City of East Palo Alto
Housing Trust Fund Revenue Sources
Public Review Draft
February 3, 2020
City of East Palo Alto February 3, 2020
New Revenue Sources
PREPARED FOR :
City of East Palo Alto
PREPARED BY:
David Paul Rosen & Associates
1330 Broadway, Suite 937
Oakland, CA 94612
510-451-2552
510-451-2554 Fax
[email protected]
www.draconsultants.com
3941 Hendrix Street
Irvine, CA 92614
949-559-5650
949-559-5706 Fax
[email protected]
www.draconsultants.com
City of East Palo Alto February 3, 2020
New Revenue Sources
Table of Contents
1.0 Introduction and Summary....................................................................1
2.0 Principles for Housing Trust Funds........................................................2
2.1 Initial Criteria for Assessing Revenue Sources.............................2
2.2 Potential Revenue Sources.........................................................3
3.0 Basic Principles Governing Taxes and Fees in California.......................5
3.1 Fees Versus Taxes: Distinctions and Relative Advantages ..........5
3.2 Taxing Power of the City.............................................................5
3.3 Proposition 13 ............................................................................6
3.4 Propositions 62, 218 and 26 .......................................................7
3.5 Special Taxes and General Taxes Compared ..............................8
3.6 Limitations on Fees: The "Nexus" Requirement.........................10
3.7 Propositions 4 and 111 (Gann Limit).........................................12
4.0 Taxing Mechanisms and Fees...............................................................13
4.1 Real Estate Transfer Tax.............................................................13
4.2 Assessment Districts..................................................................14
4.3 Infrastructure Financing Districts...............................................15
4.4 Enhanced Infrastructure Financing Districts...............................16
4.5 Pay-for-Performance and Social Impact Bonds..........................16
4.6 Business Fees and Taxes............................................................18
4.7 Transient Occupancy Tax .........................................................19
4.8 General Occupancy, Parcel and Municipal Service Taxes.........21
4.9 Utility User Tax.........................................................................22
4.10 Utility Franchise Fee ...............................................................22
4.11 Housing Conversion and Preservation Taxes and Fees ............23
4.12 Sales and Use Tax...................................................................25
4.13 General Obligation Bonds.......................................................26
4.14 Automobility Taxes.................................................................26
5.0 Foundation and Corporate Support.....................................................27
5.1 Housing Trust Silicon Valley .....................................................28 City of East Palo Alto February 3, 2020
New Revenue Sources
5.2 Silicon Valley Community Foundation......................................28
5.3 Chan Zuckerberg Initiative........................................................29
5.4 Facebook ..................................................................................30
5.5 Google Foundation ...................................................................30
5.6 Salesforce Foundation...............................................................30
6.0 Estimated Revenue from New/Increased Revenue Sources.................33 City of East Palo Alto February 3, 2020
New Revenue Sources
List of Tables
1 Business License Tax Rates, City of East Palo Alto 19 2 Budgeted Annual Revenues from Selected Key
Revenue Sources, City of East Palo Alto, FY 2019/20
33 3 Estimated Annual Revenue Potential, Affordable
Housing Trust Fund Revenue Sources
34 Housing Trust Fund Revenue Sources February 3, 2020
Administrative Review Draft 1
1.0 Introduction
DRA was retained by the City of East Palo (City) to evaluate potential new revenue sources for the City’s Affordable Housing Trust Fund (AHTF). The City’s AHTF is a permanently dedicated, annually renewable source of revenue available to help low and moderate income people achieve affordable housing. These funds help to fill the gap between the amount low and moderate income households can afford to pay for housing and the cost of developing or acquiring housing in the marketplace. They help provide the debt, equity, subsidy and credit enhancement capital needed to provide affordable housing. Since current sources of affordable housing subsidies available to the are insufficient to meet the need for affordable housing in the City, the City is interested in identifying additional resources that can promote the development of affordable housing.
Current sources of affordable housing subsidies available to the City include inclusionary housing in lieu fees and commercial development nexus fees. The City is not an entitlement jurisdiction for HOME, CDBG or Emergency Shelter Grant (ESG) funds, but participates in and is eligible to receive funds from the County of San Mateo HOME Consortium. These sources are not profiled here.
DRA does describe briefly in this report recent ballot initiatives passed by the voters of East Palo Alto, a portion of the proceeds of which are either restricted or currently appropriated for affordable housing activities:
• Measure HH, a parcel tax on large commercial properties approved by East Palo Alto voters in November, 2018;
• Measure O, a 1.5% residential rental business license tax on properties of five or more residential units; and
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• Measure P, a 0.5% sales tax to general funding for local projects and vital City services.
DRA also evaluates potential new sources and estimates the revenue potential from increased tax or fee rates for several existing sources already in use by the City.
It should be noted that the City of East Palo Alto is currently close to its Gann appropriation limit on the proceeds of taxes that may be appropriated for spending in a given fiscal year (see Section 3.7 below). According to the FY 2019-20 Appropriations Limit (i.e. Gann Limit) approved by the City Council, the City is at approximately 88% of its limit. Therefore, the City is significantly limited in the amount of additional tax and fee revenue from many of these sources that the City can adopt for use in its Housing Trust Fund or other uses in the City.
This report evaluates the following categories of potential revenue sources:
n taxes
n fees
n assessment and infrastructure financing districts.
n foundation support; and
n corporate support.
2.0 Principles for Housing Trust Funds
Housing Trust Funds are particularly well suited to meet the large and long-term capital investment needs of housing development. Unlike funds that rely principally on the vagaries of state or local annual appropriations, the Housing Trust Fund is a permanent dedication to the provision of affordable housing. Thus, local officials, developers, lenders and neighborhood groups alike can determine construction investment schedules and amounts far in advance. Ideally, funds will be available when needed and in the amount needed.
To maximize the prospective benefits, trust funds should observe six principles:
Equity: Trust funds operate to correct the inequities of unregulated markets by targeting their assets for
the benefit of individuals and families most in need
and underserved by market rate housing.
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Productivity: Trust fund programs emphasize the economically productive activities of new construction and
rehabilitation, and emphasize purchasing or
refinancing existing housing when acquired for
long-term or permanent affordability.
Supplementation: Trust funds supplement, rather than supplant, current state and local funding for housing.
Size: Trust funds are large enough to materially alleviate the housing crisis. They do not represent a token
effort.
Efficiency: Trust fund administration and programs maximize efficiency and minimize bureaucratic delays, cost
and complexity.
Profitability and Creditworthiness:
Trust fund beneficiaries are best served by a design
that provides profit-making incentives for the
participation of private sector partners, particularly
financial institutions.
2.1 Initial Criteria for Assessing Revenue Sources
The following initial criteria for evaluating potential revenue sources were developed by DRA based on the above principles and our experience with the development of Housing Trust Funds:
n election and other adoption requirements: the adoption requirements of a potential revenue source can have a
significant effect on the success of establishing a revenue source for a housing trust fund. Generally, potential revenue sources subject to general elections are difficult to adopt. In many cases, sources subject to general elections require a supermajority vote for successful passage. Other sources, such as commercial linkage fees, require adoption by a City Council. Private sources, such as foundation support, are not subject to public approvals of any kind.
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n ability to raise funds for affordable housing.
n degree of control by City staff: depending upon the source of funds for a housing trust fund, City staff may or may not have control over developing programs and policies for the use of housing trust funds.
n cost of developing revenue source.
n successful development of revenue source in other cities. n changes to state law are not required.
