Legislative Analyst's Office Analysis of the 2003-04 Budget Bill

Proposition 46 Housing Bond

In November 2002, the voters approved a $2.1 billion housing bond. The General Fund will pay an average of $157 million annually for 30 years to pay for the principal and interest of the bonds. In this piece, we review the administration's proposal for implementing the bond's provisions and outline potential options for using the bond to help address the budget situation.

Housing Bond Provides Funding for 21 Programs

Overview of Proposition 46

Proposition 46 (Chapter 26, Statutes of 2002 [SB 1227, Burton]), allocates $2.1 billion in funding to 21 housing programs, as shown in Figure 1. The major allocations of the bond proceeds are as follows:

• Multifamily Housing Programs ($1.11 Billion). The bond funds a variety of housing programs aimed at the construction of rental housing projects, such as apartment buildings. These programs generally provide local governments, nonprofit organizations, and private developers with low-interest (3 percent) loans to fund projects. In exchange, a project must reserve a portion of its units for low-income households for a period of 55 years. This measure gives funding priority to projects in already developed areas and near existing public services (such as public transportation).
• Homeownership Programs ($405 Million). A number of the programs funded by Proposition 46 aim to encourage homeownership for low- and moderate-income homebuyers. Most of the funds are to provide downpayment assistance to homebuyers through low-interest loans or grants. Typically, eligibility for this assistance is based on the household's income, the cost of the home being purchased, and whether it is the household's first home purchase.
• Farmworker Housing ($200 Million). These funds will be used to provide loans and grants to the developers of housing for farmworkers. Program funds are used for both rental and owner-occupied housing.
• Other Programs ($385 Million). Additional funds are allocated for the construction of homeless shelters, payments to cities and counties based on their approval of housing units, provision of mortgage insurance for high-risk homebuyers, and capital needs of local code enforcement departments.

While most of the programs will be administered by the Department of Housing and Community Development (HCD), some of the programs will be administered by the California Housing Finance Agency (CalHFA). Specifically, CalHFA will administer the preservation (except $5 million administered by HCD), homebuyer's downpayment assistance, nonprofit-sponsored counseling, school facility fees, school personnel, and housing loan insurance programs.

Funds to Be Spent Over Several Years

For the programs with larger allocations of funds (such as the multifamily housing and CalHome programs), the administration proposes to award funds over as many as seven years. For some programs, such as the multifamily program, once the funds are awarded to a project, they would not be disbursed until many months later—at the time construction was completed.

Some Programs Have Limited Time Periods. For many of the funded programs, the measure limits the length of time available for the funds to be spent. If after a specified length of time—between 18 and 48 months—a program's funds are unspent, they would be reallocated to a different housing program.

LAO Assessment of Proposed Timing. Figure 2 illustrates our estimates of the expenditure of bond funds under the administration's proposal. For the smaller set-asides, the funds are generally proposed to be spent within a few years. Many of the homeownership programs operate on a first-come, first-serve basis—meaning qualified homebuyers will be able to apply as long as funding remains.

As noted above, the allocations for the larger programs are spread out over a number of years. Spreading the allocations out over time reduces the amount of assistance immediately available. At the same time, it should improve the overall quality of the housing funded since HCD funds are awarded largely on a competitive basis. If more funds were awarded in any given year, it is possible that lower-score projects would be funded. By spreading the dollars out, there is more time for higher-quality projects to be put together and submit applications. Based on past experience, the funding levels proposed should attract an adequate number of qualified applicants to ensure healthy competition for the funds. Our assessment, therefore, is that the administration's proposal on timing is reasonable.

Broad Legislative Discretion Over Use of Funds

Chapter 26 gives the Legislature broad authority to make changes to the programs funded by the bond proceeds. Specifically, the bond act provides:

The Legislature may, from time to time, amend the provisions of law related to programs which funds are, or have been, allocated pursuant to this section for the purpose of improving the efficiency and effectiveness of the program, or for the purpose of furthering the goals of the program.

For instance, while $155 million in bond funds must be spent on farmworker housing, the Legislature generally has the ability to alter what type of farmworker housing is funded, who is eligible to receive funding, and the terms of the funding. Since funding for some of the programs will last for several years, this provision gives the Legislature the opportunity to review a program's effectiveness and make any desired changes.

