State and Local Housing Policy
November 13, 2003
The Impacts of Intercity Competition and Intergovernmental Factors
on Local Affordable Housing Expenditures
Victoria Basolo 1999
Abstract


Intercity competition reduces the likelihood of cities to spend local dollars
on housing programs
Intergovernmental factors positively influence cities to spend local dollars
on housing programs
Introduction
 Federal devolution and funding cutbacks put pressure on cities
 Cities cannot afford housing programs
 Redistributive policies may cause mid to upper income people to move away
 Cities use zoning regulations to exclude high density housing
 New Jersey - Mount Laurel case of exclusionary zoning
 Court mandated cities in the state provide their fair share of low
and moderate income housing
 Most affordable housing programs originate from the federal government
 Federal and state governments often require cities to set aside revenue for
affordable housing programs
Intercity Competition
 Cities compete to maintain population base, fiscal health, and to attract new
residents
 Tiebout  the individual will choose the community with the best local services
 If the community fails, the individual moves
 However, Tiebout ignores other factors such as life cycle, distance
to work, proximity to family and friends
 Peterson  people consider costs and benefits of government services
 Reason cities will eschew redistributive policies
 Lower tax
 Federal government should be responsible for redistributive
policies
 Schneider  local market with businesses and residents on the demand side and
the government on the supply side
 Synthesis of the public choice perspective
 Tiebout  residents as buyers and city as sellers
 Niskanen  budget maximization
 Peterson  motives of city decision makers
 Schneider/Peterson – with redistributive policies, lower income people pay less
taxes and receive housing while higher income pay more and gain little
 Downs  city competition allows cities to maintain a reasonable tax rate in order
to attract residents
State and Local Housing Policy
November 13, 2003


Inconsistent with redistributive policy
The solution to city competition is state and regional allocation of
resources
 Rusk  states should facilitate annexation while the federal government should
provide incentives for metropolitan organization
Intergovernmental Influences
 Regulations are implemented through federal grant programs
 Shift in attitude toward government has resulted in a trend toward small central
government and devolution of responsibilities
 Significant decline in federal budget authority for low income housing, but federal
budget outlays for assisted housing have increased steadily.
 State policy regulations may direct local policy and require certain activities
 Localities are required to assess and meet community needs
 California law mandates redevelopment agencies set aside a
percentage of earnings
 Federal devolution increased state involvement but state funding still remained
low
Research Questions and Methods
 Does interjurisdictional competition decrease spending on affordable housing?
 Intergovernmental (IG) funds stimulate cities to spend more local
revenue
 Do cities spend more as IG increases?
 States have direct control over localities and can force localities to
perform certain tasks
 Are housing plans or set aside mandates more likely to spend local dollars?
Results
 48% of cities cooperate with their neighbors to achieve balanced economic
development
 19% perceived cooperation between their city and neighboring jurisdictions
 32% had no consideration of the neighboring cities activities
 Federal government is the largest source of funding and funds most affordable
housing
 Local housing professionals queried
 Federal funding is very important
 State funding is less important
 State mandated planning is more prevalent than housing set aside
requirements
 Cities rely on IG dollars (federal grants) but the effects on local expenditures
are still unknown
 More than ½ of the respondent cities spent zero city funds on housing
programs
 As intercity competition increases, cities are less likely to spend funds on
affordable housing
2
State and Local Housing Policy
November 13, 2003
Conclusion
 Federal government has the greatest level of influence regarding local
expenditures on affordable housing
 Competitive cities are less likely to spend local funds on affordable housing
 Federal funding encourages cities to spend more
Inclusionary Housing in California and New Jersey: A Comparative
Analysis
Nico Calavita
Kenneth Grimes
Alan Mallach
1997
Summary
IH should be part of the affordable housing strategy – but that is unlikely
Introduction
 Intensified gap between upper and lower class due to:
 Residential segregation creates urban underclass
 Less manufacturing jobs
 Inner-city isolation from job market
 Higher living standards of suburbs
HUD counteracts this with mobility programs
For example: moving to Opportunity for Fair Housing Demonstration
 Help low income families move to healthier communities
State level initiatives:
 “Anti-snob zoning” in Mass
Public housing depends largely on public sector subsidies
 HUD residential mobility programs
 This dependence raises serious questions of the programs effectiveness
 IH is a different approach that is emerging
Inclusionary Housing
 Describes techniques that link construction of low and moderate-income homes to
construction of housing for the marketplace
 Includes lower income units in a market driven development
IH objectives
 Increase supply of affordable housing
 Foster greater economic and racial residential integration
 Superior to section 236 and Section 8 which fostered integration at the macro
scale
 Resulted in isolation within suburbia
Uncertainties for IH
 Susceptible to pressure from both market and political conditions
3
State and Local Housing Policy
November 13, 2003

