The 2019-20 Budget: Considerations for the Governor's Housing Plan

The 2019-20 Budget: Considerations for the Governor’s Housing Plan GABRIEL PETEK LEGISLATIVE ANALYST FEBRUARY 2019 Summary Housing in California has long been more expensive than most of the rest of the country. Addressing California’s housing crisis is one of the most difficult challenges facing the state. The 2019-20 Governor’s budget includes various proposals aimed at improving the affordability of housing in the state. Specifically, the Governor proposes (1) providing planning and production grants to local governments, (2) expanding the state Low-Income Housing Tax Credit program, (3) establishing a new state housing tax credit program targeting relatively higher-income households, and (4) expanding a loan program for middle-income housing production. The Governor’s housing proposals raise questions about which populations to prioritize. The Legislature will need to decide if it agrees with the Governor’s approach to spread the state’s housing resources among broader income levels—including middle-income households—or whether it prefers to target the state’s resources toward the Californians most in need of housing assistance. Because the need for housing assistance outstrips current resources and there are fewer policy options to address affordability for low-income households, we suggest the Legislature consider prioritizing General Fund resources towards programs that assist low-income households. Given that the Governor’s proposals are largely conceptual at this stage, we highlight key questions the Legislature might want to ask the administration as it considers the merits of the proposals, including: (1) the timeline for awarding new affordable housing funding, (2) plans to fund future maintenance costs associated with affordable housing developments, and (3) the state’s approach for administering the newly proposed state housing tax credit program. Lastly, we note that the enormity of California’s housing challenges suggest that policy makers explore a variety of solutions. While the Governor proposes a few approaches to address the state’s high housing costs, the Legislature could pursue a variety of other tactics that address these and/or other facets of the state’s housing crisis. BACKGROUND significant shortage of housing, particularly within coastal communities. A shortage of housing along California’s Building Less Housing Than People Demand coast means households wishing to live there compete Drives High Housing Costs. Housing in California for limited housing. This competition increases home has long been more expensive than most of the rest of prices and rents. Some people who find California’s the country. While many factors have a role in driving coast unaffordable turn instead to California’s inland California’s high housing costs, the most important is the communities, causing prices there to rise as well. Today, analysis full gutter 2019-20 BUDGET an average California home costs 2.5 times the 20 percent. Some households in California spend national average. California’s average monthly rent is significantly more on housing. Over 1.5 million about 50 percent higher than the rest of the country. low-income renter households in California report High housing costs drive California’s official poverty spending more than half of their income on rate from roughly 13 percent (slightly higher than housing. This is about 11 percent of all California average) to 19 percent (highest in the nation) under households, a higher proportion than in the rest the Census Bureau’s Supplemental Poverty Measure, of the country (about 7 percent). Figure 1 depicts which takes into account food, clothing, shelter, and the share of income spent on rent by income utilities. Though the exact number of new housing quartile. The figure demonstrates that Californians units California needs to build to address housing spend a larger share of their income on rent than affordability is uncertain, the general magnitude is households in the rest of the nation at every income enormous. We summarize our prior research that quartile and households with the lowest income attempted to estimate the magnitude of the state’s face the highest rent burden. housing shortage in the nearby box. Housing Affordability Challenges Even Many Households Have Difficulty Affording Middle-Income Households. Households that Housing in California. Housing costs are the pay more than 30 percent of their incomes on largest component of most households’ spending housing are generally considered cost burdened each month. For homeowners, these costs and may therefore have difficulty affording other include monthly principal and interests payments; necessities, such as food, clothing, transportation, property taxes and homeowner’s insurance; and and medical care. While low-income households household utilities like water, gas, and electricity. are the most likely to be cost burdened, high For renters, housing costs are their monthly rent housing costs, particularly in California’s coastal and any utilities the tenant pays. Despite higher communities, have created affordability challenges incomes relative to the rest of the country, for for middle-income households. About 1 million most California households, higher housing households at or above California median income costs consume a large portion of their income. (households earning above $70,000 annually) in Specifically, the typical California household the state are cost burdened. (In