California remains Standard & Poor’s lowest-rated state. But the agency boosted its bond outlook last week, thanks to a decreasing budget deficit that’s more the result of cutbacks and an improving economy than tax increases.

This wasn’t the only glimmer of hope resulting from California’s budget battles last year -- strange as it is to find good news in a state that is far from getting its spending addiction under control.

The most encouraging news was the success of Governor Jerry Brown’s plan to shutter the state’s 400-plus redevelopment agencies, which were 1940s-era urban-renewal relics that had come to drain about 12 percent of the state’s property taxes from more traditional public services to pay subsidies to developers who build local projects favored by city hall planners.

This under-reported news is arguably more significant than the storyline about whether or not California will raise taxes to solve its fiscal problems.

The agencies -- long criticized for their distortion of local land-use decisions, large debt loads and frequent abuse of eminent domain for non-public uses -- were dead as of Feb. 1, the result of a political dynamic that few could have predicted even a few months ago. Successor agencies will dispense with their debt, but redevelopment officials can take on no new projects. This is good news.

Making Republicans Rich

“Redevelopment is a Democratic program that makes some Republicans rich,” says Assemblyman Chris Norby, a Republican from Fullerton who got the anti-redevelopment ball rolling by encouraging Brown and the previous governor, Arnold Schwarzenegger, to think about grabbing redevelopment cash to close the state’s enduring deficit.

Most legislative Republicans rallied to try to save the RDAs, as they are known, despite Republican criticisms about the agencies’ property-rights abuses and use of central economic planning. It was not the state GOP’s finest moment by any stretch. Many of its legislators came up from local government, where redevelopment is sacrosanct.

A majority of Democrats, despite their vocal support for redevelopment as a means to lift up downtrodden cities, backed the governor’s plan to eliminate them. Democrats were desperate for the money, and preferred this course to cutting other programs.

As in many states, redevelopment in California began after World War II to provide financial tools for cities to combat blighted areas. These agencies first designated an area as such, based on factors so broad that anything a city deemed as blighted was determined to be so. Then the agency floated debt to pay for infrastructure and other improvements in the project area. The growth in property-tax revenue flowing into the area became the agency’s dollars under the theory that the agency caused the newfound growth. The new money paid off the debt. RDAs could float debt without a public vote, and they gained expanded eminent-domain powers.

After the property-tax-limiting Proposition 13 of 1978, and mostly because of subsequent initiatives and legislation that shifted more local-funding decisions to Sacramento, localities began to complain about insufficient tax revenue. (After decades of huge local expansions of pension and health-care benefits for public employees, it’s hard to argue that California municipal budgets were ever pared to the bone, but that’s a story for another day.)

Shopping-Mall Subsidy

City governments came to view redevelopment as a means to grab more money from counties and the state, whether or not they really needed it, and the agencies were used to subsidize auto malls, big-box stores and shopping centers.

The subsidies would bring in retail and sales-tax dollars, and cities used redevelopment to vie with one another to lure businesses. Suburban cities focused on undeveloped plots and targeted areas that seemed to be on an upward economic swing already.

Many cities also used redevelopment to build new downtowns, which sometimes meant using eminent domain, or the threat of it, to level the old ones. In the best-run cities, redevelopment subsidized chain stores and paid for some infrastructure projects -- in the worst ones, it gave central planners the power to run roughshod over property owners, to ladle out corporate welfare and to impose their vision on communities with little public oversight.

What changed? The state was out of money and there were precious few places to find it. The agencies divert more than $5 billion annually. Governor Schwarzenegger had proposed taking some redevelopment money -- these are state agencies, after all -- to fill the budget gap. The redevelopment lobby responded in November 2010 with Proposition 22, which forbade the state government from raiding these funds. Redevelopment supporters portrayed the initiative as a means to stop Sacramento from stealing local dollars. It passed.

Then newly elected Governor Brown came up with a clever way to circumvent the rule. The state no longer was free to divert funds from the agencies, so he proposed shutting them down entirely. He eventually signed two laws passed with only the slimmest Republican support: One law shut down the agencies and the second allowed them to buy their way back into existence by providing money to the state’s general fund. Redevelopment officials challenged both laws in the state Supreme Court.

Their strategy backfired when the court, in late December, found the first law was “a proper exercise of the legislative power,” but tossed the second law because of provisions in the Proposition 22 measure -- which the arrogant redevelopment supporters had written -- prohibiting the legislature from requiring such payments. The decision essentially hoisted the dumbstruck RDA leadership on its own petard.

Few Budget Options

Efforts to extend the life of the agencies failed. Capitol observers assume that California will revive the redevelopment process in some way, but that has yet to happen. The non-partisan Legislative Analyst recently said “the state had few practical alternatives” to shutting down agencies that diverted so much money from other government services. What seemed unthinkable months ago now looks like a no-brainer in hindsight.

It’s a great victory for property rights and fiscal responsibility. It is also something that could be replicated nationwide given that 48 other states (Arizona being the exception) have redevelopment districts of some kind.

That such a significant victory could take place in California’s toxic political climate should offer encouragement to reformers everywhere.

(Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity. He is based in Sacramento, California. The opinions expressed are his own.)

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To contact the writer of this article: Steven Greenhut in Sacramento, California, at steven.greenhut@franklincenterhq.org.

To contact the editor responsible for this article: Katy Roberts at kroberts29@bloomberg.net.