Inland Empire Outlook Spring 2013

INLAND EMPIRE OUTLOOK Economic and Political Analysis Volume IV | Issue 1 | Spring 2013

The Revobluetion:The Inland Empire’s New Political Geography pg. 2-7 The Inland Empire Real Estate Market Warms Up pg. 8-13 Health Care in Riverside County: A Procedures-Based Approach for the Future pg. 14-19 Unwinding Redevelopment Agencies pg. 20-23

CLAREMONT MCKENNA COLLEGE Claremont, California INLANDEMPIRECENTER.COM

New Political Geography

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e begin this issue of the Inland Empire Outlook by examining the changing political geography of the region (p.2). The 2012 elections saw Democratic gains in the Inland Empire and rising support for liberal ballot initiatives, both the continuation of a process that began twenty years ago.

Another change we see is that the Inland Empire’s housing market is picking up (p.

8). After six tough years, two of sharp decline followed by six years of stagnation, the median price for a home in the Inland Empire is up 20 percent from one year ago.

Notices of default in the last quarter of 2012 are also down from their peak in 2009.

We also examine healthcare in Riverside County, analyzing current public health concerns (p. 14). Officials hope to implement programs toward a preventive care approach and also have high hopes for the opening of the new University of California Riverside School of Medicine. Finally, we look at the process and status of unwinding redevelopment authorities (p. 20).

On April 11, 2013, the Inland Empire Center, in partnership with the UCLA Anderson Forecast, will hold the fifth CMC-UCLA Inland Empire Forecast Conference at the Miramonte Resort & Spa in Indian Wells. Jerry Nickelsburg of UCLA Anderson Forecast will present the state and national forecast, Professor Marc Weidenmier of CMC will present the Inland Empire forecast, and Professor Manfred Keil of CMC will present the Coachella Valley Forecast. The conference will also feature panels on the healthcare challenges and opportunities for the Coachella Valley and on the impact of the tourism industry on the Coachella Valley. Major sponsors of the conference include the Coachella Valley Economic Partnership and Rabobank.

We at the CMC Inland Empire Center hope you find this edition of Inland Empire Outlook a useful guide. Please visit our website, www.inlandempirecenter.org, for updates to these stories and other Inland Empire news. -The Editors

A Revobluetion: The Inland Empire’s New Political Geography

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Photo Credit: Reuters

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he political landscape in the Inland Empire is turning blue. Once solidly Republican, like Orange County and San Diego, the region’s political shift reflects rapid growth and demographic changes over the past decade. The Inland Empire’s population grew by almost one million between 2000 and 2010 and Latinos made up three-quarters of that growth, a fact that tends to favor Democrats. Democrats’ share of total Democratic and Republican registrants has risen roughly 5 percent in both Los Angeles and Riverside Counties, and almost 3 percent in San Bernardino County in the last decade.

Democratic gubernatorial votes (as a percent of total Democratic and Republican gubernatorial votes) have followed a similar trajectory. Despite a dip between 2002 and 2006 for all three counties, these figures increased just under 5 percent for both Los Angeles and San Bernardino Counties and over 2 percent in Riverside County.

Democrats have enjoyed even more success in recent presidential races. President Obama’s general popularity, coupled with the Inland Empire’s voter registration shift, led to substantial gains for Democrats. In 2004, Kerry earned 64 percent, 42 percent, and 44 percent of total Democratic and Republican votes in Los Angeles, Riverside, and San Bernardino counties, respectively. By 2008, those numbers jumped to 71 percent, 51 percent, and 53 percent for Obama, where they roughly held (72 percent, 51 percent and 54 percent) in 2012.

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Page 3 Figure 1. Democratic Registration as Percent of Total Democrat and Republican Registration

The region’s political shift can also be seen in its congressional delegation and mirrors the change in the California delegation over the course of 30 years. Republicans in 1980 were competitive in congressional districts throughout the state, including many coastal areas. California elected 43 members to the 97th Congress, with Democrats winning a narrow majority (22 vs. 21 seats).

Republicans won 14 of their 21 seats in coastal counties. By contrast, only five Republicans elected in 1980 represented districts exclusively in the inland region. Three decades later, the state’s political map

Figure 2. Democratic Share of Total Democrat and Republican Ballots for Governor

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had greatly changed. Starting with Bill Clinton’s first election in 1992, Democratic candidates decisively won California’s vote for president. After 1994, they won almost all other statewide elections for U.S. Senate and state constitutional offices (with Arnold Schwarzenegger’s two elections as governor the most important exceptions). After the mid-1990s, they progressively tightened their grip on the state Assembly, state Senate, and congressional delegation until, in 2012, they won two-thirds majorities in all three. In contrast to the evenly divided congressional delegation of 1980 (22 Democrats, 21 Republicans), the delegation elected in 2012 (53 members) is dominated by Democrats, 38-15.

