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- Chapter 1—The State Lacks an Effective Approach to Building Enough Affordable Homes
- Chapter 2—The State Has Not Ensured That Local Jurisdictions Accommodate Needed Affordable Housing
- Other Issues We Reviewed
Chapter 1
The State Lacks an Effective Approach to Building Enough Affordable Homes
Chapter Summary
California is failing to build enough affordable housing in part because the State lacks an effective plan for how it will meet the statewide need for affordable housing. For example, the State does not have a clear plan describing how or where its billions of dollars for housing will have the most impact. In fact, the absence of a comprehensive and coordinated plan allowed the mismanagement and ultimate waste of $2.7 billion in bond resources to occur with little scrutiny. These bond resources could have helped support the construction of more affordable housing. Presently, the State does not possess the data it needs to determine how much affordable housing it has supported with its financial resources. The State's lack of a coordinated housing plan is also evident in the four state housing agencies' misaligned and inconsistent program requirements, which we found can slow development and increase project costs. In addition, the Tax Committee's and Debt Limit Committee's review processes are redundant, contributing to the need to merge these two committees.
The State Lacks an Effective Plan for Using and Overseeing the Billions of Dollars Available for Affordable Housing
California is falling significantly short of providing enough affordable homes to lower-income residents, in part because the State does not have an effective plan for building that housing. Collectively, the four key state housing agencies reported awarding billions of dollars each year in financial resources to support affordable housing; however, without a comprehensive and coordinated plan between those agencies, the State cannot ensure that it is maximizing its resources and directing those resources to areas where they will have the most impact. Based on population projections and estimates of persons per household, HCD determined in 2018 that the State needs to add about 180,000 homes each year through 2025, which amounts to more than 70,000 new units of affordable housing annually. However, from 2015 through 2019, the State supported the development of an average of only 19,000 affordable housing units each year.Because of the State's data limitations, we rely on the Tax Committee's tax credit award data to represent the amount of state-supported housing units funded from 2015 through 2019. According to the four housing agencies, the Tax Committee's data are the most complete and accessible set of data to use for this purpose because most affordable housing projects receive tax credits. Based on changes to state law, HCD has developed an updated methodology for calculating need that now includes factors such as the number of cost-burdened and overcrowded households. Using this methodology and more recent federal data, we estimate that the need for affordable housing is now 125,000 units annually through 2029. If the State does not immediately take action to remedy the significant shortfall in affordable housing units, the number of housing units needed annually will continue to grow and could exacerbate the State's homelessness crisis and increase the number of Californians who pay burdensome housing costs.
The State's current statewide housing plan (state housing plan) does not clearly demonstrate how the State will build enough affordable housing. HCD develops and is responsible for implementing that housing plan, and state law requires HCD to update it every four years. HCD's current state housing plan generally meets the existing requirements in state law. For example, it includes an evaluation of the housing conditions throughout the State and strategies and recommendations for addressing the State's housing challenges, such as providing options for how the State could further invest in affordable housing development. However, the current state housing plan—which HCD last updated in 2018—lacks key attributes, such as identifying where state resources will make the most impact and defining outcomes for measuring success, as Figure 6 shows. Although state law does not expressly require this information, it is essential for the State to effectively plan how it will meet the statewide need for affordable housing.
In addition, the State's current housing plan does not identify all financial resources available for each housing agency and the amount of additional resources necessary to support the construction of the remaining affordable housing units needed. For example, the current housing plan does not quantify how much affordable housing the State can support with existing state resources and how much the State will need to obtain from other sources, such as federal, local, and private sources. Further, while the State's housing plan describes the policy issues relevant to the housing needs of vulnerable populations, such as people experiencing homelessness, seniors, individuals with disabilities, and farmworkers, it does not specifically identify the units needed for these populations and how the State will fill this need. As HCD illustrates in the state housing plan, these vulnerable populations are affected even more significantly by high housing costs and limited housing availability, and they sometimes encounter barriers to accessing housing, such as poor credit history or the need for supportive services. Further, the current state housing plan does not mention the award activities or capacity of the Debt Limit Committee, which awards billions of dollars of bond resources annually, primarily for affordable housing.
Figure 6
The State's Housing Plan to Build Affordable Housing Does Not Include Some Necessary Information
Source: Analysis of HCD's Statewide Housing Assessment.
If the State is to improve its housing plan, it needs to redefine the plan's purpose. The deputy director of housing policy development indicated that HCD's state housing plan is primarily a communication and education tool, not an instrument for guiding and measuring how state housing agencies award financial resources for affordable housing. Therefore, the State needs to expand the purpose of its housing plan and require HCD to provide a roadmap for how the State is going to build enough affordable housing to address the severe shortage. The gaps in the current plan may well have allowed the State to mismanage its financial resources and not effectively monitor where its resources have been used.
The State Mismanaged $2.7 Billion in State Housing Resources That Could Have Contributed to More Affordable Housing
The State's lack of an effective plan has allowed at least one instance of mismanagement of available resources to occur with little scrutiny. We found that the Debt Limit Committee let roughly $2.7 billion in bond resources expire from 2015 through 2017. These bond resources could have helped finance thousands of units of affordable housing and potentially made an additional $1 billion in total tax credits available for that purpose, since those tax credits are contingent on a bond allocation. Despite the magnitude of this mismanagement, the Debt Limit Committee did not disclose the $2.7 billion loss in its public meeting minutes and corresponding documents, and during our audit, committee staff struggled to identify and explain the extent and cause of the loss. The loss itself, the lack of transparency, and the staff's inability to account for the loss of resources we observed at the Debt Limit Committee indicate that a holistic strategy to maximize and measure the impact of affordable housing resources is sorely needed in the State's housing plan.
Over several years, the Debt Limit Committee made questionable allocation decisions that led to the waste of the $2.7 billion. Federal law makes a certain amount of tax-exempt bonds available to each state annually to use for affordable housing and some other purposes for a limited time. The Debt Limit Committee's mission is to ensure that these bonds are fully and efficiently used to finance projects and programs that provide maximum public benefit and contribute to the economic vitality of the State. According to the Debt Limit Committee's estimated public benefits summaries from 2012 to 2014, it allocated bonds in a lump sum to the California Pollution Control Financing Authority (Pollution Control) in December of those years in an attempt to preserve bonds that would be unused at the end of the calendar year (totaling $3.5 billion) and that, per federal law, would have expired if not transferred to a bond issuer for future use. We refer to these unused bonds as remaining resources. Bond issuers then have up to three years to put remaining resources to use before they expire. The expired $2.7 billion was part of the $3.5 billion the Debt Limit Committee allocated as lump sums to Pollution Control from 2012 through 2014 (expiring in 2015 through 2017, respectively). Because Pollution Control used only $800 million of the $3.5 billion within three years, the remaining resources expired and were no longer available for any purpose.
The Debt Limit Committee made decisions that contradicted its legislative priorities as documented in committee staff reports, the ongoing demand for bonds, and the past use of bonds. Attention to these factors would have helped ensure that the Debt Limit Committee was allocating the finite resources where they were most needed and most likely to be used. However, the Debt Limit Committee had information at the time that the usage of some of the bonds the committee allocated for nonhousing purposes was low for the types of projects that Pollution Control finances due to industry changes. In fact, staff reports from the 2012, 2013, and 2014 committee meetings indicated that staff recommended against providing Pollution Control with additional financial resources in those years because it already had billions in unused resources allocated to it from prior years. At the same time, the Debt Limit Committee noted in its staff reports from January 2011 through January 2014 that promoting affordable housing was a legislative priority and noted in its 2011 through 2013 public benefits summaries that demand for bonds for affordable multifamily housing was robust during the years of its questionable allocations to Pollution Control. The Debt Limit Committee also provided some of its remaining resources to housing at the end of each year from 2012 through 2014, and unlike Pollution Control, the housing issuers used the majority of the resources allocated to them during this period. If the committee had allocated bond resources based on demand and past use of bonds and assigned more of the remaining bonds for affordable housing purposes, it might have avoided substantial waste. In 2015 and 2016, the Debt Limit Committee allocated all remaining bond resources to housing and nearly all of those resources were used.
