By Rachel Dawson
Milton Friedman once famously said that “nothing is more permanent than a temporary government program.” If Friedman were currently living in Portland, Oregon, it is likely he would instead be saying “nothing is more permanent than a temporary Metro tax.” The Metro Council unanimously voted in July to approve funding for planning and development grants supported by the regional government’s construction excise tax (CET) in the 2019-20 fiscal year. This CET is riddled with problems, including the removal of its sunset date and mission creep.
The CET was originally adopted by the region in 2006 as a temporary tax to support development planning for areas newly brought into the urban growth boundary (UGB). The tax is paid by anyone applying for a building permit for construction within the UGB, with some exceptions.
Its original sunset date was slated for 2009 or until Metro collected a certain amount of money. When asked if this was a permanent tax in 2006, Metro responded by saying, “No. This tax takes effect July 1, 2006, and will remain in effect until $6.3 million is collected.” This fund threshold was met and the original sunset date was passed, however, the CET was not allowed to die.
The CET was extended another five years until 2014, and again extended in 2014 until 2020. Instead of extending the CET once more, Metro voted to eliminate the tax’s sunset date in 2019, using its powers to create a continuous revenue stream. The resolution approved by the Metro Council states, “Collection of the excise tax will continue into the future until such a time as the Metro Council determines it is no longer necessary or effective.” Based on this language, the tax will never end, because Metro will never find such a flow of cash unnecessary.
It now appears that Metro has taken the liberty of shifting the scope and purpose of the tax, leading to mission creep. By the end of the CET’s original sunset date, the vast majority of the planning work the tax was established to carry out was completed. Metro no longer had enough projects to justify the tax’s existence.
Therefore, Metro expanded the scope of projects eligible for funding in 2009 so that tax revenue could be used for planning in existing urban areas in addition to the newly added territory. The purpose of the CET has again changed in recent years to prioritize “equitable development” projects within the UGB.
For example, Albina Vision Trust was awarded $375,000 for its community investment prospectus as part of Metro’s new equitable development category. Albina Vision Trust does not own any of the land referenced in its proposal. Rather, the project focuses on “community-based programming” and the “investment potential” of the lower Albina area. The desired project outcome is to pre-develop scenarios of what the community could look like and how the organization could maintain “social values” in Albina. The CET was originally created to plan development of land incorporated into the UGB, not to think about how a nonprofit can maintain social values in a neighborhood it does not own.
Metro’s approval of the Albina Vision Trust prospectus highlights another problematic change that has been made to the CET: Metro now has the authority to approve grants to private organizations instead of only to public entities. Metro should not be picking winners and losers by investing tax funds in ideas which may not be successful at the expense of other potential players.
Concerns regarding the CET do not stop there. Metro’s auditor concluded in a 2016 report that Metro has poorly managed use of CET funds. Administrative costs have increased since 2009, the program is becoming less aligned with regional planning priorities, and its regional impact is unknown. Furthermore, no performance measures were in place when the program was reviewed, and project monitoring was weak. For example, Metro amended funding of a project that was already largely completed and approved two different contracts that likely funded the same project.
Most area residents are unaware of Metro’s CET and its troubling history. This lack of regional oversight has allowed Metro to manipulate the CET to accommodate its wishes without regional approval or knowledge. The CET should have expired in 2009 when it raised the original amount of funding and completed the work it was created to support. If Metro wants to pay for other projects with CET revenue, it should go through the process of winning voter approval to create a new revenue stream.
Rachel Dawson is a Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.
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By Rachel Dawson
The Metro Council voted June 7 to place a housing bond measure of $652.8 million for only 3,900 units on the ballot this fall. The regional government estimates the cost of new projects will be around $253,000 per home. But as there is no cap on cost per dwelling, project costs could be much greater. This bond will spend too much money on too few homes. However, private developers in the Portland region have shown it’s possible to build more residences at a lower cost compared with Metro’s proposal.
