How California’s sixth-cycle RHNA was rigged

Here is the unedited version of my RHNA op-ed that appeared in Berkeleyside on Oct. 25, 2021. The op-ed got a nice mention in San Francisco’s 48 Hills online magazine. We no longer have the luxury of thinking Albany can be insulated from the venality and dysfunction of the state legislature in Sacramento. However, that story will have to wait for another post, along with some information on an interesting ballot initiative that can help solve the problem. For now this 4,000+ word op-ed is enough.

Slouching towards Berkeley: The coming of RHNA/Housing Element disaster and how the city can limit the damage

“That zoning is a tool to create housing production is a widely held and completely fallacious idea. Just because something is permitted doesn’t mean it happens.”

architect Daniel Solomon, quoted in the San Francisco Chronicle

Berkeley residents are about to discover how dysfunctional the latest California Regional Housing Assessment (RHNA) has become. The RHNA (pronounced REE-na) process, and the housing elements based on it, have always been bureaucratic, expensive and ineffective. But thanks to the intervention of State Senator Scott Wiener, RHNA has been twisted into a profit-making tool for his corporate allies. With the City of Berkeley starting to work on its housing element, which will force the city to make drastic revisions to its zoning, residents must struggle to limit the damage.

What Wiener and his allies have managed to accomplish is remarkable. If the state senator had proposed a bill to his fellow legislators that would force many of the state’s cities to rezone for bigger buildings and then would restrict cities to rubber-stamping the new building permits, I don’t think he would have found the votes. Yet he has managed to accomplish the same thing in a piecemeal fashion.

In what follows, I’ll provide my perspective on RHNA and the housing element process, explain how Sacramento has corrupted them, and explore what Berkeley residents can do to protect themselves.

The website of the California Department of Housing and Community Development (HCD) states:

“Since 1969, California has required that all local governments (cities and counties) adequately plan to meet the housing needs of everyone in the community. In order to create a housing plan (aka housing element) showing it could meet the local housing needs, a jurisdiction must first know how much housing it must plan for (and estimate how much will be needed at a variety of affordability levels in order to match the needs of the people who will live there). This is determined by a process called the regional housing needs assessment.”

Bay Area cities are currently planning for the sixth RHNA cycle, which will start on June 20, 2022, and end on December 2, 2030. Here’s how it works:

Step 1: The California Department of Finance provides detailed forecasts of population and households that span the eight-year RHNA period. These forecasts are passed along to the Department of Housing and Community Development (HCD).

Step 2: HCD starts with the household projections and estimates the number of housing units required to house them. HCD adds housing units to cover older units that will be torn down and to provide enough vacant units to allow housing turnover to take place smoothly. It may make additional adjustments. HCD then allocates the statewide estimates to different regions and passes them along to regional councils of governments.

Step 3: The regional councils next allocate their allotment to cities and unincorporated areas in their region. For the Bay Area, the council of government is the Association of Bay Area Governments (ABAG). ABAG allocates household units to all nine counties in the region and 101 municipalities (note that San Francisco is both a city and a county).

Step: 4: In their housing elements, cities and counties then plan for where the additional housing can be built. They must modify zoning if there is insufficient space for the new housing.

Creating a housing element is labor-intensive and requires specialized expertise. Many cities hire planning consultants to assist them. Recently I spoke with one highly regarded consultant who confided that their office was limiting housing element work because the “process was broken.” Although the criticism was heartfelt, it is more accurate to say that the process never worked well. This had become obvious by 2003, 18 years ago. The introduction to a 2003 report from the Public Policy Institute of California on the state’s housing element policy stated:

“During the 1990s, noncompliant communities were just as likely to expand their housing stock as communities that complied with the law. Furthermore, when other factors were held constant, noncompliance was not a significant predictor of the rate of multifamily development.”

Senate Bill 35

In past decades, the housing element process didn’t make much difference. For market-rate housing, most cities met their numerical targets, but often not in ways the house elements emphasized. When it came to subsidized affordable housing, the targets were seldom met because the required subsidies were beyond the means of most cities, and state and federal funding was scarce.

