**TAKING STOCK OF PUBLIC HOUSING**

**September 16, 2003**

**Gregory A. Byrne, Kevin Day, and James Stockard**

**Senior Research Team, Public Housing Operating Cost Study**

**Presented to the Public Housing Authority Directors Association
(PHADA) in preparation for a strategic planning session by their Board
of Trustees on the future of public and assisted housing**

**Introduction**

We would like to begin our perspective by reviewing some of the positive
events that have shaped public housing (1.2 million units, 3,200
agencies) for about the past decade.

-   In the aggregate, funding levels have grown substantially. Annual
    appropriations for public housing modernization have averaged \$2.8
    billion over the past ten years, compared with just \$1.6 billion in
    the early 1980s. Beginning in 1992, the Congress has also provided
    about \$500 million annually for the HOPE VI program. Operating
    subsidies have increased as well, from around \$2.2 billion in the
    early 1990s to \$3.5 billion today. Collectively, including rental
    income, public housing is a \$9 billion annual enterprise

-   Substantial progress has been made in ridding public housing of its
    most obsolete properties, and much new replacement housing has been
    built, often of quite high quality and often in mixed-income
    settings.[^1]

-   Implementation of a performance evaluation system, while still
    evolving and while responsible for a number of unwanted consequences
    (including a disproportionate attention on process), can be credited
    with improvements in rent collections, occupancy levels, and the
    timely obligation of capital improvement dollars.

-   There has been some significant regulatory reform, including the
    elimination of the requirements for one-for-one replacement, the
    maintenance of centralized waiting lists, and federally-mandated
    admissions preferences.

There remain, however, a number of significant challenges:

-   **Physical.** Large parts of the inventory still need substantial
    work, requiring many times more funding than currently available
    through the annual Capital Fund program. There are also properties
    that simply lack effective demand -- for example, senior buildings
    built mostly with efficiencies in soft markets. And, there is still
    no practical system of replacement reserves, or of borrowing and
    refinancing that leads to the updating of the stock over time.

-   **Operating Funding**. Operating funding is too variable, dependent
    on annual appropriations. There are also inequities in the
    distribution of operating funds.

-   **Isolation**. Public housing remains isolated from the rest of the
    real estate community. This isolation robs public housing of best
    practices, unnecessarily constrains the pool of personnel, and
    limits broader program support.

-   **Management**. Too frequently, the quality of public housing
    management is poor. Although not universal -- there are housing
    authorities that are effective, and even outstanding, performers --
    the problem is large enough and deep enough to be systemic, both in
    its condition and its causes. The management challenge is
    particularly acute among larger agencies, resulting from a
    confluence of factors. Public housing authorities (PHAs) have,
    unfortunately, responded to local political environments and to
    federal program arrangements by developing defensive organizational
    structures that are out of sync with private practice and ill-suited
    to delivering effective property management services. Capital
    improvements, therefore, often cannot be sustained.

-   **Oversight.** HUD oversight is mostly ineffective. At times, it can
    also be meddlesome and contradictory. The emphasis is on rule
    compliance and organization, not property performance.

We will examine each of these challenges individually, with accompanying
prescriptions.[^2] The issues, however, are interconnected. The
underlying theme is that, to make real progress on the above fronts,
public housing must become more "property-based" in terms of funding,
management, and oversight, consistent with other federally-assisted and
private sector housing. Preferably, public housing would become
indistinguishable from other affordable housing.

**The Physical State of Public Housing**

One of the most pressing issues in public housing is developing a
vehicle that would allow PHAs to address their capital backlogs more
quickly and then to preserve these repairs with competent property
management and a system of replacement reserves (standard practice in
all other real estate and no reason why it should not also be the case
with public housing).

Despite over \$38 billion appropriated for modernization over the past
15 years, there remains a large backlog of capital needs, possibly
somewhere between \$18 and \$22 billion (\$15,000 to \$18,000 per
unit).[^3] Some of this backlog represents work that, while needed, is
not mission-critical. Most homeowners, and most apartment complexes,
live with a certain level of capital needs. Still, there are significant
numbers of public housing properties that have yet to be modernized.
There are many more that, while in relatively good condition,
nonetheless lack the capital funding necessary to repair the parking
lots, install new landscaping, or otherwise make the kinds of physical
upgrades and improvements that would go a long way towards removing the
physical stigma of public housing.

