by Ed Lazere
PDF of this analysis
The budget proposed by Mayor Williams for fiscal year 2005 would make fundamental changes to the District’s Housing Production Trust Fund. Under the mayor’s proposal, the District would issue bonds for the Trust Fund, and up to $20 million would be set aside each year to repay the bonds. At the same time, the mayor’s proposal would eliminate the current funding formula for the Housing Production Trust Fund, which dedicates 15 percent of deed recordation and transfer taxes to the Trust Fund each year. In 2005, this formula would generate $40.5 million.
A $20 million funding stream would be sufficient to issue a bond of $250 million to $275 million, or a series of smaller bonds adding to the same level. The so-called "securitization" proposal thus could generate a substantial pool of funds to invest in affordable housing. This would allow the District to support several major housing developments and to produce affordable housing in the near future before real estate prices rise even further.
While the notion of securitizing revenues from the Housing Production Trust Fund has merit for these reasons, the specifics of the mayor’s proposal raise several serious concerns. Most important, it represents a dramatic reduction in the District’s funding commitment to affordable housing.
- The mayor’s proposal would cut funding for affordable housing by more than half. From a budget perspective, the proposed $20 million limit on bond payments would represent the District’s annual support for the Trust Fund. This is less than half of the $40.5 million that would be dedicated under existing law in 2005. The District’s Chief Financial Officer projects that formula funding for the Trust Fund would rise to nearly $50 million by 2008, which means the $20 million cap represents an even larger cut in future years.
- The securitization proposal could result in even less than $20 million in annual support for affordable housing. The proposal would set aside $20 million each year to cover bond repayments. But in any year when these costs are less than $20 million, the difference would not remain in the Housing Production Trust Fund but would instead revert to the District’s general fund for other uses. Bond repayments would be less than $20 million if the mayor chose to issue smaller bonds over a number of years rather than a single $250 million bond.
- The plan to securitize revenues from the Trust Fund does not require eliminating the current funding formula. The District could maintain the current funding formula and securitize a portion as needed to meet the up-front costs of a substantial housing development in the near future. The portion not set aside for securitization could be used to support other projects.
In addition to funding issues, other considerations call into question whether the Trust Fund should be securitized in 2005.
- Securitization only makes sense if plans for substantial housing investment are in place. Bonds for capital projects typically are not issued until funds are needed to begin construction. It does not make sense to secure a substantial bond ‘ and begin making interest payments ‘ before the funds will be put to use. Yet the Williams administration has no plans for major affordable housing projects in 2005, and it likely would take years to develop plans, identify sites, and arrange financing. For this reason, securitizing the funding stream for the Housing Production Trust Fund does not appear warranted in 2005.
- Many types of affordable housing projects can be supported without securitization. Efforts to help tenants purchase their building, to preserve affordable housing in an apartment building facing expiring federal housing subsidies, and to provide gap financing to a non-profit housing developer can be supported with the Housing Production Trust Fund’s current funding stream without issuing bonds. In 2002, for example, the District awarded $20 million from the Trust Fund, which leveraged $140 million in other financing to develop 2,000 housing units. The District made further awards from the Trust Fund in 2003.
In the end, the mayor’s proposal appears to be designed primarily as a budget-savings measure. By limiting annual bond payments to $20 million, the budget submitted by the mayor projects over $100 million in savings over the next four years compared with dedicating taxes to the Trust Fund under the current formula. The securitization proposal would soften the immediate impact of reducing annual funding for affordable housing by using those funds to secure a large bond.
The benefits of this would be short-lived, however. The $250 million in bonds that could be generated under the mayor’s proposal would be the only source of funding for the Housing Production Trust Fund over the next 20 years. If a $250 million were spent at a rate of $40 million per year ‘ to match the funding that the existing funding formula provides ‘ the bond proceeds would be depleted over a six or seven-year period. This means the Trust Fund would have no resources to invest in housing for the remaining 13 or 14 years that bond payments would continue to be made.
A Securitization Alternative
There may be cases in which securitizing revenues from the Housing Production Trust Fund would be needed to support a substantial housing development. For this reason, it makes sense to modify the Trust Fund to allow bonds to be issued. At the same time, it does not make sense to use securitization as the sole source of Trust Fund financing.
Instead, the District could maintain the current funding formula for the Housing Production Trust Fund and allow a portion to be securitized when needed to meet the costs of a substantial housing development. A bond should be issued, however, only when it is clear that it is needed to support a large development, and the amount of the bond should be limited to the costs of the project. This proposal would make best use of securitization while also ensuring that the Housing Production Trust Fund has an ongoing source of revenues to support affordable housing in the future.
 Some have argued that future funding for the Trust Fund could be reduced because the deed recordation and transfer tax rates may be reduced in the future. The rate for each tax was raised from 1.1 percent to 1.5 percent in 2003 to help address the District’s substantial budget shortfall. The tax increases were intended to be temporary and included a trigger mechanism to return to the old rates when the District’s fiscal conditions improve. Yet even if the tax rates were reduced to their prior level, funding for the Housing Production Trust Fund would be $30 million in 2005 and higher amounts in future years, significantly higher than the mayor’s proposal.
A bond of this size would require annual payments of $20 million for 20 years. As noted, the mayor’s proposal would not allow annual payments to exceed $20 million.