State policymakers have been working to address the crises created by their overspending habit for half a decade now. Mostly, this has been accomplished through fee increases, revenue shifts, selling claims on future cash and, recently, major tax hikes. But should state government start looking for savings from within, an estimated $600 million can be found by reforming and restructuring the Michigan State Housing Development Authority.
MSHDA’s mission and programs distort the market for low-income housing. Generally, the housing market has a mechanism for providing low-income housing without government assistance. Rental housing complexes are built initially for people of higher incomes, but as the complexes become used, or as newer complexes are built, the older buildings become increasingly available for low-income tenants.
MSHDA’s programs create a greater demand for the construction of new or renovated low-income housing. By doing so, capital is shifted from where it is needed most to where there is less need.
MSHDA is a 280-employee state government bureaucracy that is ultimately unnecessary and should be eliminated. But if the state chooses to continue operating these programs, it should at least operate them efficiently.
An article in the June 2007 issue of Michigan Privatization Report explained that MSHDA is ripe for reform. A good place to start would be for MSHDA to shed its multifamily loaning programs.
MSHDA sells bonds with low rates for its multifamily lending programs and writes loans for multifamily housing developments at higher rates. Interest from the bonds is usually exempt from federal income taxes. This arbitrage scheme allows the agency to operate without assistance from state tax money. Its bonding and loaning programs provide above and beyond the costs of administration. Multifamily loans make up 63 percent of the value of MSHDA’s loan portfolio, so it represents a significant chunk of MSHDA’s income.
Financially, multifamily loaning is a big money generator for MSHDA. Last year these loans were responsible for $29 million of MSHDA’s $63 million net investment income.
MSHDA should sell its current assets and its ongoing lending operations, either bundled or separately.
Assessing the value of MSHDA’s cash, investments and multifamily loan portfolio is fairly simple. However, apart from spending less in servicing the multifamily loans, there are not a lot of other efficiencies to be gained. Selling these would be like securitizing the state’s tobacco settlement money or selling the lottery proceeds — the state gets a lump sum of cash for an asset. Net assets of multifamily loaning programs are $127 million, which serves as a minimum the state can expect from a sale of its existing multifamily loans and bonds. An estimate on the net present value of the loan portfolio yields a value of $177.6 million. To get a precise figure, MSHDA would simply need to bring it to market.
The Michigan State Housing Development Authority is a state agency that oversees a number of programs originally designed to help provide for low-income housing.
The previous issue of Michigan Privatization Report detailed how MSHDA has become more of a political operation, promoting the Cool Cities Initiative and financing broadband development. MSHDA is ripe for reform. In lieu of eliminating MSHDA, this article looks at a number of reforms that would limit the political tendencies of MSHDA programs while generating revenues for the state.
Efficiencies can certainly be wrung from MSHDA’s ongoing operations. In order to implement a proper lending program, there are specific functions that need to be performed: credit analysis; underwriting and project analysis; construction loan servicing; plan and cost reviews; environmental analysis; and employing a lawyer to draft the loan documents and make sure everything is properly executed.
All of these functions can be done in the private sector. In
fact, it is very likely that a private firm could do the job with fewer
employees and would contract out for specific functions, such as environmental
analysis. MSHDA transferred $32.6 million from its multifamily programs to cover
operating expenses for fiscal year 2007 and $31.3 million the year before. A
contractor would be expected to incur only
a fraction of that.
Contractors have leveled criticism of MSHDA for excessive bureaucracy and red tape in the administration of its multifamily loan programs. A private company that leases these programs could probably expect to expand them. With efficiency gains, and a modest increase in the average lending volume, MSHDA may be able to obtain $432 million for a 20-year lease of its multifamily lending programs.
MSHDA would still retain its bonding functions. In order for bonds to be tax-exempt, they must be issued on behalf of a state authority and used for an approved purpose. Financing low-income housing facilities under federal guidelines is one of those purposes. A buyer would have to request bond financing authority from MSHDA for any project to be financed.
Leasing MSHDA’s multifamily lending may raise some eyebrows from the federal government, as well as state policymakers. But states have been given wide latitude from the federal government over how to implement these programs, though it appears that no other state has looked to contract out these programs. More importantly, there does not appear to be any legal statute that would prevent MSHDA from leasing this program.
There are issues in contracting that would need to be resolved, of course. There are programs that conflict with its lending, escape clauses and what to do if the federal government changes the program. These problems can be worked out in the contracting process.
For instance, MSHDA offers the Pass Through program to developers, whereby it authorizes a tax-exempt bond for a developer. Since this uses the limited amount of bond capitalization available to MSHDA, Pass Through would be in conflict with the program lessor’s interests. However, including in the contract rules for the amount of bond cap the contractor could write would be an equitable way of overcoming this conflict.
A key provision in contracts would be the requirement that any project that the contract company finances would be subject to the same requirements and oversight that MSHDA currently applies to its projects.
Leasing these programs and selling its portfolio would affect MSHDA’s current operations. MSHDA distributes $15 million to subsidize nonprofit housing developers, and uses multifamily lending to support its general operations. Unfortunately, many of these nonprofit agencies spend more developing a property than private firms. Instead of being an automatic handout, the money that MSHDA uses for this program should be subject to legislative scrutiny. In other cases, some of this money is not used to develop low-income housing at all.
Two other major programs, the Low Income Housing Tax Credit and its federal low-income rental subsidies, are self-sustaining. Administration of the LIHTC program is covered by fees, which carry federal restrictions limiting them to the costs of the program. Low-income rental subsidies are covered dollar for dollar by the federal government. While we should be skeptical of these programs, they are not likely to be attractive for competitive contracting without significant reforms.
MSHDA’s multifamily loaning programs are attractive for leasing, however, and policymakers should follow through with these reforms. MSHDA already has a longstanding relationship with the private sector — companies underwrite their bonds, MSHDA sponsors single-family programs with private banks, and the agency is constantly consulted by private firms. Selling multifamily loan programs would simply be one more private-sector interface.
If MSHDA does decide to sell its portfolio and lease the programs (there is a constitutional question over state control over MSHDA and whether the state can use its funds), it may also want to pare down some of the $435 million it holds in escrow and reserves. This is the result of the ruling in the recent Parkwood v MSHDA case. With some of this money and the proceeds from the sale of the multifamily loan program, the state would receive an upfront payment which could be used to fund its employee healthcare benefits. The state is facing an estimated $6.9 billion in unfunded health benefits for state employees and $13.5 billion in unfunded retiree health benefits.
By selling or leasing MSHDA’s multifamily loan programs, the state will get more efficient services and a lump-sum payment that can start funding the promises that it has made to retirees.