By simply doubling or tripling funding for the capital account, the
Congress could, of course, eliminate the backlog over five or ten years.
Such a scenario appears unrealistic. Capital funding has been flat over
the past ten years (declining in real terms), and future budget
pressures caused by the swelling federal deficit and looming obligations
of the baby boom generation suggest additional pressures just to
maintain that level of support.

If the Congress is not going to appropriate much higher levels for
public housing modernization, another option would be to allow PHAs to
take out long-term loans to meet their capital needs, as is the custom
for virtually all other housing programs. In order to pay off these
loans, PHAs would need a new subsidy arrangement. In essence, PHAs would
trade in their two separate funding programs -- the Operating Fund and
the Capital Fund -- and receive one subsidy sufficient to cover
operating costs, mortgage payments (including lender-determined debt
coverage requirements), and replacement reserves. We outlined a program
of this nature in *"Final Draft Report: Debt Financing of Public Housing
Capital Improvements, November 1, 2001."* The Administration introduced
in 1992 a program of substantially the same form, called the Public
Housing Reinvestment Initiative (PHRI).

A program like PHRI would potentially allow PHAs to finance the entire
backlog of capital needs now, while maintaining funding levels over the
next ten years at or slightly below current projected levels, result in
appropriations levels about 8% lower than current funding over a ten
year period, even after factoring in \$625 million annually for
replacement reserves (at about \$500 per-unit, per-year).

One of the major fears is that, by introducing private lenders, units
will be lost from the stock in the event of default. Appropriately
structured mortgage insurance or other forms of credit enhancement and
guarantees would largely mitigate that concern.

Beyond the obvious benefit of raising capital to more rapidly accelerate
improvements to public housing, something like PHRI would force an
immediate shift to a property-based funding, monitoring, and management
system for public housing -- the major reform themes presented in this
paper. Lenders would only lend on a property-by-property basis;
subsidies, oversight, and management would naturally follow.

At the same time, a PHRI type program would create the appropriate
vehicle for funding replacement reserves. A peculiar feature of public
housing funding is that properties do not have property specific
reserves to provide for ongoing capital needs. Typically, when a private
rental property gets built, the lender requires the owner to set aside
an amount each month to fund the timely replacement of appliances and
other building systems. If well-funded and used responsibly, along with
occasional refinancing, such a replacement reserve system can extend a
property's useful life almost indefinitely. It also relieves the
operating budget of these non-routine expenditures. Currently, because
capital needs greatly exceed annual funding, few PHAs can afford to
set-aside a portion of their capital fund grant each year to fund
replacement reserves -- a situation that shortens the life-span of any
capital improvement.

**Operating Funding**

Before the early 1960s, PHAs received no federal operating subsidies,
relying entirely on the rents that they collected. There was then a
brief period of experimentation with different, and mostly inadequate,
subsidy schemes. In 1975, HUD implemented the Performance Funding System
(PFS), now called the Operating Fund. PFS works this way: a PHA receives
in operating subsidy the difference between a formula-determined
"allowable expense level" and what it charges in rents. This allowable
expense level is supposed to represent what a well-run housing authority
would spend on operations, based on the experience of a small sample of
agencies in the early 1970s and updated annually for inflation.

Unlike other sponsors of federally-assisted housing, who received
long-term subsidy contracts at the time of project award, PHAs must rely
on annual appropriations for their operating subsidies. In recent years,
these funding amounts have become less predictable. Over the past
decade, operating subsidies have been funded at 100% of HUD-estimated
levels just twice; other years they ranged from 89% to 99.5%. (Because
subsidies represent about half of a typical PHA's operating budget, each
1% reduction in subsidy equates into a 0.5% reduction in total operating
revenue). These less-than-full funding levels can be taken as an
indication of the Congress' reservations over the accuracy of this
antiquated formula, as well as lingering concerns over program
performance. How much should it really cost to operate public housing?
Would private operators be able to perform adequately with the same
resources?

