Does Old Sacramento Need Saving?

You might have heard, the City of Sacramento built a new arena downtown. Some people are very excited about it. Others a bit less so. That divide may last for a while. It will take a number of years for either side to develop meaningful evidence of whether it was a good idea for spending a quarter billion dollars. In the mean time, everyone who cares about Sacramento’s future should be rooting for the arena’s success, but more importantly, looking to smooth out any problems that may arise.

One concern I have been hearing widely is that parking costs related to the arena are undercutting the public’s ability to patronize Old Sacramento’s businesses and cultural amenities. As one Old Sacramento business owner puts it, “We’re withering on the vine down here.” Speaking for myself, as a parent, when deciding where to take my child for a fun afternoon, paying a $15 parking tab would definitely be an impediment. That said, attendees of an arena event might stop by one of Old Sacramento’s businesses or be reminded of the fun times their family has had at the Railroad Museum.

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So is Old Sacramento in trouble?

Thanks to the good folks at State Parks and the City of Sacramento, I was able to quickly acquire the data to start to investigate the question, how did the arena impact attendance at the Railroad Museum and revenues for the local businesses?

Despite the concerns voiced by many, attendance at Sacramento’s venerable Railroad Museum has been steady through the first half of the Golden 1’s inaugural season. This may represent a small disappointment, after about two years of steady growth, but it is far from a catastrophe.

Railroad Attendance

How about the businesses? That data is a little less timely, only running through the third quarter of 2016, missing the Kings season, but it does show a small 2.4% decline over the prior year. It may have been impacted by the loss of parking at the mall or difficulties related to construction. It may also have just been a small correction after growth of 5.7% the prior year. The revenue has bounced around quite a bit, so we should avoid reading too much into a small change. I am told that revenue was down modestly this winter, but that could just as easily be explained by the extreme weather.

It is unclear to me if Old Sacramento needs saving from anything except the freeway, but there is nothing like a good controversy to drive progress. As a part of his “Destination Sacramento” campaign, the mayor and some business leaders are pushing to kick the area up a notch as well. Ideas include public art, water taxis, expanded dinner cruises, additional events, best of all, a terrace that would literally allow visitors to dip their toes in the river and, worst of all, a new name.

The terrace would be amazing. The challenge would be dealing with the numerous layers of bureaucracy involved with ensuring our region’s flood safety. Public art, as well, whether a series of tomato on a fork statues or a statue commemorating the sesquicentennial, would be fantastic. I suspect at some point one of my colleagues at Sacramentality will write on the economic benefits of public art. I wonder about the value of water taxis that do not really have anywhere to go, but I would not write it off.

Here is another idea. The City could use perceptions of difficulty on game days, whether real or imagined, as a marketing ploy the rest of the time. It could offer discounted parking on non-arena days and blast it out on social media, email lists and the morning shows as “family fun days.” Best yet, the program would cost virtually nothing.

Opportunity for equality abounds in Sacramento’s universities

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They say that education is the great equalizer.

The Equality of Opportunity Project, led by Stanford economist Raj Chetty (cue Mugatu: That Raj Chetty’s so hot right now!) has provided a tremendous dataset to help us test this axiom. The team assembled data from 30 million college students, demonstrating how America’s colleges and universities contribute to income mobility.

The resulting report focuses on success as the frequency with which colleges move students from the bottom income quintile to the top. This combines a measure of access (share of students in the bottom quintile) with a measure of success (portion of those students starting in the bottom quintile who are able to reach the top). This is a reasonable approach, but not the only one or, necessarily the best one. Many elite universities (Ivy League and similar) score well on the success measure. They specialize in sending a narrow, already high-achieving group of students into the top income bracket. Those elite universities universally score quite low on the access measure. When the Chetty team combine those two score, the elite universities are graded middling or worse.

stc-logo-vert-2-lineBy contrast, some public colleges and universities have 30% or more of their students coming from low income families. Most of them, however, send a relatively small share of those students into the upper income brackets. South Texas College, for example, draws 52% of its students from the lowest income quintile. Not surprising for a small college in impoverished Hidalgo Texas. Of those low-income students, only 13% are able to advance to the top quintile.