Although the Debt Limit Committee developed a new policy intended to prevent the waste of available bond resources in the future, it does not include adequate reporting provisions. During our audit, the Debt Limit Committee staff could not explain why management made the decisions that led to the $2.7 billion loss of bond resources. The committee did not document the reasoning behind the decisions, and the management who made them have left the committee. The current executive director said that she became aware that the Debit Limit Committee lacked an adequate process for tracking remaining resources when she started her position in February 2020, and has developed a policy to prevent this type of waste from happening again. However, while the Debt Limit Committee's current policy includes a process for tracking remaining resources and reporting it on its website each month, it lacks reporting provisions to disclose them in its public meetings, where it makes decisions to allocate these resources. Further, the Debt Limit Committee should develop a methodology for basing its decisions on demand for bond resources, use of previously allocated bonds, documented legislative priorities, and risk of allocated bonds being lost.
Even with these changes, the State's housing plan still needs to identify all financial resources available for supporting affordable housing, including bonds allocated by the Debt Limit Committee. As long as the State's housing plan lacks information about the extent of available affordable housing resources, a strategy for their optimal use, and an assessment of their impact, the State will lack assurance that all of its housing agencies are effectively using their financial resources to increase the supply of affordable housing. Further, including this information in the plan can help inform local jurisdictions and developers about the available financial resources.
The State Needs to Determine Where Its Resources Will Make the Biggest Impact
The State's current housing plan does not identify where the State's financial resources can have the most impact, and we found disparities in awards among certain counties. By not identifying in its housing plan where state resources will have the most impact and thereby lead to more affordable housing, the State may have allowed certain counties with the highest indications of need for affordable housing to receive disproportionately lower amounts of available state resources. The State has established that affordable housing is needed in all its geographic areas. Using federal data on severe cost burden, rental overcrowding, and rental housing availability (indicators of need), we identified counties with the highest need for affordable housing. For example, residents in San Bernardino County had among the highest indicators of need for affordable housing: nearly 47 percent of its lower-income renter households are spending more than half of their income on housing—a severe cost burden. We then explored the distribution of awards from the Tax Committee from 2015 through 2019 because tax credit projects make up the majority of affordable housing supported by the State. To provide a uniform measure of the distribution of tax credit awards, we used tax credit-supported units compared to total population.Table B in Appendix B presents the Tax Committee's tax credit awards—including federal and state tax credits—and units supported by those awards by county from 2015 through 2019. Our analysis found that tax credit awards in San Bernardino County were disproportionately low during this period: the county's share of the total tax credit‑supported affordable units statewide was only half as great as its share of the state population. We found examples of similar situations in several other counties—Butte, Kern, Marin, Riverside, Santa Cruz, and Stanislaus; these counties also had high indications of need yet fewer tax credit-supported units compared to their share of the State's population.
Seven other counties—Amador, Calaveras, Inyo, Modoc, Mono, Tehama, and Trinity—had no tax credit awards or applications at all from 2015 through 2019. Although these are smaller, more rural counties, their indicators of need were significant, with between 18 percent and 43 percent of their lower-income renter households paying more than half of their income on housing. State law requires that a certain portion of tax credits must be reserved for rural areas, but the Tax Committee has not attempted to recruit developers to apply in counties with few to no tax credit awards. While the Tax Committee has conducted application workshops and participated in housing conferences throughout the State, these workshops were typically held in larger cities, such as Los Angeles, Sacramento, and San Diego.
The distribution of tax credits in some counties is disproportionate to their share of the State's population partly because the Tax Committee does not actively solicit applications from those areas that are not applying. Although the Tax Committee maintains data on the number of applications it receives, the tax credits it awards, and the affordable housing units it supports, it has not used this information to identify disparities by geographic region, which is essential for ensuring that affordable housing is being built in all areas of the State. The Tax Committee considers geographic distribution when awarding some of its tax credit projects, but it has not done so for the majority of tax credit projects. Using these data and other factors, such as indicators of need, would enable the Tax Committee to identify areas of inequitable distribution. The executive director of the Tax Committee stated that not all areas of the State are receptive to affordable housing and this could be a reason for low application and award activity. However, she agreed that tracking applications and awards by geographic areas would be helpful to the committee, and it could use that information to encourage more applications and provide more awards to underrepresented areas.
Although the Tax Committee is open to tracking its geographic impact, the state housing plan should also identify all available resources and their distribution statewide. If HCD identified in the state housing plan where state resources would make the most impact, the Tax Committee and the other state housing agencies would possess valuable information about underrepresented areas statewide, and they could set goals for focusing on those areas.
The State Currently Lacks the Data Necessary to Develop a Comprehensive and Coordinated Plan
The State does not have the data to determine how much affordable housing it has supported with its financial resources. For example, the State lacks a unified data system across state housing agencies that tracks applications, type and amount of funding awarded, number of units created, and project location for all housing awards. HCD indicated it could be beneficial to include this information in the state housing plan, but that it would be difficult to accomplish without these data. However, HCD needs to collect this information to identify how state resources are contributing to meeting the State's housing need and to measure how well the State has maximized the impact of its financial resources.
The deputy director of housing policy development explained that existing data do not show the total amount of funding the four state housing agencies have contributed to a particular affordable housing project. The agencies often award financing for the same projects, but they do not use a common method for identifying the projects they fund, such as a common identifier. As a result, if HCD reports funding 100 affordable housing units and the Tax Committee reports funding 100 affordable housing units, it is unclear how many homes the State has actually added to its supply—100, 200, or some number in between. We found the same problem when we analyzed data obtained from these agencies. One consequence of these data limitations is that HCD cannot fully assess progress toward meeting goals established in the state housing plan and the amount and types of housing the State should support using a particular level of funding.
HCD has an opportunity to improve the State's limited housing data. Effective January 2020, state law now requires the state housing plan to include a housing data strategy that identifies the data useful for enforcing existing housing laws and informing state housing policymaking and an evaluation of data priorities. By passing this law, the State recognized a need for more consistent housing data statewide, data that also provide a better understanding of the involvement of all state agencies in the development of affordable housing. The State's new data strategy could include a common method for identifying every state-funded affordable housing project and thus understanding their different funding sources. The law requires HCD to include representatives from the California Department of Technology, metropolitan planning organizations, local governments, and relevant academic institutions and nonprofit organizations with relevant expertise in the workgroup that will develop the data strategy. While the law does not require HCD to include the other state housing agencies in this workgroup, the deputy director of housing policy development at HCD indicated that it intends to include them. However, state law also does not specifically require that data on the State's financial resources for affordable housing be a component of the data strategy. Without data on the real impact of affordable housing resources, the State will continue to struggle to gauge how successfully its housing agencies are meeting Californians' needs and continue to leave millions with burdensome housing costs.
The State's Cumbersome Processes Can Unnecessarily Slow Down Affordable Housing Development
The State's lack of a coordinated housing plan is also evident in the four housing agencies' misaligned and inconsistent program requirements, which create unnecessary obstacles for developer applicants. These unnecessary inconsistencies can slow down development as well as drive up costs, another factor that can interfere with the State's efforts to better meet its goals for affordable housing. Although all of these agencies have programs with the same goal—to support multifamily housing for lower‑income households—many of the State's requirements are misaligned among the housing agencies because each agency generally developed its requirements without coordinating with the others. State law clearly states the need to maximize the amount of state resources available for affordable housing and to minimize the administrative costs and simplify the financing systems for developing such housing, yet the agencies have not attended to this guidance. We also found that the redundancy of the Tax Committee and Debt Limit Committee reviewing and approving applicants' financial resources separately for the same project is unnecessary.
Building affordable housing is complex and costly, and developers often must secure funding from multiple financing sources to cover the costs of a single project, including a combination of public and private financial resources. As we noted in the Introduction, at the state level, currently four separate agencies provide project applicants with financing to help develop affordable housing. Further, applicants can obtain resources from multiple agencies for a single project. However, project applicants must meet each different set of application deadlines and requirements to qualify for those financial resources, and they often apply to at least two of these agencies for financial resources to cover the cost of a single project. We found that when they established their requirements, the agencies did not coordinate with one another. As Table 1 shows, the multifamily housing programs at each of the four agencies have different eligibility requirements for the same types of projects. For example, although every agency requires applicants to provide evidence of prior experience with affordable housing development, the amounts and types of experience required of applicants differ across all four agencies. This lack of standardization is inefficient for developers and generally unwarranted given that these are all multifamily programs with similar goals.
