Sunday, January 29, 2017

For affordable housing, should we subsidize rent payments or subsidize the construction of rent restricted units?

Today's Sacramento Bee includes an op-ed touting AB 71, which would end the mortgage interest reduction for second homes and redirect the estimated $300 million towards tax credits that finance construction of rent-restricted affordable housing units.

Of the various funding mechanisms for affordable housing currently proposed in the legislature, I prefer the AB 71 approach to some of the other proposals, such as a transfer tax on real estate transactions.  But given the enormity of California's affordable housing problem, we need to allocate these funds to the most efficient approaches.  I'm not sure tax credits for affordable housing construction are it.

While the op-ed calls this approach "proven," tax credit financed affordable housing actually has a lot of critics in economic and policy research.  The costs of projects financed in this way are high, there is evidence the program "crowds out" other housing invesment and thus does not increase housing units by as much as it appears.  In addition, not all of the benefits are received by low-income households - it creates benefits for high-income households who buy the tax credits and financial professionals who bundle and market them.

Thus, there are many economists who believe subsidizing rent vouchers (section 8) is a more effective approach.  A recent op-ed by Zillow Chief Economist Stan Humphries captures this line of thinking.  He argues that we should eliminate tax credit programs and mortgage interest deductions and redirect those funds to rent vouchers that reach more households and allows them more flexibility about where they live and do not lock them into a specific unit to receive a subsidy.

The summary of the Governor's proposed budget has some interesting data on the cost of building tax-credit subsidized affordable housing in California.  In the housing chapter it states, "Total development costs average $332,000 per unit for the construction of new affordable units, which limits the number of units that can be built with limited resources."

That prompted me to take a quick look at the average cost of providing affordable housing in California's largest county, Los Angeles.  According to the Governor's budget, it cost $372,000 per unit to build affordable housing in LA County between 2011-15.  Typically, the tax credits provide 70% of project financing (the rest private investment), thus $300 million in funding from AB 71 could finance up to $428 mil. in affordable housing construction or about 1,150 units per year at LA Costs.

What are the costs of providing rent vouchers in LA?  Note there are also waiting lists for rent vouchers, just as there are for placement in affordable housing units.   According to the Housing Authority of LA, $465 million in annual funding serves 45,000 families, an annual housing subsidy of about $10,333 per family.  At these costs, directing AB 71's $300 million towards rent subsidies would help 29,000 families per year, about 25 times the number of families that could move into new affordable units each year at the same funding level.  Of course, the tax credit financed units stay in the affordable housing stock year after year and the buildings are required to remain rented as affordable units for 30 years after construction.  So after 25-30 years, there would be a similar amount of low-income families helped each year by the same continuous funding stream - but why wait decades when you can reach more people now with rent subsidies that provide them with more flexibility about where they can live.

Looking at these numbers and the other policy arguments, I would suggest the state look towards increased funding of rent subsidies rather than subsidizing construction of affordable units.  To increase housing supply, we need policies that reduce the cost of constructing all types of housing, both market rate and affordable.

Thursday, January 12, 2017

What Should My Family Do With Our L.L. Bean Gift Cards After Trump's Latest Tweet?

I have a small personal connection to one of President-elect Trump's latest tweets, and it also provides a good discussion topic for my students.
It all started with a consumer boycott advocated by a group called "Grab Your Wallet" because corporate board member Linda Bean has been an active Trump donor and supporter who just got in trouble with the FEC because she didn't properly register the "Make Maine Great Again" PAC she founded as a super-PAC and thus exceeded legal political contribution limits.  L.L. Bean has responded with this statement

I have L.L. Bean gift cards in my wallet right next to my L.L. Bean Visa which has some reward points built up that I could spend.*  My 19-year old college student daughter who has been actively protesting Trump also has gift cards, and I expect I will learn that she has joined the L.L. Bean consumer boycott when I speak to her later tonight.

So what should she do with the gift card?  Burn it?

My suggestion is that she spend it right away on a hat or warm boots she could use for the protest march outside the Chicago Trump tower she will be attending.  Why?

L.L. Bean already has the money.  Thus, the gift cards and our Visa reward points are a liability to the company, so if we cut them up we have given them cash for nothing in return.  Ironically, the most harmful thing she can do to L.L. Bean is to buy something with the gift card right away.  I suggest she buys their most popular products so all the new Trump supporters making their first purchase from L.L. Bean today face a depleted inventory and poor selection.

If you are a holding a L.L. Bean gift card and want to support the company as Trump suggests, it could be the best way to support them is to throw it away.

Of course, there are other more serious issues embedded in this tweet/controversy.