Figure 3. Democratic Share of Total Democrat and Republican Ballots for President

For much of this period, as Republican strength was eroding on the coast, it was concentrating inland, to the point where a majority of Republican districts fell partly or entirely in the inland region. These changes created within California a prominent east-west divide that in many ways replicated the national division of liberal “blue” states on the coasts and the upper Midwest from the conservative “red” states in much of the interior west, lower Midwest, and South. To be sure, just like the national red vs. blue divide, California’s new east-west alignment has exceptions. For example, Republican strength in the inland region was limited by the growth of the Democratic-leaning Latino population, especially in parts of Imperial County, the Inland Empire, and the Central Valley.

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Indeed, in the 2012 election, Democrats made new electoral inroads in the state’s interior by winning several closely contested elections in newly drawn legislative districts. For example, in the Inland Empire’s 36th congressional district in Riverside County, Democrat Paul Ruiz defeated six-term incumbent Republican Mary Bono Mack and in the newly drawn 41st congressional district, also in Riverside County, Democrat Mark Takano defeated Republican John Tavaglione. Some areas in San Bernardino County formerly represented by Republicans David Dreier and Jerry Lewis shifted to Democratic control in the new 27th district represented by Judy Chu and the new 35th districted represented by Gloria Negrete McLeod. (See Figures 4 and 5).

The Inland Empire’s voting patterns on statewide initiatives have mirrored the trends in registration and voting for executive office and Congress. While exact statistics are difficult to compare – initiatives do not always align precisely with partisan platforms – one can gauge large-scale shifts in voting patterns by looking at data on initiatives that best correspond to particular parties. For instance, the 2012 Proposition 36 revised the “Three Strikes Law” to allow the imposition of a 25-years-to-life sentence only when the third strike is serious or violent. Like most initiatives believed to relax criminal penalties, Prop 36 was considered to closely align with the Democratic platform. In contrast, Proposition 8 in 2008, which amended the state constitution to declare that only marriage between a man and a woman is valid or recognized in California, better corresponds with the Republican platform.

Professor Ken Miller, of the Government Department at Claremont McKenna College, analyzed voting patterns on key initiatives in the last twenty years to identify a surge in Democratic voting in the Inland Empire. He identifies five propositions that can be considered as particularly conservative, meaning that the traditional Democratic vote would have been against these initiatives. They are Proposition 187 in 1994, which restricted illegal immigrants’ eligibility for public services; Proposition 209 in 1996, which restricted the use of racial or gender preferences in state contracting, hiring, and university admissions; Proposition 22 in 2000, which adopted a statute that only marriage between a man and a woman is valid or recognized in California; Proposition 8 in 2008; and Proposition 36 in 2012. It is useful to track the growth of the traditional Democratic positions over the almost two decades that span this group of initiatives. In 1994, only 44 percent of Los Angeles County, 29 percent of Riverside County, and 31 percent of San Bernardino County voted in accordance with the traditional Democratic position on Proposition 187. Six years later, those numbers dropped further to 42 percent, 27 percent, and 25 percent, respectively, on Proposition 22.

In 2008, however, signs of a shift emerged. Roughly 50 percent of Los Angeles County votes on Proposition 8 reflected the traditional Democratic vote, as did 35 percent of those in Riverside County and 33 percent in San Bernardino County. While this past election cycle did not feature a clear-cut conservative initiative, the Inland Empire demonstrated more support for two key liberalleaning initiatives than in the past. Although it did not pass, Proposition 34, which aimed to repeal

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Figure 4. Inland Empire Congressional Districts. 112th Congress, elected November 2010

the death penalty, earned 55 percent of the vote in Los Angeles County, 38 percent in Riverside County, and 39 percent in San Bernardino County – a far cry from the level of opposition in these counties when the death penalty was instituted in California. Proposition 17, which established California as a death penalty state in 1972, saw only 33 percent of Los Angeles County, 27 percent in Riverside County, and 26 percent in San Bernardino County take the Democratic position and vote against the measure. Support for Proposition 36, relaxing California’s “Three Strikes Law,” was even stronger. It was supported by an overwhelming majority of voters in all three counties: 72 percent in Los Angeles County, 62 percent in San Bernardino County, and 64 percent in Riverside County.

Like California in recent decades, the Inland Empire has also become much more densely-populated and diverse.