Our work on the Public Housing Operating Cost Study[^4] suggests that
the operating funding currently made available for public housing, in
the aggregate, is just about right, if one assumes a cost structure
essentially similar to non-profit operators of assisted housing. In the
aggregate, we estimated that today's formula expense levels for public
housing were some 5% lower than other federally assisted housing, after
controlling for such factors as building type, location, number of
bedrooms per unit, etc. If one were to include certain investment and
other income that PHAs are currently allowed to keep (without an offset
in subsidy), however, total funding is roughly equal to estimated needs.
There were, of course, distributional effects among PHAs. As a group,
the largest agencies would experience a 3% decrease, with the smaller
categories increasing between 10-19%.

To help evaluate the appropriateness of our model, we looked at the
operating costs of many privately-managed public housing properties (one
of the few places with property-level data). We also used experienced
operators of assisted housing to prepare estimated budgets on some 100
public housing properties, specifically targeting certain "special"
property types -- very old properties, large properties, scattered site
properties, etc. This field testing experience showed that the model was
quite reasonable for most properties, with minor adjustments that raised
the lowest values and decreased the highest values.

A new formula-funding system, one pegged to the cost of operating
federally-assisted housing, should do a lot to correct inequities in the
current system, i.e., PHAs of similar characteristics but with
dissimilar funding levels. Indeed, there appear to be certain classes of
PHAs that have been historically under-funded -- for example, much of
the South West. Equally important, a benchmark system should help ease
concerns within the Congress about the adequacy of funding levels. We
know now what it would cost other non-profit operators to run public
housing, a figure that happens to be quite close to current funding
levels. In fact, our model showed that public housing should cost more,
on a per unit basis, than federally-assisted housing (23% more) because
public housing is older, has more bedrooms per unit, is located in
higher poverty census tracts, etc. -- all statistically important cost
drivers.

The other major advantage of the work under the Cost Study is that the
recommended operating cost model is a property-based model (providing
estimated expense levels for each public housing property), which should
facilitate the transition to property-based management. Finally, a
subsidy system tied to real cost drivers, with property-specific
allocations, would allow appropriate annual adjustments for a broad
range of local changes, rather than the current system of annual
adjustments for inflation alone.

**Isolation**

The former chair of a large housing authority, with extensive experience
in mortgage lending, recently reflected on his long involvement in
public housing, "I never thought of it as real estate." Indeed, public
housing appears quite odd to other housing professionals.

-   **Public housing isn't funded like other real estate**. Both the
    operating and the capital funding are agency-funding programs, not
    property-funding programs. The money is provided to the PHA as an
    entity (the "organization"), with near complete discretion in how to
    allocate resources -- either among properties or between direct and
    indirect expenses. Consequently, there's no separate set of
    financial statements, or record of income and expenses, on each
    property, which serves as the most basic assessment and planning
    tool in private real estate. As previously noted, there's also no
    system of replacement reserves and no ability to refinance a public
    housing property. In conventional or assisted housing, the equity
    that gets built up (either through reduction in mortgage principal
    or increased property values) is used to recapitalize or otherwise
    finance major repairs and upgrades. For a private operator, this
    changes the whole way at which you look at a property and how
    long-term property planning is conducted (always cognizant of the
    underlying value of the asset).

-   **Housing authorities look quite different organizationally than
    similarly-sized property management or development companies**.
    Housing authorities maintain much more complex organizations, with
    many more organizational levels and specialized departments and
    employing many more centralized staff. The organizational pyramid is
    inverted, with fewer directly employed at the property level.
    On-site personnel are also assigned far less authority and
    responsibility.

-   **Management of the properties does not appear to be the primary
    product.** Sometimes, it is the pursuit of other social objectives
    (resident empowerment or self-sufficiency programs, small or
    minority business development programs, etc.). Sometimes it appears
    to be the protection of employee interest groups. There are multiple
    candidates, but property management does not predominate, with
    results that reflect that misplaced emphasis.

Because public housing has limited interaction with the broader
apartment industry, it often doesn't share in the advances in technology
and management practices. It also doesn't benefit from the managerial
skill that exists in private housing (a much larger industry and, as
such, a larger reservoir of talent). In the infrequent times that
private housing professionals either are appointed to housing authority
boards, or hired into management positions, they have a hard time
translating their skills or are schooled to believe that "things work
differently" in public housing. Isolationism also has an impact on HUD's
program staff, who have little knowledge and experience with
conventional property management. This more limited orientation finds
its way into the writing of program rules and in day-to-day enforcement.

