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SR 01-12-2016 8A City Council Report City Council Regular Meeting: January 12, 2016 Agenda Item: 8.A 1 of 11 To: Mayor and City Council From: Andy Agle, Director, Housing Division, Housing and Economic Development Gigi Decavalles-Hughes, Director Subject: Potential New Local Funding Sources for Affordable Housing Recommended Action Staff recommends that the City Council: 1. Review, comment, and provide direction regarding a report prepared by the Housing Commission regarding potential sources of funding for affordable housing; 2. Review, comment, and provide direction regarding a narrowed list of potential sources of financing for affordable housing, and 3. Authorize the City Manager to negotiate and execute a first modification to professional services agreement No. 10141 in the amount of $40,000 with Goodwin Simon Strategic Research, a California-based company, to conduct a resident survey to gauge support for various potential affordable housing funding strategies, resulting in a four-year amended agreement with a total amount not to exceed $123,400. Executive Summary In August 2015, Council identified “maintaining an inclusive and diverse community” as one of its top Strategic Goals and later held a study session reaffirming its long-term commitment to a robust affordable housing program. Concurrently, the Housing Commission has concluded a year-long community discussion regarding funding for affordable housing with a report and recommendations to Council. The Commission’s recommendations include potential new funding sources that would require voter approval. In order to assess voter opinions regarding potential funding sources, staff recommends a contract modification in the amount of $40,000 for the City’s contracted survey research firm, Goodwin Simon Strategic Research, to complete a telephone survey to assess resident support. Background 2 of 11 Santa Monica has a long history of supporting social equity, housing affordability, and community inclusivity. Santa Monica voters have expressed their support for housing affordability through a series of voter-approved initiatives, starting in 1979 with the adoption of rent control and continuing through 2010 with the adoption of Citywide eviction protections. However, local measures to support affordability and inclusivity in Santa Monica have been undermined by state actions, including legislation allowing for vacancy decontrol of rent-controlled apartments and removal of rent-controlled apartments, as well as the 2012 elimination of the Santa Monica Redevelopment Agency, the City’s primary funding source for the production and preservation of low-income housing. Over the past five years, approximately 400 to 550 long-term, rent-controlled apartments have gone to market rents each year. Without a stable source of financing for affordable housing, there has been a significant dimin ution in the tools available to the City to combat the loss of housing that is affordable to low- and moderate-income households. In November 2014, Santa Monica voters considered a ballot measure to increase the local documentary transfer tax, as well as a companion measure to direct all funds toward affordable housing if the transfer tax increase was approved. In considering whether to place a measure on the November 2014 ballot, the City completed a telephone survey of likely Santa Monica voters (Attachment A.) The polling results showed strong support for affordable housing and majority support for an increase in the documentary transfer tax. At the ballot box, a majority of voters supported directing funds toward affordable housing, though the transfer tax increase failed to receive majority support. As a result, the City is left without a significant, stable source of funding for affordable housing, thereby impacting the City’s ability to maintain inclusivity and diversity. At its August 23, 2015 retreat, the City Council reaffirmed i ts support for affordable housing by identifying “maintaining an inclusive and diverse community” as one of its top strategic goals. At its August 25, 2015 meeting, Council held a study session (Attachment B) regarding the current state of housing affordability in Santa Monica, as well as various approaches 3 of 11 to creating a local funding source for affordable housing. A summary of the potential funding sources presented at the study session is outlined in the table below. POTENTIAL SOURCES OF AFFORDABLE HOUSING FUNDING Funding Source Description Revenue Estimate (yr.) General Fund Reduction in other programs to support affordable housing Would depend on cuts Transit Occupancy Tax Tax on hotel stays; currently 14% ~ $3M for each 1% increase Documentary Transfer Tax Taxes transfers of real estate; currently $3 per $1,000 of sale value ~ $2.4 Million for each $1.50 increase in transfer tax Utility User Tax Tax on utility use such as gas, electric, phone, etc.; currently 10% ~ $3 Million for each 1% increase General Obligation Bond Property tax surcharge $220/year per property for 30 years = $100 Million bond Parcel Tax Property tax surcharge $334/year per property = $8 Million annually Sales Tax Tax on retail goods; currently 9.5% ~ $7.5 Million for each ¼% increase Parking Tax Tax on parking fees; currently 10% ~ $1 Million for each 1% increase Council comments during the study session questioned the feasibility or value of certain of the proposals, including questioning whether a general obligation bond or parcel tax could meet the required two-thirds voter approval threshold and whether they should be preserved for capital improvements (in the case of GO bonds) and school funding (in the case of parcel taxes.) Council expressed interest in continuing to explore the other identified options. At its August 25, 2015 study session, Council also initiated a discussion of appropriate long-term goals with respect to the preservation and production of affordable housing. One goal that appealed to several Council and community members was to match the annual loss of affordability on 400 to 550 long-term, rent-controlled apartments with the preservation or production of deed-restricted affordable housing. The goal is tempered by the sobering reality that local gap financing for 400 to 550 affordable homes is 4 of 11 estimated to range from $140 million per year (estimated gap financing for new construction of 400 deed-restricted homes) to $275 million per year (estimated gap financing for preservation of 550 existing apartments.) Given that the total General Fund budget is less than $350 million in FY 15/16, the laudable goal appears unachievable. During 2015, the Housing Commission focused its efforts on receiving broad input regarding the community’s support for affordable housing and possible