In California, a State and Local War Over Revenue and Responsibilities

Its name is a pun. Dive Bar may sit along Sacramento’s struggling K Street pedestrian mall, but far from sheltering scruffy boozers, the bar caters to the trendy young. Especially those who like to socialize in sight of a large tank of water containing a young woman swimming around as a mermaid. 

Early this year, around the time it opened, Dive Bar came in for a spate of publicity glaringly at odds with what its owners had hoped for. Instead of its more obvious attributes, the feature of the bar garnering the most attention was the fact that the development in which it was housed had been subsidized by Sacramento’s redevelopment agency.

Because of the way redevelopment agencies work in California, the city’s subsidy meant that the state, indirectly, was also bankrolling the project. This did not look good at the very moment when lawmakers and Democratic Governor Jerry Brown were desperately trying to close a $25 billion state deficit by considering drastic cuts to public education, public health programs and old-age services, among other parts of the budget. “Maybe laid-off teachers can land jobs as mermaids,” suggested George Skelton, The Los Angeles Times’ veteran political columnist.

Soon enough, Dive Bar settled down to being just another stop on Sacramento’s nightlife scene. But that could change again, depending on how the California Supreme Court rules in a case it will decide sometime around the turn of the year. A suit, brought by cities and redevelopment agencies against the state, challenges a move by the legislature essentially requiring cities to fork over hundreds of millions of dollars to school districts if they want their redevelopment agencies to remain in business.

Proposition 13’s escape hatch

California’s redevelopment agencies have been around since a 1945 state law allowed cities and counties to create them to tackle urban blight. Since 1952, they have been authorized to steer most of the property tax “increment” generated by new development back into their own coffers. The idea was to lift the burden of supporting redevelopment from taxpayers by creating a self-supporting mechanism for the agencies.

Although California cities quickened their redevelopment activities in the mid-1970s, the approach took off after the passage of Proposition 13 in 1978. That measure limited cities’ and counties’ ability to raise property taxes; redevelopment offers an escape hatch.

If the court ultimately decides in favor of the redevelopment agencies and against the state, it will blow a hole in the thin tissue separating California’s current finances from chaos. “We’ll be in a world of budget hurt,” says Peter Detwiler, a consultant to the Senate Governance and Finance Committee. “Then we cut meal programs for the elderly so subsidies can continue for places like the mermaid bar.”

But if so, it will only be justice, in the minds of local officials. “There is a pattern of lawlessness that has emerged in state government that is deeply concerning to us,” says Chris McKenzie, executive director of the League of California Cities. “It seems to be acceptable in the legislature now for them to enact obviously unconstitutional laws and then await the determination of a court. City officials are beyond outraged. They’re livid.”

Strained by three years of tight finances at every level, relations between states and localities may be growing less collegial pretty much everywhere, but if you want to see just how icy they can get, head to California. “It’s a bit like the Israelis and the Palestinians, or the Balkans,” says Detwiler. “This sense that if you do something to me I’m obliged to do something to you, and pretty soon we’ve got lots of what are politely known as ‘collateral casualties.'”

Pair of proposals

As in most such conflicts, there is a long history of slights on both sides. But the immediate causes of this year’s tension lie in Brown’s struggles to balance California’s budget. In addition to cutting billions from state spending, he proposed two major steps: eliminating local redevelopment agencies and transferring most of their $5 billion annual property-tax haul to schools, counties and the state; and “realigning” state services by shifting responsibility for various criminal justice, social service and mental health programs to the counties, along with $6.3 billion in funding this year and ongoing funding in later years.

In the end, the Democratic-controlled legislature gave him variations of both proposals. In the face of intense lobbying from cities and redevelopment agencies, it split Brown’s redevelopment idea in two: In order to get around a set of voter-enacted propositions prohibiting the state from taking money from cities and from redevelopment agencies, one bill eliminated the agencies altogether while the second allowed cities to reestablish them if they paid a “voluntary” contribution to local schools, fire districts and transit agencies. The legislature also enacted Brown’s realignment proposal, but did not include his request for a constitutional amendment to make the funding allocations to counties permanent.

Even so, by comparison with the redevelopment fight, the counties’ dealings with the state on realignment have been relatively cordial, though mixed with frustration and wariness. The state is asking a lot of county governments — its package devolves to the counties “a broader array of programs than any other state-local realignment in modern California history,” in the words of the Legislative Analyst’s Office. It began diverting non-violent, non-serious, non-sexual offenders to county jails, and shifting responsibility for parole violators and parolees to county probation officers on October 1. The state is also increasing county responsibility for various mental health programs, drug and alcohol programs, child welfare and foster care, and adult protective services.

