Close to Home: Pension funds are a bad fit for housing

In her candidate statement for the November election, Noreen Evans, who is running for 5th District supervisor, has identified $2.3 billion in the Sonoma County Employees Retirement Fund as a source for financing affordable housing.

On the surface, this seems like an idea worthy of investigation. But this needs to be evaluated from the priorities of the retirement fund and its usefulness to housing. From both perspectives, the proposal seems questionable.

Looking at the pension fund and its purpose, it is important to understand that the Sonoma County Board of Supervisors doesn’t have authority to choose investments. This is the exclusive responsibility of the Sonoma County Employees Retirement Association board.

The Board of Supervisors’ authority over the Sonoma County Employees Retirement Association board is limited to appointing four of its nine members. Four voting members are elected by employees and retirees, and the county’s elected auditor-controller treasurer tax collector serves as an ex-officio voting member. The Board of Supervisors doesn’t make investment decisions. So the most that Evans could be saying is that she would suggest this direction to the retirement association board.

California law also prohibits the Sonoma County Employees Retirement Association from expending funds “for any purpose other than the expense of administration of the system, investments for the benefit of the system, and the provision of benefits to the members and retired members of the system and their survivors and beneficiaries.”

“Social investing” is specifically mentioned in the retirement association’s investment policy statement: “The board may not approve investments with less than competitive risk-adjusted expected returns in order to benefit another group of people or some project considered socially desirable.” Clearly, the Sonoma County Employees Retirement Association board wouldn’t choose to make an investment that has a lower return or greater risk when compared with other opportunities. Investment in affordable housing would need to be evaluated under these criteria.

From the standpoint of the financial resources, affordable housing can use all the help it can get, but it isn’t clear that pension fund investment is a workable option. A lack of financial resources is, in fact, the greatest constraint to the production of housing affordable to low-income people. However, low-income affordable housing is limited in the amount of debt it can service. Affordable housing, unfortunately, needs considerable subsidies, money that doesn’t have to be paid back, at least not anytime soon.

Subsidies are the largest portion of affordable housing finance and more subsidy is needed to house those with the lowest incomes. Subsidy takes the form of grants, deferred payment loans and tax credit investor equity. Pension funds wouldn’t be a subsidy source since there is little or no return on investment.

Affordable housing does borrow money for construction loans and long-term mortgages. This lending could be investigated by the county retirement association board and evaluated in relation to other investments. However, once affordable housing has received its development entitlements and secured all needed subsidies, there is no shortage of willing lenders.

Further, interest rates for construction and mortgage financing are near all-time lows. The retirement association would need to accept lower rates of return to provide any further benefit, but this would be contrary to its obligation to seek competitive risk-adjusted returns. This would ultimately result in increased county contributions to the pension fund.

While any ideas to expand the supply of affordable housing are certainly better than ignoring the issue, it seems that Evans may need to do some more homework on this one and explain how this proposal might work, given the investment priorities of the Sonoma County Employees Retirement Association and actual financial needs of affordable housing.

David Sundstrom is a former auditor-controller for Sonoma County, and John Lowry is former executive director for Burbank Housing in Santa Rosa.