Public housing's centralized funding and reporting systems have also
encouraged a centralized approach to property management. Real estate
ownership and management, it turns out, is inherently a property-centric
enterprise. In conventional housing, each property is managed as its own
franchise, or cost center, with separate financials, staff, operating
objectives, etc. -- no different than a McDonald's, a Starbucks, or a
branch bank. In property management, you need someone in charge of that
property day-to-day, someone to whom you want to invest significant
authority and responsibility and who can respond quickly to day-to-day
concerns (or face loss of tenants or deteriorating property conditions).

PHAs, in contrast, rarely utilize "strong" site mangers and rarely
maintain project-based budgeting and accounting systems. Typically, the
manager does not oversee maintenance, does not collect rent on site,
does not have a budget, does not order materials, and does not have
direct authority over on-site personnel. Similarly, the regional manager
in public housing (who oversees the site manager) cannot review the
performance of a property by looking at its income and expenses, does
not hire/fire key site staff, and spends most of his/her time
negotiating with the central office, on behalf of the properties, for
resources or approvals that, in private housing, would require no
intercession. Moreover, these centralized organizational arrangements
(purchasing, warehousing, maintenance, etc.) are far more difficult to
coordinate and manage, putting even greater pressure on the more limited
managerial skill in the public sector and requiring larger
infrastructure (office space, information systems, etc.). These
centralized systems are also more expensive, resulting in much higher
overhead than typically found among other operators of assisted housing.

Isolation can also be credited with public housing's inferior and
ineffective oversight system. One of the most effective monitoring tools
in private housing is the property budget. It tells you not only how
you're spending, and how that spending compares with comparable
properties, but it reflects performance on rent collections, occupancy,
and more. In place of the financial performance of a property we have,
in public housing, a lot of focus on process.

One way to think of the differences between public housing oversight and
all other housing oversight is in the widely divergent ways of
approaching the issue of getting desired results. For-profit and
non-profit owners and management companies begin with the general --
"Did we take in more money than we spent? Are the apartments full? Did
we collect most of the rent? Does the property look good?" If the
answers are unsatisfactory, there is a second and (if necessary) third
level of inquiry focusing on more specifics. In the public housing
arena, we tend to begin with the specific "Did you submit your HUD form
(any form) in time, with all the boxes completed? Did you have your
monthly resident meeting and is a copy of the minutes available? Have
you properly calculated the average number of days to process a work
order through the central maintenance reporting system?" These attempts
to regulate procedures often miss the larger picture and may even
convince various actors that all is well when larger problems are
present, but not captured by the particular details requested. Because
most public housing administrators have not had real estate experience
outside of the public arena, they may not be confident in their ability
to make the judgments necessary at the general scale and therefore turn
to over-regulating the specifics in hopes that will make the general
turn out well. Clearly, this approach has not worked well in many
places.

If you believe that public housing's isolation is at the heart of what
ails it, then the answer seems clear: make public housing more like
other assisted housing. To do that would require four actions:

1.  **Change the funding system to a property-based funding system,
    along with true cost-accounting.** Assign the funding to the
    properties and make housing authorities manage those assets
    accordingly. When the funding is provided to the organization, and
    not the properties, it is too easy for interest groups of all types
    -- employee groups, resident groups, political representatives of
    affected neighborhoods, etc. -- to make claims on the funds. The
    last priority can be the properties. Make PHAs charge a management
    fee for overhead expenses (under the current system, these expenses
    are lumped together with other administrative costs, making it
    almost impossible to track). No longer permit general cost
    allocation systems that spread the cost of, say, the central
    maintenance staff across all properties (except in unusual
    circumstances, such as certain scattered site operations or the
    aggregation of small properties).

2.  **Change the monitoring system to a property-based monitoring
    system, one with real teeth.** No longer monitor housing
    authorities, per-se. Monitor only the properties. The organization
    would be irrelevant to HUD, much the same way that state housing
    finance agencies look only at the performance of individual
    properties -- they don't evaluate management companies or portfolios
    of properties. Then, if a property is not performing, force change
    at the property level. If, after a period of warning, performance
    has not improved, first cut the PHA's management fee, second remove
    the management, and third recover and reassign the asset. (See
    Overseeing Public Housing, below).

