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Redevelopment as we’ve known it really is dead in California. On December 20, the California Supreme Court upheld the legislature’s elimination of redevelopment agencies — and struck down the option for the agencies to pay back a portion of their funding to continue to exist.

This outcome represents the worst-case scenario for supporters of redevelopment. I for one was surprised, having spent all of 2011 working with various coalitions to reform, rather than eliminate, redevelopment. SPUR Board members like Elizabeth Seifel and Fred Blackwell worked tirelessly throughout the last year to avoid this outcome.

As of this writing, some people hope that the state legislature will come up with a new bill that brings redevelopment — or parts of it — back to life. The Supreme Court ruling is clearly more draconian in its result than what the legislature intended. However, new legislation seems unlikely as cities are all winding down their redevelopment agencies, and other government entities are getting ready to feast on the remains of redevelopment. Each redevelopment agency must prepare a list of its “enforceable obligations” — things that still need to be paid for by redevelopment funds before funds flow to other government entities. And each city needs to figure out how to do what has been traditionally been done with redevelopment funds.

What does this surprising turn of events mean for the urbanist agenda in California?

The mixed history of redevelopment

To begin with, we need to acknowledge that redevelopment probably did more harm than good over its long life. Starting in the 1920s, progressive planners in America dreamed of tearing down “slum housing” and replacing it with new, modern public housing. In 1937 the Wagner Housing Act launched both public housing and urban renewal in America, linking the two with the requirement that, for every unit of new public housing created, a unit of “substandard” housing would be removed.

California adopted enabling legislation for urban renewal in 1945. The sins of this phase of redevelopment have been widely documented. The planning establishment, including SPUR (then the San Francisco Planning and Housing Association, and later the Planning and Urban Renewal Association), supported urban renewal in a misguided attempt to stem population and job flight from the inner city. In 1947, SPUR published its report “Blight and Taxes,” urging San Francisco to get to work on its program to reinvest in depressed neighborhoods as a way to shore up the shrinking tax base of the city.

San Francisco’s most important African-American neighborhood, the Fillmore, was bulldozed, as were the South of Market area’s single-room occupancy hotels. The post-war “pro-growth machine” — a coalition of labor, business, developers and planners — worked together to build new neighborhoods according to the design fads of the day, with little regard for the people who lived there. The result was displacement on a massive scale and the creation of places that, today, no one loves.

I’m willing to argue that the damage done by this generation of modernist planners outweighs any positive redevelopment outcomes that came later. But the ironic truth is that, for the past 30 years, redevelopment has become one of the leading tools for social justice and equity in planning. It’s the single most important source of funding for affordable housing and a primary tool for economic development. Moreover, the sins of early redevelopment catalyzed a generation. Community-based movements managed to stop slum clearance, urban freeways and many other mistakes of modernist planning. By the late 1970s the values of the planning profession had undergone a profound shift to emphasize walkability, historic preservation, mixing of uses and the virtues of a traditional, fine-grained property-ownership fabric. The age of wholesale change was over. The age of careful interventions — or no interventions at all — had emerged.

Redevelopment in its early days channeled federal dollars to local projects. But by the 1970s, federal money was mostly gone, and what remained was the powerfully creative tool called tax-increment financing. When a redevelopment area is formed, the original assessed value of all properties within the project area is established. Improvements are planned, and a new assessment is made of the higher land value that the improvements are expected to generate. The difference between the property taxes on these two assessed values is the “increment” of tax increase, which is transferred to the redevelopment agency for up to 45 years after the plan is approved.

Redevelopment has been used for many different types of projects across the state of California, from clear winners like Mission Bay to clear losers like subsidizing golf courses. In cities like San Jose, redevelopment removed key parts of the downtown fabric and left parking lots. Once a new generation came into power, the San Jose Redevelopment Agency spent several decades trying to create a new downtown core that would become a pedestrian-oriented center for Silicon Valley. Now the city is making good progress on how it will continue to fund new projects. Defenders of redevelopment need to acknowledge that many investments by redevelopment agencies simply did not work — from either the perspective of stimulating economic growth or of making successful urban neighborhoods. On the other hand, critics have to admit that many other projects done by redevelopment agencies did work.

