2018-19 Budget Highlights

The Governor released his 2018-19 Budget this morning.  Here are the highlights of the budget of most interest to APA. Of note are a number of charts included in the “Housing and Local Government” section of the budget included on pages 115-125. The text of that section is included below.

 http://www.ebudget.ca.gov/

BUDGET HIGHLIGHTS:

  • Total Budget 2018-19: $131.7 billion
  • Additional payment to rainy day fund in anticipation of recession: $3.5 billion
  • Budget this year has a “healthy one-time surplus” or a $2 billion deficit – both are mentioned
  • 2018 is the first year of a 10-year transportation plan – budget allocates $4.6 billion for road and transportation infrastructure as part of SB 1, including $556 million for investments in trade and commute corridors to support “continued economic growth and implement a sustainable freight strategy” and $721 million for local passenger rail and public transit modernization improvement
  • Transit and Intercity Rail Capital Program—An increase of over $4.2 billion (including $4 billion in additional Cap and Trade as well as $256 million from loan repayments) for transit capital investments that provide greenhouse gas reductions, with at least 50 percent of the funds directed to benefit disadvantaged communities
  • Trade Corridor Improvements — An increase of over $2.8 billion (including $2.5 billion in new revenues and $323 million from loan repayments) for Caltrans to fund projects along the state’s major trade corridors, providing ongoing funding for a program originally established with $2 billion in one‐time Proposition 1B bond funding.

Housing in California – Housing and Local Government

  • California faces a shortage of housing, particularly affordable housing, for its growing population. Though demand has increased steadily, construction rates continue to lag due to a number of barriers, including local zoning and permitting decisions surrounding housing production. The state projects 180,000 units of new housing construction is needed annually over the next 10 years to meet the state’s growing housing demand. However, production has remained below 100,000 new units annually over the last eight years, which represents the lowest sustained permitting levels since 1965. Housing production since the last recession has lagged historic economic recoveries.
  • The lack of housing supply creates a number of challenges for the state and its residents. High housing prices limit the amount families can otherwise invest in nutrition, education, and other necessities after paying for rent. Approximately half of all California households are spending more than 30 percent of their income on housing costs, and nearly one‐third of all California households are spending more than 50 percent of income on housing costs.
  • Members of median‐ to moderate‐income professions such as teachers, fire fighters, police officers, and nurses are increasingly unable to afford to live in the communities that they serve. When households spend increasing shares of their incomes on housing costs, it leaves less money that could otherwise be used to support the state’s economy. Additionally, insufficient housing in job centers hinders the state’s environmental quality and runs counter to the state’s climate change goals. When Californians seeking affordable housing are forced to drive longer distances to work, an increased amount of greenhouse gases and other pollutants is released. Recent studies indicate that high‐density housing minimizes environmental harm because people have the least environmental impact when living in urban areas.
  • The housing shortage directly impacts the number of individuals experiencing homelessness in California as well. In 2016, although California comprised 12 percent of the nation’s population, it had 22 percent (118,100) of individuals experiencing homelessness in the United States as reported by the U.S. Department of Housing and Urban Development. California had an even greater share of the chronically homeless, with 39 percent of the nation’s total.
  • Although the state has a number of policies and programs in place to construct affordable housing and assist the homeless, policy changes that lead to an increase in the housing supply are the most effective long‐term solution for reducing housing costs for all Californians.

Local Decisions Drive Per‐Unit Costs

  • Local governments have primary control over land‐use and housing‐related decisions, and can enact policies that either encourage or discourage housing construction, which impacts housing costs for all Californians. Even though job and housing markets cross jurisdictional boundaries, housing entitlements and permits are determined locality by locality.
  • Throughout the development process, each local government is faced with factors that discourage housing development, including community opposition, incentives to approve sales‐tax generating development over residential development, and market conditions, such as high land and construction costs.
  • The number of new units developed continues to be very low in many jurisdictions compared to the projected need. Housing production rates, proportional to projected housing need, vary widely across the state. Between 2003 and 2014, only 47 percent of projected need was constructed and not one of the state’s regions built enough housing to meet all identified housing needs. Construction rates were lowest for housing serving lower income families. Total development costs average $332,000 per unit for the construction of new affordable units, which limits the number of units that can be built with limited resources.
  • To address the statewide housing shortage, more units need to be built at a lower per‐unit cost. Local factors that drive up per‐unit costs include permitting and impact fees, delays in permit approvals, and parking requirements. These cost drivers can add tens of thousands of dollars to the cost of constructing housing.

Funding for Affordable Housing

  • The state continues to target its limited resources in a manner that supports statewide policies and objectives, such as sustainable communities, transitional housing for former offenders, and supportive housing for homeless populations. The Budget reflects $3.2 billion in state and federal funding and award authority. These programs provide grants and loans to construct affordable housing, assist first‐time homeowners with down payments, and offer various supports for individuals and families experiencing homelessness.
  • Previous affordable housing programs have come at a significant cost to the General Fund. The state continues to pay debt service on the Housing and Emergency Shelter Trust Fund Act of 2002 (Proposition 46) and the Housing and Emergency Shelter Trust Fund Act of 2006 (Proposition 1C). Though the funding provided by these bonds has been expended for the construction or rehabilitation of approximately 80,000 affordable units, the state must pay debt service totaling $355 million General Fund in 2017‐18 and a total of $10.7 billion over the life of the bonds. Issuing further General Obligation bonds would be an inefficient and ineffective use of General Fund resources.

