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Friday, April 18, 2008 | One of the most heartrending arguments for dramatic changes to the city of San Diego’s historic preservation program is that its tax discounts for homeowners results in an annual revenue loss to the San Diego Unified School District of nearly $1.5 million.

That sum factored in media reports, propelled damning rhetoric in a county Grand Jury report and became a talking point of Mayor Jerry Sanders in press conferences and on the Roger Hedgecock radio show earlier this month. And so, the city’s Mills Act program looked quite like a fat tax break to homeowners in some of San Diego’s wealthiest neighborhoods at the expense of schoolchildren. And this at a time when schools are preparing to slash staff levels and budgets.

But it’s not true.

The school district didn’t lose $1,486,317, as was claimed in the Grand Jury’s report titled “History Hysteria.” The state reimburses the district to make sure it has a particular level of funding for schools, even if property tax revenue drops, according to the state Department of Finance and San Diego Unified School District. The program does mean losses for the city of about $600,000, for the county, and for several other municipal agencies due to the tax discounts.

The number blunder exemplifies some of the confusion swirling in the debate over one of the few programs for which San Diego leads the state. San Diego has entered into far more Mills Act contracts, more than 800, than any city in the state. The contracts with homeowners of historically designated homes trade a break in property taxes for a homeowner’s promise to keep the facade up to snuff.

Mike Letendre, the current Grand Jury foreman, said the group calculated the loss to the school district by finding out how much property tax revenue was lost under the program, and determining the school district’s share of that, based on data from the County Assessor’s Office. The Grand Jury did not call the school district to find out if it had actually lost money, Letendre said. He said the jury prefers to keep its investigations under wraps.

“When we do our investigations, we like to keep it pretty narrow,” he said. “We don’t want people wondering, ‘Why are they asking that question?’ Then the cat gets out of the bag, if you know what I mean.”

Aside from the school district argument, the Grand Jury and the mayor of San Diego say the city is losing much-needed revenue to Mills Act tax discounts, and the program is run inefficiently. The city has no measure in place to check on homes once they’ve been granted a Mills Act contract, and thus no way to guarantee the homeowners are reinvesting their savings into maintaining their homes. There are fees and rules about what homeowners of such homes can and cannot do to the facades, but little accountability to ensure they’re following the rules.

Where critics of the program have grown incensed over financial losses to schoolchildren that didn’t actually lose any money, their side hasn’t contained all of the confusion and gossip in the debate. Since January, members of the historical preservation side have passed along unproven rumors that the mayor is secretly planning to kill the Mills Act to smooth the way for dense development in older San Diego neighborhoods. Even in the days preceding the Friday workshop, Mills Act contract holders and other historical preservation defenders shared their fear that the mayor planned to end the program outright, which he vehemently denied.

The Mayor’s Office first proposed reforms to the program in early January, after reviewing the program internally for nearly two years. That got the historic preservation community worked up, eliciting allegations that the mayor was trying to pave the way for developers to add density to older neighborhoods. But the city’s goals for reform included many that the historical preservation community agreed with — like instituting better monitoring and inspection and affixing fees to applications to speed up their application process.

After the publication of a San Diego Union-Tribune story in January criticizing the program and the publication of the Grand Jury report in March, Sanders stepped up his promises of reform. While the Grand Jury called for a moratorium on Mills Act contracts, Sanders said he wouldn’t end the program. He has proclaimed his desire to place a cap on the number of Mills Act contracts awarded every year and to restrict the eligibility on which homes can receive the contracts to less-expensive areas.

The Grand Jury report raised questions like “How many examples of Craftsman homes does the City really need?” and painted the program as a tax break for rich La Jollans and Mission Hills residents. Stalwart local historic preservationists saw the criticism from the Grand Jury, from local media, and from the Mayor’s Office as a united attack on a beloved program, and planned to wear red shirts in anger to a workshop Friday with city officials.

Revenues lost are more than made up for in benefit from conserving historical resources, said Jim Mills, a veteran state legislator for whom the Mills Act was named. Mills said he’s always been surprised at how many properties in San Diego received Mills Act discounts, but that he’s not criticizing it.

“You don’t solve any of the city’s current problems by doing anything about the Mills Act,” Mills said recently at a cafe in Coronado, where he’s now retired. “This is like having a sprained ankle when you have terminal cancer.”

Indeed, Andrew Narwold, a University of San Diego economics professor, recently concluded a study that showed increases in value for historically designated homes and for the homes surrounding them, even up to 500 feet away. As the assessed value of those houses increases, the city and other agencies stand to benefit from those higher property taxes.

A state historic preservation officer, Milford Wayne Donaldson, wrote the mayor a letter last week criticizing the ham-handed work of the Grand Jury in attempting to point out problems with the program, which Donaldson said appeared to be “based on outdated and erroneous misconceptions about current practices in historic preservation.”

In an interview, Donaldson said the group appeared, from the report, to be “probably the most unprofessional, uninformed grand jury that I have ever seen in my life on historic preservation.”

As the program has grown in popularity, the escalating workload for the handful of city staff charged with processing the applications has left them unable to execute a key part of the program, checks on homeowners to make sure they’ve kept the house maintained properly.

