2. Bill Analysis and Context
During the Great Recession, the state terminated most of its funding for affordable housing by shuttering local development agencies (RDAs) (see Embarcadero institute, 2020). At the time, RDAs were providing 80% of the state funding for affordable housing through the redeployment of local property taxes. Facing a budget deficit, Governor Brown froze local redevelopment activities in 2011, and shuttered the agencies in 2012, diverting their property tax resources to schools and local services to backfill the state funding shortfall (see Fig. 1).
Figure 1. Sharp Decline in State Funding for Affordable Housing
Even during the economic boom that just ended, the state never resumed funding for affordable housing at the same level, despite a doubling of income tax revenue (Embarcadero Institute, 2020). The state collected almost $100 billion dollars in income tax last year, up from just over $40 billion a decade ago. But spending on affordable housing still languished, despite a number of voter-approved propositions that allowed the state government to take on debt for affordable housing (Fig. 2).
Figure 2. State Income Tax Revenue Doubles While Its Spending on Affordable Housing Stagnates
Over the last few years, rather than restoring funding, some state legislators have blamed local zoning and tried to use state-mandated density bonuses to spur affordable housing development. Now adopted bills including SB-330 (2019), AB-1763 (2019), SB-35 (2017), SB-375 (2008) and recent amendments to the Housing Density Bonus Law (originally adopted in 1979), were designed to stimulate affordable housing production through the streamlining of approval processes, the provision of additional density bonuses as incentives, the creation of CEQA exemption, and the supply of a new funding mechanism for sustainable affordable transit-oriented development (TOD).
Although it is still too soon to assess the impact of the two bills passed in 2019, it seems clear that prior incentive approaches are not working as the state is building less new affordable housing than it was in the 2000s (see Fig. 3).
Figure 3. New Construction of Affordable Housing
1. More Developer Incentives, Fewer Affordability Requirements
Rather than address the affordable housing crisis head-on by restoring funding, state legislators now seek to extend the affordable housing development incentives to market-rate housing. Many of these bills (AB-1279; AB-3155; SB-1385) offer additional developer incentives (e.g. increased density) while lowering affordability requirements (e.g. agreements to provide affordable housing) already in place in existing law. Overall, this year’s bills offer more incentives to construct housing of any kind (especially duplex units) with less emphasis on the need to provide affordable units. As a result, this could lead to fewer affordable units being constructed as the statewide requirements to receive bonuses may require fewer affordable units.
Streamlining and incentives originally put in place to encourage low-income housing are now on offer for higher income brackets in the current bills (SB-1120, AB-1279, SB-995). These new incentives add further complexity to an already complex system of incentives and have the effect of overriding current law and pitting the production of higher-income housing against lower-income housing – an unfair fight. According to some studies, misaligned incentives (and requirements) is already an issue with some inclusionary zoning ordinances, which the latest bills do not address or attempt to solve (Terner Center for Housing Innovation at UC Berkeley).
In addition, three of these bills (SB-902, SB-995, and SB-1085) provide additional exemptions to CEQA review. The necessity and value in providing these exemptions is unclear but appears to benefit larger market-rate housing projects that would be constructed regardless of these additional exemptions. Further, SB-375 (adopted in 2008) already allows CEQA exemptions for qualified housing projects near major transit.
2. Reliance on Fees-in-Lieu
Perhaps even more damaging to the cause of affordable housing are new in-lieu fees (fees developers can pay instead of building the required affordable housing). The fees suggested in-lieu of building affordable housing are far below the actual cost of building the units, creating an attractive arbitrage for developers of market-rate housing. Fees that are set far below the cost of on-site performance inherently result in little affordable housing (Inclusionary Housing.org).
With an increased reliance of some of these bills (AB-1279 and AB-3155) on fees-in-lieu of providing affordable housing units, it is unclear if funds that are generated will be enough to subsidize other affordable housing projects. Will these fees generate anywhere near the amount of funding to effectively subsidize affordable units in a reasonable timeframe? In many cases, these fees are much smaller than the actual cost of constructing an affordable unit and may actually reduce the number of affordable units that are built if the developer opts to pay a fee.
It is reasonable to assume that the market will take care of market-rate housing. If this is the case, then the state should focus on using tax dollars to help fund state mandated affordable housing and meet RHNA targets. The real affordable housing story is that we lag in production because the state does not choose to fund it (Embarcadero Institute, 2020).
Future bills should consider the variety of funding mechanisms available to developers and local governments and investigate ways to make sure each funding model is sustainable and large enough to fund the affordable housing needed to meet existing state targets and need.
3. Upzoning and Continued Erosion of Local Land Use Authority
Although the proposed bills with an upzoning element (AB-1279; SB-902; SB-1120; SB-1385) are not as heavy-handed as the failed SB-50 and SB-827 (which would have superseded most local zoning controls and allowed higher densities) the proposed bills still represent an override of local zoning codes and the land use element in local general plans.
This year’s set of bills move away from proposing higher densities around major transit stops or in “jobs rich” areas, to instead encourage duplex, triplex, and fourplexes by offering additional streamlined approval incentives or allowing upzoning in existing single-family neighborhoods. Although this may serve middle-income buyers, this approach will not create affordable housing in high-density markets where affordable housing is needed most (e.g. the Bay Area, Los Angeles, and San Diego). According to the most recent Regional Housing Need Assessment permit reports, counties are not having trouble reaching the state’s market-rate housing goals (Embarcadero Institute, 2019).
4. Affected Areas Remain Undetermined
Over and above the market concerns, a number of these bills (including AB-1279 and SB-902) continue to emphasize “objective design standards” in an effort to ensure vaguely written land use regulations (such as subjective design controls) are not used to deny otherwise compliant housing projects. However, many of these same bills use vague or complex criteria to determine areas where local governments should or must allow higher densities, housing types, or offer concessions. Because these criteria are often vague and rely on findings released by the Department of Housing and Community Development after the bill is passed, it is impossible to analyze the neighborhoods and areas that may be impacted by these new requirements.
In addition, municipalities and counties are already required to have a General Plan with chapters on housing and Regional Housing Needs Allocation (RHNA) targets. Local plans are generally informed by knowledge of the sites best suited to affordable housing development. No data suggests that state forays into municipal planning are providing positive results but are burdening local governments with additional development process and compliance requirements.
5. Economic Uncertainty & Changing Housing Markets
Finally, these bills are being considered during an uncertain time, when California and the nation are facing a deep recession and a potentially weakened housing market (CalMatters). The uncertain future economic outlook for state and local governments, not to mention private property owners, developers, and businesses, will undoubtedly impact the residential and commercial real estate market in California.
In the short term, increased unemployment and economic uncertainty could lead to a softening of the housing market, though not necessarily uniform across all areas (CoreLogic Housing Analysis). Early real estate market data points to an increased interest in small cities and rural areas Redfin, 2020). With the shift to remote work, and an uptick in California’s domestic out-migration, real estate insiders are preparing for “a seismic shift towards smaller cities” (Redfin, 2020). Longer term, the economic hangover from the shelter-in-place order could delay and/or reduce construction of new housing. With a potential market disruption upon us, pressing ahead with the ‘old normal’ may place the California State Legislature out of step.