In 2017, things changed. The state legislature passed a housing bill package of 15 bills (links here and here), and Governor Jerry Brown signed them. Probably the most influential and controversial was Senate Bill 35, authored by San Francisco Sen. Scott Wiener. The bill streamlined multifamily housing projects approvals ministerially (a euphemism for rubber-stamping applications without public hearings) in cities that failed to issue building permits for their share of the RHNA housing allocations.

The bill had a serious defect, as the League of California Cities pointed out in its request for a veto to Governor Brown. The League’s letter stated that the bill should:

 “Require the trigger for ministerial approval of housing projects to be based on the number of entitled and approved applications, a process that a local agency actually controls, rather than building permits, which a developer controls and will not pull until they are ready to construct a project.”

Although this may seem like a trivial point, it has major consequences. To understand why, two things need to be explained: First, cities do not build housing, developers build housing. Cities approve project applications but cannot require developers to build the approved projects. Since approvals typically have a long shelf life of one to three years, developers can bank their approvals and be picky about when they convert them to building permits.

Second, the goal of developers is not to build housing. The goal of developers is to make money. Building housing and making money are not the same thing. Developers are portfolio managers. They hold a range of assets including undeveloped land, project approvals, unfinished projects, market-ready completed projects, and cash and other financial assets.

Developers reallocate their assets to maximize the value of their holdings. Developers are loath to dump so much of their product on the market at one time that they drive their prices down against themselves. Developers are also captive to their lenders and suppliers. If banks don’t want to lend, or if labor and building materials are too expensive, they may have to put their plans on hold until they “pencil out.” According to this recent article:

The builders do not care anything about the existing-home-sales market, and they don’t care about the housing shortage. They’ll always go slow and steady … People want an oversupplied market, and we just don’t do that in America.

For all these reasons it makes no sense for SB 35 streamlining to be triggered by developers failing to pull building permits. But in the aftermath of SB 35 becoming law, this is the reality cities face. Typically a city is not evaluated until the mid-point of the RHNA cycle, when the city reports to the Dept. of Housing and Community Development the number of building permits issued since the start of the RHNA cycle. At that point, a city is required to have issued at least 50 percent of its share of the RHNA goal for building permits in the region. This determination is made separately for each income category of households — above moderate, moderate, low income, and very low income.

If there are an insufficient number of building permits in any income category, for the rest of the RNHA cycle the city must issue building permits ministerially, or by right, for projects in that income category. The city can only require the developer to meet “objective standards,” those that involve “no personal or subjective judgement by a public official.” If these standards are met, then the building permit is issued without any public meetings or any other review. It would be almost impossible to write a set of objective standards that would cover every possible contingency. As an experienced land use attorney told me, due to a lack of review by planning boards and the public, SB 35 can lead to “unpleasant surprises.”

Cities are often blamed for dragging their feet and creating bottlenecks by issuing approvals too slowly, but the data show otherwise. In their report “New Development in California 2018,” the Construction Industry Research Board (CIRB) stated:

Considering only the projects that are under construction or approved awaiting building permits, there are currently 451,000 new homes and 308 million square feet of non-residential space that will likely be built over the next five years.”

Under SB 35, whether cities approve enough housing to meet the RHNA targets makes no difference. And even if developers and trade unions agree they couldn’t possibly build that much new housing, it doesn’t matter. If building permits are not pulled, cities are blamed. The passage of SB 35 left cities vulnerable to schemes that set up cities to fail. All that was needed was a bill that politicized the RNHA process and inflated the numbers. That bill was SB 828.

Senate Bill 828

The Bay Area Council is the leadership organization of the Bay Area’s corporate elites. It lies in the middle of an ecosystem of other pro-development organizations including the Metropolitan Transportation Commission, the Silicon Valley Leadership Group and SPUR. Among legislators in Sacramento, Sen. Wiener, who is notorious for his ties to big real estate (links here and here),  is their main water carrier.

The council usually tries to wield its influence from the shadows, but regarding SB 828, the council openly bragged about its success. In the council’s Jan. 29, 2021, Weekly Flash online newsletter, in an article titled (appropriately enough), “Playing the Housing Numbers Game,” The council made this statement:

“In the fall of 2017 the Bay Area Council’s housing team met with state Senator Scott Wiener to discuss the ongoing housing crisis, its root causes and what needed to be done to fix things…Out of that meeting came SB 828 (Wiener), a law that makes the calculation process more scientific and accurate. Lo and behold, this year the Bay Area’s RHNA allocation jumped from 188,000 units to 441,000 units.”

