LAO 2004-05 Budget Analysis: General Government

Analysis of the 2004-05 Budget Bill

Legislative Analyst's Office
February 2004

Housing and Community Development (2240)

The mission of the Department of Housing and Community Development (HCD) is to help promote and expand housing opportunities for all Californians. As part of this mission, the department is responsible for implementing and enforcing building standards. It also administers a variety of housing finance, economic development, and rehabilitation programs. In addition, the department provides policy advice and statewide guidance on housing issues.

The budget proposes expenditures of $619 million for 2004-05. Spending related to the Proposition 46 housing bond accounts for more than $400 million of this amount. The proposed General Fund expenditures of $14 million—largely for emergency shelter assistance and the operation of migrant farmworker housing—is a 9 percent decrease from the current year. Federal funds account for $147 million of the proposed budget-year expenditures, primarily for the Community Development Block Grant and Home Investment Partnership Act programs. Special funds provide the remainder of the department's expenditures. The department has a proposed staffing level of 481 personnel-years.

Mandate for Regional Planning Continues to Suffer From Ineffectiveness

The regional planning mandate costs much more than the Legislature expected and does not ensure the construction of affordable housing. We recommend that the Legislature eliminate the mandate to save the General Fund about $4 million in annual liabilities.

As part of its general plan, every city and county is required to prepare a "housing element" which assesses the conditions of its housing stock and outlines a five-year plan for housing development. Unlike other components of a local government's general plan, the housing element must be approved by the state—an activity performed by HCD. Despite the legal requirement of having a housing element approved by HCD, less than 60 percent of local governments currently meet this obligation.

Proposal to Continue Deferral of Costs

Reimbursable Mandate for Some Costs. The basic requirement for cities and counties to develop a housing element (and to have it approved by the state) predates the mandate reimbursement process. The state, however, has since added reimbursable requirements—such as the regional allocation of housing units. Specifically, the state is required to pay regional councils of government (COGs), cities, and counties for these more recent requirements:

Governor Proposes Deferring Reimbursements Again. As with many other mandates, the 2003-04 Budget Act appropriated only $1,000 for the regional planning mandate—in effect deferring (with interest) the costs of reimbursements to local governments. For 2004-05, the Governor proposes to again defer these payments. During this deferment, local governments are still required to follow the statutory requirements, and the state continues to accumulate a financial liability for the mandated costs.

Mandate Ineffective. In the 2003-04 Analysis, we reviewed the regional planning mandate's effectiveness (please see pages F-94 to F-97). We found the following:

While the concept of state guidance and oversight on housing production has merit, the mandate has not achieved its intended results.

Recent Developments Add to Case Against Mandate

Since our analysis last year, there have been three major developments related to the regional planning mandate, as we discuss below.

Mandate Makes No Difference in Housing Production. Last year, the Public Policy Institute of California (PPIC) released a comprehensive review of the state's housing element law. The study compared the housing production during the 1990s of those jurisdictions which had received HCD approval on their housing elements to those which had not. The study found that there was no significant difference in housing production between those cities in and out of compliance.

Costs Continue to Rise. Last year, in reviewing submitted claims for the years 1998-99 through 2001-02, we found that local governments had submitted claims totaling $9.9 million. In each of those years, the annual budget bill provided less than $1 million for the reimbursements of local governments. We were concerned that the mandate was costing the state about three times more than the Legislature expected. Since last year, local governments have amended and updated their claims. As a result, for those same four years, total claims now total $13.7 million. In other words, the costs for the mandated activities have risen to about four times the amount the Legislature expected.

Working Group Has Not Focused on Costs. In the summer of 2003, the department convened a working group of local government, housing, and business representatives in order to address ongoing problems with the overall housing element process. As a result of the working group's meetings, the department has begun implementing changes in its review process for housing elements to improve consistency. In addition, the department reports that the working group has reached conceptual agreement in several areas and hopes to sponsor legislation this year implementing reforms. The department and the working group, however, have not dedicated much effort to addressing the rising costs of the mandate.