But one thing is clear: Redevelopment became the go-to tool for many mayors and city councils up and down the state, with more than 400 redevelopment agencies forming in California. Redevelopment project areas comprise fully 12 percent of the assessed value of the state. In many cases a lot of money was spent with little result. All of this helps explain why Governor Jerry Brown decided to go after the agencies despite his own successful use of the redevelopment tools when he was mayor of Oakland.

What is so difficult in trying to think about city-making in the post-redevelopment era is that redevelopment was used for so many different purposes. As we try to think through how we will solve urban problems using new tools, we will need to devise somewhat distinct solutions for each of the things that we formerly relied on redevelopment to do. Let’s take a look at each of them:

Affordable housing

Over the past 20 years, redevelopment has provided the most consistent source of funding for affordable housing in San Francisco and the State of California. Last year, redevelopment provided more than $1 billion in annual funding statewide. State law requires redevelopment agencies to spend 20 percent of the tax increment they collect on affordable housing. In some project areas, San Francisco decided to spend 50 percent of net tax increment on affordable housing. For the affordable housing movement, the death of redevelopment is a catastrophe. But in theory the question of what to do in a post-redevelopment world is not complicated: We need to come up with other sources of funding for affordable housing.

As a combined city and county, San Francisco was able to keep 80 to 90 percent of the local property tax in redevelopment areas; now, without redevelopment San Francisco will be able to capture about 65 percent of the incremental property tax. The city can continue to spend money on affordable housing if it so chooses. But for other cities, the death of redevelopment means a far bigger cut. Most housing advocates are hoping for a new statewide source of funding to make up at least some of the reduction.

Infrastructure and public amenities

Tax-increment financing was used to build infrastructure: streets, roads, sewer lines and all the other basics. It was also used to build public amenities like parks, museums and streetscape improvements: Yerba Buena Gardens, the Tech Museum in San Jose, the new park along Mission Creek and countless other examples. This would then attract private investment to come into a blighted area. When property values would rise as a result of the infrastructure investment, the redevelopment agency would pay back the initial cost of the infrastructure with the tax increment it received.

It’s impossible to imagine private development creating a public amenity like Yerba Buena Gardens without the tool of redevelopment.

The governor, a year ago, said that the elimination of redevelopment would be accompanied by new tools that would make it easier to pay for infrastructure, such as lowering the threshold to issue bonds requiring voter approval to 55 percent. As of yet, we have seen no move in this direction. Moreover, voters do not typically agree to tax themselves to pay for boring, uncharismatic things like basic infrastructure.

It seems that, no matter how you look at it, the elimination of redevelopment is going to result in a reduced investment in infrastructure. Increased reliance on voter-approved bonds might be part of the solution. At a local level, cities can establish set-asides to pay for infrastructure or infrastructure maintenance, as SPUR has recommended.

Perhaps the most important answer will be increased use of Mello Roos Community Facility Districts (CFDs) and Infrastructure Finance Districts (IFDs). These are the two remaining primary tools that California law provides local governments to issue bonds to pay for up-front infrastructure. 

There are some important differences: CFDs generate a revenue stream for bonds by adding a 20- to 40-year assessment on top of existing property taxes. Accordingly, they impose a new and direct financial burden on the property owner, so they have a tough political hurdle.

IFDs don’t increase property tax assessments, but instead divert a portion of the future new property tax generated above a base year (the so-called “increment”) for 30 years to provide a revenue stream for bonds, similar to classical redevelopment tax increment financing. Private property owners in theory should not object to the creation of an IFD if they understand that it won’t affect their bottom line — and, better yet, can help pay for public infrastructure investment in their neighborhood. However, IFD law typically limits the portion of increment available for bonding to between 10 to 20 cents per dollar, severely limiting its use beyond the City and County of San Francisco (where approximately 60 cents per dollar would be available). 

Both CFDs and IFDs require a two-thirds approval of the voters and/or property owners that will be included in the district. (If 12 or more registered voters live within the boundaries of a proposed CFD or IFD, the law requires an election.) As a practical matter, this means that they only work for large single-ownership parcels (like former rail yards or military bases) with limited housing, and not for complex mixed-use urban neighborhoods with a multitude of property owners.

Redevelopment granted the democratic process enormous power over private property owners: Locally elected legislative bodies could vote to put properties into redevelopment areas without property-owner approval so long as the district as a whole met the legal definition of blight. Without redevelopment, there can only be infrastructure financing where the property owners consent by a two-thirds majority (or, again, by two-thirds of the registered voters if 12 or more registered voters reside in the district). Will this create an incentive for property owners to free load off of the investments made by other property owners or by the public? While locally elected legislative bodies may not always act wisely in how they apply their power over private landowners, nevertheless, the current shift of power away from the democratic process and toward private owners is striking.

