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.

It is known as the Gamble Memo. Mention it within the very small circle of politicians and policy wonks who pay attention to the city's finances, and no additional description is needed. They will know what you mean.

Robert Gamble had no idea when he drafted his bureaucratic missive -- just a page-and-a-half of text with some charts attached -- that it would achieve such renown.

When he wrote it in late January 1997, Gamble was deputy executive director of the San Francisco Redevelopment Agency. He was the main bookkeeper, responsible for counting the agency's beans. A skinny, friendly, bespectacled man, Gamble was soon to finish almost two decades of studious public service and enter the private sector. Politicians build monuments. Public finance wonks leave behind memos, and Gamble's memo has proved an ominous portent for master politician Willie Brown.

Two years into his term, Mayor Brown's agenda has become clear -- he wants to build things. Sports stadiums, housing, museums, hotels, fancy government buildings, office complexes, kiddie parks, whatever it takes to remake vast portions of the city to Brown's liking. Paying for it all, of course, is the tricky part. When pressed for the nagging particulars on how he'll fund his myriad visions, Brown has often pointed to the Redevelopment Agency as if it were a font of riches waiting to be drunk.

But Brown knows that's not true. He knows the Redevelopment Agency is almost tapped out. He's read the Gamble Memo.

The memo was a five-year projection of the agency's finances. It used four different scenarios to illustrate that, basically, the agency was reaching the end of its financial rope. "While these projections are not definitive, they do provide the [Redevelopment] Commission with a broad sense of the financial constraints we are facing," Gamble wrote.

Though relatively dry, the memo contained phrases that are downright incendiary within the circumspect lexicon of financial analysts -- statements like "obviously not feasible," and "clearly not a sustainable course."

In plain English, what Gamble outlined for his bosses was the Redevelopment Agency's descent into a black hole of debt. With budget cuts and a little luck, his scenarios showed, the agency would be able to slog along until the turn of the century. But after that, the agency will have piled up so much debt that it will probably have to abandon many of its plans for fixing up downtrodden areas of the city.

The agency won't literally go broke. It won't have to shutter its doors and send everybody home. Rather, it is rapidly approaching the governmental equivalent of maxing out its credit cards. The agency has borrowed so much money -- some of it for remarkably stupid purposes -- that it may soon be unable to borrow any more. When that happens, most of the cash available to the agency will be required to pay back debt, and there will be little money left over in any given year for actual redevelopment projects.

Improbable as it may seem, even as San Francisco booms the agency that should be most involved in revitalizing and rebuilding scarred portions of the city is careening toward irrelevancy.

An SF Weekly examination of the agency's financial records makes clear what has happened. Year after year -- for at least the last nine years -- the agency has effectively run a deficit, spending more money than it takes in from property taxes, leases, and land sales. Each budget cycle it has covered the shortfall -- as much as $37 million a year -- primarily by selling bonds. That is, by borrowing.

Counting all the various forms of bonds it has issued to finance projects and cover yearly shortfalls, the Redevelopment Agency now has more than $700 million in debt. Most of the borrowed money was used to buy land, build public improvements like streets and sidewalks, or provide affordable housing. In short, the bricks-and-concrete type of work that is expected from the agency.

But big chunks of the borrowed money -- tens of millions of dollars in bond proceeds -- have been sunk into money-losing projects. Other money has been siphoned off to help the agency pay salaries and cover its overhead. Although extracting the exact numbers from the agency's financial documents is tricky, SF Weekly's examination indicates that the agency has effectively skimmed at least $50 million of bond proceeds over the years to pay salaries and administrative costs.

Using debt to pay overhead, although apparently not illegal, is generally considered foolish. The money must be paid back someday, with interest, and that will cost taxpayers tens of millions of dollars well into the next century.

The inevitable result of this freewheeling approach to borrowing is that the agency will strangle on its debt. That's exactly what Gamble foresaw when he wrote his now-famous memo, and in the ensuing year nothing has happened to prove him wrong.

While the predicament is largely not of Brown's making, the mayor is left to deal with it. He received a copy of Gamble's memo, and met with Gamble more than a year ago to discuss the agency's finances. "I was glad that he took it seriously," says Gamble, now deputy director of the Richard and Rhoda Goldman Fund.

Lesser mayors might have been disheartened by the news, but Brown is not one to let his grand visions bog down in a pesky financial quagmire.

Judging by the mayor's public proclamations, you wouldn't think there was much of a problem at all. Brown has continued to tout the Redevelopment Agency, pledging its help for myriad projects. Just two weeks ago, Brown and his cadre of department heads and aides announced a tentative plan to lure a Bloomingdale's department store to downtown. Sure enough, there were promises of some Redevelopment Agency money to grease the deal.

