by Edward Ring and Soledad Ursúa
California’s homeless crisis is now visible to everyone living in the state. Along with tens of thousands of homeless who are concentrated in various parts of major cities, additional thousands are widely dispersed. If you drive into most major urban centers, you will see tent encampments along freeway junctions, under bridges, along frontages, and beside drainage culverts. In smaller towns, they congregate by the dozens in parks and parking lots, along the streets and in the alleys. And in the inland suburbs, they camp out in ravines and along flood-control channels. In California’s largest cities, by the tens of thousands, they erect makeshift housing along sidewalks, using tarpaulins draped over shopping carts, tents, boxes. It is completely out of control. Billions have been spent to ameliorate the situation, and these billions have only served to make the situation worse than ever.
It’s hard to identify ground zero for California’s homeless crisis. But the San Francisco Bay Area and Los Angeles County host, between them, well over 100,000 of California’s estimated 130,000 homeless. And in both of those metros, local government policies have utterly failed.
This failure is partly because local elected officials are hampered by state laws which make it nearly impossible to incarcerate petty thieves and drug addicts, or institutionalize the mentally ill, and court rulings that prohibit breaking up homeless encampments unless these homeless can be provided free and permanent “supportive housing.”
The state and federal governments have even mandated that providing “housing first,” and getting every homeless person under a roof prior to any allocations of funds for treatment to overcome drug addiction or manage mental illness, is a condition of receiving government funds to help the homeless.
And if these laws and court rulings that have made homeless populations unmanageable weren’t enough to exacerbate the problem, California’s state legislators have crippled the ability of developers to cost-effectively construct any type of housing. State laws designed to prevent “sprawl” have caused land prices within cities to skyrocket. California’s environmental laws, most notably the California Environmental Quality Act (CEQA), require a dizzying, time-consuming, expensive, and seemingly endless array of reports from developers seeking project approvals. There are hundreds of applications and fees that developers must file with dozens of state and local agencies. Often these agencies will take months, if not years, to process the applications.
Without first changing these laws, the problem cannot be fixed. But instead of challenging these laws, local elected officials have used them as an excuse to engage in one of the most corrupt misuses of government funds in American history.
A vast special-interest movement has sprung up to spend the money anyway. This alliance of interest groups constitutes what has now become a Homeless-Industrial Complex, comprised of government bureaucracies, homeless advocacy groups operating through nonprofit corporations, and large government contractors, especially construction companies and land development firms.
They have used money from the state general fund, from state bond funds, from special local taxes and fees, and from local bond measures, to construct housing for the homeless, heedless of the per-unit cost. While a few thousand units of actual housing have been constructed so far, billions have already been spent.
A recent audit by Los Angeles City Controller Ron Galperin exposed the city’s inability to build enough homes with the $1.2 billion in Prop HHH voter-approved bond funds to address the homeless crisis. At an average cost of $550,000 per apartment unit of “permanent supportive housing,” small wonder. Similar or even higher average per-unit costs are typical of previous efforts in Los Angeles as well as throughout California.
Diverting nearly all funding to “housing first” at the expense of treatment, and elevating the costs of that housing through legalized corruption, guarantee that billions more will be wasted as homelessness in California gets worse. California’s local, county, and state governments have demonstrated themselves to be administratively and ethically inept. If the state government can’t do the job, it may be time for federal intervention, under the vision and leadership of President Trump, bringing to bear a comprehensive interagency response.
If several federal agencies launched a coordinated effort to get California’s homeless crisis under control, it could be accomplished in months instead of several years. As it is, California’s homeless crisis is out of control and getting worse every day. Federal action would not solve the homeless crisis overnight, but it would prevent something truly catastrophic occurring such as a disease epidemic, and it would set the stage for Californians more swiftly implementing permanent solutions, for which there currently is no end in sight.
For example, the IRS could reform the laws governing nonprofits to curb the legalized waste of billions that pour into what have become special interest behemoths.
The Securities and Exchange Commission could classify the taxpayer as having investor rights, in a long-overdue move that would make it a lot more difficult for public projects to squander public funds.
The SEC could also require consultants to public agencies to register as financial advisers and be subject to the same restrictions on political donations that govern these consultants in the private sector.
The Justice Department could investigate some of the more egregious wasteful projects allegedly launched to help the homeless to possibly uncover cases of collusion or racketeering.
