Note: This is the first in a series of client alerts about housing bills moving through the California State Legislature this session.
For the last six years, veteran California Assemblymember Cecilia Aguiar-Curry (D-Winters) has been on a crusade to help local governments build the critical infrastructure—from streets and sanitation to water supply and fire protection—needed to support new housing development. To this end, she has amassed a powerful coalition including affordable housing advocates, labor councils, local governments, equity organizations and special districts in support of a constitutional amendment to address infrastructure funding challenges introduced by Proposition 13 long ago. Despite her efforts, however, the proposal has languished in the legislature.
In this client alert, the first in a series on housing and land use issues, we will explore why the measure has failed to advance in past years and the prospects for success in the 2023 legislative session.
Fiscal Constraints on Local Governments
An open secret in the world of housing and land use is that new housing does not pay for itself: a local government will pay more for the services and infrastructure needed to serve a home than it will ever recoup through property taxes. This situation largely traces back to the passage of Proposition 13 of 1978, the “taxpayer revolt” that capped property taxes at 1% of a home’s assessed value. In the decades following, local governments were faced with a significant fiscal disincentive to approve new housing, instead turning towards the sales-tax revenue offered by strip malls, car dealerships and big box stores in a practice now known as the “fiscalization of land use.”
While the property tax limit dominates the discourse on Prop 13, it contains another, equally impactful provision: the requirement for a two-thirds majority vote to approve a local special tax increase (a “special tax” is a revenue measure devoted to a specific purpose such as affordable housing or public transportation). Accordingly, Prop. 13 not only slashed property tax revenues but also hamstrung the efforts of cities, counties and special districts to secure funding by going to voters.
Assembly Constitutional Amendment 1 (Aguiar-Curry, 2023) would authorize a local government to impose, extend or increase a sales and use tax, transactions and use tax or parcel tax for the purposes of funding the construction, rehabilitation or replacement of public infrastructure, affordable housing or permanent supportive housing by a 55% majority vote. The bill would extend the same provisions to voter approval of general obligation bonds and would create an exception to the 1% cap on property taxes to service the bonds.
As defined, “public infrastructure” includes but is not limited to parks, water and sanitation systems, flood control, hospital construction and libraries. “Affordable housing” refers to housing affordable to lower, low- or very low-income households in addition to workforce housing for individuals earning up to 150% of the countywide median income, while “supportive housing” denotes housing that is linked to social services and has no defined length of stay.
A constitutional amendment can be referred to voters by the state legislature upon approval by a two-thirds majority of lawmakers in each house. If approved by a majority of voters in the next statewide election, the measure is ratified and the constitution is amended.
According to Assemblymember Aguiar-Curry’s 2019 fact sheet on the proposed amendment, the two-thirds vote threshold makes it significantly more difficult for local revenue measures to succeed. School bond measures, which require a 55% majority vote, have a roughly 80% pass rate while special tax and general obligation bonds are approved less than 50% of the time. Tellingly, almost 80% of those revenue measures garnered more than 55% of the vote and would otherwise have been approved.
The idea proposed in ACA 1 has received significant political support over the years. ACA 1 (Aguiar-Curry, 2019), the only iteration so far to receive a committee analysis listing support and opposition, boasted support from dozens of cities and counties, a wide variety of special district associations, unions, elected officials, economic development organizations, affordable and non-profit housing developers, planners, and environmental and social justice advocates. The organizations that expressed the most direct and public support for the measure included California Professional Firefighters, Housing California, the State Building and Construction Trades Council and the California Labor Federation. Opposition consisted of just two groups: the Howard Jarvis Taxpayers Association, author and sponsor of the original Prop. 13, and the Valley Industry and Commerce Association.
The impact of ACA 1 would extend well beyond its direct financial support for affordable and permanent supportive housing. One of the lingering effects of Prop. 13 and the fiscalization of land use is that local jurisdictions, blocked from raising necessary revenue through property taxes, have resorted to funding infrastructure costs through the use of “development impact fees.” Cities levy development fees to pay for services needed to build new housing or to offset the impacts of growth in a community. These fees can make up a substantial portion of the cost to build new housing in California cities.
