The 2019-20 Budget: What Can Be Done to Improve Local Planning for Housing?

The 2019-20 Budget: What Can Be Done to Improve Local Planning for Housing? GABRIEL PETEK LEGISLATIVE ANALYST FEBRUARY 2019 Summary California’s cities and counties make most decisions about when, where, and to what extent housing will be built. The state requires cities and counties to carry out certain planning exercises in an attempt to ensure they accommodate needed home building. For a variety of reasons, this state oversight generally has been ineffective. For this reason—and others—too little housing has been built in many California communities, leading to a housing shortage and rising housing costs. The Governor proposes changing state oversight of local housing decisions and proposes offering rewards to cities and counties to encourage them to plan for and approve housing. Specifically, the Governor proposes (1) establishing new short-term housing goals for local communities and providing them funding to help them plan to meet these goals, (2) offering additional funding to communities that make progress toward meeting the short-term goals, (3) revamping the state’s existing process for establishing long-term housing goals for communities, and (4) linking receipt of funds for local streets and roads to communities’ progress toward meeting long-term housing goals. The Governor’s plan to establish state-defined housing goals and have local governments carry out planning to meet these goals is not a new strategy. The state has carried out such a strategy for years with limited results. In addition, past state attempts to offer rewards to encourage communities to approve housing provide little assurance that such an approach will result in significantly more home building. Accordingly, we recommend the Legislature reject the Governor’s proposal for short-term housing production goals and grants to locals. Instead of focusing on the short term, the state may be better off focusing its scarce resources and efforts on boosting home building over the long term. Along those lines, the Governor’s proposal to revamp long-term planning for housing is worthwhile. The Legislature has taken important steps in this areas in recent years. That being said, opportunities to improve the current system remain. We offer a package of changes to long-term planning that we think should be considered: (1) better incorporating measures of housing demand into the calculation of housing goals, (2) lengthening the planning horizon, (3) further enhancing state oversight and enforcement, (4) preempting local land use rules if communities do not faithfully participate in long-term planning, and (5) increasing financial incentives for locals to approve housing. We also discuss the pros and cons of linking transportation funding to local approvals of housing and offer one approach for Legislative consideration. analysis full gutter 2019-20 BUDGET INTRODUCTION As part of the 2019-20 Governor’s Budget, the housing, as well as its limitations and shortfalls; administration proposes changing state oversight (2) describes the Governor’s proposal; (3) provides of local housing decisions and proposes offering recommendations on the parts of the proposal rewards to cities and counties to encourage them aimed at increasing home building in the short to plan for and approve housing. To help the term; and (4) offers a package of changes to Legislature in its consideration of the Governor’s improve the state’s existing long-term planning proposals, this report: (1) explains the existing process for housing. process through which local communities plan for PLANNING FOR NEW HOUSING OFTEN FALLS SHORT California’s cities and counties make most Regional Housing Needs Allocation Process decisions about when, where, and to what extent Defines Each Community’s Fair Share of housing will be built. The state requires cities and Housing. Each community’s fair share of housing is counties to carry out certain planning exercises in determined through a process known as Regional an attempt to ensure they accommodate needed Housing Needs Allocation (RHNA). The RHNA home building. For a variety of reasons, this state process has three main steps: oversight has largely failed. In part because of this, • State Develops Regional Housing Needs too little housing has been built in many California Estimates. To begin the process, the state communities, leading to a housing shortage. department of Housing and Community This housing shortage has, in turn, led to rising Development (HCD) estimates the amount housing costs and declining affordability for many of new housing each of the state’s regions Californians. would need to build to accommodate the Basics of Local Government Planning number of households projected to live there in the future. Household projections are Housing Element Outlines How a Community based on an analysis of demographic trends Will Meet Its Housing Needs. Every city and and population growth estimates from the county in California is required to develop a general state Department of Finance (DOF). Each plan that outlines the community’s vision of future region’s housing needs are