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This has had dramatic political consequences. By appealing to an expanding coalition of racial and ethnic minorities and liberal whites, Democrats are extending their near-total control of the heavily populated coastal region into the Inland Empire. Of course, few things in politics are permanent, but for now, the Inland Empire is starting to look blue.

Figure 5. Inland Empire Congressional Districts. 113th Congress, elected November 2012

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The Inland Empire Real Estate Market Warms Up Page 8

Photo Credit: Jason Roberts

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rior to the collapse of the U.S. housing market in 2007-2008, there was a widespread belief among many mortgage lenders and borrowers that home prices would not fall sharply, even in overheated markets. It was assumed that homeowners would simply prefer to wait to sell their houses until the market recovered, rather than trying to unload their properties into a falling market. However, things turned out differently from what most people anticipated. The median home price in the Inland Empire − one of the epicenters of the housing crash in Southern California − dropped from $397,000 in the second quarter of 2006, to $165,000 in the second quarter of 2009, experiencing a 25.4 percent compound annual decrease (See Figure 1). The collapse of housing prices was also reflected in a sharp rise in notices of default starting in 2007, reaching a peak of nearly 30,000 units in the first quarter of 2009 (See Figure 2).

The Inland Empire’s housing market, however, has improved over the last three years. According to property records tracked by the real estate firm DataQuick, the Inland Empire saw the median home price rise at the end of 2012, after two years of precipitous decline, followed by four years of stagnation.

The median price stood at nearly $210,000 in the fourth quarter of 2012, a 20 percent increase from a year earlier (See Figure 1). The median price increase indicates that the housing market might have turned the corner. “Most every gauge shows prices are up significantly over the past year, even after adjusting for changes in the types of homes selling,” DataQuick President John Walsh said to the Los Angeles Times.

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Page 9 Figure 1. Median Home Price in the Inland Empire

As the economy and job growth have improved, the number of borrowers behind on mortgage payments has fallen dramatically by the end of 2012. Notices of default fell to 6,225 units, a 33.4 percent decrease from last quarter and 40.64 percent compound annual decrease from the peak in first quarter 2009 (See Figure 2).

“U.S. housing recoveries almost always have been ignited by rising demand from families and individuals looking for a place to live. This recovery is different,” wrote Nick Timiraos in the Wall Street Journal. Investors – including some big Wall Street players – have played a major role in recent home-price surges.

Blackstone Group, a private equity titan, and other real-estate firms, strongly believe that home prices fell too far in the hardest-hit markets. They are mostly buying distressed properties at bargain prices, renovating them with the intention to rent them out for a short-term profit and/or holding on to them for a long-term price appreciation. Buying and fixing up probably the worst houses on the street and then turning them into quality and affordable homes is what they call “a new investment strategy.”

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THE INLAND EMPIRE SAW MEDIAN HOME PRICE RISE AT THE END OF 2012, AFTER TWO YEARS OF PRECIPITOUS DECLINE, FOLLOWED

BY FOUR YEARS OF STAGNATION.

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Figure 2. Notices of Default in the Inland Empire

The decline in distressed properties – comprised of foreclosures and short sales – is another reason why the region’s median home price is up. Short sales, where homeowners who owe more than their property is worth convince the bank to agree to sell the property at a loss, constituted 28 percent of existing home sales at the end of 2012. Foreclosed properties accounted for nearly 30 percent of existing sales in the Inland Empire in 2012 compared with 94 percent in 2008 (See Figure 3). Banks in the state of California don’t have to get foreclosure approval from a judge, which makes the foreclosure process easier and faster in California than in other states.

Thus, the foreclosure process has likely worked its way through the market in California. The pronounced drop in foreclosure rates reflects the fact that a large portion of foreclosures have made their way through the system.

If prices continue to rise, more homeowners will have an opportunity to escape their negative equity positions, which will allow them to sell their properties and potentially increase supply. “A meaningful rise in the supply of homes on the market should at least tame price appreciation,” Walsh said.

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Figure 3. Foreclosures and Short Sales in the Inland Empire as a Percent of Existing Home Sales

However, rising prices are likely to keep real estate in California out of reach for many buyers.

According to the California Association of Realtors (C.A.R.), to qualify for a median-priced, $353,190 home, a homebuyer needs to earn no less than $66,940 a year. The monthly payment on that property comes out to $1,670, assuming a 20 percent down payment.

