McGeorge School of Law

Proposition 1C

 

 
Proposition 1C:
Housing and Emergency Shelter Trust Fund Act of 2006

By

Jessica Rauff
JD, McGeorge School of Law, University of the Pacific
to be conferred May, 2008
B.A., Religious Studies, Santa Clara University, 2005

 

Copyright © 2006 by University of the McGeorge School of Law


Table of Contents

I. Executive Summary
II. The Law
III. Drafting Issues
IV. Constitutional Issues
V. Public Policy Considerations
VI. Conclusion


I. Executive Summary

Proposition 1C, the Housing and Emergency Shelter Trust Fund Act of 2006, is an initiative bond act, and if passed will authorize the state to sell $2.85 billion in general obligation bonds to fund 13 new and existing housing and development programs. Legislative Analyst’s Office, Proposition 1C: The Housing and Emergency Shelter Act of 2006, http://www.lao.ca.gov/ballot/2006/1C_11_2006.htm (July 25, 2006). The bonds would be used to provide shelters for battered women and their children, housing for low-income senior citizens, homeownership for the disabled, for military veterans, and for low to medium income families, and improvements on already-existing low-income housing.

The initiative, if passed, will distribute the funding to four different areas. First, $1.35 billion will go to Development Programs, which will use the money allocated to fund three new programs focusing on development in urban areas and near public transportation. The program will provide loans and grants for regional-planning projects such as housing-related parks and traffic mitigation. Second, Homeownership Programs will be allocated $625 million of the fund, which will be used to encourage homeownership among low- and moderate-income first time homebuyers. The program is designed to accomplish this by providing low-interest loans, which would then be used for down payments. Third, $590 million of the trust will be issued to Multifamily Housing Programs. The Multifamily Housing Programs would be aimed at construction and renovation of rental housing projects. Low-interest loans capped at 3 percent will be distributed to local government, nonprofit organizations, and private developers who reserve, for a period of 55 years, a portion of their units for low and moderate-income households, as outlined below. The project will give priority to Programs in already existing developed areas and near public transit. Finally, $285 million of the Trust Fund Act will be used to provide loans and grants to developers of homeless shelters and housing for farmers. Portions of this measure will also be used to pilot projects aimed at reducing the costs of affordable housing. California Official Voter Information Guide, Analysis of Proposition 1C (Secretary of State, 2005).

Proposition 1C is an extension of programs first outlined in the successful Proposition 46 which voters approved in 2002. Proposition 46 provided $2.1 billion of general obligation bonds to fund state housing programs. It is estimated that as of November 1, 2006, only about $350 million will be left of the fund. Currently, California is listed as having 21 of the 25 least affordable metropolitan areas in the country, with only 14 percent of families able to own median-priced homes of $561,000. California also has approximately 360,000 homeless residents living on the street, and more then 5,000 women and children were turned away from domestic violence shelters last year. The Rebuild California Plan Coalition, Housing Prop 1C, http://www.plan4ourfuture.org/index.asp?Type=B_BASIC&SEC={38C0711A-4722-434A-B23F-8E091F8CAD7F} (accessed Sept. 6, 2005).

II. The Law

A. Current Law

i. Proposition 46: The Housing and Emergency Shelter Act of 2002

In 2002, the voters passed Proposition 46, the Housing and Emergency Shelter Trust Fund Act. The Act allowed for the state to sell $2.1 billion in general obligation bonds to fund 21 types of housing programs, including multi-family housing programs ($1.11 billion) and homeownership programs ($405 million). The programs have helped more then 42,000 families find affordable housing and funded 24,000 emergency shelter beds. Fear of Federal Budget Stimulates New State Housing Initiative, The Cardinal Inquirer. The bonds financed construction, rehabilitation or preservation of 17,700 affordable apartments, created or rehabilitated 9,055 shelter spaces, and helped 18,000 families become or remain homeowners. The Legislative Analyst estimates that about $350 million of the Proposition 46 funds will be unspent as of November 1, 2006. At the average bond rate of 6.25 percent, the Proposition 46 bonds will take about 30 years to pay off with an interest of $2.6 billion, totaling $4.7 billion to be paid at a rate of $157 million a year.