grouped into four development. One component of the general plan categories based on the anticipated income is the housing element, which outlines a long-term levels of future households: very-low, low, plan for meeting the community’s existing and moderate, and above-moderate income. projected housing needs. The housing element • Regional Councils of Government Allocate demonstrates how the community plans to Housing Within Each Region. Next, regional accommodate its “fair share” of its region’s housing councils of governments (regional planning needs. To do so, each community establishes organizations governed by elected officials an inventory of sites designated for new housing from the region’s cities and counties) allocate that is sufficient to accommodate its fair share. a share of their region’s projected housing Communities also identify regulatory barriers to need to each city and county. Cities and housing development and propose strategies counties receive separate housing targets for to address those barriers. State law generally very-low, low, moderate, and above-moderate requires cities and counties to update their housing income households. Each council of elements every eight years. government develops its own methodology 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET for allocating housing amongst its cities residents of many communities are reluctant to and counties. State law, however, lays out a accommodate housing growth, fearing that such variety of requirements and standards these growth could bring about changes to the nature of methodologies must meet. their community. Reflecting this reluctance, many • Cities and Counties Incorporate communities have not carried out the housing Their Allocations Into Their Housing element process in a way that truly facilitates Elements. Finally, cities and counties home building. Setting aside this concern, several incorporate their share of the regional other factors would limit how effective the housing allocation into their housing element. element process could be even if communities were Communities typically do so by demonstrating not reluctant to carry it out. We highlight some of how they plan to accommodate their these factors below. projected housing needs in each income Demographic Projections Underestimate category. Housing Demand. Projections of household growth are a poor measure of future housing Zoning Key to Meeting Housing Needs. To demand. These projections are based, in part, carry out the policy goals in their general plans on extrapolations from past trends in population and housing elements, cities and counties enact growth, migration, and household formation. zoning ordinances to define each property’s Past demographic trends fail to capture the full allowable use and form. Use dictates the category extent of demand for housing. Many communities of development that is permitted on the property— in California have significant housing shortages. such as single-family residential, multifamily These shortages mean that households compete residential, or commercial. Form dictates building for limited housing, bidding up home prices and height and bulk, the share of land covered by rents. Households unwilling or unable to pay these buildings, and the distance of buildings from high costs are forced to live somewhere else. neighboring properties and roads. Rules about Several studies have documented that movement form effectively determine how many housing units into an area is lower when housing costs are can be built on a particular site. A site with one- or higher. Consistent with this research, we see that two-story height limits and large setbacks from California’s net out-migration (out-migration minus surrounding properties typically can accommodate in-migration) to other states is higher when housing only single-family homes. Conversely, a site with costs are rising, as shown in Figure 1 (see next height limits over one hundred feet and limited page). Households forced to live somewhere else setbacks can accommodate higher-density housing do not show up in a community’s past demographic such as multistory apartments. By dictating how trends and therefore are not reflected in RHNA many sites housing can be built on and at what calculations. They nonetheless contribute to the densities, zoning controls how much housing a unmet demand for housing and resulting high community can accommodate. Zoning, therefore, housing costs. Ignoring these households when must allow for new housing on a sufficient number estimating housing demand is akin to assuming the of sites and at sufficient densities if a city or county number of people who wanted to go to a popular is to meet its community’s housing needs. sold out concert is equal to the number of people who actually attended. Clearly, more people would Limitations of the have attended if the venue had been bigger and Housing Element Process more tickets had been available. Similarly, more Communities Often Reluctant to Plan people would live in California if more housing were for Housing. The process described above built for them. through which the state dictates housing goals Time Period Covered by Housing Goals Is that local governments incorporate into their Too Short. Decisions that communities make housing elements and zoning rules has many today about housing will shape those communities shortcomings. Perhaps the most significant is that for decades. Once built, most housing remains in www.lao.ca.gov 3 analysis full gutter 2019-20 BUDGET accommodate growth while other Figure 1 residents are not. California's Out-Migration Tends to Identifying Ideal Sites for Track With Its Home Prices Housing Is Difficult. The task of anticipating which particular sites 250,000 2.5 will be profitable for developers to build on in the future is difficult. 