Full opinion text
CORRECTED MEMORANDUM AND ORDER GRANTING DEFENDANT CENTURY HOUSING CORPORATION’S MOTION FOR MODIFICATION OF EXHIBITS B AND C OF THE AMENDED CONSENT DECREE AND DENYING PLAINTIFFS’ MOTION FOR MODIFICATION OF EXHIBITS B AND C AND THE ADDITION OF EXHIBIT D TO THE AMENDED CONSENT DECREE PREGERSON, District Judge. This matter is before the court on Plaintiffs’ and Defendant Century Housing Corporation’s (“CHC”) motions and cross-motions for modification of the amended Consent Decree (“Consent Decree”). FACTS AND PRIOR PROCEEDINGS I. 1972 to 1987: The Initial Proceeding and Consent Decree A. Initial Proceeding Twenty-five years ago, on February 16, 1972, Plaintiffs brought this environmental protection suit against Federal and State Defendants in the United States District Court for the Central District of California to halt work on the proposed 1-105 Freeway project “until governmental officials complied with the following: federal and state statutes enacted to protect the human environment; federal statutes enacted to protect homeowners, tenants, and businesses forced to relocate; and federal statutes enacted to ensure public participation in the decision making process through public hearings.” Keith v. Volpe, 501 F.Supp. 403, 405 (C.D.Cal.1980). The path of the proposed freeway adversely affected housing stock in “predominantly low-income and minority communities.” Keith v. Volpe, 643 F.Supp. 37, 39 (C.D.Cal.1985). To vindicate important national and state policies, this court issued an injunction to halt further work on the proposed Freeway project until state and federal officials completed the environmental impact studies and reports required by the National Environmental Policy Act of 1969, 42 U.S.C. §§ 4321 — 4347, (“NEPA”), and the California Environmental Quality Act of 1970, Cal. Pub. Res.Code. §§ 21000-21151 (“CEPA”). In addition, this court’s order required that governmental officials hold additional public hearings, conduct further housing availability studies, and give satisfactory assurances that adequate replacement housing would be available as required by the Federal-Aid Highway Act of 1968, 23 U.S.C. §§ 501-511, and the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, 42 U.S.C. §§ 4201-4655. The Environmental Impact Report and Environmental Impact Statement (“EIS”) required by NEPA took five years to prepare, and was approved in 1978 by the Secretary of the United States Department of Transportation. Keith v. Volpe, 501 F.Supp. 403, 405 (C.D.Cal.1980). B. Consent Decree A year later, in October 1979, all parties agreed to settle the claims arising from the initial 1972 proceeding in a Final Consent Decree, later amended on September 22, 1981. The Consent Decree dissolved this court’s 1972 injunction and required that the Freeway be constructed as proposed in the EIS. Among other goals, the Consent Decree required that the Freeway project be built with supporting transit facilities; that housing stock be replenished for communities affected by the proposed path of the freeway; that employment opportunities generated by the Freeway project benefit the communities economically impacted by the project; and that significant economic opportunities and technical assistance support be provided for women and minority business enterprises. Consent Decree at 8. The Consent Decree incorporates Exhibit A, which details the construction requirements for the Century Freeway; Exhibit B, which describes the affordable housing program (“Housing Program”); and Exhibit C, which sets forth an employment and business plan of affirmative action for the benefit of the corridor communities, women, and minority group members. C. Entities Created to Implement the Consent Decree The Consent Decree created the Century Freeway Housing Program (“CFHP”) and designated the California Department of Housing and Community Development (“HCD”) as the lead agency to coordinate and implement the Housing Program. Exhibit B at 1. In addition, the Consent Decree required the State of California to participate in and fund the Century Freeway Affirmative Action Committee (“CFAAC”), Consent Decree, Exhibit C, at 25-29, and the Office of the Advocate for Corridor Residents (“Corridor Advocate”), Consent Decree at 11. CFAAC was responsible for monitoring compliance with Exhibit C, which embodies the affirmative action and equal opportunity requirements of the Consent Decree. Specifically, CFAAC was required to review and prepare written comments on the responsiveness of all bids and contracts to the requirements of the Decree; conduct periodic reviews of each contractor’s performance; receive complaints; conduct on-site inspections and interviews; assist in the process of achieving equal employment opportunity and achieving participation by minority and women business enterprises; help locate and recruit employees, contractors, and subcontractors; and establish effective programs for contractors and subcontractors unable to meet women and minority business enterprise and equal employment opportunity goals. Consent Decree, Exhibit C at 26-28. The Corridor Advocate was responsible for monitoring compliance with certain goals of Exhibit B, the Housing Program. Specifically, the Advocate was responsible for establishing a local office in the general area where the remaining displacees resided; monitoring State Defendants’ compliance with all applicable state and federal regulations pertaining to the relocation rights of the displacees; reviewing and commenting on the draft texts of notices and information sheets to be provided to displacees and the strategy for notification of tenants of rental units of their eligibility for benefits; receiving and recording displaeee complaints; providing information to displacees relevant to relocation benefits under applicable federal and state laws and regulations; and assisting displacees who had complaints or disputed claims with the California Department of Transportation (“Caltrans”). Consent Decree at 11-15. D.The Housing Program When first established by the Consent Decree, the Housing Program consisted of three distinct segments: 1. The 1025 Segment This segment required the State of California, acting through HCD as the lead agency, to rehabilitate or construct through one of its entities, namely CFHP, 1,025 units of housing pursuant to approvals given by the Federal Highway Administration (“FHWA”) before August 25, 1981. Consent Decree, Exhibit B at 1-2. 2. The 1175 Segment This segment required HCD, acting through CFHP, to construct or rehabilitate at least 1,175 units of housing to meet the housing needs of residents previously living on the Freeway right-of-way (“corridor residents”) and who were eligible for benefits under the Uniform Relocation Act, 42 U.S.C. § 4201-4655. Consent Decree, Exhibit B at 2. 