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.

That type of stupidity, basically, is what the Redevelopment Agency has been committing since 1989, every time it has sold bonds and diverted part of the money to pay its operating costs.

This fiscal year, which ends June 30, the agency's payroll will run about $9.7 million for 116 employees. There's another $2 million or so budgeted for administrative costs. Of that $11.7 million total, only $1.8 million will be paid with cash from tax increment revenue. The rest will be financed, built into bond debt that will be paid back for the next 30 years.

When you add up the operating costs that have been financed with debt over the past decade -- something the agency swears it has never done -- the total appears to be at least $50 million, and may be closer to $70 million.

Paying that money back will cost dearly, once interest charges are tacked on. By way of example, consider a hypothetical plastic ballpoint pen that costs $2 at the store. If you finance that $2 pen for 30 years at 5 percent interest, it winds up costing $8.64.

James Morales, whom Brown installed as the agency's executive director last February, says the agency has never made any secret of the practice. "We didn't hide the ball on that," says Morales, who served on the Redevelopment Agency Commission and the city Planning Commission before accepting his current, $131,000-a-year post. "It's widely known that since 1989 we've been financing salary costs with debt."

The Board of Supervisors was willing to let the practice continue, Morales says, because doing so freed up tax increment money for the city to use elsewhere. The practice was clearly shortsighted, and the accumulated debt is now a huge drag on the agency. "There are those of us who yelled and screamed that it was a stupid thing to float bonds for operating expenses," says longtime housing activist Sue Hestor. "The chickens have all come to roost."

But there are plenty of other reasons why the agency is reaching the end of its financial rope.

Before the agency can launch any major redevelopment, it must designate the blighted neighborhood that is to be fixed up as a "project area." Some of the agency's past projects -- such as Yerba Buena Gardens and the Museum of Modern Art -- are now heralded as jewels of the city.

In theory, each project area is supposed to support itself. That is, money borrowed to redevelop a project area is supposed to be paid back with tax revenue generated from that area. But when it comes to the Redevelopment Agency, theory has seldom equaled reality.

There are now 14 project areas under the agency's purview, some as small as a couple of city blocks, others vast tracts such as the Hunters Point Shipyard. Five other chunks of the city have been designated as "survey areas," meaning that once the requisite studies are completed, they can be upgraded to project areas.

But most of the existing project areas have never carried their full financial weight. They have not brought in as much new tax revenue as expected, though they still account for varying loads of debt.

The agency's financial records show that, for years, the agency has counted on its more successful project areas to carry along the weaker ones. As Rose noted in his 1992 audit of the agency, money is shuffled back and forth between projects with little regard for the formal budget adopted by the Board of Supervisors.

The agency's "cash cow" has long been the Golden Gateway, a markedly successful project area that includes the Embarcadero Center.

"The Golden Gateway center is the only redevelopment area that makes money," says Jim Chappell of the San Francisco Planning and Urban Research Association, a private citizen's group that tracks development issues in the city. "Golden Gateway is the cash cow. Everything else is a cost center."

Yerba Buena Gardens and the art museum, for instance, may be beautiful places, but they don't generate property tax revenue.

Turning a profit isn't the Redevelopment Agency's primary mission, but it can't lose money on almost every project it undertakes and hope to survive. Still, the landscape is littered with projects that -- whatever their civic value -- have continued to sap the agency's bottom line.

The South Beach Marina, for instance, was supposed to be self-supporting, but is $3.8 million in debt, according to the most recent independent audit of the agency's books. Tax increment money from somewhere else will have to be used to cover the debt.

The Moscone Center -- one of the largest and arguably most significant projects in which the agency has had a hand -- is not a help financially, because it doesn't directly generate any new tax revenue for the agency: It is owned by the city and doesn't pay property taxes.

The agency will shoot itself in the foot again with its plans for a new federal office building. The agency intends to sell land to the federal government for its new downtown building. The sale will bring a one-time infusion of cash. But because the federal government doesn't pay property taxes, the project won't help the agency long-term by generating new tax revenue, year after year.

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