The Justice Department could also send in DEA agents to break up the criminal gangs and drug traffickers who exploit California’s lenient drug laws and hide among the homeless encampments.
The Department of Housing and Urban Development could reform the Low-Income Tax Credit program to put a cap on per unit costs for housing projects to qualify. They could repeal the disastrous “housing first” mandate that prevents homeless programs from prioritizing treatment equally to constructing shelters.
The Department of Education could get even more aggressive against the teachers union which resists competition in K-12 education, and is consequently responsible for thousands of students graduating into homelessness instead of productive lives.
The Centers for Disease Control could declare a health emergency and sweep through the homeless encampments, cleaning up the trash and human excrement.
The Environmental Protection Agency could participate in that effort by declaring—quite accurately— homeless encampments to be Brownfields, in order to save California’s soil, water, and runoff to the ocean.
The Department of Labor could implement an executive order preventing Project Labor Agreements from being used to inflate the cost of housing projects, as if with the shortage of construction laborers in California, there is any need for PLAs.
And the Department of Veterans Affairs could house homeless veterans on unused sections of California’s abundant military bases.
And that’s just for a start. Here are some ways specific departments within the federal structure might be mobilized to work together and tackle the growing homelessness problem that threatens to turn the once “Golden State” into something resembling the Third World.
Treasury Department/IRS
One of the biggest sources of legalized corruption victimizing the American taxpayer is the fact that there has been no reform to nonprofit tax law. A nonprofit is the most tax-advantaged way to launder profits legally and act as an advocacy wing of major corporations. The U.S. Tax Code has been greatly abused by large national nonprofits who have turned charity work into a bankable industry, the power of which now rivals the private sector.
Today’s large charitable organizations are part of the Homeless-Industrial Complex. These nonprofits outrival many small businesses today by using the tax code to their benefit. Why pay taxes if you can find a loophole in the tax code? According to one report, the nonprofit sector—10 percent of the American workforce or 11.4 million jobs—is the third-largest workforce in the United States, behind retail and manufacturing. Total charitable giving in America in 2016 was about $390 billion, a 2.7 percent increase over 2015.
One of the most tax-advantaged ways to legally embezzle public dollars is via a nonprofit entity, which then creates a for-profit subsidiary. All of the revenue goes directly to the nonprofit controlling entity, wherein there are no caps on salaries and everything effectively is a write-off, and it becomes a zero-sum game to show zero profits. They can pay consulting and contracting fees to for-profit entities, which often can result in additional pay if the same employee is on the payroll of both entities.
Why use a for-profit business to own property when you can create a nonprofit entity, therefore excluding yourself from property taxes? The really savvy nonprofits know how to use the tax code to their advantage by hiring the most sophisticated tax attorneys and accountants, and creating multiple entities in order to do this.
The IRS could comprehensively reform the regulations governing nonprofits. For example:
- Set a threshold for annual (pre-tax) revenue from all sources of income and contributions, and once that maximum is exceeded, the IRS automatically will reclassify the nonprofit as a for-profit entity, and tax accordingly.
- Require all tax-exempt organizations to file public consolidated financials to replace current 990 disclosure requirements. Currently, under IRS guidelines, whether or not a tax-exempt organization has a parent, affiliate, subsidiary, and/or related entities, only the tax-exempt organization needs to file a public tax return. This is how they avoid disclosing their true assets and total salaries paid to employees. When an organization has multiple entities, an employee can work for any of these entities, with different titles and roles, while also receiving a salary from each of them. Without consolidated financials, it is impossible to determine how much a nonprofit executive, board member, or consultant makes. Additionally, private foundation tax-exempt entities are not required to disclose current form 990s to the IRS, something every other tax-exempt entity is required to do.
- Make the above requirement effective to-date, with a two-year retroactive look back provision in order to be in good standing and maintain its tax-exempt status. By doing so, we likely would see a sudden drop in organizations seeking tax-exempt status, and find many entities suddenly converting to traditional for-profit organizations. If an entity was not in compliance within a certain time frame, we could freeze its tax-exempt status until it was able to do so, ultimately cutting off their fundraising ability.
