Audit Slams California for Mismanaging Housing Crisis, Wasting Billions in Bonds

A damning new audit blames California’s abiding inability to fix its housing crisis on a mix of incompetent state officials and myriad local barriers—from parking minimums and zoning restrictions to litigious residents.

In a report released earlier this week, State Auditor Elaine Howle cites a particularly egregious instance in which one agency squandered $2.7 billion in bonds that could have funded thousands of below-market-rate homes.

That the glaring misstep not only happened, but went unnoticed until Howle’s team uncovered the mess points to a broader lack of oversight.

The audit describes how the state’s disjointed process for financing affordable housing—defined as financially feasible for families that make less than 80 percent of an area’s median income—slows development and drives up costs.

To make a dire situation worse, the state agencies in charge of addressing the issue have little authority to make cities and counties build their fair share of affordable housing and no viable blueprint for building a way out of the shortfall.

“The state does not currently have a sound, well-coordinated strategy or plan for how to most effectively use its financial resources to support affordable housing,” the audit reads. And the agencies in charge of addressing the issue have no “clear plan describing how or where its billions of dollars for housing will have the most impact.”

Home Base

Decades of broken promises and billions of wasted dollars have left the Golden State with some of the nation’s highest housing costs, highest percentage of overcrowded rentals and highest concentrations of homelessness.

In 523 of California’s 539 cities, at least a fifth of lower-income tenants spend at least half their wages on rent, according to Howle. And though the state makes up 12 percent of the U.S. population, it claims 27 percent of the nation’s homeless people.

The state has, in recent years, invested considerable resources to encourage developers build below-market-rate homes. In 2018, voters passed Prop. 1, which authorized $4 billion in bonds to finance affordable housing.

Still, California is nowhere close to meeting demand.

Though the state needs to add 125,000 new affordable units annually to the housing stock through 2029, it helped develop just 19,000 a year since 2015, the audit found.

Overall production of market-rate and affordable housing actually fell by 7 percent in 2019, with the state issuing just 110,000 residential building permits. Experts say the state remains up to a few million units short of what’s needed, but efforts to relax zoning to spur more and denser housing have fizzled out in the legislature.

“If the state does not immediately take action to remedy the significant shortfall in affordable housing units, the number of housing units needed annually will continue to grow,” Howle writes, “and could exacerbate the state’s homelessness crisis and increase the number of Californians who pay burdensome housing costs.”

Local Barriers

In the absence of state powers, cities and counties continue to put up roadblocks.

It names Palo Alto as one of the communities standing in the way of progress, citing a 2013 measure that overturned a unanimous City Council decision to build a 60-unit affordable housing complex for seniors.

“Some local jurisdictions may develop insufficient amounts of affordable housing because they or their constituents are opposed to it,” the report explains. “Local opposition to housing development has long been a major obstacle in California's efforts to provide affordable housing. People may be opposed to housing development generally or affordable housing in particular for a variety of reasons, such as perceptions that development will increase traffic or that it will change the residential character of a city.”

Even cities that aren’t openly resistant can limit development.

“In fact,” Howle writes, “local jurisdictions can create a number of different barriers to affordable housing development that contribute to the state’s overall shortage of affordable homes as well as its shortage of affordable housing in particular jurisdictions.”

They often do so through density limits, high fees and protracted delays.

“These barriers can ultimately make affordable housing development infeasible, such as by imposing costs that may discourage developers from building or by directly limiting the number and affordability of the units that developers do build,” the audit states. “Barriers that add costs are especially problematic for affordable projects because these projects are often more difficult to make financially feasible in the first place.”

Though the state Department of Housing and Community Development (HCD) has limited authority to hold local governments accountable, the audit found that it rarely applied even minimum oversight.

Last year, HCD determined that 87 percent of local jurisdictions fell short of targets for building new affordable housing. But the agency availed itself of enforcement actions in only 20 percent of those cases, and had yet to even evaluate many of them.

“By failing to review some local jurisdictions with especially low affordable housing development, HCD has allowed those jurisdictions to continue to provide minimal affordable housing without state investigation or enforcement actions,” Howle writes in the second chapter of her sweeping report. “That lack of review also limits HCD's ability to identify specific causes of underdevelopment and to provide technical assistance to local jurisdictions that may need it.”

Broken Bonds

One of the most alarming findings in the audit involves the state’s Debt Limit Allocation Committee, which works with three other agencies to issue loans, tax credits and bonds to affordable housing developers.

From 2015 to 2017, however, Howle found out that the committee let $2.7 billion in tax-exempt federal bond revenue simply evaporate. The debt allocation agency, a subsidiary of the State Treasurer’s Office, then tried to cover its tracks.

