The 2026-27 Budget: Streamlining California’s Affordable Housing Funding System

analysis full 2026-27 BUDGET The 2026-27 Budget: Streamlining California’s Affordable Housing Funding System GABRIEL PETEK | LEGISLATIVE ANALYST | MARCH 2026 SUMMARY Brief Covers Affordable Housing Proposals in the Governor’s Budget. In this brief, we provide background on affordable housing and affordable housing funding programs, describe and analyze the Governor’s budget proposals related to affordable housing funding, and provide recommendations to the Legislature. Developers Generally Must Secure Public Funding for Affordable Housing Projects. Affordable housing, as used in this brief, is housing for low-income people that is deed-restricted for a period of years, with limits on how much occupants have to pay. While affordable housing can include ownership housing, the Governor’s budget (and this brief) focuses on multifamily rental housing. Affordable housing developers generally must secure public funds—often including local, state, and federal sources—for projects to “pencil out.” Recent State Commitment to Simplifying Fragmented Funding System. In California, funding for and administration of state affordable housing programs has long been scattered throughout several entities—including under two separate constitutional officers (the Governor and State Treasurer). Broadly, programs under the Governor provide low-interest, long-term loans for developers, while the State Treasurer administers federal and state tax credit programs that are the foundation of virtually all affordable housing projects. For years, developers seeking funding from these different entities have characterized the process as fragmented and cumbersome, resulting in time delays and additional costs as they navigated different applications, deadlines, and scoring criteria. In response, in recent years the Legislature and Governor have been attempting to create a more coordinated funding system. Most notably, these efforts included a reorganization approved last year which is intended to create within the administration a “one-stop shop” called the Housing Development and Finance Committee (HDFC). Governor’s Budget Seeking to Continue Streamlining Effort. The Governor’s budget includes several proposals intended as next steps in the implementation and streamlining of the state’s affordable housing funding system. Most notably, the Governor proposes to split the Affordable Housing and Sustainable Communities (AHSC) program, which is currently administered by the Strategic Growth Council as an integrated housing-transportation award, and place the affordable housing component with HDFC. The Governor’s budget also proposes to create a special set-aside for HDFC-awarded projects, such that they would automatically receive a certain type of federal tax credits (rather than having to compete with other project proposals for the tax credits). Overall, a Promising Set of Proposals but Opportunities for Improvement. Generally, we find merit with the Governor’s overall approach but, in some cases, identify opportunities for refinement and improvement. As regards AHSC, we recommend the Legislature direct the administration to retain the option for developers to submit a single application for an integrated housing-transportation project (rather than requiring them to submit two separate proposals, which would run contrary to the state’s streamlining efforts). As regards the set-aside proposal, we find that the Governor’s approach could lead in some years to too much being set-aside for HDFC-funded projects, which would result in tying up resources unnecessarily. We recommend an alternative approach that would provide more flexibility. Our recommendations also include reporting requirements to help the Legislature to assess the impact of the proposed reforms. www.lao.ca.gov 1 analysis full 2026-27 BUDGET BACKGROUND In this section, we provide background on housing programs, including the largest and most (1) affordable housing, (2) the state’s major ubiquitous source of funding for affordable housing affordable housing programs and the entities projects—federal tax credits. that administer them, and (3) recent efforts by the state to create a more coordinated affordable KEY AFFORDABLE HOUSING housing system. AGENCIES AND PROGRAMS IN CALIFORNIA OVERVIEW OF AFFORDABLE Historically, funding for and administration HOUSING of state affordable housing programs has been Defining “Affordable Housing.” The term scattered throughout several departments affordable housing is often used in different and entities—including under two separate ways. As used in this brief, it refers to housing constitutional officers (the Governor and State for lower-income people that is deed-restricted Treasurer). Below, we highlight the state’s primary for a period of years (generally 55 years for rental administering entities and programs. units), with limits on how much occupants have to pay. Affordable housing can include rental Under the Governor’s Purview or ownership housing, though most affordable Department of Housing and Community housing programs in California focus on increasing Development (HCD). HCD has several subsidy the supply of multifamily rental housing (which is programs aimed at increasing the supply of the focus of this brief, as well). A “low income” unit affordable multifamily rental housing. HCD’s or property typically targets people with income flagship program is the Multifamily Housing levels between 50 percent to 80 percent of the Program (MHP), which provides long-term, area median income (AMI), whereas “very low low-interest (0.42 percent) loans to developers. income” is between 30 percent and 50 percent of The vast majority of MHP-funded units target AMI. “Extremely low income” is typically defined as households at or