Dear Governor and Legislative Leaders

As directed by the Joint Legislative Audit Committee, my office conducted an audit of the State's efforts to support affordable housing projects throughout California. Our assessment focused on financing provided for affordable housing projects from four key state agencies—the California Department of Housing and Community Development, the California Housing Finance Agency, the California Tax Credit Allocation Committee, and the California Debt Limit Allocation Committee (Debt Limit Committee). The following report details our conclusion that the State must overhaul its approach to affordable housing development to help relieve millions of Californians' burdensome housing costs.

California is failing to build enough affordable homes for lower income residents in part because the State lacks an effective approach to planning and financing development of affordable housing at both the state and local levels. For example, the State does not have a clear plan describing how or where its billions of dollars for housing will have the most impact. In fact, the absence of a comprehensive and coordinated plan allowed the Debt Limit Committee to mismanage and ultimately to lose $2.7 billion in bond resources with little scrutiny, a loss that the committee failed to publicly disclose and struggled to explain. These bond resources could have helped support the construction of more affordable housing.

The State's lack of a coordinated housing plan is also evident in the four agencies' misaligned and inconsistent requirements for the affordable housing programs they administer. The resulting approval process for the programs' financial resources is cumbersome for developers who need state resources to support their projects. Because these developers must often use multiple sources of funding for their developments to be financially feasible, the misaligned requirements can slow development and increase project costs—another factor that can interfere with the State better meeting its goals for affordable housing.

At the local level, state law and state oversight are not strong enough to ensure that cities and counties are doing their part to facilitate the construction of affordable housing. Therefore, the State needs to improve its statewide housing plan, harmonize its funding programs, and strengthen its oversight of cities and counties.

Respectfully submitted,

ELAINE M. HOWLE, CPA

California State Auditor

SUMMARY

Audit Highlights . . .

Our audit of the State's efforts to support affordable housing projects highlighted the following:

• The State's approach to planning and financing the development of affordable housing at both the state and local levels is ineffective.
•    Four key state agencies contribute to the State's basic housing efforts, but there is no sound, well-coordinated strategy or plan to most effectively use their financial resources to support affordable housing.
•    The lack of a comprehensive plan allowed one agency to mismanage and ultimately lose $2.7 billion in bond resources.
•    The four agencies' requirements are misaligned and inconsistent, which results in an unnecessarily cumbersome process for awarding their financial resources.
•    Local jurisdictions have created local barriers such as restrictions on the number of units developers can build and lengthy project approval processes. 
• State law and oversight are not strong enough to ensure that cities and counties are doing their part to facilitate the construction of affordable housing.
•    We reviewed cases in which local jurisdictions acted inconsistently with state law and/or delayed projects, yet the State lacks authority to ensure affordable housing is built in a timely manner.

Results in Brief

California's ongoing affordable housing shortage has contributed to the homelessness crisis and has left more than three million renter households with burdensome housing costs. This shortage in part stems from the State's ineffective approach to planning and financing development of affordable housing at both the state and local levels. Specifically, the State requires a far more effective statewide plan as well as sufficient oversight over the billions of dollars available for construction. In addition, the State's processes for awarding its financial resources for housing development are unnecessarily cumbersome. At the local level, state law and state oversight are not strong enough to ensure that cities and counties (local jurisdictions) are doing their part to facilitate the construction of affordable housing. Therefore, the State needs to improve its statewide housing plan (state housing plan), harmonize its funding programs, and strengthen its oversight of local jurisdictions.

The State plays a critical role in supporting affordable housing development and the Legislature has declared that private investment alone cannot achieve the needed amount of housing construction at costs that are affordable to people of all income levels—including households earning 80 percent or less of their area's median income (lower-income households). We refer to housing affordable to lower-income households as affordable housing. Four key state agencies contribute to the State's basic housing efforts and its goal of providing a home for every Californian: the California Department of Housing and Community Development (HCD), the California Housing Finance Agency, the California Tax Credit Allocation Committee (Tax Committee), and the California Debt Limit Allocation Committee (Debt Limit Committee). These four agencies provide financial resources in the form of loans, tax credits, and tax-exempt bonds (financial resources) to housing developers who build and rehabilitate affordable housing (developers) for lower-income households. This is in accordance with state law, which gives the State and local jurisdictions the responsibility to facilitate the improvement and development of housing to meet the needs of all state residents.