The Bay Area Council is not interested in making the RHNA calculations more scientific and accurate. The council’s task is to see that its corporate members make more money. Sen. Wiener helped them do that by inflating the target number of housing units in the new RHNA process and by changing the wording of the relevant government code to emphasize production. As with SB 35, the League of California Cities unsuccessfully urged Governor Brown to veto SB 828, and for much the same reason — cities plan and zone for housing, but they do not build housing, and RHNA was created to be a planning tool, not a production tool.

The inflated housing goals in SB 828 set cities up to fail. This was no surprise to Sen. Wiener or other senators when they first heard the bill in the Senate Housing and Transportation Committee on May 24, 2018. A speaker from the California Chapter of American Planning Association expressed this concern, which you can see in the video recording. Go to this link, select the April 24, 2018 hearing and hit “watch.” At 1:30:00 in the video the presentation on SB 828 starts. The opposition speaker from the planning association starts at 1:43:45 and at 1:45:45 states that SB 828 “sets us up for failure.” The American Planning Association continued to oppose this bill throughout the committee amendment process.

SB 828 empowered the Department of Housing and Community Development (HCD) to set outrageous RHNA targets for cities, sometimes more than doubling or tripling the goals from the previous fifth cycle RHNA. The sixth cycle target for the state’s four main planning regions is 2,108,200 housing units. The outside review by the Embarcadero Institute corrected for HCD’s overcounting and placed the target at 1,168,000. That number is still 29 percent larger than HCD’s fifth cycle target of 905,850 housing units, although the state’s population only grew between three to four percent during the fifth cycle. For Berkeley, the goals have more than tripled, from 2,959 total housing units in the fifth RHNA cycle, to 8,934 in the sixth cycle.

To comply with these new targets, in their housing elements cities must first “upzone,” or rezone for higher densities by raising height limits to allow apartment buildings to become taller, and in some cases reducing setbacks from property lines to allow buildings to become wider and deeper. This allows apartments to contain more units.

For example, in an urban residential neighborhood, there might be a height limit of 35 feet, with setbacks of four feet from the property boundaries. These constraints determine the size of a large imaginary box inside which you are allowed to build a house. In areas that allow apartments, there are much larger boxes of developable space inside which developers can build.

The allowable size of this box is a feature of the property, at least until another rezoning, and helps determine the value of the property. With upzoning, the developable box gets taller (as height limits are relaxed), and sometimes wider and longer (if setbacks are relaxed). The larger developable box makes the property more valuable — without any effort from the property owner. It’s a windfall increase in the property value, especially for undeveloped commercial properties. According to land-use economist Cameron Murray, connected landowners capture the benefits of land rezoning:

Land rezoning involves two distinct decisions: the choice to re-zone more land for higher-density development, and the choice of the precise area to be rezoned. Political pressure to expand higher value zoning areas is usually argued to come from owners of undeveloped land who may directly benefit, in concert with a wide range of secondary beneficiaries such as banks and construction companies, in a type of ‘growth coalition.’ The secondary decision, where exactly to rezone, involves the allocation of property rights from the community to the owners of the land within the rezoning boundary at the moment of rezoning.”

But there’s another bonus for developers. If developers don’t pull enough building permits early in the RNHA cycle, the city and its residents are penalized by being forced to accept streamlined ministerial approval processes. This is true even if cities issue a generous number of approvals early in the RHNA cycle. Note that this creates perverse incentives for developers to delay construction (perhaps an unintended consequence of SB 828). On the other hand, if cities fail to comply with RNHA rules, there are painful consequences. The combination of SB 35 and SB 828 has led to what cities call “carrots for developers and sticks for cities.”

Housing and Community Development’s role

SB 828 went through many versions as it passed through committees in the state senate and assembly, but it was never a popular bill. In the concurrence process for the bill, when the senate approved the assembly amendments, SB 828 passed with 22 yes votes, only one more than necessary. According to the rules of the state legislature, a bill must have a majority of the voting body to pass. Since there are 40 senators, passage requires 21 votes.  

