BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
           ------------------------------------------------------------------ 
          |Bill No:  |SB 879                           |Hearing    |5/11/16  |
          |          |                                 |Date:      |         |
          |----------+---------------------------------+-----------+---------|
          |Author:   |Beall                            |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |Version:  |5/5/16                           |Fiscal:    |Yes      |
           ------------------------------------------------------------------ 
           ----------------------------------------------------------------- 
          |Consultant|Grinnell                                              |
          |:         |                                                      |
           ----------------------------------------------------------------- 

                          Affordable Housing Bond Act of 2016



          Enacts the Affordable Housing Bond Act of 2016, which places a  
          $3 billion bond on the November, 2016, ballot to fund affordable  
          housing.


           Background 

           When public agencies issue bonds, they essentially borrow money  
          from investors, who provide cash in exchange for the agencies'  
          commitment to repay the principal amount of the bond plus  
          interest.  Bonds are usually either revenue bonds, which repay  
          investors out of revenue generated from the project the agency  
          buys with bond proceeds, or general obligation bonds, which the  
          public agency pays out of general revenues and are guaranteed by  
          its full faith and credit.  

          Section One of Article XVI of the California Constitution and  
          the state's General Obligation Bond Law guide the issuance of  
          the state's general obligation debt.  The Constitution allows  
          the Legislature to place general obligation bonds on the ballot  
          for specific purposes with a two-thirds vote of the Assembly and  
          Senate.  Voters also can place bonds on the ballot by  
          initiative, as they have for parks, water projects, high-speed  
          rail, and stem cell research, among others.  Either way, general  
          obligation bonds must be ratified by majority vote of the  
          state's electorate.  Unlike local general obligation bonds,  








          SB 879 (Beall) 5/5/16                                     PageB  
          of?
          
          approval by the state's electorate doesn't automatically trigger  
          an increased tax to repay the bond.  The Constitution commits  
          the state to repay investors from general revenues above all  
          other claims, except payments to public education, so general  
          obligation bond repayment is continuously appropriated, and  
          therefore not part of the annual Budget Act.  California voters  
          approved $38.4 billion of general obligation bonds between 1974  
          and 1999, and approximately $103 billion since 2000.   
          Additionally, in 2014, the Legislature enacted and voters  
          approved Proposition 1, which authorized $7.1 billion in bonds  
          for water quality and supply infrastructure (AB 1471, Rendon,  
          2014).

          Bond acts have standard provisions that authorize the Treasurer  
          to sell a specified amount of bonds, and generally include  
          several uniform provisions that:

                 Establish the state's obligation to repay them, and  
               pledge its full faith and credit to repayment, 

                 Set forth issuance procedures, and link the bond act to  
               the state's General Obligation Bond Law,  

                 Create a finance committee with specified membership,  
               chaired by the State Treasurer,  

                 Charge the committee to determine whether it is  
               "necessary or desirable" to issue the bonds,

                 Add other mechanisms necessary for the Treasurer and the  
               Department of Finance to implement the bond act, including  
               allowing the board to request a loan from the Pooled Money  
               Investment Board to advance funds for bond-funded programs  
               prior to the bond sale, among others.

          In bond acts, the Legislature generally:

                 Sets forth categories of projects eligible for bond  
               funds, such as library construction or school facility  
               modernization, 

                 Chooses an administrative agency to award the funds,  
               such as the State Librarian or the State Allocation Board,   
                









          SB 879 (Beall) 5/5/16                                     PageC  
          of?
          

                 Details the criteria to guide the administrative  
               agency's funding in each category, 

                 Enacts enforcement and audit provisions, and

                 Provide for an election to approve the bond act.

          Should the voters approve the bond act, the Legislature then  
          appropriates funds to the chosen agencies to fund projects  
          consistent with the criteria, generally as part of the Budget  
          Act, although sometimes funds are continuously appropriated.   
          The Department of Finance then surveys agencies to determine  
          need for bond funds based on a project's readiness, and then  
          asks the Treasurer to sell bonds in a specified amount.  After  
          the bond sale, the Department of Finance determines which bond  
          acts and agencies receive bond proceeds.  

