But the housing package – a spate of measures that increase funding for subsidized housing programs and reduce regulations for building certain high-density projects – is unlikely to halt debate about housing policy as home prices remain high.

For instance, median home prices in the Bay Area topped $740,000 last month and topped $700,000 in Orange County – breaking records and raising concerns about a new housing “bubble.” Statewide, median housing prices have topped $469,000, which is driving down homeownership rates and keeping the state’s cost-of-living-based poverty rates above 20 percent.

Virtually everyone, left and right, agrees that the state is facing a crisis. Candidates for the 2018 gubernatorial election, which is starting to heat up, are likely to make housing a core component of their campaigns. So far, Republican candidates John Cox, a San Diego-area businessman, and Assemblyman Travis Allen, a Huntington Beach conservative, have largely called for reducing housing regulations, but have not offered detailed plans.

Democrat John Chiang, currently the state treasurer, has touted his efforts to promote affordable housing programs. Former Los Angeles Mayor Antonio Villaraigosa has focused on bringing back government-directed redevelopment-style low-income housing programs. The partisan approaches are not surprising – and not particularly detailed, at least not yet.

The big surprise so far is that Democratic candidate Gavin Newsom, the current lieutenant governor and leader in the major public-opinion polls, has released a fairly thorough housing blueprint. It suggests that housing will be a top priority in his high-profile campaign – and his proposals embrace the main concepts touted by Democrats and Republicans alike.

“Simply put, we’re experiencing a housing affordability crisis, driven by a simple economic argument,” Newsom argued in a new post on the Medium web site. “California is leading the national recovery but it’s producing far more jobs than homes.” Here’s where the plan makes headlines: He’s calling for the development of 3.5 million new housing units by 2025, which would mean a near quadrupling of the state’s annual housing production.

That’s not an unreasonable number. In the last dozen years, “California has only produced 308 housing units for every 1,000 new residents,” he explained. Given continued population growth, “it’s obvious we’re not on pace to meet that demand.”

Typical of a Democratic official, Newsom called for more funding for affordable housing, including support for the $4 billion housing bond that is going on the November 2018 ballot. It was part of the Legislature’s housing package. Newsom also called for increasing the state’s funding of affordable-housing tax credits from $85 million to $500 million.

Taking a similar line as Chiang and Villaraigosa, Newsom called for replacing local housing programs that had previously been funded through the state’s controversial redevelopment agencies, which were shut down by Gov. Jerry Brown during the 2011 budget act, as a means to help the state plug its then-gaping budget hole. The agencies had siphoned around 13 percent of the state’s general fund budget to subsidize economic-development projects including housing.

But the real news is Newsom’s focus on “regulatory reform and creating new financial incentives for local jurisdictions that produce housing while penalizing those that fall flat.” Under the old redevelopment system, cities did indeed subsidize low-income housing. But the tax-increment financing scheme, by which cities were incentivized to permit tax-generating retail complexes, led to the overall underdevelopment of housing projects, according to various state analyses.

Those problems still exist. “Cities have a perverse incentive not to build housing because retail generates more lucrative sales tax revenue,” Newsom wrote. “The bigger the box, the better, because cities can then use the sales tax for core public services.” He doesn’t offer many details, but Newsom wants to revamp the tax system to “financially reward cities that produce housing and punish those that fail.” He’s reviving the old debate about the “fiscalization of land use,” but there’s little doubt that local incentives have a major impact on housing permits.

Echoing Gov. Brown, Newsom notes that solving the problem will take more than “throwing money” at it. He calls for “implementing regulatory reform and creating new financial incentives for local jurisdictions” – issues that will bolster conservatives who want to see more market-based housing.

Indeed, California builders have argued that they are more than capable of meeting the needs – if only government regulations and local land-use controls were loosened enough to enable them to build more. His plan will annoy conservatives, though, as he also calls for stronger tenant protections as the state streamlines the permitting process.

Most significantly, the Newsom plan – with its myriad details and mixture of elements from right, center and left – is sure to focus the early campaign on this significant issue. An energized housing debate should warm the hearts of all Californians who are concerned that housing prices are soaring beyond the reach of most California families.

