A Technical Post- Bypassing State Authorities to Implement the Rebuild Federally.

I warned you at the outset. I am going to use acronyms. I presume you understand a good bit of what is about to be written.

I was thinking about the rebuild and whether we needed to have a State or County entity/counterparty to take in the money. It is important if we get “grants” or if we have a CDBG-DR fund come in. The counterparty does not need to exist otherwise.

So, what if we bypassed the County/State altogether? What if we did not need the CDBG-DR funds at all, or rather, because we want it, the federals do it “their way?”

Our argument has been that mechanisms like those in AB 797 were a tool to start the bypass stage. We offered more than AB 797. We stacked it with existing tools like Opportunity Zones, and added in new ideas with the Disaster Investment Fund (DIF). California turned them all down (the DIF was turned down for introduction as a bill today). Still, AB 797’s structure remains, regardless of whether legislation created it or not. It was a rethinking of how to use Community Reinvestment Act (CRA) funds, and honestly, we can do it without the State. It is a description of a security to use to build out a capital stack. The DIF can be revived as a “spot bill” if desired. Opportunity Zones will require a Governor to get involved, but this Governor is too focused on scoring points against the Administration instead of helping his residents. The calculus is clear- the upside of taking on Trump beats the upside of helping the “victims.” As the top goes, so do the others, hence no dice on the DIF.

But, the question is what could a structure look like and what could a federally directed rebuild be? The feds are hinting at a potential approach here. Let’s take a minute and go down the rabbit hole.

First, let’s put aside the need for CDBG-DR. We know 70% of the funds from CDBG-DR go to Low to Moderate Income (LMI) housing as a grant (free). But that is the pre-Low Income Housing Tax Credit (LIHTC) extension in HR 1. More credits are available now and maybe more can be gotten on a temporary basis to fund rebuilding if we ask nicely. CDBG-DR funds are effectively used to flow to a County and do “predevelopment risk” for the most part. Sure, other uses exist, but the funds definitely overlap with the Economic Development Agency (EDA) and FEMA as well. CDBG-DR is mainly housing-specific. Let’s take housing out. We have addressed it last April. Depending on the property tax conversation, the housing piece could be worked out. I know philanthropy is also looking at the LMI housing too. There is funding available and incentives there as well as a capital stack. We may require additional LIHTCs temporarily via legislation, but let’s hold off on that for now.

Economic Development and Infrastructure can be funded via EDA instead of CDBG-DR. Think about that for a second. We can use our structures, use a minimal amount of funding from the feds as seed capital, and do it without the County/State or whoever messing it up. Funds, moreover, can be directed by either the Administration in EDA or through the Southwest Regional Border Commission (SRBC), a regional economic development agency as the federal entity awarding the funds and directing the capital stack. They could even contract with a CDC to advise and put it together for them.

EDA funds can be combined with other sources including Tax Increment, bonds, Community Reinvestment Act (CRA) funds, and tax incentives (read LIHTCs and Opportunity Zones). There is no need the State. The feds can convene the banks and funders on our own. They can align philanthropy. They can direct it. The funds also can be used for economic development and community enhancement, including adjacent housing and residential infrastructure. In other words, the funds can be directed by the federals at EDA and controlled in their implementation. Hmm…no need for a rebuilding authority per se. Considering the drama at the County, this option does not look so bad for Altadena.

So, you have the authority with EDA acting as the catalyst. You have funding sources, including the 797-like securities, CRA, and other sources of funds. You do not need a sovereign counterparty. Moreover, California said “no” to our Disaster Investment Fund today, but at this point, enough of California, so they are turning down all these options to work out a “state led solution.” They keep saying “no.” What’s the point of asking them to be something they are not? They want it one way and for all the fight that has gone into getting this far, why not just finish the job and do it yourself?

They are a side-car at this point, opting to poke instead of doing anything of substance. California governance is a liability, as we have seen over the last year, and will continue to see as the “drip, drip, drip” of the fire response and recovery comes out over time.

Add in SBA as a source of rebuilding capital alongside the CRA, and you have a way to finance a chunk of the residential real estate. LIHTCs are a source of capital incentive for investors, which do not need free “grants” alongside them, but if there are site preparation grants needed, the EDA could do similar things.

So, what is missing at this point? Money to actually build houses and apartments? Not really. It can be done. Money for “expenses?” We know what that means- nonprofit participation and all the other drama associated with them.

The model is here. EDA can theoretically do it. They can also contract with a Community Development Corporation to be a support/technical advisor for the process. It can all flow.

What does EDA not have? Eminent domain and land use rights. Ok. So? The fight over the latter remains to be settled considering the Executive Order and permitting delays the Administration is using to push beyond the usual uses of the Stafford Act. Let’s leave that for now. Is it important at this point to get the rebuild going? I do not think so.

Ok, this post is a lot of technical information to digest. It builds on the posts previously about what we need to do. It takes the decision out of the hands of the locals who are incapable of getting the message of the federals, no matter how many times they have been told.

Bottom line for casual readers?

Federal Rebuilding can be done, without any statutory changes (just a little bureaucratic imagination, which is an oxymoron I know), and bypass the State/local people who are holding us up.

There are some work arounds involved, but is the current model of relying on state/local governments any more efficient or requiring less work arounds than what we are proposing here? I think not. I think we can move faster and more efficiently with the model proposed.

EDA has been reduced in funding, but it retains a statutory agency with a limited purpose, a very valuable position to be in. We can reimagine parts of the mission here without the “Innovators Dilemma.”

Perhaps we can repurpose it. We need a new framework, a counter to the ideas being proposed now which may never get off the drawing board because of counterparty risk among other things, this County Rebuilding Authority which can only exist if CDBG-DR funds are allocated or a State authority. Considering the scoreboard, maybe it is time to think outside the box.

California is seemingly devoid of new ideas these days, so I will put another out there.

The federals are looking to take a more active role. Let’s just call it out and reimagine the damn thing. Sure the feds wanted to see more state participation, but the refusal on the State’s Part to do anything beyond the CDBG-DR complaints means the feds will probably have to do it themselves to do it right. The State has said as much. They are beholden to their interests. They are afraid or incapable of going beyond. They will not. Maybe it is not about reducing the federal role anymore, it is about reimagining the capital stack, and getting recovery done faster and more complete with a new playbook. Negotiations never go one way or the other, there is some new “compromise.” California’s obstinance might lead us to a re-imagination of the disaster response, but not how the parties expected it originally. Still, if the goal is to reduce the federal involvement and find new ways to finance the solution, maybe the federal guidance can get the solution there at the end, just not State driven.

At this point, the binary choice is the federals show the way or the State does it their way, which you can see what we have. They could fund it themselves, but they just won’t do it. The horse won’t drink. Lead please, someone.