          In 2002, the Legislature enacted the Housing and Emergency  
          Shelter Trust Fund Act of 2002, which authorized $2.1 billion in  
          general obligation bonds for various affordable housing programs  
          (SB 1227, Burton).  Voters approved the Act as Proposition 46 in  
          November, 2002.  In 2006, the Legislature followed up with the  
          Housing and Emergency Shelter Trust Fund Act of 2006, which  
          authorized $2.85 billion in general obligation bonds for various  
          affordable housing programs (SB 1689, Perata).  Voters  
          subsequently approved the measure as Proposition 1C in November,  
          2006.  With these bond funds almost exhausted, and the demise of  
          redevelopment funding, the author wants the state to issue  
          general obligation bonds to fund affordable housing projects in  
          the state.


           Proposed Law

           Senate Bill 879 enacts the Affordable Housing Bond Act of 2016,  
          which places a $3 billion bond on the November, 2016, general  
          election ballot.  The measure creates the Affordable Housing  
          Bond Act Trust Fund of 2016, and states the Legislature's intent  
          that all bond proceeds be deposited in the Fund.  The bill  
          allocates funds from the Fund to the following accounts:

                 $1.5 billion to the multifamily housing account, to be  
               continuously appropriated to the Multifamily Housing  









          SB 879 (Beall) 5/5/16                                     PageD  
          of?
          
               Program to construct, rehabilitate, and preserve  
               traditional and rental housing for persons with incomes of  
               up to 60% of the area median income.  

                 $600 million to the Transit-Oriented Development and  
               Infill Infrastructure Account, which the bill creates  
               within the Fund.  The bill then allocates funds from the  
               Account in the following ways:

                  o         $300 million to the Transit-Oriented  
                    Development Implementation Fund pursuant to the  
                    Transit-Oriented Development Implementation Program. 

                  o         $300 million to the Infill Infrastructure  
                    Financing Account, which the bill creates within the  
                    Account, for the Legislature to appropriate by statute  
                    for infill incentive grants to assist in the new  
                    construction or rehabilitation of infrastructure that  
                    supports high-density affordable and mixed-income  
                    housing in locations designated as infill.

                 $600 million to the Special Populations Housing Account,  
               which the bill creates within the Fund.  The bill then  
               allocates funds from the Account in the following ways:

                  o         $300 million continuously appropriated for  
                    transfer to the Joe Serna, Jr. Farmworker Housing  
                    Grant Fund.

                  o         $300 million to the Local Housing Trust Fund  
                    Matching Grant Program Account, which the bill  
                    creates, for the Legislature to appropriate by statute  
                    to provide matching grants to local public agencies  
                    and nonprofit organizations that raise money for  
                    affordable housing.

                 $300 million to the Home Ownership Development Account,  
               which the bill creates within the Fund, and continuously  
               appropriates to the CalHome Program to provide direct,  
               forgivable loans to assist development projects involving  
               multiple ownership units, including single-family  
               subdivisions, for self-help mortgage assistance programs,  
               and for manufactured homes.










          SB 879 (Beall) 5/5/16                                     PageE  
          of?
          
          SB 879 also allows the Legislature to amend any of the above  
          allocations, or any of the laws guiding those programs, to  
          improve the efficiency and effectiveness of those programs.

          SB 879 utilizes the same finance committee as Proposition 1C,  
          comprised of the State Treasurer as chair, the Director of  
          Finance; the Secretary of Business, Consumer Services, and  
          Housing, the Director of Housing and Community Development  
          (HCD); and the Executive Director of the California Housing  
          Finance Agency, or their designated representatives.  The bill  
          charges the Committee with the same duties to authorize the  
          issuance and sale of SB 879's bonds.  The measure also  
          incorporates standard provisions in general obligation bond law,  
          either explicitly or by reference, with some modifications.  

          The measure only takes effect if enacted by voters at the  
          November, 8, 2016, statewide general election, makes legislative  
          findings and declarations supporting its provisions, and  
          contains an urgency clause giving the measure immediate effect  
          if enacted.  


           State Revenue Impact

           No estimate.