There is no better example of this than local private developer Rob Justus. With Home First Development, Justus has helped build a total of 431 public units for an average cost of $90,230 since 2011. Home First likes to call this “affordable-affordable” housing. Before a project begins, the company keeps itself accountable by working backwards: They contain the costs of the project so apartments can be rented to tenants at a price that works for them. This philosophy has allowed Home First to increase the number of homes they are able to build.
In concert with the Portland Habilitation Center, Justus built 78 affordable residences in 2015 in Portland at $65,000 per unit. In 2017 he offered to build 1,000 homes in Portland at $85,000 per unit if the city could gather $20 million, but Portland officials rejected this proposal. These homes would have cost 66% less than Metro’s housing bond estimates.
Justus has made low costs possible by building in less expensive neighborhoods and using non-union labor. These homes may not be the largest dwellings in the best part of town, but they are affordable to those in the lower 30% of area median income who are in need of a home.
Along with wages and location, the materials used can greatly affect the price of a project. A Catholic charity attempted to build the complex known as St. Francis Park in 2015 using an inexpensive siding called HardiPlank. When the project went through Portland’s required design review, city regulators decided to choose a more expensive siding, which drastically increased the cost of the project. This additional cost caused the city to increase taxpayer subsidy to the building. Ironically, in 2006 a housing complex in Vancouver using the same inexpensive siding that was rejected by the city of Portland received a national development award.
The fatal flaw in this bond measure is that there is no cap on cost per home, which the city of Vancouver has demonstrated is possible to have. Vancouver passed their own Affordable Housing Fund in 2016 which caps the amount spent per housing unit at $50,000. Money from the fund would add to a project’s “capital stack,” rather than fully funding the complex. This forces project applicants (one of whom was Home First Development) to search for multiple sources of funding instead of relying on the Vancouver City Council to foot the bill.
The Metro Council could build cheaper apartments by using less expensive materials and contracting with private developers to decrease labor costs. Without a cap on cost per unit to keep themselves accountable, Metro is able to write a blank check with taxpayer dollars for every project.
Housing can be made affordable to both taxpayers and renters. Metro can do this by withdrawing the bond measure and redrafting it to include a cap on costs. Doing so would allow them to follow the lead of private developers like Rob Justus to make “affordable-affordable” housing a reality.
Rachel Dawson is a Research Associate at Cascade Policy Institute, Oregon’s free market public policy research organization. A version of this article appeared in The Portland Tribune on July 26, 2018.
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By Justus Armstrong
This October, the Portland-area Metro Council will award the first round of grants for its Investment and Innovation program. The program’s goals include strengthening local waste reduction efforts and fostering economic benefits for those from marginalized communities; but with a combination of corporate welfare and vague performance measures, the means by which Metro hopes to obtain these goals are murky at best and unethical at worst.
The program, which sets aside $3 million a year from Metro’s solid waste reserve fund over a three-year pilot period, offers two tiers of grants—one tier ranging from $10,000 to $50,000, the other from $50,000 to $500,000—to nonprofit organizations and for-profit businesses alike. Metro directs the larger capital grants toward “investments in equipment, machinery and/or buildings” for projects in line with its waste reduction goals. In awarding capital to businesses, Metro seeks to improve regional recycling and disposal infrastructure, but seems to have no regard for the program’s marketplace consequences.
By matching assets with public funding, Metro grants an unfair advantage to businesses that follow its environmental agenda. While the grants program limits funding to costs tied to waste reduction projects, padding companies’ overhead and capital costs to benefit these projects goes outside the scope of Metro’s stated goals and undermines the competitive marketplace. Businesses should earn investment capital such as buildings and equipment by themselves, not through taxpayer handouts. Most citizens would oppose the use of their tax dollars to prop up privately owned corporations. Apart from good intentions and “green” packaging, what makes this project demonstrably different? How does it fit into Article XI, Section 9 of Oregon’s Constitution, which states that no municipality shall “raise money for, or loan its credit to, or in aid of, any such company, corporation or association?” Many questions have yet to be addressed.