California, around spends about 26 percent of their monthly income 2.5 million low-income households are cost on housing. The typical household in the rest of burdened.) the country, on the other hand, spends about Estimating California’s Housing Shortage In our March 17, 2015 report, California’s High Housing Costs: Causes and Consequences, we estimated the amount of housing that—had it been built between 1980 and 2010—would have kept California’s median housing price from growing faster than the nation’s. We found that on top of the 100,000 to 140,000 housing units typically built in the state each year, the state probably would have to build as many as 100,000 additional units annually—almost exclusively in its coastal communities—to seriously mitigate housing affordability problems. Under this approach, California’s median housing prices still would have grown between 1980 and 2010, but the rate of growth would have been slower and comparable to that in the rest of the country. Under this housing supply scenario, California’s housing prices would have been 80 percent higher than the national median in 2010, instead of reaching twice the national median (as actually occurred). This suggests an aggregate of about 3 million additional housing units would have been needed between 1980 and 2010 to keep California’s housing cost growth in line with cost escalations elsewhere in the nation. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET State Historically Has Figure 1 Provided Housing Assistance to Low-Income Californians. Californians Spend More of Their Income on Housing In recent decades, the state Median Share of Income Spent on Rent by Income Quartile has approached the problem of housing affordability for low-income 70% CA Californians by (1) subsidizing the 60 construction of affordable housing Rest of U.S. and (2) reducing the housing costs 50 for some households. Below, we 40 provide additional information 30 on these government housing programs. 20 Various Government 10 Programs Help Californians Afford Housing. Federal, state, Bottom 2nd 3rd Top and local governments fund a variety of programs aimed at helping Californians, particularly low-income Californians, afford tenants for a portion of a rental unit’s monthly housing. cost. About 400,000 California households receive this type of housing assistance. • Various Programs Support Building New These payments generally cover the portion Affordably Priced Housing. Federal, state, of a rental unit’s monthly cost that exceeds and local governments provide direct financial 30 percent of the household’s income. assistance—typically tax credits, grants, In other cases, local governments have or low-cost loans—to housing developers policies that require property owners charge for the construction of new rental housing. below-market prices and rents. For example, In exchange, developers reserve these some local governments limit how much units for lower-income households. Data landlords can increase rents each year for suggests these programs together have existing tenants. Several California cities have subsidized the new construction of over these rent controls, including Los Angeles, 8,000 rental units annually in the state—or San Francisco, and San Jose. about 7 percent of total public and private housing construction—over the past two Need For Low-Income Housing Assistance decades. In addition to direct subsidies, some Outstrips Resources. About 3.1 million local governments increase the supply of low-income households (who earn 80 percent affordable housing by requiring developers of or less of the median income where they live) market-rate housing to charge below-market rent housing in California, including 2.3 million prices and rents for a portion of the units they very-low-income households (who earn 50 percent build, a policy called “inclusionary housing.” or less of the median income where they live). The • Programs That Help Households Afford amount of resources supporting existing federal, Housing. In addition to constructing new state, and local affordable housing programs is not housing, governments also have taken steps sufficient to assist all of these households. Around to make existing housing more affordable. one-quarter (roughly 800,000) of low-income In some cases, the federal government households live in subsidized affordable housing or makes payments to landlords—known as receive housing vouchers. Because programs that housing vouchers—on behalf of low-income aim to build affordable housing have historically www.lao.ca.gov 3 analysis full gutter 2019-20 BUDGET accounted for only a small share of all new housing $300 million would be allocated to the state’s built each year, they alone have not addressed the existing Low-Income Housing Tax Credit program. state’s housing needs. Moreover, most households The program provides a tax credit to housing receive no help from voucher programs. Those developers for the construction of rental housing. that do often find that it takes several years to get In exchange, developers reserve these units for assistance. Roughly 700,000 households are on low-income households. The household income of waiting lists for housing vouchers, almost twice residents must be below 60 percent of area median the number of vouchers available. The scale of income—$71,000 in San Francisco and $35,000 in these programs—even if greatly increased—could Bakersfield. Given the competitive nature of the tax not meet the magnitude of new housing required credit program, developers