           Comments

           1.  Purpose of the bill  .  According to the author, "California is  
          facing a housing crisis.  California is home to 21 of the 30  
          most expensive rental housing markets in the country, which has  
          had a disproportionate impact on the middle class and the  
          working poor.  A person earning minimum wage must work three  
          jobs on average to pay the rent for a two-bedroom unit.   
          Additionally, units affordable to low-income earners, if  
          available, are often in serious states of disrepair.  California  
          also faces a housing shortage: 2.2 million extremely low-income  
          and very low-income renter households are competing for only  
          664,000 affordable rental homes.  Further, California has seen a  
          reduction $1.5 billion of annual state investment dedicated to  
          housing in recent years.  As demonstrated through Prop 1C and  
          the 92,000 units it created, SB 879 will have a real and lasting  
          impact on the housing shortage by providing $3 billion through a  









          SB 879 (Beall) 5/5/16                                     PageF  
          of?
          
          statewide housing general obligation bond to fund existing and  
          successful affordable housing programs in California.  Further,  
          SB 879 will create jobs and provide local benefits through the  
          construction of affordable housing.  The estimated one-year  
          impacts of building 100 rental apartments in a typical local  
          area include $11.7 million in local income, $2.2 million in  
          taxes and other revenue for local governments, and 161 local  
          jobs (1.62 jobs per apartment).  The additional, annually  
          recurring impacts of building 100 rental apartments in a typical  
          local area include $2.6 million in local income, $503,000 in  
          taxes and other revenue for local governments, and 44 local jobs  
          (.44 jobs per apartment)."   

          2.   Sixteen tons  .  Debt is an essential part of almost every  
          government, business, and personal balance sheet, as borrowers  
          seek funds from lenders in exchange for a future commitment to  
          repay them.  However, evaluating the State's general obligation  
          debt is difficult; both the State Treasurer and the Legislative  
          Analyst's Office suggest there's no correct amount.  Instead,  
          experts suggest that states should look at three criteria:  
          affordability, comparability, and optimality:<1>

          California currently has $76 billion of general obligation and  
          $10.8 billion of lease revenue debt outstanding, which is  
          affordable. The Governor's 2016 Five-Year Infrastructure Plan  
          states that the General Fund spent $5.2 on debt service in  
          2014-15, which the plan estimates will grow to $5.6 billion by  
          2019-20, not including special funds.  The Plan calculates the  
          Debt Service Ratio, or the ratio between debt service and  
          general fund revenues, as 4.69% in 2014-15, which falls slightly  
          to 4.3% in 2019-2020.  These totals increase to $7.2 billion in  
          2014-15 and $8.5 billion in 2019-20 when non-General Fund debt  
          service is included, but the ratio doesn't change significantly,  
          as the Plan estimates General Fund revenues to grow, and assumes  
          no new general obligation bond authorizations.  The State  
          Treasurer calculates a debt service ratio of 6.84% in 2014-15,  
          and 6.79% in 2015-16; the percentages differ because the  
          Treasurer does not reflect offsets of federal government  
          subsidies or transfers from special funds.  While debt service  
          percentages are reasonable, every dollar spent on debt service  
          ---------------------------
          <1> Robert Wassmer and Ronald Fisher "Debt Burdens of California  
          State and Local Governments: Past, Present and Future." As  
          requested and supported by the California Debt and Investment  
          Advisory Commission.  July 2011.








          SB 879 (Beall) 5/5/16                                     PageG  
          of?
          
          reduces the funding that is available for other priorities, and  
          debt service is one of the fastest growing state costs in recent  
          years, according to the Governor's Five-Year Infrastructure  
          Plan.  The Plan proposes only $350 million in new general  
          obligation bonds.