Even for measuring success, the program’s standards are unclear; and Metro has been down this road before. Metro’s Community Planning and Development Grants program awarded around $19 million from 2006-2015 to help local governments prepare land for development. Like the Investment and Innovation program, these grants were intended to advance Metro’s long-term vision, but a 2016 report from Metro auditor Brian Evans found problems with clear direction. “The program has become less aligned with certain regional planning priorities over time,” Evans wrote. “Changes to the program reduced clarity about what was intended to be achieved and there was no process in place to evaluate the program’s outcomes.”
The Investment and Innovation program faces similar risks. Since the grants outsource waste reduction goals to third parties, Metro can only guess at their potential effectiveness. In a pre-proposal workshop for prospective applicants, Program Manager Suzanne Piluso could offer no estimate of the program’s effect on waste, saying it would take until after the pilot period to “determine if it’s moved the needle.” To be clear, that’s $9 million for a waste reduction program that can’t promise to actually reduce waste. Metro is handing out taxpayer money for hypothetical benefits that are unlikely to match the price tag.
Justus Armstrong is a Research Associate at Cascade Policy Institute, Oregon’s free market public policy research organization.
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By John A. Charles, Jr.
Metro recently decided to refer a $652.8 million bond measure to the November ballot. If approved by voters, it would authorize Metro to borrow money either to purchase existing housing units or to subsidize the construction of new ones. The loans would be paid off by higher taxes on every property owner in the region for the next 30 years.
Unfortunately, of all the things Metro could do to reduce the price of housing, borrowing money is likely to be the least effective.
For one thing, new construction is expensive. Many public housing projects in recent years have cost more than $250,000 per unit. If Metro is lucky, the bond measure might pay for a total of 2,400-3,000 new apartments. Since the Portland region produces over 10,000 units of new housing every year, Metro’s intervention would not even be noticed.
In addition, borrowing $652.8 million and paying it back with interest (for a total of over $1 billion in debt service) would make every current home and apartment more expensive. We can’t tax ourselves to prosperity.
The basic weakness in the Metro bond measure is that it misdiagnoses the problem. When the Metro Council adopted its long-range growth management plan in 1995, it made a conscious decision to limit the physical size of the urbanized metropolitan region. That limit is imposed through Metro’s control of the Urban Growth Boundary. The planning goal was to “grow up, not out,” in order to prevent rural development and create the population density needed for light rail.
While that vision may sound appealing to some, there is a tradeoff: It limits the supply of new housing. Metro has always known this. As the agency’s economists wrote in 1994, “…the data suggest a public welfare tradeoff for increased density, more transit use, and reduced vehicle miles traveled. The downside of pursuing such objectives appears to be higher housing prices and reduced housing output.”
Metro controls the regional land supply and doesn’t want lots of cheap land for housing. Metro actually needs land to be scarce and expensive, because that’s the only way to justify its vision of high-density housing projects and light rail transit. Inevitably, this will be self-defeating; higher home prices will push more and more people out of Portland, where they will become even more auto-dependent.
In addition to its control of the regional land supply, Metro also imposes a tax of 0.12 percent on all new housing construction, with the exception of projects where the value of land improvements is less than $100,000. The tax revenues are used to pay for planning required on lands that might be used for housing in the future. The City of Portland also imposes its own tax for a similar purpose, at a much higher rate. It should be obvious that taxing new construction makes the housing problem worse.
Metro’s November Bond Measure Would Make All Housing More Costly The best thing Metro could do would be to systematically inventory every artificial barrier to housing production, such as zoning ordinances, planning requirements, building codes, system development charges, and hidden taxes—and figure out a way to reduce or eliminate them.
In other sectors of the economy where supply is unregulated, the market does a wonderful job of providing us with the products we want at reasonable prices. The same thing will happen in housing, if we allow it.
John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization. A version of this article appeared in The Portland Tribune on July 3, 2018.
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