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

1 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

2 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

3 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

4 Some Key Assumptions Are Worth Noting Base Year Revenues for Housing Set-Aside Program (at 10% of Total Proposition 63 Revenues) $75 million 3% inflation Total Development Costs (TDC) (base year, avg. per unit)$300,000 Development Cost (DC) to be funded by Proposition 63 (base year, avg. per unit) $100,000 Development Cost Inflation Rate 7% (5 years) 5% (thereafter) Annual Operating Costs to be funded by Proposition 63 (base year, avg. per unit; applies to Bonding and Pay-Go scenarios only) (Current model assumes Proposition 63 funding beyond the 10% annual Housing Set-Aside) $3,000 3% inflation Annual Rental Subsidy to be funded by Proposition 63 (base year, avg. per unit/customer) $11,000 3% inflation

5 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

6 $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 Results Show Bonding’s Time & Cost Benefits * Additional operating subsidies of $760 million accrue over time on bonding units (covers only). ** Additional operating subsidies of $568 million accrue over time on pay-go units (covers only).

7 Detailed Results Reflect Tradeoffs Pay-GoBonding Units funded through 20102,8007,000 Units funded through 20156,40010,700 Units funded through ,90012,900 Total subsidy cost (through 2026)*$2.72 B$2.76 B Debt service ( ) **n.a.$2.4 billion * Includes both construction and operating subsidies for “Pay-Go” and “Bonding” scenarios. Rent Subsidy 4,300 7,900 10,100 $2.31 B n.a. ** Debt service continues past 2026, as bonds issued between 2006 and 2026 amortize over 20 years each.

8 Proposition 63 Would Leverage Other Funds  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) In all scenarios, housing units are funded in part by other funding sources; potential sources include, but are not limited to: Approximately $2 billion of Proposition 63 funding equates to over $6 billion in total invested capital for housing!!

9 Operating Costs Rise with Revenue Growth * Operating subsidies begin one year following funding, to allow for construction and occupancy Base Year *2007 Base Year Cost$3,000 Inflation Rate3.0% Peak Number of Units (2026)12,900 Total Annual Subsidies at Peak Unit Level$70 million Total Annual Proposition 63 Revenues in 2027$1.4 billion Annual Operating Subsidies as % of Revenue5.0% 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

10 Rental Subsidies May Facilitate New Units * Figures have been rounded to nearest $1,000. Fair Market Rent (average per month)$1,100 Tenant Share of Rent (average per month)$200 Net Cost of Subsidy (average per month)$900 Annual Net Cost of Subsidy (base year is 2006)*$11,000 Annual Tenant Share of Rent$2,400 Total Annual Operating Costs & Reserves($5,600) Net Income$7,800 Capitalization of Net Income at 1.15 coverage$100,000 Rental subsidies could provide incentives for new construction and rehabilitation to increase the total supply of affordable housing

11 Potential Financing Models Need Research  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 Before a bond financing program could be put in place various legal and policy issues require additional research, including:

12 Key Milestones Demonstrate “Critical Path” * The timetable above is preliminary, and subject to change. It should be viewed as ambitious in light of remaining uncertainties. TasksTiming * Research continuesNov. 05 – Jan. 06 Working group reports to Commission on researchJan. 06 – Feb. 06 Commission reviews and selects recommended approaches; presents recommendations to Department of Mental Health for action Feb. 06 – Mar. 06 Working group refines program design and development; State commences regulations Feb. 06 – Apr. 06 State concludes regulations and commences program; Projects are identified and transaction planning begins Sept. 06 – Nov. 06 Transactions are implementedNov. 06 – Feb. 07 If the Commission endorses the Housing Set-Aside concept today, key next steps could include the following:

13 For More Information We welcome your ideas and input Lehman Brothers Inc. Public Finance Constellation Blvd., 25 th Floor Los Angeles, CA Barbara A. Lloyd Peter J. Taylor Kevin O’Brien