Some Administrative Costs Are Too High

We believe 5 percent for administrative costs is a reasonable target for each program funded by the bond. We, therefore, recommend a number of reductions to proposed administrative costs—increasing funds available for housing assistance by $13 million. We also recommend that the California Housing Finance Agency provide the Legislature with detailed budgets for each of its programs.

Dollars Spent on Administration Reduce Funds for Housing. Proposition 46 authorizes the use of some of the bond proceeds to pay for the costs of administering the programs. Each dollar spent on administrative costs, however, results in one less dollar available for direct housing assistance. As with the housing assistance dollars, the costs of administration will be financed over the next 30 years.

Many of the programs supported by the bond have limits on the percentage of funds that can be used for administrative costs. For instance, the statute establishing the multifamily housing program limits administrative costs to 5 percent of total program funds.

Governor Proposes $85 Million in Administrative Costs. As shown in Figure 3 (see next page), the Governor proposes a total of $85 million from the $2.1 billion bond (4.1 percent) to be used for administrative costs. The HCD-administered programs have developed cost estimates based on the past operation of their programs. On the other hand, CalHFA has proposed using a flat 5 percent for administration in all of its programs. While most of the proposed administrative levels appear reasonable, we do have concerns in several areas, which we discuss below.

HCD Program Administrative Costs High. The HCD has operated the farmworker, self-help, and CalHome programs over the past few years. Based on this experience, the department proposes spending 10.1 percent, 9 percent, and 6.1 percent, respectively on administrative costs. We believe the department should be able to spend less on administrative costs for these programs. First, prior experience with the programs should lead to the elimination of some "start-up" activities—such as extensive work developing the program funding notices. Second, as applicants apply for funding over multiple years, the need for some technical assistance should diminish. Finally, HCD could reduce long-term monitoring costs by better coordinating with other agencies which provide funding for the same projects. Incorporating these factors into HCD's workload projections would reduce its administrative costs.

Emergency Housing Assistance Program (EHAP) Costs Exceed Statutory Limit. The statute establishing the EHAP program specifically limits administrative costs to 4 percent of total funds. The administration, however, proposes to spend 4.6 percent of the $195 million on administration.

CalHFA Programs Lack Budgets. While CalHFA has stated that administrative costs will not exceed 5 percent, the department has not presented any budgets or documentation on its proposed expenses. The department has noted that not all of its programs will need the full 5 percent for essential administrative costs. In these cases, the department intends to use any remaining funds for program marketing.

Recommend Administrative Savings. We consider 5 percent for administrative costs a reasonable target for each program (in the absence of alternative restrictions). As such, we recommend that the Legislature reduce all of HCD's proposed administrative costs to a maximum of 5 percent. In the case of EHAP, we recommend the department adhere to the existing statutory requirements. We further recommend that HCD report at budget hearings on any proposed program changes necessary to achieve these efficiencies. As shown in Figure 3, the net effect of these recommendations would be to increase bond funds available for housing assistance by $13 million.

While CalHFA already proposes to meet this 5 percent threshold, it should provide documentation on its proposed administrative activities so that the Legislature can review them for reasonableness. Consequently, we recommend that CalHFA provide the Legislature with detailed budgets for each of its programs. In particular, CalHFA should provide justification for its marketing activities on the basis of need—rather than potentially relying on marketing as a placeholder for spending up to the 5 percent level.

Migrant Services Center Needs Rehabilitation

We recommend the use of $6 million in migrant worker bond funds to support the reconstruction of one of the state's migrant farmworker housing facilities.

Final Year of Reconstruction Deferred. The state owns about two dozen migrant farmworker housing centers throughout the state. The HCD's Office of Migrant Services contracts with local entities to operate these facilities. For the past decade, the department has been implementing a reconstruction plan to renovate the facilities (through a combination of funds from the federal government, the General Fund, and bonds). One center—the Planada facility in Merced County—is still awaiting funding. Due to the budget situation, the roughly $6 million in General Fund dollars scheduled for this project was deferred in the current year, and the Governor again proposes to defer the funding in the budget year. Due to its physical condition, the center will not be able to operate past 2003-04 without reconstruction funds. 