However, 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. For example, state law requires HCD to develop a state housing plan every four years, but its most recent state housing plan from 2018 lacks key attributes, such as explaining how state financial resources will contribute to meeting current and future housing need and identifying where those resources will have the most impact. Although state law does not expressly require this information in the plan, without it, the State cannot demonstrate how it will build enough affordable housing and ensure that its financial resources are put to best use. In one important example, the absence of a comprehensive and coordinated plan allowed the Debt Limit Committee to mismanage and ultimately to lose $2.7 billion in bond resources with little scrutiny, a loss the committee failed to publicly disclose and struggled to explain. These lost bond resources could have helped support the construction of more affordable housing.

The State's lack of a coordinated housing plan is also evident in the four agencies' misaligned and inconsistent requirements for the affordable housing programs they administer. The resulting approval process for the programs' financial resources is cumbersome for developers who need state resources to support their projects. Because these developers must often use multiple sources of funding for their developments to be financially feasible, the misaligned requirements can slow development and increase project costs. In addition, the Tax Committee's and Debt Limit Committee's review processes for projects are redundant in several respects because the committees review most of the same projects, contributing to our recommendation to streamline the funding process and consolidate these two committees.

The State's shortage of affordable homes is also attributable to barriers local jurisdictions have created. These local barriers—such as restrictions on the number of units developers can build or lengthy processes for approving developers' projects—make it more challenging to build needed affordable homes. Each local jurisdiction is responsible for planning to accommodate a designated portion of the State's needed affordable housing units; state law requires jurisdictions to adopt what are called housing elements (local housing plans) that identify sites suitable to accommodate these units, and also requires them to include actions to mitigate potential barriers to development. However, state law does not currently ensure that local jurisdictions actually mitigate such barriers. For example, although state law requires local jurisdictions to conduct streamlined reviews of affordable housing projects in certain cases, it does not guarantee streamlined reviews for all potential sites that jurisdictions have identified in their housing plans—meaning that jurisdictions can still undermine affordable housing development by using lengthy and uncertain approval processes. We found that, as of June 2019, local jurisdictions had collectively reported issuing building permits for only 11 percent of the affordable housing units in their current housing plans. Underdevelopment of affordable housing statewide and in certain areas is especially problematic because nearly every area in the State needs more affordable housing: for example, in 523 of 539 local jurisdictions, at least 20 percent of lower‑income renter households spend half or more of their incomes on housing—a severe cost burden.

Even if the Legislature strengthens state law to ensure that local jurisdictions mitigate key barriers to building affordable housing, HCD's current limited oversight is insufficient and its lack of authority does not permit it to ensure that all jurisdictions follow through with mitigating those barriers. Although HCD is responsible for overseeing local jurisdictions' housing efforts, it lacks adequate enforcement authority—short of initiating time‑intensive litigation—to ultimately ensure that jurisdictions comply with state law when they review affordable housing projects. In one case, HCD indicated that a city had acted inconsistently with state law by delaying a project on a site the city had identified for affordable housing and that the developer had subsequently withdrawn its application for the proposed development. Yet HCD simply encouraged the city to work with the developer and indicated that failure to comply with state law could result in litigation. 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. Without substantial changes to address these issues, the State will continue to face a patchwork of local housing efforts that limit Californians' access to affordable homes.

Summary of Recommendations

The Legislature should amend state law to do the following:

• Require HCD to prepare an annual addendum to the State's housing plan that identifies all of the financial resources the State possesses for the development of affordable housing, the number of affordable units those resources are expected to help build, the amount the State will need to obtain from other sources, where the State's resources will have the most impact, and outcomes to measure the success of its investments.
• Create an interagency workgroup to develop consistent program requirements for awarding financing resources to multifamily housing projects to maximize affordable housing built and remove administrative barriers.
• Strengthen existing standards for mitigating barriers on potential affordable housing sites to ensure that local jurisdictions conduct streamlined reviews and do not unduly restrict the number of units developers can build on each site.
• Create an appeals process for developers to resolve disputes over eligible affordable housing projects in a timely and fair manner.
• Eliminate the Debt Limit Committee and transfer its authority to the Tax Committee to manage tax-exempt bonds, including its responsibilities for reviewing applications and allocating bond resources.