Homes are selling faster. The median number of days on the market for homes at the end of 2012 was 73, down from 99 days one year ago. Affluent domestic and international cash buyers – largely investors – are diving into the market to scoop up homes taking advantage of favorable home prices. Nationwide, 32 percent of homes are now sold to cash buyers. The continuation of record-low interest rates is also fueling the market. The rush of investors into the housing market is dictated by the fear of missing out on cheap homes. The Wall Street Journal reports that “Sellers are calling the shots right now,” said Carolyn Williams, a real-estate agent in Dana Point, California. “What’s out there is gobbled up with anywhere from five to 25 offers.”

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Figure 4. Homes Sales in the Inland Empire

The number of existing homes in the Inland Empire listed for sale in 2012 totaled 65,510, up 1.12 percent from a year earlier but still down 9.7 percent from 2009, leaving would-be buyers chasing a shrinking supply of homes (See Figure 4). Many homeowners, worried that prices have not yet improved sufficiently, are still reluctant to list their homes. This lowers the supply of existing homes on the market and drives prices up.

Unlike the existing home sales, sales of new homes in the Inland Empire remained low over the last two years, totalling 5,111 in 2012. This shows that home builders are not yet ready to expand new home sales. When the market declined, builder confidence also fell. New-home builders are sensitive to rising labor and material costs and a short supply of ready-to-build lots.

They now take more time and consider all options before building, and are more careful to choose features that keep prices within reach of more home buyers.

At the beginning of 2013, the Consumer Financial Protection Bureau (CFPB) issued new mortgage rules, which will go into effect in January 2014. The rules force lenders to ensure that borrowers have the ability to pay back the loan. To qualify for a home mortgage, buyers must have a substantial down payment, good credit history, minimal debt, and a secure income. Such strict lending requirements are likely to lead to more stringent standards for mortgage borrowers.

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The Inland Empire’s housing market has improved over the past three years. More and more people in the area can now afford to buy a median priced home. The only problem is that the inventory of housing is too low these days. “Sales would be even higher if inventory were less constrained in REO-dominated markets, particularly in the Central Valley and Inland Empire, where there is an extreme shortage of available homes,” said C.A.R’s President Le Francis Arnold.

The housing market will continue to recover in 2013. Most economists and real estate experts expect the U.S. prices to rise in 2013 due to strong investor demand, low interest rates, and shortages in home supply. As Le Francis Arnold writes, “Sales will be stronger in higher-priced areas, where there are more equity properties and a somewhat greater availability of homes for sale.”

Photo Credit: Charlie Louise

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Health Care in Riverside County: A Procedures-Based Approach for the Future

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UC Riverside. School of Medicine Photo Credit: Peter Phun

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iverside County, like much of California and the United States, is currently at a crossroads with regard to health care. Public health professionals and policy makers are focusing on preventative care instead of the procedures-based approach, with the hope that the preventive care model will be more effective. As in much of the United States, the leading causes of death in Riverside County are chronic illnesses, which demand a health care system addressing preventative care. The success of preventative care programs in Riverside County will be dependent on the community’s backing, as well as funding in a system where most revenue comes from performing procedures, not providing preventative care.

Riverside County experienced huge population growth from 2000 to 2010, ranking as the fifth most rapidly growing county in the United States. Riverside County continues to trail the state in education, employment, and number of insured people. Healthcare associated with chronic problems like obesity currently costs the county a tremendous amount every year. Now, several changes are occurring to lead Riverside County’s health care system into the future, with a focus on preventative care and the development of programs to insure the currently uninsured. Experts like Claremont Graduate University’s Dean of School of Community and Global Health, C. Anderson Johnson, and Riverside County’s Director of Public Health, Susan Harrington, agree that proper execution of preventative programs will be crucial to the county’s health care progress.

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Ms. Harrington recently released the county’s 2013 Community Health Profile, outlining current health concerns and trends. The report lists three areas in which major impacts may be possible. “Better diet, more physical activity, and less substance use can significantly improve health outcomes and advance the quality of life” in Riverside County. The four leading causes of mortality in the county are heart disease, cancer, chronic lower respiratory disease, and stroke, all of which are chronic diseases. Chronic diseases demand different healthcare strategies, largely preventive measures. In contrast, infectious diseases are mostly treated with procedures after diagnosis.

Figure 1.Ten Leading Causes of Death, Riverside County and California, 2010

Source: County of Riverside Department of Public Health, 2013 Community Health Profile.

Heart disease accounts for the largest portion of deaths in Riverside County every year, approximately 27 percent. The majority of heart disease is attributed to excess lipids and cholesterol in the blood. Heart disease is an ideal example of a chronic disease that can be addressed by preventative measures. Because it is a function of diet and exercise, change in community attitude has the potential to have a significant impact on health in the county.