In addition, HCD has not coordinated its deadlines with the other agencies, which can prolong the application process and delay housing development. We found that the Tax Committee and Debt Limit Committee generally had similar deadlines for reviewing applications and making awards. Further, CalHFA has aligned many of its deadlines with those of the Debt Limit Committee, which met six times to allocate bond resources for affordable housing in 2019. In contrast, HCD currently only awards funds semiannually for its multifamily housing program. Thus, if an applicant does not submit the application by one of these deadlines or does not receive approval in the current cycle, the project may be delayed by at least six months. Although data limitations at these agencies do not allow us to determine how often these delays happen, such inconsistencies are unnecessary and can delay the development of needed affordable housing. According to HCD's deputy director of financial assistance, HCD's deadlines are sensitive to the Tax Committee's application deadlines for certain tax credits, which have historically occurred twice a year. However, the majority of the Tax Committee's tax credits are awarded more frequently throughout the year. HCD's failure to align its deadlines with those of the other housing agencies creates additional administrative barriers for applicants and the resulting delays can drive up costs and slow down affordable housing development.
Table 1
| CalHFA | HCD | Tax Committee | Debt Limit Committee | |
|---|---|---|---|---|
| Examples of Program Requirements | Multifamily Housing Program Loans | Multifamily Housing Program | Tax Credits Paired With Bonds (Multifamily Housing) | Bond Resources for Rental Projects (Multifamily Housing) |
| Evidence of housing need and demand | X | X | X | X |
| Evidence of local approval | ✓ | X | X | ✓ |
| Evidence of financial feasibility | X | X | X | X |
| Evidence of prior project experience | X | X | X | X |
| Evidence of compliance with construction standards | X | X | X | X |
Source: Analysis of state laws and agency documentation.
= The requirement is inconsistent with all other state agency requirements.= The requirement is consistent with at least one other state agency standard.
Project applicants can incur additional expenses during the time it takes to secure the multiple sources of funding. For example, developers must acquire rights to the land for housing development before beginning the state application process, and according to housing studies, delays could carry high land-holding costs such as property taxes and insurance fees. In addition, a study published by the Terner Center for Housing Innovation at the University of California, Berkeley noted that sometimes developers also enter into contractual agreements with major investors who require a guaranteed annual return in exchange for investing in the housing project; therefore, the longer it takes developers to navigate these approval processes, the higher the amount eventually owed to these investors. Lastly, project applicants may also have to bear additional costs related to the process of reapplying to an agency if their initial application is denied, such as the costs of obtaining updated market studies to meet program requirements, staff time for preparing a new application, and application fees. Ultimately, these additional costs may discourage developers from building more affordable housing.
Nevertheless, despite the requirements in state law to do so, HCD has failed to coordinate with other housing agencies and eliminate inconsistencies in the requirements of their multifamily housing programs. State law specifically requires HCD to coordinate its multifamily housing requirements with other major housing funding sources, including the Tax Committee. HCD's deputy director of financial assistance noted that the department set out to align its requirements with the other committees, but over time HCD and the Tax Committee independently refined their program requirements to address policy priorities. However, HCD's failure to align its requirements with those of the other agencies as state law requires creates additional obstacles for developers who build affordable housing, making it more difficult for the State to meet housing needs. Further, the State enacted a law in September 2020 to require HCD to align its multifamily housing program with five of its similar programs, including aligning funding cycles and application rating and ranking, by January 2022. We believe HCD should also align these requirements and funding cycles with those of the other agencies.
Although state law does not require CalHFA to align its requirements with those of the other housing agencies, CalHFA requires applicants to use the same application as the Tax Committee and Debt Limit Committee. According to CalHFA's chief deputy director, some of its requirements are inherently more stringent than the other state housing agencies because its loans must generally be paid back before other debt holders. Further, it must uphold its obligations to bond holders, maintain its credit ratings, and ensure that it can recover loan payments to stay self‑funded. However, he indicated that CalHFA participates in monthly coordination meetings with HCD, but is open to working with the other agencies to align their requirements to the extent feasible.
Moreover, because the Tax Committee and Debt Limit Committee approve financing for the same projects—the majority of tax credits are paired with bond allocations—the differences in their multifamily program requirements are unnecessary. We expected the two committees to coordinate eligibility requirements and reduce unnecessary administrative burden on project applicants. We find this lack of coordination of particular concern because the differences increase the possibility that the two committees will unnecessarily come to different conclusions when approving financial resources for the same project. Although limited data at both committees again prevent us from determining how often this happens, we found a few recent instances that illustrate this problem. Because of differences in the way each committee prioritized the list of project applications they reviewed, in January 2020 the Tax Committee approved at least six projects that a month later the Debt Limit Committee did not approve. Because certain tax credits from the Tax Committee are contingent upon a bond allocation award from the Debt Limit Committee, these projects did not receive any financing from either committee at that time. Although applicants can and generally do reapply and may eventually be awarded the financial resources for their projects, these delays can increase costs to applicants and set back the construction of affordable housing.
We found that the committees' explanation for inconsistent requirements is unreasonable. Debt Limit Committee staff indicated that the differences in requirements were caused by the Debt Limit Committee's inability to update its regulations in a timely manner to stay consistent with the Tax Committee. However, we found that the Debt Limit Committee did not make changes even when it had the authority to do so. The Tax Committee and the Debt Limit Committee each adopt their own program regulations and are each responsible for making amendments to these regulations to align with changes to law and to respond to the changing nature of the affordable housing market. While the Tax Committee is exempt from the standard regulation‑setting process that most state agencies must follow, the Debt Limit Committee does not share this exemption but instead has special authority to issue regulations as emergency regulations without complying with emergency procedures and thereby bypass the lengthier standard process. This authority for setting emergency regulations exceeds the standard authority granted to other state departments in that the committee need not justify the use of emergency regulations. Although the Debt Limit Committee used this emergency regulation-setting process, for example to clarify definitions, it generally did not use this process to align its requirements with the Tax Committee in recent years. Debt Limit Committee staff indicated that they were not aware that they could use their authority to issue emergency regulations to update requirements. The current executive director, who was appointed to her position in February 2020, is now aware of the authority to do so. Even without knowing of and using this authority, the Debt Limit Committee could have used the standard regulation-setting process to align the program requirements, but it generally did not use this process to align its requirements either. As a result, the Debt Limit Committee did not make recent efforts to remove unnecessary inconsistencies with its requirements and the Tax Committee. This is unacceptable and may have resulted in slowed production of affordable housing in California.
Consequently, it is not surprising that developers we interviewed reported challenges with obtaining state funding and expressed a need for a system that consolidates and coordinates multiple housing resources into one centralized process. For example, one developer noted that a significant barrier with multiple sources of funding is that every awarding entity has a different application process with different deadlines and different rules. For each of these processes, there are additional costs associated with meeting the different requirements. Further, many developers acknowledged that it would be much easier if the requirements aligned with one another. The State could thus benefit from having a standard set of requirements, consistent deadlines, and a single application process for its multifamily housing programs, which not only would reduce the likelihood of delays for applicants but also could increase the State's supply of affordable housing.
The Debt Limit Committee and Tax Committee Should Be Consolidated
The process wherein two agencies review applications for the same housing projects and separately determine eligibility when the financing is integrally linked is, in several respects, redundant and thus may contribute to inefficiencies. The two committees make awards to most of the same projects because the majority of affordable housing tax credits are paired with bond allocations. Additionally, the Tax Committee and the Debt Limit Committee have similar membership, such as the State Treasurer and representatives from HCD, CalHFA, and the State Controller's Office. These committee members often discuss the same projects in consecutive meetings in what amounts to a duplication of effort.