funding mechanisms to achieve affordable housing preservation and production . The Commission hosted a series of meetings, including presentations from local experts, to understand the historical efforts and achievements of Santa Monica’s affordable housing policy and programs, as well as the current dilemma regarding the need for affordable housing and lack of funding sources. The Commission also created several opportunities for the community-at-large to provide input regarding the type and scope of affordable housing in Santa Monica, including a special weekend meeting. The Housing Commission’s efforts culminated in a report to Council (Attachment C). Discussion The Housing Commission’s report addresses measures to he lp low-income Santa Monica residents stay in their rent-controlled apartments, as well as strategies to protect and expand the supply of deed-restricted affordable housing, including policy and program recommendations that do not require City funding. Housing Commission Report Given Santa Monica’s high housing costs, the Housing Commission recognizes that there is a mismatch between housing costs and the ability to pay for housing even among households whose incomes exceed the median for the region. However, the Commission recommends that the Council first focus its efforts on the lower-income members of the community, given the extremely limited supply of housing in Santa Monica that is affordable to such households and the disproportionate likelihood t hat such households are severely rent-burdened. The Commission intends to spend the 5 of 11 coming year evaluating options to address the housing needs of moderate -income households. With respect to helping residents stay in their rent-controlled housing, the Commission recommends that the City continue its efforts to protect tenants from harassment. The Commission also recommends a pilot program to provide rental assistance to low- income residents of rent-controlled apartments whose housing costs may force them to vacate their homes. With respect to existing programs, the Commission recommends strengthening monitoring of deed-restricted housing, increased efforts to connect local residents and workers with affordable housing, careful monitoring of expiring affordability requirements on existing housing, pursuing affordable housing on City-owned land, and maximizing inclusionary affordable housing associated with market-rate housing. Regarding new programs and policies, the Commission recommends incentivizing affordable auxiliary dwelling units, as well as exploration of private-market approaches to preserving existing housing for affordability. Housing Commission Report: Affordable Housing Financing The Commission recognizes that maintaining Santa Monica’s inclusive and diverse identity will require the City to continue to f und the preservation and production of affordable housing. The Commission also recognizes that trying to replace all long-term rent-controlled housing by preserving or producing deed-restricted housing is beyond the City’s means. As a result, the Commission recommended that the City work to stem the tide by returning, at minimum, to funding approximately $15 million per year in housing, as was done prior to the dissolution of redevelopment. The Commission anticipates that local funds will continue to leverage outside funding sources, including low-income housing tax credits, California Affordable Housing and Sustainable Communities grants, county funds, and other programs that are being considered at the state and county levels. With respect to new funding sources, the Commission 6 of 11 recommends that the City combine some repurposing of existing General Funds with the creation of a new General Fund revenue source. Regarding existing General Funds, the Commission recommends that the Council establish a policy to dedicate $7.5 million per year, or approximately two percent of the General Fund, toward affordable housing. Commission discussion and community input on the matter looked at the City budget cuts that were implemented as a result of the Great Recession, which resulted in minimal impacts on City services. Regarding new revenue sources requiring voter approval, the Commission report focuses on three primary measures: 1. Sales Tax: A one-quarter of one-percent increase in the sales tax, estimated to increase City revenues by approximately $7.5 million per year, with a companion measure requesting that funds be spent on affordable housing. The Commission discussed the regressive nature of sales taxes, though given California’s exemptions for food and medicine, the fact that a large portion of sales taxes come from visitors, and the universal nature of sales taxes, the Commission unanimously identified its preference for consideration of a sales tax increase. 2. Documentary Transfer Tax: Similar to the measure considered by the voters in November 2014, the tax would increase from $3 to $9 per $1000 of sales value for all properties sold over $1 million, with a companion measure requesting that funds be spent on affordable housing. Though extremely volatile, the measure could raise over $9 million per year. The Commission expressed interest in exploring whether the first $1 million of sales value could be exempt from the increase. 3. Construction Tax: A tax that would equal five percent of calculated value of all commercial and for-profit multifamily construction, with a companion measure requesting that funds be spent on affordable housing. Early estimates identify the potential to raise up to $7.5 million per year. Potential Funding Sources Staff agrees with the Housing Commission regarding the funding sources that hold the greatest potential. The following are key considerations with respect to the potential funding sources.  General Fund: The General Fund portion of the FY2015-16 budget is $348 million. Reallocating two percent of that amount would provide approximately $7 million. The projected five percent variation between revenues and expenditures in the FY 13/15 Budget was addressed by cutting approximately two percent in departmental 7 of 11 operating budgets, cutting one percent from the capital improvement budget, and increasing revenues by two percent from new and increased fees. Over the long run, reallocating another two percent of the budget toward affordable housing could begin to impact existing programs or services. In the near term, however, staff believes that Council could allocate funds, in the amounts recommended by the Housing Commission, toward affordable housing without significant reductions in other programs. Doing so would require a Council policy decision to allocate all funds received by the City, from repayment of loans made to the former Redevelopment Agency, toward affordable housing. In November 2015, the California Department of Finance approved the repayment of a City/Agency loan with an outstanding balance of over $36 million. The loan is expected to be repaid over the next four to five fiscal years. The annual repayment, combined with the $1.2 million that Council has directed to be allocated to affordable housing annually from redevelopment residual funds received by the City (i.e. redevelopment “boomerang” funds), would meet or exceed the $7.5 million annual amount recommended by the Housing Commission over the next four to five years. In the longer-term, once the City/Agency loan is repaid, reductions in other programs or designation of General Fund revenue growth toward affordable housing would be necessary to maintain the pace of funding.  