below 60 percent of AMI, with below 30 percent AMI. an average award per project of about $10 million. Developers Generally Must Secure Public HCD has smaller, similar-type programs aimed Funds to Finance Affordable Housing Projects. at the special populations of veterans and Unlike with market-rate rental housing, rental farmworkers. (HCD also administers the Infill income that is expected to come from low-income Infrastructure Grant Program, which does not fund housing is typically insufficient on its own for units but provides funding for infrastructure—such affordable housing developers to obtain a private as roads and utilities—that supports higher-density construction loan or mortgage and to fund ongoing affordable housing in locations designated as maintenance and other operations costs. Thus, infill.) MHP and these other programs have been affordable housing developers need public funds funded in recent years primarily by a combination for projects to “pencil out.” Generally, the lower of voter-approved general obligation bonds and the income of the households targeted to live at direct, one-time General Fund support. In recent the property, the deeper the public subsidy that years, HCD awarded more than $500 million is needed by the developer. Affordable housing annually for these programs. However, with the developers often must apply for and assemble gap exception of $120 million one-time General Fund funding from a number of sources, including from provided for MHP in the 2025-26 budget, all bond local governments (such as proceeds from a city or funds and prior General Fund appropriations have county housing bond), state, and federal funding. been awarded for HCD’s multifamily rental housing This process is commonly referred to as building a programs. (HCD plans to release a notice of funding project’s “capital stack.” Below, we discuss state availability for the remaining MHP funding in entities that administer California’s major affordable spring 2026.) 2 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET California Housing and Finance Agency Under the State Treasurer’s Purview (CalHFA). Like MHP, the Mixed-Income Program As described below, the State Treasurer’s (MIP) provides low-interest loans to developers Office has two committees that for decades have for new rental housing development. MIP tends to administered a set of complex funding programs. target households with a somewhat higher AMI than Two Types of Federal Low-Income Housing MHP, supporting units at a mix of incomes between Tax Credits. Federal low-income housing tax 30 percent and up to 120 percent of AMI. MIP credits (known as “LIHTC”) are the foundation of receives about $30 million annually from the state. the capital stack for virtually all affordable rental MIP derives its funding from Chapter 364 of 2017 housing projects. Developers receiving a LIHTC (SB 2, Atkins), which authorizes a recording fee on award generally sell the tax credits to private certain real estate documents. The amount per MIP investors. (Typically, the investor pays somewhat award is relatively small, with average awards of less for the tax credit than the tax credit’s “face about $5 million. value,” such as 80 cents or 90 cents for every $1 Strategic Growth Council (SGC). A key in tax credit benefits they receive.) Developers source of gap funding for developers is the use the resulting equity they receive from the Affordable Housing and Sustainable Communities sale of the tax credits to finance their affordable (AHSC) program. AHSC is funded on an ongoing housing projects. Once the housing project is basis by Greenhouse Gas Reduction Fund, with placed in service (made available to tenants), revenues derived from cap-and-invest (previously investors can claim the tax credits over a ten-year known as cap-and-trade) auction proceeds. period to reduce their taxes. There are “9 percent” The program is statutorily required to receive tax credits and “4 percent” tax credits, with the 20 percent of auction revenue, with at least half 9 percent tax credits generally providing more of AHSC funding for affordable housing. The than double the equity for a developer’s project purpose of AHSC is to fund projects that reduce than a 4 percent tax credit. (The box on the next greenhouse gases by supporting high-density, page provides an example explaining the 9 percent energy-efficient developments and encouraging and 4 percent tax credits and how they support transit and “active transportation” (such as cycling). affordable housing development.) As a result, The affordable housing component of AHSC 9 percent tax credits tend to be used to support provides a low-interest loan similar to HCD’s and construction of developments serving larger shares CalHFA’s programs; the “sustainable communities” of very-low and extremely low-income households. component consists primarily of a grant for transportation adjacent to the housing that is built (such as for bus shelters and bike-path Figure 1 upgrades). Currently, applicants submit a Affordable Housing and single application with a project proposal that Sustainable Communities Awards must integrate housing with transportation. Each funded project can receive up to a Greenhouse Gas Reduction Fund (In Millions) $35 million award for affordable housing and up to $15 million for transportation $900 (sustainable communities). AHSC is 800 700 administered by SGC, which develops the 600 guidelines for the program. HCD currently 500 performs a number of programmatic functions 400 for AHSC, including preparing the notice of 300 funding availability, assisting SGC staff with 200 the review and scoring of applications, and 100 disbursing the award monies to recipients. 