Recommend Using Migrant Services Set-Aside. The $25 million set-aside of migrant worker bond funds is intended to build housing for migrant farmworkers. Under the program's existing statutory authorization, only local governments and nonprofit organizations are eligible to apply for the funds. The reconstruction of the Planada facility, however, is consistent with the intent of the program to assist migrant farmworkers. Consequently, we recommend a $6 million appropriation of bond funds for the project with budget bill language authorizing the expenditure of these bond funds on this state facility. This action would eliminate the need for future General Fund spending on the project and allow the facility to operate in future years.

Options for Using the Housing Bond To Help Address the Budget Shortfall

Due to the state's fiscal condition, we have explored the possibility of using funds from the housing bond to help the state address the budget shortfall. Based on our preliminary work, we believe the bond could be used for this purpose—potentially benefiting the General Fund by hundreds of millions of dollars. Below, we outline two such options.

Backfill Redevelopment Housing Funds

Governor's Proposal for Redevelopment Funds. As part of its mid-year proposal, the administration proposed requiring local redevelopment agencies to transfer unencumbered reserves in their low- and moderate-income housing funds to their county's Educational Revenue Augmentation Fund (ERAF). This proposal which would benefit the state's General Fund by reducing state education financing obligations. At the time of this analysis, it was unclear whether this proposal would be adopted by the Legislature. If the Legislature were to adopt a similar proposal in the future, housing bond funds could be used to offset any negative impacts to redevelopment agencies' housing projects.

Bond Funds Could Replace Low- and Moderate-Income Housing Funds. Specifically, the Legislature could specify in law that any redevelopment agency that transfers housing funds to ERAF is guaranteed replacement funding under Proposition 46. To receive this replacement funding, redevelopment agencies could be required to submit a letter to the State Controller's Office indicating the amount of replacement funds needed on a project-by-project basis. The funds could then be disbursed from an appropriate bond program's allocation (for instance, a multifamily project by a redevelopment agency could be funded from the multifamily bond funds). To encourage the timely development of affordable housing and allow remaining state housing bond funds to be used for other housing projects, we suggest that such a "replacement guarantee" be time-limited—say, up to four years.

Funding Switch for Committed, but Not Disbursed, Projects

Millions in Funds Have Not Yet Been Disbursed. Over the past several years, the state has awarded hundreds of millions of dollars in program funds to various housing projects. The original source of the funding was General Fund appropriations to a number of housing special funds. Because funds are often not disbursed until projects are completed, the awarded funds still remain in state accounts today for many of these projects. Estimates suggest that as much as $300 million currently remains in committed, but not disbursed, housing funding.

Option to Switch Fund Sources. As an option, the Legislature could replace the General Fund dollars in the various housing programs with bond funds. To accomplish this, the General Fund dollars could be transferred from the various special funds back to the General Fund. These funds would then be replaced with bond funds on a dollar-for-dollar basis. As a result, no projects would be affected—each would receive the same allocation of funding (but from a different fund source).

Timing Considerations. The estimate of available nondisbursed funds are time-sensitive. Disbursements occur on a regular basis—as projects complete their construction. While roughly $300 million in committed but undispersed state monies would likely be available today, a portion of those funds will be disbursed by the end of the current year. Waiting to enact this option until the 2003-04 Budget Act, therefore, could substantially reduce the available General Fund savings—perhaps leaving in the range of $200 million available.

Key Considerations

If the Legislature were to pursue the two options outlined above, several key issues should be considered.

Reduced Future Capacity. Under these options, changes to the allocation of housing bond funds would reduce the availability of housing funds in the future. The options would not, however, affect the available funds in the next couple of years. Current plans for awarding funds could continue as planned in the near term, but bond funds available toward the end of the scheduled allocation process would be diminished. At that time, based on legislative priorities, General Fund dollars or future bond act monies would be potential substitute funding sources for the reduced funding capacity. 

Legal Considerations. As noted above, Chapter 26 gives the Legislature broad flexibility to make changes to the funded programs. Still, the Legislature is constrained to some degree by the Constitution and case law. Generally, the courts have restricted the Legislature's actions to those changes which (1) substantially comply with the underlying purpose approved by the voters and (2) do not violate express provisions included in the bond measure.

Our initial review of the housing bond language suggests that these legal restrictions would make it complicated, but not impossible, to implement the changes outlined above. Ensuring that any legislative changes to the housing bond maintained the broad intent of Proposition 46 (with corresponding legislative findings) would help facilitate the successful sale of the bonds. Before implementing changes to the housing bond, we would recommend conferring with Legislative Counsel.