          California's comparability to other states is less favorable,  
          but improving.  The State Treasurer's 2015 Debt Affordability  
          Report, issued last October, contains the following chart:

           ---------------------------------------------------------------- 
          |Debt Ratios Of 10 Most Populous States, Ranked By Ratio Of Debt |
          |To Personal Income                                              |
          |                                                                |
           ---------------------------------------------------------------- 
          |-----------------+------------+---------+---------+------------|
          |      State      |  Moody's/  | Debt to |Debt per |Debt as a % |
          |                 |   S&P/     |personal |capita(b)|            |
          |                 |  Fitch(a)  |income(b)|         |  of state  |
          |                 |            |         |         |GDP(b)(c)   |
          |-----------------+------------+---------+---------+------------|
          |Texas            |Aaa/AAA/AAA |  1.0%   |  $406   |.71%        |
          |                 |            |         |         |            |
          |-----------------+------------+---------+---------+------------|
          |North Carolina   |Aaa/AAA/AAA |  1.9%   |  $739   |   1.56%    |
          |                 |            |         |         |            |
          |-----------------+------------+---------+---------+------------|
          |Michigan         |Aa2/AA-/AA  |  1.9%   |  $758   |   1.74%    |
          |-----------------+------------+---------+---------+------------|
          |Florida          |Aa1/AAA/AAA |  2.4%   |  $973   |   2.42%    |
          |-----------------+------------+---------+---------+------------|
          |Pennsylvania     |Aa3/AA-/AA- |  2.4%   | $1,117  |   2.21%    |
          |-----------------+------------+---------+---------+------------|
          |Ohio             |Aa1/AA+/AA+ |  2.7%   | $1,109  |   2.27%    |
          |                 |            |         |         |            |
          |-----------------+------------+---------+---------+------------|
          |Georgia          |Aaa/AAA/AAA |  2.8%   | $1,043  |   2.32%    |
          |-----------------+------------+---------+---------+------------|
          |California       | Aa3/AA-/A+ |  5.1%   | $2,407  |   4.24%    |
          |-----------------+------------+---------+---------+------------|
          |New York         |Aa1/AA+/AA+ |  5.7%   | $3,092  |   4.66%    |
          |                 |            |         |         |            |
          |-----------------+------------+---------+---------+------------|
          |Illinois         |  A3/A-/A-  |  5.7%   | $2,681  |   4.79%    |









          SB 879 (Beall) 5/5/16                                     PageH  
          of?
          
          |-----------------+------------+---------+---------+------------|
          |                 |            |         |         |            |
          |-----------------+------------+---------+---------+------------|
          |Moody's Median   |            |  2.5%   | $1,012  |   2.21%    |
          |All States       |            |         |         |            |
          |-----------------+------------+---------+---------+------------|
          |Median For The   |            |  2.55%  | $1,076  |    2.3%    |
          |10 Most Populous |            |         |         |            |
          |States           |            |         |         |            |
          |-----------------+------------+---------+---------+------------|
          |                 |            |         |         |            |
          |(a) Moody's,     |            |         |         |            |
          |Standard &       |            |         |         |            |
          |Poor's, and      |            |         |         |            |
          |Fitch Ratings as |            |         |         |            |
          |of September,    |            |         |         |            |
          |2015.            |            |         |         |            |
          |                 |            |         |         |            |
          |(b) Figures as   |            |         |         |            |
          |reported by      |            |         |         |            |
          |Moody's in its   |            |         |         |            |
          |2015 State Debt  |            |         |         |            |
          |Medians Report   |            |         |         |            |
          |released June    |            |         |         |            |
          |2015. As of      |            |         |         |            |
          |calendar year    |            |         |         |            |
          |end 2013.        |            |         |         |            |
          |                 |            |         |         |            |
          |(c) State GDP    |            |         |         |            |
          |numbers have a   |            |         |         |            |
          |one-year lag.    |            |         |         |            |
           --------------------------------------------------------------- 

          Determining optimality or whether government is investing in the  
          quantity and quality of public capital desired by residents, and  
          financing the appropriate share with debt, is more difficult.   
          LAO recommends that the Legislature consider the Five-Year  
          Infrastructure Plan as a starting point to developing a  
          coordinated approach to infrastructure funding, and establish a  
          committee to focus on statewide infrastructure.  This question  
          is especially difficult for affordable housing, as a broad  
          consensus does not exist regarding the causes of the current  
          lack of affordable housing, and if subsidies are necessary, who  
          should pay for them, and in what form.  Public funding exists in  









          SB 879 (Beall) 5/5/16                                     PageI  
          of?
          
          the form of tax-exempt mortgage revenue and general obligation  
          bonds, and Low-Income Housing Tax Credits, among others, while  
          some local agencies have also adopted policies that place the  
          obligation on market rate housing developers through exactions,  
          in-lieu fees, and inclusionary zoning policies.

