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The Last Subsidy - Local Zoning Control

Perhaps the most overused word these days is the word “crisis.” Everything, we’re told, is a crisis. Still, when it comes to “affordability” (healthcare, college educations, housing, insurance, etc.) in California's major metropolitan areas, the label may be accurate. There is little question, for example, that housing affordability continues to seriously challenge the average family in San Francisco.

The question is why. The simplest answer is that historically, in instances where wealth and income distribution are widely disparate and land resources are limited, there is no way to create “affordable housing” without some form of subsidy.

There is no historic data to contradict this maxim.

In response to this, state government has tried to address that subsidy by every means imaginable: increased taxes on income and sales, fees (SB 2), financial penalties (SB 35), public debt (SB 3), revenue reallocation (Cap & Trade funds) and increasingly draconian, mandated quotas that force the financial deficiency problems on local municipalities (SB 828).

One can probably expect this trend to continue.

At the same time, the traditional sources of subsidy funding, most notably the federal government’s allocation of taxpayer funds, have been decreasing and in some cases vanishing for more than 40 years.

This has all created somewhat of an “optics” problem for state government looking to increase tax revenues, as they start to see signs of palpable resistance by voters.

Undeterred, increasingly powerful government agencies in partnership with mega-rich corporate interests are turning their sights on what may be the largest remaining pool of value there is to subsidize affordable housing: your property rights and the sovereignty of your locally elected government.

Some perspective

Affordable housing is a concept that was invented by the federal government in 1937, under federal housing legislation. Prior to that, you just lived wherever you could, to survive.

Starting with the creation of the FHA in 1934, “subsidy” consisted of low interest rate loans and loan guarantees, federal financing of private developers[1], direct financing of housing construction and other methods. But, as the federal government began to withdraw from direct involvement in affordable and low income housing development, during the Nixon Administration and all subsequent administrations, federal subsidy evolved into more arms-length forms that included direct tenant subsidy (Section 8 vouchers), mortgage insurance, grants programs and Low Income HousingTax Credits.

Meanwhile, as direct federal involvement has waned, state and local governments have had to step up their participation, adding their own grants programs, matching tax credits, low interest loan programs and direct subsidies in the form of waived fees and taxes.

Yet, all of this notwithstanding, the overall funds available for affordable housing development, in inflation adjusted dollars, has been steadily decreasing for more than half a century. The coincident fall in inflation adjusted incomes has increased the severity of the financial crisis many families now face.

Consider that the Low Income Housing Tax Credit program was created in 1986 with the goal of providing an incentive for private capital to build affordable housing. Though far from perfect in its distribution of benefits, it has been one of the most successful financial instruments ever instituted by federal and state governments (many of whom match federal credits allocations).

The total value of the LIHTC in 1986 was approximately $6.5 billion. Today, it is approximately $8.7 billion. If it had merely kept up with housing and construction costs’ inflation in major metropolitan areas in the U.S., the LIHTC would have to be approximately $65 billion, today.

This example alone is enough to show the magnitude of the problem.[2]

Limitless growth without affordability

The title of a recent article in the San Jose Mercury News asked, Are San Jose residential towers too costly to build? The article notes that rents for market rate, high density housing would have to rise 25% from their present levels to make the development of more than 6,000 units of high-rise housing, presently fully entitled and ready to go, pencil out, financially. It goes on to say that construction costs are currently rising as much as 1.5% per month, compounded (almost 20% per year).

Even by Silicon Valley standards, this kind of rental rate increase far outstrips average wage growth.

One would think that this might cause decision makers to stop and question their fundamental assumptions about the notion of limitless growth, particularly in high density urban areas, where the only way to grow is up. Clearly, the market is trying to tell us something: that we should be developing somewhere else.

But, no one is listening.

As a consequence, private developers are demanding more and more concessions of state and local governments to award communities the “privilege” of their investment, which will only happen if it produces a rate of return that their investors, in their sole opinion, determine is adequate.

However, instead of questioning the benefits of growth, unelected, highly politicized state agencies and corporate, special interest groups refuse to even consider any options that are not just other versions of more of the same. Their theory is that hype-growth will produce abundant affordable housing, despite there being absolutely zero long term statistical evidence to support that theory. But, that doesn’t seem to matter in our new “post truth” world.

Political dialog remains locked onto how things “should” be instead of working with how things are. Senator Scott Wiener is currently the head cheerleader for this approach.

Having avoided the more important question of why the public should be asked to subsidize private, for profit development returns on investment, in the first place, it appears that state legislators are only concerned with figuring out how to force the public to pony up more.

The bottom line in all of this, financially, is inevitable. The general public will shoulder the consequences and burdens of this growth and provide the subsidy needed to keep rents from rising to the levels the market otherwise demands. This translates into more taxes, more fees, decreasing local government services, more government agencies and middlemen monitoring compliance… more of everything except solutions to affordable housing.

Growth addiction

Assuming we are in agreement about the social justice goals of providing affordable housing to those most in need, our approach to how we accomplish this is failing. This would suggest we step back and look at what we’re doing and how we’re doing it and reassess our approach.

