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 --