Sales Tax: A sales tax increase requires majority voter approval. Each quarter- percent increase results in approximately $7.5 million of additional revenue to the City. The City’s current sales tax rate, including the transaction and use tax adopted by voters in 2010, is 9.5 percent. The maximum allowed sales tax rate in California is 10 percent. If the County electorate adopts a sales tax increase to support transit on the same ballot that a sales tax increase is adopted in Santa Monica, both sales tax increases would be valid, though there could be voter antipathy toward two sales tax increases on the same ballot. Currently, fewer than ten cities in California have sales tax rates of 10 percent. Culver City’s rate of 9.5 percent matches Santa Monica’s, while the cities of Los Angeles and Beverly Hills impose rates of 9.0 percent. Some community members have advocated for a one- half percent sales tax increase in Santa Monica, with a companion measure that asks Council to allocate 50 percent of the funding toward school maintenance. The advocacy reflects concern that while approved school bonds are financing new and renovated school facilities, funding for maintenance of existing school facilities continues to be a challenge. Sales tax ballot measures in a variety of California communities over the last several years have largely been successful. However, there could be concern among local voters that the local sales tax was increased four years ago.  Documentary Transfer Tax: An increase in the documentary transfer tax, a one-time tax paid upon sale of a property, requires majority voter approval. Every $1.50 increase in the documentary transfer tax is expected to raise approximately $2.4 million per year, though transfer tax receipts are extreme ly volatile in any year. For example, over the last six years, transfer tax receipts have ranged from a high of $7.9 million to a low of $2.7 million. Santa Monica’s current tax rate is $3 per $1,000 of sale value, in addition to the County rate of $1.10 per $1,000. While some 8 of 11 Northern California cities have transfer tax rates of up to $15 per $1,000 of sale value (including a San Francisco rate that goes up to $25 per $1,000), the rates in Culver City and Los Angeles are $4.50 per $1,000, while Beverly Hills maintains the general County rate of $1.10 per $1,000. Polling of Santa Monica residents during April 2014 (Attachment A) indicated majority support for a transfer tax increase, as well as using the increased revenues for affordable housing. However, in November 2014, Santa Monica voters rejected an increase in the documentary transfer tax, following a well-funded opposition campaign by the California Association of Realtors.  Construction Tax: Imposing a construction tax would require majority voter approval. The idea entails applying a surcharge based on the valuation of property improvements associated with building permits. For example, if the total valuation of a new construction project was $1 million and the construction tax rate was one percent, the surcharge would be $10,000. Building permit valuations fluctuate significantly from year to year. For example, over the past five years, annual permit valuation has ranged from approximately $250 million to nearly $390 million, meaning that receipts from a construction tax could be volatile. The Housing Commission report recommends a rate of five percent, with an exemption for single - family improvements. The City Attorney’s Office is investigating possible legal obstacles to implementing a construction tax, including any limitations on applying the tax to multifamily development and any restrictions on double taxation, as most construction projects pay sales taxes on materials. If a five-percent construction tax had been applied to commercial construction (including tenant improvements) over the past five years, the expected annual receipts would have ranged from a high of $12 million to a low of $3.6 million, with an average of $6.8 million per year. Other potential revenue measures are not recommended as prime candidates at this time for the following reasons:  Transient Occupancy Tax: While increasing a tax that is charged only to visitors provides appeal at the ballot box, each one percentage point is estimated to raise approximately $3 million per year, well below the goals identified by the Housing Commission. The hotel industry could wage a fierce battle against a potential measure, particularly in the same year that Council is expected to adopt a hotel living wage.  Utility User Tax: Tax receipts are gradually declining as use and telecommunication services eligible for the tax decline. In addition, a one percentage point increase is estimated to raise approximately $3 million per year, well below the goals identified by the Housing Commission.  General Obligation Bond: While a General Obligation Bond creates the opportunity for an immediate infusion of money into the Housing Trust Fund, past polling has shown that the two-thirds voter threshold is likely too high to achieve success.  Parcel Tax: Similar to a General Obligation Bond, the two-thirds voter threshold would be very difficult to surpass. 