2.2 Potential Revenue Sources
The following potential revenue sources are reviewed in this report:
n real estate transfer taxes
n assessment districts
n infrastructure financing districts
n business fees and taxes
n transient occupancy tax
n general occupancy, parcel or municipal services taxes n utility user tax
n utility franchise fees
n housing conversion and preservation taxes and fees
n sales and use tax
n general obligation bonds
n automobility (rideshare) taxes
n private foundation and corporate support
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3.0 Basic Principles Governing Taxes and Fees in California
3.1 Fees Versus Taxes: Distinctions and Relative Advantages A tax is a charge by a public entity that is imposed to raise revenue. A general tax is levied for general purposes. A special tax is legally committed to a specified purpose. A fee is a charge for a specific purpose, payable by persons who need or create the need for a service or facility.
The major advantage of taxes is that no connection is required between the activity that is taxed and the purposes for which the resulting funds are spent. In general, a city may tax one activity, put the money in its general fund or in some special fund, and expend it for an entirely unrelated purpose.1 On the other hand, under California law, and U.S. Supreme Court case law, fees must bear a reasonable relationship to a burden created or benefit received by the person charged the fee.
Fees are not subject to Proposition 13’s amendments to the state Constitution, to other provisions that require voter approval or potentially prohibit certain taxes, or to the limit on overall municipal revenue imposed by Article XIIIB of the California Constitution. Some forms of taxes are now prohibited altogether and others require a two-thirds vote.
3.2 Taxing Power of the City
Cities that are organized under the general laws of the State (Section 34102) have less autonomy than those that adopt their own charter (Section 34101), also known as “home rule” cities. General law cities follow the laws set forth in the Government Code commencing with Section 34000.
California courts have found that, except as provided in the municipal affairs doctrine, there is no constitutional grant of authority to tax.2 The Constitution prohibits the Legislature from imposing taxes for local purposes. Instead, the Legislature may authorize local governments to impose them (California Constitution, Article XIII, Section 24). Court cases have confirmed that the power 1 See e.g., Fenton v. City of Delano (1984) 162 Cal. App. 3d 400, 405 (a tax is a public burden imposed without reference to particular benefits to individuals). 2 Source: California Legislature Senate Committee on Local Government, Revenues and Responsibilities: An Inventory of Local Tax Powers Second Edition, December 2010.
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is derived from the Constitution with authorization by the Legislature (City of Woodlake v. Logan (1991) 230 Cal.App.3d 1058, 1065 [282 Cal.Rptr. 27]; Armstrong v. County of San Mateo (1983) 146 Cal.App.3d 597, 624 [194 Cal.Rptr. 294]; County of Los Angeles v Sasaki [23 Cal.App.4th 1442 (1994)].
Under the constitutional “municipal affairs” doctrine, charter cities can levy taxes which have not been preempted by the state or federal governments (Article XI, Section 5). In contrast to a charter city, a general law city may only impose those taxes that it is authorized to impose under California statutes. However, Government Code Section 37100.5 grants statutory authority for general law cities to levy any tax which may be levied by any charter city unless a different general law limits or prohibits such a tax. This blanket authority means that a general law city’s authority to tax is similar, but not identical, to a charter city’s authority.
Government Code Section 37100.5 allows general law cities to impose most, but not all, of the taxes that charter cities may impose under the “municipal affairs” doctrine. For example, California Supreme Court decisions which have allowed charter cities to impose real property transfer taxes do not grant the same authority to general law cities, which are still subject to Constitutional and statutory restrictions on such a tax.
The California Constitutional and statutory limits are discussed below.
3.3 Proposition 13
Proposition 13, enacted by voters in 1978, added Article 13A to the California Constitution. In addition to its well-known limit on increases in property taxes, Article 13A prohibits any local government from imposing any “sales or transaction” tax on the sale of real property. This language covers local real estate transfer taxes, if they are special taxes. The Court of Appeal held that this prohibition does not apply to general taxes (Cohn v. City of Oakland, 1990, 223 Cal. App. 3d 261, 263).
Article 13A also requires a two-thirds popular vote to approve any permissible “special tax.” A special tax is one for a specific purpose, and not placed in the general fund for general governmental purposes, in contrast to a “general tax,” the proceeds of which are deposited into the city’s general fund (City and County of San Francisco v. Farrell, 1982, 32 Cal. 3d 47,57). Thus, if the City were to enact a tax earmarked and legally obligated to be placed in a special fund such as a Housing Trust Fund, it would constitute a special tax and require a two-thirds vote.
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3.4 Propositions 62, 218 and 26
Under current case law, Article 13A (Proposition 13) does not affect general taxes, other than ad valorem taxes on real property. With the passage of Proposition 62 in 1986 and Proposition 218 in 1996, however, a majority vote is necessary for local governments to adopt a general tax. In addition, under Propositions 62 and 218, a “special” tax requires a two-thirds approval of the electorate.
Article 13C of the California Constitution defines a general tax as “any tax imposed for general governmental purposes.” A special tax is “any tax imposed for specific purposes, including a tax imposed for specific purposes, which is placed into a general fund.” In other words, a new tax (or increase in existing tax) that dedicates revenues specifically to an affordable housing trust fund is considered a special tax under the California Constitution.
Article 13C discusses voter approval necessary for local taxes. Article 13C states that “(a) All taxes imposed by any local government shall be deemed to be either general taxes or special taxes… (b) No local government may impose, extend, or increase any general tax unless and until that tax is submitted to the electorate and approved by a majority vote… (d) No local government may impose, extend, or increase any special tax unless and until that tax is submitted to the electorate and approved by a two-thirds vote.”
Proposition 62 imposed several restrictions on the powers of cities, counties and special districts to enact general taxes, including the following:
n All new general taxes must be submitted to the voters and approved by a majority of the electorate.
n No tax may be submitted to the voters except by
ordinance or resolution passed by a two-thirds vote of
the local legislative body.
n No new transaction or sales tax may be imposed on the sale of real property.
n Any special tax must be approved by two-thirds of the electorate.
For bond measures, Article 13 of the California Constitution requires a two-thirds approval by voters. With the passage of Proposition 39 in 2000, bond measures Housing Trust Fund Revenue Sources February 3, 2020
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that benefit schools only require 55 percent approval by voters. All other bond measures, however, remain at the two-thirds voter approval standard.
During the years since the passage of Proposition 218, California courts have struggled to differentiate between taxes requiring voter approval and other kinds of government revenue measures that do not. In 2010, California voters passed Proposition 26, amending Article XIIIC to add the first constitutional definition of a "tax." Under Proposition 26, all levies, charges, and exactions “imposed” by state or local governments are taxes, unless they fit into one of the seven stated exceptions for local government:
1. “A charge imposed for a specific benefit conferred or privilege granted directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of conferring the benefit or granting the privilege.
2. A charge imposed for a specific government service or product provided directly to the payor that is not provided to those not charged, and which does not exceed the reasonable costs to the local government of providing the service or product.
3. A charge imposed for the reasonable regulatory costs to a local government for issuing licenses and permits, performing investigations, inspections, and audits, enforcing agricultural marketing orders, and the administrative enforcement and adjudication thereof.
4. A charge imposed for entrance to or use of local government property, or the purchase, rental, or lease of local government property.
5. A fine, penalty, or other monetary charge imposed by the judicial branch of government or a local government, as a result of a violation of law.
