Proposition 1: Should California Sell Bonds to Develop Affordable Housing and Help Veterans and Lower-Income Residents Buy Homes?

Proposition 1, which will appear on the November 6, 2018 statewide ballot, would allow California to sell $4 billion in bonds in order to fund development of affordable housing and assistance to help veterans and low- and moderate-income Californians purchase homes. The Legislature placed Prop. 1 on the ballot. This post provides an overview of Prop. 1, discusses its expected impact, and examines other issues the measure raises in order to help voters reach an informed decision.

What Would Proposition 1 Do?

Prop. 1 would allow California to sell $4 billion in bonds to support affordable housing development and to help veterans and low- and moderate-income homebuyers purchase homes. Prop. 1 was placed on the ballot through legislation enacted last year, the Veterans and Affordable Housing Bond Act of 2018 (Senate Bill 3, Beall), which was part of the broader legislative housing package passed by state policymakers to help address California’s housing affordability crisis. Of the $4 billion in bonds sold under Prop. 1, $3 billion would be repaid over several decades, with interest, from the state General Fund, and $1 billion would be fully repaid by veterans receiving bond-funded home loans.

What Problem Does Proposition 1 Aim to Address?

California faces a housing affordability crisis. Among all Californians in 2016, more than 4 in 10 households (42.1%) across the state paid more than 30% of their incomes toward housing costs, a level considered unaffordable according to the US Department of Housing and Urban Development. More than 1 in 5 (21.0%) were severely housing cost-burdened, spending over half their incomes on housing, according to a Budget Center analysis of US Census Bureau data.

Californians with low incomes have particularly high rates of housing cost burden. Among households with incomes below 200% of the official federal poverty threshold, more than 1 in 2 (57.3%) paid more than half of their income toward housing costs in 2016. Unaffordable housing burdens affect residents in all parts of the state, even in areas where housing costs are lower, because incomes in those areas tend to be lower as well. Moreover, California’s high housing costs are a key driver of the state’s high poverty rate. Under the Supplemental Poverty Measure, an improved poverty measure that accounts for differences in local costs of living, nearly 1 in 5 Californians (19.0%) were living in poverty from 2015 to 2017 — giving California one of the highest poverty rates in the country, statistically tied for first (with Florida and Louisiana) among the 50 states.

When individuals do not have access to housing they can afford, the consequences can be serious. This is because safe, stable housing is a key foundation for short-term and long-term health and well-being. Unaffordable housing costs can force households into substandard housing, which is linked to poor health outcomes. Lack of affordable housing can also force families to move more often, and this housing instability is linked to negative health outcomes for both adults and children, as well as worse educational outcomes for children. In the most extreme cases, high housing costs can push households into homelessness, with particularly negative effects on children’s physical and mental health. Addressing the problem of housing affordability can help prevent this cascade of negative health, behavioral, and educational outcomes. Improvements in individual health and well-being can also translate into broader public benefits, as healthier individuals are less likely to need public services and supports to address health or mental health needs.

A key driver of California’s housing affordability crisis is an inadequate supply of housing. The Department of Housing and Community Development estimates that 180,000 new housing units need to be built each year to keep up with housing demand, but over the past 10 years only 80,000 units have been built per year on average. Given the large scale of this problem, an array of different policy strategies are needed to push California’s housing supply to catch up with the need for housing for current and future residents.

One strategy is direct state investment in building affordable housing and helping individual Californians afford housing. An increase in the supply of housing that is affordable to the lowest-income residents is especially needed in California, because these households are least able to afford California’s escalating rents, which have been growing faster than median annual earnings. The National Low Income Housing Coalition estimates that California has only 67 affordable housing units available for every 100 low-income households. Research in the San Francisco Bay Area has also shown that in the face of gentrification pressures, an increase in subsidized affordable housing units has nearly twice the impact in reducing displacement of low-income households at the regional level, compared to a similar increase in market-rate housing units.

What Is the Expected Impact of Proposition 1?

The bond funds from Prop. 1 would be allocated to a number of established state housing programs. Of the $4 billion total, $3 billion would support the development of affordable housing and homebuyer assistance for low- and moderate-income Californians, specifically:

  • $300 million to the Infill Infrastructure Grant Program, for new construction and rehabilitation of infrastructure that supports high-density affordable and mixed-income housing in infill locations

The remaining bond funds consist of $1 billion for the Cal-Vet Home Loan Program to provide homebuyer loans to veterans, without regard to income (which would be paid back to the state by the loan recipients). Altogether, the Prop. 1 bond funds would support a wide variety of housing activities, including multifamily affordable housing development, infrastructure to facilitate infill and transit-oriented housing, affordable homeownership opportunities, farmworker housing, self-help (e.g. Habitat for Humanity) and mobile home housing, and mortgages for veterans.

In the case of housing and/or infrastructure development, funds from Prop. 1 would typically make up only a portion of the total funds for any given project. Bond funds would be used by developers to leverage additional federal, state, and local public funds, as well as private financing, to cover the full costs of these types of projects, which would multiply the impact of the Prop. 1 funds.