9 of 11  Parking Tax: As a large portion of the parking tax is raised from City parking facilities, an increase in the parking tax would simply shift City revenues. In addition, a very large increase in the tax would be required to meet the Housing Commission’s goals. Survey of Santa Monica Voters Community support for the various funding mechanisms can be gauged through polling. For example, a poll could test support for a sales tax increase compared with support for implementation of a construction tax. The recommended poll would survey 600 Santa Monica voters. A split survey is proposed in order to gauge reactions to the different potential ballot measures. The poll could also gauge voter preferences regarding the use of new City proceeds. For example, the three primary ways to support affordable housing are direct rental subsidies, new construction, and acquisition and rehabilitation of existing buildings. Although a broad and robust affordable housing program includes all three components, the proposed resident survey could gauge resident support for the different elements of the program. The survey could also gauge support for homeownership assistance programming as another potential use of any new affordable housing funding. The housing measure that was recently approved by San Francisco voters included homeownership assistance and it could be useful to understand whether such a ssistance resonates with Santa Monica residents. Finally, the City’s survey research firm cautions against asking about too many funding sources or too many programs, as the survey would need to be of a manageable length in order to find participants and its reliability would be increased with fewer options. Ideally, the report would ask questions regarding two potential funding sources, rather than three. In that regard, staff recommends that the survey focus on the sales tax increase and the imposition of a construction tax, given that the 2014 election showed that the documentary transfer tax is difficult for many voters to understand and that there is a well-funded organization ready to fight the increase. 10 of 11 Vendor/Consultant Selection In late 2014, the City issued a request for proposals seeking a public opinion and research consulting firm to conduct the citywide telephone survey. Following review of proposals by an interdepartmental evaluation committee, on July 28, 2015, Council authorized the City Manager to negotiate and execute an agreement with Goodwin Simon Strategic Research to complete two citywide surveys over the next four years. Given the firm’s familiarity with Santa Monica, as well as the need to coordinate the regular citywide survey with the proposed revenue survey, staff recommends an amendment to the existing contract with Goodwin Simon. Next Steps With Council approval, the polling of residents regarding support for various funding sources and affordable housing approaches would be anticipated to occur during February or March of 2016. Staff would then return to Council with results of the polling and recommended strategies, including a potential revenue measure for the November 2016 ballot. November 2016 may be an ideal juncture for voters to consider a potential measure, given that it is a presidential election that is expected to yield high voter turnout, which typically produces more progressive voting in Santa Monica. With Council support, staff would continue to review the other recommendations included in the Housing Commission staff report and return to Council with recommendations as part of the upcoming budget preparation process. Financial Impacts and Budget Actions The proposed contract modification with Goodwin Simon Strategic Research is for an amount not to exceed $40,000. Funds are available in the FY 2015-16 budget at account SO015202.589000. Prepared By: James Kemper, Housing Administrator 11 of 11 Approved Forwarded to Council Attachments: A. Weblink Summary of City of Santa Monica Issues 2013 Survey B. Weblink Staff Report 8.25.2015 C. Final Housing Commission Report 1 Date: December 17, 2015 To: Mayor and City Council From: Housing Commission Re: Affordable Housing Strategies BACKGROUND The residents of Santa Monica long have sought to preserve our City’s economic diversity. In 1979 the voters placed rent control into our City Charter. In 1990 the voters amended the Charter to require that 30% of all new housing be permanently affordable to and occupied by households earning no more than the Los Angeles County median income, and that half of that 30% be permanently affordable to and occupied by households earning no more than 60% of the median income. In 1998 the voters amended the Charter to permit the expenditure of City funds to create affordable housing units each year, equal to up to one half of one percent of the existing housing stock (i.e., approximately 250 units per year). The Santa Monica City Council, backed by the voters and resident groups, has taken further important actions to provide affordable housing and so preserve our economic diversity. Chief among these actions has been the dedication of City land and the expenditure of City funds to help non-profit organizations create 1,845 new affordable housing units, and acquire 1,096 existing housing units for use as affordable housing. In 1992 the City Council adopted an Affordable Housing Production Program (“AHPP”) which requires developers of new for- profit multi-family residential properties to deed restrict a portion of those units as affordable housing units (either on-site or off-site), dedicate land, or make monetary contributions to the City Housing Trust Fund. Private developers have deed restricted an additional 1,008 units as affordable housing under this program.1 1 Data provided by staff indicates that 474 of these units (47%) have been or are being created by for-profit developers in 100% affordable projects that were approved under prior law (subsequently changed by the City Council) that permitted rent levels for moderate income households that approached or equaled market rents for small units at that time, and permitted expedited ap proval of 100% affordable housing projects that consisted mostly of such moderate income affordable units. The City also has 529 units of deed restricted affordable housing that were created using HUD funds only. 2 As a result of these and other efforts, the City of Santa Monica historically has been a community that has welcomed and provided housing security to residents at all economic levels. But this hallmark of our community is steadily eroding. For example, whereas 60% of our housing stock was affordable to those earning up to 120% of median family income in 1998, only 33% of our housing stock remained affordable to such households in 2013.2 The principal cause of this erosion of affordability is California’s Costa Hawkins Act, which precludes the City from imposing any control on the initial rent charged to a new tenant upon moving into a rent controlled apartment (“vacancy decontrol”).3 As a result of vacancy decontrol, more than 14,500 Santa Monica rent control units that in 1998 were affordable to households earning just 80% of the median family income no longer are affordable even to households earning 110% of the median family income (i.e., $70,280 for a family of four).4 This represents 29% of the City’s housing stock that was affordable 17 years ago but no longer is affordable. Given these trends, and the continuing rise of market rents in Santa Monica, virtually all of the 11,742 rent control units that remain affordable to households earning up to 110% of the median family income will become unaffordable once the current tenants leave.5 Once that fully occurs – 2 See Staff Report 1421presented at 8/25/15 City Council Study Session on Affordable Housing at Fig. 7. HUD defines housing as affordable to a household when it need not expend more than 30% of its income on that hous ing. 3 See 2014 Santa Monica Rent Control Board Annual Report at p. 19 & Fig. 16. Rent control continues to limit the amount by which this initial rent can increase each year, thereby assisting a new tenant who can afford the initial rent to remain a long term member of our community. 