© 2019 California Center for Jobs and the Economy
 

Supported by a grant from the James Irvine Foundation, in collaboration with the California Business Roundtable.

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COST OF LIVING

 

 

 

 

 

 

 

The dominant and consistent issue throughout the research conducted by this project was that lower income Californians are aware of what they need to do in order to improve their economic situation and largely are aware of the opportunities to do so.  But the rapidly escalating costs of living—led by housing—swamp whatever progress they have been able to make and sap whatever time and household resources they otherwise would have to progress further. 

 

More perniciously, this situation has made them highly risk averse to even attempting to make these changes for fear they will make the wrong choice and risk being overwhelmed by the costs they now face.

 

1.Increase Housing Supply

 

There is no possible progress that can be made on economic mobility without increasing the supply and thereby reducing the cost of housing in the state.  The scale of the current shortfall is prohibitive to using traditional affordable housing tools.  The extent of the cost barriers—running across multiple income groups—requires that supply be expanded at multiple price points, not only to deal with the current affordability crisis but to prevent housing costs from being the barrier they are now as households attempt to move from affordable to market rate moderate income housing.

 

  • Reduce the Cost of Constructing New Homes.  Current housing construction in the state is essentially limited to affordable housing where subsidies are available and to higher price point market housing that can absorb the high cost of permitting, increasing regulation, inclusionary requirements, and impact and mitigation fees.  Moderate income housing is simply uneconomic in many of the state’s urban areas under these existing conditions.

 

  • Enact Governor Brown’s original By-Right housing proposal[i] from 2016, but with expansions substantially in line with those recommended by the Legislative Analyst (LAO).[ii]  The By-Right proposal contained significant streamlining proposals to reduce the current approvals that now add significant time and cost—if not resulting in outright rejections—for new housing.  The proposal in summary:  (1) created a ministerial permit process for multifamily, infill housing projects conforming with existing general plan and zoning, meeting specified affordability requirements, and were not proposed for various land types; (2) set time limits for city/county objections to streamlined projects; (3) set limits on design review; (4) eliminated CEQA review; and (5) required relocation assistance for any displaced households.   

 

  • Specific expansions consistent with the LAO recommendations would include:  (1) expand the range of housing covered; (2) remove or substantially reduce the affordable unit requirements to ensure barriers to moderate income housing are not created; and (3) move any additional affordable unit provisions to the incentives under the state density bonus requirements.

 

  • For all housing proposals consistent with a local general plan, enact a moratorium on requirements for CEQA until:  (1) the housing supply backlog—to be determined by Department of Housing & Community Development—necessary to keep pace with population growth has been reduced by a specified amount (e.g., elimination of the backlog as determined from annual building permit data and prior Department determinations of required supply additions; construction of the 2.8 million units estimated in the Fall 2017 UCLA Anderson Forecast as required to return state housing costs to their 2014 levels), and (2) as determined on a moving three-year average, the state continues to construct new housing without increasing the size of the backlog.

 

  • Reform CEQA to require transparency on litigants and overall reduce its misuse in litigation, and return to its original intent to ensure environmental considerations in public decisions.

 

  • Reduce construction costs by reducing other regulatory requirements, costs, and fees:  (1) until the housing supply backlog is eliminated (as above) allow new housing to be built according to state building standards—except those related to seismic, fire, and other safety elements—as they existed during 2003-2005, the only period during the last 28 years when California saw new housing construction at the level required to keep pace with population growth; (2) cap impact fees and total mitigation costs at a specified percentage of construction costs; (3) enact a multiple-year bond package to finance local capital improvements that would otherwise be covered through local impact fees, with financing bonuses tied to affordable units; and (4) prohibit prevailing wage requirements for housing, including affordable units, constructed pursuant to By-Right provisions.

