Davis Enterprise Op Ed by Sue Greenwald

Project doesn’t pay its own way

By Sue Greenwald | Special to The Enterprise | October 03, 2009

I voted against the Wildhorse Ranch project for two simple reasons: The project had not been sufficiently considerate of its neighbors, and more than 2,000 units of housing are already approved but remained unbuilt in Davis and at UC Davis’ West Village.

A building boom is already in the works, poised to begin as soon as banks start to lend again and the housing market picks up. I believe we have enough approved housing without Wildhorse Ranch.

This large number of unbuilt units has accumulated slowly and under the radar screen. I was actually surprised when I sat down a few days before the council vote and tallied up the 2,000 units. These included 541 Davis units (counted conservatively and confirmed by city staff), 1,012 student units, 474 West Village faculty/staff units and 65 West Village mixed-use units.

Since the proposed Wildhorse Ranch units are far from affordable and we had already exceeded our state-issued growth targets, I saw no compelling reason to move forward with another project. According to city staff – who relied on figures supplied by the developer – the least expensive units will be 78 attached townhouses whose average price will be over $451,000 when the developer expects the first houses to come to market.

But to vote against a project is one thing and to work against it is another. I voted against this project because I felt we had enough approved houses. I wrote this op-ed piece because this project and this campaign are setting a number of bad precedents.

Fiscal challenges

Most readers are familiar with the flawed process by which this item was rushed onto the ballot during one very, very late-night session. But few are aware of a more subtle, but equally unfortunate, precedent that is being set in terms of how city staff evaluates whether a project brings in enough tax revenue every year to pay for the annual costs of providing city services.

In the past, the city employed sound and well-established accounting principles, and avoided using one-time revenues to pay for recurring annual expenses. In the case of this project, staff broke with precedent and resorted to a fiscal sleight of hand to claim the project breaks even.

To give a little background: Most housing developments do not generate enough yearly revenue to the city to pay the annual cost of providing city services. But this project is on a particularly unhappy piece of land from a city fiscal perspective. Due to differing tax-sharing agreements with the county, different parcels of land in Davis return varying amounts of property tax to the city.

While, on the average, the city retains 17.5 percent of the property tax collected, on this piece of land the city retains only 11.79 percent. Thus, the city would retain about one-third less property tax revenue than average from this parcel.

To make up some of the difference, the developer shifted costs to the new residents in the form of an additional yearly Community Facilities District (similar to Mello-Roos) payment. But a deficit still remained.

So the city accepted a one-time $1,500 fee per market-rate unit to account for an annual recurring deficit – a payment that will be spent down in only 15 years. Since city staffers used a 15-year fiscal forecast, they claim the project breaks even. But after 15 years, the deficit suddenly reappears.

It would have been more reasonable to apply a onetime revenue source toward plugging an annual recurring deficit if that revenue had been large enough to provide a significant stream of income, at standard rates of return, without eating into the capital. This is what should have been done, but wasn’t.

Had the developer been willing to provide a one-time payment of about $7,500 per unit, for example, a fund could have been established that would have funded the deficit in year 16, and partially funded the ever-increasing deficit into the future.

By way of comparison, the recently approved Verona project in Mace Ranch, which had a much stronger fiscal balance to begin with, provided a one-time payment of $12,000 per market-rate unit and $6,000 per affordable unit. Wildhorse Ranch is a far worse fiscal deal for the city.

False claims

Although this project runs a deficit after 15 years – even using the city’s developer-friendly fiscal model – the Yes on P campaign made a wildly fallacious claim in its ballot statement rebuttal. The campaign claimed the project would bring a fiscal windfall of $4 million to the city which, the campaign said, would provide a ‘reliable annual source of funding for city services.’

This disingenuous claim is based on a nonexistent $3.2 million savings attributed to the fact that the project will not rely on the city’s dedicated affordable housing trust fund. There is, of course, no such savings. The affordable housing trust fund is a fund that, by law, cannot be used to fund anything except dedicated affordable housing.

Affordable housing is a social benefit, but it is a fiscal drain since it uses city services but usually pays no property tax. The council merely chose to require the developer to use state and federal subsidies to build the required low-income rental units, which is one of the two standard methods prescribed in our affordable housing ordinance.

False ballot statements of this magnitude set a very bad precedent. In order for democracy to work, voters must be honestly informed about the facts.

The bottom line is that the Wildhorse Ranch project breaks even for the first 15 years, according to the city’s developer-friendly fiscal model (which assumes, among other things, that both our temporary parcel tax and our temporary sales tax are renewed, and ignores our major unfunded liabilities), and it runs an increasingly large deficit thereafter.

New housing development in general presents a fiscal challenge for cities these days, but this project is more challenging than others.

- Sue Greenwald is a member of the Davis City Council.