Considerations for the Revised Housing and Homelessness Plan

Background

State’s Housing Affordability and Homelessness Challenges. Housing in California has long been more expensive than most of the rest of the country. Today, an average California home costs 2.5 times the national average. California’s average monthly rent is about 50 percent higher than the rest of the country. High housing costs drive California’s official poverty rate from roughly 13 percent (slightly higher than average) to 19 percent (highest in the nation) under the Census Bureau’s Supplemental Poverty Measure, which takes into account food, clothing, utilities, and shelter. While many factors have a role in driving California’s high housing costs, the most important is the significant shortage of housing, particularly within coastal communities. Though the exact number of new housing units California needs to build to address housing affordability is uncertain, the general magnitude is enormous.

Not surprisingly, those living in poverty are the most significantly affected by the state’s severe affordable housing crisis. These households are at greatest risk of housing instability and homelessness. The 1.5 million low-income households that pay at least half of their income toward housing are at greatest risk. For this population, job loss or an unexpected expense could result in homelessness. California has more people experiencing homelessness than any other state in the nation. As of January 2018, California has about 130,000 homeless individuals, which represented about 25 percent of the total homeless population in the nation. Addressing California’s housing and homelessness crisis is one of the most difficult challenges facing the state.

Governor’s 2019‑20 Budget Proposed Funding for Housing and Homelessness. In January, the Governor’s 2019‑20 budget included various proposals aimed at improving the affordability of housing in the state and addressing homelessness. Most relevant to this analysis, the Governor proposed $750 million in one-time General Fund grants to local governments meant to accelerate meeting new housing production goals. Specifically, $250 million would be available to cities and counties to support various activities, like conducting planning and making zoning changes, to help them meet new short-term housing production goals. As local governments reached these new goals, an additional $500 million would be available to cities and counties for general purposes as a reward for reaching milestones in their short-term housing goals. The January budget also proposed a total of $200 million one-time General Fund towards a new state tax credit program targeting housing development for households with relatively higher-income levels. Similarly, $500 million one-time General Fund was proposed for an expanded housing production loan program for households with incomes up to 120 percent of area median income. Finally, the Governor proposed $500 million in one-time General Fund grants to local governments meant to address homelessness. Of this amount, $300 million would be available for general purposes as rewards to communities that showed progress towards developing shelters and housing for the homeless. See our analyses of the Governor’s January budget on housing, local planning efforts, and homelessness for more information.

Governor’s Revised Housing and Homelessness Proposals

The Governor proposes significant changes in the May Revision to the housing and homelessness plan introduced in January. These changes are primarily related to policy. The May Revision increases General Fund expenditures by $150 million for homelessness for a total General Fund investment of $2.525 billion ($1.75 billion for housing and $775 million for homelessness). Below, we summarize the key changes.

Housing

Repurposes General Purpose Grants Towards Housing-Related Infrastructure. The May Revision repurposes the $500 million in flexible funds proposed in January for the Infill Infrastructure Grant (IIG) Program administered by the Department of Housing and Community Development. The IIG Program provides funding for infrastructure projects that support high-density affordable and mixed-income housing in locations designated as infill.
Expands Eligibility for Short-Term Housing Planning Grants to School Districts and County Offices of Education (COEs). The May Revision adds school districts and COEs as jurisdictions eligible for a portion of the $250 million proposed in January so that they can develop plans to use their excess properties for teacher housing.
Continues to Target Housing Tax Credit and Loan Proposals Towards Relatively Higher-Income Households. The Governor’s May Revision does not change these January proposals. The administration continues to target these programs towards relatively higher-income level households.
Maintains Proposed Linkage Between Transportation Funding and Compliance With Housing Element Process. The Governor’s May Revision maintains the link proposed in January between SB 1 transportation funding and compliance with the housing element process.

Homelessness

Increases Grants to Communities Meant to Address Homelessness by $150 Million. The May Revision increases the homelessness proposal to $650 million one-time General Fund. These funds would be administered by the Homeless Coordinating and Financing Council as part of the Homeless Aid for Planning and Shelter Program. Communities would have through 2022‑23 to use the funds.
Expands Eligible Uses of Grants. The Governor offers communities significant flexibility on the use of these funds, including, emergency shelters, navigation centers, rapid rehousing, prevention, permanent supportive housing, job programs, and hotel/motel conversions.
Repurposes General Purpose Grants Towards Services for the Homeless. In addition, the Governor’s May Revision no longer includes any flexible incentive funding. Instead, all of the funding would be used directly by communities for various services for the homeless. Specifically, the state’s 13 most populous cities would receive $275 million, counties would receive $275 million, and Continuums of Care—local entities that administer housing assistance programs within a particular area, often a county or group of counties—would receive $100 million. The allocations would be based on the 2019 homeless point-in-time counts.

