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California's Housing Agencies
The State Must Overhaul Its Approach to Affordable Housing Development to Help Relieve Millions of Californians' Burdensome Housing Costs

Report Number: 2020-108



The Legislature has identified housing as an essential motivating force in helping people achieve self-fulfillment in a free and democratic society. To that end, the Legislature has declared that the State's basic housing goal is to provide a home and suitable living environment for every Californian. However, the Legislature has also declared that in California, private investment alone cannot achieve the needed construction of housing at costs that are affordable to people of all income levels, including to those households earning 80 percent or less of their area's median income (lower-income households). We refer to housing affordable to lower-income households—which comprise more than 40 percent of all California households, according to U.S. Census Bureau data—as affordable housing. California's shortage of affordable housing has created a substantial need for new housing and the rehabilitation of existing housing. Research demonstrates that in addition to improving the well-being of residents, affordable housing development also increases spending and employment in the surrounding economy and provides an important source of revenue to cities and counties (local jurisdictions) from sales taxes on building materials and building permit fees.

State law has given the State and local jurisdictions the responsibility for facilitating the improvement and development of housing to meet the needs of all economic segments of the community. Four key state agencies contribute to the State's mission to provide suitable housing for all Californians: the California Department of Housing and Community Development (HCD), the California Housing Finance Agency (CalHFA), the California Tax Credit Allocation Committee (Tax Committee), and the California Debt Limit Allocation Committee (Debt Limit Committee). As we show in Figure 1, these four agencies offer financial support for the development of affordable housing. Further, HCD is responsible for overseeing local jurisdictions that plan and approve the construction of affordable housing, in part, by reviewing and approving their state-required plans to build such housing.

The State's Shortage of Affordable Housing Affects Millions of Californians

California's lack of affordable housing has contributed to the homelessness crisis and has left more than three million renter households with burdensome housing costs. HCD determined in 2018 that California needs to add about 180,000 units of housing annually through 2025 to keep up with housing demand, which amounts to more than 70,000 units of affordable housing needed annually.A unit of housing can include a single-family house or an apartment. This lack of supply affects the affordability of housing, according to HCD, which reports that the State has fallen short of the needed units by tens of thousands compared to the annual projected need. At the same time, each year that the State does not meet its projected need for affordable housing, the number of needed housing units grows, making it even more difficult to keep pace with housing demand.

Figure 1

The State Provides Financial Assistance and Is Responsible for Ensuring That Local Jurisdictions Support Sufficient Affordable Housing

A depiction of state agencies' roles in financing and overseeing affordable housing development.

Source: Various state laws.

Because of this shortage of affordable homes, residents of California are experiencing widespread consequences, as we show in Figure 2. For example, California represents 12 percent of the nation's population, but 27 percent of the nation's population who are experiencing homelessness—more than 151,000 people—live in California. Since at least 2018, the State has made additional investments to boost construction of housing and to help those experiencing homelessness. However, the U.S. Department of Housing and Urban Development (HUD) reported in January 2020 that California's population experiencing homelessness increased by more than 21,000 people from 2018 to 2019, or about 16 percent. Moreover, the Governor emphasized the urgency of the State's homelessness crisis in his February 2020 State of the State address.

Figure 2

California's Shortage of Affordable Homes Has Widespread Consequences

An infographic highlighting the consequences of California's shortage of affordable homes.

Source: 2012 to 2016 and 2018 U.S. Census Bureau data from the American Community Survey, U.S. Census Bureau 2019 population estimates, and HUD's 2019 Annual Homeless Assessment Report to Congress.

* Households earning incomes that are 80 percent or less of their area's median income.

Further, high housing costs and the lack of access to affordable housing affect health, education, and quality of life for lower‑income households. HUD data from 2012 through 2016 indicates that 1.6 million renter households in the State are severely cost-burdened; that is, they spend more than half of their monthly income on housing costs. Of these, more than 98 percent are lower-income households. Figure 3 illustrates the burdensome housing costs for a lower-income household. According to HCD, when Californians are forced to pay a higher percentage of income toward housing costs, it can have a broad impact on the overall quality of their lives and the lives of their families, such as health consequences and a negative impact on children's academic performance. For lower-income households, California's housing agencies have reported that high housing costs can lead to frequent moves or force families to live in unhealthy substandard housing. According to the Terner Center for Housing Innovation at the University of California, Berkeley, as of June 2020, nearly one million renter households in California experienced a job loss as a result of the economic impact of COVID-19, placing households at risk of housing insecurity and eviction. Further, according to HCD, housing costs and supply issues particularly affect certain vulnerable populations, such as persons experiencing homelessness, people with disabilities, seniors, and farmworker households.

