MOORLACH UPDATE — More Housing — July 17, 2019

This year has been busier than the previous ones in Sacramento. And that’s saying something. It’s hard to determine what has been the hottest topic, as there are so many. But, the high cost of housing would be near the top.

Obviously, the state does not have enough supply. Even though more people are moving out of California every year to neighboring states (those with lower taxes and regulations). California is also experiencing a migration influx from foreign countries. Although this immigration is leveling off, California is also participating in the international phenomenon of rising housing prices. There are additional factors increasing housing prices. What to do?

What not to do is single out a city that has been approving the building of new homes and sue them, even as it builds more houses than other cities with "acceptable" housing elements (see MOORLACH UPDATE — Mediating Huntington Beach — February 8, 2019 and

MOORLACH UPDATE — California vs. Huntington Beach — January 28, 2019). I give my two cents in the Fox & Hounds piece below.

Twenty-fifth Anniversary Look Back

Fifty years ago, I watched a 38-year-old Neil Armstrong become the first man to step on to the moon and gather moon rocks. Twenty-five years ago this month, as a 38-year-old, I wrote a letter to Assemblyman Curt Pringle with suggested legislation on the evidence I had gathered from my experience the prior few months, garnered from running for the countywide elected position of Treasurer-Tax Collector.

I wrote about city investment policies here: MOORLACH UPDATE — Housing and Banking — July 4, 2019 and requesting the reporting of investments at the current market value here: MOORLACH UPDATE — Marking to Market — July 12, 2019.

In this third segment, I shared my concerns for school districts and it was titled, "Newport-Mesa Unified School District." California’s school districts are required to have their cash balances invested by the County Treasurer. After all, the Orange County Department of Education doesn’t want to see some 27 school district treasurers responsible for investing in what should be cash equivalents in the fixed income markets. But, being stuck in a fund that had the possibility to implode? I know that greed can blind people, but this situation made no sense.

Making the situation even more tenuous is that several school districts were borrowing to invest. So, I met with the District’s Superintendent and Chief Business Officer. The meeting was half patronizing (thank you for informing us about your concerns) and half-contentious (you don’t need to be bothering us, as we know what we’re doing).

As time and irony would have it, that Chief Business Officer is now the Chief Executive Officer of the state’s Fiscal Crisis and Management Assistance Team (see http://fcmat.org/fcmat-staff/). This agency comes into California’s school districts in a fiscally distressed position, where reserve funds are below state guidelines. I worked with him after the Orange County Board of Supervisors appointed me to the position of Treasurer-Tax Collector until he accepted a position in Riverside County.

Serving on the Senate Budget & Fiscal Review Committee’s Subcommittee One, which oversees California’s school systems, it was a fun surprise to have Michael Fine testify each year on the status of school districts his agency was interfacing with (also see MOORLACH UPDATE — San Diego County School Districts — November 7, 2018).

It’s good to have someone at the top of FCMAT who truly understands what a fiscal crisis is. Something tells me he is now in the right position, at the right time, to assist a number of school districts in the coming months and years.

Here’s what I wrote in 1995, less than five months before Orange County filed for Chapter 9 bankruptcy protection (with bolding to point out some prescient points):

Without making a long story longer, besides using ungodly amounts of leverage, the Pool is invested in highly speculative investments that are currently down in value some ten to twenty percent. In fact, the inverse floater derivatives are down forty percent in market value. Mr. Citron has some $3.5 billion in inverse floaters, for a $1.4 billion book loss (almost $1,200 per registered voter in Orange County). Frankly, my earlier estimate of a $2.2 billion overall loss in value is conservative.

I also sat down with the Superintendent and Finance Director of the Newport-Mesa Unified School District (NMUSD) subsequent to the election to discuss my findings. I also received some incredulous responses (needless to say, my cynicism rate about government has increased dramatically).

There are two issues directly related to NMUSD. The first relates to a state law that requires school districts to keep all of their reserve funds in their County’s Investment Pool (synonymous to keeping it with the County’s Treasurer). I’m sure this was initiated in order for the state to have some control over the finances of school districts.

The problem is that the NMUSD is not permitted an alternate place to put their funds. they are in a straight jacket. So if the Pool implodes, the NMUSD and all the others in the Pool will lose significant sums of money. As you may know, the NMUSD recently suffered a $4 million embezzlement and just recently achieved its minimum reserve funding requirement for the first time in ten years. Another financial set back, especially one that they could not avoid, will have this district reeling.

School districts are ultimately overseen by the state, accordingly California would have to prop up Orange County’s districts should substantial investment losses occur.

It is highly recommended that this law be modified to allow school districts to at least have alternative investment options. Banks, savings and loans, credit unions, Treasury notes, and/or money market funds would be safer than our Pool. Remember, safety of principal is the top priority.

