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First Look: Budget Center Analysis of the Governor’s 2019 Budget Proposal

Governor's Inaugural Budget Proposal Includes Bold Investments While Maintaining Fiscal Health

January 2019 | By California Budget & Policy Center

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Executive Summary

On January 10, Governor Gavin Newsom released a proposed 2019-20 budget that calls for a series of bold and smart investments in broadening economic security and opportunity for Californians, while continuing to strengthen the state’s underlying fiscal health.

The Governor forecasts revenues that are $8.1 billion higher (over a three-year “budget window” from 2017-18 to 2019-20) than previously projected in the 2018-19 budget enacted last June, driven largely by continued economic growth.

The Governor’s proposal includes a range of significant expansions in support of low- and middle-income Californians who are struggling to make ends meet and access greater economic opportunity, including doubling the state’s Earned Income Tax Credit, working toward universal preschool for 4-year olds, investing in child care infrastructure, expanding health care to move closer to universal coverage, expanding paid family leave, boosting CalWORKs grants, and increasing investment in state higher education systems. Recognizing that high housing costs contribute to California’s high poverty rate, Governor Newsom also proposes a mix of policies and an expanded state role to address housing needs and homelessness. These policies would make California more affordable and more equitable for millions of Californians.

Many of the Governor’s proposals — such as child care and housing — use one-time investments in 2019-20 to lay a foundation for significant build-out of public supports over the next several years.

Confronted by federal challenges to Californians and their communities, the budget proposal calls for investments to support immigrants, improve state and local emergency preparedness, and ensure that the 2020 census is as accurate as possible.

Recognizing that California is experiencing a period of sustained economic growth and a positive revenue outlook, the budget proposal also calls for paying down debts and building up reserves. These proposals, in combination with one-time and ongoing investments, represent a balanced approach to managing the state’s fiscal health.

The following sections summarize key provisions of the Governor’s proposed 2019-20 budget.

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Economic and Revenue Conditions

Children and Families

Economic Security

Health

Education

Other Key Priorities in the Proposed Budget

Economic and Revenue Conditions

Governor Expects Economic Growth to Continue, Albeit at a More Moderate Pace

The Governor’s proposed budget assumes that the current economic expansion continues in the near-term, albeit at a more moderate pace than in recent years. Specifically, the Administration projects that national economic growth, as measured by the change in Gross Domestic Product (GDP), will begin to moderate this year and then gradually slow each subsequent year through 2022, the end of the forecast period. The Administration also expects economic growth to slow in California during this period.

In terms of California’s labor market, the Governor’s forecast assumes steady job growth that continues to increase the state’s labor force participation rate and maintains the state’s unemployment rate at historically low levels. The forecast notes that low unemployment in 2018 failed to translate into significant wage increases thus far, other than for high-income earners, but anticipates that more workers will begin to see real wage increases this year.

The proposed budget summary outlines several risks to the Governor’s projections for California’s economic growth. These include a number of national factors, such as a large drop in the stock market, which has been experiencing significant fluctuations since last year; a national recession, which could come at a time when many people have not yet recovered from the previous downturn and when the federal government is not well-positioned to ramp up spending to mitigate its damage; and the ongoing trade war with China, California’s third-largest trading partner. Additionally, the Governor’s forecast notes that California will need to address the aging population, declining birth rates, and insufficient housing supply in order for the state’s economic growth to continue.

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Revenue Forecast Reflects Continued Economic Growth

The proposed budget assumes increases in revenues over the three-year “budget window,” from 2017-18 to 2019-20, while acknowledging that rising risks to the state’s economic outlook could affect the revenue forecast.

The Governor’s proposal projects General Fund revenues for the budget window to exceed the projections in the enacted 2018-19 budget package by $8.1 billion, before accounting for transfers such as deposits into the rainy day fund. This includes higher-than-expected revenues from the personal income tax (PIT) and the corporation tax (CT), partially offset by lower-than-expected revenues from the sales and use tax (SUT). Together, these three taxes are expected to comprise almost 97% of General Fund revenues in the proposed 2019-20 budget.

PIT revenues are projected to be $7.5 billion higher over the three-year budget window than estimated in the 2018-19 budget agreement, reflecting strong growth in wages and capital gains, particularly among high-income taxpayers. SUT revenues are expected to be $1.4 billion lower, primarily because a spike in business investment that was anticipated due to last year’s changes to federal tax law did not occur. Additionally, the lower SUT projection reflects consumer spending restraints due to high housing costs and the continued erosion of the state’s sales tax base. CT revenues are estimated to be $1.3 billion higher over the budget window, though the budget proposal warns this is expected to be a one-time increase largely resulting from shifts in the timing of corporate tax payments.

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Governor’s Budget Proposal Continues to Build Up Reserves to Bolster State Fiscal Resilience

California voters approved Proposition 2 in November 2014, amending the California Constitution to revise the rules for the state’s Budget Stabilization Account (BSA), commonly referred to as the rainy day fund. Prop. 2 requires an annual set-aside equal to 1.5% of estimated General Fund revenues. An additional set-aside is required when capital gains revenues in a given year exceed 8% of General Fund tax revenues. For 15 years — from 2015-16 to 2029-30 — half of these funds must be deposited into the rainy day fund and the other half is to be used to reduce certain state liabilities (also known as “budgetary debt”).

The Governor’s proposed budget includes a transfer of $1.8 billion to the BSA for 2019-20, bringing the reserve’s balance to $15.3 billion by the end of the fiscal year. Prop. 2 requires that when the BSA balance has reached its constitutional maximum of 10% of General Fund tax revenues, any additional dollars that would otherwise go into the BSA must be spent on infrastructure, including spending on deferred maintenance. However, while the BSA has reached this maximum, the Governor’s budget assumes that constitutionally required deposits will continue to be made since the account’s maximum balance was achieved in part through supplemental payments in prior years. This assumption is based on an opinion by the Legislative Counsel, but could be subject to a legal challenge.

The BSA is not California’s only reserve fund. Each year, the state deposits additional funds into a “Special Fund for Economic Uncertainties” (SFEU). The Governor’s proposed budget assumes an SFEU balance of $2.3 billion. Additionally, the 2018-19 budget agreement created the Safety Net Reserve Fund, which holds funds that can be used to maintain benefits and services for CalWORKs and Medi-Cal participants in the event of an economic downturn. The Governor proposes depositing $700 million into the Safety Net Reserve, bringing the fund’s balance to $900 million. Taking into account the BSA, SFEU, and the Safety Net Reserve, the Governor’s proposal would build state reserves to a total of $18.5 billion in 2019-20.

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Governor’s Budget Proposal Prioritizes Paying Down Debts

The Governor’s proposed 2019-20 budget prioritizes paying down state and local unfunded pension liabilities and paying off outstanding budgetary debt incurred during the Great Recession and its aftermath.

The budget proposal includes required and supplemental contributions to two state-run retirement systems: the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS). CalPERS and CalSTRS, like many retirement systems, are not funded at levels that will keep up with future benefits, resulting in the state needing to make higher annual contributions in order to pay down unfunded liabilities.

Beyond statutorily required contributions, the Governor’s proposed budget includes a $3 billion supplemental pension payment to CalPERS that would be made in the current fiscal year (2018-19). The budget proposal also devotes an additional $390 million to CalPERS in 2019-20 from Proposition 2 funds (see Reserves section) that are required to be set aside for reducing state liabilities.

In the case of CalSTRS, the budget proposal devotes an additional $1.1 billion, beyond statutory requirements, toward the state’s share of CalSTRS unfunded liabilities. The $1.1 billion comes from Prop. 2 funds (see Reserves section) that are required to be set aside for reducing state liabilities. The Governor’s proposal notes that the $1.1 billion is the “first installment of an estimated $2.9 billion to be paid to CalSTRS through 2022-23” using available Prop. 2 dollars.

In addition, the Governor’s proposal includes a one-time $3 billion non-Proposition 98 payment to CalSTRS to reduce the employers’ (local educational agencies and community colleges) share of unfunded liabilities in response to prior changes in contribution levels and pressures confronting employers. In 2014, the state enacted AB 1469, increasing the share of CalSTRS costs borne by all parties (the state, employers, and teachers), but particularly increasing the contribution rate of employers. Confronting a series of other pressures, including enrollment decline and increases in the costs of local services, some local educational agencies are in danger of not being able to meet their financial obligations. The Governor’s proposal would provide $2.3 billion toward the employers’ share of the unfunded liability for the CalSTRS Defined Benefit Program. The Governor proposes to use the remaining $700 million to reduce the required contributions by employers in 2019-20 and 2020-21. Overall, the proposed $3 billion supplemental payment would free up — in the short term as well as the long term — local dollars for investment in education or to allow employers to pay down retirement obligations.