Page three of the 8/30/18 Senate Floor Analyses on SB 828 list these three items that had been refined during the lengthy amendment process:

1) Revises the data COGs must provide to HCD as follows:

a) Adds, to the existing requirement to provide overcrowding rates, the overcrowding rate for a comparable housing market, as defined.

b) Adds, to the existing requirement to provide vacancy rates for the existing housing stock and for a healthy housing market, a definition of a healthy housing market vacancy rate as no less than 5%.

c) Adds a requirement to provide data on the percentage of cost burdened households and the rate of housing cost burden for a healthy housing market, as specified.

These three requirements were written vaguely enough to leave a wide latitude for their interpretation. Somewhere is the bowels of the Dept. of Housing and Community Development, unelected staffers implemented these directives in a way to produce absurdly high sixth cycle RHNA numbers. The lack of professionalism was not accidental. As one ABAG official told me, “These weren’t mistakes, they did it on purpose.”

In September 2019, the Southern California Association of Governments (SCAG) filed a formal objection to the sixth cycle RHNA allocations from the Dept. of Housing and Community Development, which, compared to the fifth cycle, more than tripled the number of housing units required in the six-county Southern California region to 1,341,827. The SCAG objections worked within the framework provided by the Dept. of Housing and Community Development (HCD) but did a thoughtful, professional job to correct the problems with HCD’s approach. HCD’s response was to ignore the suggestions in a cynical and self-serving letter.

Having seen how little success their Southern California colleagues had achieved, the Association of Bay Area Government (ABAG) executive board decided not to file an objection to the Bay Area numbers from HCD. Only one member of the ABAG leadership, Novato Mayor Pat Eklund, voted against accepting the figure of 441,176 housing units in the nine-county Bay Area, which more than doubled the fifth cycle targets.

But there may be another reason for ABAG’s lack of will — it no longer exists as a separate entity. The name ABAG is still used in some planning circles, but it is a polite fiction. ABAG was absorbed in a hostile takeover by the Metropolitan Transportation Commission (here and here). ABAG/MTC, as it is often called, is now a subsidiary of the commission, which itself was formed at the behest of the Bay Area Council, the organization that sponsored Sen. Wiener’s SB 828.

In September 2020, the Embarcadero Institute produced a report, “Double Counting in the Latest Housing Needs Assessment.” This report covered the RHNA allocations to all four major regions in California — Southern California (six counties), the Bay Area (nine counties), the Sacramento region (six counties), and San Diego County. Along with the formal complaint by the Southern California Association of Governments, the two reports uncovered similar problems with HCD’s analysis. Although these two reports are well worth reading, I won’t delve into them here. Instead, I’ll provide three common-sense examples of what’s wrong with the latest RNHA targets.

1) In February 2018, HCD published an excellent comprehensive report, California’s Housing Future: Challenges and Opportunities. In the executive summary the report noted that California needed 1.8 million new housing units statewide over a 10-year period, or 180,000 new units annually. During the 8.5 years of the sixth RNHA cycle, that would amount to 1,530,000 new housing units, half a million less than the RHNA totals for the four main planning regions alone. HCD’s RHNA figures aren’t even consistent with their best previous work. Given the problems with some of Sacramento’s other agencies, it is sad to see the Dept. of Housing and Community Development becoming more politicized and less trustworthy.

2) Affordable housing requires major up-front subsidies in the range of $600,000 to $750,000 per unit for low-and very low-income affordable housing. The RNHA goals call for 870,398 of these units in the four major RHNA planning regions. That would require subsidies in the range of $377 to $489 billion. It will not be possible to find these levels of subsidies.  

3) The sixth cycle RHNA benchmark of 2,108,200 housing units will require the production of 248,024 units annually for 8.5 years — just in the four main planning regions, which comprise 82 percent of the state’s population. Since 1967, housing production at this level occurred in only a few years in the 1970s and ’80s (“Mission Impossible? Meeting California’s Housing Challenge,” SCAG, p. 15).