2016-17 2017-18 2018-19 2019-20 2020-212021-22 2022-23 2023-24 2024-25 Figure 1 shows total award amounts since the first year of the program. www.lao.ca.gov 3 analysis full 2026-27 BUDGET Understanding the 9 Percent and 4 Percent Tax Credits How did the 9 percent and 4 percent tax credits get their name and how much subsidy can they provide for an affordable housing project? Below, we provide an explanation using two simplified examples. A 9 Percent Tax Credit Can Generate a Roughly 70 Percent Project Subsidy… Suppose a developer wanted to build a small multifamily rental complex targeting low-income households with a cost of construction of $10 million. A federal 9 percent credit would generate a stream of tax credits equal to $900,000 (9 percent x $10 million) per year for ten years, or $9 million in total. On average, though, the developer may only receive about 80 cents in equity per $1 in tax credits sold to investors. As a result, the total actual equity for the $10 million project would be roughly $7 million (80 percent x $9 million). Effectively, then, a 9 percent tax credit may provide a 70 percent subsidy for this hypothetical project. …While a 4 Percent Credit Can Result in a Roughly 30 Percent Subsidy. A 4 percent tax credit would work in a similar way for a $10 million project. The difference is that a 4 percent tax credit would generate a stream of tax credits equal to $400,000 (4 percent x $10 million) per year for ten years, or $4 million in total. Assuming the developer receives 80 cents per $1 sold to investors, the total actual equity for the $10 million project would be roughly $3 million (80 percent x $4 million), resulting in a 30 percent subsidy for the project. Figure 2 shows the value of the federal 9 percent Figure 2 and 4 percent tax credits provided to California since 2017. Since 2017, California Has Benefited From $40 Billion in Federal Tax Credits Different Processes to Obtain Two Types of Federal Tax Credits. For a 9 percent tax credit, Federal Tax Credits Awarded to Developersa developers apply directly to the State Treasurer’s Tax (In Millions) Credit Allocation Committee (TCAC). TCAC reviews 9 Percent 4 Percent Total and scores applications and makes awards to winning proposals based on the amount of 9 percent credits 2017 $971 $1,249 $2,220 2018 1,090 2,144 3,234 made available to the state by the federal government. 2019 1,115 2,416 3,531 (States receive an allotment of 9 percent credits 2020 2,102 3,017 5,119 each year based primarily on their population size.) 2021 1,914 3,590 5,504 In contrast, federal rules require developers to finance 2022 1,177 2,801 3,979 2023 1,106 3,870 4,976 a portion of their affordable housing project with 2024 1,139 4,355 5,494 “private activity bonds” as a condition of receiving 2025 1,180 6,399 7,580 the 4 percent tax credit. Each year, the federal Totals $11,795 $29,841 $41,636 government sets a cap—also based primarily on a For each year, reflects the total amount of tax credits awarded to projects, given that a stream of tax credits is generated over a ten-year population size—on the amount of private activity period. bonds each state is entitled to. (Please see the nearby box for more information about private activity bonds.) project meet specified requirements.) Both TCAC and Thus, developers seeking a 4 percent tax credit CDLAC make awards two or three times per year. apply to the State Treasurer’s Office’s California Debt Upon receiving an award, developers generally are Limit Allocation Committee (CDLAC) for their private expected to begin construction within 180 days. As a activity bonds. TCAC then pairs the 4 percent tax result, CDLAC and TCAC typically are the last stops credits with the private activity bonds that developers for developers in building their capital stack. receive from CDLAC. (This pairing of 4 percent tax State Tax Credits. California has its own tax credits is automatic as long as the developer and credit programs for low-income rental housing. 4 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET Explaining Private Activity Bonds Federal Government Allows for Tax-Exempt Bonds for Certain Private Projects. Unlike bonds issued by public entities for purely public purposes (like a highway or city hall), bonds issued by public entities for facilities that will be privately owned generally are not tax-exempt for investors. Federal law, however, allows for state and local agencies to issue a certain amount of tax-exempt bonds for certain types of private activities described below. (Investors generally are willing to accept a lower interest rate on bonds for which they do not have to pay taxes on interest earned, thus decreasing developers’ financing costs.) Federal Law Permits Bonds to be Used for Specified Housing and Nonhousing Purposes. Federal law specifies the types of projects that may use tax-exempt private activity bonds. These projects are deemed as having a “public benefit” and consist of both housing— most notably low-income rental housing—and nonhousing purposes (including industrial development, waste treatment, desalination plants, and certain other purposes). The federal government sets a cap on the amount of private activity bonds that can be issued in each state per year. The cap is based on population size. In California, CDLAC then allocates the allowed bonds among housing and nonhousing purposes. Affordable Housing Developers Receiving Private Activity Bonds May Be Entitled to 4 Percent Tax Credits. By themselves, private activity bonds are not a particularly advantageous financing tool for affordable housing developers, since developers must still pay debt service on the bonds (albeit at a lower rate than otherwise given that the bonds are tax exempt). However, federal law makes affordable housing developers eligible for an automatic award of federal 4 percent tax credits (assuming they meet all other eligibility requirements for the tax credits) if they finance at