LOS ANGELES — With housing costs soaring as demand exceeds supply, the California State Treasurer's Office is trying to put billions of dollars in unused private activity bond authority to work building affordable housing.
Treasurer John Chiang who ran for the office on a platform that included tackling the state's affordable housing crisis.
"The Golden State is short an incredible 1.5 million units, and the deficit is worsening," Chiang said in a policy blueprint he announced in February. "Current efforts are not meeting the burgeoning demand. They produce only about 7,000 units a year."
The state's housing availability crisis is not just a problem for those who either can't find housing or must pay a significant portion of their income to secure a place to live.
S&P Global Analysts' Gabe Petek warned in a February 2015 report that "the persistently high cost of housing contributes to a relatively weaker business climate in California."
The state's nonpartisan Legislative Analysts' Office said in a March 15 report that "high housing costs make California a less attractive place to call home, making it more difficult for companies to hire and retain qualified employees."
The immediate response from Chiang's office is an initiative that he says will make it easier to tap up to $9.5 billion in previously underutilized federal government resources for affordable housing.
These resources, coupled with reforms to the state's administration of tax-credit and tax-exempt bond programs that support affordable housing, aim to put a dent in the Golden State's affordable housing shortfall.
The initiative changed the regulations around a tax credit program that was created in 1986, according to Mark Stivers, executive director of the California Tax Credit Allocation Committee.
The program involves two types of federal tax credits designed to spur development of affordable housing. A limited amount of 9% tax credits – designed to provide a tax credit equivalent to 70% of a project's construction cost -- is allocated by the IRS through state housing finance agencies through a competitive process. The housing developer typically sells them to investors who use the tax credits to offset their taxes.
Housing developers can't combine the 9% tax credits with tax-exempt bonds.
But the program that offers the 4% tax credit – designed to provide a 30% subsidy to the project -- can be applied to any affordable-housing project that is financed through private activity bonds, a resource that California hasn't fully taken advantage of in recent years, Stivers said.
The private activity bond allocations that the IRS provides to each state on a $100 per capita basis every year often go unused, and the allocations expire after three years. Every PAB allocation that expires unused is a missed opportunity to finance affordable housing, and to take advantage of the leverage available through the 4% tax credit.
Treasurer Chiang' initiative aims to solve what Jeree Glasser-Hedrick, executive director of the California Debt Limit Allocation Committee, describes as a confluence of factors.
They include California's 2012 elimination of redevelopment, because the redevelopment agencies were required to set aside 20% of their tax revenue for affordable housing programs. That funding stream vanished with the redevelopment agencies.
Costs were also escalating in coastal communities, she said, and the recession made it hard to originate loans, resulting in a limited demand for tax credit equities, Glasser-Hedrick said.
The state's tax credit program for affordable housing had been underutilized since 2008, she said.
"The regulation changes do not solve all the problems, but they do help make more projects feasible," she said.
The changes allow developers to claim higher developers' fees, but require them to defer that increase. It adds to the amount of basis a project has. Deferring that doesn't require any more upfront money.
"The bottom line is you get more tax credits without increasing the cost of the project," Glasser-Hedrick said.
It also made it so developers could count the amount of assumed debt, rather than appraised debt, to secure tax credits. It also reduced the community benefit requirements for a developer to qualify for bond funding.
"Given the unused bond authority, we wanted to be able to do more housing overall," she said. "If there are no projects, there are no benefits."
By the time the treasurer's initiative was approved last year, $4 billion of unused private activity bond authority had been carried over, she said.
Local municipal issuers and joint power authorities apply to the California Debt Limit Allocation Committee for private-activity bond authority to issue tax-exempt bonds on behalf of their borrowing partners, Stivers said.
At the beginning of the year, she said, the state had $7.9 billion in bonding authority. Today, there is $1.5 billion remaining.
"It is a little deceiving, because we lost $250 million this year, because the carry forward only lasts for three years and we had some 2012 carry forward that expired," she said.
But the state has significantly depleted its carry forward, which is good, she said.
That, combined with leveraging of the 4% tax credit, has put into use a total of $3.2 billion in federal resources that would have gone unused, she said.
"The early signs show that the regulation change has been positive," Stivers said, "but we are really only four months in."
In 2015, the affordable housing program financed 1,716 units. That number increased to 2,949 units this March.
"It is a significant increase," she said.
The changes in the 4% tax credit program have resulted in 79 applications for affordable housing tax credits versus 39 applications last year, Stivers said. The number of projects awarded funding in May 2015 was 16, but in March 2016 was 44.
The treasurer's program would complement another housing proposal by Sen. Kevin de Le-n that is supported by Gov. Jerry Brown, they said.
De Le-n, D-Los Angeles, the Senate President Pro Tempore, wants to earmark $130 million from Mental Health Services Act tax revenues for affordable housing services for people with mental illness.
The revenue comes from 1% tax on personal income in excess of $1 million dedicated to mental health services, which voters approved in 2004.
The state could issue $2 billion of bonds backed by that $130 million revenue stream, Stivers said.
Stivers said that de Le-n's proposal could also leverage the 4% tax credit programs. It could also help fill the gap created by the dissolution of redevelopment agencies, he said.
In a May budget speech, Brown said he supports de Le-n's bill "because we have the money and the legislature has come up with a thoughtful program."
He acknowledged that it could mean budgetary impacts for other programs.
"They are going to get the money, but it does mean prioritizing," Brown said. "I am trying to hold down the fixed costs that debt entails, but, of course, we are going to spend money."
The state's cap and trade program to trade carbon pollution credits also provides some funding for affordable housing. But both cap and trade and de Leon's proposal have narrow targets.
"De Le-n's proposal would only fund projects that provide assistance for people with mental illness," Stivers said. "While cap and trade only provides funding for projects located near transportation."
In a year or two, Chiang's efforts could mean that the formerly underutilized program could become competitive, which state officials would then have to manage.
"We are just finishing the fifth month, so it is early times," Stivers said.
Stivers and Glasser-Hedrick did not wholly credit the treasurer's changes for a recent boom in affordable housing projects, however.
The Federal Reserve talk about raising rates is a factor in the decisions by affordable housing developers to move ahead on projects, they said.
"Interest rates are a contributing factor in people thinking now is a good time to move forward with new construction or to rehab projects before rates go up," Glasser-Hedrick said.
Equity pricing on tax credits is also currently north of one dollar. With a strong economy, Stivers said, investors are interested in purchasing tax credits for the tax break.
"If they are willing to pay more than a dollar that is a pretty strong market," Stivers said.
During a downturn when businesses are losing money, there is not as much interest in purchasing tax credits.