Sanders emphasized he’s not considering abandoning the Mills Act program, but that the program needs to be adjusted to fit the number of staff the city can sustain. And he said he can’t endorse the continuation of the program without the accompanying checks on the maintenance of the homes in subsequent years.

“I think everybody’s reacting in a bunch of different ways because they don’t know what’s going on,” he said. “Once again we’re doing a balancing act where we’re preserving our heritage but we don’t want to give money away where it shouldn’t be the case.”

He proposed imposing a limit of the number of Mills Act contracts awarded each year, tightening the eligibility requirements for properties receiving the contracts, instating inspection requirements, raising fees for the program and raising the fees paid by homeowners seeking the benefit.

Bruce Coons, executive director of Save Our Heritage Organisation, a local historic preservation lobbying group, said his group agreed some reforms were necessary but that capping Mills Act contracts would be arbitrary.

And arguments and revisions and legal consideration will cost time and money, he said.

“A cap is ridiculous,” Coons said. “We’re going to spend more money arguing about this over the next few months than the program is worth.”

Martin Rosen bought a Craftsman bungalow in Mission Hills in 2005 for $830,000 at the peak of the housing boom in 2004. At first, his property taxes were $9,000. For him and his wife, both government workers, the extra costs of maintaining a historic house — hiring artisans to fix window boxes and fireplace tiles — would be out of reach without the assistance of their Mills Act contract, which they entered last year and saw their property taxes drop to about $2,000.

“This is where I’ve been very upset with the media painting this view of rich people trying to get tax breaks,” he said. “It’s not like we’re trying to bamboozle the city of San Diego out of property taxes.”

Rosen had “always wanted” such a house, and he and his wife were renting across the street when the house came up for sale. They’d actually tried to rent it two months earlier but were beaten by another tenant by a week.

“It just seemed to be kismet when two years later it came up on the market,” he said.

And so the Rosens stretched to get into mortgages to pay for the house, and are now watching their property value decline with the rest of the housing market. The costs of maintaining their home to the standard that first attracted them to it would be impossible without the Mills Act contract, he said.

When the city of San Diego began its Mills Act program in 1996, San Diegans needed convincing that historic preservation was worth it, said Cathy Winterrowd, senior planner in charge of the city’s historical resources program. A small bungalow might have once housed a historic figure, but the economic incentive to tear it down and build a bigger structure was difficult to resist.

And so the City Council decided to adopt a broad policy for historical designation and homeowners’ eligibility for Mills Act contracts. For a long time in San Diego, it’s been nearly assumed that if a house can get historical designation, it can get a Mills Act contract. Elsewhere, the two are not as closely linked.

“But we never went back and looked at the program,” Winterrowd said. “The problem was once it became popular, once it became not like pulling teeth, we never looked at putting parameters on that.”

Like Narwold, Winterrowd emphasized the need to balance a discussion of revenues lost with the benefits gained in preservation.

“We are very proud of the program, that it worked,” she said. “It’s the character that gives those neighborhoods that important quality, and you just can’t quantify that. You don’t see it on the tax bill.”

To be considered historical in San Diego, houses or businesses have to be identified with a significant person or event, reflect special elements of a community’s development, embody architectural or design style particular to an era, be the work of a notable architect or artisan, be on a national or state register of historic places, or comprise a group or neighborhood with special character. The chronological boundary is homes built earlier than 45 years ago, though city staff realizes that the slew of ranch-style homes built in the 1960s may not be the kind of architecture worth preserving.

Winterrowd and Bill Anderson, director of planning in the Mayor’s Office, said they’re looking at a few other tools that might share the burden of historic preservation. Anderson said the city has been too reliant on the Mills Act to preserve historic structures, and might look at creating districts or overlay zones where historic character would be protected and consulted when considering new development.

Nine cities in San Diego County grant Mills Act contracts to houses and commercial properties. Proportionally, Coronado’s 30 Mills Act contracts constitute a slightly larger percentage of its total properties than San Diego’s 886, according to the County Assessor’s Office. Both cities’ Mills Act properties comprise about one-quarter of 1 percent of the total properties in the jurisdiction.

Anderson said the changes are needed partly for fiscal management purposes and also for workload purposes. San Diego is the oldest city in California, but it remained small longer than Los Angeles and San Francisco. Anderson said the fact that the most Mills Act contracts are in San Diego is worth examining.

“It raises the question, do we have more historic resources?” he said. “We have a lot and we’re proud of them. But we need to look at the program.”

Coons worries about what San Diego will look like if Mills Act contracts dwindle, if the future owners of potential historic homes lose the financial motivation to keep their houses in good condition, or to keep them standing at all.

“It’s a huge incentive, and that’s why we have a problem,” he said. “Without this, those buildings won’t be restored and they’ll be under increased pressure for demolition and we’ll lose our historic character in our neighborhoods.”

George Biagi, spokesman for the mayor, said the Mayor’s Office stands corrected about the school district’s revenue loss.

“If the schools get their money back, good for them, but the city does not,” he said. “We’re talking about just good common sense during a time when every dollar counts. To add some structure to a program that needs some structure.”

Please contact Kelly Bennett directly with your thoughts, ideas, personal stories or tips. Or send a letter to the editor.

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