Santa Rosa City Council wrestles with claim that housing funds were misspent

It was an incendiary allegation made by a politically influential Santa Rosa developer.

The city, Hugh Futrell claimed, had over the past 26 years effectively stolen $42 million of taxpayers’ money.

By diverting revenue meant for affordable housing to other programs and purposes, the city had breached the public trust and exacerbated its current housing crisis, Futrell, the developer of several downtown buildings, charged in an opinion piece in The Press Democrat editorial pages March 20.

It wasn’t just idle criticism. The piece hit a nerve at City Hall and has had a direct effect on the city’s current budget deliberations.

The debate it has sparked highlights a vexing issue for the City Council amid widening calls from residents to do more to alleviate Santa Rosa’s housing shortage: How to reconcile past council actions with the present need to set aside funds for affordable housing without jeopardizing city budgets going forward?

Futrell demanded that the current City Council boost the amount it dedicates from the so-called real property transfer tax to affordable housing and homeless services. The tax, paid whenever properties in the city change hands, was tripled by the City Council in 1990, weeks before a ballot measure passed that would have required such levies be approved by a vote of the people.

For the last decade, the city has had a policy of setting aside 20 percent of the money for housing, but Futrell argued far more of the funds should be committed annually.

“Anything less than the 90 percent commitment continues to be a breach of faith,” Futrell wrote, sending a strong message from one of the city’s most respected and connected developers. Futrell’s Museum on the Square renovation of the former AT&T building has been one of the highest profile downtown projects in recent years, and he’s one of the city’s most successful builders of affordable housing.

He also had a front-row seat to the 1990 tax hike, serving on the Housing Authority at the time and as the chair of the joint committee that came up with the idea. So he should know.

But separating fact from hyperbole is particularly challenging for a subject stretching back 26 years. The mayor at the time, Jack Healy, died in 2007. The memories of others in City Hall at the time have faded. And minutes of the meeting in 1990 offer only cursory summaries of people’s positions.

For current City Manager Sean McGlynn, who is faced with trying to help the council navigate this prickly policy debate, one thing is clear - the city did not steal anything.

“If the characterization is that there has been theft, there has been no theft,” McGlynn said last week. “If the characterization is that a policy hasn’t been living up to discussions, understandings, or characterizations from the 1990s, that is open to consideration, and this is something that the council will have to wrestle with.”

McGlynn sought to take the council’s temperature on the subject last week. If, as some members have suggested, the council planned to increase the percentage of the tax dedicated to housing, whether gradually or all at once, he needed to know soon, he said.

Chief Financial Office Debbi Lauchner noted that the city, because of its significant increases in funding for homeless services and modest increases in affordable housing, is already planning to spend the equivalent of 41 percent of the tax next year on housing-related services.

Under the 20 percent policy, the city would transfer $736,000 to housing and homeless services, but next year the city plans to spend more than $1.5 million on those efforts, she said.

Council members, however, appeared torn. Some, like Julie Combs, said that if the council is going to claim affordable housing is a priority, it should demonstrate that by funding it up front “and not using the leftovers.” She said she’d be comfortable bumping the set-aside up to 40 percent.

Vice Mayor Tom Schwedhelm expressed a similar viewpoint, though he referenced a smaller proposed increase.

Others, however, said that while they supported the hikes in funding for homeless and affordable housing, they were loath to lock in a multi-year policy without knowing what will happen with Measure P. The eight-year quarter-cent sales tax measure generates $9 million for general city operations but runs out in 2018. Discussions, including polling, are underway about whether to ask voters to reauthorize it.

Uncertainty over whether that will happen made Councilman Chris Coursey and other members hesitant to propose boosting the percentage now.

“We’re looking at a $10 million hole in our budget in a couple years,” Coursey said.

The dilemma has given fuel to those who would criticize the city, accusing it of misallocating existing tax revenues, a charge that could harm its ability to convince voters to reauthorize Measure P.

If the council doesn’t use the increase in the real estate transfer tax to boost affordable housing, Ross Liscum predicts trouble ahead for Measure P.

Liscum, a real estate agent and former member of the powerful Board of Public Utilities, says he was intimately involved in the 1990 tax increase, initially opposing it because it would increase the cost of homeownership. But he said he and other influential business groups withdrew their opposition only after Ken Blackman, the longtime city manager, and the council members agreed to send an amount equal to that raised by the new tax to the Housing Authority annually.

He said there was a “wink and a nod” from Blackman and council members that they would do so, but future councils didn’t follow through, he said.

Only later, in 2006, was the 20 percent figure established by the council, in response, Liscum said, to frustration that the original intent of the tax increase wasn’t followed.

There is scant evidence, however, of any such agreement.

The minutes of the meeting, in fact, show Mayor Jack Healy saying the opposite.

“Mayor Healy commented that he is uneasy discussing housing projects this evening,” the minutes read. “The implication that this tax is being imposed for housing is not true. It is an increase in taxes that will go into the General Fund.”

A Press Democrat story from the time quoted Healy saying something similar. “We have underestimated expenses as a result of an act of the Legislature. This is a move to recoup,” Healy said. “Whether it goes to housing or whatever is for some future council to decide.”

Former Councilman Schuyler Jeffries, now 82, vaguely recalls the vote, and said he remembers being less concerned with raising money for affordable housing specifically and more with trying to shore up the city’s financial position generally. He said he recalled how tenuous the city’s finances were.

“We didn’t realize how quickly the federal government, and even the state, could cut us off,” Jeffries said. “It happened quickly.”

Blackman, 80, reached Friday, said he had no recollection of an such agreement. The tax was a general tax, meaning the council could make no such promise of how to spend it, he said.

“There are always one or two people on a council that will end up promising something and have their word taken as a commitment from the council itself,” Blackman said.

As it turned out, the federal housing money wasn’t yanked away from the city. And a growth in funding for redevelopment, which required 20 percent of tax increment from such districts to go to housing and homeless services, triggered a surge in the construction of affordable housing. Between 1997 and 2012, when redevelopment programs were eliminated statewide, the city’s redevelopment zones generated $31 million for housing, Lauchner said.

In addition, while funding for housing was sporadic in the 1990s, a total of $14 million from the enhanced tax has gone into housing and homeless services to date, about 23 percent of the total, she said.

But Futrell said these facts don’t change his fundamental point. If the city had kept 90 percent of the increase going toward housing, as it has said it would, there might be 1,000 more units of affordable housing today, he claimed.

He said he understands that councils change and community priorities change, but what troubles him is there was never a public acknowledgment that affordable housing funding was being siphoned off to support other programs.

If the council has an open, public debate that honestly addresses the history of the tax increase and takes into account the city’s current needs, Futrell said he will be satisfied.

“That’s democracy,” he said.

You can reach Staff Writer Kevin McCallum at 521-5207 or kevin.mccallum@pressdemocrat.com. On Twitter @srcitybeat.