 

  • Expand Available Construction Labor Pool.  In 2017, the number of construction jobs in California was about 118,000 (13%) below its prior peak before the recession.  Even at this lower level, however, construction labor overall appears to be in short supply as former workers have aged out of the labor force, changed occupation, or moved to other states with more construction work and lower housing costs, and as fewer new entrants trained for construction during the recessionary plummet in available work.  While regulatory changes are needed to reduce costs and incentive new development, additional construction workers will be required to build it—a factor which will also have a direct improvement to blue collar, middle class wage jobs in the state.

 

  • Target current state jobs training funds to a statewide Construction Skills Initiative.

 

  • Increase the use of construction apprentices by:  (1) require a percentage of apprentices to be used on projects qualifying under By-Right provisions and (2) incorporating an incentive through the state’s density bonus requirements based on the number of apprentices employed from the local area.

 

  • Rebuild Local Housing Finance Sources.  The previous redevelopment agencies played a key role in financing affordable and, more critically, moderate income housing both directly by providing the local base to leverage other private and public funds, and indirectly by providing the site preparation and infrastructure leading to private developments.  While various partial replacements such as infrastructure districts have been enacted since then, none has shown the potential to contribute to the housing crisis the state now faces.  Particularly in economically distressed areas, sustained improvements to housing supply can be achieved only through long-term and sustainable capital sources, rather than the short term and often one time improvements that are achieved through tax credits and subsidies.

 

  • Authorize a new form of redevelopment agency limited to housing and mixed use applications and associated infrastructure.  Limit the property tax increment available to these agencies to the portion that would not otherwise go to K-14 agencies, determined as the greater of:  (1) the actual county percentage or (2) the statewide average (46%). 

 

  • The next Governor should convene a task force to identify efficiencies through streamlining special district services, where appropriate, through existing city and county structures.  Specifically, this would include redirecting some portion of existing property tax revenues to affordable housing.  In the aftermath of Prop. 13’s passage, then-Governor Brown in a June 8, 1978 address immediately responded with a proposal to restructure the state’s local governments to better reflect the newly-approved local government revenue framework.  Governor Brown specifically called for reforming and overhauling the thousands of special districts as part of the redistribution of future revenues from property tax.  This proposal was not pursued, and currently over 3,000 special districts—virtually all of which are generally unknown to the public—continue to draw on local property tax revenues, at $22.5 billion or 19% of the total in FY 2016.  While some of these districts—in particular the multi-jurisdiction infrastructure districts—likely are the more efficient means of providing the applicable services, a sunset review should be conducted to designate services that can be absorbed within the component city and county structures, with the hard goal of redirecting $4-5 billion of the existing property tax revenues as an ongoing, sustainable affordable housing source.

 

2.Rebuild Lower Income Home Ownership

 

The focus of the limited housing reforms adopted to date by the state is on affordable rental units, viewing lower income Californians as only renters and depriving them of the opportunities for asset acquisition—an essential component to reducing income inequality and building long-term wealth—and through the sharing economy, opportunities for income supplements. 

 

  • Require a Percentage of Affordable Housing Using Public Financing to be Units for Sale.  In addition to requiring a set—and possibly increasing—share of units to be available for sale, additional provisions could be included to promote the transition from an affordable unit, and to overcome the high barriers that now exist for movement into market rate units.  As an additional equity sharing option, incorporate deed restrictions limiting resale prices to an amount tied to a specified index (e.g., some multiple of the CPI plus selling fees) in order to keep the units in the affordable and moderate income pools.  In return, the sellers would be able to transfer their assessed valuation basis to their subsequent home purchase, in order to control their monthly transition costs and to provide long-term compensation for limiting potential capital gains from ownership of affordable units.  Consideration should also be given to modifications to the current federal and state tax exclusion for sale of a primary residence in order to provide for maximum equity preservation, including a provision to allow for the exclusion if the sale does not meet the residency time requirements but was for the purpose of moving for a new job (full exclusion rather than the current prorated amount), or a 1031-like exchange option that ties the exclusion to reinvestment equal to or greater than the amount of equity rather than the value of the properties.  These latter considerations would require changes to both state and federal law.