The Governor’s proposed 2019-20 budget also includes more than $4 billion to pay off outstanding budgetary debts incurred during the Great Recession, including $2.4 billion to eliminate outstanding loans from special funds and transportation accounts and a total of $1.7 billion to eliminate a one-month deferral of payroll from nine years ago and a deferred payment to CalPERS from over a decade ago.

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Children and Families

Governor Boosts Funding for Child Care Infrastructure, While Not Providing Additional Access to Subsidized Care

Subsidized child care allows parents with low and moderate incomes to find jobs and remain employed, feeling secure that their children have a safe space to learn and grow. These programs provide a critical service, keeping families across California afloat. Currently, subsidized child care programs serve far fewer children than they did ten years ago. While policymakers have made incremental investments in early care and education in recent years, investments to serve more children have been targeted to the California State Preschool Program, just one component of California’s subsidized child care and development system.

The Governor’s proposed budget signals a commitment to expand access to subsidized child care in future years by funding child care infrastructure in 2019-20. Specifically, the budget proposal:

  • Provides $245 million one-time General Fund for child care facilities. The state currently operates three programs that provide funding for child care facilities including a loan program for portable facilities, loans for facility repair and renovation, and, most recently, the new Inclusive Early Education Expansion Program funded in the 2018-19 budget agreement with $167 million in one-time Prop. 98 funding. The proposal does not indicate if this funding would augment existing facility funding programs or create a new program.
  • Provides $245 million one-time General Fund for child care workforce development. The administration’s stated goal is to “improve the quality of care” by investing in the education of the child care providers. Details about how this will be allocated are not available.
  • Improves and expands child care facilities on university campuses with $247 million in one-time General Fund. The proposed budget boosts resources for the California State University (CSU) in order to add more child care facilities to serve students with children. This is aligned with the administration’s proposal to also increase financial aid for student parents. (See the Student Aid section.) These funds could also be used for deferred maintenance, but it is not clear if this is deferred maintenance on child care facilities or on other CSU facilities.
  • Provides $10 million General Fund to develop a plan to increase access to subsidized child care. As mentioned in the Early Learning section, the budget proposal also includes $10 million General Fund to pay a contractor to create a plan in the 2019-20 fiscal year to address a wide variety of issues such as universal preschool, facility capacity, workforce training, access to subsidized child care, and potential revenue options for the subsidized child care and development system.

The budget proposal signals a commitment to serve more families in future years, by setting aside hundreds of millions in one-time funding for subsidized child care infrastructure in the 2019-20 fiscal year. Yet, despite this historically large proposed increase, the proposal does not provide more low- and moderate-income families with access to subsidized child care, despite years-long waiting lists.

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In California, the policy bill process is a key pathway for shaping state policy, and operates in tandem with the state budget process to move legislative proposals from concept to reality.

In an effort to build an understanding of how these two processes are related, the California Budget & Policy Center has created a new resource modeled on our popular guides to the state budget process and county budget process. Dollars and Democracy: Understanding How the State Budget Process Relates to the Policy Bill Process an overview of both processes, reviews key events and deadlines, and discusses the factors that help to determine whether a proposal moves through the Legislature on the policy bill “track” or the budget track (or both). This guide also highlights the differences between — and the unique advantages of — the state budget process and policy bill process.

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Introduction

In the years since the 2007 Great Recession, economic commentary has veered between hailing the subsequent recovery and sounding the alarm about rising inequality. Income inequality is often identified as a sign of both the country’s underlying economic troubles and public policies that disproportionately benefit the wealthy. An alternative indicator of the nation’s social and economic health pertains to wealth, specifically the growing wealth gap among people of different races and ethnicities.[1] This report illuminates the racial wealth gap, explores its underlying historical context, discusses some key factors driving the wealth gap, and lays out a set of public policies that could put California and the nation as a whole on a better path to building wealth for millions of families.

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Wealth Is Critical to Economic Security and Mobility, but Access Varies by Race and Ethnicity

Building wealth is a crucial factor in promoting generational economic mobility and opportunity. Commonly measured in terms of net worth — the difference between gross assets and debt — wealth provides families with financial security. The greater a family’s net worth, the more resources they have to weather costly unexpected events, pay for higher education, take risks on a business, purchase a home, and invest in other wealth-generating assets. Moreover, wealth can be transferred to the next generation through financial gifts or inheritances.

Income inequality has been extensively documented at both the state and national levels. Unfortunately, wealth inequality is even starker than income inequality. The top 1% of Americans took home 24% of all income, but they also had 39% of all wealth in 2016.[2] However, wealth is not only inequitably distributed across the income spectrum. It is also unfairly allocated among people of different races and ethnicities. For example, in 2016, the typical — or median — white family’s wealth nationally was $171,000 (Figure 1).[3] For black families, median wealth amounted to $17,600, or roughly 10% of that for white families. For Latinx families, median wealth was $20,700, or about 12% of that for white families. Put another way, the typical white household has $9.72 in wealth for every $1 that a typical black family has and $8.26 in wealth for every $1 that a typical Latinx family has.

National data show that this wealth disparity is not simply explained by racial and ethnic differences in income. Though one might expect that those with greater income would also have greater wealth, the data indicate that this is not the case. In 2014, black households in the middle of the income distribution had $22,150 in median net wealth, far less than did whites in the second lowest 20% of the distribution ($61,070) and only somewhat greater than that of whites in the bottom quintile ($18,361).[4]

Data specific to the Los Angeles area highlights wealth inequality at the local level in California (Figure 2).[5] In 2014 in Los Angeles and Orange counties, US-born whites had a much higher median household net worth ($355,000) than did most non-whites, including Latinx households ($46,000) and US-born blacks ($4,000). At the same time, among non-white groups, Japanese ($592,000), Asian Indian ($460,000), and Chinese ($408,200) households had greater median net worth than whites. The variation among Asian groups may reflect differing socioeconomic histories and migration patterns, and it echoes findings of substantial wealth inequality among Asian American communities in the United States.[6] These racial and ethnic differences reveal how some groups are better positioned to make the kinds of critical investments in their futures that benefit their families and the broader community.

Weathering adverse events is more challenging for households that lack sufficient wealth. When families face financial setbacks such as job loss or unexpected expenses, liquid assets — which can be converted easily to cash, such as money in the bank — offer a needed financial cushion. Unfortunately, many black and Latinx families across the country do not have enough liquid wealth to absorb sudden shocks. Nationally, blacks in 2011 had only $25 in median liquid wealth, and Latinx residents had just $100.[7] In contrast, the typical white family had $3,000 in assets that they could quickly convert to cash if needed. In the Los Angeles area, the median value of liquid assets for white households in 2014 was $110,000, compared to $200 for US-born blacks, $0 and $7 for Mexican and non-Mexican Latinx households, respectively, $500 for Vietnamese, and $245,000 for Asian Indians.[8] Moreover, while the majority of American families own some wealth, too many have zero or negative net worth (indicating more debt than assets). This problem also varies by race and ethnicity, with far fewer white households nationally (9%) having no wealth in 2016 than did black (19%) or Latinx households (13%).[9]

Families with greater wealth are better positioned to be able to transfer resources to family or friends. In addition to having more wealth, whites generally are better able to rely on their social networks during hard times. In 2016, more than 7 in 10 white families expected that they could get $3,000 from friends or family during a financial emergency, with less than half of black and Latinx households reporting the same.[10]

These disparities are not a natural occurrence nor are they due to the individual failings of people of color. Rather, as the next section points out, there are structural problems deeply rooted in our nation’s long history of racism, which has infused every aspect of our economy and which our nation has failed to fully remedy.

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The Path to the Racial Wealth Gap

Why Is There a Racial Wealth Divide?