The other concern is that of issuing taxable bonds just to invest in the Pool. NMUSD, in conjunction with three other school districts, has issued some $47 million in bonds just to arbitrage. That is, they are paying investors a rate of interest, hoping to earn a higher interest rate from the Pool.

This all works fine if you can stomach this type of gamble and if interest rates don’t go up. But, guess what? Interest rates have gone up and look as if they will continue to rise in the near future. This arbitraging, just borrowing to invest, has got to be reviewed before someone gets seriously hurt. Leverage can be a good thing if you are right, but it can be devastating if you are wrong. Simply put, if you want to make a killing you better be prepared to get killed.

The Tax Reform Act of 1986 closed the doors, pretty much, on doing this type of transaction with tax-exempt bonds. I believe the State of California should close the doors on these "black box deals" with taxable bonds. Otherwise, it better set aside reserve funds to bail out unfortunate municipality speculators who have mistimed the bond market.

Looking Forward on Affordable Housing

John Moorlach

By John MoorlachState Senator representing the 37th Senate District

With the state budget mostly concluded, now is a good time to look at future reforms to bring Californians more housing, affordable or otherwise.

It’s called a housing crisis, yet you can buy a 282-square-foot kit home on Amazon.com for $18,800, instructions included. If you need something bigger, there’s a 1,336 square foot kit home for $64,650.

So perhaps it should be called a property crisis. While building a house can be cheap, in California the property under it is the expensive component, requiring builders to meet all sorts of state and local regulations. State and local governments refuse to make it easier to erect any kind of housing.

Just Google “land entitlements” for a rude awakening on how complex property regulations are. This traditional approach needs a review.

The way not to do that is Assembly Bill 72 from 2017, by Assemblyman Miguel Santiago, D-Los Angeles. It ran roughshod over local governments’ control with their own housing regulations.

AB 72 is the weapon Gov. Gavin Newsom used in January in his unjust attack on Huntington Beach, which is in my 37th Senate District. Surf City allegedly failed to meet its affordable-housing goals mandated by state calculations for zoning to accommodate various income levels. Ironically, Huntington Beach is one of the major housing-approving cities in Orange County.

Gov. Newsom justified the lawsuit with a statement that “due to the rising house prices, it would prove to be a threat to the economy as well as deepen inequality.”

At the time, I called that “strong-arm tactics.”

Piling on, the state budget enacted last month included fines to cities of up to $600,000 a month for supposedly violating state housing goals. Cities don’t pay fines, citizens do. So, that’s effectively a tax increase.

Additionally, there is a problem with what is called the Not-In-My-Back-Yard (NIMBY) movement.

As Carson Bruno of the Pepperdine School of Public Policy described it, “Considering that the housing affordability problem is less a local issue and more a regional problem, until municipalities collectively begin opposing the movement, actual progress on solving the affordability crisis will continue to be delayed and blocked.”

Next, there are the state’s unreformed environmental laws.

A 2015 report by the Legislative Analyst found California housing prices were only 30 percent higher than the national average in 1970. Considering the mild climate and lower heating and cooling costs, that was a tolerable divergence. Soon after, housing prices began to soar to 80 percent above the national average in 1980. By 2015, prices were 250 percent higher!

The report found a major cause of the higher prices was the California Environmental Quality Act (CEQA), enacted in 1970. CEQA reports often caused cities and counties to deny “proposals to develop housing or approving fewer housing units than the developer proposed,” according to the LAO report. “CEQA’s complicated procedural requirements give development opponents significant opportunities to continue challenging housing projects after local governments have approved them.”

In May this year, the Senate postponed to next year consideration on Senate Bill 50, by Sen. Scott Wiener, D-San Francisco. A crucial part of the bill would “establish a streamlined ministerial approval process for neighborhood multifamily projects, thereby exempting these projects from the CEQA approval process.”

The reasoning is, by encouraging more housing closer to workplaces, people would drive fewer miles, reducing vehicles’ use of carbon fuels and the production of greenhouse gases. Thus, California would meet CEQA’s goal of improving the environment. I’m hopeful the Legislature will pass this component of SB 50 when it returns in 2020.

Another positive development I voted for is Assembly Bill 101, by the Committee on the Budget. Among other things, it would require the Department of Housing and Community Development to come up with a “methodology that promotes and streamlines housing development and substantially addresses California’s housing shortage.” The bill was approved without opposition in both houses and now is with the governor.

Finally, instead of punishing cities and counties with fines for allegedly not following state housing laws, how about rewarding them with more state aid to deal with the housing and homelessness crises? A carrot is a better incentive than a stick.

Rather than stigmatizing cities like Huntington Beach, an incentive approach would encourage all cities to work with the state to provide more housing.

John M.W. Moorlach, R-Costa Mesa, represents the 37th District in the California Senate.

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