Organizers say that they aim to give taxpayers a stronger voice inside the State Capitol during California’s budget crisis. The new caucus vows to support a state budget that balances the budget without gimmicks; oppose and vote against any budget that increases taxes; oppose and vote against placing tax increases on the ballot; uphold Proposition 13; and support tax cuts that bring back jobs and stimulate the economy.

The seven members who attended the press conference announcing the formation railed on existing regulations and tax rates they say are hurting California workers and businesses, arguing voters have already spoken on taxes by rejecting past tax increases on the ballot in recent elections.

At Wednesday’s news conference on the Capitol steps, Assemblyman Donald Wagner (R-Irvine), a co-chairman of the caucus, said the message to Brown was clear: “You’re not getting Republicans to go for tax increases.”

Attending members were adamant that they would not vote for the tax extensions — which require an AYE vote of two-thirds of lawmakers’ to make it on the ballot — without giving voters the option of tax cuts, even if proposals they support, including pension reforms or a spending limit, were on the table. They said they would be working to present ideas for job creation and economic recovery in the future.

To close the state’s budget deficit over the next year and a half, Brown has proposed about $12.5 billion in spending cuts and borrowing and wants to ask voters in a June special election to extend the temporary tax increases for an additional five years ($5.9 billion in 2011-12, growing to $7.2 billion in 2014-15). Extending the income, sales and vehicle taxes is part of Brown’s plan to raise roughly $12 billion through tax and fee increases.

The Feb. 10 letter responds to Sen. Mark Leno, D-San Francisco, who asked the Analyst’s Office what the Legislature could do if voters or lawmakers reject the proposed extension of tax hikes suggested by Gov. Jerry Brown. The LAO offered $13.5 billion in alternatives, presuming under Leno’s request that the ballot taxes would not succeed and other revenue ideas like eliminating enterprise zones would fail.

According to the memo, California would have to allow oil drilling to be expanded off the coast of Santa Barbara; end class-size reduction efforts in kindergarten through third grade; reduce wildland firefighting; and stop support for various public safety programs.

Those cuts, and more than 100 others, are outlined in the letter and provide a stark look at the realities of California’s budget crisis. Following are some of the actions provided on the list (click image for larger version):

GOP lawmakers have indicated they want pension reform and a spending cap to help future budgets, as well as reducing environmental red tape to make it easier to do business in the state.

“It shouldn’t be just taking money from one source and moving it over to another,” Senate Republican Leader Bob Dutton said. “That’s not a real cut. That’s more of the same smoke-and-mirrors that we’ve used in the past that’s gotten us into this trouble.”

Immediately following Gov. Jerry Brown’s budget proposal in January, the Legislative Analyst’s Office published an Overview of the Governor’s 2011-2012 Budget. As is often the case with the LAO, the analysis appears largely supportive, but reading deeper into the detail, analysts express significant reservations, specifically warning of one potential danger area with Brown’s proposal to eliminate the state’s 425 redevelopment agencies.

The LAO recommended that the Legislature take immediate action to pass “urgency legislation” as soon as possible, “prohibiting redevelopment agencies from taking actions that increase their debt.”

But the Legislature has not yet done this.

The LAO expressed concern that if redevelopment agencies were aware they were doomed, they would initiate many new projects before the cuts could be formalized, “increasing their bonded indebtedness and contractual obligations” — which would make future deficit reduction that much harder to achieve.

The LAO was right – redevelopment agencies throughout the state have been approving projects at record speed, increasing bond indebtedness and state obligation, in order to put off the inevitable.

The governor has said that his proposal to eliminate redevelopment agencies is to ensure that more of Californians’ property tax revenue is used for K-14 education. But the proposal is being met with heavy pushback from cities and counties, as well as from the California Redevelopment Association.

Californians pay more than $45 billion in property taxes annually. And a very large portion of the property taxes is redirected to redevelopment agencies in cities and counties, for development projects within specially designated redevelopment areas.