3.  **Change the public housing regulations.** Mostly, these changes
    would have a cosmetic effect. Under the Public Housing Operating
    Cost Study, we found that the differences in regulations were, for
    the most part, not major cost-drivers, and certainly not the primary
    cause of public housing's management problem. We also noted that
    there were off-sets, i.e., regulations unique to assisted housing.
    Still, creating a more uniform regulatory environment would remove
    an important perception issue as well as a handy crutch.

4.  **Allow public housing to finance its modernization needs with
    long-term debt, backed by long-term subsidy contracts (see earlier
    discussion).**

None of the other reforms currently on the table, from greater income
mixing to accreditation, would do anything to force a property-specific
foundation for public housing. Some, in fact, would have the opposite
effect.

**Management**

Perhaps the greatest problem in public housing today is management. For
a collection of reasons -- the isolation of public housing, HUD's
centralized funding and reporting requirements, the natural tendency of
public agencies to favor control over responsiveness, the absence of any
real competition or market forces -- the overall quality of management
compares poorly with other operators of assisted housing.

Much of property management is about "presence", about responsiveness to
tenant requests, and about making a big deal about little things (gum
wrappers on the ground, children riding bicycles on the lawn, touching
up the paint on the front porches, etc.). Smaller agencies, therefore,
by virtue of their size, are less afflicted, but not immune, to public
housing's program flaws. The executive director is, for all practical
purposes, the site manager. Smaller agencies are also more likely to be
located in smaller communities and may benefit from shared community
norms. Larger agencies require more organization. Hence, there are more
temptations for specialization and centralization. There are also more
interest groups with demands on agency resources.[^5]

In terms of management, public housing administrators can be divided
into two main camps. On the one side are those with the firm belief that
centralized management is cost-effective. At a recent PHADA conference,
the long-term director of a large PHA, in response to a question of
whether his site managers oversaw maintenance, emphatically remarked
that he "never met a manager who knew anything about maintenance." While
this statement fairly accurately captures the sentiments of this first
camp, it is completely at odds with conventions in private housing.
Similarly, many still believe that central warehouses offer economies of
purchasing or that site managers couldn't possibly be responsible for
almost any level of purchasing, for overseeing security or protective
services, or for making personnel decisions. All of these skills are a
routine part of any housing manager's resume in the for-profit and
non-profit sector.

On the other side of this divide are administrators who would like to
institute the kinds of flexible organizational patterns found in private
industry (or even contract for those services) but, for political
reasons, feel stuck or trapped with the current structures.[^6] To
change, they would either need to reduce the number of personnel or
significantly restructure job responsibilities and compensation levels
-- something, as public agencies, they would rather not face. Without
any formal federal mandate requiring change, or demanding higher levels
of performance, conditions will remain much the same. In the words of
one large city public housing director, "Why should I do it? There is no
incentive."[^7]

The four actions outlined at the end of the previous section -- property
based funding, property-based oversight, etc. -- would force PHAs to
change their management accordingly. Opposition has formed along five
main lines.

-   **The first is the belief that property-based financial accounting
    is a more expensive system to maintain, as opposed to consolidated
    reporting.** This is simply not the case, illustrating again how
    little is understood about conventional real estate. It cuts against
    the experience of the thousands of apartment complexes in this
    country, virtually all of which have separate financial reports. The
    cost of preparing property-level financial reports is a small
    fraction of a management company's fee. In fact, our observations
    through the Cost Study were that PHAs employed far more
    finance/accounting staff, on a per unit basis, than other operators
    of assisted housing -- and without better results in terms of
    financial reporting. The reaction from outside public housing to
    this issue has been uniform: "How can you manage without knowing
    what it costs to operate each property?" The only real exception
    here is very small properties or scattered site properties, where it
    may make sense to aggregate the management and also the financial
    reporting.

-   **The second is the fear that housing authorities simply won't be
    able to convert and manage in a more property-based manner.** PHAs
    have accommodated their organizations over the years to the unique
    set of incentives and arrangements of the public housing program.
    How can they now be asked to restructure their systems and, in many
    cases, rework collective bargaining agreements and personnel
    systems? We admit that it will take some time. But if PHAs can't
    adjust over a reasonable transition period, and they can't provide
    the same level of service, we need to move on. On public policy
    grounds, we can't maintain an inferior delivery system when we know
    that the same resources could be used more effectively by
    alternative providers. If the industry doesn't do it, there is every
    chance the Congress will at some point (look at welfare reform or
    the proposal to block grant Section 8 vouchers).