Further, the two committees' redundant application approval processes do not add value, and their review of applications varied in thoroughness. The Tax Committee and the Debt Limit Committee review the same general project information and require similar, if not identical, documentation—such as market studies—from applicants for the majority of project application components. While the Tax Committee's current review processes are generally more thorough, those of the Debt Limit Committee are not. For example, the Tax Committee generally conducts two levels of review of competitive applications and consistently tracks appeals from applicants. In contrast, the Debt Limit Committee's review of applications was not well documented. In fact, according to a program manager at the Debt Limit Committee, the committee performed two levels of review in the past but has lacked staff to continue this practice. In the end, we found no need for two separate committees to review the same project applications and approve or reject that financing. Therefore, the Legislature should consolidate these committees into one by eliminating the Debt Limit Committee and delegating its authority for allocating bonds to the Tax Committee. The two committees have the same executive director, and she agreed that there should be only one committee.
Recommendations
Legislature
To ensure that the State can identify the extent to which its financial resources are supporting its mission to provide a home for all Californians, the Legislature should require HCD to prepare an annual addendum to the State's housing plan and report to the Legislature, beginning January 2022. The addendum should include up-to-date information and identify the following:
- All financial resources for each housing agency for the development of affordable housing.
- The number of affordable units those resources are expected to build annually compared to the annual units needed, including units for individuals experiencing homelessness, those with special needs, seniors, and farmworkers.
- The amount of financial resources the State will need to obtain from other sources, such as federal, local, and private sources, to meet the remaining gap in needed units.
- Where the State's financial resources will have the most impact based on geographic distribution, population, and indicators of need.
- Outcomes to measure how well the State is maximizing the impact of its financial resources to meet the annual units needed, including measuring whether it has reduced cost burden and overcrowding, and increased housing availability.
To ensure that the State has sufficient data to determine how much affordable housing it has supported and to maximize the impact of its funds, the Legislature should require HCD to develop the housing data strategy component of its housing plan with input from the Tax Committee and CalHFA. At a minimum, the housing data strategy should include the following:
- A strategy for assigning a unique identifier to state-funded affordable housing projects so that multiple funding sources can be tracked for each project, such as all agencies using a single application process for multifamily housing programs.
- An evaluation of data priorities to measure the distribution and impact of state-awarded funds for affordable housing, such as number of applications, type and amount of funding awarded, number of units created, and project location.
To ensure that the State awards financial resources for housing in a more timely and efficient manner, the Legislature should create a workgroup including the Tax Committee, HCD, CalHFA, and other industry representatives such as private lenders and developers, and require it to do the following:
- Develop consistent program requirements for determining eligibility for awarding financial resources to multifamily housing projects, to the extent feasible.
- Align application deadlines for multifamily housing programs.
- Design the requirements and deadlines to best accomplish the goals outlined in the state housing plan and addendum, with the intent to maximize affordable housing built and to remove administrative barriers.
- Update their respective regulations to reference the new program requirements and deadlines.
To reduce administrative redundancy and streamline a portion of the funding process, the Legislature should eliminate the Debt Limit Committee and transfer its responsibilities to the Tax Committee, including reviewing applications and allocating bond resources. To ensure a thorough application review process, the Legislature should also require the Tax Committee to develop a sufficient quality control process for reviewing applications for bond resources, including multiple levels of review.
Tax Committee
To ensure that the allocation of bonds aligns with the State's housing priorities and that its awards process is sufficiently transparent, the Tax Committee should, by May 2021, establish regulations to do the following:
- Consistently allocate bonds based on factors including demand for bond resources, use of previously allocated bonds, documented legislative priorities, and risk of allocated bonds being lost.
- Document and disclose annually in its public meetings and on its website the extent of any bonds lost, the purpose for which the bonds were allocated, and the rationale for the allocation.
To ensure that tax credit awards are targeted to areas that require the most support from the State to finance affordable housing, the Tax Committee should immediately identify areas from which it has not received applications or areas with fewer awards per population and use that information to inform regulatory changes to attract more affordable housing developers to those areas.
Chapter 2
The State Has Not Ensured That Local Jurisdictions Accommodate Needed Affordable Housing
Chapter Summary
The State is facing a severe shortage of affordable homes in part because local jurisdictions can create barriers that make it harder to build those homes. Local barriers to affordable housing development—such as restrictions on the number of units developers can build on a portion of land or lengthy processes for approving developers' projects—are one reason that local jurisdictions reported issuing building permits (permits) for only about 11 percent of their needed affordable housing units as of June 2019. As we describe in the Introduction, each of the State's 539 local jurisdictions is responsible for planning to accommodate a portion of the State's needed affordable housing units, and state law requires jurisdictions to adopt local housing plans that include sites that accommodate needed units and actions to address barriers to development.
However, state law is not strong enough to ensure that local jurisdictions actually mitigate these barriers—even on the sites they identify for affordable housing. In addition, HCD's limited oversight is insufficient and its authority does not permit it to ensure that all local jurisdictions follow through with their plans to accommodate affordable housing. An effective appeals process for developers—such as through the creation of a state appeals board—could help ensure that local jurisdictions approve eligible affordable housing projects in a timely manner and provide the units for which they plan. More broadly, the State needs a comprehensive approach to facilitating more affordable housing development that does not rely on significant state financial resources if it wants to meet affordable housing goals. Without substantial actions to address these issues, the State will continue to face a patchwork of local housing policies and efforts that ultimately limit Californians' access to affordable housing.
Local Jurisdictions Can Create Barriers to Affordable Housing
Local jurisdictions can create significant barriers to affordable housing development, as we show in Figure 7, given the degree of control they exercise over development. These barriers influence the availability of affordable housing. Local jurisdictions in general have not developed enough affordable housing and certain local jurisdictions have developed far fewer affordable homes than others have. This underdevelopment is especially problematic because nearly every area in the State needs more affordable housing: for example, in 523 of 539 local jurisdictions, at least 20 percent of lower-income renter households spend more than half of their incomes on housing costs—a severe cost burden. Yet local jurisdictions statewide reported issuing permits for only about 11 percent of their needed affordable housing units as of June 2019, even though they reported having issued permits for 81 percent of the units needed for households in the highest income category, as we show in Table 2. Given the time covered in this planning period, generally from 2013 through 2024, we would expect local jurisdictions statewide to have met at least half of the affordable housing need. Although other factors may contribute to local jurisdictions' underdevelopment of affordable housing, ensuring that jurisdictions mitigate barriers to affordable development is essential for making that development financially feasible and for encouraging developers to build affordable homes where California critically needs them.
Figure 7
Local Jurisdictions Can Create Barriers That Limit Affordable Housing Development
Source: Analysis of state law, documents from HCD's website, and a variety of research from sources such as the Legislative Analyst's Office and the Terner Center for Housing Innovation at the University of California, Berkeley.
Table 2
| Very Low Income Units (Units affordable to households earning 50 percent of area's median income or below, which likely includes about 26 percent of all households statewide) | Low Income Units (Units affordable to households earning 51 percent to 80 percent of area's median income, which likely includes about 15 percent of all households statewide) | Moderate Income Units (Units affordable to households earning 81 percent to 120 percent of area's median income, which likely includes about 16 percent of all households statewide) | Above Moderate Income Units (Units affordable to households earning 121 percent of area's median income or above, which likely includes about 43 percent of all households statewide) | |
|---|---|---|---|---|
| Statewide need (in units) allocated to local jurisdictions* | 278,500 | 185,500 | 205,000 | 488,000 |
| Total units reported in building permits (as of June 2019) | 26,000 | 25,500 | 66,000 | 395,000 |
| Percentage of need met (as of June 2019) | 9% | 14% | 32% | 81% |
| Combined percentage of need met (as of June 2019) | 11% | |||
Source: Analysis of HCD's Annual Progress Report permit summary data as of June 2019, federal income distribution data, and state law.
* This statewide need represents HCD's sum of all units assigned to local jurisdictions, which covers different time periods based on each region but generally covers years between 2013 and 2024. For example, the Southern California Association of Governments's portion of this need—which applies to all of the local jurisdictions in that region—covers the time period of 2014 through 2021. As a whole, the State was more than halfway through the time covered for this need as of June 2019—meaning we would expect local jurisdictions statewide to have met at least 50 percent of the need in each category above.