Critics argue that redevelopment redistributes tax dollars, allowing government to subsidize development projects that would be built by private developers, resulting in a reduction of the money available for public schools, city and county services, and even often replaces independent small businesses with big box stores, chain retail businesses and auto malls.

Supporters of redevelopment argue that it gets rid of blight, and refurbishes key areas of cities, as well as providing low-income, affordable housing.

Pending any urgency legislation or decision to oppose or support Brown’s proposal, the Senate Governance and Finance Committee held a hearing last week about the potential consequences and benefits, seeking answers to four questions:

What did the governor propose for redevelopment agencies?

What questions should legislators ask before acting on that proposal?

What are the consequences of eliminating redevelopment agencies?

What are the feasible alternatives?

At the hearing, State Treasurer Bill Lockyer said he is in support of Brown’s proposal and called redevelopment agencies “vampire agencies sucking blood from everyone around them.” Critical of the unilateral shift of money pulled away from local governments into development projects, Lockyer also expressed criticism of the mad rush by the agencies to get new development projects on the books. “Bad deals are being made. They are quickly selling bonds with unconsciously high interest rates,” said Lockyer.

According to the treasurer, the governor’s budget “provides long-term, increased revenues to local agencies and governments,” and is merely a question of spending priority. Lockyer asked the committee how it serves the state to use local property taxes to prompt inter-regional shifting of economic activity? However he added, “We have yet to find any local government people to admit it is a waste of money.”

Lockyer recommended ending redevelopment agencies and starting all over again. “It would be the prudent, smart, and efficient way to do it… It is better to reinvent,” he said.

Prior to the hearing, the LAO released a report to the Legislature that concluded that redevelopment agencies should be eliminated “because they do not significantly enhance the California economy.”

And, the LAO was concerned with a lack of detail available surrounding the  proposed elimination of the agencies, and noted an even greater problem – redevelopment debt costs are not widely known.

LAO general government director, Marianne O’Malley, said that 12 percent of all property taxes are designated for redevelopment – about $5.7 billion. Of that, 58 percent goes to general redevelopment projects, 20 percent goes to affordable housing projects, and 22 percent is shared by counties, K-14 schools, special districts and cities.

The LAO report states that local governments could and should use “alternative tools” to finance economic development locally, and that revenues should be treated as property taxes only because “doing so avoids further complicating the state’s K-14 financing system or providing disproportionate benefits to K-14 districts in those counties where redevelopment was used extensively.”

The California Redevelopment Association, a government-funded group that advocates for statewide redevelopment agencies, is opposed to Brown’s proposal, and claims that more than 304,000 jobs will be lost if the redevelopment agencies are eliminated.

But the LAO report refutes this claim emphatically. “We find the methodology and conclusion of CRA’s report to be seriously flawed. In our view, it vastly overstates the economic effects of eliminating redevelopment and ignores the positive economic effects of shifting property taxes to schools and other local agencies,” reported the LAO.

Michael Cohen, Department of Finance chief deputy director, said that cities could continue with local economic development, but finance it through tax increases. The finance department proposed putting future redevelopment projects to a local vote, requiring only 55 percent of voters to approve tax increases to pay for development projects, instead of the two-thirds vote threshold currently required to pass taxes. Cohen explained that property taxes would not be increased, but the local vote would instead be used to approve an increase in sales and gas taxes to pay for local development projects.

A Senate staff employee in the hearing audience commented that much ado was being made about lowering the vote threshold to 55 percent to pass local taxes for redevelopment. “There’s no vote currently needed at all for redevelopment projects,” he said. “Don’t people realize that redevelopment agencies have been operating for decades spending millions of dollars without a vote of the people?”

Predictably, John Shirey, the director of CRA, and Bill Bogaard, League of California Cities vice president, testified at the hearing, opposing the elimination of redevelopment agencies. “I think the proposal is unconstitutional,” Shirey said.

“That’s a weak argument,” said Dave Titus, chief of staff for Assemblyman Chris Norby, R- Fullerton. “We spoke to Finance Director Anna Matosantos who said there is no unconstitutionality at all with the proposal.” Titus said, “According to Matosantos, it’s within the legal limits to eliminate an agency.”

