Proposing new directions for housing policy in California

Photo via Wikimedia Commons by Robert Campbell

Prepared by Gary Gerbrandt • CP 230/Professor Carol Galante • November 12, 2018

Executive Summary

The aim of this report is to propose new directions for California’s housing policy. While government and private actors have been making small differences, the time has come for radical new solutions in conjunction with existing strategies. The novel policy recommendations that follow have been designed with California’s unique constraints in mind, and attempt to minimize financial impacts to all stakeholders while maximizing production, preservation, and protection. They are also likely to require less political capital to achieve than other marquee solutions (such as replacing Costa-Hawkins, imposing new taxes and fees, or further expanding bond authority).

While maintaining its robust current set of policies and programs, this report recommends that California should pursue the three following actions to increase production, drive innovation in and funding for housing, and protect vulnerable tenants:

Establish a state-level density appeals board to allow for prioritization of housing production goals and state policies over exclusionary practices at a regional level.
Increase the corporate charitable deduction limit for nonpolitical housing-related causes to generate new funding for production, preservation, and protection.
Develop a standard statewide residential rental agreement for all future leases, to be filed with a centralized state registry.

Furthermore, this report recommends that the Newsom administration advocate on behalf of two market-driven federal LIHTC reforms: first, locking the “4-percent” credit rate at its stated figure; and second, adjusting allocations from the current per capita formula to a new produced units per capita formula. In tandem, these changes will support investors to drive affordable unit production nationwide, while achieving equity of outcomes across states.

Detailed Recommendations: State Policies

Recommendation 1: State-Level Density Appeals Board

One of the most intractable villains in Californian housing policy is the unbelievable gap between housing needed and housing produced. There are many reasons to blame. Building here is expensive, but there remains a large gap between construction cost and sales price.¹ CEQA and the rest of the state’s regulatory burden introduce significant delays and uncertainty in approvals, which has begun to be addressed by laws like 2017’s SB 35. Cities are resistant to new housing construction, and use zoning to force it away; this, too, is being addressed by laws like AB 72. The gap yawns widest, though, in the coastal cities, which the California LAO argues need to add almost 100,000 housing units per year on top of the 100-140,000 units being built in the state “to seriously mitigate [California’s] problems with housing affordability.”²

Having recently moved to California from Toronto, I remain agape at the starkest difference between the Bay and my home—Toronto is much denser, with developers building enormous condo towers, missing-middle buildings, and purpose-built rental towers citywide.³ Locals celebrate the cranes dotting Oakland’s skyline as a sign the tides are turning, but while Oakland permitted 4,284 units in 2017,⁴ Toronto had 61,337 condo units alone under construction at the same time in May 2018.⁵ Increasing density feels as though it’s the one lever that hasn’t been pulled to start addressing the crisis (at least, not outside of the so-called “East Cut”). This report’s first recommendation borrows from an Ontario institution to increase density across California: establishing a state-level developer appeals board for density management.

The Ontario Municipal Board was a product of a very different system from California’s. Ontario’s political structure means that cities are subordinate to provincial policies. Developers frustrated by a municipal planning decision could appeal to the provincially-appointed board, which became known for overruling local council decisions on projects that were typically larger than cities wanted. In a CBC retrospective on the occasion of its demise this past spring, its many failings are made clear: in addition to its overrulings, it had wide and unclear jurisdiction, ordinary citizens had no means to participate, it would not consider what local councils had wanted, and it was blamed by cities for eroding their negotiating positions with developers.⁶

However, there’s something to be said for a similar model, implemented more fairly. The idea behind the OMB was to ensure cities didn’t exercise disproportionate power over planning, taking it out of line with broader provincial goals. With state-local priority differences as they are in California, and density being a potent solution to the state’s housing crisis (as illustrated by Toronto’s construction pace), the state should study the establishment of a state-level planning review board to be given limited jurisdiction to grant density bonuses to projects across California. Instead of the flawed system of city-level housing elements (with a place like Beverly Hills building 3 houses and meeting its obligations[mfnThomas Fuller and Conor Dougherty, “California Today: The Beverly Hills Affordable Housing Loophole,” The New York Times (New York, NY), Feb. 5, 2018, https://www.nytimes.com/2018/02/05/us/california-today-beverly-hills-affordable-housing.html.[/mfn]), this could allow management at the regional level, with a mandate to ensure that each meets its Regional Housing Needs Assessment production totals at the prescribed affordability levels. Unlike the OMB, it would serve only the task of lifting built density, proportionate to affordability, to be in line with state goals. Reasonable limits (such as impact on utility capacity) would need to be applied.