3. The $110 Million Segment This segment required the FHWA to authorize the expenditure of $110 million in federal funds — augmented by a one-time inflationary increase — to be matched with state funds in the same proportion as the federal/state proportionate contributions for freeway construction. These funds were to be used to produce affordable housing units. Stipulation and Order of Jan. 29, 1993 Re Use of Proceeds of Sales of Units from 1025 and 1175 Housing Segments at 2-3. The Consent Decree required that any proceeds from the sale of housing units constructed under the 1025 and 1175 segments be reimbursed to Federal and State Defendants. Proceeds generated by the sale of housing units constructed under the $110 Million Segment were to be used for construction of additional low and moderate income housing. Id. II. 1988 to 199k: The Restructured Housing Program and Completion of the Freeway This court’s Order of April 14,1988, directed that the $110 Million Segment be restructured to provide a more efficient approval process by reducing FHWA’s role and by expediting procedures. The Order provided that: (1) any then-existing housing units which had been previously constructed under the $110 Million Segment be transferred to the 1025 and 1175 Segments (and counted toward meeting the requirements of these Segments as originally established); and (2) Federal and State Defendants fully fund the $110 Million Segment. Order of April Ik, 1988 to Amend Consent Decree and Implement Admin. Changes in Century Freeway Housing Program at 2-3. In February 1991, 214 units remained to be “contracted for” to complete the requirements of the 1025 and 1175 Segments of the Housing Program. Order of Feb. 20, 1991 Modifying Amended Final Consent Decree [Expanded $110 Million Program] at 2. This court’s Order of February 20, 1991 directed that these 214 units be deleted from those Segments, and that $16.05 million be added to Defendants’ obligation to fund the $110 Million Segment. Thereafter, the $110 Million Segment was to be known as the “Expanded $110 Million Segment.” The Order also directed that the Defendants deposit the total amount of their obligation to fund the Expanded $110 Million Segment into a “Special Fund Account” in the California State Treasury to be held in trust to fund the Expanded Segment. The Order further provided that any funds received by the State from transactions involving the provision of housing under the Expanded $110 Million Segment be re-deposited into the Special Fund Account, effectively recycling the funds. This court’s Order of January 29, 1993 directed that all proceeds from the sale of housing units identified in Exhibit A, from transactions after July 1, 1993 and involving units constructed under the 1025 and 1175 Segments, and from transactions involving units constructed under the Expanded $110 Million Segment were to be deposited into the Special Fund Account in the California State Treasury. The Order also directed that all costs for CFHP were to be paid out of the same account. Stipulation and Order of Jan. 29, 1993 Re Use of Proceeds of Sales of Units from 1025 and 1175 Housing Segments at 4,7. The 1993 Order also required State Defendants to prepay all estimated program costs. In exchange, State Defendants were released from any future financial obligations after July 1, 1993. Federal Defendants were also released from any future financial obligations. The Consent Decree, as first amended in 1981, required that approximately 8,700 units of affordable housing be built. As of 1995, CFHP had built, was constructing, or planned to construct approximately 5,700 affordable housing units. This performance well exceeds the Consent Decree’s goal. Stipulation and Order of July 31, 1995 Re Restructuring of the Century Freeway Housing Program (“Privatization Order") at 3. The Freeway opened on October 13, 1993, with high occupancy vehicle lanes and a light-rail line in the median as required by Exhibit A and subsequent court orders. Based on Caltrans’s most recent figures, freeway construction is now close to completion at a total cost of $2.24 billion. (Def.’s Mem. P. & A Supp. Mot. Amend Consent Decree at 2). III. 1995: Privatization CFHP, as structured before the 1995 Privatization Order, had the resources necessary to meet the housing production goals. All parties recognized, however, that continued administration of the housing program by state agencies was not the most efficient way to maximize the impact of the affordable housing funds. The parties also recognized that given the cost of state administration, the Housing Program “would not be able to allocate additional funds for affordable housing production, and funds allocated to monitor thirty-year affordability of housing units could be exhausted prior to the thirty-year term, thereby jeopardizing the housing benefits of the Consent Decree.” Privatization Order at 3. To address these concerns, this court signed and filed a stipulated Privatization Order on July 31, 1995. The stipulation was signed by Garlyl W. Hall, Plaintiffs’ Counsel, Leon W. Weidman, Counsel for Federal Defendants, and Ralph Livingstone, Counsel for State Defendants. The goals of the Privatization Order were: (1) to “maximize the use of limited resources to achieve and exceed Consent Decree affordable housing production goals;” and (2) to “prolong the monitoring and enforcement of affordable housing regulatory agreements.” Id. at 4-5. To meet these goals, the Privatization Order transferred responsibility for administration of the Housing Program from HCD/CFHP to a newly-created private, nonprofit organization to be incorporated in the State of California: Century Housing Corporation. The Privatization Order required the transfer and consolidation of all assets formerly in the Special Fund Account to CHC. Id. at 14-15. An interim administrator and trustee, Allan Kingston, was appointed to manage the Housing Program’s assets and activities during the transition from the state agencies to the CHC. Id. at 11. This court appointed a ten-member Board of Directors for CHC, selecting candidates from nominees suggested by all parties. The Privatization Order relieved the Federal Defendant from its obligations under the Consent Decree and as a defendant in Keith v. Volpe, 501 F.Supp. 403 (C.D.Cal.1980). Privatization Order at 26. State Defendant’s motion to dismiss, filed with this court on April 1, 1996, is still pending. Id. Under the Privatization Order, this court may retain jurisdiction over the case for up to five years. Id. at 24. Plaintiffs’ Counsel was to hold the same relationship with CHC as it had to HCD/CFHP. Id. IV. 1996 to Present: Modifications to the Consent Decree A. The Lopez/Montoya Report The Privatization Order anticipated further modifications to the Consent Decree and its Exhibits: Subsequent to this Order, the Administrator and the Parties shall begin review of the Consent Decree, Court orders thereunder, and state and federal laws to determine what modifications may be desirable for the Corporation [CHC] to achieve Exhibit B and C goals in an efficient and equitable maimer, and to recommend how Housing Program procedures and functions should be revised to reflect privatization of the Housing Program. The Administrator shall retain a consultant under terms substantially similar to those contained in the March 24, 1995 order of this [c]ourt, and consult with the support entities [such as CFAAC, the Corridor Advocate, etc.] to assist in such review. Any modifications to such goals and/or the Consent Decree or orders issued thereunder shall be effective only pursuant to subsequent order of this [c]ourt, and, as to modifications of the Consent Decree, with the concurrence of the Parties. Privatization Order, ¶ 2.1.2 at 17. In September 1995, CHC Administrator Allan Kingston retained consultants Daniel Lopez and Joseph Montoya to prepare a report recommending revisions to Exhibits B and C of the Consent Decree. In preparing this report, Lopez and Montoya consulted with all parties to the Consent Decree, all administrative bodies involved in implementing the Consent Decree, and Plaintiffs’ Counsel. The March 19, 1996 report (the “Lopez/Montoya Report”) was submitted to CHC’s Board and this court on March 20, 1996. The Lopez/Montoya Report proposed modifications to Exhibits B and C that were considered by CHC, pursuant to this court’s March 26,1996 Minute Order. CHC’s Board adopted a Statement of Principles and a Mission Statement and submitted comments on the Lopez/Montoya Report to this court on April 12, 1996. (Pis.’ Exh. 21; CHC Resp. Consultants’ Rept. Proposed Rev. Exh. B & C Consent Decree.) In almost all respects CHC’s Board adopted the consultants’ recommendations as presented in the Lopez/Montoya Report. In court-sponsored conferences, all parties again reviewed the Lopez/Montoya Report during the week of April 20, 1996. On April 24, 1996, this court directed the parties to discuss the Lopez/Montoya Report’s proposed revisions to the Consent Decree, to agree where possible, and to submit all unresolved issues to the court for decision. The parties failed to agree on any of the proposed modifications to the Consent Decree and arrived at an impasse. CHC then proceeded to endorse substantially all of the Lopez/Montoya Report’s proposed changes and to draft a business plan. On May 10, 1996, CHC staff presented a draft business plan to CHC’s Board for approval. This draft business plan incorporated the goals set forth in the Lopez/Montoya Report. CHC’s Board tentatively approved this plan at a June 18, 1996 meeting, subject to adoption and approval of specific implementation plans for each new loan product. On July 12, 1996, implementation plans were submitted to the New Business Committee of CHC’s Board of Directors for further discussion. On July 25, 1996, Plaintiffs’ Counsel was given the opportunity to explain his views to CHC’s Board. In a report to this court dated August 2, 1996, Plaintiffs’ Counsel acknowledged the many opportunities afforded him to consult with CHC about the business plan but asserted that he had a “legitimate concern for developing a process and structure to ensure that our clients receive the anticipated Consent Decree benefits.” (Pis.’ Exh. 28; Pis.’ Rept. Status Implementation Amended Fin. Consent Decree at 4.) B. Modification Negotiations The parties unsuccessfully attempted to discuss and agree on proposed modifications to Exhibits B and C when they met on June 23,1996 and September 18,1996. CHC submitted its proposed revisions to Exhibits B and C to this court on September 24, 1996. These proposed revisions closely paralleled the Lopez/Montoya Report’s recommendations. By Minute Order filed December 23,1996, this court ordered the parties to meet again to discuss the proposed modifications to Exhibits B and C. The parties agreed to meet face-to-face on January 17, January 22 and January 28,1997. After meeting on January 17 and 22, the parties agreed that despite their good-faith efforts, fundamental differences prevented concurrence on the modifications. They therefore cancelled the January 28„1997 meeting. This court accordingly issued a Minute Order on January 23, 1997, requesting that the parties file motions with supporting documents on January 31, 1997 and that counsel meet with Special court Coordinator Dick Johnson for further settlement discussions on February 11, 1997. In response to this Order both parties filed motions, counter-motions, oppositions and replies along with hundreds of pages of supporting declarations and affidavits. In these filings, both parties acknowledged that they were at an impasse. (Def.’s Hem. P. & A. Supp. & Proposed Order, filed January 31, 1997 at 4; Pis.’ Hem. P. & A. Supp. Mot. Amend Consent Decree at 3.) C. Summary of Parties’Proposals 1. CHC’s Proposed Modifications CHC has moved this court to adopt the following modifications to Exhibits B and C of the Consent Decree: 1)The geographic area affected by the Consent Decree’s Housing Program would be altered to include the "Los Angeles metropolitan area, including the tertiary zone,” (Def.’s Hem. P. & A. Supp. Mot. Amend Exhs. B & C Consent Decree at 7-8); 2) The underwriting criteria would be general, rather than fixed, to reflect the ever-changing real estate market and the affordable housing industry, id. at 9; 3) Distribution by income band would be recognized as a goal, rather than a strict requirement, id.; 4) The rental affordability mechanism would be updated in order to finance and sell housing developments, id. at 10; 5) CHC would be given the authority to acquire and/or rehabilitate existing housing, id. at 12; 6) Caltrans would be relieved of all obligations with respect to the Housing Program, id.; 7) CHC would assume CFAAC’s and the Office of the Advocate’s functions. Id. at 13. 2. Plaintiffs’ Counsel’s Proposed Modifications Plaintiffs’ Counsel has moved this court to adopt the following modifications to the Consent Decree: 1) The addition of a new “Exhibit D.” This Exhibit would provide for the appointment of an Office of the Ombudsman to assume the responsibilities of CFAAC, Office of Resident Services, and Century Office of Affordability Monitoring, (Pis.’ Hem. P. & A. Supp. Mot. Amend Consent Decree at 10); 2) The wording of Exhibits B and C would be modified to reflect the change in management structure from the state agencies (HCD/CFHP) to CHC, a non-profit corporation. Id. at 9. D.The February 13,1997 Hearing At the February 13, 1997 hearing, this court heard an entire day of extensive argument from both parties. In addition to argument from Counsel for the Plaintiffs and CHC, the court also heard from William G. Brennan, General Counsel and Deputy Secretary of the Department of Business, Transportation and Housing of the State of California, various CHC Board members, and from representatives of the affordable housing industry in Southern California. ANALYSIS I. The Court’s Power to Modify the Consent Decree A. The Swift Standard for Modification of Consent Decrees Before this court can consider the modifications urged by the parties, it must first resolve the threshold question whether it has the authority to modify the consent decree without the concurrence of both parties. This initial question is complicated by language in the Privatization Order relating to future modifications: Any modifications to such goals and/or the Consent Decree or orders issued thereunder shall be effective only pursuant to subsequent order of this Court, and, as to modifications of the Consent Decree, with the concurrence of the Parties. Privatization Order at 17-18. The Consent Decree itself, however, recognized the inherent power of the court to modify the Decree: Upon noticed motion and opportunity to any party to object, this Amended Decree may be modified or amended if plaintiffs’ counsel and State and Federal defendants to this litigation agree in writing with the approval of this court. As part of its inherent power, the court may modify this Amended Decree upon motion by either plaintiffs or Federal defendants or State defendants. Consent Decree Part VI at 15. The parties both appear to argue that this court has the power to modify the consent decree without the concurrence of both parties. When CHC’s Counsel was asked if the court had the power to modify the consent decree and adopt all of Plaintiffs’ Counsel’s proposed changes, over CHC’s objections, he answered: Yes, your Honor. We feel that in the instance where a substantive