Lastly, more affordable housing benefits everyone. Research suggests that the potential social and economic benefits of affordable housing, beyond simple cost savings to residents, include increased economic activity in the community and reductions in homelessness, in greenhouse gas emissions, and in costs for medical care and social services.

State Agencies Play a Significant Role in Supporting Affordable Housing Development

Developing affordable housing in California is complex and costly, and it typically requires those who build and rehabilitate it (developers) to secure funding from more than one source in order to finance a single project. According to a September 2018 report by the U.S. Government Accountability Office, the median cost of building a unit of affordable housing for certain projects completed between 2011 and 2015 in California was $326,000, whereas the median cost was $264,000 in New York and $126,000 in Texas. Project developers secure funding for their projects by applying to several—often more than four—different organizations, including private, local, state, and federal entities. In fact, for a selection of affordable housing projects we reviewed, developers used a variety of these organizations for financing. Even after securing local and private funding assistance for a housing project, project applicants often fall short of their financing needs. For example, a developer may have plans to build an affordable housing project with 112 units, for a total cost of nearly $44 million. Private investors may provide $6 million in loans and local governments may provide an additional $13 million in funds; however, the developer must still cover the remaining $25 million in expenses, in this case, turning to the State for additional financing to close the gap. Affordable housing often requires significant financial support from the State in order for these projects to be financially feasible for developers, who must agree to maintain these developments at affordable rents for lower-income households for years after they are built.

Figure 3

Millions of Renter Households in California Have Significant Housing Costs

An infographic describing the housing costs that burden millions of renter households in California.

Source: 2012 to 2016 U.S. Census Bureau data from the American Community Survey and HUD 2020 state income limits.

* Includes the 1.6 million households that are severely cost-burdened.

This monthly income is based on HUD's median family income for a low-income family of four (earning between 80 percent and 50 percent of California's median family income).

The State's four key housing agencies—HCD, CalHFA, the Tax Committee, and the Debt Limit Committee—provide financing to developers and other housing organizations, such as the California Municipal Finance Authority, for the construction of affordable housing through tax credits, tax-exempt bonds, and loans, which we refer to collectively here as financial resources. These state agencies award significant support for affordable housing through the development of multifamily housing, such as rental apartment buildings. Multifamily housing can be a cost-effective way to create a higher number of affordable housing units in a smaller space. The State also invests in single-family programs, which typically assist first-time homebuyers when they purchase a home, but they are not exclusive to lower-income households. Because the four agencies award significant financial resources to support multifamily rental housing for lower-income households, we have focused our analyses on the programs that emphasize this type of housing development.

Residing within the State Treasurer's Office, the Tax Committee and the Debt Limit Committee provide the majority of state financial resources for affordable multifamily housing projects by awarding tax credits and tax-exempt bond allocations. State law designates the Tax Committee to award federal tax credits and the Debt Limit Committee to allocate the State's tax-exempt bond resources. Significantly, because the majority of tax credits are paired with bond allocations, the two committees make awards to most of the same projects. For example, if an applicant receives approval to fund at least half of its multifamily housing project with tax-exempt bonds, the applicant often also applies for and receives federal tax credits. The Tax Committee administers the State's low-income housing tax credit program, which encourages the construction and rehabilitation of affordable multifamily rental housing. In 2019 the Tax Committee awarded $353 million in federal tax credits, which equates to $3.53 billion because project owners can take the annual credit each year for 10 years. The Tax Committee awards these federal housing tax credits to developers of qualified rental projects through an application process. Developers typically sell their tax credits to outside investors in exchange for investment in a project, as selling tax credits reduces the debt developers would otherwise incur. The Tax Committee also awards state tax credits to supplement financial resources for projects that have generally already qualified for federal tax credits yet still fall short of their total financing needs. In 2019 the Tax Committee awarded $100 million in state tax credits; however, state law authorized an additional $500 million in state tax credits in 2020 to support affordable housing. Unlike the federal tax credits, state tax credits are one-time awards taken over four years and are not claimed each year for 10 years.