least 25 percent of their construction costs with private activity bonds. (This is a recent reduction from a 50 percent requirement that was in place for many years.) In this way, there is technically an unlimited supply of federal 4 percent tax credits for states—limited only by the federal cap on private activity bonds. There are two state tax credit programs: “statutory” Tax credits have a delayed effect on state revenues and “discretionary.” The nearly 40-year old statutory since investors cannot claim tax credits until units state credit, which is continuously appropriated, are built and placed in service, which can take is adjusted by inflation each year. In 2025-26, several years. the amount of the statutory state credit is about Governance Structures for TCAC and $130 million. Under TCAC regulations, most of the CDLAC. Figure 3 on the next page shows that statutory state tax credits are paired with projects both TCAC and CDLAC have the State Treasurer, receiving a federal 9 percent tax credit; a smaller State Controller, and Director of the Department proportion of the statutory state tax credits are of Finance as voting members. (The Legislature paired with projects receiving a federal 4 percent does not have representation on either committee.) tax credit. In addition, every year since 2019-20, TCAC and CDLAC have about 80 positions and the Legislature has approved $500 million in 20 positions, respectively, and are led by an discretionary (also known as “enhanced”) tax executive director. (Currently, one person serves credits. Statute requires all discretionary state tax as executive director for both committees.) Both credits to be paired with projects receiving a federal committees are funded by fees paid by developers, 4 percent tax credit. (Because the annual amount with no state General Fund support. of state tax credits is so much less than federal tax credits, only a subset of projects receiving a federal tax credit also receive a state tax credit.) www.lao.ca.gov 5 analysis full 2026-27 BUDGET This is because under H.R. 1, developers will Figure 3 only need half of the private activity bonds they Somewhat Different Voting previously needed to access the 4 percent tax Memberships of TCAC and CDLAC credits (25 percent versus 50 percent of financing). TCACa CDLAC So the amount of private activity bonds does not change under H.R. 1, but the effect is that they are State Treasurer   stretched up to twice as far—thus increasing the State Controller   amount of tax credits. Director of DOF   RECENT EFFORTS TO SIMPLIFY CalHFA representative  —b STATE’S AFFORDABLE HOUSING HCD representative  —b SYSTEM a Committee also includes two nonvoting members: a city representative In some cases, a developer may only need tax and a county representative. b Designated as a nonvoting member of CDLAC. credits for an affordable housing project to pencil TCAC = Tax Credit Allocation Committee; CDLAC = California Debt out. (These typically are for projects intended to Limit Allocation Committee; DOF = Department of Finance; house tenants with higher AMI, who will be paying CalHFA = California Housing Finance Agency; and HCD = Department of Housing and Community Development. higher rents.) Often, though, funding from the tax credits alone (or tax credits with some local funding) CDLAC Decides on Share of Private Activity is insufficient, such that developers also need to Bonds to Go to Affordable Housing. The federal seek gap funding from state programs. For years, government specifies allowable uses of private developers have characterized this multistep activity bonds. Each state may decide to use them process as fragmented, siloed, and cumbersome for housing or nonhousing purposes. Nonhousing to navigate. Developers often describe significant can include industrial development projects, time and difficulty completing multiple applications waste treatment, and certain other types of private for multiple state entities with different time projects. CDLAC engages in an annual process to lines and scoring criteria. Additionally, because gauge demand for private activity bonds. CDLAC of the different competitions, developers may does so by surveying developers each fall on the secure an award from one program but not from projects they have in the pipeline and their intent another—thus impeding their ability to secure full to seek private activity bonds in the following year. project funding. In response, the Legislature has CDLAC uses this “demand survey” to help set the been seeking to simplify the process and move amount of private activity bonds to make available toward a more coordinated funding system, as by region and for certain other project pools. Then, described below. each January (the beginning of the new round), Set-Aside of Tax Credits for MIP. To create a CDLAC board members formally vote on how much more seamless connection between tax credits and in private activity bonds to designate for affordable CalHFA’s MIP, statute requires TCAC to set aside housing and other allowable purposes of the bonds. up to $200 million of the discretionary state tax H.R. 1. Expands Significantly the Availability credits to pair with projects receiving an MIP award. of Federal Tax Credits. H.R. 1, which was Additionally, CDLAC has a practice of setting aside passed by Congress and signed by the President private activity bonds for MIP awards (to allow in July 2025, permanently increases the size of for pairing with 4 percent tax credits). Each year, the 9 percent tax credit program by 12 percent. CalHFA informs TCAC and CDLAC of its estimated For California, this means about $150 million need for state tax credits and private activity bonds more in 9 percent tax credit authority per year. based on its MIP funding amount. More importantly, H.R. 1 has the effect of up to doubling the availability of 4 percent tax credits per year—potentially by up to $4 billion annually. 