The second leading cause of mortality in Riverside County is cancer, accounting for another quarter of annual deaths. There is a much higher prevalence among men than women, which

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the 2013 Community Health Profile attributes to the disparity in tobacco use. Tobacco use is a primary target in order to improve public health in the county. Chronic Lower Respiratory Disease (CLRD) is an umbrella term for asthma, chronic bronchitis, emphysema, and other lower respiratory illnesses. CLRD is also less prevalent among females than males, which may also be attributable to the difference in the tobacco use of the two groups. Diabetes is another major concern. While it is not one of the top five reported causes of death, its prevalence is increasing. It is also possible that diabetes is underreported as a cause of death. Sometimes it can be found listed as an underlying cause of death but it is rarely reported as the primary cause of death. Some estimates predict that as much as 8.3 percent of the US population has diabetes.

Diabetes can also be prevented or controlled with proper nutrition and exercise. In addition to the aforementioned health problems, it should be noted that the Riverside County environment ranks fifty-second of California counties for its physical environment being conducive to health.

The public health community agrees on the need to change behaviors. Less substance use, specifically tobacco use, more physical activity, better nutrition, and a healthier environment have the potential to improve public health substantially.

When compared to national benchmarks, Riverside County falls short on several measures.

According to the Clinton Foundation, 23 percent of residents were uninsured in 2009, compared to the national benchmark of 11 percent nationwide and 14.5 percent for California.

Not only does the county not meet the national benchmarks for measurable health outcomes

Figure 2. Percent with No Health Insurance Coverage, Riverside County and California, 2001-2009

Source: County of Riverside Department of Public Health, 2013 Community Health Profile.

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Page 17 like mortality and morbidity, which are 60 per thousand people and 19 percent (the national benchmarks are 53 per thousand people and 10 percent respectively), but it also exceeds California state averages in some respects. Also notable is its more than double the national benchmark numbers for excessive drinking and sexually transmitted diseases. Seventeen percent of Riverside County residents report being heavy drinkers compared to 7 percent of California residents. Making Riverside County a healthier place will no doubt take changes through multiple mediums, outside of the clinical setting.

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Dean Johnson says that the shift to a proceduresbased approach is completely necessary.

He emphasizes approaching health problems holistically by “addressing both individual behavior but also the other aspects of society that support chronic disease risk factors.”

Like many public professionals he believes that the shift in focus to preventive care will eventually bring down health care costs. There is, however, also a body of research that suggests that for most preventive services, expanded utilization leads to higher, not lower, medical spending overall. As the Congressional Budget Office explained in 2009, this is because “doctors do not know beforehand which patients are going to develop costly illnesses.

To avert one case of acute illness, it is usually necessary to provide preventive care to many patients, most of whom would not have suffered that illness anyway.” The CBO cites research that concludes that the added costs of widespread use of preventive services tend to be greater than the savings from averting the illness.

THE SHIFT TO A PROCEDURES-BASED APPROACH IS COMPLETELY NECESSARY...[IT] APPROACH[ES] HEALTH PROBLEMS HOLISTICALLY

BY ADDRESSING BOTH INDIVIDUAL BEHAVIOR BUT ALSO THE OTHER ASPECTS OF SOCIETY THAT SUPPORT CHRONIC DISEASE RISK FACTORS.

One project underway is the highly anticipated opening of the UC Riverside School of Medicine. Dean Johnson’s excitement regarding the new school comes from the school’s promise to “utilize community hospitals” as opposed to “develop[ing] their own hospitals.”

The new school touts its community-based focus and mission to bring committed doctors and economic stimulus to the county. Generally, medical schools gear most of their curricula to their base hospital; UC Riverside will focus on the surrounding community and alreadyestablished medical centers. In 2009 the ratio of people to primary care physicians, 1,576 to 1, was nearly triple the national benchmark and double that of the state of California. There has

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been a real push to open the new medical school in order to produce more doctors.

The first, four-year class will enter UC Riverside Medical School this fall, although lawmakers are still trying to secure long term funding to sustain the school. Two in particular are leading the charge. Senator Richard Roth and Assemblyman Jose Medina are requesting that $15 million a year for the next ten years be allocated in the state budget to funding the medical school. The proposed $15 million would be added to an already secured $10 million a year from private donors and local government. Though some lawmakers oppose the bill, its sponsor, Assemblyman Medina, argues that additional funding at the state level is necessary as an investment in the future of health in Riverside County. As the number of uninsured people is predicted to decrease as a result of the Affordable Care Act, the county will need more doctors to meet the demand for care.

Students entering the four-year program will do most of their clinical training in the community. The medical school’s involvement is just one piece of the puzzle in the health care shift. Many believe its impact will be large.

