The Problem Is Larger Than Housing

Southern California has more than a housing shortage. It has problems of self-government in its cities that are distorting the economy--and the landscape--and making it hard to attract new business.

The problems are both economic and political. And although the economic problem could be solved relatively easily, by a different allocation of tax revenues between state government and municipalities, the political problems are less tractable.

And they are preventing Southern California from coping with growth. The region used to welcome newcomers, build homes and schools for them and revel in being one of the fastest-growing areas of the country.

But today, when the region’s population is growing again with potential home buyers eager to renew the cycle of rising prosperity, there is a shadow on Southern California’s future.

Many communities are unwilling and most communities are frankly unable to allow homes to be built.

The solution ultimately may come to changing laws. “Every city that gets state or federal funds should be required to add a certain percentage to its housing stock,” says Bruce Karatz, chairman of Kaufman & Broad Home Corp., the region’s largest developer.

Karatz is frustrated, as all builders are, by a situation in which L.A. County has issued permits for only one-fourth of the housing it needs and Orange County is permitting only half the housing it needs.

Homes are being built in San Bernardino and Riverside counties, but that’s not where the jobs are yet. So west-east freeway corridors are clogged with commuters from the Inland Empire to Orange and Los Angeles counties.

New Attitude Needed

This is a region that never wanted to be like congested New York, but New York at least has mass transit and commuter bus and rail lines. Southern California risks having the worst of both worlds, congestion and sprawl, if it doesn’t come up with ways to respond to growth.

One imperative change is that Southern California must rethink its attitudes about housing density. Many of its communities have a virulent not-in-my-backyard syndrome of not wanting multifamily housing--much less rental properties--built amid their “single-family culture.” Also, in some communities hard-to-change building and zoning codes reflect a Southern California tradition.

But greater density is needed now if this region, the second-largest U.S. urban complex after the New York area, is to use land more economically and cope with growth.

Density need not be ugly and need not be feared, says Sanford Goodkin of the San Diego consulting firm Goodkin Considine Strategies. “In many parts of the country, creative solutions are being found--mixing housing with retail complexes, making use of harbor property as in Baltimore,” Goodkin says.

“We need to think creatively in Southern California. If apartments along New York’s Central Park are prized residences, why shouldn’t the same be true for housing adjoining Los Angeles’ Griffith Park?”

But in fact Southern California cities can do little to be creative or responsive to growth. Their most serious problem is finding money to remain solvent and independent.

California’s cities used to be financed by the property tax. But Proposition 13 and a grab for municipal revenue five years ago by the state government in Sacramento have reduced the average city’s portion of the property tax to 14 cents per dollar collected.

Worse, in 1996 voters passed Proposition 218, which decrees that no taxes or assessments may be levied by any municipality without a 51% approval by voters in a direct election.

The effect has been to distort city financing, discourage permits for housing and channel development in one direction only, toward shopping malls that generate sales tax revenues.

The rush of cities seeking sales taxes has produced the phenomenon called mall mania. Cities encourage any kind of retail operation, but especially car dealers, because they sell big-ticket items that yield high tax revenue.

Sales-tax revenue is attractive because cities can add a slight tax of their own onto the state’s levy. The sales-tax route is also desirable because the money comes with fewer costs, city governments believe. The police, fire and other services a city must supply to the average mall are fewer than those it must supply to homeowners, goes municipal thinking.

The equation is different for housing, explains Jim Hankla, the respected city manager of Long Beach who is leaving that post to take on management of the Alameda Corridor project.

“The average homeowner’s property tax brings the city $210 in annual revenue, but providing services for that homeowner costs the city $350,” Hankla explains. That in a nutshell is why Long Beach recently allowed a shopping mall to be built on vacant land next to a park and “housing was never considered,” Hankla says.

“The pattern is everywhere in Southern California,” explains Larry Kosmont of Kosmont & Associates, a Los Angeles consulting and research firm. “Cities need revenues to pay for police and other services that residents require,” Kosmont explains. “But after Prop 218, the only way to get revenue is by attracting business, and the easiest business is retail.”

Kosmont points to Burbank, which had 103 acres of land left behind by the departure of Lockheed’s headquarters. Burbank chose to have a CarMax used-car dealer and a General Motors complex of dealers redevelop that land rather than devote it to residential real estate. Bob Tague, Burbank’s director of community development, explains that using the land for housing would have required cleaning up toxic materials, though he adds that Burbank has several residential projects underway.

Still, the fact remains that on a prime location, Burbank decided not to permit housing. Instead it went into direct competition with its neighbor, Glendale.

Jeanne Armstrong, Glendale’s economic development director, worries that her city’s car dealers will be hurt by the new competition, which could reduce sales tax revenue for Glendale. The absurdity is that sales taxes go to the community in which the car is bought, so a Glendale resident logically should limit purchases to that town and all cities should encourage their residents to shop only in their hometowns.

That way lies madness--and an undermining of the common good and the larger community.

There is little doubt that a lack of permits for housing is driving up existing-home prices and driving away business, says commercial real estate broker John Cushman, president of Los Angeles-based Cushman Realty. “Businesspeople tell me all the time that they have trouble bringing employees here because of the high house prices,” Cushman says.

As yet there are no formal studies to confirm the anti-business effect, but a major report on land use, backed by the Irvine and Hewlett foundations, is due soon. It will give detail on the economic distortions caused by California’s counterproductive revenue structure.

It is certain that costs are higher. It costs a developer $600,000 and a three- to four-year wait to develop a site on a modest housing property, Kosmont says.

Such costs have put many small developers out of business, reducing further the prospects for home building in Southern California, explains Kathleen Berry, San Diego-based senior vice president of Imperial Bank’s real estate division.

Other cities do things differently. Phoenix has very high housing demand but equally high housing construction. “Phoenix has a pro-business attitude,” Berry says. OK, Southern California has a problem. What’s the solution? Economically it’s simple--in principle. Sacramento could shift more of the property tax back to the cities, give them 25 cents of the property tax dollar rather than 14 cents. At that level, the homeowner’s property tax would more than cover the city services provided and make housing as attractive to municipal budgets as retail malls.

Still, there’s a downside to every idea--control of more property tax could help wealthier communities more than poorer ones.

What Do We Want?

The real problem, of course, is that decades of governance by ballot proposition and tax-gimmick public finance, California has distorted its economy. So there is a larger issue here. We in Southern California--voters, businesspeople, city managers--must decide: Do we want autonomous communities with revenues to match their responsibilities, able to welcome newcomers and glory in new homes and schools? Do we want a California responsive to change, as it was in the years of its growth to national preeminence? If so, we should profoundly change the system we have now.

Don’t laugh--change for the better does happen. We now have a great growth in home buying among immigrant communities, as Don Lee reports elsewhere in these pages. That didn’t come about by accident, explains Angelo Mozilo, chief executive of Countrywide Credit Industries, of Calabasas. “Years ago nobody made any special effort to get home financing to new immigrants, but now there are laws and every lender makes such efforts,” Mozilo says. “It increases the markets and is simple good business.”

Whether Southern California will respond anew remains to be seen.

James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.