6 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET “AB 519” Workgroup. Chapter 742 of 2023 Recent Reorganization Approved a (AB 519, Schiavo) established the Affordable New Agency… Throughout 2025-26 budget Housing Finance Workgroup. Chapter 742 requires deliberations, the administration pursued a HCD, CalHFA, and CDLAC/TCAC to convene, reorganization of the Business, Consumer study, and make recommendations on the creation Services, and Housing Agency through a statutorily of a common application for affordable housing defined executive branch reorganization process. developers and a coordinated review process The primary stated intent of the reorganization of applications. The initial report is due to the was to (1) have an agency focused on housing and Legislature by July 2026. In addition, Chapter 742 homelessness and (2) create a “one-stop shop” requires the workgroup to, by January 2026, for developers seeking state funding for affordable consider a number of issues in the development housing. In July 2025, the Legislature completed of a potential common application and review its review of the administration’s plan and provided process, including technical requirements that funding for the reorganization. Figure 4 shows would be needed and the “optimal means of the entities that will be part of the new agency, application completion” by affordable housing effective July 2026. developers. The workgroup recently released a draft update that considers two options for doing so, including creating an integrated process for receiving a state subsidy and tax credit. Figure 4 New Housing and Homelessness Agency Will Oversee Five Entities California Housing and Homelessness Agency Department of Housing California Housing Housing Development California Interagency Civil Rights Department and Community Development Finance Agency and Finance Committee Council on Homelessness www.lao.ca.gov 7 analysis full 2026-27 BUDGET …And a New Housing Finance Figure 5 Entity Within That Agency. As part of the reorganization, the 2025-26 budget Reorganization Only Addressed Part of the Problem also included initial funding and position authority for a new Housing Development and Finance Committee (HDFC). Led by an Governor State Treasurer executive director, HDFC will be charged with centralizing administration of various HCD/HDFC CalHFA SGC CDLAC/TCAC affordable housing programs currently administered at separate departments. Not Addressed by Figure 5 shows that last year’s Reorganization reorganization plan addressed part, but not all, of the problem: CalHFA’s subsidy HCD = Department of Housing and Community Development; HDFC = Housing Development and Finance Committee; CalHFA = California Housing Finance Agency; SGC = Strategic Growth Council; program (MIP) is to join HDFC (along with CDLAC = California Debt Limit Allocation Committee; and TCAC = Tax Credit Allocation Committee. various multifamily rental housing programs at HCD), but the reorganization did not address how to coordinate with AHSC and the tax credit programs. PROPOSAL Governor’s budget includes several proposals— actions included in the 2025-26 Budget Act, involving HDFC, AHSC, and private activity bonds HDFC would have a total General Fund budget in and their accompanying federal tax credits— 2026-27 of $5.3 million in support of 21 positions. intended as next steps in the streamlining of the (As discussed below, the Governor’s budget also state’s affordable housing funding system, as transfers eight special fund-supported positions described below. from HCD to HDFC as part of the administration’s AHSC proposal.) Overall, the six positions would HDFC be charged with laying the foundation for a newly Transfers Positions From HCD to HDFC. coordinated funding system at HDFC, including The Governor’s budget proposes to transfer creating a single application for multifamily six positions (and an accompanying $1.5 million rental housing programs; developing a common General Fund) from HCD to HDFC as the next step application portal; and, where appropriate, aligning in building capacity at the envisioned new one-stop program rules, scoring, and awards processes. shop. Figure 6 shows that, when combined with Figure 6 Approved and Proposed Funding and Positions for New HDFCa General Fund (Dollars in Thousands) 2026-27 Funding Positions Transferred Transferred From HCD New Total From HCD New Total 2025-26 Budget Act $1,552 $2,253 $3,805 9 6 15 January budget proposal 1,491 — $1,491 6 — 6 Totals $3,043 $2,253 $5,296 15 6 21 a Table does not include eight special fund-supported positions that are separately proposed to be transferred to HDFC from HCD for administration of the Affordable Housing and Sustainable Communities program. HDFC = Housing Development and Finance Committee and HCD = Department of Housing and Community Development. 8 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET AHSC The Governor’s budget provides $396 million in Greenhouse Gas Reduction Funds to HDFC (from Separates AHSC Into Two Discrete Programs. what otherwise would have been in SGC’s budget) The Governor’s budget also includes a proposal in 2026-27, along with eight program-administration for HDFC to administer the affordable housing positions currently at HCD. component of AHSC, with SGC to administer the sustainable communities component. Beginning Private Activity Bonds and Tax Credits in 2026-27, developers would no longer be Specifies in Statute the Amount of Private required to submit an application for projects Activity Bonds for Affordable Housing. Proposed that integrate both aspects (affordable housing trailer bill language requires CDLAC, through and transportation). Rather, they could choose to January 1, 2037, to dedicate at least 