Several modest reforms to IFD law could help a lot, most notably allowing local legislatures to form new IFDs without a vote of property owners and tolling the life of the district until debit is actually issued. Currently, it’s not even legal to create IFDs in places that were former redevelopment areas! Will this be changed? It’s too soon to tell.

Economic development 

Another area that defenders of redevelopment worry about is economic development. Given how shaky the discipline of local economic development is, I think this is an area where it is particularly difficult to evaluate the success of redevelopment.

The basic theory of local economic development is that localities need to produce traded goods and services in order to survive. What this means in practice is, generally, three approaches:

1.     Reward businesses to come, stay or grow. There are many variants on this, some sophisticated, some not.

2.     Enhance labor productivity through education or immigration.

3.     Improve the physical or social environment in ways that are conducive to growth. This is where city boosters, chambers of commerce, advocates like SPUR and, yes, redevelopment agencies, have often focused their work.

Yes, it probably worked, and we have clear-cut successes like Mission Bay, but on the whole, it’s hard to tell if the net effect of redevelopment was an increase in jobs in California or just a shifting of jobs from one location to another.

In some cases, shifting the location of economic activity was, and is, precisely the goal. That’s why the original purpose of redevelopment was to remediate blighted areas. It may not increase total tax receipts to state government, but it very much does improve the well being of the state if we direct economic activity into depressed areas where it would otherwise not go.

Even without redevelopment, economic development will still be practiced by cities in California. We will use whatever tools we can, from business attraction and marketing (like SF Travel and the SF Center for Economic Development) to convening industry clusters (like SFMade or BayBio) to all the things we do to try to boost the skills and attractiveness of our workforce and our city.

Redevelopment provided some of the most powerful tools, especially where economic development and land-use change needed to go together. But the field of economic development has other tools as well.

The core of redevelopment

When redevelopment worked, it solved an enormous collective action problem: It got multiple property owners in a blighted area to simultaneously invest and benefit from each other’s investments. Rarely is one private sector actor big enough to assemble multiple parcels, and then finance and build major infrastructure and amenities that can also then re-capture its positive externalities. As redevelopment got more sophisticated, and combined these basic powers with affordable housing and other economic development strategies, it became a powerful tool.

It’s going to be harder to do now. The best redevelopment agencies became centers of entrepreneurial energy within local government: They had a culture of implementation and experimentation in contrast to the traditional planning culture of regulation. All of this could be lost now.

In some ways, what is most irreplaceable is the invaluable role that tax-increment finance plays in recapturing the real estate value generated by upfront public investments. I would argue that perhaps the core of modern redevelopment — as opposed to the bad old days of urban renewal — is the use of tax-increment financing: borrowing against future increases in land value to pay for things that will increase land value.

Taxing back some of the increase in land values to pay for neighborhood improvements meets all of the tests of being a good funding source: It is efficient, it does not discourage economic investment and it is fair.

In a state that has destroyed so much of its system of taxation, we have just witnessed the destruction of one more part. It was not working perfectly. It needed reform. It needed to be used less often. But all of those problems could have been solved.

It’s time to think big about what comes next. We need a new model of urban redevelopment for the 21^st century. There will not be one answer, but there should be lots of good answers, matched to the right locations. We will be working hard at SPUR, with people from around the state, to come up with strategies for all of the things we used redevelopment for: affordable housing, infrastructure financing, economic development and everything else. We’re looking forward to figuring out the next chapter, hopefully informed by what worked, and what didn’t, during the previous one.

Question: What’s the best way to revitalize Central Market?

Answer: There isn’t one way, but many — and they all need to be coordinated with one another.

While this sounds like an answer that Yoda might offer, we hope that the folks at the Office of Economic and Workforce Development (OWED) don’t have to rely on the Force alone to help finalize the Central Market Economic Strategy. The objectives of the strategy include creating an arts district, improving public safety, reducing vacancies, encouraging development and improving the public realm. All of these are good ideas — and all will need substantial political support in order to be realized.