often commit to serving to address affordability challenges for low-income households with much lower income to bolster their households in the state. application for the credit. Establishes New State Housing Tax Credit OVERVIEW OF THE Program Targeting Households With Relatively GOVERNOR’S HOUSING PLAN Higher Incomes. The remaining $200 million would be allocated to a new state tax credit program In the 2019-20 January budget, the Governor targeting housing development for households with includes various proposals aimed at improving the relatively higher-income levels. Specifically, the affordability of housing in the state. These proposals proposal targets developments for households with are largely conceptual and no details were incomes between 60 percent and 80 percent of included in the trailer bill legislation released by the area median income. In San Francisco, households administration in early February. We understand the with incomes between $71,000 and $95,000 would administration is developing additional legislation be eligible, while the range for Bakersfield residents related to its housing plan that could provide further would be $35,000 to $47,000. For both the information about the Governor’s vision. Below, we expanded and new state tax credits, the Governor’s describe the Governor’s proposals to date. Figure 2 budget assumes no reduction in revenues due to summarizes the Governor’s key housing proposals the tax credit in 2019-20 or in its multiyear budget in the 2019-20 budget. plan. (While the credits could be awarded in Expands Existing State Low-Income Housing 2019-20, the credit could not be claimed unit the Tax Credit Program. The budget proposes a total housing has been built. The Governor’s budget plan of $500 million one-time General Fund towards reflects the lag between the awarding and claiming housing tax credit programs. Of this amount, of the housing tax credits.) Figure 2 Governor’s 2019‑20 Housing Proposals (In Millions) Proposal Description General Fund Planning grants to local Provides grants to local governments meant to accelerate meeting new short-term $250 governments housing production goals. Production grants to local Provides general purposes funds to local governments as a reward for reaching 500 governments “milestones” in their efforts to meet their short-term housing production goals. State Low-Income Housing Tax Expands existing state Low-Income Housing Tax Credit program. 300 Credit program New state housing tax credit Establishes new state housing tax credit program targeting households with relatively 200 program higher incomes. Mixed-Income Loan Program Expands existing program aimed at increasing middle-income housing production. 500 Total $1,750 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET Expands Program Aimed at Middle-Income property that use creative and streamlined Housing Production. The Governor’s budget approaches to building (for example, using proposes $500 million one-time General Fund to modular construction). The administration expand the California Housing Finance Agency’s indicates that this approach is likely to produce Mixed-Income Loan Program. (This is in addition housing units more quickly and cost-efficiently to the $43 million allocated for the program in than traditional projects because housing the budget with revenue from the recent real developers would not need upfront capital to estate document recording fee.) Like the tax purchase the land and would not need to wait credit program discussed above, this program for local review processes. aims to increase housing production. However, • Making Economic Development Tools this program provides loans to developers for More Attractive. Enhanced Infrastructure housing developments that include housing for Financing Districts (EIFDs) allow local low- to middle-income households. Specifically, the governments to use property tax increment program would assist households with incomes up (the growth in property tax revenue year over to 120 percent of area median income. Households year) to finance a wide variety of projects, with incomes up to $142,000 in San Francisco and including affordable housing. The Governor $70,000 in Bakersfield would be eligible for housing has proposed legislation that encourages the constructed using funding from this program. formation of additional EIFDs by authorizing Provides Grants to Local Governments districts to issue bonds without voter approval. Aimed at Increasing Housing Production. Current law requires EIFD’s to secure approval The Governor proposes $750 million in one-time from 55 percent of voters to issue bonds to General Fund grants to local governments meant to finance major projects, like affordable housing accelerate meeting new housing production goals. developments. Specifically, $250 million would be available to cities and counties to support various activities, like ISSUES FOR conducting planning and making zoning changes, to help them meet new short-term housing production LEGISLATIVE CONSIDERATION goals. As local governments reach these new goals, In this section, we identify issues for the an additional $500 million would be available to Legislature’s consideration as it deliberates the cities and counties for general purposes as a reward Governor’s housing proposals related to the state’s for reaching “milestones” in their efforts to meet housing tax credit programs and the expansion their short-term goals. (We evaluate this proposal in of the Mixed-Income Loan Program. As noted