6. A charge imposed as a condition of property development.
7. Assessments and property-related fees imposed in accordance with the provisions of Article XIII D.
3.5 Special Taxes and General Taxes Compared
From the point of view of providing secure funding, each type of tax, special or general, has its advantages and disadvantages. The obvious disadvantage of a Housing Trust Fund Revenue Sources February 3, 2020
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special tax is the two-thirds popular vote requirement under Propositions 13, 62 and 218. At the same time, a special tax is earmarked for a specific fund and cannot be reallocated through the annual budget process.
Money raised through a general tax goes into the general fund of the city or county and does not provide a continuing source of secure funding for housing. The city or county may make policy commitments or other types of informal arrangements that attempt to ensure the expenditure of the money for a specific purpose.
However, no formal commitment can specifically limit the use of the funds. Any such commitment would make the tax a special tax and trigger the two-thirds popular vote requirement.
The City of East Palo Alto can make annual housing subsidy allocations from new general fund revenues, even if the revenues are provided by a new or increased general tax motivated by housing goals. Placement in the general fund appears to prevent a tax from being treated as special, even if it is enacted because there is a special need.
For example, one strategy used by the City Council of San Diego with DRA’s guidance is to develop multiyear plans that demonstrate the “intent” to dedicate funds to the City of San Diego Housing Trust Fund over a rolling three-year period.
The City of San Diego’s Housing Trust Fund, formed in 1992, has multiple sources of funds, including commercial linkage fees and Transient Occupancy Tax revenues:
n redevelopment agency funds;
n proceeds from the sale of City-owned property; and,
n repayments from loans made from Community
Development Block Grant funds.
The City Council reviews a 3-Year Program Plan and approves an annual investment strategy. The 3-Year Program Plan incorporates both estimates of “investments” (uses of Housing Trust Fund dollars) and a statement of revenue sources, including general tax sources such as the City’s Transient Occupancy Tax (TOT).
As a general tax, TOT revenues cannot be dedicated to the Housing Trust Fund.
However, with the City Council’s 3-Year Plans, the Council declares their intent to Housing Trust Fund Revenue Sources February 3, 2020
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provide a quantified amount of TOT revenues to the Housing Trust Fund over a three-year period. The actual amount of TOT revenue that goes to the Housing Trust Fund is voted upon annually by the City Council.
3.6 Limitations on Fees: The “Nexus” Requirement
Fees are charges placed on individual activities. If a proper factual foundation is laid, the imposition of fees is not limited by Propositions 13, 62, or 218, because the fees are not treated as taxes. However, a “nexus” must be established before a fee can be imposed.
Prior to Proposition 13, the nexus issue enjoyed little attention. Since both fees and taxes could be imposed by a majority vote of local legislative bodies, there was little urgency to establishing through nexus analysis that a particular charge was a fee, not a tax. Following Proposition 13, however, a tax requires an election. On the other hand, a fee does not, if it meets the nexus requirement.
To satisfy the nexus requirement, a jurisdiction charging a fee must make an affirmative showing that: (1) those who must pay the fee are contributing to the problem which the fee will address; and (2) the amount of the fee is justified by the magnitude of the fee-payer’s contribution to the problem.
Fees on development in California are subject to two overlapping sets of legal requirements: constitutional requirements of nexus and “rough proportionality” under the U. S. Supreme Court cases of Nollan v. California Coastal Commission (1987) 483 U. S. 825 and Dolan v. City of Tigard (1994) 512 U.S. 374; and, California’s statutory “reasonable relationship” requirements under California Government Code sections 66000-66010. Although legally distinct, these two standards are substantively similar and in practice a development fee that satisfies one will almost certainly satisfy both. The California Supreme Court in Ehrlich v.
City of Culver City (1996) 12 Cal. 4th 854, 867 concluded that the two standards “for all practical purposes, have merged.”
The Supreme Court’s decision in Nollan v. California Coastal Commission imposed a requirement that a “rational nexus” be demonstrated between the impact associated with an action and the remedy being required or, in the case of a fee, the use of the funds exacted from the developer.
To implement the Nollan decision in California, the State Legislature passed A.B. 1600, which requires local jurisdictions to establish a reasonable relationship Housing Trust Fund Revenue Sources February 3, 2020
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between a development project or class of development project, and the public improvement for which the developer fee is charged, and to segregate and account for the money separately from general fund monies. A city council or county board of supervisors can enact a fee if a rational nexus is established.
In Sterling Park, L.P. v. City of Palo Alto (“Sterling”), the California Supreme Court ruled in October 2013 that local affordable housing requirements may be challenged under the provisions of California’s Mitigation Fee Act (government code section 66000 etc.). The facts surrounding the Court’s ruling in Sterling centered on the City’s failure to file timely notice to the developer that an affordable housing in-lieu fee was required. The court ruled that the Mitigation Fee Act’s protest provisions would apply if the City’s affordable housing requirement would “divest the developer of money or possessory interest in property.” The court further ruled that these provisions would not apply if the City’s ordinance only restricted how the developer may use the property. In response to the Sterling decision, California jurisdictions are well advised to provide early written notice at the time of approval for any development project regarding fee payments as a standard condition of approval.
In Koontz v. St. Johns River Water Management District (“Koontz”), the U.S.
Supreme Court held that the requirements of Nollan and Dolan for essential nexus and rough proportionality apply even when a jurisdiction denies a permit for development. Further, the Court held in this case that the government’s demand for property from a land use permit applicant must satisfy Nollan and Dolan requirements, even when the government’s demand is for money only (i.e., an inlieu fee).
There is some suggestion in Koontz that the Court may look more closely at impact fee calculations going forward.
In response to Koontz, it will be important for jurisdictions considering affordable housing impact or nexus fees to:
• Calculate those fees within a quantified nexus methodology of reasonable relationship;
• Measure proposed fees against development feasibility; • Provide for waivers and/or individual negotiation of fees, in some cases; • Clearly demarcate any imposition of such fee from a policy of rent control; and Housing Trust Fund Revenue Sources February 3, 2020
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• Conduct a nexus study to support establishment of the fee.
3.7 Proposition 4 and Proposition 111 (Gann Limit)
In 1979, California voters approved Proposition 4, which created Article XIIIB of the State Constitution, a state law that requires the State and local governments to adopt an annual appropriation limit. This limit, also referred to as the “Gann Limit,” establishes a limit on the proceeds of taxes that may be appropriated for spending in a given fiscal year. The limit allows the City’s spending of tax proceeds to increase only by population growth and cost-of-living factors from the base year of 1978-1979. In 1990, Proposition 111 was passed which changed the way the limit is calculated. Under Article XIIIB City may increase its limit annually in two ways:
• By a percentage equal to the increase from the preceding year in county or city population (whichever is greater).
• By an amount equal to the change in per capita personal income in California or the change in the assessment roll the preceding year due to the addition of local non-residential new construction (whichever is greater).
The appropriations limit applies only to those revenues defined as “proceeds of taxes.” Certain expenditures of tax proceeds do not count as appropriations subject to the limit, including those for voter-approved debt, qualified capital outlay, and the costs of complying with court orders and federal mandates. Further, if the State provides funds to a local government for general purposes, the funds are to be counted as “state subventions” and included in the appropriations subject to limit of the local agency. However, if the State Legislature restricts the funds to specific purposes, then the funds are counted in the State—rather than local— appropriations subject to limit. During any fiscal year, a government entity may not appropriate any proceeds of taxes received in excess of the appropriations limit of the entity. If a local government receives excess funds in any one year, it may carry those excess funds into the subsequent year for use. Any excess funds remaining after the second year must be returned to taxpayers by reducing tax rates or fees. As an alternative, a majority of voters may approve an “override” to increase the appropriations limit. The law allows such an override to last for a maximum of four years.