          3.   The good news  .  Investors ultimately determine the interest  
          rate paid on a bond when they buy one.  However, ratings issued  
          from the three major credit ratings agencies often inform  
          investors and the public regarding the state's creditworthiness,  
          and assess any investment risk from investing in California  
          general obligation bonds.  These ratings change over time in  
          response to a state's fiscal situation and economy, among other  
          factors.  In 2014, ratings agencies Standard and Poor's and  
          Moody's both raised its ratings on California bonds, and ratings  
          agency Fitch has increased the state's rating twice between 2012  
          and 2014.  Agencies identified improving revenues and fiscal  
          discipline when making the upgrade.  Additionally, California  
          sold $2.95 billion in general obligation bonds in March, about  
          which the Treasurer cited "extremely high demand" with "the  
          lowest borrowing costs on 30-year bonds in the last three  
          decades."  The Treasurer added:

               "The spread between the state's new general obligation  
               bonds and a widely used municipal bond market benchmark was  
               the most favorable since 2005, and these low yields allowed  
               the state to refinance $1.96 billion in  
               higher-interest-paying bonds, saving California taxpayers  
               $398.5 million over the remaining life of the bonds.  Both  
               retail and institutional investors showed extremely strong  
               interest in the bond offerings. Retail investors placed  
               $1.3 billion in orders, the most retail orders in a single  
               offering since 2010. Overall demand was so positive that  
               the Treasurer's Office increased the amount of refunding  
               bonds by more than $500 million.  Yields on the bonds  
               ranged from 2.17% for 10-year maturities to 3.05% for the  
               longest maturity, in 2045."

          4.   The bad news  . California has a distinct problem: of the $135  
          billion that voters have authorized, more than $27 billion  
          hasn't been issued yet.  The state hasn't issued several billion  
          in transportation and resources bonds and $9 billion in high  
          speed rail bonds, plus $7.5 billion from the recently enacted  
          water bond.  While the state has made progress reducing the  









          SB 879 (Beall) 5/5/16                                     PageJ  
          of?
          
          amount of unauthorized bonds in recent years, many bond-funded  
          projects have not yet received required approvals.  The  
          Treasurer generally sells about $1 billion in new money bonds  
          twice per year, so even if the Legislature enacts and the voters  
          approve this measure, many of its purposes may have to wait  
          several years for funding as projects funded by previously  
          authorized bonds get up and running.

          5.   Program funding  . SB 879 proposes new funding for several  
          existing programs, which are described below, along with new  
          funding proposed in this bill.  These programs all received  
          funding under Prop 1C.

                 Multifamily Housing Program ($1.5 billion): the  
               Multifamily Housing Program assists the new construction,  
               rehabilitation, and preservation of permanent and  
               transitional rental housing for lower income households  
               through loans to local governments and non-profit  
                 developers.  Funds are for incomes up to 60% of area median  
               income.

                 Transit-Oriented Development Implementation Program  
               ($300 million): under this program, low-interest loans are  
               available as gap financing for rental housing developments  
               that include affordable units, and as mortgage assistance  
               for homeownership developments.  Grants to cities,  
               counties, and transit agencies are for the provision of the  
               infrastructure necessary for the development of higher  
               density uses within close proximity to a transit station  
               and loans for the planning and development of affordable  
               housing within one-quarter mile of a transit station.  

                 Infill Infrastructure Financing Grants ($300 million):  
               this program assists in the new construction and  
               rehabilitation of infrastructure that supports higher  
               density affordable and mixed-income housing in locations  
               designated as infill, such as water and sewer extensions.

                 Joe Serna, Jr. Farmworker Housing Grant Program ($300  
               million): this program finances the new construction,  
               rehabilitation, and acquisition of owner-occupied and  
               rental units for agricultural workers, with a priority for  
               lower income households.