a separate report, The 2019-20 Budget: What Can previously, our findings and recommendations related Be Done to Improve Local Planning For Housing? In to the Governor’s $750 million proposal providing addition, the report suggests a package of changes grants to local governments aimed at increasing to improve the state’s existing long-term planning short-term housing production and revising the process for housing.) state’s long-term planning process can be found in Other Housing Proposals. The Governor also our recent report: The 2019-20 Budget: What Can introduces other proposals intended to remove Be Done to Improve Local Planning For Housing? barriers to affordable housing development. How Should Funding Be Prioritized? • Building Affordable Housing on Excess State Property. The Governor has issued an Housing Proposals Raise Questions executive order directing the state to identify About Which Population to Prioritize. The excess state properties that are suitable number of low-income Californians in need of for affordable and mixed-income housing housing assistance far exceeds the resources development. Ultimately the Governor aims of existing federal, state, and local affordable to solicit affordable housing developers to housing programs. Recent housing assistance build demonstration projects on excess state programs have allocated the majority of funding www.lao.ca.gov 5 analysis full gutter 2019-20 BUDGET to housing targeted at low-income Californians. in recent years to address some barriers to private The Governor’s housing proposals spread limited housing development, opportunities remain for resources to broader income levels, including further improvement. Our aforementioned report middle-income Californians. Specifically, the and March 2015 report, California’s High Housing Governor’s budget includes a total of $700 million Costs: Causes and Consequences, provide towards establishing a new state housing tax credit additional context on these and other impediments program directed at higher-income households to private housing development. than previously targeted and significantly expanding . . . Fewer Options Available for Addressing a loan program that assists development of Housing Affordability Among Low-Income middle-income housing. The Legislature will need Households. While an expansion of California’s to decide if it agrees with the Governor’s approach housing supply would offer widespread benefits to to spread the state’s housing resources among Californians, even with a significant expansion of broader income levels, or whether it prefers to home building many low-income Californians would target the state’s resources toward the Californians still struggle with housing affordability. Figure 3 most in need of housing assistance. Below, we depicts the pervasiveness of affordability challenges provide the Legislature additional context as it among low-income households throughout the considers this decision. state and in the rest of the nation. The figure Various Approaches for Addressing demonstrates that low-income households Affordability Among Middle-Income experience similar levels of rent burden across Households . . . Low-income households can communities—suggesting that insufficient income face challenges affording housing in communities creates housing affordability challenges even across the nation. In contrast, middle-income in low-cost communities that have a sufficient households face housing affordability challenges supply of housing. Because of this, construction only in a limited group of communities where of affordable housing has a key role in helping insufficient supply of housing drives up costs. We low-income households afford housing. observe this effect most acutely in California’s The cost of housing construction makes it coastal urban communities. The higher costs of difficult for affordable housing projects to be housing in these communities can make it difficult financially viable. Without federal, state, and for middle-income households to afford other local subsidies, affordable housing developments necessities, such as food, clothing, transportation, for low-income households likely would not be and medical care. While these households could available. Consequently, focusing government stand to benefit from federal, state, or local housing funding on programs that support these projects assistance programs, other approaches could is the most effective and direct option for assisting help address affordability among middle-income these households. (While housing vouchers provide households. In prior reports, we have found that another option for low-income households to the key remedy to California’s housing challenges access affordable housing, the success of this is a substantial increase in private housing program is limited by the supply of landlords that development, particularly in the state’s coastal are willing to accept vouchers. Evidence suggests urban communities. The Legislature could help that households with a housing voucher have address housing affordability for middle-income trouble finding a landlord willing to accept it.) households by removing the barriers to private Consider Prioritizing Low-Income Households. development. Local resistance, environmental Because the need for housing assistance outstrips protection policies, and competition among resources and low-income households have fewer builders for limited development opportunities options for accessing affordable housing, we all hinder private