Altogether, the Legislative Analyst’s Office (LAO) estimates that Prop. 1 would “provide annual subsidies for up to 30,000 multifamily and 7,500 farmworker households” as well as “down payment assistance to about 15,000 homebuyers and home loans to about 3,000 veterans.” The California Housing Partnership Corporation and Northern California Carpenters Regional Council, which support Prop. 1, have estimated a somewhat larger number of housing units — “nearly 50,000 new and rehabilitated housing units” — would be created with the support of the $3 billion in Prop. 1 housing funds (separate from the $1 billion for mortgage assistance for veterans). This estimate was calculated using the IMPLAN economic impact model and was based on historical per-unit costs and leveraged funding, adjusted by region, for each of the state housing programs to which Prop. 1 funds would be allocated.**

The housing produced through Prop. 1 would not be sufficient to close California’s affordable housing shortfall. However, no single policy could be expected to fully address the state’s tremendous housing affordability challenges. The bond funds would support the production of housing units affordable to low-income residents, which are unlikely to be produced by the private for-profit housing market and which would help the residents who struggle most to afford the state’s high housing costs.

What Are the Tradeoffs in Using Bond Dollars to Support Affordable Housing Through Proposition 1?

Of the total $4 billion in bonds that Prop. 1 would authorize, the $1 billion for mortgages for veterans through the Cal-Vet Home Loan Program would be expected to be fully repaid over time by the veterans receiving home loans, at no direct cost to the state, according to the LAO. However, the remaining $3 billion in bonds for other housing activities would have to be repaid over time, with interest, from the state’s General Fund. The LAO estimates that the cost to repay the bonds would be approximately $170 million each year for 35 years. Over this period, the state would pay $3 billion to repay the principal on the bonds and an estimated $2.9 billion for the interest, according to LAO estimates, for a total of $5.9 billion, or nearly twice the amount of the original bond issuance.

The General Fund dollars used to repay the principal and interest on the Prop. 1 bonds would not be available to support other public systems and supports, including those that directly support low- and moderate-income Californians — a tradeoff that should be considered when evaluating the potential impact of Prop. 1. On the other hand, as noted above, safe, affordable, stable housing is a foundation for long-term physical and mental health and is linked to improved individual educational and economic outcomes. As a result, an investment in affordable housing could contribute to healthier, more productive residents who may have less long-term need for publicly-funded health, mental health, and safety net services.

What Do Proponents Argue?

Proponents of Prop. 1 include veterans’ organizations, affordable housing advocates, business and labor leaders, cities, and environmental groups. Among these are Dignity Health, Habitat for Humanity California, United Ways of California, California Association of Veterans Services Agencies, California Housing Consortium, Housing California, Silicon Valley Leadership Group, State Building and Construction Trades Council of California, California League of Conservation Voters, and the California League of Cities. Proponents argue that Prop. 1 “directly addresses the shortage of housing by building more affordable homes — without raising taxes.” They state that Prop. 1 will benefit “hardworking people like nursing aides, grocery clerks, and teaching assistants, so they can live in the communities where they work” and “will address rising homelessness in our neighborhoods.”

What Do Opponents Argue?

Opponents of Prop. 1 argue that the bond funds “would go to a variety of programs that may or may not repay money for revolving use” and would help only “a very limited number of persons.”

Conclusion

To address the root cause of California’s housing affordability crisis, the state needs to increase its supply of housing. Increasing the supply of affordable homes in particular is especially needed, because low-income Californians are most likely to have high housing cost burdens and are least likely to be able to afford rising rents. Prop. 1 would not in itself eliminate California’s affordable housing gap, but it would take a step toward addressing the shortfall by allowing the state to sell $4 billion in bonds and use the proceeds to develop affordable housing and help veterans and low- and moderate-income Californians purchase homes.

These bonds would be paid off over 35 years, at about $170 million per year. The $1 billion in bonds to help veterans buy homes would be fully repaid by home loan recipients, at no direct cost to the state, but the $3 billion in bonds for other housing activities would incur principal and interest costs, which would be paid out of the state General Fund. These dollars would not then be available to pay for other public systems and costs supported by General Fund dollars, like pensions for public employees, health care for low-income individuals, or the criminal justice system. A key question for voters is whether developing tens of thousands of affordable housing units and assisting veterans and lower-income residents to purchase homes is worth the tradeoff of dedicating these General Fund dollars to bond principal and interest payments over time. In evaluating this tradeoff, considerations include the fact that bond funds would leverage significant federal, local, and private dollars to support housing production and that affordable housing has cascading positive effects on health and well-being, which may reduce demands for other public supports over the long term.

— Sara Kimberlin

* Up to $360,000 of the total combined funds allocated to these programs could be used by the Department of Housing and Community Development to provide related technical assistance to cities and counties.

** This estimate did not account for the $150 million allocated to homebuyer assistance through CalHFA rather than to housing production, which would slightly decrease the estimated number of housing units produced.