Reed/Oliverio interview: the full transcript
In this wide ranging interview, Planning Commissioner Pierluigi Oliverio interviews ex-Mayor Chuck Reed on SJ housing crisis--its roots and potential fixes--the state of the Google project, and the status of pension reform and municipal borrowing in this exclusive discussion for Opportunity Now.
Pierluigi Oliverio: Almost every conversation in San Jose politics seems to be centered around how expensive it is to live here and the role of sky high housing prices. How do you see this problem?
Chuck Reed: I start at the broadest, highest level: the law of supply and demand has not been repealed. And if you look at California over the last 40 years--and San Jose in the same time period--you’ll see that we have not built enough housing to satisfy demand. Just in round ballpark numbers, California is a million houses short of what it needs to satisfy the demand. San Jose has built an enormous amount of housing and has provided housing for Silicon Valley for decades. But we in San Jose, by ourselves, cannot meet the demand created by the constraint of housing in the region or in the state. And the result of all the housing we have built is a jobs/housing imbalance unlike any other major city in the country.
PLO: So why aren’t we building the housing?
CR: In California we say that it’s horrible people have to pay so much for housing. It’s horrible that people have to live in substandard housing. It’s horrible that multiple families live in a single house. So we really feel bad about that as a state--but not bad enough to actually do something about it. It always seems to be down there around number 8 on the priority list, below things like keeping the unions happy, keeping the environmentalists happy, having more greenbelt, saving the farmland from the expansion of housing.
If you look at California--and SJ I think is typical--you see the government is trying to build affordable housing. Look at the headlines from this last week, ‘Facebook is giving $150 million for affordable housing.’ Well, how many units can they build for $150 million dollars? What’s the price per unit? We have subsidies that are being required to build affordable housing that are in the hundreds of thousands of dollars per unit. So you divide Facebook’s $150 million by $500,000 a unit, you get 300 units. How wonderful, but we’re still a million units short. So government and companies that are putting money that addresses the issue are doing important things, but it’s not going to solve the problem.
PLO: What are some things we can do to start to fix the problem?
CR: I spent 14 years as a planning commissioner--city and county combined--and 14 years as an elected official council and mayoral combined. I roughly sat through a thousand hearings on housing. I sat through a lot of hearings where the elected officials really wanted to build a housing project, but the neighborhood opposition restrained them. And even if we decided as a political matter that we were going to approve the housing project, then they’ve got to litigate it. The California Environmental Quality Act (CEQA) is structured to make it really easy for anti-housing advocates to litigate.
So my number one recommendation for the state of California: do something about the ease in which CEQA can be used to block projects and particularly affordable housing projects. My recommendation would be to eliminate the private cause of action under CEQA for housing projects, affordable housing projects in particular, so that the government would still be doing CEQA analysis, they would still be looking at environmental impacts, but once you’ve been through that you don’t have to worry about one or two people thwarting the will of the local government to build local housing projects.
The second thing is to look beyond San Jose, to the other governments around the Bay Area. And to look at how housing policy affects their fiscal health. Cities have to supply services to residents, and they can’t do that without money. If you add housing at the wrong densities it’s going to cost you more in services than the taxes generated out of the housing. This is a big impediment to governments who are trying to put their constituents first, which is the job of local governments.
So I would say to the state of California: for every new housing unit that a local jurisdiction makes, you need to give them more money. You need to give them a larger share of the property tax, because now the share of nothing is zero. We’re going to increase the property tax for everybody by building another unit of property. So my recommendation is that the state give the city of SJ and all other jurisdictions $2,000 per year out of the future property taxes for each new unit that gets built and then that really takes away the reluctance to build housing because of the fiscal impacts.
PLO: On your idea of splitting what cities get from housing as far as percentage of the property tax, I think that would be something that would alleviate city’s fears of fiscal impact, but I think then wouldn’t all the other players that get a portion of that property tax have a concern, whether it be the county, school district etc.?
