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Brown Burdens Mayors by Unloading California Deficit

San Jose Mayor Chuck Reed can look out his City Hall window and see three Adobe Systems Inc. downtown towers, housing 2,000 workers, created in part with incentives California Governor Jerry Brown wants to eliminate.

The software maker built the towers with the help of $35 million in city redevelopment money, Reed said last week in a telephone interview. He and nine other California mayors plan to meet with Brown, himself mayor of Oakland from 1999 until 2007, to persuade him not to shut the authorities that provide low- cost funds for development. The idea is part of the governor’s budget proposal.

Tax-advantaged development financing provides one of the “few tools we have to keep jobs in California,” Reed said.

Brown’s “vast and historic” plan to realign state and local revenue has mayors seething and county executives wary about being saddled with the costs of fixing California’s broken budget. Some local leaders say the governor’s proposal will shift $5.9 billion in costs to counties while slashing $5.8 billion of social-services spending, increasing the burden on municipalities, to help close a $17.2 billion 2012 deficit.

Brown also would shut about 400 redevelopment agencies to gain control over the $5 billion in property taxes now allocated to the local authorities, according to a summary of his budget from the state Finance Department. The governor would use $1.7 billion of that to pay for courts and health care for the poor. The rest would pay debt service and other obligations.

Photographer: Noah Berger/Bloomberg

California Governor Jerry Brown. Close

California Governor Jerry Brown.

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Photographer: Noah Berger/Bloomberg

California Governor Jerry Brown.

Sacramento ‘Vultures’ Warned

“To those in Sacramento who circle like vultures, seeking signs of weakness, I say that we will stand united to defend local control and keep our tax dollars here, not pour them in the pit you’ve dug,” San Diego Mayor Jerry Sanders said in a Jan. 12 speech, referring to the city’s development authority.

The state’s 398 active agencies supported 304,000 full- and part-time local jobs annually, mostly in construction, and built 98,000 affordable-housing units since 1993, according to the California Redevelopment Association.

In San Diego, the state’s second-largest city by population, the local authority’s downtown projects have spurred $12.8 billion in private investment, created 26,000 permanent jobs and generated $650 million for the city’s general fund, Sanders said. He called Brown’s proposal “a new plan to rob the future” in his annual State of the City speech.

“This proposal will hurt our underserved and distressed cities and communities,” the League of California Cities said on its website. “It will cost California thousands of jobs,” it said. The “radical” plan “makes no sense in a state with an unemployment rate of more than 12 percent,” the group said.

$2 Billion Cost

Los Angeles County said it may face $2 billion in additional costs under the governor’s budget, in a report on the plan. The county of 10 million residents, the biggest in the U.S. by population, will spend $635.8 million to monitor 30,000 state parolees transferred to its supervision and to take control of 13,550 felons, according to the Jan. 12 report.

By curbing state welfare payments through tightened eligibility rules, the governor’s budget may cut subsidies provided to more than 37,000 families in the county, according to the report. Many may wind up in a county-run program that provides $221 a month in cash assistance.

Brown’s plan “is a great big cost-shift,” said Ryan Alsop, the assistant chief executive officer of Los Angeles County. “You can understand why we’re a little nervous.”

Tax Extension

The governor plans to pay for the cost of the added prisoners and for monitoring parolees by getting voters to extend some temporary tax increases. He wants to prolong a one percentage-point higher sales tax, keeping it at a minimum 8.25 percent. Brown also wants to keep a 0.5 percentage point rise in vehicle license fees, to 1.5 percent, for five more years.

The higher rates are set to expire June 30, the end of the 2011 fiscal year, according to a summary of Brown’s budget. The governor wants voters to pass the extensions in a June special election, he said in a Jan. 10 press briefing.

The proposals are intended to deal with some of the effects of Proposition 13, the 1978 ballot initiative that slashed property-tax rates and resulted in a 57 percent drop in revenue, said Steven Glazer, a Brown adviser. After it passed, the cost for government functions including schools shifted to the state.

Brown’s realignment plan would return decision-making to cities, counties and school districts and let government “become more efficient and less expensive by reducing duplication of services and administrative costs,” according to a Jan. 10 statement from the governor.

County Concerns

County executives are concerned that the state won’t cover the full cost of moving prisoners to county jails or the burden that welfare cuts may impose, said Paul McIntosh, executive director of the California State Association of Counties. The breadth of the governor’s plan “is astounding,” he said.

The governor’s plan to tighten welfare eligibility may double Humboldt County’s general-assistance costs to $2 million a year, without reimbursement, said Amy Nilsen, the deputy county administrator. Residents are concerned that adding state inmates to county jails will mean early release for some.

A similar realignment in 1991 added to the county’s health and social-service costs because the state didn’t cover the full amount, Nilsen said by telephone. “Counties ended up with 83 cents on the dollar” of extra expense, Nilsen said. “There’s a concern that would happen again.”

Ending Job Incentives

In his fiscal 2012 plan, Brown also called for ending enterprise-zone tax incentives. One benefit gives businesses credit for creating jobs in targeted areas. The incentives, projected to reach $581 million next year, merely shift economic development from one region of California to another and don’t provide a net benefit to the state, according budget documents.

San Diego’s Sanders blasted Brown’s proposal. “There is pressure building, in Sacramento and locally, to loot our redevelopment agencies rather than make honest budget decisions head-on,” he said in his Jan. 12 speech.

“Before redevelopment began, downtown was a disgrace and a drain on our city,” Sanders said. “Today it generates far more money for city programs than it needs in services, subsidizing every neighborhood from San Ysidro to Rancho Bernardo.”

Cities can still sell bonds to finance development projects under Brown’s plan, if voters approve them, said Glazer, his adviser. Brown’s proposal includes lowering the threshold needed to 55 percent of the vote from the current two-thirds.

Bond Sale Delayed

Brown’s plan may have given pause to potential investors in the Santa Ana Community Redevelopment Agency’s planned $66.2 million bond issue. The mid-January offering, to pay for a parking garage and to refinance current debt, was put on hold because of weak demand, said Jim Cervantes, managing director of public finance at San Francisco-based underwriter Stone & Youngberg LLC.

“You can’t say it was just the redevelopment issue,” Cervantes said in a telephone interview. “The muni market is just not in a happy place. For redevelopment, you have to spend more time with the buyers to walk them through what the implications are.”

San Jose’s Reed said Brown’s proposal may jeopardize a plan to build a downtown stadium for Major League Baseball’s Oakland Athletics franchise, which would relocate to California’s third most-populous city. “There’s some question if we can make it work,” he said.

To contact the reporters on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net.

To contact the editor responsible for this story: William Glasgall at wglasgall@bloomberg.net

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