modification is being made where a procedural element might be lacking is completely different from this case where both sides have requested substantive modifications. (R.T. at 47) (emphasis added). On this subject, Plaintiffs’ Counsel said: [The “with the concurrence of the parties” language] can only mean that modifications of the Consent Decree could be ordered with the concurrence of the parties but not without the concurrence of the parties unless — and of course we concede this — the court in its inherent power, which is also recognized in the Consent Decree — has grounds to modify the Consent Decree. (R.T. at 125) (emphasis added). Courts have wrestled with the question of what grounds are sufficient to modify a consent decree. In his moving papers Plaintiffs’ Counsel directs this court to the decision of the United States Supreme Court in United States v. Swift & Co., 286 U.S. 106, 52 S.Ct. 460, 76 L.Ed. 999 (1932). In Swift, the nation’s five leading meat packers stipulated to a consent decree limiting their commercial activities, in order to avoid anti-trust litigation. Id. at 111, 52 S.Ct. at 461. Ten years later these companies petitioned for modification of the order to reflect changed market conditions. Id. at 113, 52 S.Ct. at 461-62. The Supreme Court reversed the modification granted by the district court, and explained: “Nothing less than a clear showing of grievous wrong evoked by new and unforeseen conditions should lead us to change what was decreed after years of litigation with the consent of all concerned.” Id. at 119, 52 S.Ct. at 464. Swift’s demanding standard for modification of consent decrees proved unduly restrictive as decrees became more complex, of longer duration, and more frequently employed in public interest litigation. The Second Circuit distinguished Swift and emphasized the unique requirements of institutional reform litigation: It is well recognized that in institutional reform litigation such as this[,] judicially-imposed remedies must be open to adaptation when unforeseen obstacles present themselves, to improvement when a better understanding of the problem emerges, and to accommodate a wider constellation of interests than is represented in the adversarial setting of the courtroom. As experience with this type of litigation increases, a consensus is emerging among commentators in favor of modification with a rather free hand. New York State Assoc. for Retarded Children v. Carey, 706 F.2d 956, 969-70 (2d Cir.1983). Similarly, in a case involving the same consent decree now at issue, the Ninth Circuit recognized that “courts have not applied the strict Swift standard to modifications that alter the parties’ obligations when experience with a consent decree reveals problems with its administration.” Keith v. Volpe, 784 F.2d 1457, 1460 (9th Cir.1986). B. The Rufo Standard for Modification of Consent Decrees In Rufo v. Inmates of the Suffolk County Jail, 502 U.S. 367, 112 S.Ct. 748, 116 L.Ed.2d 867 (1992), the United States Supreme Court revisited the issue of modification of consent decrees in the context of institutional reform litigation. The Court first held that a consent decree is subject to Federal Rule of Civil Procedure 60(b). Id. at 378, 112 S.Ct. at 757. This Rule provides in part: On motion and upon such terms as are just, the court may relieve a party or a party’s legal representative from a final judgment, order, or proceeding for the following reasons: ... (5) the judgment has been satisfied, released, or discharged, or a prior judgment upon which it is based has been reversed or otherwise vacated, or it is no longer equitable that the judgment should have prospective application; or (6) any other reason justifying relief from the operation of the judgment. Fed.R.Civ.P. 60(b). Accordingly, this court’s authority to modify a consent decree is grounded in Rule 60(b). The Supreme Court in Rufo went on to explain that Rule 60(b) had not “codified the grievous wrong’ standard of ... Swift.” Id. at 378-79, 112 S.Ct. at 757. Rather, by allowing modification on “terms as are just,” id. at 380, 112 S.Ct. at 758, Rule 60(b) “permits a less stringent, more flexible standard.” Id. The Court explained that “a flexible approach is often essential to achieving the goals of reform litigation.” Id. at 381, 112 S.Ct. at 758. Modification of a consent decree under Rufo requires a two-step analysis: first, the moving party must meet the initial burden of showing change warranting the modification, and second, the proposed modification must be suitably tailored to the changed circumstances. Because Rule 60(b)(5) allows for relief when prospective application of a judgment is no longer equitable, “a party seeking modification of a consent decree bears the burden of establishing that a significant change in circumstances warrants revision of the decree.” Id. at 383, 112 S.Ct. at 760. A moving party can meet this initial burden “by showing a significant change either in factual conditions or in law.” Id. at 384, 112 S.Ct. at 760. The present case involves changed factual conditions. The Supreme Court in Rufo described three settings where a change in factual conditions allow for modification of a consent decree: Modification of a consent decree may be warranted when changed factual conditions make such compliance with the decree substantially more onerous.... Modification is also appropriate when a decree proves to be unworkable because of unforeseen obstacles ... or when enforcement of the decree without modification would be detrimental to the public interest. Id. The district court’s role does not end when the moving party has met its initial burden and shown that a change of fact warrants modification of a consent decree. Once the moving party has met this burden, the court “should determine whether the proposed modification is suitably tailored to the changed circumstance.” Id. at 391, 112 S.Ct. at 763. There are three concerns which guide this evaluation. First, “a modification must not create or perpetuate a constitutional violation.” Id. Next, “[a] proposed modification should not strive to rewrite a consent decree so that it [does no more than] conform[ ] to the constitutional floor.” Id. Finally, the district court should “defer to local government administrators, who have the primary responsibility for elucidating, assessing, and solving the problems of institutional reform, to resolve the intricacies of implementing a decree modification.” Id. at 392, 112 S.Ct. at 764 (internal quotations and citations omitted). Federal courts have relied on Rufo’s flexible standard to modify consent decrees when changing factual circumstances-or changing laws have made the decrees detrimental to the public interest. In Hook v. Arizona, 98 F.3d 1177 (9th Cir.1996), the Ninth Circuit modified a consent decree which allowed holiday gift-packages for Arizona state prisoners, when an explosive growth of prisoners and a dramatic increase in prisoners’ drug use made searching the packages an “excessive burden” on state prison authorities which “proved to be detrimental to the public interest.” Id. at 1180. Other circuits have applied the Rufo standard to proposed modifications of consent decrees which implement race-based affirmative action plans, Branch v. Seibels, 31 F.3d 1548 (11th Cir.1994), decrees which regulate prison conditions, Alberti v. Klevenhagen, 46 F.3d 1347 (5th Cir.1995), and decrees relating to trade restraints. In re