Impose a tax on excess executive compensation among tax-exempt organizations. Even a limit of $500,000 for any individual or executive pay would have a huge impact. While a limit of $500,000 per year may seem high, some of these nonprofit executive salaries are much higher. At these rates of compensation, the entity is no longer a public benefit, as it now benefits a specific employee. - Tax all public charity organizations in the same manner as private foundations. While there are 30 types of 501(c) organizations, there are two different types of 501(c)(3)s, private foundations vs. public charities. Private foundations pay taxes on net investment income which generally includes interest, dividends, rents, royalties, and capital gain net income, and is reduced by expenses incurred to earn this income. In reaching the asset threshold, the assets of related organizations are considered. A 501(c)(3) public charity follows different taxation rules from that of a private foundation.
- Disallow private foundations from 501(c)(3) exemption. A private foundation consists of nonprofits that don’t qualify as public charities. Foundations may be sub-classified as private operating foundations or private non-operating foundations and receive some of the advantages of public charities. Well-known foundations include the Rockefeller Foundation, Bill and
- Melinda Gates Foundation, and the Getty Foundation. In essence, highly profitable, multinational corporations have figured out how to take advantage of the tax code, and the creation of a private foundation is the best and most tax-advantaged way to do so.
- Tax tax-exempt organizations for any business activity outside of their chartered IRS exemption.
- Hold all 501(c)(3) organizations to the same lobbying disclosure rules. Other tax-exempt organizations that lobby, must either notify their members as to how much of their dues are nondeductible because they’re spent on lobbying or pay a proxy tax at the highest corporate rate, yet this rule does not apply to 501(c)(3) organizations.
Nonprofit organizations have become corrupt and politicized and gone far beyond the charitable missions for which their tax-exempt status was originally conceived. Reforming the tax laws governing nonprofits will not only result in leaner, more effective nonprofit advocacy for the homeless, which translates into less expensive homeless shelters and less expensive housing for the homeless, but it will also remove the incentives for individuals and organizations to abuse the nonprofit exemptions in all segments of American society.
Securities and Exchange Commission
Affordable housing developers are not disclosing the value of city land, therefore engaging in what is arguably taxpayer-backed fraud by not disclosing the full project costs to the investor, which in this case is the taxpayer. All real estate—whether it is single-family, commercial, or investment—is an investment made by an individual, who pays property taxes to local governments. Property taxes are allowable deductions for investment properties, therefore, the property owner is an investor.
Recommendations: Use the SEC Act of 1933 and 1934 to:
- Recognize the American taxpayer as a protected class of investors by the SEC.
- Recognize any interest in real estate meets the definition of a “security.”
- Apply insider trading laws to real estate investing.
If the American taxpayer is afforded the same rights that investors are accorded in private investment transactions, it will become far more difficult for public agencies to get away with waste and fraud. This will not only lower the costs for public homeless shelters and public housing for the homeless, but it will also lower the costs for all taxpayer-funded public projects.
SEC/Division of Enforcement
Local elected officials accept campaign donations from special interest groups, and in return, give them the rights to large redevelopment projects. This is a pay to play scheme. These groups are not registered as investment advisers, yet they provide investment advisory services to municipalities.
Recommendation: Apply Section 206(4) of the Investment Advisers Act of 1940 to all industries who partake in municipal contracts, requiring that investment advisers are subject to a two-year timeout from providing compensatory advisory services or political contributions.
Why should investment advisers have to register and adhere to campaign finance restrictions in the private sector, but not in the public sector? Holding them to the same rules as in the private sector will eliminate obvious conflicts of interest, and make the bidding process for homeless projects and services more competitive.
Justice Department/Antitrust Division
The special interest movement known as the Homeless-Industrial Complex may be engaging in collusive practices to substantially lessen competition, and this may include price-fixing schemes where one person holds property for the benefit of another. We are facing a crisis today manufactured by special interest groups and elected officials, who stand to benefit financially from it, thus potentially making this a racketeering case.
Recommendation: Invoke the Sherman Act of 1890, the Clayton Act of 1914 and the Federal Trade Commission Act of 1914, to prohibit cartels and the abuse of monopoly power.
Taking these steps will make all the stakeholders involved in helping the homeless, where billions already have been spent, far more careful in what sorts of partnerships they form, and what sort of “arms-length” transactions they execute.