This board would likely attract support from the developer community, given the history of its OMB roots, and the fact that with density often comes feasibility. Its intent would be to further grease the skids of production, and they would be its producers. It is in line with the expedited approval logic in SB 35, only it would be empowered to transcend local zoning restrictions. The costs of such a move, however, would be significant—cities of all sizes, especially those with a long track record of exclusionary zoning, would be vehemently opposed to such a clear existential threat to their conservationism. Others may fear a slippery-slope erosion of local jurisdiction, even if they support the stated aim. There may be constitutional law challenges, likely citing the Euclid decision, arguing for cities’ rights to zoning as a police power. Community-based organizations may raise (valid) displacement and gentrification and cultural preservation critiques. Program design should reflect these concerns.

Recommendation 2: Corporate Tax Deductions for Housing-Related Causes

In 2017, the Bay Area added 3 housing units for every 10 jobs it created.⁷ There is an uneven sharing of burden in the state, where the housing crisis is fought primarily by government and advocacy groups, with little direct participation from corporations. Employers should not be penalized for acting as economic engines. The jobs they create, particularly in the Bay Area, have influenced the housing market because they are economically positive. But their economic power can be marshalled in the fight against the housing crisis in the state.

With Prop 13 in place, innovative strategies are required to engage corporations as a source of funding in the fight. With the passage of the Trump administration’s signature 2017 tax reform law, taxpayers can now deduct up to 60% of adjusted gross income, up from 50%, on their itemized federal taxes. California has not matched this change; only 50% of giving is deductible at the state level. This report recommends taking advantage of this difference to get corporations to join the coalition against the housing crisis. California should allow corporations to claim up to 60% of adjusted gross income in charitable deductions, proportionate to the amount, up to 10%, of income they dedicate to nonpolitical housing-related causes.⁸

This would open the doors to a concerted effort by corporations, at a cost to California of only 9 cents per dollar donated (given the state’s corporate tax rate of 8.84%).⁹ To attract a meaningful infusion of cash, Governor-Elect Newsom and key administration figures should pursue donation announcements from major state employers, particularly the tech companies so loudly criticized for their roles in the Bay Area housing crisis. This program could provide a new, if relatively small, funding source for production, preservation, and protection—a very rough estimate suggests a maximum of $300M per year.¹⁰ It could also engage companies on in-kind donations, potentially including worker hours, to address the crisis.

Defining eligible causes—such as direct funding to affordable housing developments via soft loans, operating expenses for housing advocacy groups, or pro bono architecture and legal work for housing—would help to guide investments strategically. Opposition to the relatively small change would likely be limited. Progressives may see it as a giveaway to corporations, or they may welcome the support at a relatively low cost. Conservatives would likely support the tax relief. States generally adjust their tax policies in line with federal guidance, so this would hardly be radical. The greatest obstacle to success may be willingness on the part of corporations to participate—which could be bolstered by publicity and partnerships between the state and donor corporations to show their desire to fight the good fight.

Recommendation 3: Standardized and Centrally Registered Rental Agreements

Protecting renters is a critical goal of any affordable housing policy regime. In 2016, about 80% of renter households made less than $75,000 per year nationwide, compared to about 50% of owner households.¹¹ Simply put, renting is a more affordable way to participate in the housing market—it doesn’t require the equity input of ownership, and it is critical for younger and older people. And renting is common, with 46% of Californian households renting their homes.¹² But surprisingly, there is remarkably little data available on what rents people are actually paying. It is challenging to glean detailed insights on renting in California, with no central system to track rent costs for policy-making, compliance, or research purposes.

At the same time, tenants may not be fully aware of their rights. In Ontario, as part of a raft of housing affordability and justice reforms, the government implemented a standard lease for most rental transactions as of May 2018. This targeted unenforceable conditions written into rental agreements, such as prohibitions on pets and last-minute eviction rights.¹³ The standard lease is available in multiple languages, and clearly describes rights for both tenants and landlords, providing space for allowable conditions and basic demographic information about the lease and its parties.¹⁴ California can invest in protecting its renters from predatory behavior by pursuing a similar approach.

These problems could be solved with a two-birds, one-stone approach. This report’s third recommendation is to implement a standard rental agreement for California, available in a variety of languages, with tenant and landlord rights made clear. These rental agreements should be processed digitally and held in a registry administered by the state government. This provides two key benefits: an enforcement mechanism to allow compliance audits of agreements, and a data-harvesting mechanism to build an accurate sense of the statewide and local rental markets over time. The state could include relevant demographic questions in the agreement to maximize the research value of the provided data.