CR: They’ll all have concerns, but right now the property tax they’re getting is zero, so we’re talking about splitting future revenues which makes it a lot easier because 100% of 0 is still 0. So the big percentage of property tax revenues goes to the state which they then use to fund the schools. The state could change the allocation percentage and everybody would come out ahead. Because when you build more housing, the total revenues out of property taxes is sufficient to pay for the services that you might need--much more so than the 11% that the city or 20% the county might get out of it.” (This scenario assumes the new low income housing development is not exempted from property tax in perpetuity as is the case for almost all low income housing developments in San Jose)
PLO: Why is it that up until the 1970s we could build a lot of housing in San Jose that was affordable, didn't cost $500k per unit, and we didn't price people out? Why is it so much more expensive now to build a house?
CR: It was easier in those days, in the 60’s or 50’s to build because there was essentially an unlimited supply of land. But California decided in the 1970s that controlling sprawl, having greenbelts and urban growth boundaries and preserving farmland were more important than building new housing. And so if you look at where the growth boundaries of San Jose were in the 70’s, we’re still in the same place. And so the land supply has been constrained, driving up land costs and the ability to build things. We did the easy stuff, and so now the projects are hard. Infield projects are hard for lots of reasons. .
PLO:With the COVID migration people have left cities: SF has seen a 35% drop in rent, other cities have had significant declines including SJ. Do you believe this is a level of permanent migration, or purely cyclical?
CR: We’ll need to see what’s going to happen to jobs and whether or not the demand for housing is going to be affected by job density. As long as the Silicon Valley keeps creating jobs, that provides pressure on the supply and cost of housing. To the extent that SV permanently decides people are going to work remotely, then that would have an impact on the cost of housing. But my guess is that while companies will use a lot more remote working, they’re going to continue to add headcount to SV for all of the reasons that made SV great. SV has suffered CA politics, CA taxes, CA housing constraints for decades and has coped with that not by picking up and moving out of state, but by expanding out of state. It’s Intel’s ABC rule: which is Anywhere But CA for expansion. I think that most likely the remote working from smaller communities around the country will continue to grow, but I think the headquarters headcount is also going to grow, also.
PLO: I agree. But will also note HPE just announced they’re moving their HQ from SJ to Houston. There will still be HPE employees in SJ that will have people living here buying houses or continuing to pay their mortgages. But--as you know how cities are financed--now that the point of sale will be Houston instead of SJ, that’s a significant sales tax loss for the city of SJ, which is a disappointment. Cities don't receive sales tax from software sales since there’s no sales tax, but if a physical object is sold such as in the case of HPE, or Cisco, there is sales tax. So companies relocating can have a tremendous financial impact on a city’s finances.
Which brings me to Prop 19. It passed, and it’s going to allow anyone over 55 to take their tax basis anywhere in the state of CA. There’s some other implications on the cost basis for property tax or inheritance. Do you think this will incent people to sell their house in SJ and move to Lake Shasta or Tahoe?
CR: There’s always been an incentive to do that, because housing is cheaper in some of those areas. So if people are not in a position where they need to work in the office every day, I think Prop 19 adds to that incentive. When you do the math and you’re at a low tax rate and suddenly you’re going to have your taxes go up a lot, that wouldn’t be a big incentive to pick up and move. But if your taxes are going to be the same, then the price differential between SJ and Redding is a big plus. But this only affects people who don’t need to be close to the office, so it’s a relatively modest percentage of homeowners. I would guess it won’t be a measurable difference in the cost of housing because I think it will just be absorbed by other supply and demand factors.
PLO: Minneapolis and Portland have declared war on the single family home by eliminating the single family home zoning in their cities. Single family zoning has historically had some evils and therefore in the name of trying to correct the wrong, they are allowing fourplexes or sixplexes in all neighborhoods, byright and with no public or community meeting. They think this is a way to provide affordable housing. Your thoughts?