Justice Department/DEA
In California, voters enacted Proposition 47, which downgraded property and drug crimes, and Prop. 57, which provided for the early release of nonviolent inmates. The two measures have perpetuated a constant cycle of drug use and the need to commit crimes to pay for drugs. Drug dealers now operate their businesses with minimal deterrents. Organized drug traffickers are able to hide under the guise of homelessness within homeless encampments.
Recommendation: Drugs are still illegal on a federal level, and the DEA needs to get involved in fighting drug trafficking that is camouflaged within the homeless communities.
California’s policymakers have abandoned citizens to an epidemic of drug use. State laws make it nearly impossible to stop public use of hard drugs. Traffickers and users operate with near impunity, and the state has become a magnet for both. With rampant drug use comes organized crime, exacerbated mental illness, property crimes to support drug habits, and public disorder. A federal crackdown will get this all back under control.
Justice Department/Law Enforcement Agencies
State and city officials no longer enforce the core responsibility of any government, which is to guarantee public safety. Private property is no longer respected under this diminished rule of law, thus violating the civil rights of law-abiding residents victimized by a state of lawlessness.
Recommendation: Activate and deploy federal law enforcement agencies such as the U.S. Marshals and the FBI to restore law and order to citizens.
With federal agencies cooperating with local law enforcement to enforce federal crimes, including robbery and larceny, the deterrent against property crimes that went away with the enactment of Proposition 47 will be reestablished.
Housing and Urban Development/Federal Housing Administration
Federal tax credit programs and taxpayer-backed dollars are being abused by special interest groups, under the guise of social redistribution policies. Specifically, the LIHTC (Low-Income Housing Tax Credit) program may be unduly influenced by nonprofit housing developers with no incentive to build cost-effective solutions, and are now reaching “affordable housing” per apartment costs that can exceed $750,000.
These high costs are due to California’s state and local governments requiring hundreds of permits with exorbitant fees and lengthy processing times, excessive environmental regulations, and prevailing wage requirements. Very few developers are capable of complying with this punitive array of obstacles, ensuring that the “subsidy” goes to powerful and favored special interest groups, defeating the underlying policy of the program in general.
Recommendations:
- Repeal “housing first,” which prevents funds from immediately being shared with treatment programs.
- Federal tax credits must be prioritized towards projects that are cost-effective.
- Withhold Community Developer Block Grants from the State of California.
- Require the exemption of state prevailing wage requirements in order to use the Federal LIHTC.
- Cap the cost per bed or per unit in order to receive public funding.
- Reform the LIHTC program so that it only financed “affordable housing” within 60-120 percent of area median income, but require developers to prove that residents could afford to live there, using household budgeting tools that take into account utilities and surrounding expense factors.
- Reform LIHTC so that deeper LIHTC subsidy models in the 30-50 percent of AMI have their own program, similar to HUD programs like Section 8.
- The HUD Office of Inspector General should identify examples of abuse of federal subsidies and prosecute offenders.
By setting conditions on federal funds for homeless projects, and by removing the “housing first” rule that prevents treatment from getting equal priority to shelter, more assistance would be possible with the same amount of funding.
Department of Education
Where you live determines where you go to school, so California’s inner-city youth are most impacted. For a child, education is destiny, and it is the only way for most people out of poverty. We are spending billions of dollars on the homeless crisis and job training for the uneducated, and public schools in California rank 40th in the nation. Unless we provide opportunities to Americans, they will fall victim to substance abuse. We have witnessed a market failure in public education, and the only way to correct market failures is to open up competition.
Recommendations:
- We need an “education first” policy that recognizes that the teachers union is the primary barrier to improving educational outcomes in the United States;
- We must improve our failing public education system by allowing competition via new charter schools and allowing for robust opportunity scholarships (i.e., voucher) programs.
California’s public education system has been fatally undermined by the teachers’ unions, which oppose any sort of competition to traditional public schools. Breaking their monopoly through charter schools or even vouchers will provide opportunities to students who today are graduating to homelessness instead of living productive lives.
Health and Human Services/Centers for Disease Control
Our homeless crisis is in large part a mental illness and drug crisis, masked as an “affordable housing” crisis by special interests. The mentally ill are our most vulnerable population, requiring our most help as they are a danger to themselves and others. A recent study by the Los Angeles Times has found that 78 percent of the unsheltered homeless in Los Angeles suffer from mental illness.
