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
Many MSHDA functions can be done in the private sector. It is very likely that a private firm could do the job with fewer employees and would contract out for specific functions.
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.
The McDonnell Towers in Southfield were built using MSHDA incentives. MSHDA finances low-income housing across the state, but could be operated more efficiently if leased to a private lender.
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
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.