The roots of the racial wealth divide can be found in racist policies and practices dating back to our nation’s early days. Under the institution of chattel slavery, enslaved Africans were valuable assets whose labor generated wealth for their white owners. After emancipation, blacks worked as landless tenant farmers and sharecroppers. They were also largely shut out of the Homestead Acts, through which the federal government gave approximately 246 million acres to homesteaders — land that was the original source of family wealth for about one-quarter of the US adult population by 2004.[11] Public land acquisition and private land ownership were often explicitly restricted by race. White expansion westward depended on the displacement of Native Americans from their territories and in many states — including California — land ownership was limited to citizens, precisely to discriminate against non-whites ineligible for citizenship.[12]

In the period following the Great Depression and World War II, US policy substantially restricted communities of color from benefiting from the wealth-building policies that helped grow the American middle class. Housing was a key area in which both public policy and private actions clearly advantaged whites. From 1934 to 1968, the Federal Housing Administration (FHA) financed mortgages to expand homeownership, but also deliberately created segregated white neighborhoods to keep out “incompatible racial element[s].”[13] Federal policies also harmed black neighborhoods by excluding many residents of these areas from eligibility for government-backed loans and mortgages and discouraging lending to people of color by designating their neighborhoods as bad credit risks. Nationally, due to the FHA’s underwriting practices, just 2% of government-backed mortgages during this period (1934 to 1968) went to homebuyers of color.[14] These practices helped whites build assets, reduced home values in non-white neighborhoods, and pushed would-be homebuyers of color into predatory land contracts that systematically stripped wealth from their communities.[15] While the Fair Housing Act of 1968 banned racial discrimination in housing rentals and sales, it initially carried no real federal enforcement mechanism for discrimination claims, light penalties for violators, and high burdens for victims of discrimination.[16] Additionally, due to political resistance to desegregation, the Department of Housing and Urban Development often avoided exercising or outright obstructed its legal mandate to affirmatively promote integration, thus entrenching these inequalities.[17] Today, housing discrimination remains a barrier for people of color, who are recommended and shown fewer housing units than are equally qualified whites.[18]

The Racial Wealth Gap Has Widened in Recent Decades

Due to a long history of discrimination, the racial wealth gap has been an ever-present feature of American economic life. Yet over the past several decades, this disparity has worsened. Although black and Latinx households saw their net worth rise incrementally, albeit fitfully, from 1983 to 2007, the net worth of white households was still steadily outpacing these gains.[19] Unfortunately, the Great Recession and the housing crisis reversed the gains made by black and Latinx families, rolling back a generation’s worth of progress.

The recession hit Americans hard; from 2007 to 2010, median net worth for all racial and ethnic groups dropped by about 30%.[20] However, for people of color, the pain did not end there. While white families’ net worth stabilized in the immediate aftermath of the downturn (2010 to 2013), black and Latinx families continued to see their wealth decline by an additional 20%.[21] Latinx and Asian American households were disproportionately hurt by the foreclosure crisis, as they were far more likely to live in one of the five states that were hardest hit, including California.[22] Though median net worth has since risen for all groups, the racial wealth divide has continued to increase. From 2013 to 2016, median net worth for Latinx and black families rose 30% to 50%, respectively, compared to an increase of 17% for white families.[23] Despite these gains, the white-black wealth gap still increased by 16% and the white-Latinx gap rose by 14% during the same period.

Exacerbating the racial wealth divide is the nation’s current wealth-building incentive structure. The federal government subsidizes savings and investment through certain tax benefits — including tax credits, deductions, exclusions, and preferential rates — which do not show up on the federal government’s balance sheet but still count as public spending.[24] These subsidies perpetuate inequality by favoring those who are already wealthy, with the top 20% of earners receiving most of the benefits.[25] With the exception of tax credits, these tax breaks are more likely to benefit white households, which disproportionately belong to the top 20%.

Just as wealth is distributed unevenly, so are practices that strip wealth from communities. In the years leading up to the foreclosure crisis, predatory lenders made subprime mortgage loans — which have higher interest rates, fees, and penalties — irrespective of borrowers’ ability to repay. People of color, especially women, were particularly targeted by subprime lenders for bad mortgages even when they qualified for better loans, with black, Latinx, and Asian Pacific Islander women more likely to receive subprime mortgages than whites.[26] When the mortgage market crashed, these households lost substantial wealth.  Payday lenders, which offer short-term, high-cost loans with excessive interest rates that borrowers must repay quickly, present another obstacle to wealth-building for communities of color.[27] Lenders tend to be concentrated in neighborhoods of color, and 60% of borrowers are women, particularly Latinx and black women.[28] These borrowers are often living paycheck to paycheck and use these loans to cover basic needs. They can become trapped by debt, taking out new loans with increasing fees to pay the previous loan. As a result of this “loan churn,” only 14% of borrowers can repay their loans within the short-term window and half of all loans are extended over 10 times.[29] In California, 83% of the total payday loan transactions in 2016 were for subsequent transactions by the same borrower and 79% of these subsequent loans were made within a week of the previous loan, the majority on the same day.[30]

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Key Factors Contributing to the Growing Wealth Divide

Many factors are driving the growth of the racial wealth gap. This section examines three key causes: housing, unemployment and the labor market, and higher education.[31]

Unequal Access to Homeownership and Affordable Housing

Throughout the US as well as in California, housing has become unaffordable for many families, whether they own or rent their homes. In 2015, more than 4 in 10 California households had unaffordable housing costs, meaning these costs exceeded 30% of household income.[32] More than 1 in 5 households statewide faced severe housing cost burdens, spending more than half of their income on housing. This affordability crisis predominantly affects Californians of color. Among all of the state’s renters paying more than 30% of their income toward rent, more than two-thirds (68%) were people of color and nearly half (46%) were Latinx.[33]

For those who own their homes, a house is often a family’s greatest investment, and it represents the largest single segment of their wealth portfolio. Among all homeowners, housing comprised about 30% to 40% of their assets in 2016.[34] Historically less able to access homeownership, black and Latinx Americans have lower homeownership rates than whites. Nationally, more than 7 in 10 white households (73%) own their homes, compared to less than half of Latinx and black households.[35] In California, where homeownership rates are lower than the national average, more than 6 in 10 whites (63%) own their homes, while only one-third of blacks and about 4 in 10 Latinx Californians (42%) are homeowners (Figure 3).[36] In Los Angeles and Orange counties specifically, over two-thirds of whites were homeowners in 2014, which was significantly greater than the homeownership rate for most other racial and ethnic groups.[37]

Racial disparities in housing wealth account for a substantial share of the wealth divide. According to one study, the number of years a household owned their home explained 27% of the growth in the racial wealth gap between blacks and whites from 1984 to 2009.[38] Whites are more likely to receive family assistance in making a down payment on a home and generate housing wealth years earlier than black and Latinx families. Even among homeowners, a substantial racial wealth gap exists: black and Latinx homeowners still see lower returns to homeownership. In 2016, net housing wealth among homeowners was $215,800 for white families, compared to only $94,400 for blacks and $129,800 for Latinx families.[39] Greater access to assistance from family means that white buyers are more likely to be able to make a down payment earlier in their lives as well as to make more sizable down payments, which leads to lower interest rates and lending costs.[40] Additionally, because of the legacy of residential segregation, blacks tend to own homes in majority black neighborhoods, and these homes do not appreciate at the same rate as those in largely white neighborhoods.[41]

Given these deep disparities, some researchers argue that in order to help people of color build housing wealth on par with whites, increasing both homeownership rates and returns is key.[42] If black and Latinx families owned their homes at the same rates as whites, the wealth gap would decrease by 31% and 28%, respectively.[43] Separately, equalizing returns to homeownership would reduce the black-white wealth gap by 16% and the Latinx-white gap by 41%.

Higher Unemployment and Unequal Access to Well-Paying Jobs With Benefits

Earned income and employer-provided benefits are an important source of economic security for many American households. Taken together, unemployment and household income explain almost 30% of the growth in the white-black wealth gap.[44]

Across all levels of education, the unemployment rate for blacks is higher than for whites.[45] Equal rates of employment would not be enough to eliminate the racial wealth divide, as white families with an unemployed head of household possess five times the wealth of black families headed by a person who works full-time.[46] Clearly, people of color remain at a disadvantage in the labor market even when they are employed. Furthermore, black and Latinx workers are less likely to hold higher-paying jobs that offer key benefits like retirement plans, health coverage, or paid leave, all of which are important for wealth-building.[47] This insecurity may affect women of color to an even greater extent. They face a “larger wage gap, greater job segregation, higher rates of unemployment, and primary caregiving responsibility” than do white women.[48] Latinx and black women are less likely than white women to have employers who offer retirement plans, and women in general are more likely than men to work part-time or low-wage jobs that restrict access to wealth-building benefits.[49]

The Heavier Burden of Higher Education Costs

Having at least a college degree is increasingly tied to greater economic security. Workers with a college degree have higher lifetime earnings than those with only a high school diploma and are more likely to be stably employed in a job with benefits.[50] Californians with a bachelor’s degree can expect more than double the average annual earnings of those with only a high school diploma.[51] Increasing access to higher education is also beneficial for the state. Some research suggests that the lifetime return to the state per graduate with a bachelor’s degree is over $200,000.[52] However, state investments in public higher education lag far below pre-recession levels.[53] Over the years, spending cuts have shifted the cost of higher education from the state to students and their families through increased tuition and fees.

Yet not all families can support their children’s education equally. In 2013, whites were more than twice as likely as blacks to receive financial help from their parents for higher education.[54] This disparity in financial support is not due to a difference in parents’ supportiveness of their children’s postsecondary education. Indeed, research indicates that black parents are more likely to spend a larger share of their resources on their children’s education.[55] Those black parents who support their children financially have less wealth and income than white parents who provide no financial support. However, in general, black families simply have less wealth to leverage toward the cost of an education.