Steven Greenhut is a Sacramento-based writer. Write to him at stevengreenhut@gmail.com.

SACRAMENTO – California’s redevelopment agencies were a fixture on the local political landscape for six decades, as they guided development policies and grabbed “tax increment financing” that localities used to pay for infrastructure improvements, downtown renovations and affordable-housing projects. They had some notable successes but generated enormous controversy before Gov. Jerry Brown shuttered them in 2011.

They were designed in the 1940s to fight urban blight. But the agencies were criticized for their use of eminent domain on behalf of private companies; for running up debt without a vote; for the subsidies they ladled out to developers; and for financing big-box stores and auto malls rather than helping inner cities spruce up. The governor ultimately killed them because these agencies had become a drain on the state’s general-fund budget, consuming 12 percent of the budget.

It was a shock to see such a powerful sector dry up, as local agencies morphed into “successor agencies” that had nothing left to do other than pay off existing debt. But the redevelopment industry – the developers, lobbyists, city officials and low-income housing advocates – never really went away. Each year since 2011, lawmakers have proposed and sometimes passed measures that incrementally bring back the redevelopment process.

The way that complex process worked in the past involved city councils essentially creating agencies that target “project areas” for subsidy. The agencies would float debt to fund infrastructure and pay subsidies to developers who build things within those areas. Cities often would subsidize retail projects because of the sales taxes they provided. The gain in the property taxes from the new development was designed to pay off the debt.

But those taxes often come out of the hide of other public services, such as schools and public safety. The state budget had to backfill the losses and the result was the budgetary drain that the governor plugged. But with the state’s fiscal situation having improved markedly since 2011, legislators have been less concerned about any financial impact of revived agencies.

In 2015, the governor signed Assembly Bill 2, which created Enhanced Infrastructure Finance Districts (EIFD) that have many similarities to the old redevelopment project areas. Under the old law, redevelopment officials would simply declare an area blighted before gaining new powers of subsidy and debt funding within that area. Under what some called Redevelopment 2.0, those borrowing and spending powers were limited to infrastructure projects.

To prevent some of the old fiscal abuses, the new EIFD process bans the newly created agencies from unilaterally creating project areas that would steal tax revenue from counties, fire authorities or school districts. Instead, they would have to gain the approval of the other districts, thus providing incentive for a less controversial project. These projects also lacked the affordable-housing requirement that was found in the old redevelopment law.

This year, affordable housing is the Legislature’s pet issue in its final week of session. The governor and Democratic leaders have promised a legislative package to deal with the state’s housing crisis. Lawmakers also are considering Assembly Bill 1568 by Assemblyman Richard Bloom, D-Santa Monica, which would add a housing component to those infrastructure districts. Critics say it’s creeping redevelopment, combined with an expanded ability for local governments to raise taxes.

“Local governments have been without a reliable financing mechanism to invest in economically depressed, transit-rich areas since the demise of redevelopment agencies in 2011,” Bloom said in a Senate Rules Committee analysis. This proposal “provides local jurisdictions with the authority to finance infrastructure and affordable housing using new sales and use taxes in addition to property tax increment within qualifying districts.”

Lawmakers are expected to make technical amendments Friday and then send it to the Senate floor for a vote Monday. The bill requires that the Enhanced Infrastructure Financing Districts use the new taxes to fund affordable housing on infill sites. The measure has passed its committees on a largely party-line vote, with most Democrats favoring it and most Republicans opposing. It’s backed by several planning and local-government organizations, and has a high likelihood of making it to the governor’s desk by the Sept. 15 deadline.

If that’s so, then it will be interesting to see whether Gov. Brown, who fought so hard to eliminate redevelopment agencies, is willing to let them return incrementally, albeit with a different name and somewhat different rules.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Real-estate prices have gotten so high that they stretch family budgets and are a root cause of California’s highest-in-the-nation poverty rates, based on the Census Bureau’s new cost-of-living-adjusted poverty measure.

The situation is so acute it’s drawn the attention of the national media. “A full-fledged housing crisis has gripped California, marked by a severe lack of affordable homes and apartments for middle-class families,” according to a recent New York Times article. Median home prices have hit a “staggering $500,000, twice the national cost.”