Tenant groups, housing advocacy organizations, and academics have discussed both standard agreements and rent registries as valuable parts of a housing policy toolkit. Tenants would be likely to benefit more than landlords, who may oppose this initiative for its effects on existing power dynamics in renting. There would also be obvious privacy concerns regarding the rent registry, which could be addressed by selective aggregation for rent reporting and mindful research use. However, standard agreements are a meaningful way to give renter households an understanding of their rights—and a registry thereof would be incredibly valuable in better diagnosing the situation of renters across California.

Detailed Recommendations: Federal Advocacy

LIHTC is one of the most successful affordable-housing production and preservation programs in the history of American federal policy. Proposed as a market-driven solution by a conservative reform panel convened by President Reagan, a bipartisan group in Congress established it in 1986 as America shifted away from directly funding housing production. It persists to this day, with additional reforms—including a structural shift allowing unit income averaging—coming into force as recently as March 2018, with two Republican majorities in Congress. As the Newsom administration develops its approach to working with the federal government, finding areas to advocate for policy changes from a positive, mutual perspective will be important. Strengthening the LIHTC program, to increase stability for its investors and state administrators, is a shining example of an easy negotiation between California and Washington in a time without many.

Two key changes to LIHTC should be the focus of Californian advocacy. First, stabilizing the market for “4-percent” tax credits will address the needs of corporate LIHTC investors, affordable housing activists, and states like California in dire need of more affordable housing. As it stands, the “4-percent” credits—so named to represent the amount of eligible housing costs which can be sold as tax credits to investor partners—fluctuate, with a maximum of 4% of costs. In July 2018, this floating rate meant that these credits were only worth 3.29% of costs. While fixing the rate for these credits at 4% would mean lower tax revenues, bipartisan bills co-sponsored by Orrin Hatch (R-UT) and Carlos Curbelo (R-FL) sought to change this in 2018. Lowering taxes, particularly for corporate investors who purchase LIHTCs, is a priority of both the Trump administration and the Republican Party; stabilizing the credit level would create a more attractive and rational market for investors; and states, housing advocates, and individuals would benefit from the increase in housing production.

A less likely change, with greater impact to California, would be a shift in allocation formula for LIHTC. Today, credits are allocated proportionate to state population. This means that California gets the largest share of credits, but, per data shared by Glaeser and Gyourko, those credits produced or preserved about one-third the amount of affordable units per person in Louisiana, from 1987 to 2005.¹⁵ (See Appendix 1 for calculations on outcomes by state.) Analysis of these numbers suggests that there is a wide range of units produced per million people, with little consistency among larger and smaller states. This is likely attributable to the cost of production.¹⁶ Arguing for a change in the allocation formula is a defensible push, given the wide discrepancies across states. This would require the definition of a standard target; for comparison’s sake, the population-weighted average from 1987 to 2005 was 5,063 units per million residents, or 280 units per state per year. High-cost states, like California—ranked 48th, at 3,196—would benefit from any more equitable funding allocation.

To pre-empt fears of Trumpian Democrat-resistance, there are no obvious political barriers to this recommendation—while the states which would get more credits allocated to them are bluer than others, several purple states (including Arizona, Nevada, Colorado, and Pennsylvania) would benefit similarly in proportion to California. It’s fairer, simply. It incurs no additional cost, nor does it raise any taxes. However, the number of total units produced or preserved nationally may fall somewhat, and increased cash transfers to states like California could draw partisan opposition. Both present strong, politically fungible criticisms, and as such, most advocacy energy should be spent on fixing the 4% tax credit rate.

Appendix 1: LIHTC units per million residents by state, 2005

The table below shows an initial set of calculations, to be reperformed by the incoming administration with more recent data, which demonstrates the significant gaps between population and number of units produced or preserved with LIHTC funding. This uses population and unit data from Glaeser and Gyourko (Table 5-5).¹⁷ They are ranked by the number of units produced and preserved per capita, which is expressed as a ratio to the 2005 population. California is ranked 48th.