Families may consider financial aid, but that assistance is not always available or sufficient. In California, low- and middle-income students turn to Cal Grants, which are the foundation of California’s financial aid program.[56] Only 16% and 25% of very low-income black and Latinx students in California, respectively, receive a Cal Grant award.[57] The vast majority of black and Latinx students who do receive state financial aid get the Cal Grant B access award, which is intended to help low-income students pay for basic expenses yet has not kept pace with the state’s rising housing costs.[58] The federal Pell Grant has also eroded in value, failing to keep up with rising costs of college attendance.[59]

Disproportionately burdened by rising tuition and fees, facing insufficient financial aid, and less able to rely on family resources, low-income students as well as students of color are more likely to face economic barriers to completing their degrees. These students often have to employ a range of coping strategies that impede their academic progress, including enrolling part-time, dropping courses, skipping semesters, or taking a job to cover expenses.[60] They also are more likely to take on debt to finance their education. Among all households, black families are more burdened by student debt than are white families. Over half (54%) of all black households headed by those ages 25 to 40 have student debt, compared to 39% of their white counterparts.[61] For Latinx households, just over 1 in 5 (21%) have student debt, likely due to lower rates of college attendance and attainment. Black borrowers also tend to owe more than white borrowers and both black and Latinx borrowers are more likely to take out riskier private loans.[62] This debt burden can be an obstacle to attaining a degree, as black and Latinx student borrowers are more likely to drop out.[63] As a result, they lack access to the relative labor market stability and asset-building opportunities that come with a college degree.

Yet while higher education is associated with greater earning potential, boosting the number of black and Latinx students who attain a degree in and of itself will not eliminate the wealth divide. In part due to debt payments, higher risk of default, and disparate experiences in the labor market, black and Latinx graduates do not see returns to their education that are equal to those of their white peers. At every level of educational attainment, black and Latinx families have less median wealth than their white peers. Not only do white college graduates hold more than five times the wealth of black and Latinx graduates, but even whites without a degree are wealthier (Figures 4 and 5).[64] Nor does the disparity disappear for those who received parental financial support for a degree, which is associated with degree completion but does little to reduce racial gaps in income or net worth.[65] In short, attaining a degree does not necessarily protect graduates of color from debt burdens or the discriminatory policies and practices that contribute to the racial wealth gap over the course of a lifetime.

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Key State Policies to Address the Racial Wealth Gap

The research on wealth overwhelmingly concludes that individual achievement is not sufficient to overcome growing racial and ethnic wealth inequalities. Given the important role of public policy in fostering both an American middle class and the racial wealth divide, closing the wealth gap will require a new approach to public policy at both the state and national levels. This section suggests some state-level policy changes that could increase wealth for communities of color and decrease the disparity between whites and other groups.

The Need for Action: Four Key Policies to Build Wealth

1. Create a state-level estate tax

An estate tax is levied on large accumulations of wealth that are transferred from the estate of people who have died to their beneficiaries.[66] Ideally, the US would have a robust estate tax that would reduce wealth accumulation, with the proceeds invested in wealth-building strategies designed to level the playing field for all Americans. However, the federal estate tax has been weakened dramatically since the late 1990s to the point that nearly all estates are exempt from this tax.[67] Most recently, the Tax Cuts and Jobs Act of 2017 raised the exemption from the federal estate tax to more than $10 million per person.[68] This change will further concentrate wealth among families that are already highly advantaged. California should create its own estate tax, joining 18 other states and the District of Columbia that tax inherited wealth.[69] With such a tax, California could both reduce wealth disparities and use the resulting revenues — potentially in the billions per year — to fund wealth-building policies or other public investments that would benefit the vast majority of Californians.[70]

2. Support homeownership for low-income Californians

To ease the burdensome housing costs and help Californians build wealth, state policymakers can further help low-income Californians become homeowners, which could benefit Californians of color. One option is to invest in shared equity programs, which offer subsidies to lower the initial costs of a home for new buyers.[71]  When homeowners sell their home, a portion of the proceeds is reinvested in the program, allowing future low-income buyers to afford a home and keeping the program sustainable. California could significantly invest in affordable homeownership by providing funding for shared equity housing for those otherwise priced out of the housing market and tie funds to long-term affordability requirements. Local governments and nonprofits could be responsible for monitoring units and resales, and offering support to homeowners.

To help fund this investment, California should consider eliminating the state mortgage interest tax deduction. The deduction allows households to reduce their taxable incomes by the value of qualified mortgage interest expenses paid on up to $1 million in debt and primarily benefits wealthy homeowners.[72] This tax break exacerbates racial and ethnic disparities, with white families not only more likely to own homes, but also to have more valuable homes.[73] Eliminating the deduction would both make California’s tax code more equitable and yield substantial revenue for shared equity programs.[74]

3. Create debt-free public higher education for low- and middle-income households

California policymakers should take steps to substantially deepen the state’s investment in higher education, with a particular focus on subsidizing the full cost of attendance for low- and middle-income households. Targeting students with lower incomes would reduce the racial wealth divide by eliminating borrowing for many students of color, thus removing one barrier to completion and increasing the return on a college degree by allowing students to avoid wealth-stripping student debt.[75] To this end, policymakers should increase the supply of competitive Cal Grants and raise the value of the Cal Grant B access award for living expenses.

4. Boost investments in children through Children’s Savings Accounts (CSAs).

CSAs are savings accounts for children that have the potential to reduce generational inequities in wealth-building. Seeded with an initial deposit from the state that would accrue interest throughout childhood, a CSA could be automatically opened for each child at birth (with greater endowments for children from less wealthy families) or applied only to children from low-wealth households. Contributions from family and friends could receive a public match, the size of which could increase for families with less wealth. Once the child reaches adulthood, the savings could be used for higher education, homeownership, or other investments throughout their lifetime. Such a program could substantially reduce the racial wealth gap and increase asset security.[76]

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The Future of Wealth

The rise of a strong American middle class did not happen accidentally. It required a healthy economy supported by large and intentional public investments. These actions were largely structured to benefit whites to the exclusion of communities of color, and that decision bears serious moral and economic consequences for our future well-being. Nationally, whites are projected to become a racial minority by 2045.[77]  In California, people of color already constitute the majority of the state’s population, and their share is projected to rise to more than two-thirds (68%) by 2045.[78] As a result, the economic welfare of people of color will increasingly determine the welfare of our state and of the larger society. Californians and all Americans need to decide which future we want. One option is to continue down our current path, disproportionately concentrating wealth and opportunity with a handful of whites, while locking out people of color. A better option is to improve public policies at the state and federal levels in order to ensure equitable investments in all of our people and create a strong and inclusive economy.

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Appendix

Measuring Wealth

Researchers primarily use three surveys to explore the distribution of wealth in the US: the US Census Bureau’s Survey of Income and Program Participation (SIPP), the Federal Reserve Board’s Survey of Consumer Finances (SCF), and the Panel Study of Income Dynamics (PSID) conducted by University of Michigan faculty. While all three of these surveys allow for comparisons by race and ethnicity, these categories tend to be limited. For example, due to sample size constraints, Asians, Native Americans, Pacific Islanders, and those who report more than one race are grouped into a single “Other” category, as in the SCF.[79] Wealth-related data by race and ethnicity is available for certain localities — including the Los Angeles area — from The National Asset Scorecard and Communities of Color survey (NASCC).[80] Due to these data limitations, The Racial Wealth Gap: What We Can Do About a Long-Standing Obstacle to Shared Prosperity focuses on the national differences in wealth between white, black, and Latinx households and reports local data when available.

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Endnotes

[1] In this report, the term “racial wealth gap” is used to refer to an economic problem that affects various races and ethnicities.

[2] Jesse Bricker, et al., Changes in US Family Finances From 2013 to 2016: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 2017), p. 10.

[3] Though these gaps decrease when accounting for other demographic and economic factors associated with wealth, sizable disparities remain. See Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).

[4] William Darity Jr., et al., What We Get Wrong About Closing the Racial Wealth Gap (Samuel DuBois Cook Center on Social Equity and Insight Center for Community Economic Development: April 2018), p. 9.

[5] Data are from the 2014 National Asset Scorecard and Communities of Color survey and are for Los Angeles and Orange counties. The authors do not account for nativity status, with the exception of distinguishing between US-born blacks and African blacks. Median net worth for African blacks was $72,000. See Melany De La Cruz-Viesca, et al., The Color of Wealth in Los Angeles (Duke University, The New School, the University of California, Los Angeles, and the Insight Center for Community Economic Development: March 2016), p. 40.

[6] Christian E. Weller and Jeffrey Thompson, Wealth Inequality Among Asian Americans Greater Than Among Whites (Center for American Progress: December 20, 2016).

[7] This analysis excludes retirement savings. Including retirement savings, black and Latinx Americans had $200 and $340 in median liquid wealth, respectively, while whites had $23,000. See Rebecca Tippett, et al., Beyond Broke: Why Closing the Racial Wealth Gap Is a Priority for National Economic Security (Center for Global Policy Solutions and Duke Research Network on Racial and Ethnic Inequality at the Social Science Research Institute: May 2014), p. 2.