Detroit Auto Dealers Ass’n, Inc., 84 F.3d 787 (6th Cir.1996). The present case is sufficiently analogous to an “institutional reform” case to be controlled by the Rufo standard. A “particularly significant” rationale underlying the flexible Rufo standard for institutional reform consent decrees is that “such decrees reach beyond the parties involved directly in the suit and impact on the public’s right to the sound and efficient operation of its institutions.” Rufo, 502 U.S. at 381, 112 S.Ct. at 759 (internal quotations omitted). Similarly, in the present case there is much more at stake than the interests of the parties. The creation of affordable housing is of tremendous importance to the citizens and communities of Southern California. Moreover, although CHC is a non-profit corporation, its funds originated from state and federal resources, and its duties and responsibilities most closely resemble those of a public institution. In institutional reform cases, “decrees often remain in place for extended periods of time, [and] the likelihood of significant changes occurring during the life of the decree is increased.” Id. at 380, 112 S.Ct. at 758. In the present case, the same court has retained jurisdiction over the case for twenty-five years, and has overseen numerous changes during the life of the decree. Finally, as is true with consent decrees in many other institutional reform eases, the government — here, the State of California — remains a party to the original consent decree. Because the present case is closely analogous to institutional reform eases, the Rufo standard controls the modification of the consent decree. Applying the Rufo standard, the Ninth Circuit recently explained, “[w]hen determining whether modification of a consent decree is appropriate, the district court should exercise flexibility.” Hook, 98 F.3d at 1179 (citing Rufo, 502 U.S. at 383, 112 S.Ct. at 759-60). Accordingly, this court approaches the parties’ requests for modification with flexibility in mind. II. Defendant CHC has Met its Initial Burden of Demonstrating Significant Change of Fact Warranting Modification, and the Proposed Modifications are Suitably Tailored to the Changed Circumstances Under Rufo, a party seeking modification of the consent decree “has the burden to demonstrate that a ‘significant change’ in fact ... warrants the modification.” Hook, 98 F.3d at 1179. CHC has met this burden for each of its proposed modifications. In addition, CHC’s proposed modifications are “suitably tailored to the changed circumstance[s],” Rufo, 502 U.S. at 391, 112 S.Ct. at 763. Before discussing these proposed modifications in detail, a brief survey of the context and goals of the Consent Decree and Privatization Order is warranted. The Privatization Order of 1995 created a new and innovative organization in CHC: a non-profit corporation with much of the experience of a state agency, yet with the flexibility and low administrative costs of a non-governmental organization. CHC was created “in order to maximize available resources so that Consent Decree affordable housing production goals can be met and exceeded.” Privatization Order at HH (emphasis added). Privatization took place “in recognition of the need to preserve and protect the benefits of the Housing Program for future generations.” Id. at ¶ 1 (emphasis added). To achieve these ambitious goals, the Privatization Order sought Board members with broad areas of expertise, including “[u]rban development and/or planning; ... [b]anking and/or financing of affordable housing, with knowledge of community lending and credit quality procedures; ... [t]he needs of corridor communities [production and legal aspects of real estate development [government programs and funding sources ...; and [ajffordable housing production and rehabilitation.” Id. at ¶ 1.1.2a-e. The Board members ultimately selected by this court reflect each of these broad areas of expertise, and represent an impressive stock of talent and experience intended to do far more than spend-down affordable housing funds as quickly as possible. The Privatization Order also recognized that the Consent Decree, amended fourteen years earlier and intended to regulate state agencies, was inappropriate for the new CHC. The Privatization Order directed that the CHC Administrator and the parties: [SJhall begin review of the Consent Decree, [c]ourt orders thereunder, and state and federal laws to determine what modifications may be desirable for the Corporation to achieve Exhibit B and C goals in an efficient and equitable manner, and to recommend how Housing Program procedures and functions should be revised to reflect privatization of the Housing Program. Id. at 2.1.2 (emphasis added). Thus, the Privatization Order was predicated on the premise that the Consent Decree needed to be modified. Moreover, the Order anticipated that such modifications would be immediate; “[subsequent to th[e] Order,” id., and while the Administrator was still overseeing the transition of the Housing Program from the state agencies to the newly-created CHC. To help expedite the review of the Consent Decree and to solicit possible modifications, the Privatization Order directed that the Administrator “shall retain a consultant.” Id. (emphasis added) The Privatization Order certainly did not contemplate that nearly two years would pass, that the parties would be at impasse and unable to agree on a single modification, and that the entire affordable housing program would grind to a halt. Therefore, in addition the Ninth Circuit’s admonition in Hook that the court should exercise flexibility when considering modifications of a consent decree, 98 F.3d at 1179, the court is also mindful of two goals underlying the 1995 Privatization Order. First, the Order created a non-profit corporation which was intended to provide affordable housing for many years to come. Second, the Privatization Order recognized that the old Consent Decree needed to be modified to serve this new organization, and the Order anticipated immediate modifications. Finally, this court is thoroughly familiar with the concerns of the parties, has been closely involved with the construction of the Freeway, creation and monitoring of the Housing Program, and roles of the support agencies, and brings this experience to bear when evaluating the proposed modifications to the Consent Decree. A. CHC’s Proposed Modifications to Exhibit B 1. Expansion of the Geographic Area The Consent Decree envisioned primary, secondary, and tertiary development zones for affordable housing, extending six, twelve, and eighteen miles respectively from the Freeway. Consent Decree, Exh. B Part III.B. at 11. The primary zone of operation was expanded to the secondary zone pursuant to this court’s Order of June 23, 1988. CHC proposes modification of Exhibit B to permit the “production of affordable housing located in the Los Angeles metropolitan area, including but not limited to, Los Angeles and Orange Counties, as determined-by Century’s Board of Directors.” (Def.’s Proposed Exh. B at Sec. Ill, “Area Served.”) The sixteen years that have passed since the Consent Decree was last amended have seen enormous change in the demographies and needs of the corridor communities. As the Lopez/Montoya Report explained, “[a]t this time ... all known [Freeway] displacees have been served ...” {Lopez/Montoya Report at 4.) Michael J. Wright — former urban planner with the County of San