While both measures have an important story to tell individually, I wonder about the value of conflating access with efficacy. Doing so is meant to allow for a meaningful comparison between highly selective schools and public colleges and universities that, by design, do not have admissions policies designed to weed out 90% or more of their applicants. Ultimately, the approach is rife with selection bias and is grading schools on a measure that few have much control over.  With the exception of the most selective universities, this measure of access is not primarily a function of policies, outreach strategies, or other administrative decisions. Rather, the makeup of the student body is defined by the community they serve as well as the ability of the local high schools to graduate students with the basic qualifications needed to proceed to college.

I also wonder about the value of focusing on whether colleges move students from the bottom quintile into the top. Has a college failed if it helps its graduate move from poverty as a child to the middle class? Is our goal affluence or bust? Perhaps those Ivys should consider it a failure, but most college should not. In fact, in terms of sheer arithmetic, doing so is effectively setting up a requirement that everyone be above average, which usually only works out in Lake Wobegon.

educationopportunity-columbia-sunyI prefer to focus on the share of low income students that are able to move into the middle class or higher (which I am defining as the top two quintiles) and make more narrow comparisons among comparable colleges and universities. Is it truly meaningful to compare Columbia University with State University of New York (SUNY) Stony Brook? Would a low income 18-year-old chose Stony Brook over Columbia? Should they? Despite SUNY scoring nearly three times as well by Chetty’s measure, the answer is no. If accepted, from a future earnings perspective, any student should jump at the opportunity to attend any of the elite universities. Columbia scores poorly on Chetty’s measure, though because they admit relatively few low income students. Instead, I would offer that it is more meaningful to compare Columbia to its Ivy League companions and Stony Brook to other SUNY campuses and perhaps other comparable state universities.

educationopportunity-csuchartSo how does Sacramento fare? Our flagship university, Sacramento State, excels, 22nd among the 375 comparably “selective” public universities in the country and second among the non-technical CSUs. Sixty-four percent of low income Sacramento State students were able to move up into at least the middle class, edging out San Diego, Fullerton and Long Beach and trailing only San Jose (69%). This ranks better than a number of elite universities, including Duke, Amherst and UNC Chapel Hill, as well as two UCs, an outcome that is particularly impressive given Sacramento’s moderate income levels. Overall the top of these rankings is dominated by technical schools, CSUs and SUNY campuses.

So would a low income student be better off attending Sacramento State than Duke? Individual experiences of course vary, but according to Chetty’s class mobility data, yes, the average low income student will earn more money after attending Sacramento State than Duke University, at a fraction of the cost.

Looking across the causeway, Davis also represents well. With 71% of low income students finding their way into the middle class or better, the Aggies are third among the UCs, but ahead of both the Bears and the Bruins.

What is most impressive, though, is that unlike Columbia, Duke or even UC Davis, Sacramento State (and the CSU system, overall) is lifting the prospects of low income students, regardless of SAT scores. Given that most of these students stay in the region, the success of Sacramento State is not just helping these indviduals, it is lifting the economy of the entire region.

Sacramento Needs a New Flag

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Sacramento, I love you. But it’s time we had a frank discussion about our flag.

It’s… well, ugly.

Behold:

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Sacramento’s flag reminds me of that type of inoffensive abstract art that is the go-to for corporate hallways. There is a lot to dislike here, from the lack of symmetry, the odd blobs in the corners, the unappealing color palette (and two different shades of blues?), to the Rorschach test of what’s being depicted.

And it’s not just me who hates our flag. The world does. In 2004, the North American Vexillological Association conducted an internet beauty pageant asking the public to grade the municipal flags of America’s 150 biggest cities. Sacramento’s scored a 4.97 out of 10. Not the worst of the bunch – get it together, Pocatello – but it’s still a failing grade.

Which is too bad, because a city’s flag can be a source of civic pride. If you go to Oakland, for example, you will see the city’s official logo – an Oak tree – everywhere. People actually tattoo the city’s tree on their arms. Like the Kings logo does for basketball fans, a city flag can help rally and unite its citizens and become a part of that city’s identity. But for a municipal flag to go from obscurity to mainstream it needs be appealing, instantly recognizable, and easily reproducible.

