A Tale of Two Budgets, or Why All this New Development Doesn't Help Fremont's Budget

By Vinnie Bacon

The City government tells us that new development brings in revenue. What they don't say is that much of this revenue cannot be used for police, fire, or other basic services.

The proposed Oakland A's Ballpark Village has raised the issue of redevelopment within the City of Fremont since it will be considered a redevelopment project. As noted in my position paper on the ballpark almost 85% of the money generated for the City of Fremont from this project will go to the City's Redevelopment Agency and not to the City's General Fund.

Fremont's Two Big Sources of Funding

There are two big sources of money controlled by the Fremont City Council and Fremont's City Manager. One is the General Fund. The other is the Redevelopment Fund. These two funds belong to two legally separate entities. The General Fund is what the City of Fremont uses to fund city services such as police and fire. The Redevelopment Fund is what the Fremont Redevelopment Agency uses to fund housing and development projects in the city's redevelopment areas.

Though both agencies are controlled by Fremont's elected and appointed officials, they have separate monies, rules, and goals.

The General Fund

The General Fund is the City of Fremont's primary source of money. 75% of General Fund expenditures in fiscal year 2008/09 will fund the direct costs for public safety and maintenance. Since mid-2001 the City's General fund has been under stress. Revenues flowing into the General Fund declined between 2001 and 2004, causing reductions of more than 20% in the police, fire, and maintenance budgets and staffing levels since 2003, even as demand for these services has increased. The cost of providing services is projected to continue to exceed ongoing General Fund revenues in both fiscal years 2008/09 and 2009/2010.

The General Fund had total revenues in 2007/08 of $128.5M. Of this, approximately $50M came from property taxes. The second largest source of General Fund revenue, approximately $27M, came from sales tax. Property taxes are projected to remain the major source of revenue for the General Fund.

In 2007/08, the General Fund budget ran a deficit: the City spent more money than it took in. The amount of the deficit in 2007/08 was $4.6M, which was covered by a surplus accumulated in previous years. The projected budget deficit for 2008/09 is $5.7M. If the projected increases in property and sales tax revenues do not occur, the deficit for 2008/09 could increase to $11.3M. This would more than wipe out all the reserves available to the City for balancing the General Fund budget. The 2008/09 budget, according to the City staff, leaves unmet needs in the areas of Public Safety, Infrastructure, and Retiree Medical costs. Contributions to Retiree Medical costs were not funded in the 2007/08 budget and will not be funded in the 2008/09 budget, leaving Fremont with a ticking time bomb of unfunded future obligations.

The Redevelopment Fund

The Fremont Redevelopment Agency is a legal entity separate from the city of Fremont, responsible for implementing the Redevelopment Plan in the Redevelopment Areas of Centerville (302 acres), Niles (138 acres), Irvington (473 acres), and the Industrial Area southwest of 880 (3,000 acres). The Industrial Redevelopment Area includes the Auto Mall, Pacific Commons, and the proposed site for the Ballpark Village.

Revenues for the Redevelopment Fund come from tax increment revenues in the Redevelopment Areas. Tax increments are any increases in property tax revenues that occur after the Redevelopment Area was established. The Niles, Centerville, and Irvington areas were all established in 1977 and expanded in 1983. The Industrial Area was established in 1983. Both Pacific Commons and the Auto Mall have been built in the Industrial Redevelopment Area since it was established, so the majority of property taxes they pay goes not to the City's General Fund, but to the Redevelopment Fund, giving it property tax revenues in 2007/08 of $30M, and projected property tax revenues in 2008/09 of $34M. This amounts to 40% of the property tax revenues available to Fremont. If the projected Ballpark Village is built in the Industrial Redevelopment Area, the property tax revenues flowing to the Redevelopment Fund will add up to 50% of the property tax revenue available to Fremont.

With this large revenue stream and no ongoing obligations other than $7M in annual debt payments, it's no surprise that the Redevelopment Fund has accumulated a large surplus. At the beginning of 2007/08. it had a surplus of $28M, and is projected to have a surplus of $29M at the end of 2008/09. This surplus is equal to the total amount that the Redevelopment Fund will spend on housing and redevelopment projects in 2008/09.

Unfortunately, California Redevelopment laws prohibit spending Redevelopment funds to pay for basic services, like police, fire, and road maintenance.

More Money for Redevelopment = Less Money for City Services

The intensive residential development planned for the Redevelopment Areas in Irvington and the Industrial Area will heighten the contrast between the financial health of the Redevelopment Fund and the financial straits of the General Fund. Residential development provides no sales taxes for the General Fund, while increasing demands on the police and fire services that must be paid for from the General Fund. The study commissioned by the Oakland A's projects that the Ballpark Village will generate $15M per year for the Redevelopment Fund, but only $3.6M per year for the General Fund. It is difficult to see how the General Fund will be able to pay for adequate police and fire services given this funding situation.

Perpetual Redevelopment?

Fremont's Redevelopment Plans were initially adopted with a time limit and a cap on the amount of property tax increment monies that could be collected by the Redevelopment Agency. The time limit during which the Industrial Redevelopment Area can collect tax increments is 51 years, and the current cap on the amount of tax increment dollars collected is $400M. Because the tax increment collected from the Industrial Area is so large, the $400M cap will be reached in 2011. The Redevelopment Agency has proposed an amendment to the Redevelopment Plan that would increase the tax cap to $1.1B. This would have a significant negative impact on Fremont's General Fund for many years into the future.

Don't Raise the Cap

Though the Redevelopment Agency supports many worthwhile activities, including affordable housing, improved transportation, and improvements in parks and recreational facilities, Fremont cannot afford to sacrifice basic safety and maintenance services to increase the surplus funds available for redevelopment. That's why I believe we need to determine the specific financial impacts involved in raising the cap on tax increment dollars for the Industrial Redevelopment Area. Unless there is a compelling financial reason to raise the cap, I believe the extra funds should be moved to the City's General Fund by not raising the cap.

References
1. ERA final economic report, 05/08/2007

City of Fremont Web Site