Recommendations:
- Declare a health emergency to address mental illness and substance abuse among the homeless, and,
- Create a federal tax credit to build and reopen mental healthcare facilities, for locations based outside of urban areas. We are witnessing a mental health and drug addiction epidemic afflicting tens of thousands of homeless, making Los Angeles’ “Housing First” policy ineffective.
- Subsidize the costs and regulate addiction treatment programs which can cost $30,000-60,000 per visit. Funding on these programs needs to revised criteria that create an incentive for providers who can do it cost-effectively.
- Directly pay individuals who directly provide care for and house a family member with a severe mental illness.
Getting people back into mental health treatment, either through more cost-effective publicly funded programs, or by making it easier for family members to care for their mentally ill loved ones, would ameliorate some of the most tragic consequences of the ineffective approach to-date.
The homeless crisis is also creating a risk of a disease epidemic. The trash and human excrement accumulating in homeless encampments have spawned an exploding population of disease-carrying animals and insects that thrive in these conditions: rats, fleas, mosquitoes, ticks, mites, and lice. Los Angeles already has outbreaks of typhus, hepatitis, and tuberculosis, as do other cities in California. Shigella, a communicable form of diarrhea, is now common among the homeless. There have even been outbreaks of trench fever, spread by lice.
Recommendation: The Centers for Disease Control should declare a health emergency to swiftly clean up the trash and human excrement. The out-of-control populations of rats, fleas, mosquitoes, ticks, mites, and lice should be exterminated.
California’s policymakers have utterly failed to protect the public from the diseases being spawned and spread by the trash and excrement piling up in homeless encampments. Declaring a health emergency and applying federal resources to the problem can fix it before it’s too late.
Environmental Protection Agency
California’s state legislature recently passed AB 1197, and it was quickly signed by Governor Newsom. The new law only pertains to Los Angeles and exempts any homeless housing project from the California Environmental Quality Act.
Yet because of the homeless, our streets are littered with feces, needles, and trash. While many are campaigning about climate change, far more imminent threats to public health and quality of our oceans are linked to the growing homelessness crisis in California with thousands of tons of human excrement and drug paraphernalia runoff flowing directly in our oceans and water systems.
California’s environmentalists have somehow forgotten that all drains lead to the ocean. Equally troubling, the trash and human excrement in these homeless encampments have lead to an explosion of disease-carrying rodents. Now there are issues with homeless related fires.
Recommendations:
- Declare areas where the homeless are concentrated as Brownfields, via the EPA Brownfields program;
- Mandate a community EPA liaison on any state project given an environmental exemption in order to deter environmental crimes.
Using Brownfield status to bring financial resources and regulatory leverage to bear on homeless encampments may be the only way to stop ongoing degradation of California’s soil, water, and ocean runoff.
Homeland Security
Today we are witnessing organized crime hiding within the extensive homeless encampments, taking advantage of permissive laws to conduct many illicit activities in broad daylight. Criminal organizations are growing among the homeless, understanding our laws and using them to their benefit, in order to diminish the role of law enforcement.
Recommendation: The Department of Homeland Security needs to infiltrate these homeless encampments and root out organized criminal networks.
If the DHS and the Justice Department work together to bring federal power and federal statutes into what have become lawless areas of California, the laws that tie the hands of local law enforcement can be overridden.
Department of Labor
States with the highest homeless populations, such as California, are run by special interest groups that require union memberships to work.
Recommendations:
- Implement a presidential executive order that exempts housing programs from prevailing wage laws and project labor agreements.
- Require At-Risk Targeted Persons (ARTPs) Employee Hiring Mandates; ex-felons, persons with mental illness, chronically homeless individuals; sober ex-drug addicts;
- Develop meaningful federal tax incentives and tax abatements to small businesses to incentivize employment of ARTPs and provide on-site workforce housing.
By exempting housing programs from prevailing wage laws and project labor agreements, the Department of Labor can lower the per-unit costs of shelter beds and units of housing. California’s labor market is so tight that these exemptions will not harm the workers. Similarly, by creating incentives for employers to hire at-risk individuals, more of the homeless will begin to reenter society. Organized labor should compete for projects and should not hinder the ability of organizations and companies to hire at-risk individuals as nonunion workers, and the Department of Labor can ensure that through executive order.