-   **The third is the view that public housing has a unique mission in
    either who it serves or in the additional services it provides.**
    The demographics of the tenant population in public and assisted
    housing are remarkably similar. So, there's nothing unique there.
    Further, many operators of assisted housing also provide services in
    addition to shelter, but the real estate comes first. Even if public
    housing had a more "difficult" population, or it provided more in
    the way of services, these events would not give cause to maintain
    the existing funding and management systems. Instead, it would seem
    that the more challenging the needs of the properties, the more that
    one would want to empower the staff at those properties to manage
    effectively and the more that one would want to know the costs of
    those properties.

-   **The fourth is the concern that, were public housing to adopt the
    changes proposed, why have a public housing program at all?** Why
    not just become part of the larger world of assisted housing? This
    is a good question. What is it that defines the public housing
    program? Do we want to maintain an antiquated funding system? Is
    that what should be preserved? The changes recommended above would
    still allow for public ownership, tenant rights, and long-term deed
    restrictions -- but these provisions already exist for assisted
    housing as-well. Indeed, it seems hard to justify maintaining two
    "shops" within HUD, the Office of Public and Indian Housing (for
    public housing, or PIH) and the Office of Housing (for other
    federally assisted housing), each with essentially the same function
    -- the oversight of federal low-income housing programs.

-   **The fifth is the unease over the fact that these changes would be
    huge for HUD, which already has its hands full with the existing
    program**. We don't doubt the latter. Actually, these proposals
    would help HUD focus. It would result in better systems, clearer
    goals. Still, it requires a major organization re-tooling, larger
    than that required for the PHAs. But, as discussed in the following
    section, there are options if HUD/PIH cannot make the conversion
    since these are tasks that can readily be acquired in the
    marketplace.

**Oversight**

As indicated, the current oversight system for public housing has a
number of flaws: (1) it evaluates organizations, not properties; (2) it
is overly focused on process and not results; (3) it encourages
centralized management (exactly what we don't want, particularly since
public agencies are already prone towards such tendencies); (4)
oversight is bifurcated between the field offices and the Real Estate
Assessment Center (REAC); (5) there appears to be no theory of practice
of how to intervene effectively once HUD identifies problems (frequently
too late); and (6) it doesn't seem to have (or fails to apply) any real
sanctions.

It is not hard to imagine what a reformed oversight system would look
like. Indeed, there are a number of organizations that currently provide
asset management services for large portfolios of properties -- HUD's
Office of Housing (overseeing assisted housing), state HFAs, tax credit
syndicators (equity investors), etc. These bodies share the following
common elements.

-   **Asset Managers**. There is a person in each organization that has
    his/her hands around a "portfolio" of properties. The job of the
    asset manager is to monitor the on-going performance of each
    property in the portfolio, to track indicators, and watch for
    trends. Some asset management organizations assign as many as 70
    properties to an asset manager. For public housing, the proper ratio
    might be something on the order of one per 30-50, given that public
    housing is older and needs more attention. Still, that's only around
    300-400 asset managers for the nation, which would represent the
    bulk of the oversight staff.[^8]

-   **Annual or quarterly submission of property-specific financial and
    performance data**. Each property must submit regular performance
    and financial reports, at least on an annual basis and sometimes on
    a quarterly basis (more regularly if troubled). Some will rely
    principally on the financial reports. Others will also ask for
    separate reports on rent collections, accounts payables, vacancies,
    etc.

-   **Annual on-site physical inspection and/or management review,
    conducted by the asset manager.** Public housing properties are
    inspected annually, but by a third-party (a REAC contractor) and
    with no context for past performance. They're not inspected by a
    public housing asset manager. What was found at the last visit? Have
    physical and management conditions improved? There's no sense of
    history or subtlety to the existing physical inspection system, only
    a raw score. Beyond the physical inspection, there's also no annual
    management review of a property in public housing, common in these
    other organizations.