200,000 California This is because developers’ Home Price Relative to U.S. decisions about which sites to 2.0 (Right Axis) build on and when are based 150,000 on a multitude of considerations and require detailed analyses 100,000 California of economic, engineering, and 1.5 Net Domestic political information. In addition, Outmigration 50,000 (Left Axis) decisions of landowners can significantly influence which sites are developed. In some 1.0 cases, planners and builders 2000 2005 2010 2015 may agree that certain sites Note: "California Home Price Relative to U.S." equals California median home price would be ideal for new housing divided by U.S. median home price. but landowners may be unwilling to sell their land to home place for decades. Further, once a certain type builders. As we discussed of housing—especially single-family housing— in our 2016 report, Common Claims About becomes the norm in a neighborhood, it becomes Proposition 13, this may be exacerbated by very difficult to add new, different types of housing California’s property tax system which can to the neighborhood. Despite this, the housing encourage landowners to hold onto vacant or element process only requires cities to consider underutilized properties longer than they otherwise how their actions today will accommodate housing would. needs over the next eight years. This can be There Are Practical Limits to State Oversight. problematic. The history of housing development Although HCD reviews each community’s housing in California over the last several decades shows element and inventory of sites, HCD lacks the why. For decades, many cities allowed much of capacity to thoroughly vet the thousands of their land to be built up as relatively low-density potential housing sites identified in communities’ housing, primarily single-family homes. Today, housing elements. Over the course of a few years, given resistance to add more dense housing to HCD staff are tasked with reviewing the housing single-family neighborhoods, many communities elements of the state’s 58 counties and 482 cities. have very limited space on which to accommodate Many housing elements are lengthy and complex new housing. The share of neighborhoods documents. Some housing site inventories contain experiencing any home building has dropped thousands of properties—for example, the city of significantly over time in many cities, as shown Los Angeles’ site inventory contains over 20,000 in Figure 2. This concentration of building in a sites. To carry out this task, HCD historically has minority of neighborhoods limits opportunities received funding in the millions of dollars per year. for builders. It also contributes to tension in In contrast, local planning departments receive over communities that can contribute to resistance $1 billion per year in funding from local sources. to additional home building. Residents of the In addition to having far greater resources, local neighborhoods where housing is being built may planning departments also have more insight into push back wondering why they are being asked to their local communities. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Affordable Housing Funding Insufficient for and local governments. Currently, the amount of Locals to Meet Housing Goals. The housing public funds available for affordable housing falls element process aims to facilitate home build for well short of what would be needed to finance the households of all income levels. A key segment cost of 58,000 affordable homes per year. Just to of this intended housing production is affordable cover the state’s typical share of affordable housing housing for low-income households. The most subsidies (about one-fourth of total costs) likely recent RHNA projects a need for 58,000 new would require an annual, ongoing funding stream low-income affordable homes per year across the of $4 billion to $6 billion. Despite recent increases, state. To build these affordable homes, builders state funding for affordable housing currently totals typically need some type of subsidy because the about $2 billion per year. This mismatch of funding rents and prices low-income households are able makes it unrealistic to expect local communities to pay do not cover builders’ construction costs. to meet their housing goals for lower-income Most often, this subsidy is provided through a households. combination of financial support from federal, state, Figure 2 Home Building Occuring in Fewer Neighborhoods Share of Census Tracts That Built Five or