[8] Data are from the 2014 National Asset Scorecard and Communities of Color survey and are for Los Angeles and Orange counties. The authors do not account for nativity status, with the exception of distinguishing between US-born blacks and African blacks. See Melany De La Cruz-Viesca, et al., The Color of Wealth in Los Angeles (Duke University, The New School, the University of California, Los Angeles, and the Insight Center for Community Economic Development: March 2016), p. 38.

[9] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).

[10] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).

[11] Thomas M. Shapiro, The Hidden Cost of Being African American: How Wealth Perpetuates Inequality (New York: Oxford University Press, 2004), p. 190.

[12] Office of the Historian, United States Department of State, Indian Treaties and the Removal Act of 1830; Gregory P. Downs and Kate Masur, The Era of Reconstruction: 1861-1900 (National Park Service, US Department of the Interior: 2017), p. 70; and Masao Suzuki, “Important or Impotent? Taking Another Look at the 1920 California Alien Land Law,” The Journal of Economic History 64 (2004), pp. 125-130.

[13] Richard Rothstein, The Racial Achievement Gap, Segregated Schools, and Segregated Neighborhoods: A Constitutional Insult (Economic Policy Institute: November 12, 2014).

[14] Dedrick Asante-Muhammad, et al., The Road to Zero Wealth: How the Racial Wealth Divide Is Hollowing Out America’s Middle Class (Institute for Policy Studies and Prosperity Now: September 2017), p. 15.

[15] Jeremiah Battle, Jr., et al., Toxic Transactions: How Land Installment Contracts Once Again Threaten Communities of Color (National Consumer Law Center: July 2016), pp. 3-4.

[16] Under the 1968 Fair Housing Act, the Department of Housing and Urban Development (HUD) had to investigate complaints of discrimination within 30 days. If HUD pursued the claim, it could only seek voluntary settlements with noncompliant parties or advise complainants to file private lawsuits, for which penalties were capped at $1,000. In 1988, Congress updated the Act to provide administrative enforcement of the law, extend HUD’s investigation time to 100 days, and increase the maximum civil penalties, which currently range from $20,111 for a first offense to $100,554 for those with a history of offenses. See Douglas S. Massey, “The Legacy of the 1968 Fair Housing Act” Sociological Forum 30 (2015), pp. 571-588; Administrative Conference of the United States, Enforcement Procedures Under the Fair Housing Act (June 18, 1992); and 82 Federal Register 24523 (2017).

[17] Douglas S. Massey, “The Legacy of the 1968 Fair Housing Act” Sociological Forum 30 (2015), pp. 571-588; Nikole Hannah-Jones, “Living Apart: How the Government Betrayed a Landmark Civil Rights Law,” ProPublica (June 25, 2015).

[18] US Department of Housing and Urban Development, Housing Discrimination Against Racial and Ethnic Minorities 2012: Executive Summary, (June 2013), p. 1.

[19] This analysis excludes durable goods. Dedrick Asante-Muhammad, et al., The Road to Zero Wealth: How the Racial Wealth Divide Is Hollowing Out America’s Middle Class (Institute for Policy Studies and Prosperity Now: September 2017), p. 8.

[20] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).

[21] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).

[22] Rebecca Tippett, et al., Beyond Broke: Why Closing the Racial Wealth Gap Is a Priority for National Economic Security (Center for Global Policy Solutions and Duke Research Network on Racial and Ethnic Inequality at the Social Science Research Institute: May 2014), p. 4.

[23] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).

[24] Refundable tax credits are the exception, as they are recorded in the federal budget. See Lewis Brown Jr. and Heather McCulloch, Building an Equitable Tax Code: A Primer for Advocates (PolicyLink: 2014), p. 3.

[25]  Lewis Brown Jr. and Heather McCulloch, Building an Equitable Tax Code: A Primer for Advocates (PolicyLink: 2014), p. 7.

[26] Heather McCulloch, Closing the Women’s Wealth Gap: What It Is, Why It Matters, and What Can Be Done About It (Closing the Women’s Wealth Gap Initiative: updated January 2017), p. 9; Suparna Bhaskaran, Pinklining: How Wall Street’s Predatory Products Pillage Women’s Wealth, Opportunities, and Futures (June 2016), p. 16.

[27] Scott Graves and Alissa Anderson, Payday Loans: Taking the Pay Out of Payday (California Budget & Policy Center: September 2008), p. 7.

[28] Suparna Bhaskaran, Pinklining: How Wall Street’s Predatory Products Pillage Women’s Wealth, Opportunities, and Futures (June 2016), p. 18-19.

[29] Suparna Bhaskaran, Pinklining: How Wall Street’s Predatory Products Pillage Women’s Wealth, Opportunities, and Futures (June 2016), p. 17.

[30] California Department of Business Oversight, Summary Report: California Deferred Deposit Transaction Law—Annual Report and Industry Survey (May 31, 2017), p. 8.

[31] In a 2013 analysis, these areas explained 61% of the ongoing racial wealth divide between whites and blacks. See Thomas Shapiro, Tatjana Meschede, and Sam Osoro, The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide (Institute on Assets and Social Policy: February 2013), pp. 2-3.

[32] Sara Kimberlin, Californians in All Parts of the State Pay More Than They Can Afford for Housing (California Budget & Policy Center: September 2017).

[33] Sara Kimberlin, Californians in All Parts of the State Pay More Than They Can Afford for Housing (California Budget & Policy Center: September 2017).

[34] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).

[35] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).

[36] California Budget & Policy Center analysis of US Census Bureau, American Community Survey data. Data are for household heads age 18 and older in 2016.

[37] Melany De La Cruz-Viesca, et al., The Color of Wealth in Los Angeles (Duke University, The New School, the University of California, Los Angeles, and the Insight Center for Community Economic Development: March 2016), p. 33.

[38] Thomas Shapiro, Tatjana Meschede, and Sam Osoro, The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide (Institute on Assets and Social Policy: February 2013), p. 2.

[39] Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).

[40] Thomas Shapiro, Tatjana Meschede, and Sam Osoro, The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide (Institute on Assets and Social Policy: February 2013), p. 3.

[41] Thomas Shapiro, Tatjana Meschede, and Sam Osoro, The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide (Institute on Assets and Social Policy: February 2013), p. 3.

[42] Laura Sullivan, et al., The Racial Wealth Gap: Why Policy Matters (Institute for Assets and Social Policy and Demos: 2015), p. 1.

[43] If black families owned their homes at the same rate as whites, the median black household’s wealth would increase by over $32,000 (451%). For Latinx families, equalizing homeownership rates would increase the median household wealth by over $29,000 (350%). Laura Sullivan, et al., The Racial Wealth Gap: Why Policy Matters (Institute for Assets and Social Policy and Demos: 2015), pp. 11-13.

[44] Thomas Shapiro, Tatjana Meschede, and Sam Osoro, The Roots of the Widening Racial Wealth Gap: Explaining the Black-White Economic Divide (Institute on Assets and Social Policy: February 2013), pp. 2-3.

[45] William Darity Jr., et al., What We Get Wrong About Closing the Racial Wealth Gap (Samuel DuBois Cook Center on Social Equity and Insight Center for Community Economic Development: April 2018), p. 7.

[46]  William Darity Jr., et al., What We Get Wrong About Closing the Racial Wealth Gap (Samuel DuBois Cook Center on Social Equity and Insight Center for Community Economic Development: April 2018), p. 8.

[47]  Laura Sullivan, et al., The Racial Wealth Gap: Why Policy Matters (Institute for Assets and Social Policy and Demos: 2015), p. 25.

[48] Heather McCulloch, Closing the Women’s Wealth Gap: What It Is, Why It Matters, and What Can Be Done About It (Closing the Women’s Wealth Gap Initiative: updated January 2017), p. 7.

[49] The data refers specifically to defined contribution plans. See Heather McCulloch, Closing the Women’s Wealth Gap: What It Is, Why It Matters, and What Can Be Done About It (Closing the Women’s Wealth Gap Initiative: updated January 2017), p. 12.

[50] Tatjana Meschede, et al., “‘Family Achievements’? How a College Degree Accumulates Wealth for Whites and Not for Blacks,” Federal Reserve Bank of St. Louis Review 99 (2017), p. 123.

[51] Hans Johnson, Testimony: The Need for College Graduates in California’s Future Economy (The Public Policy Institute of California: November 1, 2017).

[52] Jon Stiles, Michael Hout, and Henry Brady, California’s Economic Payoff: Investing in College Access and Completion (The Campaign for College Opportunity: April 2012), p.13.

