The Redevelopment Sinkhole

Years of reckless borrowing have sent the city's Redevelopment Agency spiraling into debt. Mayor Brown's pet projects may flush it down the drain entirely.

The Redevelopment Agency -- which was created in 1947 -- didn't begin receiving any tax increment revenue until 1985, instead supporting itself mostly with grants from the federal government. The agency also receives money by selling or leasing out property that it owns.

In 1989, the agency and the Board of Supervisors agreed to begin moving some of the tax increment money over to the agency's bank accounts, so the agency could start selling tax increment bonds. But every year since then the cash allotted to the agency has lagged behind the agency's expenses. The Redevelopment Agency, in turn, has barreled along by borrowing money to cover the shortfalls in its budget. Each year, it sells bonds -- called Tax Allocation Revenue Bonds -- to make up the difference between what it takes in and what it spends. The tax revenue bonds don't have to be approved by voters.

Redevelopment agencies are expected to borrow money. In fact, they have to borrow to do their job. But the debt is supposed to be carefully balanced against the money that comes in once redevelopment projects take wing and begin generating additional tax revenue. The amount of money the agency can borrow in any year is primarily determined by how much tax increment revenue hasn't already been pledged to pay back bonds.

What has emerged at the San Francisco Redevelopment Agency is a vicious cycle of borrowing to stay afloat. By shortchanging the agency, the supervisors wind up with more tax dollars to spend on short-term city needs, money that has been particularly dear since Proposition 13 placed severe limits on new tax revenues available to the city.

But each time the Redevelopment Agency is shorted on tax increment revenue and sells Tax Allocation Revenue Bonds to make up the difference, the agency pledges to pay the bonds off with future property tax revenue. As time goes on, the agency must borrow more and more money to cover its payments on debt it has already issued. Ultimately, so many bonds will have been sold that paying them back will eat up all of the future tax increment revenue. The tax increment money will have been spent before it is even collected. The well will run dry.

That moment is approaching.
Although virtually no one noticed, the city's budget analyst warned back in 1992 that the agency should stop borrowing so much money.

In a management audit delivered to the Board of Supervisors, Budget Analyst Harvey Rose reported that the city could save hundreds of millions of dollars in finance charges if the supervisors would give the Redevelopment Agency more tax increment revenue so it could stop selling so many bonds.

At the time, the agency had sold just $89.1 million in tax revenue bonds, Rose noted. But paying that money back was going to require $7.18 million in tax increment revenue per year for the next 30 years, for a staggering total of more than $215 million. "It would be less expensive in the long run to use tax increment revenues rather than bond financing to fund redevelopment activities," Rose's audit said.

The audit merited scant mention in the press, and its recommendations clearly have been ignored. The agency's bond debt has continued to swell as it takes on debt to cover operating shortfalls.

Gary Kitahata, who sat on the Redevelopment Agency's board from 1989 until 1995, maintains that the agency did try to wean itself from debt, but says the supervisors wouldn't let go of the tax increment money.

"The agency staff always recommended that the agency pay for its costs as it went along, pay-as-you-go," Kitahata says. "That's the way the budgets went over [to the supervisors] and when they came back, they came back with debt."

But the agency itself is far from blameless for its debt emergency. After all, it is the agency that kept spending more money than it had.

Rose's audit noted, for instance, that the agency was paying salaries far higher than other city departments. At the time of the audit, 12 percent of the agency's employees earned more than $70,000 a year, twice the average for other city departments. (Almost one-third of the agency's employees now earn more than $70,000 a year, according to the latest agency budget.)

Rose's audit also criticized the agency for passing out lucrative contracts to nonprofit agencies without seeking bids. And the agency regularly broke state law, the audit found, by shuffling money between accounts and projects without regard for the formal budget approved by the supervisors.

Particularly pernicious, the audit reported, was the agency's practice of using bond proceeds to pay administrative costs, things such as salaries and office supplies. But six years later, that practice continues, a tar ball of debt that will be stuck on the agency for decades to come.

Suppose you own a bakery. The ingredients you buy -- flour, sugar, colored sprinkles -- become more valuable once you form them into cakes and pies. So it makes sense that you might borrow money to buy flour. The money you borrowed can be paid back from the profits on the resulting extra pies.

But it would be stupid to borrow money to meet your payroll. That's just cash that disappears when your employees bank their paychecks. If you borrow to pay salaries, you have no greater number of cakes or pies to sell, but you still have to pay back the debt with interest.

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