Affordable Housing Institute : US

In a step remarkable even for a state known for its remarkable politics, on November 20 three housing authorities — Boston, Brookline, and Cambridge — filed suit against the Commonwealth of Massachusetts (Suffolk Superior Court, 06-4831, Boston Housing Authority et al. v. Commonwealth of Massachusetts et al., hereinafter BHA v. Massachusetts), charging the state with having breached its legal obligation to fund their operating subsidies:

 

These were the three cities that enacted rent control, but we won’t hold that against them.

Three of the largest public housing authorities in Massachusetts filed a lawsuit yesterday accusing the Romney administration of shortchanging the state’s nearly 250 local authorities by millions of dollars, causing housing conditions to deteriorate and forcing the closing of hundreds of substandard apartments.

The housing authorities in Boston, Cambridge, and Brookline contend that Governor Mitt Romney violated state law by freezing subsidies for operating and maintenance costs starting in 2003. The move has resulted in a “near crisis” for authorities that run nearly 50,000 apartments statewide for poor, elderly, and disabled residents, the suit said.

 

Crisis? What crisis?

I’ve previously posted about the deteriorating state of Massachusetts’ state-funded public housing, and more broadly about the imminent breakdown of the entire public housing delivery system nationwide. The breakdown is being accelerated by massive and irresponsible under-funding:

 

In July, the Legislature’s Subcommittee for Public Housing issued a report that agreed with the housing authorities [in economic if not legal terms. -- Ed.].

It said that the state should have given authorities $194 million in 2002 to cover operating and maintenance costs, instead of $115 million.

Spread across 247 local housing authorities managing 49,968 apartments of state-funded housing, that $79 million shortfall translates into $1,580 per apartment per year annually, or $140 per apartment per month. It’s sixty cents on the dollar — 40% less than the authorities need. You try living on 1,100 calories a day and see how well you do.

 

The lawsuit makes fascinating reading, and to understand fully the dependency trap that continues to haunt public housing authorities, we must jump back in time to 1937, Franklin Roosevelt’s New Deal, and public housing’s funding and regulatory schema, which we will intersperse with sections from the plaintiffs’ lawsuit.

 

“The only thing we have to fear, is fear itself.”

(Those who think they know all this stuff may skip to tomorrow’s post.)

Public housing in the United States was established in the 1937 National Housing Act. Way back then, there were no state housing finance agencies, no GSEs, no FHA mortgage insurance, no specialized business of affordable housing, virtually no mission-oriented sponsors. Back then, affordable housing meant slums, rooming houses, or tenements.

 

Chicago, 1910

The economy, one may recall, was slowly wheezing back to life from the Great Depression.

 

Breadline during the Depression

Like many a chief executive elsewhere around the globe, facing failing urban housing markets, Roosevelt decided to put the Federal government directly into the housing business, so the 1937 Act established a four-point structure:

1. Public ownership. Direct public ownership of the housing.
2. Local ownership. Even if funded from Washington, each property to be owned by local housing authorities.
3. Up-front grants, grant-based funding of all capital costs, therefore no debt.
4. Cheap rents, set at the cost of operations.

Model tenements, New York, 1936

Later, when it became clear that the poorest of the poor could not afford even the cheap rents, two more planks were added:

5. Mean-tested rents, set at a percentage (initially 25%, today 30-32%) of each household’s income.
6. Federal operating subsidy to bring Net Operating Income back up to zero. (Later, realizing that zero NOI also precludes capital improvements, HUD added the concept of modernization funds.)

For the last forty years, these six elements have formed public housing’s operating paradigm. They are interconnected — if one is housing those who cannot afford even the cost of operations, then one must provide an operating subsidy. Similarly, if the Federal government was going to build and pay for the housing, ran the thinking, it needed to be affordable indefinitely. Not only would there be direct public ownership, the housing authorities would need to be prevented from mortgaging their patrimony. So each housing authority, as a condition of receiving its funding, signed a declaration of trust — or, in Massachusetts state-funded properties, a Contract for Financial Assistance (CFA) — that encumbers the property comprehensively.

 

Not to mention the red tape

Quoting from the lawsuit’s sample CFA:

3.12 Encumbrance or Sale of Project

The Authority covenants and agrees that it will not, without the written approval of the Department:

· Sell, transfer, convey,

· Alienate, assign, mortgage, pledge, or

· Otherwise encumber

the Project, or any part thereof, or any properties used in connection therewith (except that the Authority may lease dwellings in the Project to individual tenants in accordance with the provisions of this contract), or cause, permit or suffer to be created or maintained any lien or charge thereon, and may, at the direction of the Department, execute and record such declaration of trust or other documents satisfactory to the Secretary as well, under the laws of the Commonwealth of Massachusetts, give or purport to give constructive notice of the covenants of the Authority embodied herein.

CFA dated 5/29/85, page 11 of 15.

Said in plain English, the owner cannot use any form of financing whatsoever.

 

They might hurt themselves

 

Further, the rents a housing authority can charge, being set at a household-affordable level, by economic definition generate negative Net Operating Income:

 

 

The local authority can’t make a profit, it can’t cover its costs, and it can’t finance its public housing. It is entirely dependent on its funder (state or Federal) for survival.

I’ve previously described why this system is heading toward systemic breakdown, but in the meantime:

What happens if the funder decides to be irresponsible?

 

[Continued tomorrow in Part 2.]

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