4 See 2014 Santa Monica Rent Control Board Annual Report at p. 20 & Figs. 17- 18; 7/16/15 Remarks to Housing Commission by Stephen Lewis, General Counsel to Santa Monica Rent Control Board (confirming that Figure 18 uses median income for family of four to calculate affordability). 5 See Staff Report 1421presented at 8/25/15 City Council Study Session on Affordable Housing at Fig. 5. The 11,742 units exclud es the 1,096 deed restricted acquisition/rehab units. 80% of all rent control units affordable in 1998 to those earning 110% (or less) of median family income and thereafter subjected to vacancy decontrol no longer were affordable in 2014. See 2014 Santa Monica Rent Control Board Annual (footnote continued) 3 which could take less than 20 years at present unit turnover rates 6 – the only Santa Monica housing affordable to those in the bottom half of the economic distribution will be our deed restricted affordable housing stock. Unfortunately, the City’s ability to respond to this affordable housing crisis experienced a serious setback when the State abolished redevelopment agencies in 2012. Prior to that time, Santa Monica had used over $15 million in redevelopment funds each year either to create new affordable housing, or to acquire existing rental units and preserve them as affordable housing.7 In this report the Housing Commission provides recommendations for addressing the housing needs of those households earning the median income or less. The threat to this portion of our community is dire, both because market rate units no longer are affordable to such households, but also because HUD data indicates that a large portion of the Santa Monica renter households earning less than the median family income faces a severe housing cost burden (that is, they are paying more than 50% of their income for housing).8 The Housing Commission also is concerned about the threat to households earning up to 200% of median family income, and will conduct further investigatory efforts and deliberations in the new year regarding possible courses of action to prevent the loss of this group from the City. This threat is not as acute as the threat to those households earning the median family income or less. This is because Rent Control Board data indicates that a large portion of the rent Report at p. 20 & Fig. 1. Given that market rents continue to increase, that 80% figure likely will be close to 100% in the future. 6 For example, 8,977 of the 11,742 rent control units that today remain affordable to households earning up to 110% of the median family income are occupied by the same tenant that occupied the unit prior to vacancy decontrol going into effect in 1999. Between 400 and 550 such long-term rent controlled units were lost to vacancy decontro l each year from 2009 through 2014. See Staff Report 1421presented at 8/25/15 City Council Study Session on Affordable Housing at Fig. 5 and pp. 14-15; 2014 Santa Monica Rent Control Board Annual Report at p. 11 & Fig. 5. 7 See Staff Report 1421presented at 8/25/15 City Council Study Session on Affordable Housing at p. 17. 8 See discussion at page 6 & note 14. 4 controlled units remain affordable at this time to households earning up to 200% of median family income, even with vacancy deco ntrol,9 and because HUD data indicates that the existing burden of housing costs is not as severe for this group as it is for residents at lower income levels.10 But this will change over time as rents continue to rise. And, based on anecdotal information, it appears that rents on newer uncontrolled units already are unaffordable to households earning up to 200% of median family income. Further, home ownership of any kind currently is out of reach for any but the wealthiest of Santa Monicans. PRIORITIES MOVING FORWARD Assist Lower-Income Santa Monicans To Remain In Their Rent Controlled Homes At present, there are 11,742 rent controlled units that are affordable to households earning 110% of the median family income or less. This represents roughly 23.5% of our current housing stock. By contrast, there are just 4,436 deed restricted affordable housing units in the City, representing roughly 9% of the total housing stock.11 Recent experience shows that it now costs the City roughly 9 For example, staff obtained data from the Rent Control Board regarding initial rents for controlled units subject to vacancy decontrol during 2015. Using the AHPP adjustments to median family income for household size and household size occupancy standards, it appears that 86% of studio and one bedroom apartments, and 73% of two bedroom apartments, remained affordable to households earning 200% of size-adjusted median family in come (.7 of median family income for studios, .8 for one bedroom units, and .9 for two bedroom units). Using the same approach, 71% of studio units, 58% of one bedroom units, and 22% of two bedroom units remain affordable to households earning 155% of size-adjusted median family income. 10 See discussion at page 6 & note 14. 11 See Staff Report 1421presented at 8/25/15 City Council Study Session on Affordable Housing at Fig. 5. The City also administers 1,092 Section 8 tenant- based vouchers. Because the holders of these vouchers almost all live in either deed restricted or affordable rent control units, they do not add to the City’s current overall supply of affordable housing (although they do facilitate the ability of those with the least in come to remain a part of our community). 