The problem is particularly bad in the state’s major metropolitan areas. The median single-family home price in the nine-county San Francisco Bay Area, for instance, has topped $750,000. Public-opinion surveys suggest soaring home prices – rather than job opportunities or the state’s business climate – are the key reason many people are moving to other states.

But while there’s broad agreement that housing affordability is in crisis, there are two schools of thought on how to address it. Democrats are primarily trying to raise taxes and fees to pay for more government-subsidized affordable housing, whereas Republicans want the state to chip away at local governmental barriers to home construction.

Legislators and the governor have made little progress in crafting a detailed housing plan for this legislative session. But there are a handful of bills moving their way through the Capitol that encapsulate their approach. Their high-priority measure, when legislators return to the Capitol late next month, is Senate Bill 2, which would impose fees of $75 to $225 on every real-estate transaction to provide $225 million in annual funding to subsidize developers of low-income housing.

“With a sustainable source of funding in place, more affordable housing developers will take on the risk that comes with development and, in the process, create a reliable pipeline of well-paying construction jobs,” according to the Senate bill analysis.

Senate Bill 3 also takes a similar approach toward building affordable housing. The measure authorizes $3 billion in general-obligation bonds to pay for low-income and transit-oriented housing. It would need to be approved by voters in the November 2018 election. There’s also talk about using proceeds from the cap-and-trade auctions to fund such programs.

One major bill embraces some of the concerns expressed by those who want to encourage market-oriented solutions to the problem. Senate Bill 35, by Sen. Scott Wiener, D-San Francisco, “creates a streamlined, ministerial approval process for development proponents of multi-family housing if the development meets specified requirements and the local government in which the development is located has not produced enough housing units to meet its regional housing needs assessment,” according to the bill summary. The streamlined process would apply where a project meets “objective zoning, affordability, and environmental criteria, and if the projects meet rigorous labor standards,” according to Wiener.

The bill circumvents local planning decisions, but New Urbanists and others say such pre-emption is needed because “not in my back yard” (NIMBY) sentiments among residents and city officials have impeded developers’ ability to add high-density housing in urban areas. The latter point – the requirement that workers receive union wage rates – has been a major sticking point for some conservatives, who believe the mandate could drive up the cost of home construction.

The building industry has neutralized another measure, Assembly Bill 199, which could have required such above-market wage rates for a wide range of privately funded housing projects. AB199 originally would have required “prevailing wage” for any project that involved an agreement with a “state or a political subdivision.”

The building industry argued that “the language was purposely ambiguous and could mean simple tasks, like a new porch, would require union labor,” according to a San Diego Union-Tribune report. The amended version removes that language and now applies only to projects that receive public subsidies.

There’s wide disagreement about whether additional mandates for affordable housing will substantially boost the supply of lower-priced homes. Even if the new subsidies pass, those dollars are a drop in the bucket, given the overall size of the state’s housing market, critics say. And government mandates that builders provide a set number of affordable units as part of their new subdivisions may ramp up the overall costs for market-based units.

The Union-Tribune’s Dan McSwain compared the process to something out of a Kafka novel: “Raise the overall price of market units, thus ensuring that fewer get built, in order to subsidize a handful of poor families … who win a lottery administered by local government agencies, with staffs funded by housing fees that inflate prices.” McSwain blamed high costs partially on city-imposed fees that inflate housing prices by 20 percent or more.

The Legislature isn’t about to tackle that broader problem. Legislators have yet to reform the California Environmental Quality Act and other environmental rules that drag out the approval process for major new developments. For instance, Southern California Public Radio recently reported that the Newhall Ranch development in Los Angeles County finally “is moving forward after recently winning key approvals.”

That Santa Clarita Valley project, which will house 60,000 people, has been in the works since the 1980s and still is a long way from a ground-breaking. It’s been delayed by environmental lawsuits and legal challenges related to its possible impact on climate change.

Southern California Public Radio quoted real-estate experts who say the project will only make a small dent in the region’s housing shortage. But is that the fault of the developer or of policymakers who have ignored the problem so long that adding tens of thousands of new housing units only amounts to adding a few drops in the housing bucket?