At the moment, counties are scrambling to deal with the criminal-justice shift, and only in part because they’re trying to figure out how to house offenders who once would have been sent off to state prison but will now be staying put — sometimes for many years — in county jails that were built with a year’s sentence in mind. They also are grappling with the added stress on their systems that realignment will mean for their approach to criminal justice in the first place. “We know there is not enough money in realignment for counties to simply replicate the incarceration model the state currently uses,” says Paul McIntosh, director of the California State Association of Counties. “It’s a game changer.”

Because realignment carries with it some flexibility in how they can structure their programs, the counties see in it a chance to use counseling, substance abuse diversion, and other approaches to temper their jail populations — but only if they can figure out how to train and staff such efforts while at the same time dealing with the immediate reality that, in some cases, thousands of new inmates will soon be landing in their jails. “The opportunity is there to do reform in correctional practices,” says Marjorie Rist, chief probation officer of Yolo County, just west of Sacramento. “But you want to make sure you’re targeting the right things at the right offenders with the right treatments. And that takes planning — more than the three months we’ve been given — to do it strategically, efficiently and effectively.”

Much to be decided

In truth, there are a variety of considerations the state and legislature have yet to flesh out, and not just in the criminal justice arena. How will the state deal with the strict rules that govern its child welfare dollars, for instance, if it expects the counties to innovate enough to save money? How will it set goals and performance measures it expects counties to meet — and do it in less time than the 11 years it took the state mental health department to come out with such measures after mental-health services were realigned in 1991? Will the legislature resist the temptation to undermine the counties by piling up new state pilot programs in later years, as it did after 1991, and diverting realignment dollars to them?

Not surprisingly, the money questions are topmost on county officials’ minds. Without the constitutional amendment Brown proposed, they worry that the money the state has dedicated to this year’s realignment will not keep pace with their responsibilities. “We’ve watched the state play Lucy-with-the-football way too many times,” says Valerie Brown, a Democratic county supervisor in Sonoma County. “They tell us there’ll be money coming to support us doing things differently, then the next thing the money’s not there, the caseload has increased, and we’re in a world of hurt again.”

Still, at least the counties and state officials are conferring as they plan their approaches to realignment. Cities and redevelopment agencies have essentially broken off negotiations.

Both sides can make a case for their approach. The state’s troubles stem from the fact that, ever since the Proposition 13 property-tax limitation measure passed in 1978, it has been required by law to reimburse cities, counties and school districts for lost property-tax revenue. Redevelopment agencies, by declaring an area blighted, redeveloping it and then reaping the increased property taxes — the so-called “tax increment” — essentially divert into their own pockets some $3.5 billion a year in taxes that would otherwise go to school districts and local governments, according to the Legislative Analyst’s Office. The state spends some $2 billion to $3 billion to “backfill” this amount. 

“It’s not a line-item, it flows out of the state by operation of law,” says Peter Detwiler. “It’s a fairly invisible subsidy. Legislators don’t see it, they don’t vote on it, there’s no line-item that says, ‘Should we subsidize redevelopment?'” It was left up to Brown to decide that the answer to that question was No.

And it will be up to the state Supreme Court to decide whether the legislature’s “Well, maybe, but only if you pay…” approach was legitimate. The fact that the justices took the matter on an expedited basis suggests that they believe the cities and redevelopment agencies at least have a case.

The cities’ anger rests on several legs. In 1992, unable to continue subsidizing school districts as it had been, the state had counties set up special funds to which some city, county and special district property-tax revenues were diverted in order to support schools. Over the years, cities have chafed at the billions of property-tax dollars they’ve been forced to set aside. San Jose, which is a party to the redevelopment suit against the state, reckons it has lost about $40 million annually over the past decade. “Think about what it means to lose that much on an ongoing basis,” says Michelle McGurk, press secretary to San Jose Mayor Chuck Reed. “We’ve had a budget deficit every year for the past ten years, and had we had $40 million more, we’d have avoided deficits in about half of them.”

More immediately, though, the state’s move on redevelopment agencies threatens the one reliable tool cities had for increasing property-tax revenues — redevelopment was their route around Proposition 13 limitations. Though many cities have opted to pay what they called the state’s “ransom” in order to keep their redevelopment agencies operating, several — including San Jose — have announced they’ll have to shut theirs down. “We believe that will have a devastating effect on both the local and the statewide economy,” says the League of Cities’ Chris McKenzie. For its part, the Legislative Analyst’s Office argues that while redevelopment may indeed boost specific parts of cities, “there is no reliable evidence that it attracts businesses to the state or increases overall regional economic development.”

The state Supreme Court has issued an order staying portions of the redevelopment legislation until it decides on the challenge. In the meantime, cities all over the state are putting their redevelopment plans on hold.

Rob Gurwitt is a freelance writer based in Norwich, Vermont. He can be reached at [email protected]