DCFPI Testimony on the FY 2005 Budget Support Act of 2004

Chairman Cropp and members of the Committee, thank you for the opportunity to speak today.  My name is Ed Lazere, and I am the executive director of the DC Fiscal Policy Institute.  DCFPI engages in research and public education on the fiscal and economic health of the District of Columbia, with a particular emphasis on policies that affect low‑ and moderate‑income residents.

I would like to focus on two titles of the Budget Support Act today ‘ the plan to securitize the Housing Production Trust Fund and the proposed tax on health care providers.

Housing Production Trust Fund

Under the mayor’s proposal, a funding stream of up to $20 million would be used to secure a bond or series of bonds for the Housing Production Trust Fund.  At the same time, the proposal would eliminate the current funding formula 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 one or more bonds adding up to a total of $250 million to $275 million.  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.  Creating the authority to establish bonds on behalf of the Housing Production Trust Fund has merit for these reasons.

Nevertheless, the mayor’s proposal has numerous flaws and does not represent a sound use of securitization.  Most important, issuing debt for the Trust Fund only makes sense if plans for substantial housing investment are in place, and if the amount needed to support the plans exceeds available funding from the annual funding stream.  It does not make sense to secure a substantial bond ‘ and begin making interest payments ‘ before this time.  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.

It is worth noting that 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.

It appears that the main "security" in the mayor’s securitization proposal is that it locks in funding for the Trust Fund at a relatively low level for 20 years.  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.  While it is understandable that some may argue that full funding of the Trust Fund is not affordable in 2005, it is not clear why support should be frozen for the next 20 years.  If the police were held at the current-year level for 20 years, our police force would be decimated over time.

The demand for affordable housing clearly exceeds $20 million per year ‘ or the $275 million in proposed bond proceeds.  There are 42,000 DC households that have severe housing problems, meaning that they spend at least half their income for housing or live in severely substandard housing, or both.  Assuming a relatively modest subsidy of $20,000 to produce an affordable housing unit, it would take over $800 million to address their needs.   Dealing with other issues, such as expiring federal subsidies or helping moderate-income families become homeowners, would add further costs.

In 1990, the District spent over $50 million in local funds on affordable housing, when adjusted for inflation to today’s dollars.  This is more than would be spent in 2005 if the Housing Trust Fund were fully funded under existing law.  It suggests that the city can administer housing programs with significant annual funding.

For these reasons, it would be better to modify the Trust Fund to allow a portion of its funds to be securitized rather than to securitize its entire funding stream.  Bonds could be allowed when needed to support a substantial housing development, with the amount of the bond limited to the costs of the project.  Moreover, securitization should not be used simply as a means to freeze funding for affordable housing for 20 years.  The Council should determine how much the city can afford to devote to affordable housing in 2005, but it does not need to make funding decisions beyond one year.  It can maintain the existing funding formula even if that formula cannot be fully supported in 2005.

Health Care Provider Tax

The mayor’s budget includes a proposal to set a tax on the receipts of hospitals, nursing homes, and intermediate care facilities for mentally retarded persons.  The tax would raise $18 million in 2005 and $35 million in years after that.

In other states, provider taxes typically are adopted in conjunction with expansions of state health programs such as Medicaid, including increases in reimbursements for certain services and expansions of eligibility.  The adverse impact of the tax thus is offset at least in part by the increases in public spending on health care.

 The mayor’s proposal would not operate in this fashion, however.  The new provider tax is not paired with increased payments to providers.  Instead, the Williams Administration argues that in recent years it has increased funding for the Healthcare Alliance, raised some Medicaid provider rates, implemented Medicaid waivers, and protected Medicaid services.  Hospitals and other providers, on the other hand, see the tax entirely as a new cost.  It seems reasonable for providers to be concerned about the tax, since it is not clear that health care expansions in recent years match the size of the tax.

It seems clear that many on the Council are eager to modify the provider tax proposal.  Eliminating the tax entirely would require the Council to identify $35 million in savings, a substantial task.  If this were done through Medicaid reductions, a total of $115 million in cuts would be needed to generate $35 million in local savings.

It is not too late to modify the mayor’s proposal to look more like the provider tax packages adopted in other states ‘ that is, by pairing the tax with Medicaid expansions.  This approach would have the advantage of being far less costly than simply eliminating the tax.  Because the District’s share of Medicaid costs is 30 percent, enhancing Medicaid services and providers rates by $35 million would cost $10.5 million in local funds.  The remaining $24.5 million would be supported with federal funds.  This means that keeping the provider tax and expanding Medicaid services would require the District to find $10.5 million in savings elsewhere in the budget, but eliminating the provider tax entirely would require the Council to find $35 million in savings.

A proposal to expand Medicaid provider rates would need to be designed carefully and with input from providers.  And it is important to note that it is impossible to design a set of enhancements to fully offset the provider tax for each hospital and nursing home.  Instead, the enhancements would ease the impact of the tax for all providers but would assist some providers more than others.

Thank you for the opportunity to speak.  I am happy to answer any questions you may have.