90 percent of pursue a project that just builds affordable housing, total private activity bonds each year for affordable for example, or just transportation infrastructure. In rental housing. The language allows CDLAC, conversations with the administration, staff indicate by a unanimous vote, to reduce the amount to that this approach would provide more flexibility 80 percent in a given year and to reallocate unused to developers to address local needs. Some areas private activity bonds for nonhousing purposes. and neighborhoods of the state, for example, The trailer bill declares that establishing a private might be in need of affordable housing but do not activity bond “floor” for affordable housing “reflects necessarily need transportation upgrades (or vice the statewide priority” to support affordable versa). In addition, administration staff indicate housing in the state and to “provide certainty in a future desire to incorporate AHSC’s affordable long-term planning and investment” for developers. housing component as part of a single application for HDFC awards. Designates at Least Half of Affordable Housing Private Activity Bonds for Splits Funding for Each Component Based HDFC-Awarded Projects. This proposal would on Historical Award Amounts. The Governor have the effect of creating a special set-aside proposes to provide the affordable housing program of federal 4 percent tax credits exclusively for under HDFC with 70 percent of total AHSC funding, projects receiving HDFC gap funding (which would with sustainable communities receiving 30 percent. include MHP and the affordable housing part of This is consistent with past breakouts of funding for AHSC, among other subsidy programs to be under the two components of AHSC. Figure 7 shows the HDFC’s purview). Under the proposal, CDLAC Governor’s proposed multiyear expenditure plan and TCAC would retain control of the allocation of for each program. (Actual amounts for each will private activity bonds and tax credits, respectively, depend on total revenues received from auctions.) but the allocations would be “ministerial” (nondiscretionary) Figure 7 decisions. The stated intent of Governor’s Budget Proposes to Split AHSC Into Two the Governor’s proposal is to eliminate developers’ need to Discrete Awards have to compete for tax credits Proposed Expenditure Plan (In Millions) after receiving an HDFC award— Affordable Sustainable Percent for thereby fast-tracking their capital Housinga Communitiesb Total Affordable Housing stack assembly and accelerating 2026-27 $396 $170 $566 70% time-to-construction. The other half 2027-28 435 186 621 70 (or less) of private activity bonds— 2028-29 475 204 679 70 and thus tax credits—would be 2029-30 516 221 737 70 part of a “general” pool that could Totals $1,822 $781 $2,603 70% be used by CDLAC and TCAC for a To be administered by Housing Development and Finance Committee. b To be administered by Strategic Growth Council. affordable housing projects that do AHSC = Affordable Housing and Sustainable Communities. not need or seek an HDFC subsidy. www.lao.ca.gov 9 analysis full 2026-27 BUDGET If, by November 1 of each year, Figure 8 there are private activity bonds that have not been allocated to (claimed Summary of Proposal to Create a from) the special set-aside HDFC Set-Aside for HDFC-Awarded Projects pool, proposed trailer bill language would allow CDLAC to re-designate Private Activity Bonds them for the general pool. Figure 8 summarizes the proposals for the private activity bonds and Affordable Otherª Rental Housing 10% 4 percent tax credit set-aside. 90% Administration Indicates Intent to Leverage Existing Half or More: Remainder: Processes to Identify a Special Set-Aside General Pool Set-Aside Amount Each Year. for HDFC-Awarded (Non-HDFC-Awarded The proposed trailer bill states Projects Projects) that CDLAC “shall reserve at least Federal 4% Tax Creditsb one-half” of private activity bonds for HDFC-awarded projects but a May include industrial development and other specified projects by private developers. Under federal law, those projects are not eligible for 4 percent tax credits. does not specify the process for b Allocation of private activity bonds and federal 4 percent tax credits would be ministerial (nondiscretionary) for HDFC-awarded projects in the special set-aside. determining a certain percentage HDFC = Housing Development and Finance Committee. each year. In conversations with the administration, staff a certain set-aside amount (such as 50 percent or envision identifying a set-aside 60 percent) of private activity bonds (already set amount using processes that build off current aside for affordable housing). practices. Broadly, this would consist of (1) CDLAC Proposal Is Silent on Federal 9 Percent Tax conducting an annual survey of developers about Credits and State Tax Credits. The Governor’s projects in their funding pipeline and intent to seek proposal only creates a set-aside for the private private activity bonds in the coming year (CDLAC’s activity bonds—and thus the federal 4 percent existing “demand survey”), (2) discussions between credits. The administration does not address the CDLAC and HDFC about the latter’s assessment question of what role the federal 9 percent tax of resources it will have available to make awards credits as well as the state tax credits would play in (similar to a process already used to estimate MIP’s the proposed new funding model, including whether set-aside), and (3) an estimate of what proportion or not federal 9 percent and state tax credits of overall private activity bonds will be needed also should be set-aside for projects receiving an for HDFC projects. Based on this information, HDFC award. HDFC would then formally request to CDLAC ASSESSMENT Below, we provide our assessment of the HDFC Governor’s proposals. In general, we find merit Proposed Resources Transfer to HDFC Is in with the Governor’s overall approach, though in Line With Legislative Direction. The Governor’s some cases identify opportunities for refinement budget is consistent with the policy goals of the and improvement. reorganization approved by the Legislature in July 2025, which is to re-envision and implement a more integrated and accessible funding system. 