-   **Annual Financial Audits**. Although not always worked as well as
    one would like, the independent financial audits are intended to
    certify the soundness of financial reports and otherwise identify
    material weaknesses. They are a check-and-balance. Public housing
    only has agency-level audits, not property-level.

You can go to almost any housing finance agency and find this structure.
The same is true for the National Equity Fund, the Enterprise Social
Investment Corporation, and other syndicators (and hence overseers) of
low-income housing tax credits. They differ mostly in the particulars --
the frequency, for example, of inspections or submission of financial
reports.

Assume that an asset manger for an HFA has been reviewing the financial
reports for a property and finds that rent revenues are decreasing and
accounts payables are increasing. There's something going on. He/she
schedules a visit to the property and finds that the management company
has had difficulty (for unexplained reasons) keeping a site manager. The
property has run through three site managers and the position is
currently vacant. Not surprisingly, conditions are deteriorating. The
asset manager sends a corrective action letter (strike one) and
schedules a return visit in two months. On the return visit, conditions
have not improved (strike two), and the HFA sanctions the management
company by reducing its management fee. Several months later, a
follow-up visit shows no improvement (strike three) and the HFA requires
a change in management company.

Notice that the HFA, through the asset manager, never once intervened to
understand why the management company could not perform the task for
which they were paid. The HFA never once considered giving the
management company technical assistance to fix its internal management
problems -- say, to help it develop a new hiring procedure or to acquire
a new management software program. The expectation is that the owner and
management company are professionals and know how to own and manage.
There is also the presumption of responsiveness, i.e., if the HFA asks
you to do something, that you will do it or suffer the consequences. The
HFA doesn't have the time, resources, or inclination to baby-sit.
Finally, there is the knowledge that, if not performing and not
responsive, you can and will be replaced by some other management
company (initially) or owner (second stage).

Public housing operates under none of these same protocols. It doesn't
have a property monitoring system. It doesn't have a property-based
intervention strategy, and it doesn't replace poor performers. The field
offices also are not organized or empowered to take action.

HUD should follow the same basic model as other asset management
entities and stop evaluating the organization. If a public housing
property is not performing (regardless of whether other properties in
the agency are stable), it should first place the property on warning --
expect it to be turned around. If not responsive, the PHA should be
given a second chance, although probably not without first penalizing it
with a reduction in management fee. By the third time, HUD should
replace the management. HUD should not give the PHA more technical
assistance, loan it staff from other PHAs, or ask the local university
to run it (as was the case several years ago for one large, troubled
PHA). HUD should treat PHAs as grown ups. Eventually, if management does
not improve, HUD should recover the asset and change the ownership.
There are others that have proven to be responsible owners of affordable
housing.

Realistically, it will be several years before PHAs will be able to
provide true financial reports on a property-by-property basis. Still,
HUD can begin to require PHAs to report other property indicators (rent
collections, occupancy levels, etc.) on a property basis. HUD can also
begin to organize its staff accordingly, so that there are asset
managers assigned to groups of properties.

Two other big issues are whether HUD has enough staff within PIH and
whether those staff can be cross-trained accordingly. Fair enough. There
are currently about 1,500 HUD employees assigned to PIH. This seems
adequate to oversee public housing under a proper property-based
arrangement. However, PIH staff are also responsible for overseeing the
Section 8 voucher program and for miscellaneous grants. Skill levels may
be the larger challenge, particularly if one begins to rely more on the
subjectivity and experience of the "asset manager" in reviewing a
property's performance (as is the case for private asset management
organizations). Fortunately, while capacity might be an issue within
PIH, it is not a capacity issue in terms of industry. One side of HUD
already performs these functions, as do HFAs and others.

**Going Forward**

There have been countless public housing reform initiatives over the
past several decades -- tenant management, homeownership, income
targeting, annual plans, etc. Remarkably, what's been absent from these
proposals is a framework that begins with the presumption that public
housing is, first and foremost, a real estate enterprise. Let's get that
part fixed.

For the first 25 years of its existence, public housing had the stage to
itself. Beginning in the early 1960s, the Congress began to encourage
private sponsors (for-profit and non-profit) to develop and own
low-income housing. As a result of these efforts, there is now a fully
mature industry of private sponsors of affordable housing and, not
surprisingly, well-established rules for financing, overseeing, and
managing low-income housing -- rules that public housing frequently
violates. Moreover, by maintaining this separate universe, public
housing misses out from the experiences of the wider real estate
community.

