Moral bankruptcy: Part 1, the maze without exits
Want to kill a program without repealing it? Simply de-fund it. Want to kill it slowly without being blamed? De-fund it in small steps. Sooner or later it keels over.
We’re having a little trouble
A few days ago, I posted about the remarkable new ‘never have to pay’ language in HUD’s new Section 8 renewal contracts, using as my source material NAHMA’s update on the subject.
This NAHMAnalysis discusses controversial new language in project-based Section 8 HAP contracts in which HUD obligates funding for a period of time less than the term of the contract. At issue is the extent of owners’ responsibilities under these contracts if HUD does not pay them beyond the number of months committed.
Now NAHMA has put its legal counsel to work on just what these new words mean:
At the insistence of HUD’s attorneys, the project-based Section 8 HAP contracts now include a new section 2, which allows HUD to obligate funding to owners for a period of time (expressed in months) less than the term of the contract (either one-year of multiyear).
To refresh your memory, HUD is using its monopsony power (leverage gained from being the sole buyer of a commodity) and sovereign unbindability power to impose unilateral changes in contract renewal terms, as follows:
The HAP contract forms are available as attachments to the Section 8 Renewal Guide and posted to HUD’s website at: http://www.hud.gov/offices/hsg/mfh/exp/guide/s8renewpgchg80907.pdf.
To be crystal clear, HUD is withholding ongoing funding unless and until owners comply:
May I suggest you sign the new contract language, sir?
They will have to be signed by owners, executed by PBCAs and returned to HUD. HUD states funding will be available once the contracts are executed.
That is, HUD has some money now, but is refusing to provide it unless owners, coerced, sign this concessionary agreement. Why should owners do that? HUD’s answer is the height of gall:
According to HUD, the benefits of the new contract renewal language are two-fold.
1. It allows the Department to keep some money flowing to owners when funding for the full contract term is not available.
2. It notifies owners about the status of funding for the contract.
HUD is claiming, with remarkable bravado, that owners benefit from knowing they are being shortchanged, and that owners surrendering rights to object ‘allows HUD to keep some money flowing.’ In thirty years of doing business with the government, this is as much bald-faced brass as I’ve ever seen.
What underfunding?
The new contracts are already being used to renew contracts that expired in the 4th quarter of FY 2007.
The substance of this new section 2 is very similar across the different project-based Section 8 HAP contracts, but there are some modifications to the wording based on contract type. For example, Section 2 of the new Basic One-Year Term contract reads:
2 TERM AND FUNDING OF RENEWAL CONTRACT
a. The Renewal Contract begins on ____________________ and shall run for a period of one year.
b. Execution of the Renewal Contract by the Contract Administrator is an obligation by HUD of $ ______________________________, an amount sufficient to provide housing assistance payments for approximately _______ months of the Renewal Contract term.
The contract thus explicitly imposes a mismatch in term. Owners are bound to provide housing for twelve months. HUD is bound to provide funding for something less than twelve months. What about the additional months?
c. HUD will provide additional funding for the remainder of the Renewal Contract term subject to the availability of sufficient appropriations. When such appropriations are available, HUD will obligate additional funding and provide the Owner written notification of (i) the amount of such additional funding, and (ii) the approximate period of time within the Renewal Contract term to which it will be applied.
The contract is completely silent on what happens if additional funding does not arrive on time, or never arrives.
The funding never arrived
Are owners left “holding the bag” for the remainder contract term when the money promised by HUD runs out?
None left for you
Uh, yes.
What happens to the tenants? Why not just provide full funding for the full term of the contracts?
Because they don’t have the money.
A number of NAHMA members have expressed serious concerns that the new language legally binds them to provide housing under Section 8 rules and rent limitations for a year (or more) with no assurance of payment beyond the months to which HUD commits. While NAHMA cannot provide legal or business advice to our members, we have consulted the
Especially when dealing with HUD …
Three major public policy questions are raised by a worst-case scenario where HUD stops making payments after the initial months specified in the contract. These questions include:
1. Is the owner released from obligations under the HAP contract?
2. Do the statutory tenant notice provisions prevent rents from being increased until there has been compliance with the one-year contract termination notice period?
3. Are the tenants eligible for section 8 enhanced vouchers?
1. Is the owner released?
Ordinarily, one would expect that a contract calling on the government to pay as owners provide service would have an implicit right to terminate service if payment stopped. Not so fast, when dealing with the government:
Research suggests owners could terminate their HAP contracts if HUD cannot provide the subsidy. An uncured material failure to perform under the contract by HUD relieves the owner of its remaining duties under the contract. Moreover, in the landmark Section 515 prepayment case, Franconia Assocs. v. United States, 536 U.S. 129 (2002), the Supreme Court held that contracts between the federal government and housing providers are subject to the same rules as contracts between private parties. This is not to suggest owners can terminate the HAP contracts due to late payments. According to the research by Coan & Lyons, the threshold for an uncured material failure would be more consistent with scenarios in which, “the government provides no funding or inadequate funding and expresses an intent not to provide additional funding or expresses no intent at all.”