The city is well positioned to build on its work in the Central Market District. The passage of the neighborhood’s payroll tax exemption is bringing in big employers like Twitter. Meanwhile several city departments (including Planning, the Department of Public Works and the Municipal Transportation Agency) are in the process of contemplating some major changes for Market Street itself as part of the Better Market Street Plan. All of these positive changes could help form the basis for real improvements in the district.

The Central Market Economic Strategy seeks to build on this work. In doing so, the city will need to find ways of dealing with challenges that have bedeviled planners for decades, such as high storefront-vacancy rates along Market Street. How can the city, given the current fiscal climate, attract and retain businesses in the area? Are there ways of incentivizing temporary uses to enliven the area? How can we get arts uses to thrive?

SPUR is in the process of developing its own position on the latest draft of the Central Market Economic Strategy. We urge you to do the same.

Read the draft plan at centralmarketpartnership.org  >>

Tell the city what improvements you want to see for Central Market >>

While the Bay Area is still climbing out of the great recession, we’re simultaneously experiencing the makings of a second dot-com boom. The Chronicle reports that tech jobs have climbed near to their year 2000 peak of 34,116. Silicon Valley is hiring again. And so is San Francisco. Between Twitter, Zynga, Yelp, Salesforce and others in social media, gaming and cloud computing, a growing sector of the economy is based right here in the city.

We can’t predict in advance which companies will succeed: Google launched during the last boom, but so did Webvan, whose only traces today are the eponymous cup holders at AT&T Park. Nevertheless, it’s encouraging for all of us who promote economic development to see this kind of growth and investment in a niche well-suited to our city.

The question is, will San Francisco be able to retain the successful companies as they grow and begin to employ significant numbers of people?

Right now, the answer is a frustrating no for one very clear reason. Our payroll tax.

San Francisco has a relatively unique business tax that requires companies with payrolls over $250,000 to pay the city the equivalent of 1.5 percent of total employee compensation. SPUR has argued for years that we should restructure the city’s tax system to remove this disincentive to hiring, replacing the payroll tax with either a gross receipts tax or, better yet, a tax on behavior we want to discourage, like pollution. In the last decade, SPUR has served on several major revenue panels that tried to eliminate the payroll tax, only to founder on the problem of political opposition to the alternative taxes.

Recently, we’ve come to understand a particularly harmful dimension of the existing payroll tax: its levy on stock options.

San Francisco is the only city in California that charges a payroll tax, and it may be the only city in the country that extends this tax to stock options. Thanks to Sarah Lacy of Tech Crunch, who broke the story, a new report from San Francisco’s chief economist and some excellent reporting by the Bay Guardian, the particular problem of taxing stock options has become clear. San Francisco forces companies to pay the payroll tax when employees exercise their stock options — a strong incentive for a company considering an IPO to get out of the city.

This is a particular problem for fast-growing tech companies, a sector that has shown notable promise for the city. The levy has generated a flurry of discussion and concern from pre-IPO companies who stand to lose millions of dollars if they stay in San Francisco.

The last time the city leadership did something about the payroll tax, it was a measure targeted to draw biotech firms into the city. In 2004 San Francisco adopted a biotech tax credit as part of a coordinated strategy that included building Mission Bay; locating a new UCSF campus there; zoning for biotech space; and attracting the California Institute for Regenerative Medicine to San Francisco. The tax credit exempted the companies from the 1.5 percent pay roll tax for 7.5 years — and it’s clear that, as part of a broader economic-development strategy, it had a huge impact. The number of biotech companies locating jobs in the city has gone from two to 74.

The biotech tax credit involved targeting a specific industry; this year the city proposed targeting a specific geography with the Mid-Market tax credit put forward by Supervisor Chiu. SPUR has been very supportive of this measure. While we retain skepticism about the effectiveness of tax breaks in general, there is a strong policy rationale for trying out such a strategy in Mid-Market, a stretch of blocks that has resisted attempts at economic revival for decades.

Spurring the conversation this time is Twitter’s possible move to Brisbane. For SPUR, the issue isn’t retaining the social-media giant — although it would be a significant win for the city. It’s never a good idea to engineer tax breaks for individual firms. But an incentive for any company to create jobs in struggling Mid-Market is an idea with strong policy merits.

The conversation that started with Mid-Market and attempts to keep Twitter in San Francisco has now expanded to encompass strategic thinking about the wider tech community. We have a pivotal opportunity to keep a piece of this industry in the city instead of watching all of it move to the suburbs. Right now Twitter, Zynga and Yelp are making decisions about whether to stay in San Francisco. But we need to fix the tax structure for all the firms we don’t know about yet.