More Homes Per Year Los Angeles Long Beach Santa Monica 100% 80 60 40 20 1950-54 1980-84 2010-14 1950-54 1980-84 2010-14 1950-54 1980-84 2010-14 San Francisco San Jose Sunnyvale 100% 80 60 40 20 1950-54 1980-84 2010-14 1950-54 1980-84 2010-14 1950-54 1980-84 2010-14 www.lao.ca.gov 5 analysis full gutter 2019-20 BUDGET Housing Element Process significantly contributed California’s major shortage Falls Short of Its Goal of home building. As we discussed in California’s High Housing Costs: Causes and Consequences, Evidence of Housing Element Shortfalls. In California has for decades built only about half our 2017 report, Do Communities Adequately Plan as much housing each year as needed to meet for Housing?, we laid out evidence that the housing demand. element process falls well short of its objective of Recent Legislation Likely Will Improve ensuring that communities accommodate needed Outcomes. Over the last two years, the Legislature home building. Communities’ zoning rules often are has enacted several bills aimed at boosting home out of sync with the types of projects developers building through a variety of avenues. Some of desire to build and households desire to live in. this legislation included changes to procedures, Our review found that most housing built in recent standards of review, and enforcement for housing years was on sites that were not identified in a elements. Other legislation reformed the process communities’ housing element. Further, in several through which housing needs are distributed to cities that we examined, most projects required communities within a region. These changes likely a significant increase in the density allowed by will lead to improved outcomes. Nonetheless, local zoning rules. The failure of housing elements opportunities remain to build on recent legislative to identify and adequately zone feasible sites for actions to further improve long-term planning for housing creates a drag on home building. This has housing. GOVERNOR PROPOSES CHANGES TO STATE OVERSIGHT OF LOCAL HOUSING DECISIONS In his 2019-20 budget, the Governor proposed Offer Grants to Local Governments to changes to state oversight of local housing Encourage Them to Meet Short-Term Goals. decisions and proposed to offer rewards to cities The Governor’s budget also proposes making and counties to encourage them to plan for and $500 million General Fund available for cities and approve housing. As of now, these proposals are counties to reward them for reaching “milestones” conceptual. In many cases, the administration has in their efforts to meet their short-term goals. As a signaled its intent to engage stakeholders in the community reaches its milestone, it would receive development of the final details. Below we describe a portion of the $500 million which it could use for the Governor’s proposal to date. any purpose. Develop Short-Term Housing Goals for Cities Rethink Long-Term Housing Goals. The and Counties. The HCD would develop new administration also signals its intent to revamp the “short-term” housing production goals for cities and current housing element and RHNA process. As counties. (The administration has not yet defined part of this effort, the administration would engage what time period these short-term goals would with stakeholders to develop a plan for linking cover.) Locals would then be expected to conduct funding for local streets and roads to communities’ planning and make necessary land use changes progress toward their RHNA goals. to achieve their new short-term goals. To assist locals in doing so, the Governor’s budget proposes allocating $250 million General Fund to cities and counties that could be used for planning activities. 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET PROPOSED SHORT-TERM BUILDING GOALS QUESTIONABLE The Governor’s plan to establish state-defined flexible funding that they could use for infrastructure housing goals and have local governments projects as a reward for permitting housing. These carry out planning to meet these goals is not a programs include: new strategy. The state has carried out such a • Housing-Related Parks Program. This strategy for years via the housing element and program awarded cities and counties a total RHNA processes with only limited success. The of $200 million over multiple years to reward Governor’s plan hopes to encourage locals to them for permitting low-income affordable participate by offering one-time financial rewards. housing during the years 2010 through 2016. Prior state attempts to offer such rewards provide Awarded funds could be used for creation or little assurance that doing so will significantly improvement of parks or recreation facilities. increase communities’ willingness to plan for and • Workforce Housing Reward Program. This approve housing. All in all, it is unclear how the program awarded cities and counties a total Governor’s plan differs significantly from past of $75 million over multiple years to reward strategies that generally have fallen short of their them for permitting low-income affordable goals. housing during the years 2004 through 2006. We recommend the Legislature reject the Awarded funds could