The building industry was decimated in California by the Great Recession of 2008. Building more than 248,000 housing units annually for 8.5 years has never occurred in California, and it’s extremely unlikely it could be achieved in the sixth RHNA cycle. Post-Covid, the construction industry labor shortage is predicted to get worse:

“As homebuying reaches a fevered pitch across the U.S., contractors in New York and several other states are facing the most severe shortage of skilled construction labor since the Great Recession.”

Back in the fall of 2017, when Sen. Wiener planned with the Bay Area Council to inflate the RNHA targets, it appears they were a little too successful. It’s physically impossible to achieve the overall RHNA targets. It is financially impossible to achieve the affordable housing targets. Even the market-rate (above moderate) targets will be difficult. Developers will not oversupply and flood the state with market-rate housing to the point they drive down their profits.

Part of the problem may be that Sen. Wiener and his staff did not meet with the Department of Finance demographers to understand their methodology, which underpinned the household forecasts used in the RHNA process. This would explain the double-counting detected by the Embarcadero Institute. I had an opportunity to ask Sen. Wiener about this, and his non-response left me with the impression that his staff did not meet with the demographers or understand their methodology. But judge for yourselves. Here is a video interview with Sen. Wiener. My question begins at 57:25.

However the goals were reached, the post-SB 828 RHNA targets are exaggerated to the point of absurdity. Cities and counties are being set up to fail. Yet hundreds of cities and counties across the state will spend millions of dollars in staff time and consultant fees to pursue a housing element fantasy.

What Can Berkeley Do?

There are three important things that Berkeley’s residents can do:

1) Have realistic expectations about the amount of affordable housing that can be built, and where it can be built. Berkeley’s RNHA allocation calls for 3,854 housing units for low- and very low-income residents. The subsidies for that much affordable housing would be in the range of $1.6 to $2.2 billion dollars. It’s highly unlikely that non-profit affordable housing developers will find the required amounts.

In addition, some city council members may have the mistaken notion that the RNHA process can be an effective tool for integrating high-income, mostly White neighborhoods. That also is unlikely to happen. I would encourage the residents of Berkeley not to waste time and energy chasing naïve city council members down rabbit holes. Learn about the process, keep your expectations reasonable, and choose your battles carefully.

 2) As the current President of ABAG and the head of the ABAG Executive Board, Mayor Jesse Arreguín accepted the Bay Area’s RHNA target of 441,176 new housing units. He was also in charge of allocating these new units to the Bay Area’s nine counties and 101 cities, including the figure of 8,937 housing units for Berkeley, a 17 percent increase over existing units. He has a history of making deals that may not be in the public interest (here and here).

At an October 15 ABAG administrative committee chaired by Mayor Arreguín, four Marin Counties had their RHNA allocation appeals rejected. You can review the video here. At 0:54:16, the following statement appears on a slide:

 “Areas at risk of natural hazards are not identified in housing element law as a constraint to housing development.”

Mayor Arreguín makes additional comments at 1:06:45 that are worth watching. Berkeley’s hillside fire risks are well known. But there are also earthquake liquefaction risks in parts of the western flatlands. It is imperative to ask Arreguín how the city can plan for almost 9,000 new housing units without creating new fire or liquefaction risks.

3) Get up to speed on land value recapture, as many local governments are doing (including Berkeley). In the words of land-use economist Cameron Murray (quoted earlier), the decision where exactly to rezone:  

Involves the allocation of property rights from the community to the owners of the land within the rezoning boundary at the moment of rezoning. In the absence of mechanisms such as land value taxes or betterment taxes that recoup the value of the resulting price-differential, there is scope for bargaining between politicians and landowners of different areas, including the potential for corruption and bribery during the final determination of rezoning boundaries.”

The residents of Berkeley will have to be on the lookout for precisely this sort of “potential for corruption and bribery,” in addition to learning more about land value and betterment taxes.

I am including a link to the Murray article and to two other academic papers that give you a broad view of land value recapture. The City of Berkeley has been exploring land value recapture since at least 2017 (here and here). Also see this.

I wish the residents of Berkeley the best of luck in confronting the RHNA monstrosity that is slouching toward their city.

(Postscript, April 15, 2022: The timestamps on the RHNA appeals process video have been updated because MTC/ABAG changed them.) 

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