There is no way, of course, that the agency can possibly pick up the tab for all the plans Brown has floated. He knows that, and so does James Morales, Brown's handpicked executive director of the agency. "Somewhere along the line, people became enamored of the potential of the Redevelopment Agency," Morales says. "We cannot do all the things that have been promised to communities." What the agency does in the next few years, Morales acknowledges, will be dictated by what Brown wants.

For almost a year after receiving the Gamble Memo, Brown remained silent on the agency's financial troubles. The city's daily newspapers, blissfully ignorant, continued to prattle on about the mayor's redevelopment plans.

The problem was suddenly discovered in mid-December, when Brown appeared unannounced before a meeting of the agency's board of commissioners, which he controls by virtue of appointing the commission members. At the meeting, Brown acknowledged the state of the agency's finances, and for the first time signaled his designs on the limited financial resources the agency has left.

Back off of revitalizing mid-Market Street, the decayed stretch of San Francisco's main drag that has begged help for years, Brown instructed the commissioners. Forget about the promises to remake the neighborhood around the Transbay Terminal. Those projects, long in the planning, aren't going to make the cut.

Instead, Brown told the board to concentrate its remaining resources on two major projects that he wants.

Foremost is Mission Bay, a massive development of housing, stores, and office buildings straddling China Basin planned by the Catellus Development Corp. Back when Brown was Assembly speaker, Catellus paid him handsomely to be one of its lawyers. Now, Brown's Redevelopment Agency is going to help Catellus build its long-stalled Mission Bay complex.

The other project Brown wants is development of Hunters Point, the abandoned Navy shipyard that now sits mostly vacant and laced with toxic waste. It lies smack in the middle of Brown's political base, and is central to his long-shot dream of spawning a veritable urban renaissance in the city's southeast quarter.

So far, Brown and his aides have been notably vague about just how much Redevelopment Agency money they hope to pour into the two projects. Remarkably, both Morales and David Prowler, the mayor's point man on the Mission Bay development, say they have absolutely no idea how much money the Redevelopment Agency will kick into the deal.

Both Mission Bay and Hunters Point are complex, time-consuming undertakings, and it will be years before either begins generating new tax revenue for the city.

But as other long-planned projects are canceled and the Redevelopment Agency's financial health wanes, the mayor seems intent on using its dying gasps to breathe life into the two huge new projects closest to his heart.

Most of what the public knows about the Redevelopment Agency -- as told by elected officials and reported in the daily newspapers -- is an alluring web of myths, a theory almost totally disconnected from reality.

In theory, redevelopment is a logical way for a city to rebuild its rotting areas without draining taxpayer dollars from other government services. The Redevelopment Agency, the theory goes, would use special powers granted by the state legislature to condemn property, amass land parcels, build amenities like streets and sidewalks, and lure development to blighted areas. After fancy new buildings go up, the city would reap a bounty of increased property taxes from the developed area. The new property tax revenue -- called a tax increment -- would repay any bills the agency racked up while planting seeds for the project.

The myth holds that all the tax increment money would flow back to the Redevelopment Agency, making its projects self-sustaining islands of prosperity. After the agency paid off its debt, any money left over could be used to launch new projects, and to build affordable housing for low- and moderate-income families, the type of housing that is at a premium in San Francisco's crushing housing market.

But reality is much messier than theory.
Before the Redevelopment Agency gets its hands on a dime of tax increment money, the cash first passes through the hands of the city. The tax increment dollars generated by redevelopment projects pour into the city's General Fund, like all property tax revenue, and then are divvied up by the Board of Supervisors. The Redevelopment Agency submits its budget to the supervisors every year, and gets only what the supervisors decide to give.

In most of the state's other major cities, the tax increment revenue is almost automatically passed along to the Redevelopment Agency. But, as best can be told from city financial records, the San Francisco Board of Supervisors has never actually given the Redevelopment Agency all of the tax increment funds that have been collected. Instead, year after year, the supervisors have kept some of the money to shore up the city's own budget.

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.

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.

Taken together, the agency's past projects have led to a continued drain on its ability to pay for future ones. Its line of credit is running out.

That's why it's curious for Mayor Brown to insist that the agency plunge ahead with Mission Bay and Hunters Point.

The smartest thing for the Redevelopment Agency to do right now, several agency watchers agree, is to find some simple projects that can be completed quickly, generating higher property values and new tax revenue. A fresh infusion of tax increment money would not only provide a short-term boost to the agency's bottom line, but would enlarge the stream of future tax proceeds against which the agency could borrow.

The dumbest thing the agency could do in its current precarious state, those watchers say, would be to keep plowing money into large, slow-moving projects that will take years -- perhaps decades -- before they turn the corner and start producing new property tax revenue for the city's coffers.

Neither Mission Bay nor Hunters Point fulfills the criteria for being financially smart. But that apparently doesn't matter, because those projects do fulfill the only criteria that seems to register these days in city government -- Willie Brown wants them done.