State	Population (2005)	Units (1987-2005)	Units per million 2005 residents	Rank (units per million 2005 residents)	Rank (2005 population)
D.C.	550,521	6,150	11,171	1	50
Louisiana	4,523,628	40,204	8,888	2	24
South Dakota	775,933	6,366	8,204	3	46
Mississippi	2,921,088	23,643	8,094	4	31
North Dakota	636,677	5,132	8,061	5	48
Oklahoma	3,547,884	26,627	7,505	6	28
Kansas	2,744,687	20,545	7,485	7	33
Vermont	623,050	4,498	7,219	8	49
Delaware	843,524	6,080	7,208	9	45
Texas	22,859,968	159,296	6,968	10	2
Wyoming	509,294	3,349	6,576	11	51
Virginia	7,567,465	48,775	6,445	12	12
Arkansas	2,779,154	17,545	6,313	13	32
Ohio	11,464,042	72,039	6,284	14	7
Kentucky	4,173,405	25,992	6,228	15	26
Alabama	4,557,808	28,187	6,184	16	23
Wisconsin	5,536,201	33,220	6,001	17	20
Iowa	2,966,334	17,792	5,998	18	30
South Carolina	4,255,083	25,065	5,891	19	25
Georgia	9,072,576	53,065	5,849	20	9
Rhode Island	1,076,189	6,277	5,833	21	43
Nebraska	1,758,787	10,151	5,772	22	38
Michigan	10,120,860	57,497	5,681	23	8
Maryland	5,600,388	31,631	5,648	24	19
Tennessee	5,962,959	33,290	5,583	25	16
Missouri	5,800,310	32,318	5,572	26	18
West Virginia	1,816,856	9,876	5,436	27	37
New Mexico	1,928,384	10,454	5,421	28	36
Indiana	6,271,973	33,362	5,319	29	15
Minnesota	5,132,799	27,081	5,276	30	21
Utah	2,469,585	12,807	5,186	31	34
Idaho	1,429,096	7,056	4,937	32	39
Oregon	3,641,056	17,594	4,832	33	27
Florida	17,789,864	85,024	4,779	34	4
Massachusetts	6,398,743	29,936	4,678	35	13
North Carolina	8,683,242	40,034	4,610	36	11
Illinois	12,763,371	57,180	4,480	37	5
Montana	935,670	4,099	4,381	38	44
Maine	1,321,505	5,708	4,319	39	40
Washington	6,287,759	27,127	4,314	40	14
Pennsylvania	12,429,616	52,850	4,252	41	6
New York	19,254,630	73,397	3,812	42	3
Colorado	4,665,177	17,777	3,811	43	22
Nevada	2,414,807	9,149	3,789	44	35
Arizona	5,939,292	21,514	3,622	45	17
Alaska	663,661	2,299	3,464	46	47
Connecticut	3,510,297	11,412	3,251	47	29
California	36,132,147	115,478	3,196	48	1
New Jersey	8,717,925	27,275	3,129	49	10
New Hampshire	1,309,940	3,833	2,926	50	41
Hawaii	1,275,194	3,709	2,909	51	42

Works Cited

The ACTION Campaign. “Establishing a Minimum 4 Percent Low-Income Housing Tax Credit Rate.” The ACTION Campaign, Washington, DC, 2018.

Arango, Tim, and Thomas Fuller. “Gavin Newsom is Elected Governor of California.” The New York Times (New York, NY), Nov. 7, 2018. https://www.nytimes.com/2018/11/07/us/california-midterms-election.html.

Glaeser, Edward L., and Joseph Gyourko. Rethinking Federal Housing Policy: How to Make Housing Plentiful and Affordable. Washington, DC: The AEI Press, 2008.

Fuller, Thomas, and Conor Dougherty. “California Today: The Beverly Hills Affordable Housing Loophole.” The New York Times (New York, NY), Feb. 5, 2018. https://www.nytimes.com/2018/02/05/us/california-today-beverly-hills-affordable-housing.html.

Hansen, Leah. “The Ontario Municipal Board will soon be no more. Here’s what that means for you.” CBC News. Apr. 2, 2018. https://www.cbc.ca/news/canada/ottawa/omb-planning-appeal-tribunal-development-1.4595608.

Joint Center for Housing Studies of Harvard University. “America’s Rental Housing 2017.” President and Fellows of Harvard College, Cambridge, MA, 2017.

Kendall, Marisa. “‘The Oakland we knew is not going to remain’: Massive building boom tears through city.” The Mercury News (San Jose, CA), Aug. 12, 2018. http://extras.mercurynews.com/oaklandboom/.

KPIX. “Bay Area Adds 3.5 Times As Many Jobs Compared To Housing Units In 2017.” KPIX CBS SF Bay Area. Sep. 11, 2018. https://sanfrancisco.cbslocal.com/2018/09/11/bay-area-jobs-housing-crunch-mtc-abag-report/.

McGillivray, Kate. “Ontario’s new standard lease could crack down on ‘wild west’ rental agreements.” CBC News. Feb. 7, 2018. https://www.cbc.ca/news/canada/toronto/ontario-standard-lease-1.4524570.

National Low-Income Housing Coalition. “Out of Reach 2018: California.” Out of Reach. 2018. https://nlihc.org/oor/california.

Taylor, Mac. “California’s High Housing Costs: Causes and Consequences.” California Legislative Analyst’s Office, Sacramento, CA, 2015.

Urbanation. “Condo Construction Surpasses 60,000 Units for First Time.” Urbanation, Inc. May 1, 2018. https://www.urbanation.ca/news/223-condo-construction-surpasses-60000-units-first-time.