The supply of affordable homes varies depending on where Californians live even though indications of high need exist in almost every area of the State. As we describe in the Introduction, state law generally establishes that each local jurisdiction must plan to accommodate its "fair share" of affordable housing. Nevertheless, local jurisdictions across the State have developed vastly different amounts of affordable units funded by the Tax Committee, which supports most state-financed affordable housing. For example, as we show in Figure 8, San Marcos has received Tax Committee funding for more than 2,200 affordable units. In contrast, the adjacent city of Encinitas—with a population almost two-thirds as large as San Marcos's—has received funding for just 29 such units. The difference between these cities is especially significant considering that in Encinitas about 60 percent of lower-income renter households spend at least half of their incomes on rent, which is much higher than San Marcos's rate of 35 percent.
Figure 8
Two Neighboring Cities in San Diego County Have Developed Significantly Different Amounts of Affordable Housing Despite High Indicators of Need
Source: Analysis of active projects data from the Tax Committee from 1987 through October 2019, 2020 household population data from the Department of Finance, and 2012 to 2016 cost-burden data from the U.S. Census Bureau.
Note: We present an interactive dashboard for viewing additional detail about local jurisdictions' state-supported affordable housing development and indicators of housing need at https://www.auditor.ca.gov/reports/2020-108/supplemental.html.
Some local jurisdictions may develop insufficient amounts of affordable housing because they or their constituents are opposed to it. Local opposition to housing development has long been a major obstacle in California's efforts to provide affordable housing. People may be opposed to housing development generally or affordable housing in particular for a variety of reasons, such as perceptions that development will increase traffic or that it will change the residential character of a city. This opposition can take different forms, including citywide referendums: for instance, according to HCD, residents in Palo Alto placed a measure on the local ballot in 2013 that overturned a unanimous city council decision to allow for a 60-unit affordable housing development for seniors. However, local jurisdictions that are not openly resistant to affordable housing can also limit development, wittingly or unwittingly, through the many aspects of the development process they control.
In fact, local jurisdictions can create a number of different barriers to affordable housing development that contribute to the State's overall shortage of affordable homes as well as its shortage of affordable housing in particular jurisdictions. For example, local jurisdictions may limit the number of units developers can build, they may require that developers pay large fees, or they may have processes that delay or prevent approval of affordable housing projects. These barriers can ultimately make affordable housing development infeasible, such as by imposing costs that may discourage developers from building or by directly limiting the number and affordability of the units that developers do build. Barriers that add costs are especially problematic for affordable projects because these projects are often more difficult to make financially feasible in the first place.
We observed concrete examples of these potential barriers in some of the cities we reviewed. In analyzing primarily publicly available information from four pairs of cities of similar populations and locations—Aliso Viejo and Cypress, Norwalk and Santa Monica, Huron and Taft, Brentwood and Pittsburg—we found significant differences in some of their housing policies that may have contributed to their varying levels of affordable development. For example, Santa Monica's default density standards—the number of units allowed per acre—allow developers to build more housing units per acre than Norwalk's standards do in each of their multifamily residential zones. In their high-density residential zones, for instance, Santa Monica generally allows up to 48 units per acre for affordable housing projects compared to Norwalk's maximum of 30 units per acre. Norwalk also requires an additional building permit—a "conditional use permit"—for certain multifamily housing such as buildings that exceed the city's height limit of 35 feet. This type of requirement allows local jurisdictions more discretion in approving housing projects and can be a constraint on development. In contrast, Santa Monica does not appear to require that type of permit for multifamily buildings in its multifamily residential zones, where it allows up to 45 feet in height for affordable projects. Further, Norwalk's default parking standards require developers to provide parking spaces in a garage and to include as much as eight times the number of parking spaces that Santa Monica's default standards require for certain projects, potentially increasing costs for developers. Ultimately, differences like these may be one reason Santa Monica has facilitated much more affordable housing development than Norwalk has: HCD's data indicate that from 2014 to 2018, Santa Monica reported permits for nearly 500 total affordable units whereas Norwalk reported permits for just four affordable units—even though Norwalk has a larger population than Santa Monica does and both cities have indications of high need.
Barriers to Affordable Housing Persist in Part Because State Law Is Not Strong Enough to Ensure That Local Jurisdictions Mitigate These Barriers
The State has recently enacted several statutes that could have a significant impact on affordable housing development, as we note in the Introduction. However, local jurisdictions can still create barriers to affordable housing—such as barriers related to density and to approval processes—because state law is not yet strong enough to ensure that local jurisdictions mitigate these barriers. As we describe in the Introduction, local housing plans are jurisdictions' roadmaps for housing development, and HCD is responsible for reviewing each of these plans when jurisdictions adopt them every five or eight years. The plans must include sites suitable for affordable development and actions to remove potential barriers to development where possible. However, the requirements in state law contain gaps that allow these barriers to persist, even for the sites local jurisdictions identify for affordable housing. Because HCD's review process for local housing plans largely focuses on whether jurisdictions have included appropriate analyses or met minimum requirements in state law, its approval of these plans does not necessarily mean that local jurisdictions have done everything possible to mitigate barriers to needed affordable housing. For example, HCD's status report from September 2020 indicates that all eight of the cities we reviewed have had compliant housing plans since at least 2016, even though we identified potential barriers in some of the cities that may have contributed to their low amounts of affordable housing development.
Perhaps most critically, state law's default standards for allowable density are likely too low even though increasing density could provide more affordable homes. Density determines how many housing units can exist on a given amount of land, and higher-density housing can both provide more homes and make affordable housing more financially feasible for the developer. State law establishes default densities of at least 10 to 30 housing units per acre, generally based on a local jurisdiction's proximity to urban areas, which local jurisdictions can adopt for potential affordable housing sites without including further justifications in their housing plans. These default standards likely affect densities in many local jurisdictions; the median maximum density standard among local jurisdictions statewide was 24 units per acre for multifamily housing according to a survey of more than 270 jurisdictions that the Terner Center for Housing Innovation at the University of California, Berkeley, published in 2018. Indeed, two cities we reviewed clearly aligned their densities with the State's default standards. But cities we reviewed with more affordable housing development tended to allow higher densities and go beyond the minimum requirements in state law. For instance, Aliso Viejo allowed up to 50 units per acre on its main potential affordable housing sites and subsequently developed almost 400 units of Tax Committee-funded affordable housing at 50 units per acre on those sites. However, that amount of affordable housing would have exceeded the standards in nearby Cypress, which only allowed up to 30 units per acre on its potential affordable housing sites. Cypress reported issuing permits for fewer than 20 total units of affordable housing from 2014 through 2019.
Increasing the default densities in state law has little downside. Although several local jurisdictions have opposed state-mandated density increases in the past because of concerns around local control, community character, and other issues, the default densities of 10 to 30 units per acre that we describe above are not mandates. If local jurisdictions provide justifications in their housing plans that HCD approves, such as compelling evidence that lower densities can accommodate housing needs based on past development experience, they can still adopt lower densities for the sites they identify for affordable housing. Therefore, increasing these default densities would not unduly restrict local control. More importantly, the existing default densities—which became effective in January 2005—may compromise the State's efforts to increase affordable housing development. In fact, the densities of particular projects can sometimes be several times higher than the State's default standards; for example, we identified Tax Committee project applications that specified densities such as 82 units per acre for a Santa Ana development, 90 units per acre for a Fresno project, and 117 units per acre for a project in Mountain View. Despite recent changes to state law that expanded developers' ability to apply for increases above local jurisdictions' maximum allowable densities, jurisdictions can still create a barrier to affordable development by maintaining low maximum densities. Raising the default densities in state law, even modestly, is an efficient way to encourage more critically needed affordable development on each portion of land that local jurisdictions identify for affordable housing.
We found that state law is not strong enough to prevent local jurisdictions from undermining affordable housing projects with lengthy and uncertain approval processes. For instance, although state law has multiple statutes that streamline local approval processes for certain affordable housing projects—limiting local jurisdictions' time and discretion in approving the projects—these statutes do not necessarily apply to all potential affordable housing sites that local jurisdictions identify in their housing plans. Specifically, one statute contains several eligibility requirements that may exclude some affordable developments from streamlined approval—for example, that qualifying projects cannot be located in a coastal zone, which can cover significant portions of some cities and include sites local jurisdictions select for affordable housing. Another statute requires streamlined approval only for certain sites, such as sites that jurisdictions have included in consecutive housing plans without attracting development. If it expanded these eligibility criteria to guarantee timely and nondiscretionary approval of affordable projects on all sites that local jurisdictions identify in their housing plans for affordable housing, the State could mitigate a potential barrier that sometimes significantly delays or prevents affordable development. For instance, according to HCD, the city of Simi Valley has taken at least three years and several hearings to review a project that would provide 84 affordable homes on a site the city has identified to accommodate affordable housing, despite the fact that the city has identified no adverse impacts of the project on public health or safety during that review. These are delays that a streamlined review might have prevented.