Sacramento’s flag is none of those things. But the good news is that while Sacramento is California’s oldest city, her flag is one of the state’s newest, and we have not shied away from rebranding in the past…

Meet the New Flag…

The history of our current flag dates back to 1989. In honor of Sacramento’s 150-year anniversary, the city council appropriated $25,000 for city celebrations, including $5,000 “for the design and fabrication of a new City Flag.” A team of five volunteer artists from the Art Directors and Artists Club of Sacramento set to the task, generating four options for council consideration. After nine months of design, public review, and debate, our city’s new banner was finally unveiled by Mayor Anne Rudin at the Radisson Hotel to top off the Sesquicentennial celebration.

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The four contenders.

As one flag expert delicately put it, Sacramento’s flag has a distinctly “modernistic design.” Or, as one internet wag put it, “Sacramento… what the f— is going on there?”

What is going on there, for those interested, is a potent bouillabaisse of symbolism. To wit:

“White represents the city’s virtue, strength, and bright future. The two blue sections represent the city’s rivers (the Sacramento and the American), green stands for the agricultural heritage, and the gold color represents the gold miners so important in the history of California and of Sacramento, the center of the Gold Country and the 1849 Gold Rush.”

…Better than the Old Flag.

But, as ugly as the present city flag is, it is orders of magnitude better than the third grade art project that was its predecessor. Behold again:

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Much like its clip art, the old flag has a colorful history. By 1964, Sacramento was one of the last major cities without an official flag. This gave E. A. Combatalade, the enterprising founder of the Sacramento Camellia Festival Association, a grand idea. He approached the city council about adopting an official flag to mark the city’s 125-year anniversary. (Sound familiar?) They agreed. Working with a flag manufacturer and an assistant editor at the Sacramento Bee, he designed a flag steeped in Sacramento’s 19th century heritage:

“Centered at the hoist is the C. P. Huntington locomotive, in profile toward the fly, commemorating Sacramento as the terminus of the nation’s first transcontinental railroad. … Centered at the fly is a Pony Express rider on horseback, headed at full gallop toward the hoist, marking Sacramento’s role as the western terminus of the Pony Express. … In the lower center … is the state capitol dome, denoting Sacramento as the state’s capital. … [A]bove the dome is a bearded miner, kneeling by a stream, panning for gold, and symbolizing the discovery of gold in California.”

And what flower adorns the base of the capitol dome? Combatalade’s beloved Camellia – Sacramento’s official flower.

Can there be a good flag?

It turns out there is no law that municipal flags have to be unattractive. There’s actually an excellent TED talk on how to Make Local Flags Great Again.™ And, in fact, the good people at the Vexillogical Association have distilled down the designing of a smart local flag to five key principles:

  1. Keep it simple.
  2. Use meaningful symbolism.
  3. Use two to three basic colors.
  4. No lettering or seals of any kind.
  5. Be distinctive.

Consider, for example, four city flags that beautifully illustrate these design principles:

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These are simple but memorable designs, using bold colors, that tell a story of what each city is about. The fleurs-de-lis on New Orleans’ flag is a nod to that city’s French heritage; Denver’s flag nestles the city below the Rocky Mountains; Chicago’s blue strips represents the two branches of the Chicago river and each star a major episode in the city’s history; and Phoenix … has a phoenix.

Third Time’s the Charm

The last two flags were adopted to celebrate Sacramento’s 125-year (1964) and 150-year (1989) anniversaries. Unfortunately, Sacramento’s 175-year anniversary (2014) has already passed – but that does not mean we should wait until the 200th to commission a new flag.

Sacramento in 2017 is a city undergoing a renaissance. The arts, culinary, and sports scenes are booming; downtown is metamorphosing into a landmark destination; and residents from all corners of the map are excited to live in and claim the city. Even outsiders are recognizing that – gasp!Sacramento is cool.

Let’s seize this electric moment, and give Sacramentans a banner to finally match our pride in our city.

The Airbnb Ordinance Isn’t Working

 

rental_permitLess than 5 percent of Airbnb hosts have registered and are paying taxes, and many are undoubtedly illegal; here’s why.

My wife and I could be the postercouple for Airbnb. We mostly use Airbnb when we travel because we prefer a local feel to a hotel. After buying our house, we became hosts ourselves to meet people and help the family pocketbook. Renting a spare bedroom is not the expressway to the Louis Vuitton life, but it does cover a little under half our monthly mortgage and factored into our decision to become homeowners.