10 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET The administration’s overall plan is for HDFC to (70 percent) for affordable housing and up to begin making awards beginning in 2026-27 but with $15 million (30 percent) for transportation. Yet, there HCD and CalHFA staff providing support over the is no inherent policy rationale for that 70/30 split. next year or two as HDFC engages in this redesign The Legislature may find that the need and demand work and builds internal capacity. for affordable housing is different from what is proposed by the Governor and that proportionally AHSC more (or less) funding should be provided for Merit to Moving Affordable Housing Awards that purpose. to HDFC… Overall, having AHSC’s affordable Private Activity Bonds and Tax Credits housing program at HDFC has the potential to simplify how developers build their capital stack. Merit to Setting in Statute the Proportion of This is because, rather than having programs Private Activity Bonds for Affordable Housing. spread across SGC and other state entities, The amount of private activity bonds CDLAC developers would be able to apply for funding at has designated for affordable rental housing in one place—HDFC. Also, HCD currently plays a key recent years has varied somewhat—from a high role in the review and implementation of AHSC, of 93 percent to a low of 86 percent. We find that so it already has “in house” knowledge of the designating the vast majority of private activity program. Further, the intent is that this knowledge bonds for this purpose, as CDLAC has done, is and program capacity will be transmitted to HDFC consistent with good public policy given (1) the through the proposed position transfers from state’s priority to support more affordable housing HCD to HDFC. and that (2) doing so unlocks federal funding via …Though, for Some Projects, Approach the 4 percent tax credits. (The federal government Would Run Contrary to Streamlining Goals. does not allow 4 percent tax credits to be used We concur with the administration’s point that for nonhousing projects receiving private activity no longer requiring applications to include both bonds.) Setting the percentage in statute, as affordable housing and transportation components proposed in the Governor’s budget, thus would would provide more flexibility to developers to ensure that CDLAC’s decisions remain consistent address local needs. In some cases, though, with legislative priorities. In addition, the trailer bill developers may wish to obtain funding to language allows CDLAC some flexibility to reduce undertake both components for a given project. the percentage split should future demand for Yet, under the Governor’s proposal, in such cases private activity bonds among affordable-housing the developer would have to begin applying in developers change for some reason in a given year. two places: HDFC for affordable housing and Promising Idea of Providing Tax Credits for SGC for the transportation component—with no HDFC-Approved Projects… The Governor’s guarantee the project would be approved by both proposed concept of automatically awarding private entities. Such an approach, though, would work activity bonds and tax credits to HDFC-funded at cross-purposes with the state’s policy goals projects has the potential to address an important of (1) reducing the number of places and times a and fundamental problem in the state’s affordable developer must apply and (2) no longer potentially housing funding system: developers having to apply having scenarios in which a project is approved by to different state entities for project funding, with one state entity but rejected by another. no assurance that awards will be made consistently Unclear Whether Proposed Funding Split to fund projects. An advantage of the Governor’s Is the “Right” One. The Governor’s proposal proposal is that it builds on a similar process to provide 70 percent of total AHSC funds for already in place for MIP. Another advantage is that affordable housing (and 30 percent for the it allows CDLAC and TCAC to retain their authority transportation aspect) is based on the historical as technical administrators of a highly complex split. This split, in turn, is based on SGC’s funding mechanism (private activity bonds and practice of awarding up to $35 million per project tax credits), rather than attempt to transfer those www.lao.ca.gov 11 analysis full 2026-27 BUDGET responsibilities to an entity under the Governor toward the end of the year (when CDLAC would (HDFC) with no such experience or expertise. be permitted to transfer unallocated resources to In addition, the Governor’s approach would retain the general pool for other developers to access). the ability of developers who are not seeking gap In such cases, this rigid approach would result in funding through HDFC to apply directly to the State resources being tied up unnecessarily for most of Treasurer’s committees. the year, undercutting the state’s priority of quickly …Though the Set-Aside Amount Needed Will deploying funds for developers to build projects. Vary and Could Fall Below Half in Some Years. State Would Benefit From Leveraging We do have some concerns with the Governor’s Federal 9 Percent and State Tax Credits Too. proposal to designate in statute a specific amount The Governor’s budget is in some ways incomplete of private activity bonds (half or more) that must be in