[53] Amy Rose, State Spending Per Student at CSU and UC Remains Well Below Pre-Recession Levels, Despite Recent Increases (California Budget & Policy Center: March 2018).

[54] Yunju Nam, et al., Bootstraps Are for Black Kids: Race, Wealth, and the Impact of Intergenerational Transfers on Adult Outcomes (Insight Center for Community Economic Development: September 2015), p. 8.

[55] Tatjana Meschede, et al., “’Family Achievements?’ How a College Degree Accumulates Wealth for Whites and Not for Blacks,” Federal Reserve Bank of St. Louis Review 99 (2017), p. 124.

[56] There are three types of Cal Grant awards: Cal Grant A is used for tuition and fees; Cal Grant B provides an allowance for living costs known as an “access award” (in addition to tuition and fee assistance after the first year); and Cal Grant C is for students who attend occupational or career colleges. See California Student Aid Commission, What Is a Cal Grant Award?

[57] Data are from 2008. See The Campaign for College Opportunity, The State of Higher Education in California: Latinos (April 2015), p. 18 and The Campaign for College Opportunity, The State of Higher Education in California: Blacks (May 2015), p. 29.

[58] The Campaign for College Opportunity, The State of Higher Education in California: Latinos (April 2015), p.19; The Campaign for College Opportunity, The State of Higher Education in California: Blacks (May 2015), p. 29; and Amy Rose, Barriers to Higher Education Attainment: Students’ Unmet Basic Needs (California Budget & Policy Center: May 2018).

[59] Spiros Protopsaltis and Sharon Parrott, Pell Grants — a Key Tool for Expanding College Access and Economic Opportunity — Need Strengthening, Not Cuts (Center on Budget and Policy Priorities: July 27, 2017).

[60] Amy Rose, Barriers to Higher Education Attainment: Students’ Unmet Basic Needs (California Budget & Policy Center: May 2018).

[61] Mark Huelsman, et al., Less Debt, More Equity: Lowering Student Debt While Closing the Black-White Wealth Gap (Demos and Institute on Assets and Social Policy: 2015), pp. 16-17.

[62]  Latinx students tend to borrow smaller amounts than both blacks and whites at public institutions but may borrow greater amounts at private for-profit institutions. See Mark Huelsman, The Debt Divide: The Racial and Class Bias Behind the “New Normal” of Student Borrowing (Demos: May 19, 2015), pp. 7-8.

[63] Mark Huelsman, The Debt Divide: The Racial and Class Bias Behind the “New Normal” of Student Borrowing (Demos: May 19, 2015), pp. 14-16.

[64] For a white household whose head does not have a bachelor’s degree, median net worth is $98,100. For a black household whose head does have a college degree, median net worth is $68,200. For Latinx households, the equivalent figure is $77,900. See Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).

[65] Yunju Nam, et al., Bootstraps Are for Black Kids: Race, Wealth, and the Impact of Intergenerational Transfers on Adult Outcomes (The Insight Center for Community Economic Development: September 2015), p. 12.

[66] Jonathan Kaplan, Repeal of the Estate Tax Would Reduce Federal Resources While Key Public Services Are on the Chopping Block (California Budget & Policy Center: October 26, 2017).

[67] Even before the passage of the Tax Cuts and Jobs Act of 2017, which further scaled back the national estate tax, only 2 out of every 1,000 estates were subject to the tax. Jonathan Kaplan, Repeal of the Estate Tax Would Reduce Federal Resources While Key Public Services Are on the Chopping Block (California Budget & Policy Center: October 26, 2017).

[68] Steven Bliss and Chris Hoene, Final GOP Tax Plan Is a Big Gift to the Wealthy, but Would Harm Most Households and Our Economy (California Budget & Policy Center: December 18, 2017).

[69] In order to establish a state estate tax, the Legislature would have to ask voters to repeal or amend Proposition 6 of 1982, which prohibits the state from imposing an estate, inheritance, or wealth tax. See California Budget & Policy Center, Principles and Policy: A Guide to California’s Tax System (April 2013), p. 21. For more information about state estate taxes, see Elizabeth McNichol, State Estate Taxes: A Key Tool for Broad Prosperity (Center on Budget and Policy Priorities: May 11, 2016).

[70] For estimates on the amount of revenue an estate tax could raise, see Elizabeth McNichol, State Estate Taxes: A Key Tool for Broad Prosperity (Center on Budget and Policy Priorities: May 11, 2016) and Legislative Analyst’s Office, A.G. File No. 2017-038 (November 30, 2017).

[71] Brett Theodos, et al., Affordable Homeownership: An Evaluation of Shared Equity Programs (Urban Institute: March 2017), p. 1.

[72] William Chen, Spending Through California’s Tax Code (California Budget & Policy Center: August 2016).

[73] In 2016, the average net housing wealth in the US was $215,800 for white homeowners versus $94,400 for black homeowners and $129,800 for Latinx homeowners. See Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).

[74] The Department of Finance estimates that California will lose $4 billion in revenue due to the mortgage interest deduction in state fiscal year 2018-19. See California Department of Finance, Tax Expenditure Report: 2018-19, p. 5.

[75] Mark Huelsman, et al., Less Debt, More Equity: Lowering Student Debt While Closing the Black-White Wealth Gap (Demos and Institute on Assets and Social Policy: 2015), pp. 18-20.

[76] Laura Sullivan,, et al., Equitable Investments in the Next Generation: Designing Policies to Close the Racial Wealth Gap (Institute on Assets and Social Policy and CFED: 2016), pp. 9-11.

[77] William H. Frey, The US Will Become “Minority White” in 2045, Census Projects (The Brookings Institution: Updated September 10, 2018).

[78] California Budget & Policy Center analysis of Department of Finance data.

[79] This report uses the terms “Asian” and “Asian American” depending on the cited source. For more on the SCF’s racial and ethnic categories, see Lisa Dettling, et al., Recent Trends in Wealth-Holding by Race and Ethnicity: Evidence From the Survey of Consumer Finances (Board of Governors of the Federal Reserve System: September 27, 2017).

[80] Melany De La Cruz-Viesca, et al., The Color of Wealth in Los Angeles (Duke University, The New School, the University of California, Los Angeles, and the Insight Center for Community Economic Development: March 2016), pp. 19-20.

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Poverty & Inequality

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California has one of the most generous state financial aid programs in the country. In addition to receiving federal financial aid such as the Pell Grant, many California resident students also attend college tuition-free through various state and institutional grants at the California Community Colleges (CCCs), the California State University (CSU), and the University of California (UC). For California’s undocumented students, the road to higher education is a bit rockier. Extending financial resources to “Dreamers” (undocumented immigrants brought to the US as children) would boost their opportunities and produce long-term economic benefits to the state.

California has an estimated undocumented immigrant population of 2.6 million, more than 6% of the state’s population. Immigrants, including those without permanent legal status, play a vital role in our state’s economy and local communities, contributing billions in federal, state, and local tax contributions annually. Since higher education attainment is closely linked with higher earnings, ensuring that undocumented students have the support they need to succeed in college is vital to California’s economic well-being.

What Challenges Do Undocumented Students Face?

Undocumented students must navigate a complex set of challenges in pursuing higher education, complicated by their legal status. A study from the University of California at Los Angeles found that undocumented students reported significantly elevated levels of anxiety and constant concerns over deportation.

In addition to social stressors, one of the greatest barriers Dreamers face in pursuing higher education is accessing financial aid support. Undocumented students come from families with lower average incomes than other families, which means paying for college is out of reach for many without financial assistance. Undocumented students do not qualify for federal financial aid such as the Pell Grant, which provides low-income students with up to $6,095 to help pay for college. They are also unable to receive federal student loans or participate in work-study programs that provide part-time jobs for students with financial need. In addition to being barred from federal financial support, undocumented students are at the bottom of the eligibility pool for Competitive Cal Grants, the state’s primary grant that provides aid for tuition and living expenses for nontraditional students (e.g., those who do not attend college immediately after graduating from high school).

Without proper legal documentation, many Dreamers struggle to find meaningful work opportunities and build their professional skills. They also experience job insecurity, low wages, and labor-intensive work. The documentation status of other family members creates additional financial hardship and stress, even for students with citizenship. The constant social, financial, and legal challenges Dreamers face impede on their well-being and ability to succeed academically.

What Support Is Available for Undocumented Students?

In 2012, the Deferred Action for Childhood Arrivals (DACA) program provided Dreamers with temporary protection from deportation and legal permission to work. This federal program enabled thousands of students to work legally in the United States. As of 2017, more than a quarter of active DACA recipients live in California. While the Trump administration continues its attempts to dismantle DACA, many states, including California, have taken an inclusive approach by passing policies that strengthen and expand support for undocumented students.