For most local governments, the funds constrained by Article XIIIB include the general fund, the capital outlay fund and special revenue funds. The source of Housing Trust Fund Revenue Sources February 3, 2020
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revenues will determine whether a fund requires a separate appropriations limit.
Examples of proceeds of taxes governed by the Gann appropriation limit are:
property taxes, sales taxes, utility taxes, state subventions, fines, forfeitures, interest revenue on regulatory licenses, user charges and user fees to the extent that those proceeds exceed the costs reasonably borne by the entity in providing the regulation, product or service. Nexus fees which are established at the estimated cost to mitigate or defray the impact of development are an example of fees that would not be subject to the appropriation limit.
4.0 Taxing Mechanisms and Fees
4.1 Real Estate Transfer Taxes
Real estate transfer taxes are local taxes assessed on real property when ownership of the property is transferred between parties. Authorized by the Documentary Transfer Tax Act, California Revenue and Taxation Code Sections 11901-11934, counties are allowed to impose a tax of $1.10 per thousand dollars of property value. A city within a county is allowed to charge a rate of one-half of the amount specified above, to be credited against any tax charged by the county (so the combined amount does not exceed $1.10 per $1,000).
Article 13A, Section 4, of the California Constitution states that “cities, counties, and special districts…may impose special taxes on such district, except for ad valorem taxes on real property or a transaction tax or sales tax on the sale of real property within such City, County, or special district.” In order for any city or county to raise real estate taxes over the $1.10 per thousand dollars authorized under the Documentary Transfer Tax Act, an amendment to the California Constitution is required to overturn Article 13A, Section 4.
The one potential exception to Article 13A, Section 4, is the ability of charter cities to impose real estate transfer taxes. Article 11 of the California Constitution authorizes cities to adopt a city charter and provides that such a charter has the force and effect of state law. In addition, under Article 11 there is a “home rule” provision that grants to charter cities the authority over “municipal affairs”, which the courts have interpreted to include the power to tax. Because Article 13A does not clearly define “cities”, it is not clear if the Article 13A prohibition on the establishment of local real estate transfer taxes applies to charter cities. However, Article 13C clearly applies to charter cities, so at a minimum a charter city contemplating a local real estate transfer tax must secure two-thirds approval from Housing Trust Fund Revenue Sources February 3, 2020
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the electorate. Many charter cities in California currently charge higher real estate transfer taxes than the amount authorized by the Documentary Transfer Tax Act.
The City of East Palo Alto currently charges a documentary transfer tax at the permitted rate for a general law city of $0.55 per $1,000.
4.2 Assessment Districts
Assessment districts can often be used to relieve general fund burdens and potentially make general fund moneys available for housing. Unlike a tax, which is applied to all property in an area to pay for general expenditures and improvements whether or not the property is directly benefited, a special assessment can be charged only on property specially benefited and assessed in proportion to the benefit received. Special assessments are not subject to the Proposition 13 or Proposition 62 election requirements.
We know of no case in which an assessment district has been formed and special assessments collected to assist affordable housing, although assessments are used to construct infrastructure, which lowers the total cost of constructing housing.
Assessment districts have also been used to relieve cities’ general funds of existing obligations, freeing up general fund revenues for other uses.
Over a dozen State statutes enable cities and counties to set up special assessment districts. The procedures for creating districts vary. Setting up a special assessment district generally involves adoption by the city council of a resolution of intention, notice to the property owners involved, and preparation of a report spreading the cost of improvements among the affected properties. If the owners of a more than half of the area of property to be assessed file protests, a four-fifths vote of the city council is most commonly required to override the protest.
Some districts have less strict approval requirements. A Landscape and Lighting Maintenance District can be created by the governing body. A Parking and Business Improvement Area Act district can be stopped by a protest of the majority of affected landowners, but can otherwise be created by the governing body. A Benefit Assessment Act district for street maintenance can be created by the governing body unless 25 percent of the affected voters protest, in which case an election is required.
Proposition 218 provides a weight for each property owner’s vote, based on the amount of the assessment paid by the property owner. Article 13D of the Housing Trust Fund Revenue Sources February 3, 2020
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California Constitution states that an “agency shall not impose an assessment if there is a majority protest. A majority protest exists if, upon the conclusion of the hearing, ballots submitted in opposition to the assessment exceed the ballots submitted in favor of the assessment. In tabulating the ballots, the ballots shall be weighted according to the proportional financial obligation of the affected property.”
Article 13D also states that “electors residing within the district who do not own property within the district shall not be deemed under this Constitution to have been deprived of the right to vote for any assessment. If a court determines that the Constitution of the United States or other federal law requires otherwise, the assessment shall not be imposed unless approved by a two-thirds vote of the electorate in the district.” In other words, if a vote to approve a benefit assessment district that is limited to property owners is declared unconstitutional or otherwise illegal, then a two-thirds voter approval standard is automatically adopted for benefit assessment districts.
Article 13D states that “in any legal action contesting the validity of any assessment, the burden shall be on the agency to demonstrate that the property or properties in question receive a special benefit over and above the benefits conferred on the public at large and that the amount of any contested assessment is proportional to, and no greater than, the benefits conferred on the property or properties in question.” This standard may be difficult to meet for a benefit assessment district for affordable housing.
4.3 Infrastructure Financing Districts
Senate Bill No. 308 enacted in 1990 authorizes cities and counties to create infrastructure financing districts (IFDs). The funds collected through such districts can be used to finance public capital facilities, including housing.
The intent of the Legislature in allowing infrastructure districts to be created was to provide a mechanism for public capital facilities to be financed in areas that are substantially undeveloped. A district cannot finance facilities or services that existed when the district was created and it cannot finance facilities or services that supplant those that already existed. Infrastructure financing districts can’t pay for maintenance, repairs, operating costs, and services.
A district may only finance public capital facilities of community-wide significance that provide benefit to or are larger than the district. Examples of such facilities are Housing Trust Fund Revenue Sources February 3, 2020
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highway, water treatment plants, childcare facilities, libraries, parks open space and housing. At least 20% of any housing units built must be affordable to low or moderate income households.
Forming an infrastructure financing district is cumbersome. The city or county must develop an infrastructure plan, send copies to every landowner, consult with other local governments, and hold a public hearing. Every local agency that will contribute its property tax increment revenue to the infrastructure financing district must approve the plan. Schools cannot contribute their property tax increment revenues to the IFD. Once the other local officials approve, the city or county must still get the voters’ approval to:
n Form the IFD (requires 2/3 voter approval).
n Issue bonds (requires 2/3 voter approval).
n Set the IFD’s appropriations limit (majority voter
approval).
4.4 Enhanced Infrastructure Financing Districts
SB 628, which became effective on January 1, 2015, authorizes cities and counties to create Enhanced Infrastructure Financing Districts (EIFDs). The EIFD legislation equips local jurisdictions with new tools for financing affordable housing, chiefly through the use of tax increment financing (TIF).
EIFDs may only use incremental property tax revenues from tax entities that consent to participating in the EIFD, and the law specifically excludes the diversion of tax increment belonging to educational districts. Moreover, taxing entities that elect to participate also specify their level of participation. Accordingly, the amount of tax increment generated in EIFDs will be less the increment generated by TIFs that were created under redevelopment.
SB 628 contains provisions that provide extensive flexibility in the crafting of housing programs. For example:
• A single District may include areas that are not contiguous. • An EIFD may cross municipal boundaries.
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• EIFD funded projects need not be located in the District provided that “any facilities financed outside of a district must have a tangible connection to the work of the district.”