Department of Veterans Affairs
Veterans experience homelessness at a higher rate than the civilian population. About 7 percent of people in the United States can claim veteran status, but former service members make up around 13 percent of the country’s homeless population, according to the National Coalition for Homeless Veterans.
Recommendations:
- Use military bases to house homeless veterans.
- Work with the Department of Labor’s Office of the Assistant Secretary for Veterans’ Employment and Training.
Offering on-base housing to homeless veterans is an idea whose time has come. Giving them this respect after their service to our nation is fitting, and could make use of surplus facilities throughout California’s extensive network of military bases.
Federal Intervention Could Work Quickly
The objective of these recommendations is not to presume they offer the complete set of answers, or even the complete list of federal agencies that can be involved. These solutions that involve the federal executive branch are limited only by how conscientiously and how creatively they can be crafted.
But the impact of the recommended changes would be immediate and profound.
California’s homeless crisis would quickly improve. Criminal drug traffickers would be looking over their shoulders. The CDC and EPA would declare an emergency and clean up homeless encampments. Homeless veterans would find immediate shelter. And the power of the Homeless-Industrial Complex, a special interest movement that has been enriched by going slow and overspending on everything, would be shaken to its foundations.
Nonprofits would no longer be able to legally squander funds intended to help the homeless. Taxpayers would have the same rights as private sector investors, making it less likely public agencies could waste money on projects. Federal funds would be contingent on cost-effective projects.
Unions would have to compete to participate in projects, and with the shortage of construction workers in California and the many projects awaiting funds, that would not be a hardship to them. Over time, maybe a sustained effort by the Department of Education to introduce competition to the monopolistic union-controlled public schools might even change both the aptitude and the attitude of students graduating into California’s workforce.
Eventually, maybe the other root problem connected to homelessness—prohibitively expensive housing—would be addressed. Not only through many of the reforms proposed here, which could apply to low-income housing as easily as to permanent supportive housing, but through a loosening of the requirements to run building permit applications through an obscene gaggle of local and state agencies.
Projects that take as little as 20 days in Texas to get approved, and at most 20 months in most states, can take up to 20 years in California. Small wonder there’s a housing shortage. These countless applications with their exorbitant fees and endless delays constitute criminal negligence and naked, insatiable public sector greed, masquerading as a public service.
In California, at the state and local level, despite well-funded rhetoric to the contrary, there is a shortage of creativity and a shortage of conscientiousness. The residents of the hardest-hit cities facing this problem are trailblazers, pointing out that Emperor Newsom has no clothes, yet their cries for help have been ignored.
California’s policymakers are puppets of special interests. Those special interests include their own bureaucracies, which are controlled by public sector unions that gain membership dues and power whenever a public sector challenge worsens. Similarly, the other special interest members of the Homeless-Industrial Complex, developers and nonprofit corporations, gain profits and revenues when the homeless crisis worsens.
It is time for the federal government to take decisive action where our public servants on the state and local level have utterly failed the public. It must never be forgotten that this failure victimizes not only the taxpayers and the members of the public who live in areas overrun with homeless people. It also victimizes the homeless themselves, who are not getting shelter, and who are not getting treatment.
The power of the special interests who have turned homelessness into a self-serving, taxpayer-funded industry, must be broken.
An executive order from President Trump declaring a state of emergency, followed by an interagency effort according to a blueprint patterned after this checklist, could get America’s homeless crisis under control. And it could happen in months instead of interminable years.
– – –
Edward Ring is a senior fellow of the Center for American Greatness. He is a co-founder of the California Policy Center, a free-market think tank based in Southern California, where he served as their first president. He is a prolific writer on the topics of political reform and sustainable economic development. Ring, a fifth-generation Californian, has an undergraduate degree in political science from UC Davis, and an MBA in finance from the University of Southern California.
Soledad Ursúa is a New York City-trained and educated investment professional with 12-years direct experience with public-private partnerships, small business, and nonprofit finance, and investment advisory services, with a specialization in federally backed tax credit programs for economic development. She holds a B.A. in Global Studies from the University of California, Santa Barbara, and an M.S. in Urban Policy Analysis and Management, with a focus in public finance, from Milano the New School for Management and Urban Policy. She lives in Venice Beach, California.