housing development. Policies suggest the Legislature prioritize General Fund that remove these barriers provide opportunities resources towards programs that assist low-income to improve affordability among middle-income households. As noted earlier, the Legislature could households. While the Legislature has taken steps continue to pursue broader changes that facilitate 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2019-20 BUDGET private housing construction, which would help could be exhausted, so if this funding were address affordability challenges for middle-income available it could help serve as a backstop for households. affordable housing. This is akin to the Safety Net Reserve, which sets aside funds for future Key Implementation Questions costs for the California Work Opportunity and Key Questions Surrounding Housing Proposals Remain. Given Figure 3 the conceptual nature of many of Cost Burden Among Low-Income Renters the Governor’s housing proposals, Pervasive Across Communities we highlight key questions the Share of Low-Income Households Who Spend Legislature might want to ask the More Than 30 Percent of Their Income on Rent administration as it considers the merits of the proposals. Non-Cost Burdened Cost Burdened Households Households San Francisco • What Is the Best Timeline for Kings Awarding New Affordable El Dorado Housing Funding? Even if the Rest of U.S. Legislature ultimately approves Imperial the Governor’s proposals, the Alameda Legislature should consider Placer the best timeline for awarding Napa the new housing funding. Shasta San Mateo On the one hand, releasing Marin the funding right away is Contra Costa consistent with the immediacy Santa Clara of the housing affordability Santa Cruz problem and helps bring relief Fresno to Californians more quickly. San Joaquin On the other hand, the state Stanislaus has approved significant Yolo funding for affordable housing San Luis Obispo Sonoma in recent years, most notably San Bernardino the $3 billion included in Santa Barbara the Veteran and Affordable San Diego Housing Bond Act of 2018. Kern Given the recently authorized Ventura funding, there might be Tulare some benefit to delaying the Sacramento award of this funding until Riverside economic conditions weaken. Butte Solano Development and land costs Los Angeles likely will be cheaper during Humboldt a recession, perhaps making Merced it so that more affordable Orange housing units could be built Madera later than if the resources 20 40 60 80 100% were used immediately. At the same time, other funding sources for development www.lao.ca.gov 7 analysis full gutter 2019-20 BUDGET Responsibility to Kids and Medi-Cal programs affordable housing and helping middle-income in the event of a recession. households afford housing, the Legislature could • How Will the State Address Future pursue a variety of other tactics that address these Maintenance Costs Associated With issues and other facets of the state’s housing crisis. Affordable Housing Developments? For example, the Legislature could examine reforming Given the significant one-time investments local zoning laws, altering the allocation of local taxes in affordable housing in recent years and to incentivize residential housing development, and the proposed one-time investments by streamlining the California Environmental Quality Act. the Governor in 2019-20, the Legislature In recent years, the Legislature has made progress should ask the administration how it plans on some of these fronts. to fund future maintenance costs associated with existing and future affordable housing CONCLUSION developments. Without additional funding to Addressing California’s housing crisis is one preserve affordable housing, the state could of the most difficult challenges facing the state’s see its advancement on affordability diminish policy makers. Millions of Californians struggle to over time. find housing that is both affordable and suits their • How Will the State Administer the New needs. The crisis also is a long time in the making, State Housing Tax Credit Program? the culmination of decades of shortfalls in housing How the state will administer the newly construction. And just as the crisis has taken proposed state housing tax credit program decades to develop, it will take many years or aimed at increasing access to affordable decades to correct. housing for middle-income households is In light of the state’s housing crisis, the Governor’s unclear. We suggest the Legislature engage interest in investing state resources on affordable the administration in a discussion of the housing is commendable. However, we questions (1) allocation process, (2) eligible activities and the expansion of housing assistance programs program guidelines, and (3) expected housing towards broader income levels when other options production achievements. are available to assist middle-income households cope with high housing costs. Furthermore, given Additional Opportunities Remain the conceptual nature of many of the Governor’s The enormity of California’s housing challenges housing proposals, we highlight key questions suggest that policy makers explore a variety of the Legislature should ask the administration as it solutions. While the Governor proposes a few considers the merits of the proposals. approaches for expanding the availability of LAO PUBLICATIONS This report was prepared by Lourdes Morales and reviewed by Brian Uhler 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. 8 LEGISLATIVE ANALYST’S OFFICE