Concerns about expanding streamlined approval processes do not outweigh the benefits of providing timely development of needed affordable housing. According to the deputy director of housing policy development at HCD, local jurisdictions have argued to HCD that streamlined approval requirements reduce a local community's ability to provide input for new housing developments and that reducing local input is problematic because the State lacks insight into local conditions. However, projects with streamlined approvals typically must be consistent with local jurisdictions' objective standards, such as design review standards, meaning that jurisdictions can still set basic requirements for these projects. Further, local jurisdictions already select their own potential affordable housing sites, describe in their housing plans overall environmental constraints to development, and have the option to perform formal environmental reviews of areas before projects seek approval. Therefore, local jurisdictions could choose and plan sites in a way that alleviates issues with streamlined approvals. Several housing studies have acknowledged that streamlined review processes facilitate housing development. In addition, we spoke with representatives of a housing nonprofit organization and a homebuilder association who both indicated that streamlining reviews at the local level could improve affordable housing efforts.
The Legislature should require that local jurisdictions mitigate key barriers in the near term, and it should require that HCD undertake a more holistic evaluation of potential barriers in the long term. Specifically, as we describe in this section, the Legislature could begin by increasing the default densities in state law and expanding current streamlined approval processes. These are the most significant barriers we identified where clear gaps in state law exist despite recent legislation. However, other potential barriers—such as the amount and quality of land that local jurisdictions designate for affordable housing, the parking requirements they impose, and the fees they charge developers—may still persist because of other gaps in state law. In the long term, the State could evaluate the effectiveness of recent legislation and require that local jurisdictions adopt a set of default housing standards that mitigate all potential barriers on sites they identify for affordable development unless the local jurisdictions include an adequate plan to accommodate needed affordable units using different standards. Encouraging more development on sites that local jurisdictions identify for affordable housing is critical to achieving the State's housing goals; without ensuring that jurisdictions have policies that encourage necessary development on those sites—sites that are the basis for how jurisdictions plan for needed housing—there is little reason to expect the State can provide enough affordable homes for Californians.
HCD has expressed some concerns about developing default standards to mitigate potential barriers to affordable housing, but doing so is possible and could encourage the development of needed affordable homes. The deputy director of housing policy development at HCD indicated that developing useful default standards would be difficult given the diversity and nuances of local jurisdictions. However, HCD has already published several specific best practices for local jurisdictions, such as requiring no more than one parking space per unit for certain projects, allowing building heights of at least three stories for multifamily housing, and considering factors such as proximity to transit and competitiveness for Tax Committee funds when selecting potential affordable housing sites. Further, the current default densities in state law show that it is possible to identify specific, flexible default standards. Because addressing all potential barriers to development would likely require further research, and because HCD has already identified best practices for mitigating many barriers, we believe the Legislature should task HCD with determining appropriate default standards that would help ensure that local jurisdictions are facilitating the development of necessary affordable housing.
The State Has Not Ensured That Local Jurisdictions Follow Through With Their Plans to Accommodate Affordable Housing
Even if local jurisdictions developed effective plans to remove affordable housing barriers, HCD's limited oversight is insufficient and its lack of authority does not permit it to ensure that all local jurisdictions are following through with those plans, which we depict in Figure 9. As we note in the Introduction, HCD received authority in January 2018 to monitor local jurisdictions for compliance with their local housing plans and with certain housing laws. This monitoring can result in HCD issuing written findings and revoking its approval of local jurisdictions' housing plans; that penalty makes them ineligible or less competitive for certain state housing and infrastructure funds and may encourage some local jurisdictions to address HCD's findings, although the penalty could well be less effective in areas already resistant to developing affordable housing. Ultimately, HCD has only one current option to fully enforce its findings when local jurisdictions are persistently noncompliant: it can notify the Attorney General for possible litigation. To improve its oversight, the State needs an adequate and timely enforcement mechanism—such as an appeals process for developers—for situations in which local jurisdictions fail to approve eligible affordable housing projects.
Figure 9
The State Does Not Ensure That Local Jurisdictions Follow Through With Their Housing Plans
Source: Analysis of state law and HCD documents pertaining to its oversight of local jurisdictions.
Despite the importance of its oversight, HCD has scrutinized only a portion of the local jurisdictions that have not provided the affordable housing described in their housing plans. Although HCD's progress report data as of 2019 suggest that at least 470—or 87 percent—of the State's local jurisdictions were not on track to provide needed affordable homes, HCD's public lists of enforcement actions indicated it had followed up with fewer than 110—or about 20 percent of all local jurisdictions—as of July 2020. We identified several local jurisdictions HCD had not yet reviewed even though they reported especially low affordable housing development; the city of Lathrop, for example, reported zero permits for affordable units from 2016 to 2018 even though it reported permits for 850 units of more expensive housing and has some of the highest indicators of need in the State. By failing to review some local jurisdictions with especially low affordable housing development, HCD has allowed those jurisdictions to continue to provide minimal affordable housing without state investigation or enforcement actions. That lack of review also limits HCD's ability to identify specific causes of underdevelopment and to provide technical assistance to local jurisdictions that may need it.
HCD's oversight of local jurisdictions has been limited in part because it does not proactively and comprehensively identify local jurisdictions to review. HCD's current review process is largely complaint-driven; it is based mainly on inquiries HCD receives rather than on information it collects each year from local jurisdictions about their progress in meeting housing needs—including permits they have issued for affordable housing. When we asked HCD about its approach to this oversight, its deputy director of housing policy development indicated that its current process is complaint-based primarily because of a lack of time and resources. However, HCD could take a targeted approach to this oversight by identifying and following up with the local jurisdictions that have the most severe lack of affordable housing development and the highest needs. Further, the deputy director stated that HCD wants to be more proactive about identifying local jurisdictions to review, and that using information local jurisdictions report about their affordable housing development—if coupled with other metrics such as indications of highest need for affordable housing—is a viable option for developing a targeted and proactive approach to this oversight.
However, even when HCD's reviews identify local violations that require state enforcement, its two primary enforcement options—revoking its approval of local housing plans and referring cases for potential litigation—do not always ensure that local jurisdictions allow developers to build affordable housing in a timely manner. When local jurisdictions are persistently noncompliant, HCD's only real enforcement option is to notify the Attorney General for possible litigation. Since 2018, when HCD received authority to do that, we identified only one such case it had referred to the Attorney General as of August 2020—a case that resulted in litigation against the city of Huntington Beach. In that instance, HCD alleged that Huntington Beach had adopted barriers, such as reduced densities, that were inconsistent with its previously approved housing plan; as a result, the legal complaint indicates that HCD sent Huntington Beach a letter in 2015 informing the city that these changes nullified HCD's prior approval of the housing plan, and that the city also faced a related lawsuit that year brought by affordable housing advocates. Yet according to the complaint it took another letter from HCD in November 2018, which found that the city's housing plan remained out of compliance, followed by litigation from the State in 2019 before HCD finally found the city's housing plan in compliance with state law in early 2020, nearly five years after the city's purported initial violation. This litigation approach can be time-intensive and ultimately inadequate for ensuring local jurisdictions' timely compliance with their housing plans and with state housing laws—especially regarding approval of specific affordable housing projects.
We found cases of specific project delays that also demonstrate the consequences of HCD's lack of enforcement authority. For example, HCD has been monitoring an affordable housing project in Simi Valley—which we mention in the previous section—that the city has been reviewing for more than three years; HCD indicates that during this review, the city identified no adverse impacts. According to a July 2020 letter that HCD sent to Simi Valley, the city had held four hearings in 2020 alone to consider approving the project and had postponed a potential fifth hearing multiple times. HCD noted that at the most recent hearing, the city's attorney indicated that the city could not, in any legally defensible manner, disapprove the project, yet the city council seemed disinclined to approve the project based on aesthetic concerns and ambiguous safety concerns. However, HCD's oversight over the course of three letters from December 2019 through July 2020 to Simi Valley essentially amounted to encouraging approval of the project and warning the city that denying the project risks violating state law, which could result in a referral to the Attorney General. Requiring streamlined reviews for projects on all sites that local jurisdictions have selected for affordable housing, as we discuss in the previous section, could have helped resolve this issue—the project was proposed on a site Simi Valley had identified in its housing plan for affordable housing.
