MOORLACH UPDATE — Housing Bond Audit — October 5, 2018

This past Tuesday, I was back up at the Capitol to participate in the Joint Informational Hearing of the Senate Transportation & Housing and Governance & Finance Committees, as I sit on the latter. The title was “Housing for Working Families: How Do We Pay for It?” It was the first of two hearings. As this hearing dealt the housing shortage and financing, the market forces actually causing this crisis will be the topic of the next hearing to be held in November in the city of Long Beach. (If it were up to me, the regulatory dynamics unique to the California real estate market should have been addressed first.)

The first panel, addressing the topic “California’s affordable housing crisis by the numbers, recent actions to close the housing gap, and new ideas for future investments,” included Lisa Bates, Deputy Director of Financial Assistance, California Department of Housing and Community Development.

It gave me the opportunity to ask Ms. Bates about the recent State Auditor’s audit report on her department and its shortcomings (see the fact sheet at https://www.auditor.ca.gov/pdfs/factsheets/2018-037.pdf and full report at https://www.auditor.ca.gov/reports/2018-037/index.html). The Chair of the Transportation & Housing Committee, Senator Jim Beall, thanked me for the inquiry, as he too was concerned about the report.

A few thoughts. There is a $4 billion housing bond measure on the November ballot, Proposition 1, that this department would oversee (also see MOORLACH CAMPAIGN UPDATE — 2018 Ballot Measures — September 21, 2018). It would be more reassuring if the audit report praised Housing and Community Development. Consequently, voters are likely to approve another massive bond with minimal oversight.

Our State Auditor does great work. Regretfully, no one seems to care. Have you heard any reaction to the audit report from the Governor? From Alexis Podesta, the Governor’s Secretary at the California Business, Consumer Services and Housing Agency? I didn’t hear a peep from her.

Now you can see why I authored SB 1297 this year to establish the office of a Chief Operating Officer (see https://moorlach.cssrc.us/content/senate-bill-1297-state-chief-operating-officer). No one seems to be running the show in Sacramento (also see MOORLACH UPDATE — SB 1297 – COO — April 19, 2018).

Fortunately, The Bond Buyer permitted me to vent a little on these two concerns in the piece below. Note: The reference at the conclusion of the piece should be to Proposition 63 (2004).

California is better at authorizing housing bonds than administering them

By Keeley Webster

https://www.bondbuyer.com/news/audit-problems-with-california-housing-bond-administration?brief=00000159-f607-d46a-ab79-fe27f2be0000

LOS ANGELES — California’s housing agency exercises inconsistent oversight of programs funded by state housing bonds.

That’s the state auditor’s conclusion in a report that was released a few weeks ahead of the November election, in which state voters will be asked to authorize $4 billion of new general obligation bonds for housing.

The Department of Housing and Community Development’s oversight of bond funds remains inconsistent, said California State Auditor Elaine Howle.

The audit of the Department of Housing and Community Development is State Auditor Elaine Howle’s fifth in a series tracking results from the Housing and Emergency Shelter Trust Fund Acts of 2002 and 2006.

The agency’s “oversight of housing bond funds remains inconsistent and HCD has failed to follow through on half of our recommendations from previous reports,” Howle wrote in a letter to state lawmakers attached to the 41-page report released in late September.

“We found problems related to how HCD is monitoring some bond programs, whether its housing bond database can perform key functions, and how it is ensuring that it does not exceed administrative spending limits,” Howle wrote.

“HCD generally provided adequate monitoring of its loan‑based programs by performing on‑site visits and reviewing required reports. However, it did not adequately monitor its grant‑based programs,” the audit report said. “As a result, it cannot be certain that award recipients for these programs used the funds to assist target populations with homeownership or home rehabilitation.”

State Sen. John Moorlach, a Costa Mesa Republican, called Howle “the real deal,” who has been willing to take on the same issues he has hammered as a senator – primarily what he sees as poorly run state agencies.

Though Howle has issued five reports questioning oversight of housing bond funds, nothing has changed, she wrote.

The accountability in Sacramento is negligible – and bonds continue to be approved by voters, Moorlach said.

“Howle writes these reports and no one gets fired, nothing gets modified and no one gets retrained,” he said.

Moorlach authored a failed bill asking that the state create a chief operating officer position to make sure criticisms raised in audits are addressed.

The state’s November bond measure comes on top of more than $10 billion in housing bond measures that have been approved by voters statewide and in individual cities and counties over the last two years.

San Jose, Santa Rosa and Santa Cruz in northern California are following the lead of other coastal cities that got voter approval for housing bond measures, and are placing measures on November’s ballot.

Issues raised in audits — particularly around the use of bond funds — don’t seem to affect the rate of voter approval on bond measures.

“I think 90% of the bond measures on the state ballot have been approved,” Moorlach said. “People don’t realize there is a cost. They don’t realize it is going to raise taxes. They don’t understand debt.”

Reports by Michael Coleman of the California League of Cities bear out Moorlach’s comments on approval rates for state bond measures. School district bond measures and city tax measures have an even higher approval rate.

The state’s $4 billion Proposition 1 would fund a variety of existing programs, including $1.5 billion to support apartments for low-income residents and $1 billion for loans to help veterans purchase farms and homes.

Many of the recent spate of city and county housing bond measures have been aimed at tackling homelessness.

It’s a case of trying to fix a symptom while not dealing with the underlying problem, said Christopher Thornberg, founding partner of Beacon Economics, LLC, an independent research and consulting firm.

While very visible, Thornberg said, the homeless population in California is a minuscule percentage of the overall population. In Los Angeles County, it’s 45,000 people in a county of 10 million.

“The idea that the housing shortage is best discussed in the context of homelessness is like saying an elephant is best discussed on the basis of its tail,” Thornberg said. “Politicians are making a big deal out of homelessness and it’s distracting from the real problem, which is the failure to clean up the zoning issues or allow a proper degree of development by failing to push back against the NIMBYs.”

“We view California’s housing shortage as an important, though difficult to quantify, long term headwind to the state’s economic growth prospects,” said Gabriel Petek, an S&P Global Ratings analyst.

There’s an economic cost: the price of housing, both rental and for-sale, has soared in the Bay Area, for example, as housing inventory failed to keep pace. Between 2011 and 2015, the Bay Area added over 500,000 jobs, but only 65,000 housing units, according to the Bay Area Council, a business group.

S&P Global Ratings has been including the state’s housing shortage in ratings reports for several years.

“We view California’s housing shortage as an important, though difficult to quantify, long-term headwind to the state’s economic growth prospects,” said Gabriel Petek, an S&P Global analyst.

“For example, notwithstanding that California boasts strong income and wealth indicators—per capital income is 116% of the nation for 2017—it’s also plagued by an above average poverty rate,” S&P wrote in an Aug. 23 report, when it affirmed California’s AA-minus GO bond rating. “After accounting for the cost of living, the state’s poverty measures look even worse. Nowhere is this more evident than in the state’s real estate market, where a chronic shortage of affordable housing, especially in its large metropolitan areas, undercuts the state’s business climate.”

The California League of Cities supports Proposition 1.

It also supports Proposition 2, the No Place Like Home measure, which would ratify a plan to allow the state to use an income tax surcharge to support mental health programs to back bonds to fund housing for homeless people with mental health problems.

In 2016, Brown signed legislation allowing up to $2 billion of bond proceeds to be backed with revenue from the so-called millionaire’s income tax imposed in 2004’s Proposition 62.

That plan has been tied up by a lawsuit contending Proposition 62 does not authorize the use of bonds. Proposition 2 would remove that ground for the suit.

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