According to Airbnb’s surveys of its members, we are not atypical. Half of Airbnb hosts say the platform has helped them afford their home; in some cities like Los Angeles, up to one-quarter of hosts say Airbnb saved them from foreclosure or eviction. Airbnb can help hosts make ends meet but, for most hosts, it’s not a full-time job and generates only a few thousand dollars a year: again, according to Airbnb corporate, “the typical US host earns the equivalent of a 14-percent annual raise.” Because Airbnb is cheaper than a typical hotel, it is also a boon to visitors. Cheaper housing means many visitors stay longer and spend more on their Sacramento experience, which benefits the larger economy.

In the past few years, Airbnb usage has blossomed in Sacramento. Whereas in 2013 there were fewer than 50 Airbnb units, today there are several hundred. A Brookings Institution study found that the Sacramento metro region experienced one of the largest growths in room-sharing. And, according to a 2015 study by a hotel market analysis firms, Sacramento is one of the top ten U.S. markets for Airbnb revenue as a percent of hotel rooms revenue – meaning Airbnb is providing accommodations for a growing percentage of our city’s short-term visitors.

But not everything is unicorns and rainbows in the new home-sharing economy. There are convincing reports coming out of America’s tourist meccas – e.g. New York, San Francisco, and Los Angeles – that some landlords are evicting tenants and converting long-term rental housing into more profitable, short-term Airbnb rentals. In those cities, the net effect is an affordable housing double-whammy: fewer affordable rental units overall and higher rents for everyone else as supply decreases but demand remains the same. More later on how Airbnb impacts the Sacramento market, but suffice to say that the “hotelization” of long-term rental units should be a policy concern in a city that (dubiously) boasts the fastest growing rent market in the nation.

The Airbnb Ordinance

For much of 2015 the City of Sacramento wrestled with what to do with Airbnb. Existing Airbnb units were all illegal, city staff concluded, because they were effectively bed and breakfasts operating in residential areas without a conditional use permit. Some members of the public wanted an outright Airbnb ban. It could hurt the rental market and transient guests might make bad neighbors that hurt residential quality of life. On the flip side, Airbnb contributes to the local economy and is an important source of income for many residents.

In January 2016, the city council adopted an ordinance that admirably attempted to thread this needle. It legalized Airbnb but subjected homeowners to the same 12% tax imposed on hotels. At the same time, the council capped the maximum number of days an off-site homeowner can rent out their property on Airbnb to deter the conversion of long-term rentals.

In a little more detail, under the ordinance a homeowner:

  • must register annually with the city;
  • must post a copy of their permit inside the unit and include their permit number on all rental ads;
  • must pay a 12% tax on the rent received;
  • cannot rent to more than 6 persons at a time; and,
  • cannot rent out their house for more than 90 days per year unless they also live there (in which case there is no maximum).

To address neighborhood nuisance concerns, the ordinance also provides notice to neighbors who live within 200 feet of an Airbnb unit, prohibits homeowners from hosting weddings and conferences, and creates a process for the city to revoke a permit if the unit becomes a source of noise complaints or otherwise falls out of compliance with the law.

Swing… and a Miss

So, with 2016 now for the history books, how is the ordinance doing? The answer is… not good.

I made a public records request with the city to find out how many Airbnb units had registered in 2016. As of December 31, 2016, about a year since the short-term rental ordinance was enacted by the city council, a grand total of 13 hosts have registered their units with the city. The applications of another 10 hosts were pending, which, assuming they get approved, will raise the total to 23 registered hosts.

Any way you slice it, that is a tiny fraction of the total population of Sacramento Airbnb hosts. In November 2015, then-City Manager John Shirey estimated there were 170 Airbnb hosts in Sacramento, which would still mean only about one of every ten hosts has registered. But Shirey’s denominator is almost certainly too low, probably even then and certainly now. If you search the Airbnb website for a room in Sacramento, it reports that there are presently “300+” units. AirDNA, by far the most comprehensive and most cited public resource on Airbnb listings, reports that there were 340 active hosts in Sacramento in the past 30 days.

To get the most accurate picture possible, I contacted AirDNA and they agreed to share their historical listings data for Sacramento with me. According to their data, in 2016 there were 496 hosts who, for at least one day in that year, listed 678 properties in Sacramento.

