California slipping toward bankruptcy, again

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Conn Carroll

California is going broke. Again. The state controller has estimated that the state will run out of money sometime this month. California will need to find $3 billion in cuts or revenues to keep the state in the black through the rest of this fiscal year.

And next year looks even worse. California's Legislative Analyst Office projects that, even with billions in one-time revenues from Facebook's impending IPO, Gov. Jerry Brown's budget will run a $6.5 billion deficit.

Democrats in state government are desperate for cash. And they are beginning to cannibalize their local government brethren for revenues to make up the difference. The state's more than 400 redevelopment agencies have become one of the first targets.

Created in the 1940s, RDAs empower a city or county to identify almost any parcel of land as a "redevelopment area." When that is done, state property tax revenues from that area are frozen and any subsequent increase in property tax revenue beyond the frozen level goes directly to the RDAs.



RDAs are also empowered to borrow money without any voter approval. They can then buy property with that borrowed money and pay it off with the expected revenue stream from their take of the property taxes. All told, RDAs skim $5 billion from Sacramento every year.

Intended for "economic development," RDAs quickly became the bread-and-butter of almost every pay-to-play construction project in the state. Developers would give money to local politicians, and those politicians would use the RDAs, and their powers of eminent domain, to obtain land for their campaign contributors on the cheap.

Developers then made millions building upscale shopping malls like Victoria Gardens in Rancho Cucamonga. Everybody won ... except the free market and taxpayers.

In 2010, then-Gov. Arnold Schwarzenegger tried to close his multi-billion dollar budget gap by raiding the RDA. Developers didn't like that. They fought back with Proposition 22, which passed in November 2010. The measure forbids the state from siphoning off RDA money.

Fast forward to 2011, when Brown hatched a new plan to get that $5 billion. Being a Democrat, he had no philosophical problem with governments picking winners and losers through crony capitalism. But he did want, to steal a phrase from the Godfather, to wet his beak a little.

So Brown passed two laws. The first outlawed the RDAs entirely. That was the stick. The second allowed the RDAs to exist, but only if they gave a certain percentage of revenues to the state every year. That was the carrot.

Some RDAs were happy to play Brown's extortion game. But others took him to court ... and they blew up the system for everybody. The State Supreme Court threw out the second law, ruling that it conflicted with Proposition 22.

But the justices kept the first law banning the agencies. As of February 1st, all 400 plus RDAs suddenly became extinct

But while Brown now gets his RDA cash (which still isn't enough to close next year's budget gap), California local and city governments are stuck holding the bag for all their liabilities.

Cumulatively, RDAs own about $2 billion in assets statewide. Problem is, they also owe around $4 billion in debt. Local governments across the state are scrambling to figure out how to pay off this new burden.

Already crushed under the weight of unionized government employee pensions they can't afford, Brown's RDA money grab is driving many localities to the brink of bankruptcy.

The city of Stockton began the bankruptcy process last week. The cities of Hercules and Lincoln are not far behind.

So have California Democrats learned that government-funded crony capitalist development isn't good for their constituents' bottom line? Not at all. State Senate President Pro Tem Darrell Steinberg, D-Sacramento, is looking to "recreate a new set of economic development tools for cities."

That will end well, too, I'm sure.

Conn Carroll is a senior editorial writer for The Washington Examiner. He can be reached at ccarroll@washingtonexaminer.com.

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