5 $115,000 per bedroom to assist a non -profit developer to create new affordable housing, and roughly $300,000 per bedroom to assist a non-profit developer to acquire, rehabilitate and preserve an existing unit as affordable housing.12 The City should do everything practical to keep lower-income Santa Monicans currently living in rent controlled apartments in their homes. This is the most cost effective means of preserving Santa Monica’s existing economic diversity because vacancy decontrol will make virtually all of the remaining affordable rent controlled units unaffordable when the current tenants leave, and because it is expensive to provide replacement affordable housing units. The City recently has taken important legal actions to protect at-risk tenants. These include the strengthening of the tenant anti-harassment ordinance and the funding of a second full time housing attorney at the Santa Monica office of the Legal Aid Foundation of Los Angeles (“LAFLA”). In order to determine the efficacy of these measures, and to quickly identify any further actions needed, the Housing Commission recommends that the City Council request and review reports on a minimum of a quarterly basis from the City Attorney, LAFLA, Code Enforcement, and the Rent Control Board – as well as receive public input – on challenges to tenant retention, actions taken in response, adequacy of enforcement resources, and potential improvements to existing tenant protection laws. In making this recommendation, the Housing Commission recognizes that most owners of rent controlled buildings comply with the law and are providing a vital service to the City in maintaining its economic diversity. The Housing Commission publicly recognizes and honors these landlords, most especially those who owned their buildings continuously since the enactment of rent control, and those who rent to Section 8 tenants. The Housing Commission supports staff’s intention to develop a recommendation to the City Council for further public recognition of these landlords by the City. The Housing Commission further recommends that the City develop a fund to provide rental assistance when doing so will keep low income Santa Monicans 12 See Exhibit A hereto (10/19/15 spreadsheet of project costs and City costs from Andy Agle). Acquisition and rehabilitation – although generally less expensive overall – is more expensive to the City because the projects do not qualify for State or federal tax credits. See Staff Report 1421presented at 8/25/15 City Council Study Session on Affordable Housing at p. 5. 6 currently living in rent contro lled units in their homes, such as seniors and totally disabled individuals with fixed incomes, and low wage families. The size of this population is not known at present. Anecdotal information – including inquires to staff from renters seeking assistance – indicates that such a population exists. And this population might be a large one, given that the most recent HUD data available estimates that there are 6,325 Santa Monica renter households earning 50% or less of the median family income that are paying more than 50% of their income for housing.13 Given the uncertainties surrounding the scope of the need, and the best design for administering such a fund, we recommend that the City develop a pilot program with initial funding of $250,000. If the results of the pilot program confirm that the need is greater and that the program at scale would be cost effective, then greater funding resources should be devoted to the program. Protect And Expand The Supply Of Deed-Restricted Affordable Housing Given vacancy decontrol and the realities of the rental market, Santa Monica’s long term ability to maintain economic diversity will depend upon its supply of deed-restricted affordable housing units. Consequently, the City should protect its current stock and produce new affordable housing units. The Housing Commission recommends: • Proactive and more comprehensive monitoring of compliance with AHPP and development agreement (DA) requirements for tenant 13 See HUD CHAS Data for Santa Monica, California (based on 2008-2012 ACS Survey) at Chart entitled “Income by Cost Burden (Renters only)”, available at http://www.huduser.gov/portal/datasets/cp/CHAS/data_querytool_chas.html. This group consists of 4,375 Santa Monica renter households earning 30% or less of the median family income (some 65% of all such households), and 1,950 Santa Monica renter households earning from 30% to 50% of the median family income (some 58.6% of all such households). This same HUD data estimates that more than 50% of household income is spent on housing by 1,315 Santa Monica renter households earning from 50% to 80% of the median family income (some 27.1% of all such households), by 285 Santa Monica renter households earning from 80% to 100% of the median family income (some 9.7% of all such households), and by 90 Santa Monica renter households earning from more than 100% of the median family income (some 0.6% of all such households), 7 income qualifications and rent levels in existing and future deed - restricted affordable housing units. • Proactive and more comprehensive efforts to connect qualified residents and workers with all existing and future deed restricted affordable housing units in the City. • A return over time to at least the $15 million annual affordable housing funding levels from local sources that existed prior to the dissolution of redevelopment in 2012. The Housing Commission’s specific recommendations regarding local funding mechanisms and the uses for those funds are set out in the next section two sections of this report. In order to maximize the impact of funds raised, the City should review its existing inventory of land to identify sites than can be devoted to the development of affordable housing. For example, the Housing Commission supports using a portion of the Big Blue Bus site for affordable housing, subject to a feasibility study.14 • Incentivize homeowners to add auxiliary dwelling units as deed restricted affordable housing. The City of Los Angeles is studying the concept, and such a program already is in place in Sonoma County.15 We believe the City should develop such an affordable auxiliary dwelling unit program appropriately tailored to our circumstances. • Continue to monitor and develop plans to maintain the affordability of units subject to City and non-City d eed restrictions as these restrictions approach termination. 14 Because the site at 2018 19th Street was identified by a local architect as another potential site for affordable housing, the Housing Commission recommends that the City Council consider anew whether a proposed sale of that property is advisable in light of the issues raised at the August 25, 2015 affordable housing study session and/or in this report. 