Briefing Report: Setting the Context for Thinking About California’s Affordable Housing Void

Wednesday, April 18, 2012


In a decision released on December 29, 2011, the California Supreme Court ruled unanimously in favor of a state law (ABx1 26) passed last summer that abolished redevelopment agencies (RDAs) and voted 6 to 1 to strike down a companion measure (ABx1 27), that would have allowed the agencies to continue if they shared their revenues. With no legislative action taken to extend the February 1st dissolution timeline, California’s redevelopment agencies have now disbanded.

The court's decision came in response to a lawsuit filed by redevelopment agencies and cities against both the law eliminating redevelopment and the companion measure that would have required revenue sharing.

Redevelopment and affordable housing

Required to set aside not less than 20 percent of their property tax increment revenues for affordable housing projects[i], redevelopment agencies were the largest local funders of affordable housing in California. Now in the wake of a post-redevelopment world, policy makers face the difficult challenge of finding a viable alternative for this funding source.

As discussions begin to take shape, it is important to set a broader context for the affordable housing conversation. Historically, redevelopment agencies have been one of the best local vehicles to fund affordable housing. However, by no means is this model the only, nor necessarily best, method for increasing the stock of affordable housing in California.

Too often the affordable housing debate begins and ends with the premise that there is no affordable housing unless it’s controlled or subsidized by the government.

As lawmakers consider how to replace the revenue stream redevelopment provided for affordable housing projects, the timing may also be right to implement meaningful changes in policy that can aid in making housing more affordable for all segments of California’s society.

How did redevelopment agencies spend funds set aside for affordable housing?

Despite redevelopment’s successful track record of creating affordable housing, the redevelopment model can also lend insight into how a government controlled program can fall short on the “highest and best use” standard regarding the use of taxpayer’s money in creating affordable housing.

In terms of housing production efficiency and effectiveness, it is not clear that any studies exist which compare redevelopment agencies’ results in producing affordable housing with other financing approaches. However, state audits and oversight reports frequently concluded that a significant number of redevelopment agencies took actions that had the effect of reducing their housing program productivity, including:

  • Maintaining large balances of unspent housing funds.

    • According to reports that redevelopment agencies make to the Department of Housing and Community Development, unencumbered balances had grown to $2.2 billion in 2009-10.

  • Using most of their housing funds for planning and administrative costs.

  • Spending housing funds to acquire land for housing, but not building the housing for a decade or longer.

Expanding the conversation.

In the coming weeks and months the Legislature will witness a firestorm of ideas and suggestions offering a variety of ‘fixes’ attempting to fill the gap in funding of affordable housing left in the wake of redevelopment’s dissolution. Indeed several legislative approaches have already been introduced and are making their way through the process.

One of those bills is AB 1585 authored by Speaker John Perez. This measure would keep the money on deposit in a Low and Moderate Income Housing Fund (L&M Fund) with the succeeding housing entity to be spent on activities allowed under the housing provisions of the former Community Redevelopment Law.  This would serve to preserve funds for low to moderate income housing that are otherwise in jeopardy as well as potentially allow some projects abruptly halted by the end of redevelopment, to move forward.

As many agencies still have balances in their Low and Moderate Income Housing Funds, pursuing a policy ideal that allows communities to keep and continue to utilize those funds may have merit and avoids pulling the rug out from under communities in desperate need of those financial resources.

Yet another, more objectionable measure is SB 1220, also known as the Housing Opportunity Market Stabilization (HOMeS) Act. The bill would impose a $75 fee on the recording of real estate documents to provide an ongoing source of funding for the development, acquisition, rehabilitation, and preservation of affordable housing. It is estimated that the measure would generate an average of $700 million per year.

Lawmakers will have the opportunity to discuss and debate these and other legislative proposals, however it is important that the conversation not be limited solely to “revenue stream replacements” for the monies lost for affordable housing through redevelopment.

A Diversified Approach

There is no one silver bullet to solve California’s affordable-housing issue. The barriers to affordable housing are often as diverse as the segments of the population they represent. As such any policy “solution” should be as equally diverse in addressing the number of barriers to building affordable housing rather than only focusing on the creation of another revenue source.

While a valuable tool has been removed from the toolbox, there is still an array of options available to ensure communities can keep and continue to build housing that is affordable to all segments of society. Towards those ends, lawmakers should be careful not to let a focus on financing tools overshadow the benefits of regulatory reform. As the LAO has noted “it may be possible for cities and counties to achieve some of the goals promoted under redevelopment – such as infill urban development, affordable housing, and downtown revitalization – by modifying existing land use of other policies.”

The point to keep in mind is simply this: While economic development is a complex issue, it need not always be conducted via the heavy arm of government. High housing prices are almost always due to government planning rules that prevent homebuilders from meeting the demand for new homes.

Following are several reforms lawmakers can pursue to make housing more affordable without the use of redevelopment:

  • Get out of the way: It is a tenet of Republican policy that local agencies are best positioned to determine the local land use and transportation planning to meet the needs of their constituents. However the underlying premise of many legislative proposals in Sacramento state that in regards to local planning, growth and development, the State knows best. This top-down approach often drives up the cost of housing.

  • Empower Nonprofit Organizations: Nonprofit organizations can help provide valuable opportunity to low- and very low-income community members by helping provide better housing options through a variety of programs.  As such lawmakers should find ways to help empower these non-profit entities to build more housing and play a more active role in the construction of affordable developments.

  • Prevailing Wage: State law requires contractors to pay a local “prevailing wage” to workers on publicly funded construction projects. The state’s formula yields prevailing wages that are almost always the wage rate in union collective-bargaining agreements. This prevailing wage requirement is one of the biggest impediments to the development of affordable housing in California.

    • The additional construction costs attributable to prevailing wages range from 10-32 percent. This includes costs that rise when prevailing wages are required such as interest rates, origination fees, and insurance coverage. Administrative costs also rise because employers must periodically submit certified payroll reports.
  • Regulatory Reform: The most important factor that contributes to excessive home prices in California is the amount of regulation imposed on landowners and developers. In fact a report from the Department of Housing and Urban Development (HUD) found that excessive and often unnecessary regulatory barriers are closing the door to affordable housing for American working families. The report found that outdated, exclusionary and unnecessary regulations continue to block the construction or rehabilitation of affordable housing.

  • Reform CEQA: The California Environmental Quality Act (CEQA) was originally intended to protect the environment and ensure smarter development. While CEQA has resulted in many positive gains, the law has increasingly been abused to delay projects for reasons wholly unrelated to environmental protection.

    To overcome the challenge of frivolous lawsuits that would delay housing opportunities, Senate Republicans put forward a set of common sense reforms last year that would have expedited infill and affordable housing projects. Some of these reforms included awarding attorney’s fees in proportion to the success of plaintiff on their suit; discouraging or limiting document dumping after public comment periods; increasing urban infill development exemptions to better achieve the state’s GHG goals and sustainable strategies. Rather than side with more growth, the Governor rejected any compromise and kept legal and regulatory hurdles in place.

    As the state considers new approaches to fill the affordable housing void left in the wake of redevelopments dissolution, policy makers can and should pursue policies that continue to assist local communities provide for their citizenry while also making housing affordable to all economic segments of the population.

For more information on this report or other Local Government issues, contact Ryan Eisberg, Senate Republican Office of Policy at 916/651-1501.

[i] Legislative Analyst’s Office “The 2012–13 Budget: Unwinding Redevelopment” February 17, 2012.