• An EIFD can be established without a finding that the area comprising the District is blighted.
EIFDs can support a wide assortment of project types, and the City can employ a variety of financing strategies using EIFD tax increment revenues. In comparison to the financing practices used by redevelopment agencies under the redevelopment program, the City will almost certainly want to emphasize new financing techniques, relying less on the issuance of tax increment bonds, which requires approval of 55 percent of the registered voters in the District. TIF strategies that the City should consider include site-specific and pay-as-you go TIF structures.
County participation is an important factor when considering the feasibility of an EIFD. By securing a contribution of County property tax increment, the City leverages its own investment of increment. Another important consideration when forming an EIFD is to identify specific policy issues that the EIFD will address. A theme-based EIFD will be more likely to attract County participation if it resonates with County policy concerns.
4.5 Pay-For-Performance and Social Impact Bonds
Under a typical pay-for-performance model, a government agency contracts with an independent service provider to provide social services, and agrees to provide incentive payments to the provider if it achieves agreed-upon performance targets.
The government agency funds the incentive payments from cost savings realized by the government when outcomes exceed benchmarks based on historic norms. (An independent third party will typically verify outcomes.) The contractual agreement between the government agency and the social service provider is sometimes referred to as a pay-for-performance contract.
The service provider can obtain a loan from an investor to pay for capital expenditures and operations associated with services it provides under the pay-forperformance contract and pledge a share of the of the incentive payments it receives from the government agency towards repayment of the loan. These loans are referred to as Social Impact Bonds (SIBs).
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The Los Angeles County Department of Health Services (DHS) has developed an innovative and well performing health and social service delivery program called Flexible Housing Subsidy Pool (FHSP). The FHSP model represents an innovation that appears to produce a more efficient outcome than would result from the use of social impact bonds (SIB) and other pay-for-performance financing strategies.
Through the FHSP, DHS contracts with owners of rental properties to provide longterm rent subsidies to house DHS patients who are chronically homeless. Providing stable, service-enriched, housing for homeless individuals dramatically reduces County health care expenditures, the savings from which are redirected into the long-term rent subsidies.
4.6 Business Fees and Taxes
California cities are afforded wide latitude in the assessment of various kinds of business fees and taxes, subject to the potential election and other requirements of Proposition 62. Business taxes can be imposed or increased under Proposition 13, because they are not taxes on real property. However, if legislatively earmarked for housing when imposed by a city or county, they would be special taxes requiring a two-thirds vote of the electorate under Proposition’s 13’s terms.
Existing business taxes generally take one or more of the following forms:
n Flat business license fee;
n Employee head tax;
n Gross receipts tax;
n Payroll tax.
Table 1 summarizes the business license tax applied to all businesses in East Palo Alto except owners of five or more rental units. In 2016 East Palo Alto voters passed Measure O, with 77.5% approval, authorizing a tax equal to 1.5% of gross rental receipts on the owners of five or more rental units. The tax is a general tax, but the potential use of funds for housing-related purposes was emphasized. The Measure O business license tax may not be passed on to tenants. It does not apply to any units during the first 10 years after a certificate of occupancy is issued.
Anyone leasing less than five units, nonprofit operators of affordable housing, Section 8 units, or below market rate units with deed restrictions are exempt.
Hardship exemptions may be granted.
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Table 1
Business License Tax Rates
City of East Palo Alto
Annual Gross Receipts Range Tax
-- $1,000 $50
$1,001 $100,000 $125
$100,001 $250,000 $250
$250,001 $500,000 $500
$500,001 $10,000,000 $1 for each $1,000 of gross
receipts
$10,000,001 And up $10,000 + $0.50 for each
$1,000 of gross receipts above
$10,000,001
Source: City of East Palo Alto.
4.7 Transient Occupancy Tax
California Revenue and Taxation Code section 7880 authorizes the legislative body of any city, county or city and county to levy a tax on the privilege of occupying a room or other living space in a hotel or other lodging unless the occupancy is for a period of more than 30 days. Such transient occupancy taxes are often referred to as “hotel” taxes.
Transient occupancy tax revenues could be allocated to housing assistance. This may be justified, for instance, by the large number of low-paid hotel workers who need affordable housing.
An alternative to increasing the tax for housing assistance would be securing dedication for housing assistance from existing TOT revenues, or any increased revenues occurring at current tax rates, as a result of a growing hotel economy. It appears to be legally possible to rededicate all or portions of TOT revenues derived from assessments that existed prior to the passage of Proposition 13 (1978).
However, East Palo Alto does not appear to have any hotels that fall into this category.
Any new or increased TOT as a general tax requires a majority vote. To dedicate TOT for special purposes, such as affordable housing, requires two-thirds voter approval.
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Most cities set the rate of their TOT as a percentage of the hotel room rate.
Generally, TOT rates range from 8% to 14%1. Some cities set it as a cap, for example 12% or at any lesser rate that the city council shall determine by resolution. The City of East Palo Alto currently charges a TOT of 12%, which is the maximum approved by the City Council. Additional increases in the TOT in East Palo Alto must be voter-approved. Of the TOT collected, the General Fund keeps 80%, 10% goes to the TOT-Affordable Housing Fund (for affordable housing development), and 10% goes to Children Youth Family Fund (for local grants).
Short-term rentals have become a topic of interest in many communities, and an increasing number of cities, counties and states have passed laws to regulate these types of rentals. For example, the City of Pacific Grove requires owners of shortterm rentals (STRs) to obtain a STR or Home Sharing License. These ordinances apply to all properties (including rooms and guest houses whether or not detached) rented for less than 30 days. In 2017, the City Council approved an ordinance allowing a maximum of 250 STR licenses in the City at a time, and implementing a lottery to determine who receives those licenses. Vacation rental hosts are required to collect the city’s transient occupancy tax (TOT) from guests and file monthly TOT returns with the city. While Airbnb collects this tax from guests on behalf of its hosts, other short-term rental platforms (such as HomeAway and VRBO) do not. Short-term rental operators using those platforms are responsible for collecting it themselves. The TOT rate in Pacific Grove is 12%. The City estimates that STRs generate more than $1 million a year in TOT revenue.
As other examples, Redwood City passed a similar STR law in 2018, and estimates that the 12% TOT tax could generate $400,000 a year for the City.
DRA was unable to estimate the number of STR listings on AirBNB, or other STR sites, in East Palo Alto. However, an article published in the Silicon Valley Business Journal2 showing the top ten AirBNB listings that appeared most often on site uses’ “wish lists” including two properties in East Palo Alto, then listing for $209 per night and $96 per night, respectively.
1 Source: League of California Cities.
2 “These are Silicon Valley’s top 10 most wished for Airbnb listings,” by Olivia Schaber, July 18, 2017.
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4.8 General Occupancy, Parcel and Municipal Service Taxes Article 11 of the California Constitution permits cities to enact an “excise” tax, often called a “parcel” tax, on the privilege of occupying residential property in general, similar to but broader than a transient occupancy tax. In general, such taxes have been submitted to the voters as special taxes for an identified purpose, subject to a two-thirds approval requirement. A parcel or occupancy tax is not a special tax subject to Proposition 13 if its proceeds are not earmarked for a particular purpose.
Most parcel taxes assess a flat fee on each parcel of property, regardless of its size or value. Parcel taxes are regressive, since they represent a larger burden on less expensive properties. A parcel tax rate may differ based on the type of property, for instance improved and unimproved properties may have different rates and residential and commercial properties may have different rates.
