December 2019 Board Report

Friday, December 13, 2019

To: Board of Directors

From: Nancy Pfeffer, Executive Director, COG, Gerald Caton, Chair, Economic Development Working Group, COG

Subject: COG Proposal to the State for a Gateway Cities Trial Program to Financially Incentivize Cities to Rezone Non-Residential Properties into New Housing Developments

Background:

The COG’s Economic Development Working Group has been communicating with representatives from the Governor’s Office on the development of Gateway Cities’ economic development initiatives which will assist in the implementation of State’s priorities. One of the State’s highest priorities is solving the housing supply and affordability crisis. In response to this crisis, the Economic Development Working Group has developed a proposal to have the State financially incentivize those Gateway Cities that choose to rezone underperforming office, industrial and commercial sites into new housing developments. The proposed program would assist the State to meet its stated goal of developing 3.5 million new housing units by 2025 while allowing Gateway communities to revitalize underperforming non-residential sites as well as providing funding for core city services to new residents.

Issue:

Historically, the passage of Proposition 13 greatly restricted the amount of property tax revenue available to fund annual core city services. As a result, local municipalities are conditioned to perceive residential uses as less desirable than alternative revenue generating land uses and as a drain on local revenue sources. Specifically, new residential units result in an increase in population, which in turn places an added demand on costly local services and programs on an ongoing basis.

With retail trending so strongly to online sales, cities are seeing many of their regional malls and strip commercial centers struggling to find tenants. These failing retail sites, often adjacent to major highways with public transport, could be ideal sites for the construction of new housing as part of a mixed-use and/or transit-oriented development. However, since cities are sales tax dependent, they are reluctant to rezone these struggling commercial properties to residential out of fear of eliminating potential sales tax revenue generating opportunities as well as having to accommodate residential uses that will require the delivery of costly local services.

In order to facilitate the change of existing land uses for residential purposes and to help solve the housing crisis in the State, the COG’s Economic Development Working Group has developed a proposal which would allow local municipalities to be financially incentivized for the creation of new housing units. To accomplish this change, the existing housing model employed by the State of California needs to be modified to enable host communities of transit-oriented, mixed-use and stand-alone residential infill Housing Developments to receive the property tax revenue from those developments for the purpose of funding core city services to new residents.

Our proposal has three qualifications for cities to receive the incentive of property tax revenue:

First, cities would only qualify to receive the property tax revenue incentive for the construction of housing that occurs as a result of existing non-residential property being rezoned to accommodate new Housing Developments. Second, to assure that this program only has a minimal financial impact on other taxing entities, there would be a 2% cap placed on the total number of newly formed parcels that would be authorized to participate in this program during any given housing element Planning Period pursuant to California Government Code Section 675588(f)(1). In accordance with the referenced Code Section, “Planning Period” is defined as the time period between the due date for one housing element and the due date for the next housing element over an eight-year cycle. So, for example, if a community has a total of 20,000 parcels, the maximum number of newly formed parcels that could have the property tax revenue diverted to the participating city for incentivizing new housing construction during the current 2013-2021 Planning Period would be 400 parcels. Third, participating cities will be required to possess a State Certified Housing Element.

The Economic Development Working Group’s proposal recommends that the Gateway Cities be utilized as the test location for the program. A large majority of cities located in the Gateway Cities COG region are “no and low” property tax cities that receive only one-third of the property tax revenue generated by higher property tax cities. It is estimated that “no and low” property tax cities receive property tax revenue equaling less than five percent of their respective operating budgets, while higher property tax cities receive funding for over fifteen percent of their respective budgets. Twenty-five of the twenty-seven Gateway Cities receive much less than 15% of the property tax generated in their respective communities and many receive about half that amount.

The Gateway Cities are also the most densely populated sub-region of the State. Collectively, the Gateway Cities Region’s population density, with approximately 8,485 people per square mile, is well above the averages for both California and Los Angeles County. The Gateway Cities Region is approximately four times as dense as Los Angeles County and forty-three times denser than California. Therefore, the Gateway Cities communities are most in need of an economic incentive from the State to encourage the development of additional housing in an already densely populated area.

Recommended Action

Authorize COG staff to work with our State elected officials to develop legislative implementation of the proposal.

Attachment

  • “Proposal to Incentivize the Gateway Cities to Rezone Non-Residential Properties into New Housing Developments”

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