The good news is the Legislature and governor are paying attention to a serious problem that has been percolating for years. The question, as always, is whether state officials can craft legislation that will make a real dent in the problem.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Photo Credit: HUD.gov

Rent control is on the march in California, addressing years of leases that have increased to as much as 43 percent over the national average for a one-bedroom apartment.

In the last year, rent has increased 6.5 percent in the state.

Is Rent Control the Answer?

The answer for local politicians is rent control; 16 cities now have such policies, but it had been 30 years since the last time any municipality enacted such a thing until Richmond did so August 6.

The state is one of the most expensive for both buying and renting, and more cities across the U.S., mostly on the coasts, are dealing with rent increases that are taking up to a third of some tenants’ annual salary.

In Richmond, rents have jumped an estimated 30 percent since 2011. To cover the administrative costs of the new rent control program, which begins Sept. 4, a fee will be imposed on all owners of rental properties.

But a review of reports and testimony surrounding a bill pending in the statehouse indicates that fees levied on developers is how we got to the ever-rising rents in the first place.

“Pay to Play”

The first report, which now reads as a road map to rent hike disaster, was released in August 2001 by the state Department of Housing and Community Development. Titled “Pay to play,” the report dug into the residential development fees that are now being noted as the primary cause of rent increases:

“California’s high residential development fees significantly contribute to its high housing costs and prices,” the report stated. “Among our sample of California jurisdictions, fees account for an average of 10 percent of the median price of new single-family homes. Fees account for a lower share of housing prices in more expensive housing markets and a higher share in less expensive markets.”

The report also included a simulation, calculating what would happen if development fees were cut. Using Santa Clara County as an example, a 50 percent reduction in development fees at a 45-unit apartment building would take down monthly rent by 4 percentage points, still allowing for a 10 percent return.

It’s hard for a lot of the public to be sympathetic to developers; over the years they’ve been portrayed as desecrators of open woodlands and the ruin of tradition. At the same time, without them, housing would be a mess. And stopping them, even worse.

Plethora of Fees

There are a dozen fees that can be leveled on developers. They include environmental documentation fees, school mitigation fees and something called a plan check fee, which involves a review of a planned building or development. In Long Beach, that can cost up to “85 percent of Building Permit fee per plan check, but not less than $112.58,” according to city documents. In Roseville, a plan check can involve as many as seven city departments for a multi-family project. If time is money, and it is for most developers, that can be a costly delay.

State Sen. Janet Nguyen, R- Garden Grove, introduced Senate Bill 341 in February that would, in part, address the state’s outsized development fees by requiring a periodic assessment of the various fees being charged by municipalities on developers.

Nguyen said in a May hearing of the Senate Standing Committee on Appropriations that the average local development fee in the state is over $22,000 as opposed to $6,000 in other states. And when adjusted for cost of living, California’s property tax rate is the highest in the U.S.

She noted that the last evaluation of the various development fees was done in 1998, “and it is time to update these numbers to find out what effect these fees have on current housing prices.”

But of course there’s a cost to the proposed periodic assessments; a Department of Finance representative said it would be around $300,000 each time.

If passed, Nguyen’s legislation would make California one of the rare states with a regular assessment of developer fees, said Clancy Mullen, vice president of Austin, Texas-based Duncan Associates, which advises municipalities on impact fees.

“Unless there is a push in a legislature to clamp down, these are not looked at with any regularity in states,” said Mullen, whose group compiled a 2012 survey on developer fees in the U.S. “States may pass an enabling act then tweak it from time to time, but there is no regular review. This would be a first.”

By Chriss Street

There is nothing like the threat of insolvency and a downgrade to junk bond status to motivate traditionally liberal politicians to abandon the environmentalists who heavily fund their campaigns.  Last week, Gov. Jerry Brown of California tossed one of his core campaign-bundling constituencies under-the-bus at a bill-signing event in downtown Los Angeles.

As Brown signed his third measure this year that dramatically narrows the “sustainable” crowd’s ability to use litigation to delay or kill capital projects, the governor said it is time for “big ideas and big projects,” especially ones to “get people working.”  With the pace of public insolvencies and Chapter 9 municipal bankruptcy fillings accelerating across the United States, Brown is the vanguard for high-profile progressives willing to bet that capitalism can pull them back from the precipice of disgrace and potential recall.

