Audit Stretches to Find Trouble in Portland’s Affordability Mandate

On Wednesday, the Portland city auditor’s office released an investigation of Portland’s inclusionary housing program, the affordability mandate that applies to new buildings of 20 or more homes.

The audit makes some good arguments and some confusing arguments. It found one fairly glaring problem in the program: a two-year backlog in the city’s work to check that landlords and tenants are in compliance. Then, to make things more confusing, The Oregonian decided to make a seemingly scandalous headline of something the auditors hadn’t even recommended changing—the fact that the program has covered part of its own administrative costs using the relative trickle of money it collected directly.

Because Sightline has a long history of caring deeply about inclusionary zoning and wanting Cascadian governments to get it right, I decided to dedicate a throwback Thursday to a bloggy point by point response to some findings and recommendations of this audit.

I’m going to try to minimize technical language, but things may still get a little obscure. In classic blogger fashion, I’d be happy to talk more in the comments.

Okay, without further ado:

“Improve Program goals so they are specific to the Program, attainable based on who the Program is designed to serve, and measurable.”

Sightline’s take: yep.

Portland’s inclusionary housing program (“IH”) was put together in a hurry, in an environment of justifiable urgency that verged on panic. In 2014 and 2015, a construction collapse followed quickly by a migration boom had sent Portland rents and displacement soaring at the fastest rates in many years. In November 2016—the same day they funded the city’s first local affordable housing bond—voters would take matters into their own hands by putting tenant advocate Chloe Eudaly, a thoughtful bookstore owner who barely campaigned but happened to be really upset about rising rents and really good at Facebook, on the incoming city council.

In the months leading up to that transfer of power, inclusionary housing, re-legalized by the state legislature one year prior, was Something the City Could Do. The unfortunate result of this enthusiasm was that the city essentially started with a set of desired program specs and retroactively filled in a rationale for them, without ever clearly defining the program’s goals.

Yesterday, the auditors found that those original goals “were not effective performance measurement tools and did not accurately convey the Program’s purpose.”

It’s a good point. Better defining success was one of our four recommendations last year for improving the program. New program language (approved this year, after the research for yesterday’s audit had already been conducted) is a modest improvement, but the key language (“support the production of units”) is still too vague to be a very useful test of whether or not the program is working as intended.

“Fees are intended to fund affordable housing development and preservation, but according to the Bureau, as of June 2023, this had not yet happened. Instead, the fees have gone solely towards Program operating costs.”

Sightline’s take: More transparency here would be good, but the existence of administrative costs isn’t a scandal.

One of the so-called “sideboards” placed on local inclusionary housing programs by Oregon law is that they must offer a “fee-in-lieu option.” Developers must have an option to pay cash to the city as an alternative to providing affordable housing themselves. The state doesn’t restrict how cities can use this cash, and until this year the city didn’t formally promise to use it in any specific way, though it was understood to be intended for affordable housing programs.

Instead, the city apparently used this money to fund its affordable housing program … in other words, it used the trickle of cash revenue generated by inclusionary housing to cover the expense of paying a few city staffers to oversee inclusionary housing as part of their jobs.

An important thing to understand here is that the cash revenue is just a trickle—about $5 million over seven years, the audit says, with another $7 million on the way. That $5 million would have been enough to fully fund about 20 below-market homes in IH projects, or about 2 percent of the private below-market homes either created by the program or in the pipeline. Instead, this $714,000 per year in revenue went toward a program whose operating costs the bureau has put at about $1 million to $1.7 million annually.

Because of changes to the program design this spring, it’s unlikely that more such cash will be coming in regularly.

In any case, 2 percent is a reasonable cost ratio. A parallel might be the city’s parking meter program, which funds things like streetcar service and public transit discounts for low-income workers, but not before covering its own expenses. You have to pay those expenses somehow, after all.

Another thing: It’s good that Portland’s IH program wasn’t designed to collect a lot of in-lieu fees. (Portland did this, essentially, by setting the in-lieu fees so high that it’s almost always cheaper for developers to provide below-market homes directly.)