Riverside County plans to focus most of its future efforts around preventative care.

With initiatives like Healthy Riverside County, the county plans to tackle problems of nutrition, physical activity, and tobacco use. These three elements are strongly correlated to the chronic diseases, several of which are the leading causes of death among Riverside County residents and US citizens.

Figure 2. Percent with No Health Insurance Coverage, Riverside County and California, 2001-2009

Source: County of Riverside Department of Public Health, 2013 Community Health Profile.

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Additionally, as the healthcare system shifts to adjust for next year’s implementation of the Affordable Care Act, Riverside County is scrambling to prepare for an anticipated increase in the newly insured. Dean Johnson hopes that its implementation will mean an easier shift from a procedures-based approach to an outcomesbased approach. While the change will mean more people have access to healthcare, a county already facing a shortage of doctors may struggle to keep up.

Also, California is currently piloting a program to streamline its Medicare and Medi-Cal systems. Because people often receive services through both Medicare and Medi-Cal, the state is adopting the Coordinated Care Initiative.

Riverside County will be one of eight counties involved in this duals demonstration, which will give people eligible for both Medicare and MediCal benefits the option to combine them into one plan. The duals demonstration is slated to begin in September of this year.

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CALIFORNIA IS CURRENTLY PILOTING A PROGRAM TO STREAMLINE ITS MEDICARE AND MEDI-CAL SYSTEMS...

[BY] ADOPTING THE COORDINATED CARE INITIATIVE.

As Riverside County’s population is on the rise, there will be larger demands upon the local health care system in the near future. If the new programs are successful in changing nutritional habits, physical activity levels, and reducing the use of harmful substances, the healthcare outcomes may show evidence of the county saving on healthcare expenditures.

The new initiatives have the potential to increase efficiency in the management and delivery of healthcare.

With a growing population, a shifting demographic, and a change in disease trends, there is no question that the Riverside County health care system must change, and senior officials recognize this. Experts like Dean Johnson emphasize that the most successful preventative care-based systems incorporate not only education but also the right mix of public and private funding, as well as involvement of infrastructure projects to create better environmental settings. Moving forward, Riverside County’s approach will be to shift to preventative and outcomes-based care. The goal will be to insure the uninsured, change lifestyle choices, and to address environmental factors including access to care.

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Unwinding Redevelopment Agencies

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Jerry Brown, Governor of California Photo Credit: Justin Sullivan, Getty Images

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ver the past few decades, redevelopment agencies have operated as an influential and powerful conduit for California’s local governments to improve areas in need of economic growth.

Originally authorized by the California State Legislature in 1945, redevelopment agencies were first conceived as a local tool to address regional economic issues. The legislation allowed for local agencies to declare certain areas as ‘blighted.’ Through tax increment financing, redevelopment agencies were then provided funding to oversee projects to make local improvements and stimulate economic growth. Tax increment financing is a method of financing that first fixes an initial level of property tax revenue and then allocates any growth to a designated agency.

As the program grew over the years, its scope and power expanded significantly. In 1966 there were only 27 project areas under the supervision of redevelopment agencies (RDAs) with no one area greater than 200 acres, commanding a small portion of the state’s total property tax revenue. In stark contrast, by 2008 RDAs received 12 percent of California’s total property tax revenue—roughly $5.7 billion—and six project areas themselves exceeded 20,000 acres. The expansive RDA program came to a halt on February 1, 2012, when California eliminated redevelopment authorities.

Despite attempts to constrain the use of RDAs in the 1980s, the state legislature failed to curb their rapid adoption and growth. However, sentiment opposing the use of redevelopment agencies grew as RDAs strayed further from an original model that sought to emphasize small-scale regional economic development. In 2010, redevelopment agencies commanded a $5 billion budget across the state of California and not only had minimal voter accountability but also had little to no transparency in their dayto-day operations. The tremendous amount of tax revenue that was redirected towards RDAs revealed the costly price of redevelopment for California. Redevelopment agencies received more property taxes in 2011

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Page 21 than all of the state’s fire, parks, and other special districts combined, and in some areas RDAs received more than the city or county that created them, effectively forcing the state to backfill K-13 districts with a sum equivalent to the cost to fund the University of California or California State systems.

