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:

  1. 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.
  2. Increase the corporate charitable deduction limit for nonpolitical housing-related causes to generate new funding for production, preservation, and protection.
  3. 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.1Mac Taylor, “California’s High Housing Costs: Causes and Consequences” (California Legislative Analyst’s Office, Sacramento, CA, 2015), 14. 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.”2Taylor, “High Housing Costs,” 4.

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.3Toronto is also a place without the same NIMBY/preservationist energy as the Bay Area, and has a deeply imperfect housing system, with wild prices and concentrated developer power. Its definition of “affordable housing”, in a Canadian context where there is no federal program to shape its meaning, is 80% of average market rent. But Toronto is not the focus here — density is, in general. Locals celebrate the cranes dotting Oakland’s skyline as a sign the tides are turning, but while Oakland permitted 4,284 units in 2017,4Marisa Kendall, “‘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/. Toronto had 61,337 condo units alone under construction at the same time in May 2018.5Urbanation, “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. 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.6Leah Hansen, “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.

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.7KPIX, “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/. 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.8For absolute clarity, a corporation that contributed 1% of adjusted gross income to housing-related causes could deduct 51% of adjusted gross income from its California taxes. This would be a sliding scale, with a maximum additional deduction of 10% of adjusted gross income.

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%).9As a Canadian, I am still getting used to American tax terminology, but I am grateful to the IRS for making me confident in this math, per their guide to deductions and credits accessible at https://www.irs.com/articles/tax-credits-vs-tax-deductions.  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.10While I am not an accountant, and these calculations are in need of secondary review, figures on page 23 of California’s “revenue estimating exhibits” note an estimated net budgetary contribution from state corporate taxes in 2017-18 of $238M. Assuming that amount is roughly equal to 8.84% of total state corporate adjusted gross income would imply $2.692B in taxable corporate income in the year. 10% of that amount would be $269M per year. The figures are accessible at https://www.ftb.ca.gov/aboutFTB/Tax_Statistics/Reports/Revenue_Estimating_Exhibits/05082018.pdf. 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.11Joint Center for Housing Studies of Harvard University, “America’s Rental Housing 2017,” President and Fellows of Harvard College, Cambridge, MA, 2017, 10. 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.12National Low-Income Housing Coalition, “Out of Reach 2018: California,” Out of Reach, 2018, https://nlihc.org/oor/california. 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.13Kate McGillivray, “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. 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.14The standard lease template for Ontario can be downloaded as a PDF at http://www.forms.ssb.gov.on.ca/mbs/ssb/forms/ssbforms.nsf/FormDetail?OpenForm&ACT=RDR&TAB=PROFILE&SRCH=&ENV=WWE&TIT=2229E&NO=047-2229E. 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 2005.15Edward L. Glaeser and Joseph Gyourko, Rethinking Federal Housing Policy: How to Make Housing Plentiful and Affordable (Washington, DC: The AEI Press, 2008), 108-109. (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.16An additional factor in this may be the mix of shares between units produced and units preserved; states may have different strategies for the use of their LIHTC allocations. 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).17Glaeser and Gyourko, Rethinking Federal Housing Policy, 108-109. 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.

StatePopulation (2005) Units (1987-2005) Units per million 2005 residents Rank (units per million 2005 residents) Rank (2005 population)
D.C. 550,521 6,150 11,171 150
Louisiana 4,523,628 40,2048,888224
South Dakota 775,933 6,366 8,204 346
Mississippi 2,921,088 23,643 8,094 431
North Dakota  636,677 5,132 8,061 548
Oklahoma 3,547,884 26,627 7,505 628
Kansas 2,744,687 20,545 7,485 733
Vermont 623,050 4,498 7,219 849
Delaware 843,524 6,080 7,208 945
Texas 22,859,968 159,296 6,968 10 2
Wyoming  509,294 3,349 6,576 1151
Virginia 7,567,465 48,775 6,445 1212
Arkansas 2,779,154 17,545 6,313 1332
Ohio  11,464,042 72,039 6,284 147
Kentucky 4,173,405 25,992 6,228 1526
Alabama 4,557,808 28,187 6,184 1623
Wisconsin 5,536,201 33,220 6,001 1720
Iowa 2,966,334 17,792 5,998 1830
South Carolina 4,255,083 25,065 5,891 1925
Georgia 9,072,576 53,065 5,849 209
Rhode Island 1,076,189 6,277 5,833 2143
Nebraska 1,758,787 10,151 5,772 2238
Michigan 10,120,860 57,497 5,681 238
Maryland 5,600,388 31,631 5,648 2419
Tennessee 5,962,959 33,290 5,583 2516
Missouri 5,800,310 32,318 5,572 2618
West Virginia 1,816,856 9,876 5,436 2737
New Mexico 1,928,384 10,454 5,421 2836
Indiana 6,271,973 33,362 5,319 2915
Minnesota 5,132,799 27,081 5,276 3021
Utah 2,469,585 12,807 5,186 3134
Idaho 1,429,096 7,056 4,937 3239
Oregon 3,641,056 17,594 4,832 3327
Florida 17,789,864 85,024 4,779 344
Massachusetts 6,398,743 29,936 4,678 3513
North Carolina 8,683,242 40,034 4,610 3611
Illinois 12,763,371 57,180 4,480 375
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 4517
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.

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