When you want to raise money for affordable housing, a good way to do that is with a property tax that (like Portland’s housing bond) draws a little bit from everybody. But Portland’s main goal with IH isn’t to raise money. It’s to integrate amenity-rich buildings and neighborhoods by income. Collecting a bunch of money wouldn’t do that—and in any case, fees on new housing are a horribly inefficient way to raise public money, because they indirectly enrich incumbent landlords by driving up the costs of competing with them.

Housing Bureau staffers now say they “plan in the future to use the fees to also fill affordable housing finance gaps.” Though The Oregonian put this issue in the headline of their coverage of this audit, the auditors chose not to recommend that the city do anything different on this front. I don’t see any reason to disagree with this judgment by the auditors.

“Smaller Inclusionary Housing units are the most commonly produced and already affordable”

Sightline’s take: The second part, at least, is a problem—but it’s already been addressed somewhat.

With rents in Portland flat recently thanks to a wave of new apartment buildings and a flat or slightly falling population, market-rate rents for studio apartments and one-bedrooms in much of the city are actually lower than the maximum prices set by Portland’s IH program. The result: the program has been requiring a bunch of paperwork for no meaningful benefit at the moment. Rents for a single person’s apartment would be affordable to single people making 80 percent of the median income even without regulation—so what’s the point of the regulation?

This is something Portland’s 2024 reforms have since addressed. They reoriented the program around a lower price target, serving people who earn 60 percent of median income. This was done by fully funding the “60 percent option” via tax abatement in most neighborhoods where apartments can be built.

It’s still true that small homes are cheaper than bigger ones, so Portland’s IH program still gives developers an incentive to err on the side of small homes. But is that so bad? Nothing in the program goals suggest that bigger homes should be a top policy priority, and Portland and other Cascadian cities have a much deeper shortage of small homes than of big ones. In fact, the program arguably overincentivizes big apartments by giving developers the option to count them as multiple smaller homes. The bureau’s “strategic target” for the ratio of larger units has been just 15 percent, well below the 23 percent the program has been delivering.

Speaking of which, here’s the auditors’ next recommendation…

“Determine and document if the following would advance City goals:
• Requiring or further incentivizing the development of affordable units with two or more bedrooms; and
• Implementing Program controls to help ensure there is at least one household member per bedroom.”

Sightline’s take: That’s just, like, your opinion, man.

The auditors seem troubled by the fact that only 23 percent of below-market homes in the IH program had two or more bedrooms, even though the ratio of new homes outside the program with two or more bedrooms is also 23 percent.

In other words, the auditors seem to be of the opinion that inclusionary zoning should cater disproportionately to families.

Should it? The auditors cite the city goal to “increase housing opportunities for families and individuals facing the greatest disparities,” but that’s not a call for disproportionate attention to families. Meanwhile, they also observe that “44 percent of the three-bedroom apartments produced through the Program were vacant between four and 15 months after their buildings opened.” This would seem to suggest that landlords have some trouble finding larger households interested in living in big apartment buildings, even at a discount rate. Affordable housing for kids is an extremely important goal, but IH might not be the best tool for that job.

If the auditors feel that IH should aim to disproportionately serve larger households, that’s a valid position. Maybe they should join the crowd and run for Portland city council. But it’s not the obviously correct position. It’s a policy decision beyond the normal scope of an audit.

Similarly, the auditors warn that “some households of two and three can rent units with an extra bedroom that is not used for sleeping.” You can make a reasonable argument that below-market homes should only be used for sleeping and not (for example) working from home. But there’s nothing in city policy suggesting that a home office for a qualifying household is incompatible with the program’s goals, and it’s strange that the auditors saw fit to call this out.

“Develop methods and guidance for property owners to help ensure that marketing is effective and fair.”

Sightline’s take: Education can’t hurt, but this is a tough problem to solve.

The auditors report that “several property managers said Inclusionary Housing apartments have been harder to fill and vacant for longer than market-rate ones in the same buildings.” They also raise a possible reason for this: “Inclusionary Housing units [are] located within market-rate buildings, so people looking for affordable housing may not know it exists.”