Laws enacted in 1976 and 1993 required RDAs to spend 20 percent of their tax increment funding on affordable housing and required some “pass-through” payments to local agencies that failed to receive any benefits from increase in revenues. Nevertheless, the public still had few methods to monitor an agency’s activities and no state authority audited or monitored a RDA’s actions. Proponents of redevelopment claimed that redevelopment agencies served as efficient and sustainable models to promote economic growth in underdeveloped areas and provided one of the largest funding sources for affordable housing. However, the huge revenue that redevelopment commanded and the money it redirected from other public agencies proved to be the greatest point of contention, spurring Governor Jerry Brown to back legislation to recover portions of the revenue redirected to RDAs. In June 2011, Governor Brown signed Assembly Bill 26 and Assembly Bill 27 into law. Under AB 26, all redevelopment agencies were directed to immediately suspend the majority of their prior functions such as making loans, incurring new debt, and entering contracts. AB 26 also called for the termination of RDAs by establishing a formal dissolution process to settle financial affairs. Alternatively, AB 27 provided RDAs the opportunity to avoid dissolution if they entered into a voluntary program which included annual payments to other taxing entities such as schools or special districts. Assembly Bill 27 sought to provide a method for RDAs to exist within the current system yet also alleviate some of the burden that the redirected tax revenue cost the state of California in other agencies such as K-13 Districts.

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THE STATE OUTLINED FOUR KEY COMPONENTS TO THE DISSOLUTION PROCESS: LOCAL MANAGEMENT AND OVERSIGHT, A COMPREHENSIVE LIST OF ALL FUTURE REDEVELOPMENT EXPENDITURES, LOCAL DISTRIBUTION OF FUNDS, AND STATE REVIEW.

Both AB 26 and AB 27 were challenged in state court. On December 29, 2011, the California Supreme Court upheld AB 26 on the grounds that the California State Legislature had the authority to dissolve entities that it created; however the ruling of California Redevelopment Association v. Ana Matosantos declared AB 27 to be unconstitutional on the grounds that it violated a state provision which prohibited specifying RDAs to transfer funds to particular state agencies. Ironically, the RDAs’ attempt to challenge the legislation which limited but still allowed for their existence proved to be the act that disbanded redevelopment in California in its entirety, leaving AB 27 invalid and forcing RDA dissolution through AB 26.

February 1, 2012 marked the official conclusion to California’s RDA program. The dissolution process set into motion by AB 26 took effect, a process which sought not only to ensure that a redevelopment agency’s existing financial obligations were fulfilled but also sought to minimize any outstanding obligations in order to maximize the remaining funds available for other governmental purposes. In order to do this, the state outlined four key components to the dissolution process: local management and oversight, a comprehensive list of all future redevelopment expenditures, local distribution of funds, and state review.

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Page 22 To achieve this, the state defined successor agencies to manage redevelopment projects currently underway and dispose of assets and properties as advised by an oversight board. Each city or county that created an RDA became its successor agency, except for the following cities that designated their own unique successor agencies: Bishop, Los Angeles, Los Banos, Merced, Pismo Beach, Riverbank, and Santa Paula. Recognizing the administrative costs involved in the transition out of RDAs, successor agencies are allocated up to $250,000, or up to 5 percent of the former tax increment revenues, for administrative expenses in 2011-12 and up to 3 percent in future years. As an advisory panel for the successor agency, the oversight board oversees the successor agency. It is comprised of seven representatives from the local agencies that serve the redevelopment project area: the city, county, special districts, and K-14 educational agencies. Not only does the oversight board approve the successor agency’s administrative budget, but perhaps most importantly, it adopts the ROPS— Recognized Obligation Payment Schedule—the key document that outlines the financial obligations of the former redevelopment agency for which its successor agency is responsible over the next six months. In its advisory role, the oversight board may also direct the successor agency to dispose of assets and properties or to end agreements that don’t qualify as enforceable obligations as it sees fit.

The formal dissolution of redevelopment agencies has been effective for only a year, so the lingering presence of the decades-old program can still be felt in the local governments where they were once so prominent. As cities and counties serving as successor agencies are forced to settle the accounts, the millions of dollars that once were directed into the books of their redevelopment agencies have now become points of contention with the state. The California Department of Finance approved nearly three quarters of the ROPS, which served as expense requests for the successor agencies—predominantly cities—fulfilling the remaining contractual responsibilities of their former redevelopment agencies.

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PUBLIC INVESTMENT IN LOCAL INFRASTRUCTURE WILL PROMOTE PRIVATE INVESTMENT...IF THE STATE IS SERIOUS ABOUT INFILL DEVELOPMENT, IT SHOULD INVEST IN LOCAL INFRASTRUCTURE AND FOSTER COMMUNITYBASED FINANCING, NOT PROJECT-BASED FUNDING.

