The war of words over more affordable housing escalates

Over the last two days, the argument over whether the city should use its bonding authority to plow more money into affordable housing has threatened to turn into a pitched battle, with both sides digging in their heels.

On one side is Council member Lisa Herbold, who this week introduced a moderated version of what her colleague Council member Kshama Sawant plans to introduce next week. Whereas Sawant’s proposal strips all funding from the troubled North Precinct police station project and issues $130 million of new 30-year bonds carrying an annual debt service of $8.7 million, Herbold’s proposal only takes $3.4 million from the North Precinct (though nearly drains its 2017 appropriation) and issues $29 million of bonds for an annual debt service of about $1.9 million. Both plans require some fund-swapping sleight-of-hand to keep within the restrictions on certain pots of money they want to tap, as well as relaxing the city’s financial policy prohibiting the use of volatile real estate excise tax (REET) funds to pay debt service on bonds.

Neither proposal has specifics on how the bond revenues would be used. Herbold has a memo from Enterprise Community Partners that suggests several options. Herbold stated in yesterday’s budget committee meeting that she believes the funds should simply be added to the pot of money that the Office of Housing already has in its budget for an RFP process next year, rather than committing it up-front to a specific use, since more modeling needs to be done to weigh the various options. There’s certainly logic to that argument: it would be better to evaluate it in the context of specific proposals by real organizations, rather than  trying to predict who might come forward with the best idea. Nevertheless, Council member Burgess sharply suggested that Herbold withdraw her proposal until she had a specific plan.

But both plans share one bigger drawback: neither has a solid plan for how to pay the debt service after 2018. Sawant wants to pay for it (indirectly) with REET funds; Herbold wants to set up a “growth fund” in 2019, fed with a “sliver” of property tax revenues from new construction, that could be used to pay for the debt service on these bonds and potentially other things. Herbold points out that the HALA advisory group recommended both using the city’s bond capacity for affordable housing, and setting up a growth fund. Herbold has argued for reintroducing the growth fund before.  She also notes that the city hasn’t issued bonds for affordable housing since the early 1980’s.

Yesterday, the city’s Budget Director Ben Noble sent a letter to the Council tearing Herbold’s proposal to pieces. His arguments:

  • The city already has an affordable housing plan. He referenced the Mayor’s commitment to building 20,000 new affordable homes in the next ten years, funded by a combination of the Seattle Housing Levy, the MHA commercial and residential contributions, the Multi-family Tax Exemption, and state and federal grants and tax credits.
  • Herbold’s proposal is “fiscally irresponsible.” Noble noted that there was only committed funding for the first two years, paired with a vague reference to the growth fund with no details — “a two-year funding proposal for a 30-year liability.” He also pointed out that by state law, the city’s property tax revenues may only increase each year by 1% plus the value of new construction, which lately isn’t keeping up with inflation — let alone creating new revenues that could be siphoned into a new growth fund.
  • Compared to the Housing Levy, using debt is a more expensive way to pay for new affordable housing. The Housing Levy creates a pot of money each year that can be immediately directed into projects with no future entailments. In contrast, using bonds means that the city is paying interest for years to come on the money it borrows today. Issuing $29 million in bonds will result in a total of about $56 million in debt service payment over the 30 years, including both the original principal and $27 million in interest. Noble is exaggerating here a bit, because as Budget Director he knows only too well that $1.9 million in 2046 dollars is worth far less than $1.9 million today. The real comparison is the “net present value” of those 30 years of debt service payments, which is about $42 million in 2016 dollars if inflation stays around 2%, and even less if inflation creeps higher. So yes, Noble is right, issuing debt is a more expensive way to fund affordable housing, but not nearly as much as he claims. As an aside: Noble also takes issue with issuing 30-year bonds since the extra time accrues a significant amount of additional interest. He says the city’s standard practice is 20-year bonds. Noble also notes that the city is lobbying Olympia to create a new category of REET that could be used to build affordable housing similar to the Housing Levy funds.
  • Taking money from the North Precinct re-planning effort hinders the city’s ability to house police officers in the north end of the city. Noble points out that the plan of record is to hire an additional 72 officers over the next two years, and the existing North Precinct is already overcrowded, so it makes no sense to continue the plan to hire more officers while halting work on the North Precinct plan.  Herbold claims that she isn’t de-funding the effort, though her plan takes the 2017 appropriation from $1.5 million down to a mere $100,000. She leaves $11.6 million in 2018, but it’s hard to interpret this as anything other than delaying the project for a year by starving it of its first year of funding.  Of course, Sawant would prefer to kill the North Precinct re-planning altogether so she won’t be the least concerned; but Herbold and most of her colleagues have  recognized that there are public-safety needs in the North End that are not being addressed today and are supportive of a moderately-priced approach to addressing those needs. They also don’t want to pit affordable housing against public safety, since both need to be addressed.

Mayor Murray chimed in today in support of Noble, and doubling down on the notion that the existing funding sources are ample.

This afternoon, Herbold took her case to the people, sending out a newsletter to her mailing list reiterating her proposal and the reasoning behind it — without offering any new details that would address Noble’s concerns.

This will play out behind closed doors over the next few days as Budget chair Tim Burgess tries to assemble a new “balancing package.” Then the Council members will publicly vote on any final amendments next week.

It will be interesting to see whether worries over the future of the city’s federal funding under a Trump administration drives a heightened fiscal conservatism in the Council.