Most parcel taxes in California are used to support local school districts. Relatively few school districts have attempted to pass a parcel tax. More than half of the parcel tax elections held since 1983 have passed, but the districts that passed them represent less than 10% of student population in California.1 In November, 2018, voters in the City of East Palo Alto approved Measure HH, with 79.6% approval, authorizing a parcel tax on large corporations holding real estate in the city. The measure imposes a tax of $2.50 per square foot on commercial office property over 25,000 square feet. Property that is 25,000 square feet or less and property that is not used for commercial office purposes (for example, where the primary business is retail trade, not including retail trade from non-store retailers), agriculture, accommodation and food serves are not subject to the parcel tax. The revenue generated from the tax can be used for affordable and supportive housing programs, with an emphasis on the creation of net new housing; as well as programs that facilitate access to job opportunities for East Palo Alto residents in the science, technology, engineering, and mathematics sectors, the building trades, and strengthen the City’s First Source Hiring Program.
A minimum of 35% of the revenue must be used exclusively for the construction of new, affordable housing stock. A maximum of 15% of the proceeds from the parcel tax can be used for reasonably incurred costs to the City for staff and overhead to 1 Source: ed100.org.
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administer the ordinance and provide annual reports on the amount of funds collected and expended, and the status of any project.
4.9 Utility User Tax
A Utility User Tax (UUT) may be imposed by a city on the consumption of utility services, including but not limited to electricity, gas, water, sewer, telephone (including dell phone and long distance), sanitation and cable television1. As long as the tax is enacted as a general tax, the two-thirds vote requirement of Proposition 13 does not apply. Such taxes are typically a flat percentage of total utility charges collected by the utility. Proposition 218 requires voter approval of any change in the “methodology” by which a tax is administered if the change increases the amount of the tax paid by the taxpayer.
Charged at a flat rate, a utility user tax is inherently regressive. Lower income households pay a tax that represents a higher percentage of their more modest incomes. A number of cities provide exemptions or credits from their utility user tax for low income households.
Approximately 157 cities and 4 counties in California impose Utility Users Tax, primarily for telephone, electricity and gas.2 All of these UUTs are general taxes except two. Voters in the City of Desert Hot Springs approved a UUT in June 2003 which dedicated 50% of the proceeds to resolving the City’s bankruptcy-related debt, while voters in the City of Mammoth Lakes approved the extension of the City’s sun-setting UUT and earmarked it for mobility, recreation, arts and culture.3 The City of East Palo Alto currently changes a UUT of 5% on water, cable television, gas and electricity.
4.10 Utility Franchise Fee
No person, unless exempted, may construct, install, or operate facilities in the public rights-of-way, or provide service using any facilities installed in the public rights-of-way, without a franchise that authorizes each and every service provided.
In consideration of the cost incurred to construct, install, operate or provide services using facilities in the public rights-of-way, franchisees pay the City a fee 1 General Law cities: Cal. Government Code Section 37100.5 2 Source: California City Finance.com, updated January 2017. 3 Source: ibid.
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expressed as a percentage of gross revenues. A franchise agreement (a contractual obligation) specifies the fee to the paid and the gross revenue to be included in the fee calculation. Electric, gas, and cable television are among the common franchises charged a franchise fee. Telephone utilities are specifically exempted from franchise fees by State law.
The Public Utilities Code regulates the franchise fees that general-law cities charge, but charter cities are not bound by those restrictions. The Public Utilities Commission ("PUC") regulates the way that privately owned utilities recover the cost of the franchise fees that exceed regional averages, but plays no role in establishing the validity of those fees.
California courts have always viewed franchise fees as negotiated compensation for the valuable use of public property, not as taxes. In Jacks v. City of Santa Barbara (Case No. S225589) (2017), the California Supreme Court confronted this issue of taxes versus fees in the context of franchise fees. The Supreme Court reversed a ruling by the Second District Court of Appeal that had found that a portion of the City of Santa Barbara’s electrical franchise fee was a tax because its purpose was to generate general revenue for the City. The Supreme Court held that “a fee paid for an interest in government property is compensation for the use or purchase of a government asset rather than compensation for a cost.
Consequently, the revenue generated by the fee is available for whatever purposes the government chooses rather than tied to a public cost." Moreover, the court acknowledged that the negotiated agreement between Santa Barbara and Southern California Edison could constitute evidence of the franchise’s value, so long as that agreement was reached through bona fide negotiations. It also indicated that unspecified “other indicia of value” could be used. However, it did not explain who would bear the burden of proving the value of a franchise. As a result, cities with existing franchise fees, and especially those with franchise surcharges, should evaluate what evidence they have available for their existing fees and prepare their records of decisions for new fees with this consideration in mind.
The City of East Palo Alto charges a franchise fee of 5% on water, cable television, gas, electricity and billboards.
4.11 Housing Conversion and Preservation Taxes and Fees Cities may charge development a tax not earmarked for any purpose or service, as opposed to a fee, which is justified by and earmarked for a specific need.
Examples include condominium conversion taxes.
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For taxes, the courts have allowed wider latitude to local government, not requiring a showing of nexus. Revenue-raising “taxes” need not be proportionate to any particular benefit or burden created by a particular activity. By taxing the “business” of development, cities may substitute taxes for fees, and avoid the need to show a reasonable relationship between the development and the need to be filled by the fees. They may then spend the proceeds for any general fund purpose, so long as they do not earmark the tax. There is not a nexus requirement for taxes that go into the general fund, even if the taxes apply to specific types of development. If earmarked for housing, such a tax would require a two-thirds voter approval.
A number of cities concerned about the loss of affordable housing stock have adopted housing preservation fee ordinances. Generally, these existing ordinances focus on residential hotels. Such ordinances generally require applicants who seek to demolish or convert residential housing that complies with a stated definition to either replace the units or pay a fee to help replace the lost housing. Fee levels may be set to encourage either paying the fee or developing a comparable unit.
Where a fee is charged, there must be a nexus between the requirement placed on development and the problem to be addressed. In the case of a residential hotel replacement requirement, the nexus appears clear: because affordable housing is lost, some contribution to replacing it is directly related.
There is a more serious legal obstacle than the nexus requirement to imposing fees on conversion of residential hotels or other affordable housing. The Ellis Act is a provision in California Law (Government Code section 7060-7060.7) that provides landlords with a legal way to go out of the rental housing business. The Ellis Act was adopted by the California legislature in 1985 after the California Supreme Court decision in the case of Nash v. City of Santa Monica (1984) 37 Cal.3d 97.
Therefore, a city may not impose a prohibitive price on choosing to develop the property for another use, particularly through demolition. In light of this legal issue, it might be helpful before instituting a fee on demolition or conversion of residential hotels or other affordable housing, to perform a study not only substantiating the nexus but also establishing that the fee is not “prohibitive” of conversions. The possibility of imposing a business tax on revenue-generating activities following demolition might avoid the legal hurdles facing a preservation fee.
The City of East Palo Alto currently has a condo conversion ordinance and charges a condominium conversion fee of $28,362 per unit (effective 10/1/2016).
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4.12 Sales and Use Tax
An increase in sales taxes to support a housing trust fund requires a two-thirds approval from the electorate. In some instances, it may be possible to include affordable housing as a component of a local proposition for raising or extending sales taxes.
Sales taxes fall under the restrictions imposed by Article 13. A local sales tax dedicated to a special purpose is considered a special tax and must be approved by two-thirds of the voters for adoption.