Shirey defended redevelopment agencies because the agencies spearhead the cleanup of contaminated land. “No developer would do this himself,” said Shirey. But that’s not entirely accurate.

Paul Petrovich, a Sacramento developer, has invested more than $40 million into his Curtis Park Village development project, currently home to the unsightly, Union Pacific railyard located behind Sacramento City College. Petrovich has hauled most of the contaminated soil offsite already, at a cost exceeding nearly $20 million. And he has done it under the watchful eye of the Department of Toxic Substances Control. “If developers want the land badly enough, the incentive to manage the cleanup is strong,” said Petrovich, “and they’ll do it without redevelopment money.”

The LAO’s report also found, “While redevelopment leads to economic development within project areas, there is no reliable evidence that it attracts businesses to the state or increases overall regional economic development. The independent research we reviewed found little evidence that redevelopment increases jobs… the research typically finds that any employment gains in the project areas are offset by losses in other parts of the region.”

Jean Ross, executive director of the California Budget Project told the committee, “I am not opposed to continuing local development, but am concerned about state subsidies of the activity in absence of control.”

Ross said that under the current structure, redevelopment agencies have little control and no checks and balances. “During this budget crisis, they are making decisions that otherwise wouldn’t be made,” Ross said. “Redevelopment does not pay for itself. It’s a program that is not performing.”

Also critical of a lack of transparency, the LAO reported, “Redevelopment agencies lack some of the key accountability and transparency elements common to other local agencies. Specifically, unlike other local agencies, redevelopment agencies can incur debt without voter approval.”

Titus agreed. “In more than 30 years, redevelopment agencies have never had to seek voter approval for any of the spending they’ve done. A 55 percent vote is substantially better than the way it has been.”

The full report from the LAO here.

To assist California’s lawmakers in reviewing this proposal, the state’s non-partisan legislative analyst released a policy brief on Tuesday afternoon entitled Should California End Redevelopment Agencies?  The sixteen page report explains how redevelopment redistributes and uses property tax revenues.  The Legislative Analysts Office then evaluates redevelopment, summarizes and assesses the Governor’s proposal, and offers suggestions for legislative consideration. 

The reports release comes several days after the Senate Budget Subcommittee No. 4 discussed the budget proposal, and one day prior to a hearing on the topic by the Senate’s new Governance and Finance Committee. 

One of the primary arguments forwarded by redevelopment proponents throughout the debate has hinged on redevelopment’s purported ability to contribute jobs to California’s economy.  Local officials have argued against the elimination of redevelopment agencies (RDAs) saying the move would cripple efforts to create jobs and revitalize blighted blocks in a struggling economy.  According to the California Redevelopment Association, the state’s active redevelopment authorities supported 304,000 full- and part-time local jobs annually.   However, it is this number that the LAO report takes issue with in their report.

 California’s Legislative Analyst suggests that the California Redevelopment Association has inaccurately calculated the employment effects of redevelopment.  Following is the relevant portion of the LAO report:

CRA Report Inaccurately Calculates Employment Effects of Redevelopment

The California Redevelopment Association (CRA) recently circulated a document asserting that eliminating redevelopment agencies would result in the loss of 304,000 jobs in California. We find the methodology and conclusion of CRA’s report to be seriously flawed. In our view, it vastly overstates the economic effects of eliminating redevelopment and ignores the positive economic effects of shifting property taxes to schools and other local agencies.

The CRA’s job loss estimate is based on a consultant’s report using data from 2006‑07. To estimate the number of jobs resulting from redevelopment agencies, the report calculated the total expenditures on construction projects completed within a sample of redevelopment areas for 2006‑07, as well as for any projects completed outside the area with agency participation. Based upon that sample, the report then estimated the total construction expenditures for redevelopment agencies statewide in 2006‑07 and used a computer model to calculate through various multipliers the total effect of those expenditures on the state’s economy and employment. The report concluded that redevelopment was responsible for the creation of about 304,000 full and part-time jobs in 2006‑07. Therefore, the CRA asserts that the elimination of redevelopment would result in the loss of 304,000 jobs.