Politically appealing but market declines increase developer
resistance
 New Jersey and California have the most experience with IH
California
IH programs are the result of the housing affordability crisis, growth control, and land use
regulations
 Between 1970 and 1993 gross rent levels increased 436%
 Home prices increased 723%
 Median household income increased 316%
Reasons for increase in CA housing costs
 High demand
 Development Impact Fees (DIFs)
 Growth controls
Public policies can mitigate impact
 Building permit priority for development of affordable units
“Cost offset” approach to IH initiated with the development of Irvine (voluntary
inclusionary program):
 Rezoning impact on low and moderate income housing needs
 Resulted in a settlement that required the Irvine Company to produce 700 units of
low and moderate income housing
 City provides offsets and financing off-site infrastructure
 1979 lawsuit together with a requirement from the Air Resources Board mandated
an inclusionary program in Orange County.
 Required provision of affordable housing in the vicinity of new jobs
New Jersey
Mount Laurel decision
 Found that zoning was being used to exclude low and moderate income
households
 Court found that developing municipalities must provide fair share
 However, the court provided no specific guidance on how to do so
Mount Laurel problems of inclusionary zoning led to the Mount Laurel II decision in
January 1983
 Decision cut through barriers to effective relief
 Established procedure for providing low and moderate income housing
 “Builders remedy” – lower courts were instructed to grant zoning relief and even
building permits
Legal Framework
California
 No clear state mandate or fiscal incentives for inclusionary programs
 Most inclusionary programs are adopted locally and subject to local
political and economic conditions
New Jersey
Council On Affordable Housing (COAH) - includes IH
 Encourages compliance with Mount Laurel mandate
 Regulation implementation is generally a one-size-fits-all approach
4
State and Local Housing Policy
November 13, 2003

Unresponsive to differences in environmental, social,
economic, and political conditions
However, it does offer an element of predictability

Evolution of IH Programs
California
 HCD prepared a “Model Inclusionary Ordinance”
 Diversity of IH programs early on due to housing crisis
 1980s – HCD used a hands off approach toward IH
 Regulatory relief, costs offsets – counter costs incurred in providing inclusionary
units
New Jersey
 IH was rare in NJ before Mount Laurel II decision in 1983
 Federal low-income housing tax credit  significant cost offset
 In 1990 – reduction in density led to construction of single family subdivisions in
order for developers to find relief in inclusionary requirements
Conclusion
 Each locality should meet its fair share of the region’s affordable housing need
 Seek to lower the burden of the developer through the cost-offset approach
 Diminished IH support due to antiregulatory pressure and economic tends
 IH survival depends on affordability, home ownership preference, and cost offset
compromises
 IH is an important too but not a sufficient strategy to fully address all needs
Subsidizing Redevelopment in California
Michael Dardia, 1998
Summary
Redevelopment Agencies (RDAs)
 Developed in 1945 to combat urban blight
 Engage in variety of activities today
 Provide municipal infrastructure
 Assist in provision of affordable housing
 Renovation of commercial downtown areas
 Tax increment financing for RDAs causes strain for other local jurisdictions
Purpose of study
 Estimate size of subsidies that RDAs receive
 Judge effect of RDA actions on the increase in property values
 Examine the degree of blight in project areas
Results
 Project areas were worse off than the average area in most cities
 Fewer than ¼ of the projects came close to being responsible for the property tax
revenues they received
 Total tax increment revenues was $78 million
 $40 million can be explained by actions of RDAs
5
State and Local Housing Policy
November 13, 2003