be used for a variety of Governor’s proposal for short-term housing infrastructure or facilities projects. production goals and $500 million in incentive • Jobs Housing Balance Incentive Grant funds for cities and counties. Instead of focusing Program. This program awarded a total on the short term, the state may be better off of $25 million to cities and counties that focusing on opportunities to further improve increased the number of housing permits they long-term planning and considering other policy issued (for all income levels) by 12 percent changes aimed at boosting home building over the or more in 2001. Awarded funds could be long term. California’s current housing situation used for a variety of infrastructure or facilities is the culmination of decades of decisions to projects. under-prioritize home building. It will similarly take many years or decades to truly address. Should the Rigorous Evaluation of These Programs Is Legislature reject the Governor’s plan to establish Difficult. The design of these past programs makes short-term housing goals, there would be no need rigorous evaluation of their outcomes difficult if not to provide $250 million to cities and counties for impossible. Ideally, to evaluate these programs’ them to plan to meet these short-term goals. That effects we would compare the outcomes of eligible being said, if the Legislature pursues changes to cities and counties to similar cities and counties the state’s long-term planning policies, it could that were not eligible. All cities and counties, consider providing this funding to cities and however, were potentially eligible for these counties to help implement those changes. programs. This prevents us from using such an approach. We can turn to other evidence, however, Benefit of Offering Rewards to that is less rigorous but still somewhat helpful. This Locals Is Unclear evidence, which we discuss below, suggests the Prior Programs to Reward Home Building. impact of these programs was limited at best. The Governor’s plan hopes to encourage locals No Notable Spike in Affordable Housing to meet their housing goals by offering financial Construction. If the Housing-Related Parks rewards. The state has tried this strategy before. A Program and Workforce Housing Reward Program few state programs have offered cities and counties had significantly affected permitting of affordable www.lao.ca.gov 7 analysis full gutter 2019-20 BUDGET housing, we would expect to see notable spikes do not find this to be the case. Although affordable in permitting in the years covered by these housing approvals between 2010 and 2016 (the programs. This did not occur. This can be seen in period covered by the Housing-Related Parks Figure 3 which shows how many new affordable Program) were down across the state relative to housing units were approved each year under the preceding seven years, cities with the most the Low-Income Housing Tax Credit Program (a disadvantaged neighborhoods (top fifth of all key affordable housing finance source used as a cities) saw a bigger decline—23 percent decrease component of most affordable developments) over compared to a 14 percent decrease in other cities. the past two decades. While this observation does No Increase in Number of Cities With High not allow us to conclude these programs had no Housing Permit Growth. If the Jobs Housing effect on permitting, it suggests that the effect—if Balance Incentive Grant Program had encouraged any—was small. cities to increase permitting in 2001 by at least No Outsized Response From Cities Eligible 12 percent, we would expect to see more for Larger Rewards. The Housing-Related cities with permit growth above 12 percent in Parks Program offered larger rewards for housing 2001 compared to past years. Similarly, we would permitted in “disadvantaged” neighborhoods. If the expect to see fewer cities with permit growth financial reward of this program influenced cities’ below 12 percent. This is because some cities with permitting decisions, we would expect to find that past permit growth slower than 12 percent would cities with more disadvantaged neighborhoods— increase their permit growth to above 12 percent. and therefore more likely to receive the larger Comparing cities’ permit growth in 2000 to growth reward—were more responsive to the program. We in 2001 we find no evidence of an increase in Figure 3 Rewards Did Not Create Notable Spikes in Housing Approvals New Low-Income Affordable Housing Units Approved in California 14,000 12,000 10,000 Historic Average 8,000 6,000 4,000 2,000 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET permitting. As Figure 4 shows, there were fewer to this incentive. As of 2016, only about half of cities with permit growth just above 12 percent jurisdictions were in compliance. (More recently, in 2001 than in 2000. On the flip side, there compliance has increased significantly in response were more cities with permit growth just below to legislation passed in 2017 which heightened the 12 percent in 2001 than in 2000. This evidence consequences for not reporting.) suggests that the program did not encourage $500 Million Is More Than Past Programs, Still