March 15, 2002

On Friday, March 1, 2002, under the guise of "affordable housing," the Los Angeles City Council voted 12 - 0 to further destroy the city's property tax base. They approved a plan to create a $100 million trust fund to build "affordable housing". While Mayor Hahn said that the trust fund would be built without imposing new fees or subtracting from existing services, his plan says otherwise. The plan indicates dollars will come from redirecting city revenue from several sources. Those are Community Redevelopment Agency funds, federal community development block grants, tobacco settlement funds, and an anticipated INCREASE in vehicle license fees. After the termination of Community Redevelopment Agency project areas, property tax revenue for those areas would be diverted to the trust fund instead of finally going back into the city's General Fund to cover vital city services. If utilized, block grants are currently sought and used for community rehabilitation and improvements throughout the city. Tobacco settlement funds were originally intended to discourage smoking.

The mayor's office compared the $23 per person annually spent by Los Angeles for affordable housing with $89 per person spent by Traditionally over taxed and highly indebted New York City. According to New York City's Comptroller, his city's $4,800 per capita debt (including capital lease obligations) is the highest in the nation. That's a dubious (put mildly) distinction to seek. It's ironic that the advocates want to spend more of the homeowners' taxes to make housing affordable.

While it was particularly noted that only 39% of Los Angeles residents are homeowners compared to the 66% national average, the effect of the proposal would reduce the percent of homeownership in Los Angeles while further depriving homeowners of the vital services they pay for.

Based on the recommendations of the Affordable Housing Task Force, funding of about $100 million a year would result in production of 4,000 (out of 18,000 needed) units annually. Since the proposal was heavily promoted by nonprofit affordable housing interests, most (if not all) of the units would be developed by the so-called nonprofit companies. It would be interesting to know how nonprofit corporations have the means to finance promoting their interests. Also, being tax exempt, they do not pay any property tax. Annual City of Los Angeles expenditures per capita for city services is over $1,300. If you consider an average of two bedrooms and five people per unit, the 4,000 units built annually would house 20,000 people. The $1,300 per person amounts to $26 million city government expenditures annually, without even a penny of property tax revenue. Excluding the $100 million a year diverted into the trust fund, ten years of such a program would result in (not inflation adjusted) $260 million spent annually on new residents, with no offsetting city property tax revenue. Sales tax revenue from those residents would be relatively minimal. In case you are wondering, Los Angeles County and the Los Angeles Unified School District are also excluded from collecting any property tax on those properties. Unlike single-family homes and other apartments, many children would be occupying such apartments, but NO property tax revenue would be derived from their homes to cover any of their education.

"Great Society" programs have proven that welfare programs stifle incentive and result in an increase in beneficiaries. Nonprofit affordable housing apartments would be no different. We read complaints about high salaries of public officials - The Los Angeles City Controller stopped payment of about $27,000 for a Department of Water and Power party. Those amounts are less than peanuts compared to the Effect of the "affordable housing trust fund". Unfortunately, the cost of many of our public officials is much greater than their salaries and stated benefits. The cost of decisions they make can (and do) affect us for decades after they are out of office. Lenders limit the value and how much they will lend on property subject to rent control. Inner city property values, therefore property tax revenue, have been decimated by the city's rental housing policies. Investors have been discouraged from buying and improving such property.

There are three basic answers to providing more affordable housing. Increase high paying jobs, increase the supply of housing, and reduce property related taxes. Eliminating the Business License Tax would attract many new employers, and eliminating the current disincentives to investment in housing would benefit the supply.

Victor N. Viereck
Certified Public Accountant
12702 Tiara Street
North Hollywood, California 91607
Phone (818) 985-9174
Fax (818) 985-1829

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