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Proposition 63

Proposition 63. Possible Housing Finance Opportunities for Proposition 63 (Supportive Housing for the Mentally Ill) Presentation to the Mental Health Services Oversight and Accountability Commission October 26, 2005. Bonding May Facilitate Supportive Housing.

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Proposition 63

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  1. Proposition 63 Possible Housing Finance Opportunities for Proposition 63 (Supportive Housing for the Mentally Ill) Presentation to the Mental Health Services Oversight and Accountability Commission October 26, 2005

  2. Bonding May Facilitate Supportive Housing • The purpose of any bonding approach would be to “leverage” future years’ revenues to accelerate the funding available to develop supportive housing for the mentally ill • Bonding is especially attractive when demand for housing is high, construction costs are rising, and delivery of additional housing in the near term can increase the effectiveness of other services being delivered to the customer • The trade-offs include transaction costs and interest costs paid on bonds until maturity

  3. Three Distinct Approaches Were Compared • Pay as you go – using 10% of annual Proposition 63 revenues to fund construction of new housing units • Bonding – using 10% of annual Proposition 63 revenues to repay state or local bonds issued to fund construction of new housing units • Rental subsidies – using 10% of annual Proposition 63 revenues to fund payment of rental subsidies

  4. Three Scenarios Illustrate Potential Results • The scenarios are rough approximations of potential outcomes of each approach in light of uncertainty about future circumstances • A variety of assumptions had to be made to simplify the analyses due to a significant number of unknown factors • The assumptions have been made with reasonable care, but actual circumstances in the future may prove to be very different • As a result, the outcomes approximated by the scenarios may not be able to be achieved, or at least not in the time frames illustrated

  5. Some Key Assumptions Are Worth Noting

  6. Outcomes Were Measured on Key Factors • Number of units constructed / customers served • Time period required to achieve the results • Total funded cost of units constructed / units rented • Total debt service (where applicable) • Operating subsidies projected for units constructed Note: Although Proposition 63 revenues are perpetual, the time frame examined was limited so that “snapshots” could be used for comparisons

  7. Results Show Bonding’s Time & Cost Benefits $1.39 billion in bond funds and $610 million in “coverage” revenues provide $2.00 billion for approx. 12,900 new units * $2.16 billion funds approx. 11,900 new units ** $2.31 billion funds maximum of 10,100 units by 2026 * Additional operating subsidies of $760 million accrue over time on bonding units (covers 2007-2026 only). ** Additional operating subsidies of $568 million accrue over time on pay-go units (covers 2007-2026 only).

  8. Detailed Results Reflect Tradeoffs * Includes both construction and operating subsidies for “Pay-Go” and “Bonding” scenarios. ** Debt service continues past 2026, as bonds issued between 2006 and 2026 amortize over 20 years each.

  9. Proposition 63 Would Leverage Other Funds In all scenarios, housing units are funded in part by other funding sources; potential sources include, but are not limited to: • Private activity tax-exempt bonds • State and federal tax credits • Commercial/private lending • Local government funding • Developer/investor equity • Current estimates utilize a ratio of $2 of other sources for each $1 of Proposition 63 construction funding (Proposition 63 funds 1/3) Approximately $2 billion of Proposition 63 funding equates to over $6 billion in total invested capital for housing!!

  10. Operating Costs Rise with Revenue Growth Once the peak number of units has been reached, annual funding needed for operating subsidies remains a constant percentage of total Proposition 63 annual revenues under current assumptions * Operating subsidies begin one year following funding, to allow for construction and occupancy

  11. Rental Subsidies May Facilitate New Units Rental subsidies could provide incentives for new construction and rehabilitation to increase the total supply of affordable housing * Figures have been rounded to nearest $1,000.

  12. Potential Financing Models Need Research Before a bond financing program could be put in place various legal and policy issues require additional research, including: • Ability to make long-term commitments of Proposition 63 funds for various elements in a Housing Set-Aside program • Types of bond structures and issuers that could be used at either state or local levels, including possible “pooled” financings to achieve economies of scale and enhanced credit-worthiness • Regulatory and/or legislative actions that would be necessary and could be taken to support a housing finance program • How a Proposition 63 Housing Set-Aside program would interact with other potential affordable housing development funding sources

  13. Key Milestones Demonstrate “Critical Path” If the Commission endorses the Housing Set-Aside concept today, key next steps could include the following: * The timetable above is preliminary, and subject to change. It should be viewed as ambitious in light of remaining uncertainties.

  14. For More Information We welcome your ideas and input Lehman Brothers Inc. Public Finance 102590 Constellation Blvd., 25th Floor Los Angeles, CA 90067 Barbara A. Lloyd 310 481 4963 Barbara.Lloyd@lehman.com Peter J. Taylor 310 481 4908 Peter.Taylor@lehman.com Kevin O’Brien 310 481 4924 Kevin.OBrien@lehman.com

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