$38 million in subsidy from other jurisdictions to the RDAs
Continuing on the same pattern for the other 76 projects, total
subsidy would be $170 million annually
Recommendations
1. The legislature should formally clarify its goals for redevelopment.
2. Blight conditions need to be aligned with the goals for redevelopment and made more
precise.
3. There should be a formal oversight authority to monitor RDA behavior.
4. If the legislature intends redevelopment to be self-financing rather than highly
subsidized, the pass-through rate should be increased significantly.
Introduction
 Controversy over RDAs
 1994-1995 -- 351 RDA projects spent $3.3 billion to build 5,000
low-income housing and 6,000 others
 Also displaced 500 households
 Received $1.5 billon in property taxes
 Initiated several new projects that consisted of thousands of acres
of vacant land
 Conflict revolves around tax increment financing
 Property tax increase in any RDA project area goes to the RDA
 RDA is not necessarily responsible for raise in real estate value
What is Redevelopment and how is it financed?
 RDAs designate specific redevelopment projects and focus on blighted areas
 RDAs will purchase and assemble lots for use by developers and provide
infrastructure and affordable housing
 The state gives RDAs special powers
 Can assemble properties for sale
 Can use eminent domain to acquire property to sell
 Receive city general funds, federal Community development Block
Grants
 Financed through increases in property tax revenues
 Not shared among all jurisdictions
 Payments to RDAs last as long as there is outstanding debt
Why is Redevelopment Financing Controversial?
 RDAs receive 97% of all tax increment revenues in the state
 When property taxes go to RDAs instead of school districts, the state must
reimburse the school districts
 Tax increment financing can create financial incentives to declare blight
 AB 1290 (1993) tightened the definition of blight as well as changed the
distribution of tax increment revenues
 Any new RDAs share 1/3 of their tax increment revenues with
other local taxing jurisdictions
The Redevelopment Process
Redevelopment Agencies
 City council is usually the governing board of the RDA
 In larger city agencies, the city council appoints a governing board
6
State and Local Housing Policy
November 13, 2003

RDAs can purchase and sell property, make loans or grants, enter
into contracts, seize property by eminent domain and construct or
rehabilitate structures
Redevelopment Projects
 RDA identifies a project area which is a blighted area where
redevelopment will take place
 Projects are equally divided among commercial, residential, and public
uses
 RDA must complete a preliminary Report (as well as an EIR)
 Evidence of blighted conditions and plans to eliminate blight
 Financing structure
 Sets time limits
Size of Redevelopment Activity
 Statewide, redevelopment agencies received total revenues of $1.2
billion in 1984-1985 and $2.2 billion in 1993-1994
 Project improvement is the largest operating expense
 Real estate purchases were only 4% of total operating expenditures
Policy Issues
Critics of redevelopment
 Opposed to the use of governmental powers like eminent domain and view land
write downs as gifts of public funds
 Tax increment financing is viewed as a diversion of property taxes
 Opposition of glaring abuses
 Designation of vacant land as blighted
 Attracting retail firms that generate sales tax revenues
 Reluctance to provide affordable housing
How Blighted Are Project Areas?
 Legal definition is not precise enough
 Cities can benefit from 30 years of tax increment revenues
 AB 1290 – both physical and economic blight conditions are
necessary to be classified as blighted
Do RDAs Generate Enough of the Growth in Project Areas to Earn Their
Tax Increment?
 Dependent on how much RDAs contribute to local growth
Who “Loses” Under Tax Increment Financing?
 Tax increment financing causes conflict
 Subsidies can change the distribution of public expenditures
Study Design and Methodology
 Measure property value—assessed value not market value
Results
 How blighted are project areas?
 Average differences vary within each city
Conclusions
 Difficult to quantify blight and as a result it is difficult to assess its extent
 Easier to assess the size of subsidies for redevelopment
7
State and Local Housing Policy
November 13, 2003


Match pair analysis yielded that redevelopment did have some positive
effect on assessed values
AB 1290 was a significant revision to redevelopment law
 New pass through laws increases the percentage of tax increment revenues
the must be shared with other government
 Results in less subsidies for RDAs
California’s Housing Element Law: The Issue of Local Noncompliance
Paul G. Lewis, 2003
Housing element – often called fair-share housing law
Housing element process
 Regional council which represents cities
 Assign a housing unit goal (allocation) to each city
California’s housing element problem
 Broad notion of fair-share
 Long standing problem of housing affordability and underproduction
 Limits lower and middle class opportunities
California law requires local governments to update their housing element periodically
 HCD reviews the update and certifies it if it is acceptable
 Failure to satisfy HCD or to update results in noncompliance
 Noncompliance limits eligibility for certain state and federal funds
Testing Competing Explanations for Local Noncompliance
 Large majorities of jurisdictions in the state have been noncompliant at some
point
 Lack of vacant land
 Aversion to new housing, overt antigrowth policies
 Lack of planning capacity or experience
 Older housing stock
 SB 910 would have required fines for noncompliant cities
 This study examines differences between cities able to attain housing element
compliance and those who have not
The Relationship between Compliance and Housing Production
 Housing element defenders argue that compliance enables more housing to be
built
 Other factors influence why some cities experience rapid housing development
and others do not
 Demographic characteristics
 Position in urban hierarchy
 Physical capacity to accommodate new buildings, etc.
 Housing element noncompliance is not a significant predictor of the rate of
multifamily development
 Cities that were job centers and with fewer senior citizens experience
faster rates of multifamily housing development
8
State and Local Housing Policy
November 13, 2003