To our knowledge, the consultant’s study has never been subjected to any independent or academic scrutiny. Our review indicates that the report has three significant flaws that cause it to vastly overstate the net economic and employment effects of redevelopment agencies.

 

Assumes Redevelopment Agencies Participate in All Project Area Construction. The study’s calculation of construction expenditures includes all construction completed in a redevelopment project area in 2006‑07, even if the redevelopment agency was not a participant. We find implausible the report’s implicit assumption that no construction with solely private financing would have occurred within a redevelopment area in the absence of the redevelopment agency. This is particularly true, given the large geographic scale of California redevelopment project areas. In our view, it is likely that much of the new business or residential construction (and the associated jobs) would have occurred independently of the redevelopment agency.

 

Assumes Private and Public Entities Participating in Redevelopment Agency Projects Would Not Invest in Other Projects. Most redevelopment agency projects include significant financing from private investors or other public agencies. By asserting that all of the jobs associated with redevelopment construction would be lost if redevelopment agencies were eliminated, the CRA implicitly assumes that these private and public partners would not invest in other economic activities in the state. The report provided no explanation for this assumption that the existing private capital and public agency grants would remain unused without redevelopment agency participation. 

In most cases, we would expect developers, investors, and public agencies to find alternative projects to pursue—either within the redevelopment area or elsewhere in the state.

Assumes Other Local Agencies’ Use of Property Tax Revenues Would Not Yield Economic Benefits. Under the Governor’s proposal, the property tax revenues that currently support redevelopment would flow over time to schools and other local agencies in the county. By asserting that all of the jobs associated with redevelopment construction would be lost if redevelopment agencies were eliminated, the CRA implicitly assumes that these other local agencies’ use of property tax revenues would not result in any economic activity. The report provided no explanation for this assumption.

In our view, spending by school districts, counties, and other local agencies also would yield significant economic and employment benefits.

Almost every city official can point to a project helped by redevelopment money. But with current financial circumstances so dire each leader must ask whether that was the only way to fund the project, and whether it is worth the money taken away from other vital services.  The LAO’s evaluation that California’s Redevelopment Agencies have vastly overstated the economic and employment beneifts of redevelopment seems to further prove that redevelopment agencies have yet to make their case.

Since its inception in 1945, California’s redevelopment agencies have been touted as an effective tool allowing communities to address issues of physical deterioration, revitalize downtrodden business climates, and add to California’s affordable housing stock.

Places such as Pasadena’s Old Town, Stockton’s water front plaza and San Diego’s Gaslamp Quarter have rightfully been touted as models of success. Yet those success stories are often overshadowed by similar tales marked by corruption, cronyism and either an inability or unwillingness to follow state law.

Many local officials have argued against the elimination of RDAs saying the move would cripple efforts to create jobs and revitalize blighted blocks in a struggling economy. According to the California Redevelopment Association, the state’s active redevelopment authorities supported 304,000 full- and part-time local jobs annually.

However, many of the agencies’ own filings with the State Controller’s Office – who keeps track of redevelopment financial reports – failed to show such achievements. Take for example the time frame from 2004-05 through 2008-09, about 300 redevelopment agencies did not list any jobs created. Of those, more than 250 agencies also did not list any new construction or rehabilitation.

And while the jobs discussion has dominated much of the redevelopment conversation, citizens and lawmakers alike have seemingly glossed over what is perhaps the most controversial aspect of redevelopment: eminent domain.

California’s redevelopment agencies are virtually the only government entity authorized with the power to seize private property for the purpose of redevelopment.

Eminent domain is the power governments have to confiscate, or take, private property as long as it is for a legitimate “public use”. Whereas eminent domain was initially intended to ensure that public services, such as roads and highways, were available to the public, local and state governments often use eminent domain for any project that is considered economically beneficial. Public use, as a practical matter, has morphed into a more ambiguous “public benefit.”