The California Department of Tax and Fee Administration (formerly part of the State Board of Equalization) administers the statewide general tax on the retail sale or use of merchandise or goods within the State. Tax Administration also collects the Bradley-Burns tax on behalf of cities and counties and distributes the revenue to those local governments. The Bradley-Burns tax imposes a statewide rate of
1.25%, or which 1% is allocated to counties or incorporated cities and the remainder is distributed to county local transportation funds (LTFs) to support transportation program.
In 2016, voters in the City of East Palo Alto passed, with 84.6% approval, Measure P, which authorized an additional 0.5% sales tax to provide funds for general city services. Measure P was placed on the ballot to address identified community priorities including:
• Maintaining East Palo Alto’s financial stability;
• Maintaining rapid police response times;
• Ensuring a reliable supply of drinking water;
• Upgrading storm drains to prevent flooding; and
• Maintaining street maintenance and pothole repair services.
Currently, the City of East Palo Alto collects a Bradley-Burns tax rate of 1.0% (which nets 0.95% to the City after a 0.05% administration fee) and the Measure P local sales tax of 0.50%. The combined total of state, county and city sales tax rates in East Palo Alto is 9.75%.
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4.13 General Obligation Bonds
General obligation (GO) bonds are commonly used to finance capital improvements that benefit the community, such as roads, bridges, water, sewer, schools and affordable housing. GO bonds are secured by the full faith and credit and taxing power of the issuing municipality. For California local governments, a GO pledge means that all unrestricted resources of the issuer may be used to meet debt service, including an unlimited property tax on all taxable property within the district. Local government GO bonds must be approved at an election by twothirds of voters (except for bonds issued by a school district or community college district, which require a 55% majority). Because GO bonds are very secure, they offer the lowest available interest rates.
4.14 Automobility (Rideshare) Taxes
Municipal officials in cities across the country are grappling with how to respond to the unexpected arrival and rapid growth of new mobility services. These include ride services such as Uber and Lyft (also called Transportation Network Companies, or TNCs), “microtransit” companies such as Via and Chariot and more recently dockless bikeshare and electric scooter offerings. Issues include managing general traffic congestion, as well as curbside use for pick-ups and dropoffs. Since the curbside is a scarce resource, many communities are exploring the imposition of user fees and congestion pricing to manage demand for curbside use as well as provide resources for ensuring road user safety.
For example, the District of Columbia raised taxes on ride-hailing services from 1 to 6 percent in July, 2018. Other cities and states that have enacted similar fees include New York state, Chicago, Seattle and Massachusetts.
Opponents of the taxes argue that they are regressive and disadvantage low income residents. A 2017 report from researchers at the University of California at Davis studied seven metropolitan areas and found that ride-hailing services were disproportionately used by wealthier passengers and are drawing passengers away from local bus and light-rail systems that serve a broader clientele. Proponents of the taxes argue that if rideshare companies are draining revenues from public transit and exacerbating traffic problems, they should play a part in the solution.
Some argue for maintaining lower taxes on pooled rides, which could keep ride share options affordable for low income residents.
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5.0 Foundation and Corporate Support
Foundations and private businesses can be sources of funding for a housing trust fund, although these sources of funds are not ongoing. Because these sources are not ongoing, private support in the form of grants should be considered supplemental, and not primary, sources of funds for a housing trust fund. A more appropriate strategy is to use corporate and foundation funds as “seed” funding for the establishment of the housing trust fund.
Private foundations have a long history of supporting affordable housing development. Foundations such as the Marin Community Foundation, the Koret Foundation, the Ford Foundation, the Irvine Foundation, the Fannie Mae Foundation, the Rockefeller Brothers Fund, the Mott Foundation, San Francisco Foundation, and the MacArthur Foundation, have been active in supporting affordable housing.
For the most part, foundations support affordable housing development through direct funding of developments or, more typically, funding of financial intermediaries such as the Low Income Housing Fund (LIHF), The Enterprise Foundation, or the Local Initiatives Support Corporation (LISC). Intermediaries such as LIHF or LISC then provide direct funding of affordable housing development through grants or loans to nonprofit affordable housing developers.
When foundations directly fund affordable housing developments, the funding is often in the form of a program-related investment (PRI). A PRI is a loan, not a grant, and therefore must be repaid. PRI’s typically carry below market rate interest loans but do not represent a funding source for a housing trust fund because the loans must be repaid.
Alternatively, foundations provide “capacity building” grants to nonprofit organizations to improve the nonprofits’ ability to develop and support affordable housing. Typically, these grants are small and are not used for directly financing affordable housing developments.
In rare instances, foundations have contributed funds to support housing trust funds under the control of a governmental agency. For example, the Hennepin County (Minnesota, including Minneapolis) Housing and Redevelopment Authority administers the Affordable Housing Incentive Fund, which has dedicated $8.4 million in local government money and $3 million from the McKnight Foundation to help finance affordable housing development in the County. Contributions from Housing Trust Fund Revenue Sources February 3, 2020
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private foundations to housing trust funds administered by a government agency are rare and should not be considered a viable resource. DRA is not aware of an instance where a foundation has funded a government agency-controlled housing trust fund in California.
Private corporations do not typically contribute funds to housing trust funds. DRA is not aware of any circumstance where a corporation contributes to a housing trust fund administered by a government agency. In some instances, corporations have helped create housing trust funds administered by non-governmental entities.
Because of Community Reinvestment Act requirements, private financial institutions often provide loans to affordable housing developments. In addition, private corporations often make equity investments for the benefit of low income housing tax credits. These loans and investments are at market rates, however.
Similar to private foundations, private corporations often support affordable housing development through financial intermediaries. Private corporations, especially financial institutions, support intermediaries such as LISC, LIHF, and the Enterprise Foundation. In some instances, the funds provided by private corporations to these financial intermediaries is below market rate funding.
Below we describe existing foundation and corporate support for affordable housing and related activities in the San Francisco Bay area.
5.1 HOUSING TRUST SILICON VALLEY
Led by the County of Santa Clara and the Silicon Valley Leadership Group, Housing Trust Silicon Valley was created in 2000 to combine public and private resources to support housing solutions addressing needs including homeownership, rental housing, and homelessness prevention. Housing Trust’s foundation was built upon an initial $2 million grant from the County that was matched three-fold with $1 million each from Intel, Adobe, Cisco Systems, Applied Materials, Solectron and KB Homes. The Trust exceeded its $20 million fundraising goal within two years, and has since invested over $257 million in affordable housing, becoming one of the largest housing trusts in the nation and the first nonprofit Community Development Financial Institution (CDFI) to receive a Standard & Poor’s rating, AA-.
5.2 SILICON VALLEY COMMUNITY FOUNDATION
Silicon Valley Community Foundation (SVCF) was formed in 2007 to provide leadership, expertise and capital to help address the social, economic and Housing Trust Fund Revenue Sources February 3, 2020
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environmental challenges facing communities in the region. There are four primary ways in which SVCF seeks to contribute:
• Commission research: To commission research to identify emerging issues, monitor trends and provide analysis.
• Conduct public discussions: To bring people together to engage in discussion and problem solving. These events often stimulate new insights while encouraging diverse perspectives.
• Advocate: To take principled positions on critical issues and advocate policy outcomes.
• Create initiatives: To launch initiatives and special projects, partnering with other foundations, corporations, nonprofits, donors and government agencies to work on specific topics or issues.
Since its inception, SVCF has awarded more than $6 billion in grants locally, nationally and globally, of which more than $3 billion has gone to support charities in the nine-county Bay Area in California.