In a March 2018 report, UC Berkeley’s Terner Center for Housing Innovation found that development fees for multifamily housing in California can be as high as $75,000 per unit. In some areas, fees for a single family home can reach $157,000 per unit. The study determined that development fees can amount to anywhere from 6 percent to 18 percent of the median home price depending on location.
Excessive impact fees have been shown to have at least two effects contrary to public policy. First, they limit or preclude the development of lower-cost housing. If the imposition of a fee pushes a project below an acceptable risk-adjusted return, investors will not contribute capital to the project, meaning that the development is unlikely to be built. Second, impact fees also disproportionately fall on new homebuyers, who tend to be less affluent and more diverse, while preserving affordability for older, more affluent homeowners who have already benefitted from low property taxes as a result of Prop. 13. In short, the current fiscal situation has new homebuyers subsidizing existing homeowners in a way that is neither efficient nor equitable.
ACA 1 has the potential to break this cycle by allowing a community to collectively decide to establish a broader tax base to support the infrastructure needed to serve new homes. In the long term, this policy has the potential to reduce the fee burden on new development, making more projects possible, bringing down prices and encouraging growth that can be matched with appropriate infrastructure.
Given these favorable political and policy dynamics, the obvious question is why has the measure failed to advance? In 2019, ACA 1 passed out of the Assembly Local Government Committee. When the measure was heard on the Assembly floor, however, it fell well short of the 55 votes needed for approval. In addition to the Republican members voting “no” as a bloc, a large contingent of moderate and even progressive Democratic members chose to withhold a vote or vote “no” as well.
These tallies come with some nuance—legislators often change their vote when they believe a measure is going to fail in order to avoid being on record as supporting the policy. ACA 1 was as close as eight votes away from succeeding at various points during the floor session. The next attempt, in 2021, did not receive a committee hearing, although this was likely due to shifting priorities brought on the COVID-19 pandemic.
The reality is that Prop. 13 is not called the “third rail of California politics” for naught: legislators do not want to touch it, even tangentially. Despite the fact that ACA 1 is several steps removed from “raising taxes,” lawmakers are keenly aware that it will be framed by their political opponents as a tax increase. This dynamic is especially significant for members of “target districts” where Democratic members have a viable Republican challenger.
Another factor in the measure’s failure was the notable absence of support from market-rate housing developers. While ACA 1 limits the allocation of direct funding to affordable and supportive housing, the possibility of defraying the cost of infrastructure should theoretically present a major incentive for market-rate developers to support the policy. One possibility for their hesitancy is that there are no guarantees in the measure that development impact fees would be reduced when new revenue measures are approved at the local level.
Recently enacted legislation that more closely ties fees to the impacts of new housing may change this dynamic, however.
Assemblymember Aguiar-Curry introduced ACA 1 again this year with the hope that a combination of a new class of legislators, pandemic recovery underway and an increased focus on California’s housing and homelessness crisis may be enough to push the measure over the finish line. Coming out of an election year, supporters also hope that legislators will feel confident enough to take a hard vote knowing they have two years before facing the voters again.
One factor that could play into discussions around ACA 1 is California’s gloomy fiscal outlook: as the state tightens its purse strings, local governments will be looking for other ways to raise the funds needed to address the symptoms of an economic downturn. This need is especially acute given the increased pressure that cities and counties are under to plan for and build significantly more housing under the current Regional Housing Needs Assessment cycle. On top of that, Gov. Gavin Newsom’s administration will likely be looking for ways to make a dent in their recently announced goal to build 2.5 million new homes.
It is unknown how the freshman class of 2023 will react to the proposal. While many new lawmakers have served in local government and will be familiar with the issues raised in ACA 1, several also come from newly flipped or hotly contested districts and will be wary of taking a tough vote this early in their tenure. Notably, the first re-election is always a milestone after which legislators start to feel more comfortable.
While a multitude of factors will dictate ACA 1’s success or failure this year, the deficiencies it seeks to address are persistent and substantial. Any lasting solution to California’s housing affordability crisis will have to address the way local governments finance housing infrastructure.