Cities with noncompliant housing elements developed new housing that
was weighted more toward single-family units
Rethinking the Housing Element Approach
 Tensions between various policy goals:
 Increased housing production, an equitable distribution of housing
responsibility, special attention to housing needs of low-income
groups, local autonomy, environmental protection, etc.
 Production of affordable housing rests mainly with profit motives of private
developers
 Necessary to seek a more workable approach to housing policy where success and
failure have measurable results
 Fair-share planning approach to encourage overall housing
production may place an unrealistic burden on housing policy
Introduction
Controversies over Local Government Noncompliance with the Law
 Local governments are not energetic in planning for housing and are trying to
deflect their fair share onto other jurisdictions
 High land costs and lack of state and federal funding
 About 1/3 of all cities and more than 1/5 of all counties had their housing
elements judged noncompliant by HCD
 Other localities are overdue in submitting their draft housing elements
History
 Enacted in 1969 - requires detailed planning to meet housing needs
 1970 – additional legislature required HCD prepare a statewide housing element
 Statewide housing planning became more active during the Brown administration
(1975-1983)
 Developed guidelines for implementation and enforcement of the
statute
 More aggressive approach toward fair-share goals
 By the 1980s, the concept of fair-share was fully enshrined in state law
 Reallocation process of housing needs became more fully developed
 Housing element revisions
 Emphasized performance over process of housing element
planning
Contentions
 Inconsistent levels of compliance with housing element law
 Fear of litigation motivates local governments to expend time and resources on
housing elements
 Opposition from housing advocates, growth opponents and school
districts
 Low and moderate-income housing needs are typically unmet
 Preparation of housing elements does not guarantee housing units
will be built
 Regional allocations do not take into account many local factors such as planning
and growth policies, habitat preservation, clean air and traffic congestion
9
State and Local Housing Policy
November 13, 2003

Housing element laws emerged from frustration with local exclusion of affordable
housing or multifamily units
Reasons for Noncompliant Housing Elements
Four main factors:
 Community social status and exclusion
 Attempt of upper-income homeowners to insulate their cities
 Local land-use characteristics and vacant land
 Lack of sufficient land resources to accommodate new housing
unit requirements
 Local governments often have vacant sites zoned for industrial or
commercial use
 Resources of the local government
 Small cities may be fiscally strained, or may not have professional
staff to prepare adequate housing elements
 Performance in producing housing depends on the availability of
subsidized housing funds
 Local politics and residential growth policies
 Antigrowth and growth management policies
Comparing compliant with noncompliant
 Noncompliant tend to be cities of slightly higher status
 Social exclusion
 Noncompliant tend to be older cities and lower population density
 Noncompliant has additional restrictive growth management policies
 Cities with larger populations are more likely to reach compliance, due to greater
resources and less influence from homeowners and more from pro-growth
business
Relationship between compliance and production
 Housing market and demographic factors outweigh compliance status in
contributing to variations in growth rates
 Analysis does not determine relationship of compliance to production of
affordable units
 No measurable relationship between compliance and overall housing production
Reforms
 Past attempts at reforms included penalties, self-certification and transfers of
allocation
 Recommended shift would be to directly reward effective performance based on
number and mix of new developments
 Experiences in other states regarding fair-share planning and state review of local
housing policy may be beneficial for California, such as:
 Comprehensive permitting, state or regional boards of review or
appeals, minimum zoning densities or the builders remedy
Conclusion
 Concern with overall residential production and increase of housing supplies,
particularly at low and moderate-income levels
10
State and Local Housing Policy
November 13, 2003



Housing element process as a tool to ensure adequate housing
production
 However, it is not clear that the fair-share process is the best too
Maximizing housing production can conflict with allocating a regions needs as
fair share to each municipality
The goals and approaches of state housing law must be reconsidered and a more
workable approach is necessary
Discussion Questions
1. Which is more beneficial for housing programs, intercity competition or
intergovernmental factors? Is there a way to maintain an element of intercity
competition while still influencing cities to spend local revenues on housing
programs?
2. What lessons can we learn from the Mount Laurel case in New Jersey?
3. Do people really behave the way Tiebout suggests? Do Peterson and Schneider
have a more accurate description of public choice?
4. Is there an appropriate balance between housing production and growth control
policies? Which is more reasonable?
5. What is the best way to promote compliance with housing elements?
6. Is the size of subsidy that RDAs receive justifiable?
7. Are RDAs responsible for growth that they benefit from, or are there other factors
that influence growth?
8. What is Inclusionary Housing, and is it an affective affordable housing strategy?
9. Is Inclusionary Housing sufficient to address all moderate and low-income
housing needs?
11