CR: There’s a long history of zoning in the United States as a tool to enforce segregation and constrain housing. Opening it up and making it easier to build certainly should add to the supply. Whether or not that will be significant, I don't know. I think as a policy matter starting out by saying you can put a fourplex on any single family lot, I think that’s probably a little too far. But I think if you took a more reasonable approach and start looking at distances from bus stops or light rail stops and saying duplexes instead of fourplexes or second units, that starts to make more sense. It’s like what San Jose has tried to do by making it easier for people to build ADU’s, second units, and granny flats. This way, you can spend a little bit of time demonstrating that it’s not going to destroy the fabric of the community and get a sense of which lots make sense and which don’t. I don’t think wholesale abandonment of single-family zoning will work politically because you have to bring people along, you can’t just dictate it. But the real question is: will it actually generate more housing or just remove one of the constraints?
PLO: In the General Plan you and I voted for, we estimated that by 2040 we would be adding 400,000 people to the city. So that’s like adding another 300,000 residents to San Jose in the next 20 years--and all of that would happen without invading the single-family home neighborhoods. We projected it all to happen within Transit Zones and well-positioned pieces of land. We wanted it to make sense to people and to get people in suburban areas to support the density we were trying to create in San Jose. I think the elimination of single-family home zoning would eliminate that trust. We have seen the state supersede city zoning and allowing two ADU’s by right per lot regardless of size. But it’s unclear to me that with the cost to build an ADU, that this increase in density will even have an impact on the affordable housing market.
CR: I think “affordable” is a term that has a variety of definitions. Whether or not it gets to a level that the ADU could be rented by somebody who qualifies for a government-subsidized affordable housing is unclear. It is going to depend on the nature of the housing, where it is. My concern is that newly constructed housing is not going to be affordable because the cost of construction is so high-- even when there is no land cost. So by the time somebody has finished with their permitting process and the construction process and paying for everything they're probably not going to rent it to somebody that would qualify for affordable housing. Nobody's going to build an accessory dwelling and lose money on it when they rent it out it unless they have to.”
PLO: I heard that we have found that San Jose may have the highest construction cost in the world. Do you believe that?
CR: That may have been true a while back, but that could be changing with the COVID crisis. I do know that there are many market-rate housing projects that have been approved, got through their permitting process and through the political process, but they can’t move ahead because of high construction costs. It just doesn’t pencil out. And now with rents dropping due to the COVID recession, it makes it even more difficult.
We did see during the Great Recession in San Jose that construction costs went down. You'll remember that we used to get the bids on public projects, all of them below the engineer's estimate because companies just wanted to keep their workforce together and they were bidding just as cheap as they could. But as long as the big tech companies are raking in the money and expanding and needing a bigger footprint--and that seems to be the case-- the construction costs are not going to come down very much I don't think.
PLO: The United States is a free society in which you can live where you want to live--in an expensive community with something small, or you can live in a more affordable community with something larger, or something in between. A friend of mine recently sold in downtown San Jose, they ended up buying a brand new custom-made home in Madera. It was three bedrooms, brand new for $284,000. There's a difference between the communities, but still. As you brought up earlier, if it costs upwards of $500,000 to build a low income housing it won’t pencil out. Should there be some type of incentive to build lower-cost communities? Or will people relocate to where it’s cheaper, and should we provide some sort of incentive for that?
CR: People tend to live where they work and people tend to move across the country because of jobs. Now that's less the case these days than it used to be and maybe that'll change with the COVID crisis and the surge in work from home. But jobs drive the economy and jobs that drive the demand for housing. Selling your place in San Jose and moving to Madera makes a lot of sense if you can work remotely or your company moves jobs out there. And for a period in the dotcom era, the boom era, the jobs that were being created in Silicon Valley were being moved around the rest of the State of California. But since the dotcom boom those jobs tend to be in other states and in other countries because the headquarters can manage worldwide from Silicon Valley without having to pay Silicon Valley prices for every employee.
PLO: Let’s talk about the Google proposal which originally appeared to help the jobs/housing imbalance in San Jose. But the plan has changed over time such that there is tremendous amount of housing in it now. The Planning Director has said the proposed project, as now envisioned, would have a negligible effect of improving the jobs/housing imbalance. So it would just keep us at pace with the current subpar ratio we have today.