cities to increase permitting. Instead, the program Very Small Relative to Size of City and County appears to have provided a windfall benefit to Budgets. One possible reason for the apparent communities that would have increased permitting ineffectiveness of these past programs is that the in 2001 even in the absence of the program. funding made available to cities and counties was Limited Compliance With Housing Element relatively minor compared to the size of city and Procedures. In addition to attempting to increase county budgets. In 2016-17, cities ($27 billion) and permitting, past programs attempted to encourage counties ($49 billion) received $76 billion in general cities and counties to comply with a relatively minor purpose revenue. The $500 million proposed by procedural requirement of the housing element the Governor is more funding than past programs. process—submitting annual progress reports The Governor also proposes to allow more local to HCD—by making compliance a condition of flexibility in spending the funds. This might make eligibility for funding. Many cities did not respond his proposal more successful. On the other hand, Figure 4 No Evidence of Jump in Permitting in 2001 Number of Cities by Housing Permit Growth Rate If the Jobs Housing Balance Program had worked, this gap should have gotten smaller, not larger. 30 2% to 12% 12% to 22% 25 20 15 10 5 2000 2001 www.lao.ca.gov 9 analysis full gutter 2019-20 BUDGET $500 million is still relatively small compared to If Moving Forward With Governor’s Proposal, the size of city and county budgets. Under the Structure Program to Yield Useful Information. Governor’s proposal, most local governments Should the Legislature wish to move forward would receive a reward that would increase their with a plan to offer rewards to locals, we suggest general purpose revenues by a few percent for a structuring the program in a way that would single year. This may not be a sufficient financial facilitate more rigorous evaluation of its outcomes. incentive for local elected officials to take what Specifically, we would suggest: would, in many cases, be very unpopular actions to • Establish a Comparison Group. Within each boost housing. region of the state randomly select half of Offering Rewards in Hopes of Increasing jurisdictions to participate in the program. The Home Building Would Be Risky. Based on the other half would serve as a comparison group above evidence we cannot rule out that these which could be used to judge the outcomes of prior programs had a small positive effect on the participating jurisdictions. While a random home building, but we see no evidence that these selection of participants would mean that programs significantly improved communities’ not all communities would be able to benefit progress toward their RHNA goals. Given this, from the program, such a program structure offering rewards to cities and counties in hopes would provide important information to the of boosting housing production seems like a risky Legislature about the efficacy of offering bet. If the Legislature were to allocate funding financial rewards to local communities. This for rewards, it cannot be sure what effect, if any, information could be used to improve future such a program would have on home building. programs that could offer rewards to all There are alternative uses of these funds which communities. would yield more certain benefits. For example, • Base Rewards on Prospective Increases providing $500 million in subsidies to affordable in Home Building. The program structure housing builders would almost certainly yield should be finalized and participants selected around 5,000 new units of housing. Given the and notified in 2019-20. Rewards should uncertain benefits, we recommend the Legislature then be based on local community actions not appropriate $500 million for one-time rewards in 2020-21 or beyond. This would give for locals. communities time to adjust their behavior in response to the financial incentives. RETHINKING LONG-TERM PLANNING WORTHWHILE While the Governor’s proposal to boost Options to Improve home building goals in the short term may be Long-Term Planning questionable, his plan to revamp state policies on long-term planning is worthwhile. While the Incorporate Measures of Housing Demand Legislature has taken important steps in this area Into Calculation of Housing Goals. Current in recent years, opportunities remain for further demographic-based RHNA projections could improvement. In this section, we offer some ideas be adjusted to account for signs of unmet for improvements in long-term planning. We then housing demand, such as high rents. Our offer comments on the Governor’s proposal to link modeling of California’s housing markets transportation funding to communities’ progress in California’s High Housing Costs: Causes and toward longer-term housing goals. Consequences suggested that there is roughly a one-to-one relationship between the long-term rate of growth in a community’s housing stock and the 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET long-term rate of growth in its home prices and could be to have HCD determine projected