Recent Policy Changes

Last year, the Administration proposed legislation to increase the housing supply through a streamlined permit approval process that would have eliminated duplicative administrative barriers, such as discretionary local government reviews for housing developments consistent with objective general plan and zoning standards. As the streamlining of the local approval process was not adopted and the General Fund’s condition has deteriorated, the one‐time $400 million General Fund set‐aside is no longer available. However, the Administration and Legislature approved measures that facilitate affordable housing development at the local level and assist individuals and families experiencing and at risk of homelessness:

  • The No Place Like Home Program (AB 1618 and AB 1628)—Authorizes a $2 billion bond secured by a portion of future Proposition 63 Mental Health Services Act revenues, subject to court validation, to address homelessness for individuals with mental health needs through the provision of permanent supportive housing.
  • 2016 Budget Act—Includes $149.4 million General Fund ($100 million one‐time) in new funding for housing and homelessness programs, including $35 million   for the new California Emergency Solutions Grant program and $10 million for the Homeless Youth and Exploitation Emergency Services Pilot Projects to rapidly rehouse individuals, youth, and families experiencing homelessness.
  • Homelessness (SB 1380 and AB 2176)—Creates a Homeless Coordinating and Financing Council and authorizes emergency bridge housing communities in the City of San Jose.
  • Density Bonus Law (AB 2442, AB 2501, and AB 2556)—Expands and clarifies various provisions that provide size and other bonuses to housing developers that meet affordability requirements.
  • Accessory Dwelling Units (SB 1069 and AB 2299) — Streamlines permits and requires local ordinances to facilitate the development of these low‐cost housing options that provide additional living quarters on single‐family lots that are independent of the primary dwelling unit.
  • Affordable Housing Beneficiary Districts (AB 2031) — Allows a local government, with an existing successor agency to a former redevelopment agency, to bond against the property tax revenues it receives as a result of redevelopment agency dissolution, provided the funding is for affordable housing purposes.

Additionally, in prior legislative sessions, the Governor signed measures that established Enhanced Infrastructure Financing Districts and Community Revitalization and Investment Authorities, which are important, yet underutilized, tools that local governments can use to leverage their existing resources to address housing. During the November 2016 election, voters in various local jurisdictions across the state also approved $2.7 billion in local bonds to house the homeless and support the construction of affordable housing.

Housing Policy Principles (Similar to those included in the Governor’s 2017-18 Budget Summary)

The Administration is committed to working with the Legislature on the development of a legislative package to further address the state’s housing shortage and affordability pressures. Such a package should include additional reforms and any new funding should not rely on the General Fund. Because it is counterproductive to develop a new funding source for affordable housing under a system that increases time, risk, and cost, the Administration puts forth the following principles:

  • Streamline Housing Construction — Reduce local barriers to limit delays and duplicative reviews, maximize the impact of all public investments, and temper rents through housing supply increases.
  • Lower Per‐Unit Costs—Reduce permit and construction policies that drive up unit costs.
  • Production Incentives — Those jurisdictions that meet or exceed housing goals, including affordable housing, should be rewarded with funding and other regulatory benefits. Those jurisdictions that do not build enough to increase production should be encouraged by tying housing construction to other infrastructure‐related investments.
  • Accountability and Enforcement — Compliance with existing laws — such as the housing element—should be strengthened.
  • No Impact to the General Fund—No new costs, or cost pressures, can be added to the state’s General Fund, if new funding commitments are to be considered. Any permanent source of funding should be connected to these other reforms.

Redevelopment Agencies

The winding down of the state’s former redevelopment agencies continues to be a priority for the Administration. Chapter 5, Statutes of 2011 (ABx1 26), eliminated the state’s approximately 400 redevelopment agencies and replaced them with locally organized successor agencies that are tasked with retiring the former redevelopment agencies’ outstanding debts and other legal obligations. The elimination of redevelopment agencies has allowed local governments to protect core public services by returning property tax money to cities, counties, special districts, and K‐14 schools.

In 2011‐12 through 2015‐16, approximately $1.7 billion was returned to cities, $2.1 billion to counties, and $658 million to special districts. The Budget anticipates that cities will receive an additional $733 million in general purpose revenues in 2016‐17 and 2017‐18 combined, with counties receiving $869 million and special districts $260 million. The Budget anticipates that additional ongoing property tax revenues of more than $900 million annually will be distributed to cities, counties, and special districts. This is a significant amount of unrestricted funding that can be used by local governments to fund police, fire, housing, and other public services.