The good news is, there’s a lot of interest across the political spectrum in dealing with the problem:

• Last week, Supervisor Mirkarimi introduced legislation to exempt all companies in San Francisco from paying payroll tax on stock options for two years.

• Supervisor Farrell, who has worked in venture capital and knows this issue well from the private-sector side, is working on a permanent way to take stock options out of the payroll tax.

• Supervisor Chiu is rumored to be getting ready to take another run at getting rid of the payroll tax entirely and replace it with other revenue sources.

For the most part, these ideas are not in conflict. In fact, we may need all of them. We need to do some more intense geographic targeting of incentives for Mid-Market. We need to give immediate assurances to tech firms who will otherwise need to leave the city in the next few months. And we need to revise our tax code for the long haul to not tax stock-based compensation.

Keep in mind that if we do all of this, the city will still come out ahead fiscally. We will have more jobs, and firms in all parts of the city except Mid-Market will still be paying payroll tax on the salaries of their employees.

City supervisors will vote on the Mid-Market payroll tax tomorrow, April 5. To them, SPUR says: vote yes. But don’t stop there. Move quickly to restructure the tax code so that we can retain more of the tech firms that have taken root in San Francisco.

If we get this right, we will be able to get out of the murky business of “tax breaks” for specific firms or locations. What we will have instead is a tax structure that makes it possible for dynamic firms to add jobs in the city while funding local government in a way that supports high levels of public service.

While most of the country is scrambling to identify a future economic base, San Francisco has the good fortune to host a whole ecosystem of dynamic, cutting-edge companies that are a good fit for the quirky progressivism and creativity of this place. If we get barriers out of the way and make it possible for fast-growing tech companies to stay, we may find a way to put people to work and fund public services at the same time.

Co-working studio [Photo by flickr user ahopsi]

According to a piece in Sunday’s Chronicle, tech employment in San Francisco is approaching its dot-com peak:

"The city had an estimated 32,180 tech jobs last year, compared with 34,116 in 2000, according to an analysis of state employment data by real estate consultant Jones Lang LaSalle. In 2004, the number of tech jobs had fallen to 18,210."

The most interesting thing about the growth in jobs is that it hasn’t been accompanied by proportionate growth in office space; while dot-com companies occupied 325 square feet per worker in 2000, today they occupy about 175, and that number has been falling each year. The Chronicle speculates that this is driven by the relative frugality among today’s dot-coms, which is certainly possible. While there are lots of companies out there, venture capital firms have generally been making smaller investments during this cycle.

But according to analysis we're doing here at SPUR, the increasing density of the workforce could also be due to the following trends in Bay Area work:

More telecommuting: Many more are working from home or at non-traditional offices. This is due to an increase in self-employment and to the rise in telecommuting among tech workers. While San Franciscans aren’t necessarily telecommuting more now than in past years, data from the 2005 and 2009 American Community Surveys do show increases in many other Bay Area cities, like Berkeley (where 12% of residents telecommute), Mountain View (7%) and Oakland (6%).

Mobility strategies: Everyone knows that smartphones make knowledge workers more mobile. This means that a lot of work can, and does, happen outside of the office. It also means that at any given moment during the work day, as few as 30 percent of workers are at their desks. Companies see this low utilization and decide to reduce overall private space for workers. This leads them to move to open-plan layouts and shared offices, as Deloitte did last year. Part of the motivation is to cut costs, but the trend also reflects a re-purposing of space as companies forgo private offices in exchange for more meeting space.

Co-working: Particularly among the startups that are adding to that tech-job number in SF, co-working arrangements are popular: firms (or individuals) join together to share office amenities like conference rooms and kitchens. These setups cut down significantly on space needs.

Whatever the reasons, the move to smaller office footprints should play to San Francisco’s strengths. Working in San Francisco usually means being able to commute without a car, which means firms don't have to build the amount of parking needed in places like Silicon Valley. San Francisco also has dense urban districts packed with amenities, which can complement a scaled-down workplace. In some ways, San Francisco makes life hard for a growing firm. But while addressing those challenges, the city should not lose focus on what it has to offer. After all, these young tech firms are in the city for a reason — and it’s not because it’s cheap.