Mandate Not Worth the Cost

Recommend Eliminating Mandate. The recent PPIC study and the mandate's rising costs add further doubt to the mandate's effectiveness. Based on this evidence, we conclude that the current process is not worth the $4 million it will cost to continue in 2004-05. Consequently, we recommend that the Legislature eliminate the existing mandate. As noted above, the mandate only applies to specific components of the housing element process. Even with the repeal of the reimbursable components of the process, the basic requirement to develop a housing element would not change. Instead, the more recent requirements simply would become advisory rather than required.

Better to Start From Scratch. If the Legislature wishes to impose certain mandated requirements, we believe the best approach would be to "start from scratch." The broad discretion of the existing mandate would make it difficult to simultaneously reduce costs and maintain existing requirements. A new process for planning and building affordable housing in the state could be developed through the normal legislative process. Any proposals from the department's working group could be integrated into that process.

Other Issues

Transfer School Facilities Fund Balance

The state's school facility fees reimbursement program has available bond funds that will meet the program's needs throughout the decade. We recommend that the Legislature transfer to the General Fund the available $5.6 million in nonbond funding. (Transfer $5.6 million from Item 2240-115-0101.)

History of General Fund Spending. The School Facility Fee Affordable Housing Assistance Program reimburses the purchasers of new homes for some or all of the school facility fees paid on their homes. Although the funds are in HCD's budget, the program is administered by the California Housing Finance Agency. From 1998-99 through 2001-02, the Legislature appropriated $27 million for this programs (net of various transfers). Due to low demand for the program, concerns about the program's design, and the state's worsening fiscal condition, Chapter 114, Statutes of 2001 (AB 445, Cardenas), sunset the program at the end of calendar year 2001. (Please see our January 2001 report evaluating the program.) Chapter 114 returned the remaining program dollars to the General Fund but authorized any subsequent payments from home buyers (for instance, if they sold their home before the required five years of residence) to remain with the program. The department reports a total of $5.6 million has been returned to the program in this manner. (These funds, however, could be transferred to the General Fund.)

Bond Funds Now Available. In 2002, the Proposition 46 housing bond provided $50 million to the program. In its first year of bond funds, the program spent or committed about $6 million. At a similar level of spending, the bond funds should last the program throughout the decade.

Recommend Transferring Available Dollars. Given the programs' available bond funds, the General Fund balance would be better served addressing the state's budget problem. Accordingly, we recommend the Legislature transfer the available $5.6 million, as well as any such funds in the future, to the General Fund.

Shut Down Dormant Child Care Program for Savings

Due to a lack of funding, the Child Care Facilities Financing Program is dormant and not making any new loans. We recommend that the Legislature shut down the program and transfer the $1 million in program reserves to the General Fund. (Transfer $721,000 from Item 2240-115-0472 and $248,000 from Item 2240-115-0474.)

Program Has History of Problems. The Child Care Facilities Financing Program provides both direct loans and loan guarantees for child care facility purchases, expansions, or renovations. General Fund appropriations have provided the program with its previous funding. As we have noted in the past (see, for instance, the 2000-01 Analysis, page F-130), the program has suffered from a complicated administrative structure and low demand. In recognition of these problems and as a result of the state's worsening budget situation, the Legislature returned to the General Fund much of the program's original funding.

Program Shifted Back to HCD. Although HCD is the program's administrator, the department had relied on the Technology, Trade, and Commerce Agency (TTCA) to carry out the day-to-day management of the program. With the recent shutdown of TTCA, HCD reacquired full management of the program. The program is currently dormant in terms of making new loans and guarantees. Instead, the only function of the program is servicing the existing 19 loans (with a value of $7.7 million) and 2 guarantees (with a value of $730,000) for as long as the next 30 years. The program's accounts are projected to have a fund balance of roughly $1 million at the end of the current year.

Shutdown Recommended. For TTCA's other programs that were ended, the fund balances were transferred back to the General Fund. The revenues from any loan repayments will now come to the General Fund (as well as the responsibility for administering any outstanding loans). Given its inactivity, we find this approach appropriate for the child care facilities program as well. Consequently, we recommend that the Legislature shut down the program and transfer the remaining funds to the General Fund. This would provide an immediate benefit of $1 million, with future benefits as loans are repaid. Given the program's small portfolio, we do not believe the state should dedicate any significant resources to further administrative costs. Any such costs, therefore, should be able to be absorbed by the department.

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