Diego, participant in the Century Freeway Housing Program since 1980, and current CHC Vice President for Business Development and Marketing — stated that in the many years since the original consent decree, “the character of the communities affected by the Freeway has changed.” (Def.’s Exh. E; Wright Decl. at 5 ¶ 21.) Wright explained that, for example, the 1990 Census demonstrated that the racial characteristics of many of the corridor communities have changed due to substantial migration. Id. In addition to demographic movement, other changes have shook the area since the original Consent Decree. Wright notes that: [The City of Los Angeles] has often decried the fact that Century could not bring its resources to bear outside the secondary zone, most recently in the aftermath of the Northridge earthquake ... Despite considerable pressure for Century to play an important role in the earthquake recovery housing effort, Century was precluded from providing affordable housing to earthquake victims outside the secondary zone. Id. at ¶ 22. This court has also witnessed the negative impact of focused development in a restricted geographic area. Robert J. Norris, Jr.— Deputy Executive Director of the Housing Development Division of the San Diego Housing Commission, former Associate Director of CFHP, former member of the CFAAC Board of Directors, CHC’s current Executive Vice-President, and member of the CHC Board — stated that “one of the key lessons of the former Century Housing Program has been that you cannot just throw money at the problem.” (Def.’s Exh. K; Norris Deel. at 2 ¶ 2.) Norris described the “inflated costs of property as a consequence of limiting development focus to just the primary and secondary zones,” id., as one of the reasons justifying privatization of the Housing Program. The Housing Plan “recognized that focusing in a regular manner on such a limited geography would have adverse effects on land prices in general, and specifically on affordable housing developments.” (Def.’s Exh. E; Wright Deel. at 5 ¶20.) Declarations submitted by Plaintiffs’ Counsel fail to counter CHC’s showing that there have been significant changes warranting expansion of the geographic area. Jennifer Bigelow — affordable housing and community development consultant and founding Executive Director of the Southern California Association of Non-Profit Housing (SCANPH) — states that “[i]t is hard to imagine that a 600 square mile zone [the secondary zone] ... does not contain sufficient under-developed, under-utilized or inappropriately developed sites for affordable housing.” (Bigelow Deel. at 13-14 ¶ 38.) Bige-low identifies no such sites, however, and does not counter CHC’s arguments that there has been tremendous demographic change in the corridor area. Bigelow also focuses on the “nexus” between public tax dollars and the Consent Decree’s development zones. Id. at 14 ¶ 41. The State — represented by William G. Brennan, General Counsel and Deputy Secretary of the Department of Business, Transportation and Housing of the State of California— disputes this characterization of the Housing Program funds as public tax dollars. (Def.’s Exh. D.; Brennan Deel. at 2 ¶ 3.) Brennan states that: All of the parties to the stipulated Privatization Order accepted the premise that the Housing Program funds and assets, once paid in settlement of Keith v. Volpe under the Consent Decree, were no longer public funds, that all such assets were then held by the State in nominal title only, and that transfer of funds and property held by the State nominally would not constitute a gift of public funds. For plaintiffs’ counsel to describe Century’s assets now as “taxpayer funds” or [“]taxpayer-generated funds” is wholly misleading.... Id. Moreover, Bigelow’s “nexus” argument ignores the fact that the initial zones were created to constrain and compel actions of a state agency sixteen years ago. The zones do not reflect the changed realities of the affordable housing needs now challenging the Los Angeles metropolitan area, and restrict the capacities of CHC to the “detriment[ ][of] the public interest.” Rufo, 502 U.S. at 384, 112 S.Ct. at 760. This court is inclined to agree with CHC that “Restricting the Housing Program to the secondary zone will continue to marginalize it, limit its effectiveness, and prevent it from becoming a responsive, regional force in the affordable housing community of Southern California.” (Def.’s Exh. E; Wright Deel. at 6 ¶ 23.) CHC has met its burden of showing changed circumstances warranting modification of Exhibit B, and the proposed expansion of the geographic zone is “suitably tailored to the changed circumstances.” Rufo, 502 U.S. at 391, 112 S.Ct. at 763. 2. Changes in underwriting criteria The most hotly-debated proposed modification revolves around the issue of “soft seconds” or “deep gap funding.” This type of funding essentially seeks to “subsidize the gap between the ... full cost of the housing and the revenue stream.” (R.T. at 180:17.) CHC’s proposed modification would allow it to use underwriting criteria “in a manner consistent with other affordable housing sponsors and lenders, secondary markets and government programs and agencies used in partnership with Century.” (Def.’s Proposed Exh. B Part IV at 3.) Deep gap funding is important because it allows for the development of projects for very very low income residents, such as the homeless, patients with AIDS, and the disabled. Such funding presents greater risks, however, and generates low returns for CHC over a long period of time. CHC has budgeted for some deep gap funding of projects, and intends to consider such projects in the future on an individual basis. CHC’s business plan also anticipates a financing strategy that includes permanent loans in senior positions, supported by the income stream of the development. Plaintiffs’ Counsel would prefer CHC to devote most or all of its lending efforts to deep gap funding, and at the February 13th hearing argued for a minimum of $25 million in such funding. (R.T. at 178-79.) The crux of the “deep gap” debate is the repercussions of such funding for CHC’s continued effectiveness, and, ultimately, fundamental differences in the parties’ views of the role of CHC and its Board. Plaintiffs’ Counsel believes Century’s money “was supposed to be spent promptly and expeditiously and turned into affordable housing through deep gap subsidy.” (R.T. at 170:17-24.) With CHC’s budget quickly diverted to deep gap funding, the role of the Board would be to avoid the “administrative expense” of the' state agencies and to provide “fees for services and to raise additional moneys.” Id. at 171-72. The views of CHC and State Defendant on the role of Century Housing stand in stark contrast to those of Plaintiffs’ Counsel. Deputy Secretary Brennan well described the perception of CHC when the Privatization Order was signed in 1995 (a perception in which this court shared): [ W]e all took great pride and excitement in the concept that we had devised a mechanism, a structure that had the opportunity to continue to provide affordable housing to need[y] people in the Los Angeles Basin area for years and years and years potentially to come. And that was a focus that we all had at that time, one that was subscribed by all parties and generated great excitement among everyone. (R.T. at 109-10.) Immediate diversion of all available funds to deep gap subsidies is obviously incompatible