[Noozhawk’s note: This is one in a series of articles on Noozhawk’s Santa Barbara Challenge, our public-engagement project on the city of Santa Barbara’s budget. Related links are below.]
Like many employers in one of the nation’s most expensive housing markets, the city of Santa Barbara struggles to attract and retain highly qualified employees. To help its workforce live locally on the South Coast and reduce the need to commute, the city created the Employee Mortgage Loan Assistance Program, better known as EMLAP.
Unlike private-sector employers, however, in the decade since the program began the city used its General Fund reserves to lend more than $5 million to employees so they could purchase their first homes.
Controversy over the program hit a fever pitch when local media discovered it last month. But context was largely missing from that discussion.
While stuck in the mire of a lousy economy, it’s easy to forget that the terms of the program were approved 6-0 by the acting city council in 2001. Only three public speakers appeared to talk about the agenda item.
The program, which has been halted indefinitely because of stress on the General Fund, allowed city employees to borrow money from the city’s reserves to purchase a home.
As of April 2011, the city has $3.8 million in employee loans outstanding, and 36 employees are currently participating in the program. Nine loans have already been paid off.
So what are the terms of the program? EMLAP was open to all permanent city employees, full- or part-time, who were first-time homebuyers, meaning they had not owned a market-rate home on the South Coast in the three previous years. The program wasn’t open to employees who were refinancing homes they already owned or for upgrades. Purchases were limited to homes in South Coast communities.
The employee placed a minimum down payment of 5 percent, and the bank provided a first deed of 80 percent. The city would then make up the remainder with a maximum loan of 15 percent. City participation was limited to a purchase price of $1,250,000.
The city’s loan to employees is based on a variable interest rate tied to Local Agency Investment Fund interest rates, which are quite low, and employees are only required to pay interest for the first five years. After that, the employee must pay interest and principal and the loan is due at the end of a 15-year period.
“To assist the employee, the city will also pay up to four points to the bank on the employees’ first deed of trust loan, up to $40,000 in order to ‘buy down’ the interest rate on the first trust deed,” the terms of the program say. “The points paid by the city are to be repaid when the second deed (to the city) is refinanced or if the home is sold.”
If the employee maintains continuous employment within the city five years from the loan date, 25 percent of the points value will be forgiven, and if the employee stays for 10 years, 50 percent will be forgiven. If an employee stops working for the city, the loan and any points are payable on the fifth anniversary of the loan, or 180 days from when the employee is terminated, whichever is longer.
The city’s largest loan was made to Police Chief Cam Sanchez in 2001, as a condition of his employment. Sanchez’s loan was $500,000, but isn’t technically a part of the EMLAP program. He currently owes $381,488 on the note.
Noozhawk began looking into the program earlier this year as part of its Santa Barbara Challenge investigation. A review of the list of outstanding loans for the 37 employees reveals an average loan amount of about $101,000. Of those 37 loans, 17 of the holders have only paid on the interest, putting nothing toward their loan balances to date.
Finance Director Bob Samario has talked at length with Noozhawk about the program and noted that when the program began in 2001, “we were in a much different place from an economic standpoint.” When home prices began to increase, “it was becoming more and more difficult for folks to buy a home,” he said.
Trying to hire people from outside the area became a challenge, and Samario said that keeping employees, like those in public safety, made sense. At the time, he said, Santa Barbara’s reserves exceeded city policy. The city currently has $18.2 million in General Fund reserves, nearly $8 million below city policy.
“The fact that reserves declined since then had nothing to do with this program,” he said of the General Fund. “We’ve essentially overspent.”
The last loan was issued in 2009, well beyond the beginning of the economic downturn.
“We were just on the beginning of the downturn” when the last loan was made, Samario said. “We had no idea that it would be of the magnitude we were seeing.”
Samario said there are homes that are upside down in value, in which owners owe more than the houses are worth, but Santa Barbara’s foreclosure rates are relatively low, and there hasn’t been the kind of decimation that other housing markets have endured. No employee has defaulted on any of the loans, Samario said.
If a homeowner is having difficulties, and a foreclosure is imminent, the bank would go after the first note, which is owned by the banks. If there’s nothing left after that, the city could lose money on the loan it issued.
“It’s possible that the city would lose that, but that’s as far as its going to go,” Samario said.
Because most city employees, especially nonmanagement positions, still rent in spite of this program, Noozhawk asked Samario how effective he thinks it’s been.
“That’s a value judgment,” he said.
When asked if he envisioned the program’s resurrection as things begin to trend upward, he demurred.
“It’s possible that we could bring it back,” he said. “I suspect it may take some time, though.”
That decision is up to the City Council, however, which is expected to discuss the program soon. The council’s three-member finance committee voted last week to recommend that the program be eliminated.
“Any previous council had the best intentions,” said Councilwoman Michael Self, who expressed frustration that the EMLAP numbers haven’t been part of the city’s budget discussion.
Councilman Bendy White said that if those General Fund reserves had been available instead of tied up in the loan program, the library might have been able avert budget cuts.
White also said that because there’s no floor on the interest rate offered to EMLAP employees, the loss of that money is hurtful to the city. Having the reserves on loan to employees also presents a lack of liquidity to the city, he said.
“I cannot imagine, in the current environment, that the city council would approve such a program,” said Councilman Dale Francisco.
The program will go before the full council for discussion later this year.
Jay Panzica, chief financial officer of the city of Ventura, said Ventura had enacted a similar program because obtaining housing was difficult for employees to obtain. The Ventura program has since been discontinued, also because of stress on the city’s own General Fund.
Similar programs still exist in the private sector, and one of the oldest locally is the nonprofit Coastal Housing Partnership. Founded by South Coast employers in 1987, the partnership’s goal is to alleviate recruitment and retention challenges caused by the high cost of workforce housing. By working with real-estate agents, lenders and home inspection firms, the partnership is able offer upfront savings for new homeowners, and renters, in a region where the median home price is some 11 times higher than the median household income.
“It’s a high-priced housing market,” said Corby Gage, the partnership’s executive director, who added that companies simply have to offer help with housing to remain competitive.
“It’s not enough to just have a benefit package that is traditional,” she said. “Housing is such a big part of it.”
Gage said partnership employers already factor in the cost of recruitment and retention when they need to make a new hire.
“They have to look at what the best return on investment is,” she said. “The employers we have recognize the value of their employees being homeowners.”