15 See “Affordable Second Dwelling Unit Program,” Sonoma County Permit and Resource Management Department and Sonoma County Community Development Commission 8 In addition, it appears some for-profit developers are involved in acquiring and preserving existing units as housing affordable to renters earning 80% of median neighborhood income.16 The Housing Commission recommends that the City reach out to these developers to determine what incentives (if any) would be required to make such a program generate affordable housing in Santa Monica for those earning the Los Angeles County median family income or less (the benchmark set in the City Charter for affordable housing production), without displacing existing reside nts. Further, development projects should be approved only when, in their own right, they make a positive contribution to our community, and they also make very substantial contributions to affordable housing. The Housing Commission does not believe any new market rate or mixed use development project should be approved solely because it provides new inclusionary affordable housing units. The Housing Commission is concerned that any failure to follow this approach undermines community support for affordable housing. Projects requiring DAs should provide affordable housing substantially in excess of the current AHPP minimum requirements for Tier 2.17 The Housing Commission recommends that the City Council require Tier 3 projects at a minimum satisfy the City Charter requirements by providing 30% of units affordable to households earning 80% of median family income or less, with at least half of that 30% affordable to households earning 60% of median family income or less. Alternatively, the City Council should consider requiring Tier 3 projects to provide at a minimum double the current AHPP minimum requirements for Tier 2 projects. Finally, the Housing Commission supports the staff’s intention to evaluate and, if feasible and cost-effective, develop a program to provide financial and other incentives to landlords to rent existing units to low income households. 16 See “This investment fund has a social agenda — and high-profile backers,” 9/18/15 Los Angeles Times. 17 See Santa Monica Municipal Code §§ 9.23.030(A), 9.64.040 to 9.64.060. 9 PROPOSED FUNDING SOURCES The City should assertively pursue all options for accessing funding from County, State and federal programs. In doing so, the City should work with our County, State and federal elected representatives to press the case for using Santa Monica as a demonstration project on the viability and benefits of deconcentrating poverty. Our City’s historical dedication to maintaining an economically diverse population, our outstanding social services and public schools, and our national name recognition make us an ideal location for such a demonstration project if officials consider the new emphasis by HUD and others on deconcentrating poverty.18 Santa Monica should further enhance its case to County officials by targeting affordable housing for populations on which the County otherwise is required to spend money (such as the homeless, the disabled, veterans, formerly incarcerated persons, and family reunification populations, among others). The Housing Commission recommends that the City Council request and review reports regarding the progress of these efforts at a minimum on a semi-annual basis. The Housing Commission recognizes that these external funding sources are uncertain and will require long term effort to access. The City can and should continue its proud tradition of putting its own resources where its values are, and so should develop new and stable local funding sources for affordable housing sufficient to at least restore the $15 million per year from local sources spent on affordable housing prior to the dissolution of redevelopment in 2012. The Staff Report for the August 25, 2015 City Council study session on affordable housing identifies and discusses the following potential local funding sources: 1. Monies allocat ed from the City’s General Fund; 2. General obligation bonds; 3. An increase in the transient occupancy tax; 18 See HUD Final Rule “Affirmatively Furthering Fair Housing” (June 30, 2015). For example, a recent Harvard study found that children who leave concentrated areas of poverty before they are 13 reap lifetime benefits in terms of educational attainment, income, and family stability. See Raj Chetty, Nathaniel Hendren, and Lawrence F. Katz, “The Effects of Exposure to Better Neighborhoods on Children: New Evidence from the Moving to Opportunity Experiment” (May 2015). 10 4. An increase in the sales tax; 5. An increase in the real property transfer tax; 6. A parking tax; 7. A utility user tax; and 8. A parcel tax. The Housing Commission considered each of these sources, as well as (1) a construction tax, (2) an increase in the commercial linkage fee for affordable housing, and (3) locally imposing a $75 per document recording fee.19 Existing General Fund Revenues The Housing Commission believes that any approach to local funding for affordable housing (including funding to retain current low income Santa Monicans in their rent controlled apartments) should combine the repurposing of some existing General Fund revenues with the creation of new local funding sources. Given the level of the threat to our core City value of economic diversity, and the City Council’s designation of maintaining that diversity as one of the top three City goals, the expenditure of funds for affordable housing should be a higher priority than some existing uses of funds. The City Manager and the City Council should determine where to adjust the existing budget to repurpose those funds for affordable housing. The Housing Commission believes that at least $7.5 million for affordable housing should come from new general revenue taxes, and that the City should spend up to another $7.5 million of existing general revenues (roughly 2% of the current General Fund), in order to meet or exceed a total of $15 million per year in local funding for affordable housing. New General Fund Revenues In order to raise at least $7.5 million in new revenues, the Housing Commission gave primary consideration to the following proposals: 19 This proposal is for a local version of the bill Assembly Speaker Atkins introduced in Sacramento. It has been suggested that, unlike the other local funding sources identified, this source may not require voter approval. That is a question for the City Attorney. 11 1. Real Estate Transfer Tax: Place on the 2016 ballot the equivalent of Measures H and HH from the 2014 ballot. Measure H would have imposed an increase in the real estate transfer tax from $3 to $9 per $1000 of sales price for commercial, multi-family and single family properties sold for over $1 million. Measure HH asked the voters whether they wanted the City to spend the general funds raised by Measure H on affordable housing. The Housing Commission endorsed Measures H and HH in 2014, but Measure H was rejected by the voters. Staff estimates that the tax increase, if approved in 2016, would raise $9.6 million per year ($2.4 million for each $1.50 increase in the tax). 