Specifically, California has adopted the following policies:

  • In-state tuition. Undocumented students and other students without legal residency have traditionally paid a significantly higher tuition rate at the state’s public colleges and universities. Since 2001, however, California has granted Dreamers access to in-state tuition, helping to offset the cost of college.
  • State financial aid. The 2011 California Dream Act granted eligibility to undocumented students to apply, qualify for, and receive state financial aid such as Entitlement Cal Grants and the Middle Class Scholarship. However, some restrictions limit Dreamers from receiving certain types of aid, and the acceptance or “take-up” rate for those who are awarded aid is low and varies by sector. While many Dreamers apply for financial aid, few actually receive awards. In 2017-18, more than 50,000 Dreamers applied for aid, while less than 15% were offered an award.

    • Competitive Cal Grants are the state’s primary grant that provides financial aid for tuition and living expenses for nontraditional students. Undocumented students are eligible for these grants; however, state law requires that Competitive grants may only be disbursed to them after all other eligible applicants (i.e., non-Dreamers) are paid. In 2017-18, only 14% of qualified applicants received a Competitive Cal Grant, meaning the remaining 315,106 students would have to receive a grant before Dreamers could be awarded one.

    • Undocumented students receive the same priority as resident students for other state aid: Entitlement Grants and Middle Class Scholarship Grants. The “take-up” rate for Dreamers accepting these grants is much lower than resident students and varies significantly by sector. In 2017-18 only 69% of CCC Dreamers accepted an Entitlement Grant or Middle Class Scholarship award compared to 97% of Dreamers at the UC.
  • Institutional aid. Undocumented students qualify to receive institutional grants and scholarships such as the State University Grant at the CSU and the UC Grant at the UC and are also eligible for need-based tuition waivers such as the California Promise Grant at the CCC.
  • Work-Study programs. Work-study programs provide grants for part-time work for students with financial need, helping to defray their educational costs while gaining valuable work experience. Though barred from participating in federal work-study programs, some UC campuses offer institutional work-study for undocumented students. An effort to establish the California DREAM Work-Study Program at the UC and CSU failed to pass the Legislature in 2015, as did a 2017 effort to enhance the Cal Grant B program to provide additional aid for Dreamer students engaged in community or volunteer work.
  • Dream Loan program. This program provides undocumented students at the UC and CSU with the option to borrow student loans to help cover the cost of attending college. Beginning in 2020, campuses participating in the Dream Loan program must offer income-based repayment plans for DREAM Loans.
  • State budget allocations. In recent years, the state budget has provided support for undocumented students through various programs. The 2017-18 state budget provided $3 million total for DREAM Loans at UC and CSU and $7 million for emergency student aid for Dreamers at CCC. The 2018-19 state budget provided $21 million in funding for legal services for undocumented students and employees at the CCC, CSU, and UC, and adjusted the CCC funding formula to include provisions for undocumented students.
  • Legal services and protection. Leaders at the CCC, CSU, UC and the California Student Aid Commission have pledged to protect undocumented students and ensure that resources are not used to aid the federal government in deporting students. Many UC and CSU campuses provide support through Dream Centers, liaisons, student organizations, and other on-campus resources. The University of California Immigrant Legal Services Center provides free legal services to undocumented and immigrant students in the UC system.

What Else Can Policymakers Do to Support Undocumented Students?

The absence of any meaningful federal support for Dreamers and the inability for Congress to pass the federal DREAM Act leaves states to shoulder the responsibility to assist undocumented students in pursuing their higher education goals. There are several ways California can strengthen support for Dreamers, such as:

  • Establish a statewide work-study or service incentive program. Permitting students to participate in meaningful work programs would provide much-needed financial support, as well as help students build their professional connections and experience. This could be accomplished by passing the California DREAM Work-Study Program or similar programs at the institutional level, as implemented at some UC campuses.
  • Designate and fund on-campus Dream resources. The Legislature has made several efforts to create Dream Resource Centers and designate liaisons to assist undocumented students, all of which have failed. Such designations would ensure that students on every public campus have access to the support and resources they need to be successful. While several UC and CSU campuses have already designated such support, many CCC’s have not, even though they have a higher proportion of undocumented students.
  • Increase take-up rates for Cal Grants. The “take-up” rate for Dreamers who were awarded an Entitlement Grant or Middle Class Scholarship award is very low. Evaluating why some segments have higher take-up rates than others and identifying ways to increase paid rates would ensure Dreamers are receiving the financial support they need. Having dedicated Dream Resource Liaisons who are knowledgeable about the financial aid available to undocumented students could help address this gap.
  • Expand Competitive Cal Grant eligibility. Since Dreamers are not eligible for federal financial aid, they rely on state support. Permitting undocumented students to apply for and receive Competitive Cal Grants with the same priority as resident students would provide much-needed financial support. Increasing the number of Competitive Cal Grants awarded each year would also increase the odds of a Dreamer receiving an award.

California’s economy is increasingly dependent on a highly educated workforce. Ensuring higher education is accessible and affordable for all students is imperative to meeting workforce demands and strengthening our economy over the long run. California has already established several policies that increase access to financial support for undocumented students, safeguard against immigration enforcement activities on campuses, and provide other resources for Dreamers attending the state’s higher education institutions. California already educates a large number of undocumented students in our K-12 system; ensuring their access to and success in postsecondary education continues that investment. As the new year approaches, California’s new governor has an opportunity to work with state legislative leaders to continue the state’s legacy of protecting undocumented students and can further advance the progress that has been made by enacting policies that support Dreamers’ journey towards a college degree and greater economic opportunity.

Education

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The ongoing US trade war with China, initiated by the Trump Administration, shows little sign of ending soon. After months of escalating tit-for-tat tariffs, the US has now imposed tariffs on $263.1 billion of goods imported from China, and China has responded with retaliatory tariffs on $112.4 billion in goods exported from the US to China. President Trump has recently threatened to impose tariffs on all remaining Chinese imports — representing an estimated $257 billion in goods — by early December, if upcoming trade discussions are not successful. This action would likely trigger further tariffs from China on US goods and/or other retaliatory measures targeting US companies. Tariffs imposed in response to the Trump Administration’s actions are likely to affect businesses in every part of California, because China is a major export market for goods produced in every California congressional district (see maps and link to table below).

The US has legitimate concerns about unfair trade practices in China, including deliberately weak protection of intellectual property rights and restrictions on foreign investment and market access which disadvantage US companies. The US also imports far more goods from China than it exports to China, creating a bilateral trade deficit that is cited by President Trump as a key reason for trade actions against China, though economists disagree about the significance of this trade deficit. Many economists argue that trade deficits are not problematic, and that US consumers and businesses, and the overall US and global economies, benefit from global supply chains that allow countries to specialize in producing certain goods and global consumer markets that allow producers to sell their goods widely and consumers to access goods produced globally. Some economists, however, argue that the trade deficit with China is a problem because of evidence that the increased flow into the US of lower-cost manufactured goods imported from China has triggered a drop in the number and wages of US manufacturing jobs, limiting the job opportunities available to less-educated US workers and pushing a significant number of former manufacturing workers into lower-paying jobs or out of the labor force entirely. But economists on all sides of the debate about the core concerns about trade with China — from those who emphasize the need to protect jobs and wages for US workers or address the needs of workers and communities harmed by trade, to those who believe unfettered free trade promotes the best economic outcomes, to those who support open markets coupled with targeted protections — all oppose the untargeted, broad-based tariffs that the Trump Administration has imposed on China. They argue that these types of tariffs are an inappropriate and ineffective approach to addressing concerns about China’s unfair trade practices or the negative effects of trade with China, because they appear unlikely to lead to desired reforms in China or significantly more jobs in the US, while they cause US businesses and consumers to face higher prices as a result of both tariffs imposed by the US on Chinese goods and retaliatory tariffs imposed by China on US-produced goods.

As discussed in a prior Budget Center blog post, California companies and workers are likely to feel the effects of retaliatory tariffs imposed by China because China is a key export market for California businesses. This is true for businesses in all parts of California that export goods. In fact, as of 2016 China was one of the top five export destinations for goods produced in every one of California’s 53 congressional districts, with annual exports to China valued at more than $100 million in more than 90% of districts, according to figures produced by The Trade Partnership for the US-China Business Council, based on data from the US Census Bureau and US Department of Agriculture (see maps).

Download a table of the value of goods exported to China and rank of China as an export destination by congressional district.

This means that the Trump Administration’s tit-for-tat tariff war with China, with no end in sight, can be expected to disrupt operations and revenues of businesses throughout California that produce agricultural, industrial, and manufactured goods for export — with cascading effects on jobs, business profits, and state and local tax revenues. California workers and businesses need a different federal approach to trade policy with China — one that addresses legitimate concerns about unfair competition and the negative effects of trade on workers and communities, without punishing US workers, companies, and consumers through direct and retaliatory tariffs that do not lead to meaningful trade reform.