For most of Edmund G. “Jerry” Brown Jr.’s first tour as governor from 1975-1983, Gray Davis served as his Chief of Staff. When Brown was campaigning for president in those years, Davis ran California in Brown’s absence.  In 1998, Davis was elected governor by an overwhelming 20 percent margin.

In the next 1,778 days, Davis went on a liberal borrow-and-spend blitz by signing 5,132 bills, including huge pension spikes for public employees, public control of electricity purchasing, substantial increases in school spending and the nation’s first state law requiring automakers to limit auto emissions. He even tried to pass gun control.

But when the economy turned down after 9/11 and the credit rating agencies’ downgrades sent California into a financial crisis, Davis became only the second governor in American history to be recalled by voters.

The recall of Davis sent a scare through politicians across the nation about the need to control spending and become more pro-business.  But with real estate prices skyrocketing, state and local government revenues exploded to the upside.  Spending accelerated even faster than rising revenues as governments borrowed heavily on the hope of an endless rise in property and sales taxes.

Borrowing

When the Great Recession hit in 2008, state and local governments kept borrowing and spending, because they enjoyed huge “stimulus” transfers from the Obama Administration and a two-year lag before tax revenues began to fall.  But In 2011, state and local spending fell for the first time since 1946.  This year, government entities face steep budget deficits and are struggling to pay off debts accumulated over prior years.

The Moody’s and S&P credit rating agencies provided the “investment grade” credit ratings encouraged investors to buy many dicey municipal bonds. Those agencies now fear they may have liability and are actively slashing many ratings.  As ratings levels have hit “junk bond” status, 26 municipalities filed for bankruptcy since 2010.  Three California cities have filed bankruptcy over the last 60 days and Fresno, Duarte, Compton, San Jose and other cities have acknowledged they are in financial crisis.

More ominous, for 60 years municipal debt increased annually, but this year for the first time the municipal bond market will face the “August Cliff”.  This is an event where more money will flow out of government coffers to pay off maturing debt than will come in from expanding new bond sales.  With credit ratings falling and media-driven fear rising about the “Mounting Muni Meltdown,” it is only time before conservative investors become reluctant to put their cash back to work in municipal bonds.

Development

Brown is on a pro-development tear.  He shocked the “greens” last week by joining U.S. Department of the Interior Secretary Ken Salazar in announcing plans to build two massive tunnels under the California Delta at a cost of $23.7 billion to carry water from the Sacramento River to connect to the California Aqueduct to quench Southern California’s thirst for new land development, while generating more property and sales taxes.  The next day he dedicated the 117-mile Sunrise Powerlink transmission line that can carry 1,000 megawatts of energy from the Imperial Valley to San Diego — the first major new power lines to connect to San Diego in more than 25 years.

Brown is painfully aware that California already has the second lowest state municipal bond rating in the United States, and that Moody’s recently warned it plans to issue California a downgrade soon, possibly to junk.  My analysis indicates that approximately 20 percent of cities, 30 percent of redevelopment districts and a number of counties in California may file for bankruptcy in the next two years.

Jerry Brown’s father, former California Gov. Pat Brown, first ran for state Assembly as a Republican in 1928, but lost and later joined the Democratic Party.  Pat Brown’s two terms as governor were marked by working closely with the pro-growth private sector to build the enormous California Aqueduct, enact the California Master Plan for Higher Education and found the California Commission for Economic Development.

Jerry Brown seems to have re-embraced his father’s belief in building infrastructure to support private-sector growth to rehabilitate California.  When Jerry Brown was asked why he has signed three bills this year to limit challenges to major infrastructure projects by the state’s restrictive California Environmental Quality Act, Brown responded, “I’ve never seen a CEQA exemption that I don’t like.”

Chriss Street will be in Studio with Paul Preston on “The Inside Education,” Streaming Live Monday August 6 through Friday August 10, 7-10 PM
Click here to listen each night:  http://www.mysytv.net/kmyclive.html