I’m not expressing any intent here
Courts – which are arms of the government themselves — generally give government bodies wide latitude, presuming naively that government acts to a higher standard. Here, HUD would be foolish to ‘express an intent’ not to fund – it could simply fail to fund, or blame Congress, or OMB, or the Administration, or the man in the moon.
Yeah, yeah, that’s it … the man in the moon did it
Worse, how does the owner terminate? She goes to court. That takes time. Meanwhile the residents are terrified and the newspapers are having a field day writing plague-o-both-your-houses editorials. By the time the hearing arrives, the owner and everyone else has already been severely damaged, and HUD can waltz in and say, “well, gee, your Honor, we’d really like to fund, but …”
While it is assumed that termination of the HAP contract for non-payment would release owners of federal obligations to assisted tenants, Coan & Lyons raises the possibility of lawsuits by tenants or on their behalf based on the statutory one-year tenant notification requirements.
The law is not symmetrical. A right granted to a party isn’t always forfeit just because that party is already in default. Even worse, from everyone’s perspective, the tenants are caught in the middle, and they have rights.
2. Can we raise tenant rents if HUD does not fund?
Apartments have a rent. For Section 8 apartments, some of this is paid by the resident, some by the subsidy. If the subsidy portion is not forthcoming, can the owner charge the resident – who is, after all, the person occupying the apartment?
What do you mean, that’s HUD’s standard answer?
Under the tenant notification requirements, owners may not increase assisted tenants’ rents or evict them for nonpayment of the higher rent until one year after owners notify HUD and the tenants that the HAP contract won’t be renewed when it terminates. The question arises because the statutory definition of “termination” involves contract expiration or non-renewal; it does not address dissolution of the contract for HUD’s failure/inability to make the payments.
That failure to address arises because the Congress that wrote this language could not envision a future HUD or future Congress that would fail to fund.
While it would seem bizarre that a court could allow an owner to terminate a HAP contract and then hold the owner to income limitations for previously assisted tenants, the point is there is not a lot of evidence to rule out that possibility.
Truth, justice, and the American way … if you can fake that, you’ve got it made
3. If all else fails, can we get the residents enhanced vouchers?
Enhanced vouchers are a portable form of Section 8; once again, the resident pays 30% of income, the subsidy pays the balance.
Coan & Lyons explains,
The potential adverse impact of the tenant notice period can probably be abated if enhanced vouchers are provided as soon as possible after assistance payments terminate. It is not clear whether enhanced vouchers would be provided by HUD prior to the close of the one-year notice period. Enhanced vouchers are also subject to the availability of appropriations and, therefore, in any fiscal crisis might not be available on a timely basis.
Sometimes the government is broke in one pot of money but has money in another pot. That’s extremely unlikely here.
One federal appeals court has ruled, however, that the statutory language requires enhanced vouchers to be given when project-based assistance terminates even if that occurs prior to the completion of the 12-month notice period. People to End Homelessness v. Develco, 339 F. 3d 1 (1st Cir. 2003).
That’s fine, your honor, but when HUD has refused to fund because it has no money, and then you compel it to fund, where does the money come from – and meanwhile, what do I do with my residents, and my lost NOI?
What do I do when the banker is bankrupt?
The remaining question is whether tenants would be eligible for enhanced vouchers in projects where the owner terminated the HAP contact because of non-payment by HUD. Again, there is not a clear answer. Enhanced vouchers are authorized on the expiration date of an un-renewed HAP contract. Coan & Lyons observes,
The term “date of the expiration” of a contract is even more suggestive than use of the word “expiration” in the tenant notice provision, that Congress means the date in the contract specifying the end of the contract. Section 8(t), on the other hand, merely refers to the “termination or expiration” of the contract.
HUD would interpret this language before any court test, and its interpretation is likely to be given some deference by a court.
Have you got this? HUD fails to fund a contract to which HUD is a party. What must the owner do – why, go ask HUD to evaluate whether HUD’s failure allows the owner to opt out?
Mirror, mirror, on the wall
Who’s the funder of them all?
Which way HUD leans may depend on why the funding crisis exists. If it is the government’s intent to voucher out projects, HUD might be more willing to interpret the statute as authorizing enhanced vouchers, but if its intent is to reduce housing assistance, HUD might find the tenants ineligible for enhanced vouchers if an owner is discharged from its obligations under the contract prior to the expiration date.
Either way, you’re out
Appealing to HUD before going to court gives HUD a fielder’s choice as to which of several ways to harm owners.
It is likely, however, that Congress would step in to resolve any uncertainty in favor of the tenants.
Which is good for residents, bad for properties.
In addition to the eligibility issue, there must be sufficient appropriations available for enhanced vouchers. If tenants are ineligible for enhanced vouchers, HUD may give them regular vouchers, but again there must be sufficient appropriations available for that purpose. Tenant protection vouchers, either enhanced or regular, are not entitlements. The statute is quite clear that their provision is subject to the availability of appropriations.
All these tortuous conditionalities each reaches a dead end. They merely reinforce that a maze with no exits is a prison.
[Continued tomorrow in Part 2.]
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