Fight Brews Over Cities’ Tax Windfall : Redevelopment: Municipalities keep the money the projects yield. That is unfair, say the county and other agencies that provide services.

In an age of government cutbacks, Los Angeles County and its cities and school districts are increasingly fighting over one of the few sources of funds that continues to expand: redevelopment.

Frustrated school and county officials watch a growing percentage of their property tax money diverted to city redevelopment projects, which use the money to attract office buildings, shopping centers and auto malls.

Agencies that provide welfare, health care, schools, libraries, fire stations and other services lost $335 million in tax allocations last year to 63 cities that have redevelopment projects, County Auditor Controller Daniel Ikemoto said. Six years earlier, redevelopment drained $189 million from government budgets.

As a result, Los Angeles County has sued 10 cities in the last 22 months, charging that the redevelopment projects are improper. Local school districts have tacked on an uncounted number of similar suits.

At stake in the burst of litigation--which includes pending lawsuits against Hawthorne, Bellflower and Duarte--is how the spoils of new economic growth should be divided among governments.

Cities say they should get most of the money to continue the work of redevelopment: building storm drains, replacing street lights and buying run-down, hodgepodge parcels to be packaged together in large tracts to attract even more development. Critics say cities should be forced to share a greater percentage of redevelopment money with other government agencies, which must provide more classrooms, more public health programs and more fire service with less tax money.

“If it keeps going, redevelopment will swallow up state and local government taxes,” said Christopher Sutton, a Pasadena attorney and frequent redevelopment critic. “The (redevelopment) agency budgets are really like fat little pigs floating in the shark tank right now.”

The state Legislature came up with the concept of redevelopment in the 1950s, but the process didn’t really take off until the passage of Proposition 13. The 1978 tax-cutting measure left cities with few avenues whereby to expand their revenues, except redevelopment.

It works this way:

Cities designate blighted tracts of land as redevelopment project areas. Properties within the special areas can be condemned and, sometimes, combined with other properties to form parcels big enough for larger developments. Often, cities lure developers by offering land in the redevelopment area at cut rates.

The cities also acquire a substantial tax advantage under redevelopment. Property taxes paid to all other government agencies--such as the county, school districts and library districts--remain stagnant for the life of the projects, as if property values had not increased at all.

Meanwhile, cities get increased tax revenues based on the growing value of newly developed properties, for up to 50 years. This so-called tax “increment” is then spent in the project areas, for clearing dilapidated buildings, installing storm drains, subsidizing affordable housing, and building new sidewalks, gutters and other improvements.

Critics say this is a roundabout tactic by cities to beef up their public works budgets without asking voters to increase their own taxes.

Sixty-three of the county’s 88 cities have redevelopment agencies. They siphon off tax money that would otherwise go to dozens of agencies: school districts, irrigation districts, library districts and the Consolidated Fire Protection District of Los Angeles County.

The biggest loser, though, is Los Angeles County. In fiscal year 1988-89, the county lost an estimated $178.3 million in tax revenue to redevelopment--more than five times the amount it gave up a decade earlier. That would have been more than enough money to run six departments: assessor, auditor controller, beaches and harbors, community and senior citizen services, children’s services and mental health.

“Most of these projects are creating additional burdens on the county which have to be shouldered--public social services, mental health services, health services, the custody system,” said Bill Kreger, assistant administrative officer for the county. “Inflation is driving the cost of these things up. Why in the hell shouldn’t we share in these revenues?”

But cities say the county ignores the benefits of redevelopment.

“Common sense says that if a city can revitalize an area, then it will be a benefit to the county. Period,” said Bruce Leach, planning director in Bellflower, which this year created a nearly 600-acre redevelopment area. “There will be more employment opportunities. It will reverse the negative socioeconomic situation and improve surrounding areas--where the county gets full property tax benefits.”

State redevelopment law requires that cities inform other government agencies of how much property tax money they will lose under redevelopment. Los Angeles County officials have insisted for more than a decade on no reduction in property taxes, a policy their city counterparts call “hard line.”

When negotiations over the share of taxes break down, the county sues. These lawsuits charge cities with improperly creating or expanding redevelopment areas. They usually claim that the cities conducted improper environmental reviews or that properties were not actually blighted.

“They try to throw a bunch of mud on the wall and hope something sticks,” said one city official, who asked not to be named. County officials said they are merely trying to stop the unchecked expansion of redevelopment into neighborhoods that often are not blighted.

The county filed such a lawsuit earlier this year against Hawthorne after the city voted to expand an existing redevelopment area by 309 acres. The amendment would also permit the city to take nearly $2 billion in property taxes from the area over 35 years.

The lawsuit accuses the city of improperly including unblighted areas in the project. A previous letter of protest noted that the city’s own survey showed that just 2.8% of the buildings in the area need extensive reconstruction or demolition.

Hawthorne City Manager James H. Mitsch said the lawsuit is merely a negotiating gambit. He said the need for redevelopment in the area is clear, especially where homes were demolished or boarded up near the Century Freeway construction.

The vast majority of the 27 lawsuits filed by the county over the last decade have ended in settlements. In Torrance, for example, the city last month agreed to increase property tax payments to the county from its 292-acre Industrial Redevelopment Project.

Under the agreement, Torrance will return to the county any tax revenue left over after it repays bonds and other existing obligations. By 2013, the county will again receive its customary 57% of the property tax from the area, instead of the 27% it has been getting.

Such settlements are often difficult because of the county’s tough stance, city officials said.

“Basically, they want unconditional surrender, and that makes it very tough to negotiate a settlement,” said Jeff Oderman, an attorney defending Duarte against a lawsuit. He said the county’s demands would make even minimum redevelopment infeasible for a city. “The city feels like it would be slitting its own throat if it agreed to the county’s position.”

Duarte has already borrowed money to lure a new shopping center that would include a supermarket, a performing arts center and Northview Middle School. Now the city would like to receive all the taxes from the increased value of the property, up to $61 million over 40 years. As much as $38 million of that would customarily have gone to the county.

Don Pruyn, Duarte’s finance director, said the money is already spoken for and cannot be given back to the county.

Many of the disputes have been further complicated by the involvement of school districts.

“I think they have a growing awareness that they need to be aware of the impacts of redevelopment--the loss of money,” said Brooks Coleman, a school consultant. “All public entities are desperately looking for new dollars.”

School officials contend that redevelopment often attracts new residents, and therefore more students, to an area. “If a redevelopment is successful,” Coleman said, “there will be new students generated, and for every 30 new students you need a classroom.”

Bellflower, for example, found its redevelopment plan challenged by the county and four other districts: the Bellflower and Paramount unified school districts and the Compton and Cerritos community college districts.

The city has already reached a settlement with the Bellflower schools, promising to pass on $2.5 million in taxes for school construction. But Leach, the city’s planning director, said the other districts will have a tough time showing that they are entitled to more tax money.

“This area was already developed, and in some cases, the use will be even less intense after redevelopment,” Leach said. “So how can you say there is a big impact on the schools?”

Observers say economic hard times will lead to even more challenges to redevelopment. Much of the scrutiny may come from Sacramento.

The Legislature already approved a law last year that allows counties to recover a fee for dispersing property taxes. Legislation has been proposed to let counties audit redevelopment agency budgets to make sure the cities are not claiming more in taxes than they will actually spend on improvements in the redevelopment areas. And the state Department of Finance has suggested that redevelopment agency surpluses could be tapped by the state.

“Redevelopment agencies have expanding budgets at a time when the state and other local governments are absolutely strapped,” said Steven Thompson, director of the Assembly Office of Research. “So they will continue to be looked at as a source of revenue.”