that it is silent on the treatment of federal set-aside for HDFC projects. In reality, the amount 9 percent tax credits and state tax credits for the of such bonds (and thus 4 percent tax credits) proposed set-aside pool. Because 9 percent tax needed for HDFC projects will be dependent on credits generally deliver more than twice the equity several factors—some which cannot be anticipated of 4 percent credits, they can be a powerful tool for at this time—and could vary widely. Were a large supporting deeply affordable housing projects (that statewide general obligation bond to pass, for is, projects targeting people with the lowest income example, state funding for MHP (and likely other levels). The state tax credits, meanwhile, serve gap funding programs) would increase. As a result, to further enhance equity available for a subset many projects would receive an HDFC award, and of projects receiving federal tax credits so they, thus there would be an increase in calls on the too, tend to support deeply affordable projects. proposed set-aside pool. In years of leaner supplies A significant benefit of using 9 percent tax credits of state subsidies, however, demand for the for HDFC-awarded projects is that the state would set-aside pool will be much less and a mandatory have the ability to “stretch out” its MHP (and other 50 percent set-aside for HDFC projects could gap funding) among more projects than otherwise. be too high. This prospect becomes even more Governor’s Budget Lacks a Way to Assess likely due to the up-to-doubling of the availability the Impact of Proposed Policy Change. of federal 4 percent tax credits resulting from The Governor’s stated goal for his proposals is H.R. 1. The drawback of the Governor’s proposed to reduce time and cost for developers to build language is that, even if it were clear ahead of time their capital stack and construct projects. Yet, as to CDLAC and HDFC that the 50 percent set-aside currently proposed, the Legislature would have no was going to be too high in a particular year, private way to assess the extent to which policy changes activity bonds could not be re-allocated until have that desired impact. 12 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET RECOMMENDATIONS Below, we provide our recommendations on the Reject Minimum Statutory Set-Aside Governor’s proposals. Requirement; Direct HDFC and TCAC to Prioritize Federal 9 Percent and State Tax HDFC Credits for HDFC-Awarded Projects. To avoid Recommend Approval. We recommend situations in which too much is set-aside in a given the Legislature approve the proposal to transfer year, we recommend the Legislature approve positions and resources from HCD to HDFC, which the concept of a set-aside for HDFC-awarded is consistent the purpose of the reorganization. projects but remove the proposed language about the minimum having to be at least 50 percent. AHSC Instead, the amount should be determined through Approve Proposal, With Two Modifications. the above-mentioned process envisioned by First, we recommend the Legislature direct the the administration. (Alternatively, the Legislature administration to retain an option for developers could choose to specify a minimum set-aside but to submit a single application for an integrated allow CDLAC to reallocate unused private activity housing-transportation project (rather than requiring bonds to the general pool earlier in the year—that them to split up their project into a proposal for is, before November 1.) In estimating the need for HDFC and a separate proposal for SGC). Under tax credits in the special set-aside pool, we also this approach, a joint committee of HDFC and recommend the Legislature direct HDFC and TCAC SGC staff could review and decide on integrated to prioritize awarding 9 percent federal tax credits project proposals. Second, we recommend the and state tax credits to HDFC-funded projects Legislature require the administration to report back targeting the lowest-income residents. Finally, at the end of the 2026-27 award cycle on demand we recommend that HDFC, CDLAC, and TCAC for (1) affordable housing and (2) sustainable report to the Legislature each year on where they communities—including the number of applications landed in this process of deciding on allocations received for each type, funding requested, and for the private activity bonds and each of the tax qualified applications denied due to insufficient credit programs. funding. The Legislature could use the data to help Add a Reporting Requirement. We decide whether to modify the funding amounts recommend the Legislature require HDFC to report provided for the two components. periodically to the Legislature on the outcomes of the streamlined funding system. To do so, Private Activity Bonds and Tax Credits the administration could compare like-projects Approve the Designation of Private Activity under the old funding system to new ones to Bonds for Affordable Housing. We recommend identify (1) changes in the total time developers the Legislature approve the proposal to set in take to assemble funding for their projects and statute a 90 percent floor (with the administration’s begin construction and (2) the estimated savings language that provides CDLAC some flexibility in to developers. Having a study would allow the given years) for private activity bonds designated Legislature to assess the extent to which the for affordable rental housing. streamlining efforts are having the desired effect. www.lao.ca.gov 13 analysis full 2026-27 BUDGET 14 LEGISLATIVE ANALYST’S OFFICE analysis full 2026-27 BUDGET www.lao.ca.gov 15 analysis full 2026-27 BUDGET LAO PUBLICATIONS This report was prepared by Paul Steenhausen, and reviewed by Ginni Bella Navarre 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, California 95814. 16 LEGISLATIVE ANALYST’S OFFICE