"I work for the mayor," Morales says. "Of course the shipyard and Mission Bay will be my priorities."

The Mission Bay project has two parts, both spearheaded by Brown's former law client, Catellus Development Corp. The project has been in the works in various forms for years, alternately pursued and abandoned with fluctuations in the economy and political mood.

Mission Bay North is envisioned as 65 acres of housing and shops built to the north of China Basin. Mission Bay South is larger and grander, especially now that the University of California, San Francisco has agreed to build its new campus there.

Catellus sees UCSF as a magnet that will draw biotech companies to the development, spawning acres of office buildings and apartments where now there are mostly vacant lots and piles of dirt.

Brown has made it clear that he wants Mission Bay started. But these days neither David Prowler, the Brown aide responsible for ramrodding the project, nor Morales will say how much the Redevelopment Agency will chip into the project.

"It's hard to say," says Prowler.
"We don't have final figures on that," says Morales.
Last July, Prowler told SF Weekly that the redevelopment price tag for the entire Mission Bay development would be about $100 million, and that the money would be raised by selling more Redevelopment Agency tax revenue bonds. Prowler has also been quoted in the past as saying the tab could be as high as $500 million.

The money will be used for infrastructure -- roads, utility lines, sewers, and the like. Morales insists that the project will be fully self-sustaining, the money all paid back from future tax revenue. "I don't think Mission Bay is too grand an undertaking," Morales says. "There's obviously some unknowns, but that's an area that should work."

As for Hunters Point, there's no telling how much money might ultimately be needed to redevelop the old and heavily polluted Navy shipyard. The Navy is supposedly going to clean up the toxic waste at Hunters Point before it transfers the land to the city, but even that promise is in doubt.

Morales acknowledges the shipyard is "a daunting challenge. A lot of government monies are going to have to go in to make it work."

But how much, at this point, is anybody's guess.
Morales and the Redevelopment Agency's financial staff are busily grooming the next budget that will be submitted to the Board of Supervisors, trying to squeeze out more money for the mayor's priorities. But the early figures are echoing exactly what Bob Gamble concluded in his memo more than a year ago.

According to a five-year forecast Morales presented to the Redevelopment Commission in January, the agency has just $65 million in borrowing capacity left, and that figure will shrink in each of the following years.

If Mission Bay, Hunters Point, or any of Mayor Brown's other pet projects needs more money than that -- and they surely will -- the mayor will have to look elsewhere for it.

The best evidence of just how tenuous the Redevelopment Agency's finances are these days is sitting out in San Francisco Bay. That would be Treasure Island, the former Navy base that is about to be turned over to the city.

Brown has spun glorious dreams of what can be done with the island -- a theme park, housing, movie studios, and god knows what else might be built on the remarkable piece of real estate. Clearly, whatever Brown decides to build out there will be beyond the financial wherewithal of the Redevelopment Agency.

That's one of the reasons why Brown pushed for, and won, legislative approval to make Treasure Island its own, self-contained redevelopment zone. Treasure Island will have its own commission, appointed by the mayor, and will not be burdened by the financial woes besetting the rest of the city's redevelopment projects. Of course, that also means that any future tax revenue from Treasure Island won't be of any help to other redevelopment projects. The merchants on mid-Market who are waiting for Brown to put their project on his priority list would be well-advised to ignore the progress of Treasure Island.

Besides putting Treasure Island beyond the Redevelopment Agency's reach, Brown also has been steadily transferring planning and redevelopment decisions away from the agency and into the Mayor's Office.Wes Willoughby, longtime agency spokesman who left last summer after 30 years, says the concentration of power in Brown's office is unprecedented. "In effect, the Redevelopment Agency now is being run out of City Hall," Willoughby says.

Between its mounting debts and dwindling autonomy, the Redevelopment Agency may be on the verge of becoming all but irrelevant. Although its statutory powers -- which include the ability to condemn land and relocate businesses -- are potentially potent redevelopment tools, they are of little use in an agency that has no cash to build anything.

If Brown continues to push Mission Bay and Hunters Point, he could very well wring the agency dry and cast it aside. Of course, there will still be that $700 million or so in debt that has to be paid back.

Manny Rosales sits on the Redevelopment Agency Board, even though he was not appointed by Brown. Rosales' term actually expired last year, but he remains in his post until Brown decides whether to replace him.

It may be, Rosales says, that the agency is in its waning days. Brown controls the politics, and only the mayor can decide whether to salvage the agency or relegate it to insignificance.

"I'm not privy to what the mayor's thinking," Rosales says. "I would think the role of any executive is to review the viability of all the departments, and I would hope that's what the mayor is doing. Maybe we're not necessary anymore, in the full context of how he's reviewing the city.

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