          SB 879 (Beall) 5/5/16                                     PageK  
          of?
          
                 Local Housing Trust Matching Grant Program ($300  
               million): this provides matching grants to local  
               governments and non-profits that raise money for affordable  
               housing.

                 CalHome ($300 million): this program provides grants to  
               local public agencies and nonprofit developers to assist  
               individual households through deferred-payment loans.  The  
               funds would provide direct, forgivable loans to assist  
               development projects involving multiple ownership units,  
               including single-family subdivisions.  This money would  
               also be available to self-help mortgage assistance programs  
               and manufactured homes.  

          6.   Economic benefits  .  While infrastructure spending leads to  
          increased economic activity and employment, the author points to  
          two pieces of research that demonstrate specific benefits of  
          funding affordable housing.  First, the National Association of  
          Home Builders (NAHB) estimates that construction 100 units of  
          multifamily housing has a one-time impact of $11.7 million in  
          local income, $2.2 million in taxes and other revenue for local  
          agencies, and 161 local jobs for the typical metropolitan area  
          or nonmetropolitan county. NAHB adds that recurring benefits  
          total $2.6 million in local income, $503,000 in local taxes and  
          other revenue, and 44 jobs.  Second, the California Housing  
          Partnership Corporation (CHPC) estimates that a $400 million  
          investment in the Multifamily Housing Program would result in  
          5700 units that would house 11,400 people, creating 9.234  
          one-time and 2,508 recurring jobs.  CHPC adds that additional  
          funding to MHP leverages federal funds, and because HCD has  
          several years of experience allocating funding, money could be  
          spent quickly.

          7.   Related legislation  .  Last year, the Legislature approved  
          two measure intended to increase the current supply of  
          affordable housing:  SB 377 (Beall) allowed housing developers  
          awarded low-income housing tax credits to sell them to other  
          taxpayers, and AB 35 (Chiu) which increased annual allocations  
          of the credits by $300 million, among other changes.  However,  
          the Governor vetoed both measures citing financial  
          uncertainties, and encouraging the Legislature to consider new  
          and expanded tax credits as part of the Budget.  Responding the  
          Governor's veto, legislators have advanced two proposals for  
          consideration in budget deliberations:









          SB 879 (Beall) 5/5/16                                     PageL  
          of?
          

                 Senate Proposal: Senate pro Tempore De León and a  
               bipartisan group of Senators have proposed a $2 billion  
               bond for permanent supportive housing for the chronically  
               homeless who suffer from mental illness by reallocating  
               funding generated by the surtax on incomes over $1 million  
               imposed by the Mental Health Services Act.  

                 Assembly Democratic Proposal: Assembly Speaker Rendon  
               and other Assembly Democrats have proposed allocating $1.3  
               billion in funds and tax credits for affordable housing and  
               homeless shelters.

          8.   Incoming  !  On Tuesday, May 3rd, the Committee on  
          Transportation and Housing approved SB 879 by a vote of 9 to 1.   
          This Committee is hearing the measure as the Committee of second  
          reference.  

          9.   Urgency  .  To enable a housing bond appearing on the  
          November, 2016, ballot, SB 879 contains an urgency clause  
          providing that its provisions take effect immediately upon  
          enactment.  




           Support and  
          Opposition  (5/5/16)


           Support  :  California Coalition for Rural Housing; California  
          Housing Consortium; California Housing Partnership Corporation;  
          Coachella Valley Housing Coalition; Community Economics; EAH  
          Housing; Eden Housing; First Community Housing; Food Empowerment  
          Project; Gubb and Barshay, LLP; Hello Housing; League of  
          California Cities; Mammoth Lakes Housing; MidPen Housing  
          Corporation; Non-Profit Housing Association of Northern  
          California; Resources for Community Development; Silicon Valley  
          Independent Living Center; Sonoma County Board of Supervisors;  
          TLCS, Inc.; Marian Wolfe, Housing Advisory Commissioner, City of  
          Berkeley.    


           Opposition  :  Howard Jarvis Taxpayers' Association









          SB 879 (Beall) 5/5/16                                     PageM  
          of?
          



                                      -- END --