That means less than 5 percent of Airbnb hosts registered their units with the city. Yikes.

 Mo Listings, Mo Problems

The low number of registered listings is a big problem for just about everyone, except maybe Airbnb. For the city, it means hundreds of thousands of dollars in lost revenue. According to the city, those 23 registered (or registration pending) hosts generated $4,050 in registration fees and $17,500 in taxes for the city. If every host were registered, it would generate at least a few hundred thousand extra dollars in city revenue per year. AirDNA’s upper-end estimate of Airbnb host revenue for 2016 was just under $5 million, so a safe assumption is that the city is losing about $300,000 to $600,000 in taxes per year due to low registration.

For registered hosts (we few, we happy few), the low registration rate means our units are either less competitive or less profitable than they would be if compliance was higher. Airbnb’s platform creates a perfectly efficient market for rental units. If I raise my rates to pass along the city’s tax but the rest of the market does not (because they are not paying it!), the rational renter will skip my listing for a better-priced (and equivalently attractive) alternative. Effectively, to stay competitive and to comply with the law means I need to swallow the tax: consider it a 12% penalty for following the law. Perversely, from a policy standpoint, this means the city is strongly disincentivizing compliance.

Illegal hosts are at-risk, too, but they likely don’t know it. As I’ll touch on more below, most hosts are probably unaware they have to register their units – after all, they wouldn’t have to in 99% of cities in the United States. Yet, failing to register can subject them up to a ridiculous 6 month stint in county jail and a $25,000-per-day fine. Overcriminalization, thy name is the Airbnb ordinance.

No Effect on Long-Term Rentals… Yet

Finally, while not a problem in Sacramento yet, continued lax enforcement of the ordinance could in the long-term displace rental housing.

When measuring displacement, the big question is whether an Airbnb listing is a brand new addition to the rental market or whether it is the result of a long-term rental unit being converted to a short-term one. For example, if someone takes an empty spare bedroom and puts it on Airbnb, the long-term rental market is unaffected: no units were added or lost. However, if a landlord takes an apartment building with yearlong residents, evicts them, and converts it to a daily rental property on Airbnb, the number of long-term rentals have shrunk. If supply is significantly reduced, the ripple effect is that everyone’s rents go up.

There is no data on how an Airbnb unit was used prior to being listed. However, two factors can be used to estimate the number of “commercial units” commonly thought to contribute to displacement. First, is the Airbnb listing for a private room or shared room (like a living room) inside someone’s home, which are not usually part of the long-term rental market, or is the entire place being rented? Second, is the listing being rented out for more than 6 months out of the year? If the listing is being rented less than 6 months a year, the homeowner would probably make more renting it year-round to a long-term tenant. Assuming an economically rational homeowner, this suggests the listing is not available 365 days a year. For example, the listing may be a second home or even the homeowner’s primary residence which they only put on Airbnb while they are on vacation.

An analysis by the statistics blog FiveThirtyEight.com found that, outside your Los Angeleses and San Franciscos, “Airbnb’s impact is probably still small in most cities” because they have a miniscule number of commercial listings. That certainly seems to be the case in Sacramento. According to AirDNA’s data, there were only 39 “entire place” listings that were booked for more than 6 months in Sacramento in 2016. That is equivalent to 0.04% of the 88,353 long-term rental units in Sacramento – not enough to seriously affect the market.

But, that does not mean this cannot change. Since 2012, the number of Airbnb units has been doubling each year in Sacramento. Currently half of the active listings are entire place listings. And, according to AirDNA data, 111 entire place listings were rented out for more than 3 months in 2016, potentially in violation of the anti-displacement provisions of the city’s ordinance.

Sacramento Airbnb Listings

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Source: AirDNA

Explaining the Registration Gap

So, why are so few people registered? There are a few issues here, but it mainly boils down to the fact that the city is treating Airbnb hosts like they are sophisticated business owners, which they most definitely are not. To legally run an Airbnb, a homeowner must first separately file for two permits: a business license tax application ($50) and a short term rental application permit ($125). Then, the homeowner must calculate a 12% transit occupancy tax (TOT) on all receipts and file a monthly accounting and payment to the city.