housing rents. Consistent with this, one option could be needs for 20 years and have local communities to adjust upward RHNA goals for areas with high develop plans and land use rules to meet those rent growth. This adjustment could be applied needs. Because 20 year projections would be at the first step in the RHNA process, when the imprecise, these projections and housing element state determines housing goals for each region. plans would need to be updated frequently— Specifically, the basic steps of a new process could such as every five years—based on the latest be: demographic and economic information. Under the current process, projections and plans are updated • (1) Determine Household Growth only once at the beginning of the eight year Projections. The HCD would determine planning period. projections of total households for each Conduct Random Audits of Housing Sites county based on DOF demographic Inventories. Determining whether a site is feasible projections. for a certain type of housing requires a detailed • (2) Adjust Household Growth Projections. analysis of relevant economic, engineering, and The household projections from step 1 would political information. It is not practical for HCD to then be adjusted upward for counties where conduct such in-depth reviews of the thousands past rent growth exceeded the national norm. of housing sites slated for development in This adjustment would be proportionate to communities’ housing elements. As a compromise, the extent to which a county’s growth in HCD could conduct in-depth reviews of a subset median rent over the last 20 years exceeded of randomly selected housing element sites. the U.S. average. For example, if a county is Other state agencies use random selection in projected to have 1 million households and enforcement activities—for example, state tax its rents grew 20 percent faster than the U.S., administration agencies randomly select business its adjusted household number would be records for review in conducting an audit. Should 1.2 million. these random in-depth reviews determine that a • (3) Compare Household Projections to Total community did not do its due diligence, HCD could Housing. The adjusted household projections declare the community’s housing element out of from step 2 would then be compared to total compliance. The potential of an audit with negative existing housing units within the county. The findings, coupled with heightened consequences difference between the two would be the for communities being out of compliance as county’s housing need. discussed below, could encourage communities to • (4) Sum County Estimates by Region. The more faithfully participate in the housing element county housing need estimates would then process. be totaled by region and provided to the Preempt Local Zoning Laws if Locals Do Not regional governments for allocation to cities Faithfully Carry Out Long-Term Planning. Cities and counties within each region pursuant to and counties currently have the ultimate authority newly-reformed state laws. to make decisions about zoning and other land use rules. One alternative to this approach is for the Lengthen Planning Period. Lengthening the state to dictate zoning rules. For example, last year planning period covered by the housing element the Legislature considered a bill that would have process could help to avoid communities becoming exempted proposals for new housing near transit locked into land use patterns that could prevent stops from a variety of local zoning rules, such as them from accommodating growth in the future. rules that limit building heights to fewer than five A longer planning window also could encourage stories or create minimum parking requirements. a community to think about how its decisions Proposals for the state to dictate zoning rules on things like infrastructure or climate change historically have met fervent opposition. The adaptation affect its ability to accommodate assignment of land use authority to cities and housing growth well into the future. One option www.lao.ca.gov 11 analysis full gutter 2019-20 BUDGET counties reflects a deeply held desire of the state’s Should Funds Be Tied to residents to control the environment of their Meeting RHNA Targets? communities. Many question how the state could In 2017, the Legislature enacted Chapter 5 make appropriate decisions about their community (SB 1, Beall) which increased state revenue for without intimate knowledge or their community. transportation by about $5 billion per year. Under Such concerns have prevented the state from this funding package, cities and counties receive taking a more active role in zoning decisions. At the around $1.5 billion annually to fund maintenance of same time, restrictive local zoning rules are one of local streets and roads. The Governor’s proposal to the primary causes of the state’s current housing link these distributions for local streets and roads to shortage, arguing for more state involvement. A communities’ progress toward meeting their RHNA possible compromise could be for the state to targets would create a significant, ongoing financial preempt local zoning rules only in cases where incentive