LAO Comments

Proposed Repurposing of General Purpose Housing and Homelessness Grants Will Yield More Certain Benefits. In our analysis of the Governor’s January budget, we noted that the proposals to reward communities for reaching milestones in their new short-term housing goals and developing shelters with flexible funding ($500 million General Fund for housing and $200 million General Fund for homelessness) may not produce the desired results. We urged the Legislature to consider alternative uses of these funds that would yield more certain benefits. The Governor’s May Revision proposals to repurpose the flexible incentive funding towards housing-related infrastructure and various services for the homeless individuals would produce more certain outcomes in the state’s efforts to address the housing shortage and homelessness.

Unclear Benefits of Expanding Eligibility for Short-Term Planning Grants to School Districts and COEs. The Governor’s January budget proposed $250 million one-time General Fund to help cities and counties meet their short-term housing goals. The benefits of adding school districts and COEs as jurisdictions eligible for a portion of this funding are unclear. While they may have excess properties that could be used as teacher housing, cities and counties have the expertise necessary for planning and executing this type of effort. Moreover, while this use of surplus property may have merit, the administration has not provided any analysis demonstrating whether or not this idea is feasible. Should the Legislature wish to pursue this idea, consider requiring cities and counties that apply for funding to work with local school districts and COEs to determine whether surplus property is viable for housing.

Housing Tax Credit and Loan Proposals Continue to Raise Questions About How to Prioritize Some Funds. In January, we raised concerns with how the Governor chose to prioritize populations for some of the housing funding. Specifically, we were concerned by the new state housing tax credit program targeting relatively higher-income households and the expanded housing production loan program for households with incomes up to 120 percent of area median income. Because current resources only assist roughly one-quarter of eligible low-income households, we suggested the Legislature consider prioritizing General Fund resources towards programs that assist low-income households. The Governor’s May Revision does not change these January proposals. Instead, the administration continues to target these programs towards relatively higher-income households. The Legislature will need to decide if it agrees with the Governor’s approach to spread the state’s housing resources among broader income levels—including middle-income households—or whether it prefers to target the state’s resources toward the Californians most in need of housing assistance.

Some Improvements With Proposed Linkage of Transportation Funding and Compliance With Housing Element Process. In our analysis of the Governor’s January budget, we raised concerns with tying transportation funding with housing production. We noted the problems involved with holding communities entirely responsible for housing production when many factors are outside of their control. The health of the state’s economy, lending conditions, and decisions by builders and landowners are all beyond the control of local governments but significantly affect home building. While it is reasonable for the state to ask cities and counties to do all they can do to plan for and facilitate a particular amount of home building, holding them entirely accountable for outcomes that they do not completely control may be unreasonable. To address this issue, the Governor’s May Revision links SB 1 transportation funding with compliance with the housing element process, rather than housing production. As a result, the Governor proposes holding local governments accountable for something over which they have much more control. This approach mitigates some of our concerns with this proposal. We remain concerned, however, that tying transportation funding to housing could undermine the state’s transportation goals. Allocations that best facilitate the maintenance of local streets and roads may be different than the allocation that would result if funds were tied to compliance with the housing element process.

Rethinking Long-Term Planning Remains Worthwhile. The Governor’s plan to revamp state policies on long-term planning is worthwhile. While the Legislature has taken important steps in this area in recent years, opportunities remain for further improvement. We offered a package of changes to long-term planning that we think should be considered in our February 20, 2019 report, The 2019‑20 Budget: What Can Be Done to Improve Local Planning for Housing?. In that report we recommended: (1) better incorporating measures of housing demand into the calculation of housing goals, (2) lengthening the planning horizon, (3) further enhancing state oversight and enforcement, (4) preempting local land use rules if communities do not faithfully participate in long-term planning, and (5) increasing financial incentives for locals to approve housing.

Finally, given the importance of revamping the state’s long-term planning process, the Legislature should be aware of the trade-off between continued investment in planning for the short-term housing production goals ($250 million proposed by the Governor) and helping local governments prepare for the new long-term planning process. The state may be better off focusing resources and efforts on boosting home building over the long term.