ii. Federal Housing and Emergency Shelter

Currently, 28 other states have state-implemented housing funds in addition to federal support from agencies such as FEMA and the U.S. Department of Housing and Urban Development (“HUD”). Only one of these states, however, uses general bonds, whereas the remaining 27 rely on housing-related tax revenue such as recording fees, real estate transfer tax, and property tax. California itself has over a dozen housing trust funds that have dedicated revenue sources, the majority of which rely on commercial linkage fees. Kalima Rose & Judith Bell, Expanding Opportunity: New Resources to Meet California’s Housing Needs, http://www.housingca.org/PDFs/2347_pl_book.pdf, 14 (Winter, 2005).

iii. State Housing and Emergency Shelter

Section 50003(b) of the Health and Safety Code provides that the California state government must try to provide a decent home and suitable living environment for every California family. There are three state agencies whose goal it is to accomplish this feat; the State Department of Housing and Community Development (HCD), the California Housing Finance Agency (CHFA), and the State Treasurer's Office. Ernest L. Aglipay, Proposition 46: The Housing and Emergency Shelter Trust Fund Act of 2002, CA Initiative Rev. (2002). All of the housing programs are funded by dispensing money from the trust fund established by the Housing and Emergency Shelter Trust Fund Act of 2002. Id. Unfortunately, the Act will be completely unfunded by 2007, and all housing and emergency shelter funding with have to come from the passing of Prop 1C or the state’s other legislative enactment. Some of the programs that are funded by Prop 46 and would be re-funded by Prop 1C are listed below. Id.

Building Equity and Growth in Neighborhoods Program (BEGIN): Provides down-payment assistance loans to qualifying first-time low- and moderate-income buyers of homes. Also provides grants to cities and counties to help reduce local regulatory barriers to development.

CalHome Program: Provides funds for homeownership programs to assist low and very low-income households become or remain homeowners. Funds are allocated in either grants to programs that assist individuals or loans that assist multiunit homeownership projects. Grant funds may be used for first-time homebuyer down-payment assistance, home rehabilitation, homebuyer counseling, home acquisition and rehabilitation, or self-help mortgage assistance programs, or for technical assistance for self-help and shared housing homeownership. Loan funds may be used for purchase of real property, site development, predevelopment, and construction period expenses incurred on homeownership development projects, and permanent financing for mutual housing or cooperative developments.

Emergency Housing Assistance Program (EHAP): Provides facility operating grants for emergency shelters, transitional housing projects, and supportive services for homeless individuals and families.

Farmworker Housing Grant Program: Provides grants to local public agencies, nonprofit corporations, and federally recognized Indian tribes for rehabilitation or new construction of owner-occupied housing, and construction and rehabilitation of rental units, to be used for agricultural workers.

HOME Investment Partnership Program (HOME): Assists cities, counties, and nonprofit community housing development organizations (CHDOs) to create and retain affordable housing through grants to cities and counties, and low-interest loans to state-certified CHDOs.

Homebuyers Down Payment Assistance Program: Provides junior mortgage loans to assist low and moderate-income Californians purchase homes.

Housing Preservation Program: Combines predevelopment loans with a program of technical assistance to assist in the preservation of existing affordable rental projects.

Multifamily Housing Program: Through deferred payment loans, provides local public entities, for-profit and nonprofit corporations, limited equity housing cooperatives, individuals, Indian reservations and Rancherias, and limited partnerships with assistance in new construction, rehabilitation, and preservation of permanent and transitional rental housing for lower income households.

Self Help Housing Program: Provides grants to local public agencies and nonprofit organizations that provide advice and technical assistance to help low and moderate-income owner-builders build and rehabilitate their homes.

B. The Effect of 1C

Proposition 1C suggests the addition of Section 2, Part 12, starting with Section 53540, to Division 31 of the Health and Safety Code. The Act will authorize the state to sell $2.85 billion in bonds to support the following programs.

i. Homeownership Programs

$625 million will be dedicated to homeownership programs as follows:

  • $ 290 million will be deposited into the Self-Help Housing Fund, which is dedicated to already-existing homeownership programs for low-income households, such as CalHome.
  • $ 200 million will be dedicated to down-payment assistance
    • Aimed at first-time low- or moderate-income homebuyers, this fund will provide deferred low-interest loans up to 6 percent of the home purchase price.
    • This fund will supplement programs in existence like BEGIN, CalHome, and Homebuyers Down Payment Assistance Program.
  • $125 million will be granted to local government to alleviate barriers to affordable housing. (CalHome)
  • $ 10 million in grants to assist low- or moderate-income households with building or renovating their own homes. (CalHome)

ii. Development Programs

$1.35 billion will be dedicated to development programs as follows:

  • $850 million will be deposited into the Regional Planning, Housing, and Infill incentive account.
      • This is a new program created to encourage “infill” development, i.e. increased development in already urban areas.
      • Grants will be distributed to projects aimed at fixing transportation, environmental, water and sewer issues associated with infill development.
      • A total of $200 million will go to creating, developing, or rehabilitating urban parks to promote infill development.
  • $300 million will be deposited in the Transit-Oriented Development Account, which is a new program created to encourage more dense development near public transit.
      • This sector will supply grants and low-interest loans to local government and developers to facilitate the development.
  • $200 million will be dedicated to housing-related parks in urban, suburban, and rural areas.

iii. Multifamily Housing Programs

$590 million will be dedicated to Multi-Family Housing Programs as follows;

  • $345 million in low-interest loans will go to housing developments renting to low-income tenants. (Multi-Family Housing Program, Housing Preservation Program)
  • $195 million in low-interest loans will go to housing projects which also provide health and social services to low-income renters such as senior citizens.
  • $50 million in low-interest loans will go to housing projects which provide housing for homeless young people. (EHAP)

iv. Other Housing Programs

The $285 million remaining in the fund will be distributed as follows;

  • $135 million will be put toward low-interest loans and grants for developing housing for farmworkers. (Farmworker Housing Grant Program).
  • $100 million in grants and loans will be dedicated to new pilot programs to develop housing at reduced costs.
  • $50 million will fund grants for developing homeless shelters.

Legislative Analyst’s Office, Proposition 1C: The Housing and Emergency Shelter Act of 2006, http://www.lao.ca.gov/ballot/2006/1C_11_2006.htm (July 25, 2006).

III. Drafting Issues

There do not seem to by any significant drafting issues associated with Proposition 1C. Proposition 1C is largely riding upon already-established statute and existing programs set up as a result of the 2002 Proposition 46.

There are some ambiguities in the new Infill Incentive program which will be allotted $850 million. The text outlines that portions of the funds will go to parks, infrastructure, transportation, and traffic mitigation, but fails to state how this will relate to infill programs. The legislature, by a two-thirds vote, is entrusted with specifying and implementing the act, and the ambiguities will likely be flushed-out with the legislative implementation.

The Bond Act also fails to define "low-income" or "moderate income" households, but these are provided in California Health and Safety Code Sections 50079.5, 50105 and 50106. The code states that the State limits for low-, very low-, and extremely low-income categories will be equivalent to the nation’s HUD standard for its Section 8 program. Welcome to California, Official State Income Limits for 2006, http://www.hcd.ca.gov/hpd/hrc/rep/state/incNote.html (accessed October 21, 2006). A list of the dimensions of the different categories can be accessed through the California State website, at http://www.hcd.ca.gov/hpd/hrc/rep/state/inc2k6.pdf.

Finally, $100 million is dedicated to “sponsoring entities that develop, own, lend, or invest in affordable housing and used to create pilot programs to demonstrate innovative, cost-saving approaches to creating or preserving affordable housing.” Proposition 1C, Health & Safety Code § 53545(a)(1)(F)(proposed). The text of this section is ambiguous,
yet any program seeking funding under this section will need approval of 2/3 of each house of the legislature. The fear of ambiguous statutory text in Proposition 1C is that the funding will go to waste, but with this significant legislative check, the chances of speculative projects securing funding will be diminished.

While containing some vague provisions and undefined terms, Proposition 1C is worded with an eye to severability, and if the courts decide that any of these provisions are incurably ambiguous and thus invalid, the ambiguous provision(s) alone can be severed. “There are three criteria for severability: the invalid provision must be grammatically, functionally, and volitionally separable.” Gerken v. FPPC, 6 Cal.4th 707, 714 (1993). The ambiguous provisions in Proposition IC are all grammatically, functionally, and volitionally separable, thus meeting all three elements the severability test laid out in Gerken. Therefore, if any one of the provisions is successfully challenged for being too attenuated, the rest of the act will likely not be in jeopardy.

