REGIONAL REPORT : Debate Is Raging on Housing Funds : Redevelopment: Some cities are using money meant to construct low- and moderate-income homes for other projects. Legislators accuse them of ducking their responsibilities.

Three years into a massive redevelopment project, city officials in the affluent community of Poway in north San Diego County found themselves with nearly $2 million generated by the project for low- and moderate-income housing.

But instead of using the money for homes, city officials decided in 1987 to spend some on new curbs, street lights and a sound wall “because these improvements could be shown to directly benefit low- and moderate-income households in the area.”

Legal Aid attorney Caterine A. Rodman was incredulous. She filed suit last summer to challenge the construction, contending that the city stretched the law that governs the money’s use “beyond anything it was ever meant to accomplish.”

“Are my homeless clients supposed to thank the city for giving them a nice curb to sleep on?” she asked.

The two points of view are the heart of a debate in California over the use of hundreds of millions of dollars that have been generated by redevelopment to build low- and moderate-income housing.

On one side, an impatient state Legislature contends that some cities are trying to duck their responsibility to build new homes for those who cannot afford California’s inflated real estate. Through local redevelopment agencies, cities now control the state’s largest source of money for low-cost housing.

On the other side are cities, some financially strapped, that fear low-income housing will attract transients, strain services and worsen crime. Even when they have the money to build housing, many cities are finding other ways to spend the money or are simply leaving it untouched in growing bank accounts.

“There is a reluctance and an outright arrogance on the part of some agencies--and we will not tolerate that,” said Assemblyman Richard Polanco (D-Los Angeles), who sponsored a 1988 law that requires redevelopment agencies to spend their housing money within five years. “It’s a serious problem and it’s going to get more serious with the loss of jobs in two-income households that can no longer pay the mortgage.”

While acknowledging that the state faces serious housing problems, Ken Farfsing, director of Downey’s redevelopment agency, countered that local governments have many competing needs and some of the state’s housing goals are unattainable. “The counties are going broke, the school districts are belly up and the cities are next on the list,” he said.

Regional planners estimate that in Southern California alone as much as $180 million made available for low-cost housing through redevelopment remains unspent. The planners at the Southern California Assn. of Governments say this money could be leveraged to produce about $500-million worth of homes for the poor--more than 6,000 new houses and apartments.

This comes at a time when the planning agency has identified a shortage of about 1 million affordable homes in Southern California. That is expected to increase by another 250,000 homes over the next five years, said Joe Carreras, a SCAG senior planner.

The debate over housing funds revolves around a 1977 state law that requires redevelopment agencies to set aside 20% of the property tax revenue generated by their projects to provide low-cost housing.

The agencies have been set up in more than 100 Southern California communities to rejuvenate blighted neighborhoods and downtowns. After learning that some agencies, in removing blight and upgrading neighborhoods, actually were destroying low-priced units and displacing the poor, state officials decided that taxes raised by the projects ought to help pay for replacements.

Housing advocates said some of the largest redevelopment agencies, with millions of dollars to spend, have made a commendable effort to provide housing.

In the 1988-89 fiscal year, redevelopment projects in Los Angeles, Orange, San Bernardino, Riverside, Imperial and Ventura counties raised $128 million for housing; $80 million of that was spent to rehabilitate 4,100 low-cost units. Most of the money spent--$30 million--went to build 950 units in Los Angeles.

But housing officials say much more needs to be done to provide for an estimated 50,000 homeless people in Southern California.

Housing advocacy groups have filed at least a dozen lawsuits in Southern California in the last two years to force the construction of so-called affordable housing. Many of those suits are still pending.

Most have targeted smaller, more affluent communities where they believe the Legislature’s goal of obtaining low-priced housing is failing.

Even where no suits have been filed, there has been heated controversy. A few examples:

* In the tiny but wealthy desert city of Indian Wells in Riverside County, the council sought to resolve a budget crisis by declaring almost the entire city blighted. It planned to use redevelopment funds to build a championship golf course and other incentives to attract luxury resort hotels.

When the planning was done, city officials said they had no more space to build low-cost housing. So they sought special legislation to allow the housing to be built outside the city limits. But the bill was vetoed by Gov. George Deukmejian, who said there was not sufficient cause to exempt the community from its housing obligation.

Now, City Manager Rod Wood says some of the $4 million in the low-income fund will be used for housing within the city. But officials also plan to lobby Sacramento for a similar bill next year because they still believe the money is better spent elsewhere.