2. Construction Tax: Place on the 2016 ballot a commercial and for-profit multi-family construction tax equal to 5% of calculated value, with a companion advisory measure asking the voters whether they want the City to spend the general funds raised on affordable housing. This tax falls on commercial enterprises that create additional need for affordable housing and benefit economically from the changing economic demographics of our City. Staff is continuing to analyze the likely revenues to be generated by such a tax, but estimates that it is not less than $7.5 million per year based on recent annual permitted value.20 3. Sales Tax: Place on the 2016 ballot a one quarter of one percent sales tax increase, with a companion advisory measure asking the voters whether they want the City to spend the general funds raised on affordable housing. Because the sales tax proposal requires a contribution from every person and business entity that resides in, works in, or visits Santa Monica, the individual burden is modest (25 cents for every $100 spent in the City on non-exempt purchases 21). Universal funding also 20 We understand that the City Attorney is reviewing whether there are any legal impediments to this proposed tax. 21 California law exempts various necessary purchases from sales taxes, such as purchases of food (including pet food) and medicine. See California State Board of Equalization, “Sales and Use Taxes: Exemptions and Exclusions” (July 2014). Former Mayor Denny Zane advised the Housing Commission at its December 5, 2015 meeting that sales tax data from Los Angeles County as a whole indicates (footnote continued) 12 is consistent with the belief that maintaining Santa Monica’s economic diversity is central to its character and a benefit to everyone who partic ipates in our City’s life. Staff estimates that such an increase in the sale tax would raise $7.5 million per year. The Housing Commission unanimously expresses its preference for the sales tax. The Housing Commission recognizes, however, that a majority of the voters will have the final say on any proposed tax increase, and therefore recommends that the City Council engage in polling and take still further public input before deciding on a final course of action. PROPOSED USES OF FUNDS The best use of affordable housing funds will depend in part on the amount of funds available and conditions at the time funding is restored. The Housing Commission offers several general recommendations. Income Targeting The Housing Commission recommends that locally raised affordable housing funds be used in a manner consistent with historical income targeting patterns (that is, that three-quarters of total households served be those earning 60% or less of the area median income, including at least 50% of total households served be those earning 50% or less of the area median income).22 The need appears most extreme at these lower income levels. For example, the most recent HUD data available estimates that almost 80% of the more than 8,000 Santa Monica renter households that are severely cost burdened (i.e., paying more than that businesses and visitors pay 58% of the sales tax, and residents pay 42%. Even if residents in Santa Monica pay this same 42% of City sales tax (and Santa Monica residents might pay a lesser percentage given the City’s very high levels of tourism and business activity), each of the 93,000 Santa Monica residents on average would pay less than 10 cents per day of additional sales tax under the proposal. 22 See “Population Served – Income Level (Maximum Income)” Table for “City - Funded Housing Stock” on Affordable Housing Information Summary provided by Barbara Collins at the Commission’s June 2015 meeting. 13 50% of their income for housing) are households earning 50% or less of the area median family income (the large majority of whom earn 30% of less of area median family income).23 And 95% of the more than 3,000 applicants on the City’s local affordable housing Waiting List who work or live in Santa Monica identified themselves as members of households earning 50% or less of the area median family income when they applied in 2011 (including 80% earning less than 30% of area median family income).24 No funds should be used for households earning in excess of 80% of area median income. Community / Program Targeting Protection Of Lower-Income Rent Contro lled Tenants As discussed, the Housing Commission favors development of a $250,000 pilot rental assistance program to keep low -income Santa Monicans in their rent controlled unit, followed by expansion of the program if the pilot results confirm a greater need exists and that the program at scale would be cost effective. Property Acquisitions The Housing Commission recommends that the City strongly consider issuing lease-revenue bonds backed by at least a portion of the new revenue streams generated, and using the bond proceeds to acquire land or buildings suitable for affordable housing. There is little doubt that the cost of acquisition will only rise in the future. Non-Profit Funding The Housing Commission recommends that the City continue its histor ic commitment to funding non-profit housing providers for both the acquisition and rehabilitation of existing units and the construction of new units as deed -restricted 23 See HUD CHAS Data for Santa Monica, California (based on 2008-2012 ACS Survey) at Chart entitled “Income by Cost Burden (Renters only)”, available at http://www.huduser.gov/portal/datasets/il/il15/index.html. 24 See Santa Monica Housing Division, Local Waiting List (Aug. 15, 2011). 14 affordable housing.25 The City’s non-profit housing providers historically have delivered more affordable units, and much deeper affordability, than for-profit developers of inclusionary affordable units.26 The City’s excellent social services programs which serve seniors, persons with disabilities, veterans and chronically homeless individuals, leverage County, State and federal funds for supportive housing. As new affordable housing revenues become available, the City should continue its proud tradition of providing a share of that funding to create additional supportive housing units in Santa Monica. Finally, the City should work with its non-profit housing providers to determine whether there are cost-effective opportunities for acquisition and rehabilitation of non-occupied properties (such as older commercial buildings) that could qualify for tax credits (thereby lowering the cost to the City of adaptive reuse). 27 25 41% of City loans to affordable housing non-profits have been for acquisition and rehabilitation of existing rental units. See Staff Report 1421presented at 8/25/15 City Council Study Session on Affordable Housing at p. 5. 26 Compare “Population Served – Income Level (Maximum Income)” Table for “City -Funded Housing Stock” with “Population Served – Income Level” Table for “Inclusionary Housing Stock” on Affordable Housing Information Summary provided by Barbara Collins at the Commission’s June 2015 meeting. 27 See discussion at pages 4-5 & note 13.