IV. Constitutional Issues

A. Federal Constitution

The Housing and Emergency Shelter Trust Fund Act of 2006 does not raise any federal Constitutional issues.

B. State Constitution

i. Single Subject Rule

California Constitution Article II, Section 8(d) states that "an initiative measure embracing more than one subject may not be submitted to the electors or have any effect." Cal. Const. art. II, § 8 (d). The California Supreme Court has held that an initiative measure does not embrace more then one subject if the initiative’s “various provisions are reasonably related to a common theme or purpose,” and are “reasonably germane” to one another. Manduley v. Superior Court, 27 Cal.4th 537, 575 (2002); Senate v. Jones, 21 Cal.4th 1142, 1157 (1999).

The Housing and Emergency Shelter Trust Fund Act of 2006 does not appear to violate the single subject rule. All of the provisions are reasonably related to the common purpose of perpetuating housing and emergency shelter, and no provision is in contradiction to any other provision. While the Act provides many programs, distributing loans and grants to a slew of different causes, each program is reasonably directed at curbing the housing crisis in California. The only possible second subject addressed through the Act is the allocation of funds to support parks. While parks provide housing for some individuals, this is clearly not the purpose of parks. However, the parks provision is encompassed in the “Infill Incentive” provision, and it is not a stretch to state that drastic urban development will require, amongst many other things, more public parks. Thus, park funding is indeed “reasonably related” enough to the subject of housing when related to infill of urban development, and would likely not become an issue.

ii. The Bond Process

There are three different types of bonds which are usually issued by the state. They are traditional revenue bonds, general fund-supported bonds, and budget-related bonds. Proposition 1C utilizes general fund-supported bonds.

Traditional revenue bonds are self-sustaining bonds which are paid off primarily by the projects they fund, such as bridges and bridge tolls. The League of Women Voters of California, Bond Financing. These bonds do not require the voters’ approval and are not guaranteed by the state’s general taxing power, so they usually have a higher interest rate. Id.

General Fund-supported bonds take two forms; general obligation bonds and lease-revenue bonds. Both types of bonds are supported by the state’s general taxing power, and are therefore comprised of lower interest loans. Id. The less popular of the two is the lease-revenue bond, which is paid off by the lease payments made by the state agency which benefits from the facilities the bonds were used to build. Id. These lease payments are funded by the General Fund, which is mostly composed of tax revenue. Proposition 1C, on the other hand, is a general obligation bond. General obligation bonds are paid off entirely by the General Fund and must be approved by the voters. Cal. Const. art. XVI §2(a). As of July 1, 2006, the state had about $45 billion of infrastructure-related debt yet to be paid out of the General Fund, for which it is still paying principal and interest payments. This proposition will add approximately $3.9 billion to the state’s debt in 2005-06, and up to $5.5 billion in 2010-11, not including budget-related bonds.

In March of 2004, voters approved Proposition 57 which enabled the state of California to purchase $15 billion of budget-related bonds. Budget-related bonds are bonds purchased to help offset the state deficit, and are also backed by the state’s general taxing power. The state is currently paying an annual cost of $1.5 billion in repayment on the 2004 bonds. This coupled with the General Fund debt, will amount to a total debt of $5.1 billion in 2005-2006 alone.

Current bonds purchased will be paid off over a 30-year period. Proposition 1C is no exception, and will accumulate $3.3 billion in interest before it is paid off in full, at a rate of $204 million per year. Because Proposition 1C helps fund private programs, only approximately 40 percent of the bonds can be purchased at the lower, tax-exempt rate of 5 percent, and the rest will be purchased at rates of around 6.5 percent.

V. Public Policy Considerations

A. Proponents

A “yes” vote on Proposition 1C will allow the state to collect money through the issuance of bonds which will be repaid from the General Fund to provide housing and emergency shelter. Last year, 5,108 battered women and children were turned away from domestic violence shelters because the shelters were full to capacity. Cheryl Keenan, Argument in Favor of Proposition 1C, Housing and Emergency Trust Fund Act of 2005 Official Title and Summary 28 (July 25, 2006). Proponents of Proposition 1C state that the Act will allocate much-needed funding to programs helping battered women.