But, never under estimate the power of bad ideas.

Fueled by powerful business and labor lobbyist’s money, California legislators continue to put their heads down in an effort to force the square peg of business as usual in the round hole of reality (e.g., Senator Wiener's proposed SB 827 was killed in Senate Transportation and Housing Committee, but Wiener has vowed to continue to bring it back in new forms until he wins support).

This behavior would be accurately characterized as an addiction: increasing the dosage against diminishing returns.

One wonders why, for example, it would be so bad if Silicon Valley companies expanded across the country in search of lower costs of living. Why is it a “crisis” that people are leaving California? Our economy is certainly strong enough to weather such changes and there’s certainly no proven correlation between size and quality of life. If anything, the correlation is inverse. So, who or what is the weak hand in all this that makes this prospect so frightening?

To find the answer to that, one doesn’t have to look very far.

Perhaps, the reason legislators are so hitched to the growth train is because they know that without hyper-growth equity markets would falter (Wall Street gets hurt) and billionaires would go back to just being centimillionaires (boo hoo). But worse than that, the fanciful annual yield projections used by CalPERS and insurance companies would be exposed for the frauds that they are and all those unfunded public pension obligations would come home to roost.

I realize there are those who want this to come about, but unfortunately, in the end, those most impacted would be the rest of us. As economies collapse, those at the bottom get hurt the most.

To paraphrase something I said in my first book, I’m not worried about them getting what they deserve. I’m worried about the rest of us getting what they deserve.

However, what this does tell us is that the state government should spend less time trying to figure out how to extract more value out of its residents and more time getting its own house in order, financially.

The last subsidy

Land use and its control are the very definition of government. The Magna Carte (1215 AD) essentially established our concept of the rule of law and correspondingly established private property rights and the rights of governments to levy taxes. To this day, it informs our fundamental understanding of the functions of local government.

Without locally elected government having the power to exercise control over land use, the entire purpose of our towns and cities pretty much evaporates. What else, after all, do they do? They don’t feed us, regulate markets, issue currency, provide health services, build schools, provide utilities, or provide a social safety net.

Yes, they provide some public services such as police and fire protection and maintenance of roads and parks. But, all of those functions could easily be taken care of by the state or through direct service relationships with the public, the way most utilities are. No, land use and land use decisions by locally elected bodies are their most important function and have the most significant impacts on growth and land value.

That said, as the state gets closer to maximizing its traditional methods of enriching the treasury through taxes, fees, debt and penalties (California residents are the highest taxed in the country), it appears they have begun to turn their sights on your property rights and the sovereign powers of your locally elected government as the solution to their seemingly endless need for increased revenues.

Although outcomes and unintended consequences are always hard to predict, taking control of local land use decisions and property rights[3] in our major urban centers, could unlock almost unlimited subsidy to sustain hyper-growth and development, but does nothing to address affordability.

Since it is axiomatic that scarcity creates value and commodification decreases it, rezoning vast amounts of currently restricted land for maximum density development in cities like San Francisco, could result in a significant devaluation of property values – the very subsidy that private development needs to achieve their desired profit margins.

The search for a cure

Our hyper-growth economic model has become an addiction. Like all addictions it is essentially unidirectional and only capable of believing that more and more of what ails it is the only way forward. Addictions are always blind to reality and its many warning signs.

Everywhere we look, our economic system appears to now be fully addicted to growth at any cost, regardless of the self-destructive, negative consequences. Left unaddressed this addiction will eventually consume and decimate our quality of life, our life-supporting environment and eventually our personal health, well-being and sanity… signs of which are already quite evident.[4]

Some will argue that technological innovation and riding bicycles will avoid this endgame. These are, unfortunately, nonsensical notions, considering the rate of destruction and change we’re witnessing all around us is far outstripping innovation's adoption. Add to this that the construction of new buildings and the powering of our existing built environment now consumes almost 70% of all our energy use – in spite of strides made for greater energy efficiency – and you get some idea of just how big a challenge we’re up against.

I wish that solutions to our dilemma were easy, but after decades of supporting environmental causes and studying environmental science, my opinion is that it’s simply a pipe dream to imagine that we can continue down the hyper-growth / urbanization path, without enormous environmental and socio-economic consequences.

It is no wonder that all the billionaires are building rocket ships to travel to other planets.[5]

[1] Stuyvesant Town in NYC was a public private partnership between the government and Metropolitan Life Insurance Co.

[2] By comparison, the U.S. defense budget was approximately $175 billion in 1980 (in inflation adjusted dollars). For 2019, its budget is over $680 billion. This has all occurred during a “time of peace” with no declared wars. Source: Wikipedia. U.S. Government Budget Office.

[3] E.g., Senator Scott Wiener’s SB 827

[4] UN Environmental Assessment, 2017

[5] Google, Space X/ Musk, Amazon, Virgin, etc.

Bob Silvestri is the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization funded only by individuals in Marin and the San Francisco Bay Area. Please donate the CVP to help us continue to work on the public's behalf.