In the Golden State property rights are highly vulnerable to infringement by government control in several forms: excessive taxation, regulation, and the process of takings (ie eminent domain) for centrally planned economic development.

Across the country cities have used eminent domain to force people off their land (remember the infamous Kelo case) so private developers can build more expensive homes and offices that will pay more in property taxes than the buildings they’re replacing.

These governmental forces (excessive taxation, regulation, and strong eminent domain powers) make property rights less secure, increasing owner uncertainty. Greater uncertainty decreases the willingness to undertake capital investment and accumulation thereby reducing the productivity of labor and depressing wages. Greater uncertainty also curtails transactions transferring property to new owners who discover more valuable uses. Ultimately, economic growth stagnates. When government undermines private property rights, the economy suffers and this thwarts prosperity for California’s future.

Yet this is difficult to see when after a nearly seven decade existence redevelopment has simply become the primary method of “doing business” for local governments. As such it is understandably difficult for many local leaders to perceive another way to effectively encourage private sector development in cities and counties.

While economic redevelopment is a complex issue, it need not always be conducted via the heavy arm of government. There are several alternatives to redeveloping communities, all of which can be successful if local governments follow a model that protects property rights, deregulates land uses, promotes competition, loosens business restrictions and lowers taxes.

Well-defined and enforced private property rights are the cornerstone of a capitalist economy. The positive economic effects of private property are widespread. Secure property rights promote specialization and exchange, provide incentives for conservation and preservation of resources, and promote technological innovation, entrepreneurship, capital accumulation, and investment. In essence, secure property rights underlie economic growth.

This relationship is confirmed in The Heritage Foundation’s Index of Economic Freedom. As shown in the chart, property rights and economic prosperity go hand in hand. On average, GDP per capita is over 10 times higher in nations with the strongest property rights than in those with the weakest property rights. The same is true for California’s local governments.

Simply put, private property is necessary for economic growth and to achieve prosperity. Government infringement through redevelopment’s use of eminent domain powers undermines private property rights in California. This distorts incentives, discourages the use of assets as collateral, and forfeits the benefits of capitalism. By eliminating redevelopment and the use of eminent domain, municipal leaders will witness the economic growth they so desperately desire.

Whether or not Governor Brown’s budget proposal to eliminate California’s RDA’s is accepted has yet to be seen. However the moment offers lawmakers an opportunity to strengthen the property rights of all Californian’s thereby spurring economic growth from the bottom up.

Did you know that during the state’s $25 billion deficit there’s a class you can take which teaches how to land one of those jobs? A local Learning Exchange course called “Get a State Job” answers all kinds of questions, but it raises a few big ones too.

Sacramento’s CBS13 reports on the story here.

Jon Coupal with the Howard Jarvis Taxpayers Association argues three thousand open jobs is too many, “This is probably the number one driving force behind the problems California faces with its current budget….Government is not held to the same standard as the private sector.”

Governor Brown’s realignment proposal does call for a 25% reduction in the state workforce.  However, the Administration has yet to provide any details on when and where those cuts will take place.

The reality is that the state’s government is here to stay, even if it gets leaner.  The number of state jobs that could be cut is still vague, though there is one count from the Employment Department that shows 4,500 executive positions eliminated.  The governor won’t confirm specific numbers.

Governor Brown has proposed a budget that would eliminate a $25.4 billion deficit using a mix of program cuts and higher taxes. The plan assumes that voters will agree to extend tax hikes, providing the state an additional $9 billion to $11 billion annually through 2015. 

A year ago Californians were evenly divided on the tax question. Now the Rasmussen Reports telephone survey finds 72% of voters reject raising taxes, that number puts the mere premise of Governor Brown’s proposal in jeopardy.

Senator Harman (R-Huntington Beach) believes there is another way to mend California’s recurring budget deficit. In a recent interview on FoxNews by host Stuart Varney the Senator discussed California’s budget and the prospect of expanding off-shore drilling as a way for the state to generate revenue.