However, out of the remaining quarter, as of late February there have already been nearly 50 law suits filed against the California Department of Finance by individual successor agencies, including a suit filed by the League of California Cities on behalf of several cities. The majority of the suits lie in disputes over what the Department of Finance defines as an enforceable obligation within a ROPS, as opposed to what obligations a successor agency views as enforceable. While successor agencies hold vested interests in completing pre-existing projects in their regions, the Department of Finance instead seeks to move the dissolution of RDAs forward as quickly as possible in order to free tax increment funds for other purposes.

In an earlier attempt to reconcile such disputes, the California Legislature passed Assembly Bill 1484 on June 27, 2012 to make several key amendments to AB 26. Specifically, AB 1484 outlined three new payments for successor agencies and associated penalties if they failed to meet those payment deadlines. The California Department of Finance was also given much greater authority under AB 1484 through the power of the due diligence reviews and findings of completion that it must conduct

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in order to evaluate successor agencies’ actions and proposals. These measures, however, only proved to exacerbate existing disagreements and ultimately led to the current litigation involving over 50 jurisdictions.

Seth Merewitz, Partner at Best Best & Krieger Photo Credit: Best Best & Krieger LLP

However, despite these legal disputes over funds, these successor agencies currently only serve as transition entities to settle redevelopment debts. It still remains to be seen what measures local communities will take in order to fill the role that RDAs served as providers of affordable housing and drivers of local job growth. Seth Merewitz, a partner at Best Best & Krieger who leads the firm’s Public-Private Partnership/Joint Venture Group, suggests that an effective solution to redevelopment agencies is the adoption and use of public-private partnerships. P3s, as they are also known, seek to resolve issues through the convergence and collaboration of both the public and private sectors. In this, they are similar to RDAs. Where redevelopment agencies funneled public funds into public or private projects, P3s explore the potential of investing private funds in the very same principle.

As Merewitz notes, “Public investment in local infrastructure will promote private investment. In many communities, existing roads, water, and sewage systems are inadequate to serve new developments. Updating local infrastructure would help with the higher costs of operation and maintenance in urban areas. If the state is serious about infill development, it should invest in local infrastructure and foster community-based financing, not project-based funding.”

The coming years serve as a critical juncture in establishing the future of development projects in California. As successor agencies effectively begin selling off former redevelopment agencies’ assets, the government and private sector should work together to reinvest successfully in such holdings to move local economic development forward. Returning to the original idea behind redevelopment agencies—local economic stimulus in order to promote local development—it is key that local governments partner with local businesses to achieve common goals.

Redevelopment as it once was practiced has ended. However, the goals animating RDAs still have a place in California’s economic development future. Despite the current conflict and complications surrounding dissolution, it is paramount that communities look forward and begin considering measures to replace the roles that RDAs served. Public-private partnerships are only one piece of a greater scheme that not only involves the evaluation of current laws and practices, but also a commitment to establishing new, creative funding sources. In its time, redevelopment’s tax increment financing proved to be revolutionary. Moving forward, it is time, once again, to innovate in order to encourage urban development.

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Editorial Board Andrew Busch Director, Rose Institute Marc D. Weidenmier Director, Lowe Institute David Huntoon Manfred Keil

INLAND EMPIRE OUTLOOK

Kenneth P. Miller Bipasa Nadon Yelena Tuzova

Student Editor Nina Kamath

Staff

Ryan Driscoll Jessica Jin Shannon Miller Andrew Nam Daniel Shane

INLANDEMPIREOUTLOOK.COM INLANDEMPIRECENTER.COM

The Inland Empire Outlook is a publication of the Inland Empire Center at Claremont McKenna College.

The Inland Empire Center The Inland Empire Center for Economics and Public Policy is based at Claremont McKenna College. It was founded as a joint venture between the Rose Institute of State and Local Government and the Lowe Institute of Political Economy to provide business and government leaders with timely and sophisticated analysis of political and economic developments in the Inland Empire.

The IEC brings together experts from both founding institutes. Marc Weidenmier, Ph.D., director of the Lowe Institute, is a Research Associate of the National Bureau of Economic Research and a member of the Editorial Board of the Journal of Economic History. Andrew Busch, Ph.D., director of the Rose Institute, has authored or co-authored eleven books on American politics and currently teaches courses on American government and politics. Manfred Keil, Ph.D., an expert in comparative economics, has extensive knowledge of economic conditions in the Inland Empire.

Kenneth P. Miller, J.D., Ph.D., is an expert in California politics and policy who studies political developments in the Inland Empire. Bipasa Nadon, J.D., has worked in municipal government and specializes in local government policy. David Huntoon, MBA, specializes in economic development, survey research, and tribal governments issues.

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