for communities to plan for and approve communities are not faithfully participating in the housing. These distributions are the largest funding housing element process. For example, the state stream to cities over which the state has control could develop default zoning rules that would apply and, therefore, present the clearest opportunity for in any community that HCD has determined is out the state to shift the financial incentives faced by of compliance with housing element law. local communities. Such an approach, however, Alter Allocation of Local Taxes. As we presents some problems. discussed in California’s High Housing Costs: Some Factors Are Outside of Local Causes and Consequences, local communities Communities’ Control . . . While cities have face fiscal incentives that are adverse to new significant control over when, where, and how housing. Few city and county revenue sources much housing is built, many other factors also grow proportionately with increases in population. are important. The health of the state’s economy, This can lead to fears that accommodating lending conditions, and decisions by builders and new housing—and therefore new people— landowners are all beyond the control of local will increase demands for public services faster governments but significantly affect home building. than the funding available to pay for those services. While it is reasonable for the state to ask cities This can, in turn, amplify communities’ anxieties and counties to do all they can do to plan for and about allowing new housing. One approach the facilitate a particular amount of home building, Legislature could consider to alleviate this concern holding them entirely accountable for outcomes is to alter the allocation of local government tax that they do not completely control may be revenues—particularly property or sales taxes— unreasonable. so that these allocations better reflect population growth. One option could be to allocate some or . . . So Consider Gauging Performance all of future growth in local property and/or sales Relative to Other Communities. A possible taxes within each county to jurisdictions based on compromise could be to link funding to a their population growth. While such changes could community’s home building performance relative be worthwhile, we caution that they would face to other communities. Gauging a community’s several hurdles. The State Constitution significantly performance relative to its peers instead of an limits the Legislature’s ability to alter the allocation absolute target would account for the impact of local revenues. Also, past attempts to change of changes in economic and other factors that the allocation of local property taxes or sales taxes influence home building across all communities. have faced stiff resistance from local agencies One potential approach could be the following: concerned that such changes would create winners • (1) Reform RHNA Goals. Make the and losers and disrupt the financial health of some improvements to communities’ RHNA goals communities. we discussed above. 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET • (2) Determine Each Community’s Progress example, if the calculation in step 3 says a Toward Their RHNA Targets. Each year, city has achieved twice as much progress calculate each community’s progress as the state average its streets and roads toward their RHNA goals in each income funding would be doubled. Finally, multiply category. Progress could be as measured each community’s newly-adjusted allocation by the percent of the RHNA goal that has by the ratio of total streets and roads funding actually been permitted. Then, average the under existing law to the sum of the newly percentages across all income categories to adjusted allocations for all communities. This obtain a single progress rate. would ensure that the new allocations would • (3) Compare RHNA Progress to Statewide fit within the existing pot of funding. Average. Average the progress rates across Transportation Funding Goals Could Be all cities and counties. Then, calculate Undermined. A second concern with tying each community’s relative performance by transportation funding to housing production is that dividing its progress rate by the statewide doing so could undermine the state’s transportation average. The larger the number, the better a goals. The funding allocation that best facilitates community’s performance. the maintenance of local streets and roads will • (4) Adjust Local Streets and Roads Funding almost certainly be different than the allocation Allocations. Multiply each community’s that would result if funds were tied to housing allocation of streets and roads funding under production. There is no easy way of resolving this existing law by the community’s relative tension. performance calculated in step 3. For www.lao.ca.gov 13 analysis full gutter 2019-20 BUDGET 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET www.lao.ca.gov 15 analysis full gutter 2019-20 BUDGET LAO PUBLICATIONS This report was prepared by Brian Uhler and reviewed by Lourdes Morales and Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 16 LEGISLATIVE ANALYST’S OFFICE