with the long-term effectiveness of CHC. As Kenneth D. Reed — former Vice President of Major Lending at Union Federal Bank and Century’s Senior Vice President of Operations — stated: “Century’s Business Plan is premised on Century being an on-going concern. In order to be an on-going concern, income must at least equal the cost of operation.” (Def.’s Exh. F.; Reed Aff. at 2 ¶ 6) (emphasis added). This court begins its analysis by examining the heart of the “deep gap” debate: the role of CHC. As suggested above, this court believes that CHC was created to maximize affordable housing resources and serve the Los Angeles community for many years to come. The Privatization Order demonstrates that all parties shared this view in 1995; CHC was created to “maximize available resources so that Consent Decree affordable housing production goals can be met and exceeded.” Privatization Order at 4 ¶ H. The Privatization Order was issued “in recognition of the need to preserve and protect the benefits of the Housing Program for future generations.” Id. at 5 ¶ 1 (emphasis added). The parties must have envisioned CHC as a long-term non-profit organization seeking new and creative funding products when they stipulated in the Privatization Order to the expertise requirements of the Board members. The Board was to include experts in urban development, banking and financing, and production and legal aspects of real estate development. Id. at 7 ¶ 1.1.2a-e. The current CHC Board consists of individuals with an incredible range of talent and experience; much more than necessary to simply wind-down a Housing Program. As CHC’s Board correctly responded when presented with Plaintiffs’ Counsel’s view of CHC’s limited role in dispersing deep gap loans, “this was nonsense; no corporation would be needed for that and a small group of three people could take care of it.” (Def.’s Exh. C; Lopez and Montoya Deck’s at 2 ¶ 7.) Plaintiffs’ Counsel argues that, once CHC has dispersed its funds in deep gap loans, “the board could ... raise money on its own.” (R.T. at 147:17.) This view flies in the face of the actual composition of CHC’s Board, which was created within the Privatization Order’s parameters. There are no fundraisers on CHC’s Board, and the Privatization Order did not require that this area of expertise be represented. See Privatization Order at 7 ¶ 1.1.2a-f. Thus, a quick spend-down of CHC’s funds through deep gap funding is inconsistent with the Privatization Order’s — and this court’s — view of the role of CHC in providing affordable housing for future generations. Accordingly, the court must determine whether significant factual changes warrant modification of the Consent Decree and allow CHC to pursue other loan products. The Lopez/Montoya Report found that the underwriting criteria throughout Exhibit B are “restrictive, outdated, and irrelevant to the continuing effort to provide additional affordable housing, given the opportunities to leverage and recycle funds.” (Lopez/Montoya Report at 4 ¶2.) Robert L. McWhirk— attorney of record for CHC — stated that since the underwriting criteria in Exhibit B were adopted, government subsidy programs such as Section Eight have become much less available. (Def.’s Exh. A; McWhirk Decl. at 6 ¶ 15.) The process by which affordable housing developments are underwritten with low-income tax credits have also changed. Id. Finally, the role of the secondary loan markets — Fannie Mae and Freddie Mac— have also evolved considerably in the sixteen years since Exhibit B was adopted. Id. The court also notes that CHC has never stated that it plans to eliminate deep gap funding. (Def.’s Exh. E; Reed Aff. at 3 ¶ 12) (“No one has posited that there is no longer a need for “subsidy-gap” financing ...;”) see also (R.T. at 189-90) (statement of Paul Zimmerman, Executive Director of West Hollywood Community Housing Corporation: “I was actually fairly heartened this morning to hear the amount of [deep gap] flexibility that, the board is talking about building into the program_”) Plaintiffs’ Counsel recognizes that a half-million dollars is currently designated for deep gap subsidies in the Lynwood project. (R.T. at 173.) Significant changes in the nature of the administrating organization from state agency to private non-profit corporation, in the availability of government funding, and in the nature of the secondary loan markets support CHC’s proposed modifications, and these modifications are suitably tailored to the changed circumstances. 3. Income Bands CHC proposes that Exhibit B of the Consent Decree be modified to treat the income bands as a goal, rather than a strict requirement. There are several changed factual circumstances that support this modification. The first is the change of administration of the Housing Program from a state agency to a non-profit corporation. As a non-profit, CHC is subject to IRS regulations which did not apply to the prior state administration. One such regulation defines the “Safe Harbor for Relieving the Poor and Distressed:” .01 An organization will be considered charitable as described in § 501(c)(3) if it satisfies the following requirements: (1) The organization establishes that for each project (a) at least 75 percent of the units are occupied by residents that qualify as low income; and (b) either at least 20 percent of the units are occupied by residents that also meet the very low-income limit for the area or 40 percent of the units are occupied by residents that also do not exceed 120 percent of the area’s very low-income limit. Up to 25 percent of the units may be provided at market rates to persons who have incomes in excess of the low-income limit. Rev. Proc. 96-82 § 3, 1996-20 I.R.B. 14 § 3. This regulation is significant in two respects. First, it is possible that CHC could comply with existing Consent Decree income bands, and yet violate the IRS regulation by providing less than 75% of its units to residents who earn less than 80% of the median income. The regulation also demonstrates that, even if the Consent Decree income bands are no longer requirements, structural protections remain which will force CHC to address the needs of low and very low income residents. Notably, the Consent Decree income bands permit a greater proportion of “moderate income” tenants than is allowed under the IRS “safe haven” requirements. ■ Rev. Proc. 96-32 § 3.01. Therefore, in some respects the IRS requirements provide more protection for the low and very low income resident than found in the Consent Decree. Experience has also shown that strict enforcement of the income bands has proven “unworkable,” Rufo, 502 U.S. at 384, 112 S.Ct. at 760. Market rents have dropped below the rents which would be permitted for moderate-income tenants. (Def.’s Mem. P. & A. at 10.) There is a shortage of moderate income tenants who wish to live in CHC developments, and CHC is prevented by the Consent Decree income bands from reclassifying these units for lower-income tenants. Id. CHC’s Business Plan states “[p]rojeets have been experiencing vacancies which have been increasing and now total 37% of the units. The vacancy of these units is directly related to the affordability requirements set forth in Exhibit B of the Consent Decree.” (Pis.’ Exh. 24; CHC Business Plan at 55.) As one Board member argued during the February 13th hearing, “[the vacancy rate exists] because of the rigidity of the past programs.... The problem is these units have been designated for moderate income, and moderate income people don’t want to live in these units.” (R.T. at 72:2-9.) Another problem with the income bands is the phenomenon of “income creep.” Income creep is “the change in income of the actual tenants when their income is recertified a year later — [which] could put them in a different income band, and so your distribution by income bands has changed.” (R.T. at 18:6-10.) IRS regulations anticipate this very problem: An organization originally meeting the safe harbor will continue to satisfy the requirements of the safe harbor if a resident’s income increases and causes the organization to fail the safe harbor, provided that the resident’s income does not exceed 140% of the applicable income limit under the safe harbor. If the resident’s income exceeds 140% of the qualifying income limit, the organization will not fail to meet the safe harbor if it rents the next comparable non-qualifying unit to someone under the income limits. Rev. Proc. 96-32 § 3.02(3) (emphasis added). The Consent Decree, however, has no provision to accommodate the problem of income creep. Enforcing the income bands as strict requirements could therefore require CHC to evict tenants from a unit as income creep skews the mandated distributions. Such a result is contrary both to the intent of the Consent Decree and to the public interest. Changes in the nature of the administrating agency, the constraints of IRS regulations, and experience with the Housing Program support CHC’s proposed modification changing the income bands from strict requirements to goals. Moreover, the proposed modification is tailored to the changed circumstances: CHC does not propose abandoning the income bands, but rather recognizes that the public interest is best served if the income bands are treated as goals, not as rigid requirements. 4.Rental Affordability Mechanism CHC seeks to revise Exhibit B of the Consent Decree to update the rental affordability mechanisms. The Lopez/Montoya Report explained that the current standard among affordable housing programs is rent based on “30% of adjusted county median income for rental units for the designated income band.” (Lopez/Montoya Report at 5 ¶ 4.) The Old and Restructured Housing Programs based rents on a tenant’s actual income. Id. at 6. This old system of evaluating rental amounts is not workable now that reliable income subsidies, such as the Section Eight program, are no longer readily available. (Id.; see also Def.’s Exh. A; McWhirk Decl. at 7 ¶ 17 (“The original floor rent concept is totally unworkable in the modern world of affordable housing finance without massive subsidy....”)) Similarly, it is necessary to update ownership affordability requirements to “reflect industry benchmarks applicable when the loan is originated.” (Lopez/Montoya Report at 6-7.) By incorporating these industry benchmarks, current Century owners seeking to refinance and owners involved in Fannie Mae’s rent-to-own program will have greater access to industry conforming financial products. Id. at 7. 5. Building Standards and Specifications The Lopez/Montoya Report explained that building standards controlling housing constructed or acquired under Exhibit B should conform to “the Uniform Budding Code as well as all local building and zoning codes.” (Lopez/Montoya Report at 7 ¶ 6.) As explained during the February 13th hearing, California’s local and state codes—especially in light of seismic activity—quickly go out of conformity with federal HUD standards. (R.T. at 32:7-11.) For example, federal standards in the Consent Decree—last updated in 1988—are now out of conformity with local budding codes. Id. The significant changes in local business codes—and the fadure of the federal standards to keep pace—warrant CHC’s proposed modification. 6. Enforcement of Use Restrictions Housing Program developments sold by CHC carry use restrictions, imposed to protect affordability. Experience with the currently utilized use restrictions has revealed that lenders and title companies often overlook the restrictions, resulting in expensive litigation for CHC. (R.T. at 33:3-20; see also Lopez/ Montoya Report at 8 ¶ 7.) The proposed modification reasonably permits CHC to revise use restrictions to protect the long-term affordability of its housing, and improve enforcement during sale and resale of units. (Def.’s Proposed Order at 5 ¶ IX.) 7. Loan Loss Reserve The loan loss reserve established with the California Housing Loan Insurance Fund was originally sized at $15.3 mdlion. (Def.’s Proposed Order at 6 ¶ X.) As the Lopez/Montoya Report explained, “[t]he Reserve is Century’s only insurance, other than its existing uncommitted funds, against real estate risk.” (Def.’s Exh. A; Lopez/Montoya Report at 8 ¶ 8.) Accordingly, the Lopez/Montoya Report recommended the loan loss reserve remain funded at $15.3 million, and be “increased by an additional amount as determined by an actuarial loss analysis to protect against loss under the Old Program.” Id. As explained at the February 13th hearing, the modification allowing expansion of the loan loss reserves preserves long term affordability of the units by giving CHC the resources necessary to intervene and save a project when the project cannot pay its mortgage. (R.T. at 34:16-25.) 8. Funding Eligibility CHC has proposed modifications of the Consent Decree which would enable the Board to acquire and rehabilitate existing housing, and to fund mixed-use projects. Kenneth Reed explained that “[c]ompared to the cost of constructing new housing units, the rehabilitation of existing housing may be a much less costly alternative of meeting the need to supply and preserve safe, decent and sanitary affordable housing.” (Def.’s Exh. F; Reed Aff. at 4 ¶ 14.) There currently exists a large inventory of housing requiring rehabilitation in the area now served by CHC. Id. There are also “current opportunities to buy developments at substantial discounts from the Federal Housing Administration (FHA), Office of Thrift Supervision (OTS) and others, and to convert them to affordable rents.” (Def.’s Exh. A; McWhirk Decl. at 8 ¶ 19.) Mixed-use projects can also generate income which can support affordable housing, and can stabilize affordable housing in a marginal or redeveloping neighborhood. Id. As Jennifer Bigelow stated in her declaration in opposition to CHC’s motion, “affordable housing development and economic development activities can complement each other in working to create a healthy economy and neighborhoods ...” (Bigelow Decl. at 19 ¶ 58.) Bigelow continued to question the expertise of CHC’s Board members in economic development and the wisdom of undertaking such projects. Id. CHC, however, has not stated that it plans to make mixed-use development the focus of its mission. In fact, the modification to Exhibit B only mentions mixed-use funding in the context of affordable housing. (Def.’s Proposed Order at 6 Part XI.) New development opportunities available to CHC’s Board merit modifying the funding eligibility requirements of CHC. B. CHC’s Proposed Modifications to Exhibit C CHC’s proposed modifications to Exhibit C are less extensive than those proposed for Exhibit B. These modifications delete references to Caltrans throughout Exhibit C. This change is logical in light of the fact that the Privatization Order transferred all Housing Program assets and responsibilities to CHC. See Order of July 12, 1996 Admitting