Many PHAs now indicate that they want to own and manage like the private
sector. They want to be cut-loose from silly regulations that distract
them from the larger task at hand. Let's remove the roadblocks -- real
and perceived -- and treat PHAs as housing professionals. Let's also
stop wringing our hands that we don't know how to fix public housing. If
we want to reform public housing, we need to make it more like
conventional housing in terms of standards and management practices and
more like assisted housing in terms of funding mechanisms, oversight,
and operating rules. Every legislative proposal, every regulation, and
every administrative notice in the years ahead should be evaluated
through this context.

We suggest that the debate about public housing's future has less to do
with where to go than how to get there and over what period of time.
Consequently, it makes sense to begin planning the transition. It would
be helpful to begin an asset management demonstration program within
HUD, with at least a couple different designs, to gain more
understanding over the proper structures and systems, even as statutes
and regulations are being re-written.

For the agencies that are currently performing well, there is the
question of why they need to change. Their successes are individual
successes, not system successes. Moreover, the reforms advanced here
should result in a stronger environment in which to perform.

[^1]: Some of these demolished units have been replaced with Section 8
    vouchers, which, depending on local market conditions, are not
    duplicate resources. A major contributing factor for Congress'
    readiness to tolerate the loss of units and unwillingness to fund
    hard replacement units is the dissatisfaction with the management
    performance of housing authorities over the years (see below).

[^2]: Arguably, there is a sixth major problem or concern, one having to
    do with the concentration of poverty in public housing and the
    alleged effect that the rent system has in discouraging employment.
    Social welfare programs outside of housing have undergone dramatic
    changes in orientation towards supporting work. Housing programs
    appear to be out of step with these reforms and rent reform is
    certainly a major topic of discussion among public housing groups.
    However, we do not address this issue in this paper. To the extent
    that the rent structure is a problem, then it is a problem for all
    deep subsidy programs, including Section 8 vouchers and
    project-based Section 8, and is more appropriately addressed across
    all housing programs and within the context of the entire welfare
    system. While the rent reform question deserves further discussion,
    it is far less important an issue than, say, improving the quality
    of public housing management. Nor is there any indication that the
    current rent-setting system is the cause of the management problem.

[^3]: The last national study of capital needs in public housing was
    completed in 2000, reflecting needs in 1998 (Meryl Finkel, Donna
    DeMarco, Hin-Kin (Ken) Lam, and Karen Rich, *Formula Capital Study:
    Capital Needs of the Public Housing Stock in 1998*, prepared for the
    U.S. Department of Housing and Urban Development by Abt Associates
    Inc., March 2000). Total modernization needs were estimated to be on
    the order of \$25 billion. Since that time, the Congress has
    appropriated some \$14 billion for modernization, not including \$3
    billion in the pipeline at the time of the study. It would appear,
    then, that the backlog would be substantially reduced. However, (1)
    new needs "accrue" each year, (2) at least a quarter and possibly
    one-third of each year's capital grant is spent on non-capital items
    (Administration, Operations, and Management Improvements), and (3)
    lacking adequate funding, PHAs often must spend scarce capital funds
    "patching" problems that would be more efficiently addressed under a
    comprehensive modernization campaign.

[^4]: See, *Final Report, Public Housing Operating Cost Study*, Harvard
    University Graduate School of Design, June 6, 2003.

[^5]: These examples are intended to explain but not justify
    centralization. One of the reasons large property managers push
    decision making and outcome responsibility to the site level is that
    climbing through a deep hierarchy of organizational layers takes
    time and assures a lack of neighborhood sensitivity and
    responsiveness.

[^6]: Some of these agencies have non-public housing portfolios where
    they contract for property management or organize along more
    property-based lines.

[^7]: Ideally, the mission to provide high quality housing to low and
    moderate income households should be all the incentive needed to
    find the most cost-effective methods available for managing their
    properties. Since we can't rely on that (example noted), a larger
    system intervention is needed.

[^8]: There are 14,000 public housing properties. The estimated ratios
    assume some of the smallest properties would be consolidated.