Taxes & Revenue

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Much has been written about how the Tax Cuts and Jobs Act (TCJA), pushed by Republican leaders in Congress and signed into law by President Trump in December 2017, mostly benefits wealthy households while driving up the federal deficit by $1.9 trillion over the next 10 years. This growing deficit — already 17% higher in the federal fiscal year that ended on September 30 than in the previous year — threatens federal funding for critical investments and services that provide economic security and opportunity for low- and middle-income households.

Given that the benefits of the TCJA are grossly skewed toward the wealthiest taxpayers, it is no surprise that the new law also has disparate impacts across racial and ethnic groups, with white households — which already hold a disproportionate share of the nation’s wealth — reaping a disproportionate share of the tax cuts.

New estimates from the Institute on Taxation and Economic Policy (ITEP), released with Prosperity Now, reveal just how much the TCJA will widen the already-expansive wealth gap between white families and families of color.

Income and Wealth Inequality Are Already Deeply Troubling

Before the TCJA was enacted, the nation’s income and wealth were shockingly unequal in their distribution, both by income group and race/ethnicity. In 2016, just the richest 1% of families received nearly one-quarter (23.8%) of the nation’s income, while the entire bottom 90% of families received less than half (49.7%), according to the Federal Reserve’s Survey of Consumer Finances. The distribution in California is almost identical, where the top 1% received 23.1% of the state’s income and the bottom 90% received 49.6%, according to the Franchise Tax Board.

The inequality in wealth distribution is even more striking. The nation’s wealthiest 1% owned nearly two-fifths (38.6%) of all the wealth in 2016, while the bottom 90% owned just 22.8%.

Decades of discrimination and barriers to economic opportunity for people of color has also led to stark disparities in income and wealth between white families and families of color. In 2016, white families had a median income of $61,200, while median incomes for Latinx and black families were $38,500 and $35,400, respectively. In other words, white families earned more than 1.5 times what Latinx and black families did. Here in California, median incomes are higher for all groups, but the differences between white families and families of color are quite similar to those at the national level. The median income for white families in the state was $100,407 in 2016, versus $57,447 for black families and $53,265 for Latinx families, according to data from the U.S. Census Bureau.

Wealth inequality between racial/ethnic groups is, again, far more startling than income inequality. White families had a median net worth of $171,000 in 2016, more than 8 times that of Latinx families ($20,700) and nearly 10 times that of black families ($17,600).

New Federal Tax Law Exacerbates Existing Racial Inequalities

Tax policies can mitigate economic inequality — or make it worse. Federal lawmakers last year chose the latter path by enacting the Tax Cuts and Jobs Act.

Overall, ITEP’s analysis found that nearly three-quarters (72%) of the tax cuts will go to the richest 20% of taxpayers in 2018, while only 28% of the tax cuts will go to the remaining 80%. The average tax cut for the top 1% of US taxpayers — a group with an average income of $1.8 million — will be nearly $48,000 this year. Meanwhile, households earning less than $23,000 will get an average annual tax cut of $90, equal to about 25 cents a day.

Here, too, the racial disparities are stark. White households, who are overrepresented in higher income groups, will get almost 80% of all the TCJA’s tax cuts this year, even though they make up 67% of all taxpayers. Conversely, black and Latinx households, who are overrepresented in lower income groups, will get a smaller share of the tax cuts than their share of the population of taxpayers (see chart).

In addition to getting a disproportionately small share of the tax cuts, black and Latinx households will also get a much smaller average tax cut than white households. Across all income groups, white households will receive $2,020 on average this year, more than twice as much as the average tax cut for black and Latinx households.

These racial disparities exist even among the highest-income households. Within the top 1% of all households, the average tax cut for white households is $52,400 — again, more than twice the average tax cut for black and Latinx households (see chart).

A major reason for the differences in the average tax cuts among racial groups in the top 1% is that even in this fortunate group, white households have more income from wealth, which the new tax law privileges over earnings from work. The TCJA included a massive cut to the corporate tax rate, as well as a new tax break for non-corporate business owners and a large scaling back of the estate tax. Thus, taxpayers who have large corporate stock holdings, investments in businesses, and valuable homes stand to benefit even more than high-income taxpayers who primarily have earnings from work. This further contributes to the uneven racial impacts of the tax law, as white households are significantly more likely than black and Latinx households to own stock, either directly or indirectly through retirement accounts, to own businesses, and to own their homes.

Beyond the immediate inequities of the TCJA, the resulting increase in the deficit is already being used by congressional leadership and President Trump as justification for cutting spending on federal programs that help improve the lives of lower-income families and individuals in California and across the country, which will disproportionately impact families of color. Such cuts will only serve to increase the existing inequality of opportunity between white families and people of color in the state and the nation.

State Lawmakers Can Work to Counteract Harmful Effects of the TCJA with Tax Policies That Narrow the Racial Wealth Gap

While California’s elected representatives in Washington can continue to call for reversals to provisions in the TCJA that increase economic inequality and that widen the racial wealth gap, California’s state leaders can take proactive steps toward reducing racial inequalities that are made worse by the TCJA. The California tax code is one of many areas where improvements can be made in pursuit of this goal.

For instance, one tool to reduce economic and racial inequality is to implement a state-level estate or inheritance tax. The TCJA drastically cut the federal estate tax by doubling the value up to which estates are exempt from the tax. Even before the TCJA, the federal estate tax only affected a very small number of large estates – 1,179 in California in 2017, according to the Internal Revenue Service. With the TCJA’s increased exemption amount, the number of estates subject to the tax is expected to fall by nearly two-thirds, leaving only 0.07% of estates taxable nationwide. California could enact an estate tax with an exemption level at or below the previous federal level of $5.49 million per person ($10.98 million for couples), which could reduce inequality in two ways. First, an estate tax serves as a curb on dynastic wealth, which well-off (and disproportionately white) families pass from generation to generation, ever widening the racial wealth gap. Second, the tax would provide a new source of revenue that could support more robust services that increase opportunities for low- and middle-income families of color. California voters would need to approve an estate or inheritance tax, since Proposition 6 of 1982 repealed the inheritance tax and prohibited the levying of any estate, inheritance, or wealth tax.

Another way the state tax code could be made more equitable is by reforming or eliminating tax deductions that primarily benefit wealthy homeowners, namely the deductions for mortgage interest and property taxes. White families are not only more likely to own homes, but to have more valuable homes: the average net housing wealth (home value less debts owed on the home) for white homeowners was $215,800 in 2016, compared to $129,800 for Latinx homeowners and $94,400 for black homeowners. Therefore, they benefit more from these deductions than do black and Latinx homeowners. In addition, because these tax breaks are structured as deductions, taxpayers with higher incomes and in higher tax brackets get a larger tax benefit per dollar deducted than taxpayers in lower brackets, intensifying the upside-down nature of these tax breaks. Eliminating or restructuring these tax benefits so they are more targeted to lower-income families would both increase state revenues for critical public services and lessen the tax code’s preference towards wealthier and disproportionately white homeowners.

While the options discussed above could reduce inequality by raising revenues from wealthy taxpayers, other tax provisions lessen inequality by boosting incomes for lower-income taxpayers. One effective example is the Earned Income Tax Credit (EITC). The federal EITC has been successful in reducing poverty, encouraging work, and can even improve the future earnings prospects of children in families receiving the credit. California enacted its own credit (the CalEITC) in 2015 and has since expanded it to reach more families. Lawmakers can build on the success of the CalEITC and further expand it to provide more support to California families that are struggling to make ends meet.

California lawmakers can also help lower-income families and people of color afford the costs of living by expanding the Child and Dependent Care Credit and the Renter’s Credit. Currently, both of these credits are non-refundable, meaning families can only claim the credit against any positive tax liability, so they cannot get a refund if the amount of the credit exceeds their tax liability. Unlike the CalEITC, which is refundable, these two credits provide more benefits to middle-income families than to low-income families. Making the credits refundable would provide another boost to families that are most in need of assistance.

In other words, state leaders and Californians have choices we can make, responding to and irrespective of the TCJA, to reduce the extent to which our state’s tax system exacerbates the racial wealth gap.

As a new Governor takes office, the new legislative session begins in January, and state lawmakers again consider proposals to respond to the new federal tax law, they should not overlook opportunities to reduce the longstanding inequities in the state’s tax code that contribute to the growing racial wealth gap.

California Budget
Taxes & Revenue

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In recent years, California has enacted various criminal justice reforms that have reduced the number of people incarcerated by the state and placed a greater emphasis on crime prevention and pathways to rehabilitation. Yet, even with this progress, state prisons remain overcrowded, spending on state corrections remains high, and racial and ethnic disparities persist.

This chartbook discusses the recent reforms, the key challenges still facing California’s corrections system, and the prospects for — and potential impacts of — further reforms.

Read the chartbook.

California Budget
Justice System

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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:

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.

* 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.

Ballot Propositions
Housing & Homelessness

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