The Silicon Valley Regional Fund was established in October 2015 to raise funds to expand housing and transportation strategies that link nonprofit organizations in San Francisco, San Mateo and Santa Clara counties. SVCF is currently working with regional organizations, including those in San Francisco, on issues relating to land use and housing transportation and public transit, and civic engagement of residents to participate in decision-making around these issues.
5.3 CHAN ZUCKERBERG INITIATIVE
The Chan Zuckerberg Initiative (CZI) was founded by Priscilla Chan and Mark Zuckerberg in 2015 with a mission to build a more inclusive, just and healthy future for everyone. Across three core Initiative focus areas--Science, Education and Justice & Opportunity—CZI pairs engineering with grantmaking, impact investing, policy work and advocacy to help accelerate the pace of social progress.
Since inception, CZI has awarded approximately $1.6 billion in grants and has made approximately $110 million in venture investments.
As one example of CZI’s work, Priscilla Chan founded The Primary School in East Palo Alto in August, 2018. CZI also works with local providers such as Life Moves, StarVista and Samaritan Housing in San Mateo County to increase their capacity to provide responsive and community-informed services to homeless and unstably housed community members.
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5.4 FACEBOOK
In October 2019 Facebook pledged to give $1 billion in a package of grants, loans and land with a goal of building 20,000 housing units for lower and middle income households in California. The package includes:
• a $250 million partnership with the state for mixed-income housing on excess state-owned land,
• $150 million for subsidized and supportive housing for homeless people in the San Francisco Bay Area,
• $225 million worth of land near its headquarters in Menlo Park for the construction of 1,500 units of mixed-income housing,
• $25 million for teacher housing in San Mateo and Santa Clara Counties, and
• $350 million for additional commitments based on the rollout and effectiveness of the other initiatives and to support affordable housing in other communities where Facebook has offices.
5.5 GOOGLE FOUNDATION
The Google Foundation (Google.org), the charitable arm of Alphabet, Inc. and its subsidiary, Google, was established in 2005. Googles efforts are focused in three main areas: Education, Economic Opportunity and Inclusion.
In June, 2019 Google announced it would commit $1 billion to boost housing construction in the San Francisco Bay Area. This includes repurposing $750 million of company-owned land from commercial to residential use on which an estimated 15,000 units will be built across all income levels. Google also committed to creating a $250 million fund for loans and other types of financing to preserve affordable housing and build new homes, including at least 5,000 new below-market-rate units.
5.6 SALESFORCE FOUNDATION
The Salesforce Foundation (Salesforce.org) is a tax-exempt 501(c)(3) nonprofit organization whose mission is to put technology in the hands of nonprofits and educational institutions. It provides technology, grants, and volunteering programs in three main areas:
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• Nonprofit Cloud: to help nonprofits track donor and donation data, engage with constituents, deliver programs and measure impact. • Education Cloud: to help deliver outstanding service, build lifelong alumni and donor relationships, and deliver a personalized experience for each student.
• Philanthropy Cloud: to connect companies and their employees with causes they are passionate about and measure and report impact.
5.7 EMPLOYER-ASSISTED HOUSING
Another form of housing assistance provided by corporations is employer-assisted housing.
Some major employers have participated in employer-assisted housing programs to further affordable housing opportunities in their communities. Employers may provide assistance in the form of downpayment assistance, credit enhancement, or leveraged banking/institutional relationships to assist employees with the purchase of homes. For the most part, employers that participate in these programs are municipalities and universities, although a few corporations, such as Computer Associates, Tyson Foods, Honeywell, Harley-Davidson, Kaiser Permanente, and the GMAC companies, have also participated in these programs (according to research by the Fannie Mae Foundation).
In California, there are examples of partnerships between local government agencies and corporations to further homeownership opportunities. In Santa Barbara, the Coastal Housing Partnership (CHP) collaborates with financial institutions and local employers to provide special mortgage financing. Created in 1987, CHP is a nonprofit organization that has 65 local employers as members.
These members are both corporations and local government agencies. Through financial institution partners, CHP offers low downpayment mortgages with no requirement for mortgage insurance. In addition, these loans allow for second mortgages to lower the monthly payments to homebuyers.
The California Housing Loan Insurance Fund (CaHLIF) has created partnerships between private corporations and local governments to assist homebuyers.
Through entities such as the Orange County Affordable Homeownership Alliance (OCAHA) or the California State Teachers’ Retirement System (CalSTRS), homebuyers are offered low downpayment loans as well as downpayment assistance loans. For example, OCAHA offers three percent (of purchase price) Housing Trust Fund Revenue Sources February 3, 2020
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deferred payment loans at five percent interest that can be used for downpayments or to buy down the interest rate on the first mortgage. Additionally, OCAHA offers a two percent (of purchase price) deferred payment loan at five percent interest to buy down the mortgage insurance rate. OCAHA was created by large businesses and nonprofit organizations operating in Orange County. Members include Merrill Lynch, the Orange County Business Council, the Orange County Housing and Community Development Department, the Building Industry Association of Orange County, Wells Fargo Bank, GMAC Commercial Mortgage, and The Olson Company.
With CalSTRS, low downpayment loans with no out of pocket expenses for recurring and non-recurring closing costs are offered. In addition, second mortgages from a local government agency or employer-assisted housing program are allowed.
The AFL-CIO developed a Housing Investment Trust to promote affordable housing opportunities. For the most part, the AFL-CIO programs provide market rate financing that can be leveraged with affordable housing subsidies from other resources.
Each of these programs represents a form of partnership between corporations and local government agencies. Although none of these programs result in contributions to a local government housing trust fund, each program requires some form of financial participation by a corporation. Generally, these programs should be viewed as sources of leverage for affordable housing subsidies rather than resources for affordable housing subsidies.
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6.0 Estimated Revenue from New/Increased Revenue Sources Table 2 summarizes current tax rates and budgeted annual revenues for FY 2019/20 from key existing revenue sources to the City.
Table 2
Budgeted Annual Revenues from Selected Key Revenue Sources City of East Palo Alto
FY 2019/2020
Source
City
Tax
Rate
General Fund
and Internal
Reserves
Special
Revenue and
Enterprise
Funds
City Operating
Total
Sales Tax 1.45% $5,900,000 -- $5,900,000
Utility Users
Tax
5% $1,570,000 -- $1,570,000
Transient
Occupancy Tax
12% $2,300,000 $575,000 $2,875,000
Franchise Fees 5% $1,050,000 -- $1,050,000
Gross Rental
Receipts
Business
License Tax
1.5% $550,000 -- $550,000
Source: City of East Palo Alto Operating Budget Fiscal Year 2019-2020; City of East Palo Alto.
DRA estimated the projected increase in revenue generation to the City that would result from raising tax or fee rates in these categories. These estimates are summarized in Table 3. Additional potential sources that DRA was not able to estimate but the City may want to explore include:
• TOT tax on short-term rentals (AirBNB, VRBO, HomeAway, etc.); • Increasing the City’s condo conversion fee;
• Soliciting increased foundation support of affordable housing in East Palo Alto;
• Seeking employer-assisted housing commitments.
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Table 3
Estimated Annual Revenue Potential from Increased Tax Rates Selected East Palo Alto Revenue Sources
Source
Existing Tax
Rate
Estimated Increase
in Annual Revenue
At Assumed New
Tax Rate of:
Sales Tax 1.45% $2,238,000 2.0%
Utility Users Tax 5% $314,000 6.0%
Transient
Occupancy Tax
12% $460,000 14%
Franchise Fees 5% $210,000 6%
Gross Rental
Receipts Business
License Tax
1.5% $183,000 2.0%
Source: DRA estimates based on current revenue generation.