The Debt Limit Committee allocates the State's tax-exempt bond resources that help developers of multifamily rental units to acquire land and construct new units or purchase and rehabilitate existing units; these resources also support other purposes such as recycling facilities, landfills, and wastewater treatment facilities. The Debt Limit Committee grants successful applicants for the bond resources, usually state and local governmental housing agencies (known as bond issuers), the authority to issue tax-exempt bonds for the purpose of financing affordable housing projects, up to a certain monetary limit. These bonds generally are used to fund loans to developers to build the projects. In 2019 the Debt Limit Committee awarded $4.6 billion in bond resources for affordable multifamily housing development projects, which was nearly 90 percent of the total tax-exempt bonds it awarded.Table A in Appendix A presents the Debt Limit Committee's total bond resources awarded for multifamily affordable housing, single-family housing, and nonhousing projects from 2015 through 2019. Investors purchase these bonds and do not pay federal income tax on the interest they earn from their investment.

HCD and CalHFA also provide financial support for multifamily development. HCD administers a variety of affordable housing programs including the Multifamily Housing Program, which assists housing developers by providing deferred payment loans for the construction of rental housing for lower-income households. A deferred payment loan enables the developers to obtain the money they need for development, with most repayment postponed until the completion of the loan's term. In fiscal year 2018–19, HCD reported awarding $1.2 billion in grants and loans to increase the supply of affordable housing throughout the State. CalHFA serves as the State's affordable housing lender, offering financing to developers for affordable multifamily rental housing projects by providing long-term loans and facilitating their access to tax‑exempt and taxable bonds. CalHFA issues these bonds and uses the proceeds to make loans to developers to fund their projects. In fiscal year 2018–19, CalHFA reported issuing $619 million in multifamily financing. Unlike the other three housing agencies, CalHFA is self-supporting and receives the majority of its revenues from its investments and loan interest payments from borrowers.

Affordable Housing Development Depends Largely on Local Jurisdictions

The State's ability to meet its affordable housing goals depends largely on the cooperation of local jurisdictions because they control key aspects of housing development, such as where developers can build. Most of California's 539 local jurisdictions are cities, and 84 percent of the State's population lives in cities. Cities generally oversee housing development within their jurisdictions while counties have control over the land that is outside of the cities, termed unincorporated areas. We highlight in Figure 4 the aspects of housing development that local jurisdictions typically control. However, developers actually build the housing, and some aspects of development—such as the condition of the housing market—are beyond local jurisdictions' control. The State recognizes this limitation but still intends local jurisdictions to undertake all necessary actions, including actions to address nongovernmental constraints such as land and construction costs, to facilitate the development of needed affordable housing. In other words, state law does not explicitly require local jurisdictions to build homes, but it does effectively require that jurisdictions make every effort to accommodate needed housing—and given the amount of control jurisdictions exercise over the development process, these efforts are essential for building affordable housing.

Figure 4

Local Jurisdictions Control Many Key Aspects of Housing Development

A depiction of the key aspects of housing development that local jurisdictions control.

Source: Analysis of state law, local jurisdictions' municipal codes, and documents from HCD's website.

HCD oversees local jurisdictions' efforts to plan for needed housing in three general stages, which we depict in Figure 5. The first step is to establish each local jurisdiction's housing needs, which define the number of housing units they must plan to accommodate. Based on population projections and other indicators such as the percentage of households that are cost-burdened, HCD determines the total number of housing units needed for each of the State's regional governments or, in areas where no regional government exists, for each local jurisdiction itself.Regional governments are associations that represent member jurisdictions; they cover areas ranging from single counties like San Diego to broader regions like the Bay Area, and they can carry out tasks such as developing regional transportation plans. Areas without regional governments tend to be lower-population areas. The needed units are categorized by affordability: from "very low income" and "low income" units (affordable housing) to "moderate income" and "above moderate income" units. In areas where regional governments exist, they subsequently allocate specific numbers of their needed housing units to the local jurisdictions within their regions.