Most Airbnb hosts probably have no idea how to do this, because they have never done so before and no one has explained it to them. Again, most Airbnb hosts are renting rooms out as a side-gig. They have full-time jobs and have never run a small business. For most, I’d wager, it has never even occurred to them that they need to register their units. As far as I can remember, for example, Airbnbnever emailed me as a host to tell me that, in Sacramento, I needed to register with the city and pay taxes to use their platform.

And the city does not make it easy, either. If you search for “Airbnb” in the city’s website search bar, you get four results, none of which indicate that a registration and tax requirement have been adopted. Unless someone already knows the correct terms of art for running an Airbnb (e.g. “business operations tax account,” “short-term vacation rental”) I doubt they would successfully navigate the city’s labyrinthian website to find the webpage explaining the legal requirements.

Legally, ignorance of the law is no excuse. But, if we are trying to craft successful public policy, the ordinance needs to account for the background and capacity of the regulated community.

  ♪♪ “How do you solve a problem like… low short-term rental housing unit registration?” ♪♪

It’s time for Sacramento to re-examine its Airbnb ordinance, or at the least the implementation of that ordinance. The current approach is destined for failure, or a draconian city crackdown. Luckily, the city does not need to reinvent the wheel. Drawing inspiration from other cities, here are five changes the city could adopt to fine-tune its ordinance.

(1) Require Airbnb collect the hotel tax. The city cannot hope to attain a 100% registration rate if it places the onus of registration on the 500+ mostly mom-and-pop Airbnb hosts. Expecting hundreds of people to register their units and then send in monthly paper reports on their rental activity is not only unrealistic, it’s inefficient. There’s an obvious, better solution. Have Airbnb automatically collect the tax. Airbnb alone knows who all the Airbnb users are in the city. And Airbnb is already collecting a percentage surcharge (its fee) on every listing. Having Airbnb collect the tax would mean 100% coverage, less work for the city, and less work for hosts.

And this is not a novel solution. Airbnb already collects and remits local taxes in over a dozen cities and counties just in California. If it can be done for Palm Desert (pop. 50k), it can be done for Sacramento (pop. 480k).

(2) Eliminate the permit requirement for people who rent under 90 days. If Airbnb can be made to collect and remit the tax, there is no longer a reason for the city to require hosts to register. It’s a useless bureaucratic exercise that most hosts are bound to mess up, as they currently are. Arguably, it may make sense to require the 45% of hosts who rent more than 3 months a year to register, if only to have them certify that they live in the unit (and thus are not bound by the 90-day rental cap). This is what Philadelphia does, sparing more casual hosts from added paperwork.

But, as explained next, if Airbnb can be entrusted with self-policing even this might be unnecessary.

(3) Require Airbnb to remove entire place listings that are rented for more than 90 days in a calendar year. Airbnb hosts are required to indicate whether they are listing a private room on the site, or an entire place. By definition, a host is not present when an entire place is listed. Thus, Airbnb already has the data to know which hosts are violating the city’s 90 day cap. Airbnb has boasted that it has removed hundreds of listings in other cities that violate local laws; it should be asked to do the same here.

(4) Earmark the Airbnb tax towards making Sacramento more affordable for all residents. The tax on Airbnb units is pure, additional revenue for the city, most of which (9% of that 12%) goes straight into the general fund and can be spent for any purpose. Given fears that Airbnb may contribute to Sacramento’s growing unaffordability, directing those dollars towards mitigating that possibility makes sense. Airbnb tax money will always be just a drop in the bucket compared to the city’s nearly half-billion dollar general fund, but it could give a big boost to the city’s underfunded affordable housing trust fund or to help finance Mayor Steinberg’s goal of 2,000 permanent housing units for the homeless.

(5) Decriminalize Airbnb listing errors. Finally, the ordinance needs to be amended to remove the threat of jail time and ludicrous fines on hosts who violate the ordinance. A person who fails to pay a $125 rental unit registration fee should not be sharing a jail cell with someone who physically harmed another human being. America has a massive overcriminalization problem, with over a million people in jail or prison who pose no public safety risk – let’s not add to it. Although it’s probable that few illegal hosts will be heading to the clink anytime soon, allowing the city or prosecutors to use the threat of incarceration to coerce lopsided plea deals is itself an abuse of our judicial system.