We also found cases in which local jurisdictions appear to be holding up affordable projects that qualify for streamlined reviews under state law. For instance, the city of Encinitas appears to have at least delayed—and perhaps prevented—development of a project that HCD indicates was eligible for streamlined review and was located on a site the city had identified in its housing plan for affordable housing. HCD noted in a February 2020 letter to Encinitas that the city had acted inconsistently with state law by requiring extensive additional information—such as a traffic study—from a developer who proposed an apartment complex on a site Encinitas had designated for affordable housing. According to HCD, Encinitas was required by law to grant streamlined reviews for projects that included affordable units on that particular site—meaning that it could review the apartment complex for compliance with objective standards, such as design standards available to the developer before submittal of the application, but it could not conduct a discretionary review. Although we do not question the value of local jurisdictions' input into the housing development process, Encinitas had already selected the site in question to accommodate affordable housing and HCD's letter indicates that Encinitas's extensive requests for additional information were inconsistent with the streamlined review process state law requires. Further, HCD stated in the February letter that the developer subsequently withdrew its application for the project. In its letter, HCD encouraged the city to work with the developer and indicated that failure to come into compliance with state law might result in a referral to the Attorney General. However, litigating such cases after the fact is unlikely to provide as much benefit as a more timely enforcement process would.
Establishing a timely and fair appeals process for affordable housing developers could help provide more timely development in areas that are unreasonably delaying or preventing it, as we detail in Figure 10. One potential approach is to allow developers of eligible affordable housing projects to appeal to a state appeals board within HCD when local jurisdictions have not approved their projects in a timely manner, and to grant that appeals board the authority to approve such projects when they have met state and local standards. An appeals board could expedite development of needed affordable housing and add more certainty to the development process.
Several states have already adopted statewide appeals boards to rule on local housing decisions, and California has considered a similar bill in the past. Massachusetts allows affordable housing developers to appeal local decisions to a state housing appeals committee under certain conditions, and it requires the committee to hear an appeal within 20 days of receiving the applicant's statement. California considered legislation in 2003 that would have created a five-member committee within HCD, including at least one local representative, to hear appeals from developers of affordable housing and potentially overrule local denials of their projects. Ultimately the bill prompted concerns about jurisdictions' local control and whether such a committee would be constitutional, and the bill did not become law.
To be effective, a state appeals board would need to address such concerns over local control while also providing timely and enforceable decisions. To acknowledge local control and help ensure that an appeals board would be constitutional, the Legislature could—in addition to requiring local representation on the appeals board—limit the scope of the appeals process, such as by allowing developers to appeal only if their projects are located in local jurisdictions that have the most severe lack of affordable development relative to need or in jurisdictions that have a history of noncompliance. However, an appeals board would also need to render timely decisions that allowed developers of qualifying, beneficial projects to build affordable homes as soon as feasible. That would likely require the Legislature to place time limits on the board's reviews and on any subsequent legal challenges, and to ensure that the board's decisions are enforceable.
Figure 10
An Effective Appeals Process Could Help Ensure That Local Jurisdictions Approve Eligible Affordable Housing Projects in a Timely Manner
Source: Analysis of state law, court decisions, and information from HCD.
Most importantly, an effective appeals process could help fill a critical gap in the State's oversight of individual affordable housing projects. Currently, litigation is an inadequate process for ensuring that all local jurisdictions approve eligible affordable housing projects, especially when developers may abandon projects because of the time required for such litigation. An appeals process could be a timelier, more uniform option to ensure project approval when local jurisdictions have denied or delayed certain projects that clearly meet reasonable standards and that would benefit lower‑income households. California now faces an extreme, statewide affordable housing crisis along with local barriers to addressing that crisis, and this necessitates further action. An appeals process to overturn local jurisdictions' unreasonable delays or denials of affordable housing projects could help provide Californians with critically needed affordable homes.
The State Needs to Better Leverage Local and Private Resources to Build Affordable Housing
The State needs a comprehensive approach to facilitating more affordable housing development that does not rely on significant state financial resources if it wants to provide enough affordable homes for Californians. In addition to the limits of state funding that we discuss in Chapter 1, several of the cities we reviewed indicated in their most recent housing plans that they had limited funding with which to assist affordable housing development. If it wants to address these issues and meet its affordable housing goals, the State must take ambitious actions to spur local and private investment in affordable housing development.
We identified potential strategies for leveraging private investment in affordable housing that the State could explore on a broader level. For instance, HCD notes in its guidance to local jurisdictions that one strategy for encouraging more housing development is to promote "mixed-use" development—in which housing units can coexist with commercial uses in the same project, such as apartments existing above ground-floor stores or restaurants. According to HCD, mixed-use development allows commercial revenue to act as an internal project subsidy: in other words, mixed-use development can leverage private investment to make housing more financially feasible to build. For example, Santa Monica included many mixed-use sites among the potential affordable housing sites it identified in its local housing plan, and it subsequently reported approving multiple mixed-use projects with affordable units that did not appear to be receiving Tax Committee funding. Although state law requires local jurisdictions to analyze in their housing plans whether their potential sites can provide for a variety of types of housing, it does not explicitly require that jurisdictions encourage mixed-use, affordable housing development on their selected sites. However, this strategy may encourage more development of affordable housing without significant state subsidies, and it could be part of HCD's plan for meeting affordable housing needs beyond the limits of state funding.
Similarly, inclusionary policies, which generally require developers of more expensive housing to include a certain percentage of affordable homes within their projects, is a potential strategy for local jurisdictions although not a state requirement. As we show in Table 2, development of above-moderate-income housing vastly exceeds affordable housing development. Requiring some affordable homes in more expensive developments could help address this disparity and subsidize affordable housing without necessarily using state resources. In fact, many local jurisdictions have already adopted such policies: about 30 percent of jurisdictions had inclusionary requirements in place according to the Terner Center for Housing Innovation survey published in 2018. The eight cities we reviewed varied in the degree to which they required or did not require inclusionary housing, but we found an example of an inclusionary policy that likely facilitated affordable housing development. Santa Monica, which generally requires that between 5 percent and 20 percent of multifamily rental housing units in a project be affordable, depending on level of affordability, appears to have approved a significant number of affordable units that developers paired with more expensive units in the same project. However, inclusionary policies can be controversial because they place restrictions on developers, and some researchers have argued that these policies may reduce overall housing development. Nevertheless, if it pursued a statewide inclusionary requirement, the State could reduce potential drawbacks of such a policy by requiring it only when a local jurisdiction had already met its goal for housing in the above‑moderate-income category but had not yet met its affordable housing goals. HCD could assess these policies and consider including a broader inclusionary housing strategy in its housing plan.
Regardless of these and other strategies, local jurisdictions ultimately have significant knowledge of and control over development in their localities—and incentivizing them to do everything possible to facilitate development of affordable housing may be an effective approach to achieving state goals. However, the State's current housing-related incentives for local jurisdictions are limited. For example, the State has conditioned certain funds, such as housing and infrastructure grants, on whether local jurisdictions adopt HCD-approved housing plans; but as we note earlier in this chapter, that compliance does not necessarily mean that local jurisdictions have mitigated all barriers to development or have actually accommodated needed affordable housing. Further, a new statute will give a competitive advantage to local jurisdictions that HCD designates as prohousing based on their adoption of various local policies—such as zoning more sites for housing development than state law requires—when these jurisdictions apply for funding from specific housing and infrastructure programs. However, neither state law nor HCD's framework paper from October 2019 indicate that these incentives will be based directly on quantity of affordable housing development, such as the number of affordable units for which local jurisdictions have issued permits. Moreover, the current funding programs that could be affected by a local jurisdiction's prohousing status are substantially housing-focused and offer only small scoring boosts for prohousing policies—meaning that the incentives may not be appealing to local jurisdictions that are opposed to housing development in the first place.