 

  • Create a Housing IRA.  Create an IRA-like instrument to allow workers to save pre-tax money for a down payment.  This provision would require changes to both state and federal law.

 

  • Reduce Monthly Costs.  Adopt 50-year mortgages—similar to those introduced in Japan and Europe—for affordable units, possibly backed through state bonding or the state pension funds.  Reduce overall monthly costs through measures to reduce development and construction costs, consistent with the elements in Recommendation 1, to reduce the cost of affordable housing units due to state and local design and cost mandates.

 

3.Expand Cost of Living Considerations in Future State Actions

 

State laws and regulations have had a profound impact on the costs of living that now serve as the primary barriers to upward mobility.  Numerous studies[iii] have identified the effect of the CEQA, permitting, and land use policies on restricting or prohibiting new home construction.  The way California has chosen to implement its climate change policies has produced higher utility costs and bills—with direct effects on the affordability of housing—along with fuel costs that feed directly into high costs for commuting and many goods and services.  As expressed through the research, adoption of the state’s escalating minimum wage is having a dual effect—increasing incomes for those who receive it but also contributing to growing costs for basic purchases.  State actions continue to be drivers of many of the high costs faced by lower income Californians.  The current process should be adjusted to at least consider how future such actions can incorporate these concerns.

 

  • Institute a Cost of Living Committee in the Senate and the Assembly.  Mandating that the state take into account the potential impacts of proposed actions on living costs is difficult.  The legislative process and at least theoretically the regulatory process exist to weigh the potential costs and benefit of individual actions.  The potential disconnects arise because these systems are attuned to weigh individual outcomes and not the cumulative effect of numerous such actions over time, and because in the end they are fundamentally political rather than analytical processes.  The need for such consideration, however, has become all the more pressing as a result of blanket regulatory grants of authority that have been issued over virtually the entire economy to single-purpose regulatory agencies.  While these processes cannot be mandated to produce a specific outcome, improvements can be made to ensure these considerations are explicitly addressed.

 

  • Institute committees to consider potential impacts on household budgets of proposed legislation, comparable to the Appropriations Committees that consider potential impacts on the state’s budget.
     

  • Authorize these committees to hold oversight hearings on proposed regulations with potentially significant impacts—based on information contained in the Regulatory Impact Assessments prepared under SB 617.

 

[i] California Department of Finance, Streamlining Affordable Housing Approvals—Proposed Trailer Bill, May 2016.

 

[ii] California Legislative Analyst’s Office, Considering Changes to Streamline Local Housing Approvals, May 17, 2016.

 

[iii] For example: The White House, Housing Development Toolkit, September 2016; Furman, Jason, Barriers to Shared Growth: The Case of Land Use Regulation and Economic Rents, The Urban Institute, November 2015; Shoag, Daniel and Peter Ganong, Why Has Regional Income Convergence Declined?, Brookings Institution, August 2016; Glaeser, Edward L. and Joseph Gyourko, The Economic Implications of Housing Supply, Wharton, Samuel Zell & Robert Lurie Real Estate Center Working Paper #802, January 2017; California Department of Housing & Community Development, California's Housing Future: Challenges and Opportunities, January 2017; Legislative Analysts’ Office, California’s High Housing Costs, Causes and Consequences, March 2015;  Legislative Analysts’ Office, Do Communities Adequately Plan for Housing?, March 2017; McKinsey Global Institute, Closing California’s Housing Gap, October 2016; Next10, Comparative State of the California Housing Market:  A Comparative Analysis, March 2016.

HEARING FROM THE WORKING POOR

Nearly nine in ten survey respondents perceive the cost of housing to be increasing, compared to about two thirds of respondents who note that the costs of food, gas and utilities are increasing.

HEARING FROM THE WORKING POOR

When asked to describe where they see themselves in 5 years, few focus group respondents have defined plans. Overall, they tend to spend most of their time and energy trying to get by, with little left to “invest” in improving their situation.  

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