For the most part, I think the company's statement from a few days ago is fine and I certainly see no reason to boycott them.  However, I noticed the end of their statement asks the group "Grab Your Wallet" end its "misguided" boycott.  But today, the President-elect gave them an endorsement for political reasons, and specifically directed his supporters to buy their products.  I have to wonder if L.L. Bean CEO Shawn Gorman also thinks Trump's tweet is misguided and will ask him to withdraw it as well.  I won't hold my breath on that one, especially since they are probably setting January sales records right now thanks to the President-Elect.  I can certainly understand why they would not want to upset or embarrass President-elect Trump by refusing his assistance at this point.

And that leads to what is the worst part of this entire episode.  The President-Elect is personally using the power of his office to promote products and companies connected to his political supporters.  And this is coming the morning after he had a news conference that was supposed to show his understanding of conflicts of interest, separate business from his public life.  While it is true that Presidents of all parties have rewarded political supporters in various ways, Trump's corporate intervention is taking it to a new and dangerous level.  So much for draining the swamp...  

Finally, I would note that Maine is a critical swing state that has political value to Trump far beyond what its 4 electoral votes would suggest.  It also has a moderate Republican senator in Susan Collins who is seen as one of the Republicans most likely to defect from the Trump agenda on issues like Obamacare and others.  It seems that Trump's corporate interventions have primarily been to the advantage of companies headquartered in these critical locations.  California may be the largest state in the U.S., but I doubt it will receive it's proportional share of President Trump's corporate help.

* Why do we have so much L.L. Bean stuff?  I married into a Freeport Maine family with L.L. Bean roots and loyalties.  My wife's grandparents worked in the Bean shoe factories and later the retail store their entire lives, and lived in a modest house a few blocks away until they passed away about a decade ago.  Her grandfather was the fire chief at the old station a few blocks away from famous L.L. Bean store and warehouse complex.  My mother-in-law grew up working in the store and was childhood friends with some of the family members who have gone on to great wealth running the family-owned company.    My brother-in-law and sister-in-law founded and operated a bed and breakfast walking distance from the Bean's complex catering to their tourist/shoppers until they sold it a few years ago.  Thus, my closets are full of many of their products, and I have eaten Linda Bean's "perfect" lobster rolls at her restaurant, etc.  I haven't talked to any of my immediate or extended family members about this episode yet, but I am sure the next discussion will be more lively than usual.

Monday, January 2, 2017

Final WaterFix EIR/EIS Shifts Incremental Water Supplies from Central Valley Project (Farms) to State Water Project (Cities)

I spent some of my holiday break reviewing the recently released Final EIR/EIS for the California WaterFix.  My goodness, that is a long and boring report even when you are just skimming key chapters and tables.  However, I did find one important change from the 2015 Revised Draft EIR/EIS.
Compared to No Action, building the WaterFix is now projected to increase water supply to the State Water Project by an average of 186,000 acre feet per year, and decrease water supply to Central Valley Project south of Delta users by 14,000 acre feet per year.  While this is a slight decrease from the total exports estimated in the 2015 draft EIR, it is a large change in the distribution between agricultural and urban users.  The numbers in the table below are from Table 5-12 in the Final EIR/EIS and Table B1-3 of the 2015 Revised Draft EIR/EIS.  The Final EIR/EIS only presents one scenario, eliminating the range from earlier drafts.

Change in Annual Average Water Supply From WaterFix Compared to No Action Alternative (acre feet)
Final EIR/EIS  Draft RDEIR/RDEIS High Scenario Draft RDEIR/RDEIS Low Scenario
Total SWP South of Delta 186,000 398,000 -97,000
Total CVP South of Delta -14,000 106,000 66,000
Combined 172,000 504,000 -31,000

I don't have any insight into why the CVP/SWP distribution changed, but these modeling results would seem to set the stage for the what I (and others) have long anticipated.  CVP agricultural contractors will drop out of the tunnels/WaterFix due to the cost and minimal water yield.

The tunnels are more financially feasible if all the incremental water goes to the urban-dominated State Water Project, but they still represent a very poor return on investment for urban water users for the $16+ billion in capital cost: only about 10,000 acre feet of annual water supply per $1 billion in capital investment.

Metropolitan Water District is still telling their board that they won't pay more than 25-30% of the tunnels cost. Realistically, I think the only way the tunnels are built is as an urban project - with MWD probably paying about 90% of the cost.  Maybe now that we have a final EIR/EIS, we can finally see a realistic financial plan and an honest assessment of project feasibility.

1/3 10AM Table corrected:  An observant reader let me know that I reversed CVP and SWP in the table.  They also told me not to put too much stock in these modeling results which depend on many things that remain in flux.