The Trust Fund will also provide safe, affordable homes for seniors. Between 2000 and 2020, the number of those over 65 is supposed to grow three times as fast as the average population growth. Yet, one-fifth of the households 65 and older earn less than $15,000, enough to afford about $375 per month for housing. Aging Services of California, 1C, http://www.aging.org/i4a/pages/Index.cfm?pageID=1742 (October 2, 2006). The Proposition’s low and moderate-income housing assistance will help these seniors stay in safe and comfortable housing. Grants and loans will also enable cities and counties to develop retirement homes and medical facilities to accommodate the needs of the elderly.

With only 14 percent of families in California able to own median-priced homes at $561,000, working low and moderate-income families are having troubling owning their own home. Proposition 1C will help these families by providing down payment assistance, low-interest loans and grants. Also, $100 million of Proposition 1C will go to homeless shelters, and help house the over 360,000 homeless Californians sleeping on the street each night. Cheryl Keenan, Argument in Favor of Proposition 1C, Housing and Emergency Trust Fund Act of 2005 Official Title and Summary 28 (July 25, 2006).

Proponents claim that it is no surprise that California is currently listed as having 21 of the 25 least affordable metropolitan areas in the country. Habitat for Humanity, AARP, California Partnership to End Domestic Violence, the Nonprofit Housing Association of Northern California, and State Senator Don Perata all support Proposition 1C for this reason.

The funds from 2002’s Proposition 46 will be completely depleted by 2007, and California is in the middle of a housing crisis. A “yes” on Proposition 1C will expand the number of shelter beds for battered women and homeless families with children, provide housing for homeless foster youths, make security improvements and repairs on existing shelters, and provide clean and safe homes for senior citizens and low-income families. Proposition will also create 87,000 new jobs, as well as help working families afford homes. It will help improve housing situations for the disabled, elderly, battered women, and homeless youth.

B. Opponents

Proposition 1C would add $3 billion in new government debt and expand bureaucracy, at a time when California is one of five states in the country still in a deficit. Chuck DeVore, Argument Against of Proposition 1C, Housing and Emergency Trust Fund Act of 2005 Official Title and Summary 29 (July 25, 2006). The average California family of four will have to pay over $600 in debt and interest if the proposition is passed, which will have to come from somewhere. This will likely create more incentive to raise taxes, or ear-mark money needed for our schools and other municipal resources.

It is true that only 14 percent of families in California can afford to buy a median-priced home, but adding to the state deficit may not be the solution. Opponents point out that while Proposition 46 helped house over 42,000 families, these families are still low-income and unable to live without governmental assistance. They go on to state that more than half the cost of a mortgage or rent payment in California is due to high taxes, overregulation and fees. Proposition 1C will simply add more debt to those low and moderate-income families. Also, $400 million of the fund will be spent on parks which do not house anyone. Proposition 46 housed many people, but it did nothing to actually stop or even help the poverty situation in California. Opponents claim that throwing enough money at those without will fix the problem just enough to not make it a pressing problem and will allow congress to ignore the situation for another four years.

A “no” vote on Proposition 1C will preserve funds allocated for the future, and keep the state from falling even further into debt. For every dollar we borrow, we and our children will have to pay two dollars in its wake, $3 billion of which will be interest fees alone. It is also not dispositive that the Trust Fund will fix the housing crisis in California, as much as sedate it.

VI. Conclusion

Proposition 1C, if passed, will raise up to $2.9 billion to help the California housing crisis. Through bonds paid over the course of 30 years, low- and moderate-income families, as well as the disabled and elderly, will be able to purchase or renovate their housing. The proposition will also help curb the number of homeless families and battered women sleeping on the street each night. However, all this will come at a cost to tax payers totaling $5.2 billion, averaging about $600 per family of four. California is currently one of five states in the nation still in a deficit, and it is uncertain that adding more debt will fix the housing problem in the long run. Nonetheless, fixing public housing requires constant funding, and after 2006, only $350 million will be left to fund the problem. A vote for the Housing and Emergency Shelter Trust Fund Act requires a judgment call; is helping our state’s low-income workers, elderly, veterans, and homeless worth taking on more state debt?