In fact, we did not identify any significant nonhousing financial incentives for local jurisdictions that the State currently conditions on the amount of affordable housing that jurisdictions approve. However, the Legislative Analyst's Office and housing researchers have explored the possibility of the State offering flexible or nonhousing funds to local jurisdictions based on the housing units they develop. For instance, the Legislative Analyst's Office discussed in a report for the fiscal year 2019–20 Governor's Budget that the State could allocate certain transportation funds—which it noted are the largest funding stream to cities over which the State has control—based on jurisdictions' progress in meeting housing goals. HCD even wrote in its state housing plan that the State should make a portion of funding available, proportional to a local jurisdiction's affordable housing permits, in the form of flexible funding for projects that serve a community benefit, such as libraries and parks. Further, at least two regional governments—in San Diego and the Bay Area—have used housing development as a factor in award processes for some regional transportation and community funds they disburse to local jurisdictions. These regional governments, by linking nonhousing projects like local street maintenance or transportation planning to housing criteria, may incentivize housing development in local jurisdictions that are reluctant to accommodate affordable housing. Conditioning nonhousing funding on local housing development does present challenges; for example, the Legislative Analyst's Office noted that some factors—such as landowners' decisions and the health of the economy—are outside of local jurisdictions' control but significantly affect home building. Nevertheless, we believe the Legislature should consider approaches like these at the state level, which could complement increased state oversight and help address the widespread underdevelopment of affordable housing that results in part from insufficient efforts by local jurisdictions to accommodate that housing.
Recommendations
Legislature
To help ensure that all local jurisdictions mitigate key barriers to affordable housing in the near term, the Legislature should amend state law to do the following:
- Increase the existing default densities for affordable housing, currently set at up to 30 units per acre, to a level that ensures that local jurisdictions make every reasonable effort to accommodate needed affordable housing units on sites they identify in their housing plans. Because other standards, such as maximum building height, can also limit density, the Legislature should also require that local jurisdictions' development standards allow developers to build the densities that jurisdictions specify for each potential affordable housing site in their housing plans.
- Require that local jurisdictions allow a streamlined review process with limited discretionary action for affordable housing projects on a site that a local jurisdiction has identified in its housing plan to accommodate affordable housing units.
To ensure that local jurisdictions make sufficient efforts to facilitate the development of needed affordable housing in the long term, the Legislature should require HCD to develop and submit to the Legislature specific and objective standards—for example, a maximum number of parking spaces required per housing unit—for how local jurisdictions can mitigate barriers to lower-income housing development across all the potential barriers they control, such as zoning and parking. HCD should tailor these standards to ensure that local jurisdictions implementing them have made it feasible for developers to build the housing necessary to meet lower-income housing goals. The Legislature should also require that HCD consult with local jurisdictions; regional governments; and affordable housing developers, advocates, and researchers in determining these standards. The Legislature should consider this information when developing legislation to mitigate additional affordable housing barriers: for instance, it could require local jurisdictions to adopt the standards for all potential affordable housing sites in their housing plans unless they provide reasonable justifications for using different standards.
To facilitate timely and needed affordable housing development in local jurisdictions that are not approving it, the Legislature should amend state law and consider the constitutionality of establishing an effective appeals process for developers of affordable housing projects. For example, it could consider doing the following:
- Create an appeals board within HCD to resolve disputes over affordable housing projects in a timely and fair manner. The Legislature should specify that the appeals board include at least one representative from local jurisdictions.
- Allow a developer of an affordable housing project to appeal to the appeals board if the local jurisdiction in which the developer has proposed the project is not on track to provide its needed lower-income units, if the project would contribute significantly to the local jurisdiction meeting that need, and if the local jurisdiction has unreasonably denied or delayed the project.
- Require the appeals board to render decisions on appeals in a timely manner and to approve an appeal for a project if it meets the criteria above and is consistent with state and local standards.
- Specify parameters for any subsequent litigation that challenges or enforces the state appeals board's decisions so that these decisions are enforceable and developers of affordable projects meeting reasonable standards can build as soon as is feasible.
To better leverage local and private resources and develop more affordable housing, the Legislature should consider amending state law to award a significant amount of nonhousing or flexible funds, such as existing transportation funds, to local jurisdictions based on the number of lower-income housing units they have approved relative to their needs allocation.
HCD
To ensure that all local jurisdictions make sufficient efforts to provide affordable housing, HCD should, by June 2021, develop and implement procedures for actively monitoring local jurisdictions that are not on track to provide the needed lower-income housing units included in their housing plans. Specifically, HCD should identify local jurisdictions with severe underdevelopment of affordable housing and indications of high need for that housing, and it should initiate reviews of those local jurisdictions that include steps to identify why they are not developing needed affordable housing. HCD should then provide technical assistance or take enforcement actions as necessary to help resolve any issues it identifies.
Other Issues We Reviewed
To address the audit objectives approved by the Joint Legislative Audit Committee (Audit Committee), we reviewed the Tax Committee's monitoring process for ensuring that affordable housing projects have met program requirements and that these projects will remain affordable and habitable.
Tax Committee Monitoring of Affordable Housing Projects
To ensure that properties remain affordable and habitable, federal law and regulatory agreements with project owners require the Tax Committee (committee) to perform on-site inspections of properties that received tax credits. Based on our review of a selection of 42 monitoring inspections of inhabited housing projects, although the committee generally follows the process outlined in regulations and in its internal policies when conducting monitoring, it has not used its enforcement authority to ensure that housing remains affordable and habitable, even when the properties show patterns of noncompliance. The committee rarely imposes penalties for applicants applying for future projects who have previous noncompliant projects, and it has neither used its authority to issue fines nor has it developed clear guidance to do so, despite approving a schedule of fines in 2017. For example, one project we reviewed exhibited repeated issues with missing verifications of tenant income, inoperable smoke detectors, damaged fixtures and walls, mildew, and fire hazards in numerous units in the last four inspections the committee conducted. However, the committee did not take any substantial action against this project, beyond reporting it to the Internal Revenue Service (IRS) as federal regulations require. The executive director of the committee agreed that its enforcement process could benefit from a more holistic approach that considers historical noncompliance and the type and significance of the violation. She indicated that the committee will review and reassess its current procedures. We believe that the committee needs to act immediately to ensure that properties in its purview remain affordable and habitable.
Additionally, while federal regulations direct the Tax Committee to report all noncompliance to the IRS, the committee notably does not report all violations of federal uniform physical condition standards, which can range in seriousness from a broken door to inoperable stoves or infestations of cockroaches. The IRS conducted a review of the Tax Committee in 2019 and recommended that the committee report all physical violations it observes in the units it monitors, regardless of whether the project owners have corrected them. Tax Committee staff indicated to the IRS that the volume of work that is necessary to fully comply with this recommendation would be too burdensome at current staffing levels. However, because of the timing of receiving its audit results from the IRS and constraints caused by COVID-19, a compliance senior program manager from the committee indicated that it will not be able to request additional staff to increase reporting to the IRS until 2021 for fiscal year 2022–23. Although the committee has developed guidance for its staff for reporting all egregious issues and other issues when they meet a certain prevalence threshold, these procedures are likely not sufficient to meet the IRS's requirements or recommendations.
Recommendations
To ensure stronger enforcement that encourages project owners to keep housing affordable and habitable, the Tax Committee should amend its regulations to take more meaningful disciplinary action against housing project owners that show patterns of noncompliance across multiple inspections. These changes may include but are not limited to the following actions:
- Develop clearer guidance for penalizing project owners who have a history of noncompliance when applying for tax credits for future projects; the guidance should establish the specific conditions that would warrant imposing penalties on a housing project.
- Include in its regulations procedures for imposing fines and change guidance to permit the committee to impose fines if a housing project shows a pattern of certain types of noncompliance, regardless of whether the noncompliance is corrected during the correction period.
To ensure that it complies with federal law, the Tax Committee should report all instances of noncompliance to the IRS unless federal law or guidance provides an exception.
We conducted this performance audit in accordance with generally accepted government auditing standards and under the authority vested in the California State Auditor by Government Code 8543 et seq. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on the audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
Respectfully submitted,
ELAINE M. HOWLE, CPA
California State Auditor
November 17, 2020