Our Cities Won’t Heal Without Real Estate : Economy: While the House bill would help, the Senate bill would be a giant step backward for California.

In California and across the country, it’s the economic engine that generates approximately one-fifth of our gross national product. At the local level, it’s a vital national resource responsible for 70% of the taxes for schools, roads, public safety and other essential services. And it’s a veritable job factory, employing more than 8 million people nationwide.

I’m speaking of real estate. And given its vital role in California’s and the nation’seconomy, sustained economic recovery will remain but a pipe dream so long as real estate remains distressed.

Of the more than 600,000 jobs lost in California between June, 1990, and June, 1992, more than 190,000, or almost one-third, were due to layoffs in construction and real estate-related trades. Especially hard-hit are California’s cities and counties, which are struggling to contain the damage of billions of dollars of taxes lost as commercial real estate values plunged. Nationwide, commercial real estate has lost over $500 billion of asset-value so far in the 1990s--a sum comparable to the decline in value of the stock market in the 1987 crash.

Declining property values and the dramatic reduction in construction permits in California have created significant budget deficits for the state and localities, many of which rely heavily on real-estate fees to support essential services. In Los Angeles County, for example, each new home produces between $20,000 and $40,000 in fees that help pay for schools, parks, flood control and roads. As these revenues have dissipated, casualties include school districts in bankruptcy and teachers threatening to strike over pay cuts, the escalation of park fees, the closing of libraries.

Small businesses of all kinds are now hindered by problems affecting real estate, because a primary source of America’s wealth--buildings and land--is now often considered too risky an asset to secure even a simple line of credit. Likewise, because real estate represents the savings of so many Americans, consumer confidence and buying power have nose-dived.

What’s to be done? To the extent that flawed national policies are at the root of the crisis, they should be modified. I’m not suggesting policies that would rekindle the development frenzy of the past decade. What’s needed instead is a responsible set of initiatives that addresses the impact of today’s crisis: cities, taxpayers, savers, small businesses and financial institutions. Simply put, the devaluation of our existing real estate base must be stabilized.

To this end, the real estate provisions passed by the House of Representatives as part of President Clinton’s deficit-reduction plan are a critical starting point, and California’s Congressional delegation should actively work for their enactment. These revenue-neutral modifications--to reform the passive-loss rules affecting people in the rental real-estate business, to make it easier for owners and developers to restructure troubled loans, to remove obstacles to pension investment and to ensure an ample supply of affordable housing--are necessary to alleviate today’s real estate crisis, caused largely by ill-conceived national policies and market oversupply.

The Senate’s provisions, on the other hand, are a step backward. The Senate bill jettisoned many of the important features of the House legislation and fails to recognize the link between healthy real-estate markets and healthy local economies.

Without positive action on the real-estate provisions in the House bill, California’s cities will remain at risk from deteriorating tax bases. Affordable housing will remain out of reach for many low- and moderate-income families. And we’ll see further asset-value deflation, more job losses and continued gridlock in the financial system.

Combined with positive economic and market factors, rational federal policies toward real estate should help move California’s economy and the nation’s toward economic stability, recovery and, ultimately, growth. Partisan politics and inaction are irresponsible in this debate--the issues are simply too fundamental.