Figure 5

The State Oversees Local Efforts to Accommodate Affordable Housing in Three Key Stages

A flowchart showing the three key stages by which the State oversees local efforts to accommodate affordable housing.

Source: Analysis of state law, documents from HCD's website, and the city of Menifee's housing plan.

The allocated units that regional governments or HCD assign to local jurisdictions must satisfy key objectives in state law. For example, the allocations must increase the housing supply in all local jurisdictions in an equitable manner, which should result in each jurisdiction receiving an allocation of units for lower-income households. These allocations must also direct fewer lower‑income housing units to a jurisdiction if that jurisdiction already has a disproportionately large share of existing lower‑income households—meaning that jurisdictions with a larger share of higher-income households should generally plan to provide more affordable housing than jurisdictions with a larger share of lower‑income households. Another key objective is that the allocations further "fair housing," which in part means addressing disparities in access to opportunity—opportunity for things like educational attainment and economic mobility that can support positive life outcomes for low-income families. Overall, the needs allocation process in state law establishes that each local jurisdiction must plan to accommodate its "fair share" of affordable housing.

Housing researchers and others have raised concerns that the needs allocation process had potential flaws because the process has not always resulted in each local jurisdiction planning for a fair share of affordable housing. For instance, in the last needs allocation cycle that covered 2014 through 2021, Newport Beach was allocated to accommodate just two units of affordable housing while Lake Forest, a city in the same county and with a similar population size, was allocated almost 1,100 units of affordable housing. HCD recently gained more authority to review regional governments' allocations of housing need to local jurisdictions to determine whether the allocations further the objectives in state law. HCD's new authority could help the State better ensure that each local jurisdiction plans for a fair share of affordable housing, but the allocation cycle the State is entering is in the early stages. As a result of the potential flaws in the previous cycle, we use indicators of need, such as severe cost burden for lower‑income renters, in this report to characterize jurisdiction‑level need instead of relying on the unit‑specific totals that regional governments allocated.

Local Jurisdictions' Housing Plans Must
Describe in Detail Their Efforts to Facilitate
Housing Development

Local housing plans must contain the following:

Source: State law.

Once local jurisdictions have received notification of their allocation of needed housing units, they must make a plan to facilitate the production of those units. The Legislature intends that local jurisdictions accommodate their share of needed units and ensure that housing development provides, at a minimum, the number of units allocated to each jurisdiction. To do this, every five or eight years local jurisdictions must adopt housing elements (local housing plans), which are essentially roadmaps for housing development. Local jurisdictions must include in these housing plans key information that we describe in the text box, including specific sites that are suitable to accommodate all of a jurisdiction's needed units. State law requires HCD to review each local housing plan to determine whether it complies with statutory requirements.

Finally, local jurisdictions must submit annual progress reports that describe their progress in meeting housing needs. HCD receives these reports and publishes certain data from them, including the number of affordable units for which each local jurisdiction has issued building permits. These annual progress reports also include updates about whether local jurisdictions have implemented other aspects of their housing plans, such as efforts to mitigate barriers to development and to update local housing ordinances. State law recently expanded HCD's oversight and enforcement authority: in January 2018, HCD received authority to monitor local jurisdictions for compliance with their housing plans and with certain housing laws, and to notify the Office of the Attorney General (Attorney General) about noncompliant jurisdictions.

The State Recently Enacted Statutes to Better Promote the Development of Affordable Housing

The State enacted several statutes in and after 2017 that focus on increasing affordable housing development. For example, new statutes have sought to streamline the process for local jurisdictions to approve certain projects, to increase the number of housing units developers can request to build for certain projects, and to expand requirements for local jurisdictions to identify in their housing plans sites with a realistic potential for development.

While these statutes could have a significant impact on affordable housing development in California, the State has not yet realized many of their potential benefits because they have not been effective for long enough. More importantly, we identified remaining gaps in state law, which we discuss further in the report, that if amended, could provide for more affordable housing development and help address the State's housing crisis.

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