The Yerba Buena Center in San Francisco is one of many projects in the city driven by the redevelopment agency. Courtesy photo.

There are plenty of pat answers to the question of how California, with one of the world's most diverse and vibrant economies, has ended up in such a fiscal mess. Democrats blame Proposition 13, the 1978 measure that capped property taxes. Republicans blame free-spending Democrats in general, and public employee unions in particular. Everyone blames the out-of-control voter initiative system.

Whatever your politics, a look at the budget that Gov. Jerry Brown proposed last week shows how public finance in California has devolved into a virtually incomprehensible game of money-trading among government entities. Sorting that out is crucial to any broader solutions.

Brown's first crack at the structural issues comes under the benign heading of “realignment,” an effort to shift responsibility for various services to local governments from the state.

In some cases the changes are primarily administrative: giving county governments full control over social services they basically run already. In other cases, like a proposed cut in state firefighting resources, they are a straightforward effort to relieve Sacramento of costly services that are more appropriately paid for locally.

More contentious is the proposal to abolish the state's 400-odd local redevelopment agencies. Originally intended to combat urban "blight"--Brown himself relied heavily on redevelopment to revitalize downtown Oakland when he was mayor -- many agencies have evolved into all-purpose vehicles for gaming the state's convoluted public finance system.

The idea behind redevelopment is simple: subsidize investment in blighted areas through bond issues, then pay back the bonds with the increased property tax revenue that results. This so-called tax increment financing is widely used across the country and seems like a classic win-win -- free money created by strategic use of government power.

The trouble is that in California property values increase over long periods of time even without subsidy -- and some of the private investment that's supposed to be jump-started by the government money would have happened anyway. Cities with large redevelopment zones see an ever-increasing portion of property tax revenue flowing to the redevelopment agencies.

Since cities mostly control the redevelopment agencies, this wouldn't much matter, except for one little complication: local property tax collections are distributed by a formula (locked in place by Prop. 13) under which some goes to the city, some goes to school districts and some goes to the county and various “special districts” to pay for things like health care, courts and prisons.

The state, in turn, is required by constitutional mandate to assure a minimum level of financing for schools. So when all of the “tax increment” goes to a redevelopment agency, and the cities and counties are simultaneously prohibited by Prop. 13 from raising property taxes, the state must backfill any shortfalls in school financing.

So redevelopment agencies have become a mechanism for cities to keep a larger share of property tax revenue while squeezing the counties and forcing the state to pay up for schools. That in turn creates an incentive for cities to be expansive in their definition of blight and to extend the life of redevelopment zones that are supposed to disappear once their bonds are paid off.

Brown says eliminating the agencies would both save the state money and free $1.9 billion a year for schools and local services.

The cities and redevelopment agencies are gearing up to fight his plan; among other things, they say it is unconstitutional.

As this battle plays out, there will be earnest claims about the good things that redevelopment has produced in cities like San Francisco, Oakland, San Jose and Emeryville. There will be equally earnest counterclaims about how redevelopment is supporting things like baseball stadiums and suburban auto malls and pitting communities against one another in battles to subsidize business investment.

But the real fight will have little to do with the merits of tax increment financing, and everything to do with how property tax dollars are divvied up. Brown aims to inject logic and transparency into this: If cities want to invest in urban infrastructure or spend on schools, they can choose to -- and his plan also calls for a ballot measure that would make it easier for localities to raise taxes.

If you've gotten this far, you'll probably agree that there is only one rational response to that: Godspeed.