This is indeed a big problem. It’s part of the time tax that pervades so much of the American social safety net: are you in need of publicly subsidized housing? Good luck tracking it down, figuring out if you qualify, how to prove it, and how to apply!

The auditors recommend educating apartment management companies on better marketing, but their own report also captures how this would be a never-ending task that would only add to the program’s public and private administrative costs. The city says it’s testing some new software that might help. Another possibility might be for the city to connect landlords with a local nonprofit that already has a big list of income-qualifying people. (Home Forward, which manages federal Section 8 vouchers for the county, comes to mind.)

“Improve compliance monitoring so that problems can be effectively identified and addressed”

Sightline’s take: The city could certainly add more oversight, but at the risk of undermining other priorities the audit also raises concerns about.

This might be the most damning passage in the audit:

The Bureau does not require owners to submit documentation to back up what they report, and staff have not verified that the information is accurate, although they reserve the right to do so. Bureau staff said they rely on the honor system for reporting. Two systems test if the reported rents were below the maximum, and that tenants met income requirements. Bureau staff review the results, manually test exceptions or testing errors, and work with property managers, as needed, to resolve questions and compliance problems. As of May 2023, the Bureau was two years behind in its compliance reviews.

Even without regular oversight, property owners have a very strong financial incentive to keep in compliance with city rules. If they ever get caught cheating, or even failing to document compliance with any step of the rules, they’re immediately on the hook for hundreds of thousands of dollars in penalties, equal to the original in-lieu fee plus 10 percent annual interest.

That said, is zero regular oversight the ideal amount? Probably not. In their response to the audit, the city’s Housing Bureau and Housing Commissioner Carmen Rubio wrote that they’ve “recently” doubled the staff time dedicated to IH program compliance, from half of one employee’s time to a full-time job for one employee.

Here’s the catch, though: Oversight takes time, and time costs money—the same administrative cost that The Oregonian implied on Wednesday that it’s scandalous for a government program to require.

The more the city looks over the shoulder of landlords to document that everyone is promptly reporting any changes in their income and household size, that nobody has a home office, or whatever other restrictions the city chooses to put on its program, the higher everyone’s administrative costs become. And as more and more buildings in Portland are built with IH homes, these public oversight costs will grow in near-equal proportion, leaving the public with less and less money to spend on housing subsidies. This is certainly something the government could opt to do. But it’s not just an administrative choice. It’s also a policy choice.

Another issue: The more rigorously tenants are required to document and re-document that their income and current household size qualify them to live in a below-market home, the more hassle it becomes to rent an IH unit, and the likelier such homes are to sit empty (This is less of a problem when an IH program prioritizes homes that are clearly below market price, as Portland’s now does.)

Oversight of public investment is good. But too much can backfire.

Not covered by this audit: Are affordability mandates worth the costs?

The auditors explicitly did not set out to evaluate probably the highest-profile questions about Portland’s IH program: whether it’s properly funded and whether it’s a net drag on housing development. That’s because by last spring, when the audit was underway, the city’s Housing Bureau had already hired a consultant to investigate that question itself. (The conclusion: it had been fully funded within the central city but underfunded elsewhere. Changes to the program this spring largely corrected this for rental projects, according to the consultant’s estimates.)

So, though it might have been useful for the auditors to go through their own independent review of those numbers, the auditor’s office made a reasonable decision to focus on other lower-profile aspects of the program.

For better or worse, that investigation didn’t find much to look at in the finer points. It raised a few legitimate policy choices, all of which have legitimate reasons for being the way they are. It identified the two-year backlog in spot checks of IH rents. It found some overly vague language in the program goals.

Then, separately, The Oregonian implied fault in the existence of government administrative costs. The city might have avoided this bad headline by being more transparent sooner about which money goes where.

In the end, maybe it’s actually those vague program goals that are the single biggest problem here. Because they remain so generic and qualitative (“support the production”), without any quantitative threshold that can either be met or not met, auditors and reporters have little solid ground to kick against when they come looking for problems.