“Despite the magnitude of this mismanagement, the debt limit committee did not disclose the $2.7 billion loss in its public meeting minutes and corresponding documents,” Howle writes, “and during our audit, committee staff struggled to identify and explain the extent and cause of the loss.”

Thankfully, the committee came under new leadership once California Treasurer Fiona Ma took office in 2019—two years after the bonds expired. Since then, Ma has reportedly instituted a policy of redirecting leftover bond funds to other uses.

But the state continues to operate without a unified data system to track housing funding, which leads to persistent inequities. The audit describes how the lack of communication among various state entitles leads to counties with some of the highest demands for affordable housing with the fewest tax credits and funding to build it.

In another symptom of miscommunication, four agencies responsible for leading the state’s housing efforts—the HCD, Housing Finance Agency, Debt Limit Allocation Committee and Tax Credit Allocation Committee—have inconsistent policies, which needlessly complicates an already arduous process.

The Fix

Howle suggests a number of solutions.

To nix redundancies, she recommends merging the debt limit committee by combining with its tax-credit-reviewing counterpart and creating a new workgroup to steer funding to multi-family housing projects.

“The state could thus benefit from having a standard set of requirements, consistent deadlines, and a single application process for its multifamily housing programs, which not only would reduce the likelihood of delays for applicants but also could increase the State’s supply of affordable housing,” the report says.

Overcoming local barriers might require a legislative fix. Howle says lawmakers should make HCD issue yearly reports that identify financing, how many units that could be built and where in California it would make the most sense to spend the money.

“The state needs a timely enforcement mechanism—such as an appeals process developers can use—for situations when local jurisdictions fail to approve eligible affordable housing projects,” Howle advises. “Without substantial changes to address these issues, the state will continue to race a patchwork of local housing efforts that limit Californians’ access to affordable homes.”

Jennifer Wadsworth is the news editor for San Jose Inside and Metro Silicon Valley. Email tips to [email protected]. Follow her on Twitter at @jennwadsworth. Or, click here to sign up for text updates about what she’s working on.

8 Comments

  1. > That the glaring misstep not only happened, but went unnoticed until Howle’s team uncovered the mess points to a broader lack of oversight.

    Lack of oversight?

    In spending public money?

    IN CALIFORNIA?

    You’re kidding. Who knew?

    Probably just an isolated incident.

  2. What else can you possible expect from government?

    When will you people get it through your head that humans are flawed, and humans design and implement these government policies and programs. Once you put all your eggs in the state basket, and make other options impossible, you end up with less than nothing, the problems are invariably worse. Bonds, departments, programs may make pension obligations larger, but they will never make houses more affordable. Only more houses will.

    If you make it more impossible to build more houses, you will never have cheap houses. There is no such thing as induced supply, induced traffic, etc. I don’t care how many studies you parade out. If there is a uptick in demand when new supply is injected, that just indicated latent demand. If you keep injecting supply, the market will eventually collapse. And then you will have a sea of cheap houses.

    Ms Wadsworth, you as much as anyone else should take the blame for this. You have advocated for these government solutions, very effectively I might add, with your polemics and one sided narratives. You are misinformed on so many subjects, rent control, caiusa justa, induced demand, in general the idea that government can solve these problems. So many of the proposals you and your progressive “activist journalists” have successfully championed end up making life almost impossible for the poor, have increased homelessness, and wasted an enormous amount of tax payer money, all while making the rich far far richer than they deserve. Your ideology and craftmanshiip has made me tons of money with little to no risk or effort, and I am small potatoes.

    When will you and your compatriots grow up, realize how much damage you are doing to all the most vulnerable among us, and rethink this one-sided propaganda you continuously crank out?

    The poor need you to stop feeding the rich.

  3. > If you make it more impossible to build more houses, you will never have cheap houses.

    I disagree.

    They could easily engineer an abundance of cheap, available housing simply by making California an undesirable place to live.

    Like: raising taxes, emptying jails and releasing criminals, attracting more homeless from other states, ignoring property crimes, dumbing down the schools and teaching useless, divisive social theories.

    Yes, there’s lots of things our leaders can do to increase the availability of cheap housing.

  4. The mess went unnoticed for those with a duty to …”oversight…” Taxpayers have noticed all the time!

  5. Who could have guessed that this would happen? We assign so many responsibilities to government and this is the first time they’ve fallen down on the job. Generally, overpaid bureaucrats are extremely competent and conscientious when it comes to spending other people’s money.

  6. Where did the $2.7 billion go? Did it all go to Plumpjack investors or was it federal money never spent so our $30 trillion national debt clock slowed down for a few minutes?

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