Local Update of Census Address Program

The Budget includes $7 million General Fund for the Local Update of Census Address Program. The program will provide grants ranging from $7,500 to $125,000
to cities and counties to encourage their voluntary participation in efforts to ensure the accuracy of the Census Bureau’s Master List of addresses. The program’s goal is to count all California residents in the 2020 Census by giving the Census Bureau an accurate listing of every residential dwelling in the state.

Unlike with prior Censuses, the Census Bureau will not conduct 100 percent in‐field canvassing to validate the Master List of addresses. For the 2020 Census, the Census Bureau anticipates it will perform in‐field canvassing only 25 percent of the time. Validation of the Master List of addresses is critically important to prevent an undercount of the state’s population.

The Department of Finance will administer the program and authorize distribution of grant funds. To receive a grant, a city or county must register with the Census Bureau, submit the required address materials to the Census Bureau, and provide Finance with the results of the address review. The Census Bureau will provide Finance status updates on the adequacy of each jurisdiction’s participation.

Each city’s and county’s grant will be based on the volume of housing transactions within its jurisdiction between 2010 and 2016.

CLIMATE CHANGE

  • Achieving ambitious and necessary environmental goals while continuing to expand the state’s strong economy requires working with communities to implement cost‐effective solutions to reduce greenhouse gas emissions. In December 2016, the Air Resources Board released the discussion draft of the Scoping Plan, providing a blueprint for reaching 2030 climate targets. The Plan evaluates three scenarios for meeting the 2030 target. One scenario considers sector‐specific emissions reductions through traditional command and control regulations, another considers a carbon tax, and the third considers continuation of the Cap and Trade Program. Consistent with the legislative directive in Chapter 250, Statutes of 2016 (AB 197), to prioritize direct emission controls, the Plan calls for direct reductions at refineries. To complement these direct reductions, an ongoing priority for the state will be to find ways to reduce toxic air contaminants and criteria pollutants from large emitters.

Cap and Trade Expenditure Plan

  • The Cap and Trade Program clearly represents the most flexible and cost‐effective approach to continue reducing greenhouse gases by allowing the state’s private sector to determine appropriate paths to meet emissions reductions over the next 13 years.
  • To date, the state has appropriated approximately $3.4 billion in Cap and Trade auction proceeds for programs that reduce or sequester greenhouse gases by providing individuals, households, communities, and regions more transit options, modern housing near jobs and services, additional tree cover, forest and watershed improvements, healthy soils, recycling opportunities, and housing upgrades to cut energy use (see Figure CLI‐01). Cap and Trade funding has allowed the state to leverage approximately $3.2 billion in federal funds to begin the development of the nation’s first high‐speed rail line.
  • Over the past year, Cap and Trade auctions have experienced significant volatility. After several consecutive auctions that generated over $500 million in proceeds, the May and August auctions in 2016 generated only $10 million and $8 million, respectively. However, the most recent auction in November 2016 generated $364 million.
  • One of the factors that may have contributed to this revenue volatility is the perceived legal uncertainty about Cap and Trade beyond 2020. Consequently, the Administration proposes legislation to confirm the Air Board’s authority, through a two‐thirds urgency vote, to administer Cap and Trade auctions beyond 2020.
  • The Budget proposes a $2.2 billion Cap and Trade Expenditure Plan to be allocated after legislation confirming the Air Board’s authority to administer the Cap and Trade Program beyond 2020 is enacted through a two‐thirds vote. The Budget builds upon the investment categories funded in the 2016 Cap and Trade agreement, such as short‐lived climate pollutants, carbon sequestration, low‐carbon transportation, and transformative climate communities. The Cap and Trade Expenditure Plan also includes $500 million for the Administration’s proposed Transportation package. Consistent with the provisions of Chapter 36, Statutes of 2014 (SB 862), the Budget also reflects $900 million, or 60 percent of projected auction proceeds, in continuously appropriated funds for high‐speed rail, affordable housing, sustainable communities, and public transit.
  • Of the $1.3 billion in non‐continuously appropriated funds, $863 million is proposed for transportation programs to lower emissions in the sector that represents the largest share of statewide emissions at nearly 40 percent. This funding could support a reduction in housing and transportation costs through the development of transit‐oriented development that brings jobs and housing closer together, as well as provide a substantial investment in incentives for electric vehicles and the development of in‐state low‐carbon biofuels. An additional $392 million is proposed for programs that could expand the amount of green spaces and new and upgraded housing in the state’s disadvantaged and low‐income communities, reduce pollution at landfills and provide new recycling jobs, improve the condition of the state’s forests, and enhance agricultural water conservation. Funding for these programs will be allocated only upon legislative confirmation of the Air Board’s authority, through a two‐thirds vote, to administer Cap and Trade auctions beyond 2020.

Drought Response

  • The Budget includes an additional $178.7 million of one‐time resources for 2017‐18 to reflect current drought conditions and provide immediate response to drought impacts (see Figure RES‐01). The Administration will continue to monitor drought conditions through the 2017 rainy season.
  • The State Water Board will also initiate a rulemaking to permanently prohibit wasteful water uses.