The Dive Bar Affair

12 min read

The politics of affordable housing in California

Whenever politics, public policy and competing interests converge, the effects can be explosive and controversial.

Those of us old enough to remember the 1988 presidential election will recall the name of Willie Horton, a convict serving a life term for murder in Massachusetts who was granted a weekend pass under the state’s furlough program and did not return. Instead, he travelled down to Maryland where he committed assault, armed robbery and rape. When the Democrats nominated Massachusetts Governor Michael Dukakis to run against George H.W. Bush, Republican strategists made Horton the poster child for liberal policies run amok and a misperception of rehabilitation. The election results spoke for themselves.

A few years ago, on the opposite coast and in the shadow of the worst financial crisis in the state government’s history, California had its own rehabilitation predicament – only this one involved buildings rather than prisoners.

In an effort to spur downtown redevelopment in the state’s capital city and revivify the blighted K Street Mall area, the Sacramento Housing and Redevelopment Agency put $6.8 million into the Dive Bar, a watering hole and eatery featuring what was billed as the largest nightclub aquarium in the world, with live “mermaids.” To those convinced of the frivolity of the expenditure, the Dive Bar was a fish out of water and became the poster child for redevelopment policies run amok. Pamela Prah, reporting for the Pew Charitable Trusts, observed, “Public uproar over state funding to the Dive Bar in Sacramento contributed to the downfall of California’s redevelopment agencies.”

But that was only the tip of an iceberg of fiscal turmoil.

When Jerry Brown came into office for his second stint as California governor in 2011, the state was effectively broke, with huge deficits looming and the lowest bond rating of any state in the nation. Opinion was unanimous that he and the legislature had to do something, and probably a lot of things – all of them painful. And when it came to redevelopment funding, Governor Brown did not just comb through the line items to find the Dive Bars and other controversial uses of funds. He abolished the entire state redevelopment apparatus, eliminating the 400 local redevelopment agencies and transferring more than $5 billion in property tax-generated revenue to state coffers. The first year, close to $2 billion was used to offset the budget deficit and some of the rest was redistributed to counties and cities with the implied message: You all figure out what you want to do with the money.

For the state’s affordable housing industry, this wholesale seizure and redistribution was devastating. More than 100 lawsuits remain pending between local jurisdictions and the state.

“Brown eliminated the redevelopment agencies supposedly to rebalance the budget,” says Linda Mandolini, “but it was really to redistribute the way revenue is allocated. Now what happens with that money is that it goes to counties, with responsibility for things the state had paid for. What it did was pit us against schools, police stations, fire houses, parks, etc.” Mandolini is President of Eden Housing, a large nonprofit focusing on housing for lower income families, seniors and persons with disabilities, and Chair of the Housing Trust of Santa Clara County. She is a board member of the California Housing Consortium, on the Board of Governors of the National Housing Conference, and this year was named one of “The Most Influential Women in Bay Area Business” by the San Francisco Business Times.

“We’ve gone back to the counties and said, ‘You’ve got to give us some of this money back!’”

The Governor’s Blind Spot
According to his critics – and many in the industry are among them – Governor Brown appears to have a blind spot when it comes to affordable housing. Shortly after taking office he was quoted by The Los Angeles Times, “If you’re saying you’re going to close the county hospital or lay off firefighters or you’re going to eliminate something called redevelopment, I think more people are going to say, ‘I think we can do without redevelopment. We can’t do without public safety or schoolteachers.’”

“As if educating children and having them live in housing are mutually exclusive,” Mandolini counters. “Chris Funk, the school superintendent in San Jose has stated that if a kid in a low-income community moves more than once, he is 50 percent less likely to graduate. As it is, we have about 250,000 kids in California public schools who are homeless.”

Carol Galante, Distinguished Professor of Affordable Housing and Urban Policy at the University of California- Berkeley and a former FHA Commissioner adds, “I understand that Governor Brown has done incredible work on the budget, but it is short-sighted not to see the connections and impact of not housing people in an affordable way on the economy and the environment.” California recently enacted a cap-and-trade tax aimed at reducing vehicle miles travelled and greenhouse gasses emitted. Galante believes a major goal should be “ensuring housing for all incomes and wage levels is located in close proximity to jobs and opportunities that mesh with climate change goals.”

The divergence between where affordable housing is attainable and where the jobs are is a major issue, with the Bay Area and greater Los Angeles representing the most acute housing gaps. Brown went so far as to suggest that one of his pet projects, a multi-billion-dollar high speed rail system, would allow lower income workers to commute to jobs from housing in the Central Valley. Of course, this system does not yet exist and the statewide affordable housing shortfall is currently estimated by the nonprofit California Housing Partnership Corporation at around 956,000 units.

“Brown is not in tune with reality. Every passing day the need is growing greater and we’re not keeping up,” says Geoffrey C. Brown (no relation to the governor), President and CEO of USA Properties Fund, Inc., past Chairman of the California Housing Consortium and on the board of the California Council for Affordable Housing. “At present, we have 98% occupancy in our buildings.”

Lower-cost inclusionary zoning is one of the most controversial aspects of affordable housing in the state. On June 15, the California Supreme Court upheld a Court of Appeals ruling against the California Building Industry Association (CBIA) permitting the City of San Jose to require 15 percent affordable housing on for-sale developments of 20 units or greater. Such jurisdiction, the court concluded, is “reasonably related to the broad general welfare purposes.”

The Christmas Tree Effect
The problem is further complicated by the fact that inclusionary zones cover only purchase, not rental, since the state Supreme Court ruled them a violation of the state rent control law. In 2013, Governor Brown vetoed AB1229, the so-called “Palmer Fix,” supported by the League of California Cities and numerous mayors, that would have allowed local officials to decide whether to mandate a percentage of affordable rental units in any new market-rate project.

