the designation of an area as blighted is subjective and open to abuse and that most of the tax increment is used to subsidize the developer at the expense ofthe public.  The use of eminent domain can displace long-term residents and thriving small businesses for the benefit of large  developers and corporations.

If tax increment is insufficient to finance needed infrastructure, developers can be assessed Development Impact Fees that generate additional funds for parks, fire stations and other infrastructure.  Obviously, developers usually  oppose any fees that increase their costs and the usual outcome of negotiations with the city is that the public end up subsidizing developers for these necessary improvements.

A little appreciated consequence of declaring an area  a Redevelopment District is the fact that tax revenue derived from increases in the value of property must be spent within the district and, consequently, this revenue is lost to the city general fund that pays for services throughout the city.  The city does benefit financially by receiving property tax funds that would normally allocated to schools and the county as part of the tax increment, but the extent to which this is spent on developer subsidies is unclear.  What is clear is that the city provides funds to the Redevelopment District that could be spent in other needier city communities.

The San Diego Experience

Understanding the financing of all Redevelopment Projects in the city of San Diego requires a knowledge of how property taxes are allocated.  Figure 1 shows how the 1% property taxes collected in the county are distributed to schools, cities, the county and other agencies for  fiscal year 2005.  In aggregate, about half of the $2.7 billion property taxes go to schools and approximately 11.6% to cities throughout the county and 12% to county government.  County officials stated that the city of San Diego received $200 million of the $2.7 billion total property taxes .

Table 1 details the gross tax increment derived from all the redevelopment projects in the city for fiscal year 2005 kindly provided to me by the Redevelopment  Agency of the city of San Diego on August 26,2005.  These data show that $93 million of tax increment was generated for fiscal year 2005 of which $65 million was generated by the CCDC Center City and Horton Plaza redevelopment projects.  Since 17% of these property taxes would have been allocated to the city's general fund (see Figure 2 for how property taxes are allocated in the city), the city of San Diego's general fund was depleted of $16 million as the result of the city's redevelopment projects.  So when current council members state that redevelopment projects are an important source of funds, they forget that these projects significantly impact the money potentially available in the general fund that could be used  to fund important programs such as public safety.  Finally, although it is true that the gross property taxes returned to the city is increased as a result of redevelopment projects, the cost of servicing redevelopment bond issues and the amount of tax increment used to subsidize developers reduce the net amount significantly. Appendix I: How Property Taxes were spent in 2005 in the City of San Diego

Petco Park

The 26-block Ballpark Redevelopment project consisting of hotels, retail, office buildings and residential all surrounding a new 46,000-seat ballpark for the San Diego Padres baseball club is generally considered a success.  However, this viewpoint does not take into account all of the potential costs  to the public. For example, it does not include the excessive cost to the public of the baseball park bonds issued by the city in a private offering to Merrill Lynch conducted in secret by Mayor Murphy at two percentage  points higher  than the going market rate. In addition, there  has been little or no discussion of the human and financial costs of displacing long-term downtown residents and charities that provide services to the poor and homeless as gentrification of downtown proceeds.

The Ball Park Redevelopment Project may also have other large costs hidden from the public in the form of tax increment being used to subsidize the major development partnership of this project generating excessive profits for these developers.  The accounting practices of CCDC are not transparent enough to ascertain what fraction of tax increment went directly or indirectly to the partnership.

Grantville

In May, 2005 the City Council created the Grantville redevelopment zone based on the finding that the project area was physically and economically blighted.

The Grantville redevelopment area is just north of Interstate 8 along Mission Gorge Road and includes Kaiser Permanente's Zion Avenue hospital and medical center.

Councilman Jim Madaffer championed the creation of a redevelopment zone in Grantville to address chronic problems there, including gridlocked streets and flooding. He has said it is the only way Grantville, which is in his district, will get those problems fixed.

This redevelopment project has met with stiff resistance from owners of thriving small businesses in the redevelopment area who believe the area is not blighted.

Traffic congestion was used as one criterion for blight, yet the traffic problem seems less acute than along Genesee in University City or many of the surface roads in La Jolla.  See the San Diego Redevelopment Agency Report to the City Council on the Grantville Project date March 14, 2005 (Appendix II).

The county agrees with the small businesses in the Grantville redevelopment zone and has sued the city to stop the project because the project zone is not blighted and the city is attempting to capture property taxes as tax increment from the county and schools (see above).

This appears to be a case of government involving itself in business decisions that free market forces are most efficient at making.

Broadway Navy Complex

The Broadway Naval Complex has the potential to be a jewel of the North Embarcadero water front rivaling the beauty of Balboa Park and symbolizing San Diego as a vibrant city with an outstanding quality of life.  But remember NTC was envisioned as Balboa Park by the Bay until the reality of secret backroom deals, political graft and poorly drafted contracts ruined those hopes.

The redevelopment of the Broadway Naval Complex is in danger of succumbing to the same forces that ruined the legacy of NTC.  Developers have already submitted written proposals to the navy for development of the Broadway Complex with virtually no public input. 

Some officials are comfortable with this situation (see letter to the Union-Tribune by Julie Meier Wright, President and CEO, San Diego EconomicDevelopment Corporation,  Appendix III). 

I support more public involvement in the process, lobbying of congressional representatives to intervene on behalf of the public to extend the time line for decision making on the future of the Naval Complex.  The city council must also take a more active role in ensuring the public's interest in this development is represented in discussions with the navy, the port district and the state.

City Heights

The proposed City Heights redevelopment project destroys a neighborhood in order to save it.  The plan is to seize by eminent domain 188 houses, destroy them and then build up to 509 apartments ,condos and town houses.  The neighborhood is healthy and the designation of blighted is nonsense dreamed up by some bureaucrat to justify this high-handed action.  The city council should block this redevelopment project.

Concluding Remarks

Redevelopment is not always bad if used in the manner originally conceived by California Redevelopment law.  In the city of San Diego, however, redevelopment projects have been overused and have frequently enriched the project developers at the expense of the public, the ballpark redevelopment project probably being the quintessential example.

Taking of private property invoking eminent domain by the San Diego Redevelopment Agency to transfer to other private entities is invariably wrong and should be used only if the properties are to be used for an obvious public purpose, such as a library or a park, and not to enrich one property owner at the expense of another.  The public should have access to a transparent accounting of how tax increment funds are used in redevelopment zones so they can judge the appropriateness of the use.

Whenever possible, instead of eminent domain, the city should use zoning and the facilitation of business improvement districts, along with the upgrading of public infrastructure and the location of " keystone" public facilities, such as parks and libraries to encourage existing property owners and new investors to invest in and improve communities where revitalization is needed.