* In the ocean bluff city of Carlsbad in San Diego County, city officials brightened the drive along California 1 with a redevelopment project that put purple, pink and yellow flowers in a new median strip. Then they added old-fashioned street lamps and mosaic brick crosswalks.

Legal Aid charged in a lawsuit last year that the project used about $600,000 in its housing fund as collateral to help finance the $12-million redevelopment project. City officials say they always intended the money for low-income projects, but they settled the case out of court with a promise to use the fund appropriately.

* In Downey, officials have declined to set aside 20% of their redevelopment funds, citing an exemption allowed by state law if the city is helping the poor with a “substantial effort of equivalent value.” Downey council members said the finding was justified because they were already spending a similar amount of federal Community Development Block Grant funds on low-income housing.

The finding is supposed to be reported to the state each year based on a local review to determine whether the city is still making a “substantial effort.” But for at least 10 years after the project began in 1978, state records show, Downey has failed to do so. Nonetheless, city officials recently voted to continue the exemption.

Like Downey, at least 30 Southern California redevelopment agencies have exempted themselves from the 20% requirement by citing their “substantial effort” or two other findings--that the community has no need for low-cost housing or that its housing needs can be met by spending less than 20% of redevelopment’s tax receipts.

Many of the cities targeted by housing advocates still contend that they are planning to resolve their housing problems. And they complain that housing advocates are asking for too much.

“Legal Aid is taking an extreme advocacy position and that doesn’t mean they’re right,” said Vincent F. Biondo Jr., city attorney for Carlsbad. “It’s an ongoing contention between advocates and those who have a broader interest in the best interest of the community.”

In some cities, officials say, housing is only one of many problems, and during financial hard times, other issues like police and education have a higher priority. Even with the redevelopment money, some cities say they cannot afford more low-income housing because it will burden city services like schools and police.

Compared to commercial development, housing “pays about one-third of the local taxes and consumes two-thirds of the services,” SCAG, the regional planning group, wrote in a July study.

Often, redevelopment projects seek to beautify public streets or add facilities such as parking to spur commercial investment and generate more tax money for the city. To add low-income housing at the same time can hurt that effort, some officials maintain.

Ken Emanuels, a Sacramento lobbyist for the California Redevelopment Assn., said the agencies can be torn by the twin objectives. “One doesn’t complement the other,” he said.

SCAG’s Carreras added: “They are not housing development agencies, they are economic development agencies.”

One question that looms large in the debate is just how far redevelopment agencies must go to help their low- and moderate-income residents. Housing advocates, state officials and city councils all have embraced widely differing interpretations of the law.

As adopted by the Legislature in 1977, the housing requirement specifies that agencies set aside 20% of their tax revenue “for the purposes of increasing and improving the community’s supply of low- and moderate-income housing.” It adds that housing is a fundamental purpose of redevelopment and that the “Low- and Moderate-Income Housing Fund be used to the maximum extent possible to defray the costs of production and improvement” of affordable housing.

Critics say the wording is vague. For example, does a new road in a low-income neighborhood qualify as an improvement? And how much of the money has to be used for actual construction of low-income housing? Ultimately, it may take a new law to clarify the issue.

Recently, as state and federal resources for the poor have dwindled and the local housing funds have grown, the Legislature has taken a more aggressive posture toward the proper use of redevelopment money.

In addition to Polanco’s legislation forcing agencies to spend their money more quickly, several other bills have reduced local discretion over how redevelopment funds can be used and directed more of it toward low-cost housing.

In the legislative session last fall, one successful bill targeted cities that were charging too much of their administrative costs to the Low- and Moderate-Income Housing Fund. Two other recently enacted laws are intended to stop cities from spending too much of their money on moderate-income or senior housing at the expense of low-income units.

Another proposal being considered would end the authority of communities to exempt themselves from the housing requirements.

Meanwhile, critics say the state is not doing what it should to enforce laws already on the books.

The Department of Housing and Community Development is responsible for compiling financial reports from every redevelopment agency, but its ability to make sure they meet state law is in dispute.

“We have no authority to evaluate the adequacy of redevelopment set-asides,” said Cathleen Creswell, the state housing department’s manager of planning and review. “The statute requires they submit the information to us, but it doesn’t allow us to do anything with that information.”

With resources becoming more scarce, state lawmakers say they will continue to study ways of ensuring that redevelopment money is addressing the greatest housing needs.

Sen. Marian Bergeson (R-Newport Beach), who chairs the Senate Local Government Committee, said elected officials at all levels will have to examine how government can best provide services like affordable housing.

“Where there are programs designed to promote (low-income housing), they need to work,” she said.