The issue of where public revenue goes is a complicated one in California, the most populous state in the nation, with a long-established culture of ballot initiatives in which
voters may decide directly how much they are taxed. The celebrated – some would say, notorious – Proposition 13 of 1978 capped property taxes at one percent of assessed value and severely limited annual increases.

Prior to 2011, the local redevelopment agencies got to keep a sizable portion of the property tax revenue from a “project area,” and if there wasn’t then enough money to pay for schools, by law the state had a general obligation to make up the difference. Projects, like Sacramento’s Dive Bar, were often cited as inherent problems with the system and poor overall accountability. Proponents, on the other hand, asserted that the redevelopment agencies generated about 300,000 jobs each year and about $2 billion in state and local tax revenue.

In the current environment, tax credit competition is fierce, and QAP disbursements have evolved into incentives for increasingly particular uses and situations. Michael Costa, President and CEO of Highridge Costa Housing Companies, who has long been prominent in California affordable and mixed income housing construction and management, calls it the “Christmas Tree effect.”

“Section 42 [LIHTC] did a great job,” he states. “But as we continue to hang more ‘ornaments’ on the tax credit tree – LEED Platinum, homelessness, veterans preferences, mental health and other special needs – the tree keeps sagging, until now it’s completely bent over. Housing money is now funding environmental and social programs, and each dollar spent is a dollar taken away from housing. Overall, we’re addressing workforce housing less and less. I get very concerned about this. We need a whole other solution. The nine and four percent credits were targeted at 60 percent of median income. But the state began lowering the target numbers – 30-40-50-60 percent – to win an award. If you recall the origins of low-cost housing programs, we’ve always relied on HUD for the most needy cases.”

Mandolini calls the system as it is currently operating “byzantine,” saying, “The only way you win is through special needs and financial leverage; what we call ‘boomerang money’ – the more money you put out there, the more you get back. That’s fine for a community, like Mountain View, that can throw in a lot of Silicon Valley money. But there are a lot of communities that can’t.”

“So you have to pay to play,” states Geoffrey Brown. “I would rather see QAP tie-breakers based on cost containment rather than local financial resources. At a fundamental level, we need to get back to the basics of allocating credits based on efficiency. That way, you’re going to get the most for your money.”

Costa cites a further threat: a current “debate on what happens after the 15-year term. The state is thinking of capturing back-end profits. We are so focused on the front end: building a quality product, operated right. Our concentration is on how can we make life better for our clients and encourage upward mobility. For instance, we have a lot of social programs in our communities. If this goes through, it will be completely counterproductive and encourage builders to put out the cheapest product they can and take out cash flow along the way rather than put it into maintenance, etc.”

Elimination of the redevelopment agencies left more than a billion-dollar annual gap. The last housing bond passed by California voters was Proposition 46 in 2002 and Geoffrey Brown says, “I don’t see housing bonds coming into play before 2018.”

Potential Solutions
While Carol Galante admits, “No one is going to wave a magic wand and with one policy issue solve all of the problems,” she sees a number of initiatives being proposed now that the state is in better financial shape.

Geoffrey Brown reports he and others are working with the state treasurer to change regulations to create more housing production, including energy and targeting requirements. Two possibilities Galante suggests are changing on-site parking requirements in favor of community-shared parking and researching changes in building codes to decrease the cost of construction at higher densities. “I do not know if this is technologically feasible, but this is the kind of out of the box thinking required,” she believes.

Toni Atkins, Democrat from San Diego and Speaker of the California Assembly, has created a package of bills to support affordable housing. The most significant is AB35, which would institute $300 million in new low income tax credits. Another provision would tack on a $75 per page deed recording fee and direct the revenue to housing. The tax credit bill has wide bipartisan support. Republicans seem to be resistant to the recording fee tax.

Another potential source of funding would be cap and trade dollars, which promise to be a growing revenue stream. But there is already intense competition for this money and Galante thinks there needs to be a dedicated source for housing trust funds as there are in many other states. She also would like to see a state projects appeals board that stakeholders could go to when they felt their communities were not meeting housing needs. And in addition to the tax credit expansion and document recording fee, Mandolini wants the inclusionary rental zone quirk fixed and local ballot initiatives on levying sales taxes decided on the basis of a simple majority rather than the two-thirds vote now required.

“Generally, initiatives for transportation manage to just squeak by with two-thirds, but it’s harder for some people to see the need for affordable housing,” she notes.

Two Faces
At the most basic level, one might wonder how such a fundamentally blue state, and a chief executive so liberal and idealistic that he was once known as “Governor Moonbeam,” could take such an insensitive line on housing the homeless, the poor and even teachers, police, firefighters and other average workers. Linda Mandolini, whose personal motto is “Changing the world one corner at a time,” has a theory.

“There are two faces of liberalism,” she posits. “There’s the ‘Politics of Me,’ and the ‘Politics of We.’ I’m from Massachusetts, which practices the Politics of We. Out here, we are very much the culture of Me. It’s a liberalism based on individual rights, of coming out here to seek your fortune, of the Next Big Thing. I think that’s the governor’s politics. We have so many transplants and the state goes through so many boom and bust cycles. There was gold and oil, entertainment, and now it’s tech. And every time we have a boom, the housing situation constricts.

“Tax credits are entrepreneurial, and we’re an entrepreneurial state. It’s what I like about California: Every time people write us off, we come up with something new; some new way to solve our problems. So I’m actually more optimistic than I’ve been. It will be interesting to see what happens with water.”

But her optimism is tempered with caution: “It’s so much harder than it’s been for the nonprofits. There are fewer resources, costs are going up and there is huge pressure from the market.

“And increasingly in California, everyone knows someone who needs affordable housing.”