Click the image below to watch the video:

The debate over Governor Brown’s proposal to eliminate redevelopment agencies (RDAs) in California is heating up. Since Governor Brown announced his plan to close the state’s nearly 400 municipal redevelopment agencies and shift control over much of the roughly $5 billion they handle each year, local leaders, who now direct the money, have angrily denounced the idea.

To help inform the debate, the California Budget Project pulled together a “quick and dirty” review of independent research on redevelopment – often referred to as “tax-increment financing” (TIF). This preliminary overview of the research points to two general conclusions:

o First, it’s unclear whether TIF boosts property values and results in increased property tax revenues. While the research finds mixed results, the most comprehensive independent study of California’s RDAs, conducted by the Public Policy Institute of California (PPIC), found that redevelopment activities in most RDAs studied failed to generate enough growth in property values to account for the tax increment revenues diverted to redevelopment. The PPIC study concluded that “the existing tax increment system is not an effective way to finance redevelopment. Few projects generate enough increase in assessed value to account for their share of these revenues.”

o Second, some academic research finds evidence that TIF projects simply shift economic activity within municipalities rather than creating additional economic activity. For example, one study suggests that when employment increases in TIF project areas, it decreases in other parts of the city, which could mean that TIF projects draw jobs from elsewhere in the city, rather than generating new jobs.

The findings of this body of research are echoed in the Legislative Analyst’s Office’s recent review of the economic literature, which concludes, “there is no reliable evidence that redevelopment projects attract businesses to the state or increase overall economic development in California. The presence of a redevelopment area might shift development from one location to another, but does not significantly increase economic activity statewide.”

You can read California Budget Project’s full summary here.

But in his mission to rescue California from the financial brink, the state’s new (and also former) Governor isn’t just calling for deep spending cuts, the elimination of pricey taxpayer funded projects like “enterprise zones,” and more taxes.

Brown wants to fundamentally restructure state government, a plan that begins with voters extending, for 5 years, a trio of taxes that topped $12 billion dollars and which are due to expire this summer. The Governor then wants to give that money to cities and counties, so they can assume control of many state services, including court security, fire prevention, and child welfare.

“When these taxes go away in five years,” Brown says, “the state will still be obligated to maintain the funding. We will commit to that. So, people are not going to say, oh, you’re going to give us five years, then what? The state will continue, even if the taxes go away.”

The whole idea should go away, say Republicans who contend Brown is just trying to pawn the state’s money problems onto someone else.

“I guarantee you, the intent here, behind the scenes, is to force these programs on local government, which they could do better. But it will be to phase out the state general fund responsibility for those programs, and tell the local governments, ‘raise your own money for these programs,’” says Jim Nielsen, Republican Vice-Chair of the Assembly Budget Committee.

No question, Brown’s plan relies on voters extending those income, sales, and car taxes in a special election he hopes will happen in June. He says without that money, he’ll need to find ways to cut another $12 billion. Republicans say go ahead, because they’ve taken a pledge to oppose all taxes.

For new sources of revenue, taxpayer watchdog groups worry Brown will chip away at the 2/3rds vote requirement for local tax hikes established under Proposition 13, the landmark measure that limits property taxes, and has saved Californians $500 billion since it passed in 1978 (when Brown was Governor the first time around).

Jon Coupal, head of the Howard Jarvis Taxpayers Association, says that is a concern “because if you lower the 2/3rds vote at the local level for special taxes, that’s just going to mean a raft of new taxes at the local level, particularly things that are highly regressive, a sales tax, for example.”

Changing any part of Prop. 13 would require voter approval, which is highly unlikely. Also unlikely: voters approving that tax extension — an idea they’ve already rejected twice.

But Brown says he’s determined to convince the legislature, and the people, that government accounting tricks will no longer work.

Over the next few weeks, he’ll make his pitch — that now’s the time, and he has the plan, to fix California’s persistent budget problems.