CR: I'm not surprised by that outcome--I'll be surprised if it doesn't continue in that direction and end up more new housing than new jobs. But fundamentally it's not that housing is the problem by itself-- it's the revenues out of housing compared to the revenues out of jobs that is the problem. We’ve done the math many times, and the fiscal problems San Jose faces are driven by that jobs/housing balance. One of my favorite bad pieces of data is comparing San Jose's per capita revenues with the per capita revenues with the other cities in Santa Clara County. That data tells you that if I was mayor of Palo Alto I would have twice or more per person to spend on services for my people--that’s roughly a $1,000 a person difference. There are a million people in San Jose, and a thousand dollars a person then is a billion dollars a year difference.
PLO: Do you think pension reform is cyclical?
CR: It’s cyclical because it’s hard and it’s not in politicians’top three priority items of things they want to do while they’re in office. But you reach a point where you realize the pension situation is killing us, so we have to do something about it right now. So to that extent, it’s cyclical. We have had nine years of generally positive economic growth so the incentive to enact pension reform has been very low. A few states and cities have realized that you can’t wait til the recession to do something about it, so there has been some work that has been done. The COVID recession has flattened or depressed state and local government revenues and the federal government hasn’t made up for it yet with some giant bill. So if that doesn’t happen you can expect people will be saying “we’ve got to do something about pensions because it’s just eating our lunch.”
PLO: This year’s revenue from all property taxes for the city of SJ is $370 million; the annual pension payment was $431 million. The delta of difference changes over time: if there are the boom times on property then things are flat, but the pension number is typically not a flat number. It can spike for a number of reasons, including demographics. Do you think this will become a major issue in the future?”
CR: I think it will and I think we will look back to what we accomplished on pension reform as having given SJ a little bit of relief. Because if we hadn’t it wouldn’t be $430 million this year it would be $530 million. But we did provide if not a decade, then quite a few years of relief.
PLO: The city council is considering pension obligation bonds (POB) in 2021.
CR: When it comes to politics, finding new ways to borrow money, like a POB, is the new way to fix things. It lets politicians avoid making any hard decisions, they can just take out a credit card and gamble. If you get found out, you’ll get found out when you’re probably out of office.
In aggregate POBs work well if your timing is right, and work poorly if your timing is wrong. It’s just a market timing thing which cities are so good at. I mean it’s their core competency (sarcasm).
But even as a private investor or municipality you don’t know what the market is going to do. I think the better strategy is to aim for a consistent rate of guarantee or a higher percentage guarantee, than to take on a bunch of risk, which can happen when you chase venture capital money. Venture capital companies can fail.
When I was talking to municipal bond analysts around the country part of my discussion was about pension obligation bonds. We know that when somebody does a pension obligation bond it’s a giant red flag because they’re borrowing money to pay for operations. So they’re in trouble. About 12 years ago, Detroit borrowed around $4 billion dollars on pension obligation bonds--and they received the Bond Buyer Deal of the year. The mayor got his picture on the cover of magazines. He is now in prison. And when Detroit filed bankruptcy, the one criteria of bonds that got wiped out were the pension obligation bonds. So those people got nothing in the bankruptcy.
But people will lend money no matter what. One of the things I learned when Puerto Rico failed a couple years ago that they were issuing investment grade bonds about two years before they cratered. I was at a municipal analysts’ conference and we were having a roundtable discussion and I asked the audience who was giving money to Puerto Rico before they cratered, because they had had ten years of downward trend, you could see it coming. No one in the room would admit to it, but what they said was it was those other guys that gave Puerto Rico money--the hedge fund guys.”
PLO: Because they saw some return even with the risk.
CR: They were getting something like 10% return. So the person who was placing the money was getting bonuses for the high rate of return and the people who had to collect it were a different group. So I’m sure that SJ can find someone who will lend them money at a high interest rate.
Follow Opportunity Now on Twitter @svopportunity.
Photos taken by Matt Bruensteiner and Peter S. Carter.