Overincome Renters Living in Public Housing: Scandal or Good Policy?

  On July 21, 2015, HUD’s Office of Inspector General (OIG) released an audit report entitled “Overincome Families Residing in Public Housing Units” (Audit Report Number: 2015-PH-002). The audit looked at the number of current residents of public housing whose income exceeds the maximum income required to initially qualify for public housing. The results reported as many as 25,226 families that exceeded that amount. Since the OIG report was published last month, there has been an extraordinary volume of media stories both at the local and National level, all toned in a negative light. Some of the media coverage casts this as a scandal of huge proportions, even though no rules have been broken by HUD, housing authorities, or the renters themselves. To be clear, neither HUD’s regulations nor the law have been violated by the presence of higher income persons in the Public Housing program. In fact, the practice of allowing overincome families to stay in the program has been encouraged by HUD and actively pursued by many housing authorities. There are a few reasons for this and some thought should be invested in the conversation before jumping to conclusions about whether it’s right or wrong and what to do about it. The Case for Overincome Residents In Public Housing First, there has been plenty of research, and the verdict is in, that mixed income neighborhoods are good for low income people and society as a whole (most especially the taxpayer). The presence of higher income persons provides role models for others to follow and gives real hope to those that are struggling that they too can climb out of poverty. By concentrating poverty in Public Housing and excluding higher earning households, we would be taking a step backward in our efforts against poverty. Furthermore, a real problem with our social welfare safety net is the marginal tax rate, which is a disincentive to move up the financial ladder. Basically, as one's income goes up, the amount of assistance they receive goes down while their income tax and other costs of living go up. In many cases, the net effect is less money in their pocket after modest income gains. The true benefits to income growth only occur with very large income increases, which don’t happen quickly. This places a burden on families and disincentivizes them to move up the income ladder. By telling Public Housing residents that they must move and find market rate housing as soon as their income reaches a certain level, it forces them to evaluate whether a promotion or better job is worth it. A similar scenario may play out when a couple evaluates the cost of putting their children in daycare so both spouses can work. The cost of daycare and overhead associated with working (gas, food, clothing, etc.) has to be evaluated, and some families decide it's cheaper to keep one spouse at home with the kids. Additionally, it is important to point out that, though the HUD audit estimated that the Federal government will spend $104.4 million in Public Housing subsidy over the next year to house the 25,000+ overincome families; these families are currently paying a much higher rent than their very low income neighbors. If overincome families were replaced by very low income people, much more money would be required to operate public housing. For example, in New York City, where the most overincome families were found, 37% (65,500) of families have a Total Tenant Payment (TTP) over $500 per month for rent, while another 37% (62,500) pay between $201 and $350 per month. The first group of families have higher incomes and therefore pay more for rent, since Public Housing rent is based on income. If the entire group of higher income earners living in NYC Public Housing suddenly were replaced with folks paying rent at the midpoint of the lower income group ($275 per month), NYCHA would have an annual budget shortfall of $169 million. Scale these numbers out to the entire public housing portfolio across the country, and the annual budget hole that would need to be filled is $461.43 million. Given the deep cash crisis some housing authorities are in (NYCHA has $20 billion in rehabilitation needs and little means to fund it), there is no wonder these PHA’s aren’t excited about evicting overincome residents who are helping them keep the lights on and the roof from falling in on all the other residents. Also, it helps to step back and look at the breadth of the issue before reacting. The 25,226 families found in the audit amount to 2.62% of all Public Housing units. Of those families, 53%, or 13,388, were earning less than $10,000 in excess of the income limits and another 33% were earning between $10,000 and $30,000 of the limits. Out of nearly 1,000,000 Public Housing units, only 288 families were earning more than $90,000 more than the income limit. This isn’t as big a problem as the media and the public outcry leads one to believe. Believe me, the 14% vacancy rate in America’s public housing portfolio is a significantly bigger problem, but that is an issue for another article. I’m not saying that we shouldn’t take a closer look at the issue. Clearly, a family earning 742% of the low income limit (the worst case the audit detailed) is no longer subject to the marginal tax. And since the social benefits of middle/upper income families living amongst lower income families still exists, HUD should adopt policies that allow them to stay while receiving no taxpayer subsidies and creating opportunity for low income people waiting in line. The Solution How do we: 1) address public concern, 2) make sure not a penny of taxpayer money go to finance housing for someone who has adequate means, 3) promote income diversity in Public Housing, 4) house as many low income people as possible, 5) prevent disincentives to income growth (marginal tax) among low income people and 6) make sure that housing authorities have adequate resources to pay the bills? HUD is already headed in the right direction on this. It has begun conversations with Congress on potential legislation to change how PHA’s handle overincome residents. In addition, starting this year, overincome residents are required to pay rents set at 80% of the HUD Fair Market Rent (FMR) for the area. This change is being phased in over the next three years. To see what overincome tenants would pay under this rule in your area, try out our Overincome Tenant Rent Calculator here. However, it is unclear where the 80% threshold was taken from. FMRs are famous for being out of sync with market rents (despite their technical name “fair market”) and establishing the overincome rent at 80% of an already out of sync benchmark is not enough. For example, that family in NYC that was earning $497,911 per year and paying paying $1,574 per month for a 3 bedroom apartment would now pay $1,523 per month in rent, a rent reduction. On a recent visit to Manhattan, I readily came across one bedroom apartments renting for $4,800+ per month. Clearly, the NYC FMR is lower than market rents and overincome families can easily afford this rent amount. So how do we accomplish those six goals I identified earlier? Public Concern People are upset about this. But they are not upset because a family of ample means is living in a community of lower income people. They are upset that the family may be getting something for free that the taxpayer is paying for, while others in need are not receiving assistance. In fact, I would argue that the conservative taxpayer benefits from a wealthy family living in Public Housing because of the social welfare benefits discussed earlier, as long as they are paying for every benefit they receive. To satisfy the taxpaying public, measures should be taken to ensure overincome families pay market rents and communicate that to the public (and Congress). No Taxpayer Subsidies For Overincome Families That leads me to the second goal, insuring overincome families don’t receive taxpayer subsidies intended for the poor. The 80% of FMR minimum rent policy is a start, but does not go far enough. That family should be paying an actual market rent. Pegging their rent to the FMR is an inadequate benchmark. In the Housing Choice Voucher program, housing authorities are required to do a reasonable rent assessment for each voucher placement that looks at market rents in the neighborhood. The system is already in place to do the same with overincome families in Public Housing. By having a family pay the neighborhood market rent, that $104 million in taxpayer subsidies the audit identified would go away and perhaps even be a revenue generator. Promote Income Diversity It is clear that income diversity in neighborhoods and individual rental communities is good for everyone. There are actual (not perceived) benefits to the public good, no matter if you are conservative or progressive. We must do all we can to keep middle and upper income families in the community short of subsidizing their lifestyle. The market rent proposal discussed above would allow overincome families to stay in the neighborhoods they know, love and call home, while ensuring they aren’t receiving taxpayer benefits. And, they are being encouraged to hang around since their cost of rent is the same as it is anywhere else they go. House More Lower Income People The audit rightly points out that there are thousands of low income people on the waiting lists of housing authorities all over the country who are waiting for those very apartments inhabited by overincome persons. My market rent proposal would create new housing capacity by creating additional cash flow for housing authorities. One thing not being talked about, which is a much bigger issue when it comes to housing more people, is the huge vacancy rate in Public Housing. The Nation’s Public Housing portfolio suffers from a 14% vacancy rate. In comparison, other privately held and managed affordable housing program properties (like LIHTC and Project-Based Section 8) have vacancy rates in the 2% to 6% range. For the most part, these higher vacancy rates come from Public Housing units that have not been well maintained and are not available for long periods of time because the PHA does not have the funds to repair them. By creating new cash flow streams with my market rate rent proposal, extra funds would be available to renovate those units and bring them back online creating more affordable housing units available for those that qualify. The additional cash flow in larger PHA’s may actually create cash flow opportunities to develop brand new housing or other voucher style programs. Fight the Effects of the Marginal Tax Again, if we tell a family the moment they exceed the income limit by $1 they must move or start paying a market rent, they must get a calculator out every time they are offered a promotion to see if that income boost will actually cost them money. By making the raise in their rent to a market level scaled based on their income growth, we remove the negative effects of the marginal tax. One possibility could be that their rent gradually increases to market until they reach 100% of the Area Median Income (AMI), at which point they pay full market rent. Give PHA’s More Resources to Operate Many PHA executives have chimed in on this following the report's publication. They have said these overincome residents are paying rents that make their budgets work. If those tenants are replaced with those paying much less, their budgets collapse. My market rent proposal would increase the revenue received from overincome families and provide the much needed cash flow backstop that PHA’s desperately need. Conclusion As a career affordable housing developer, owner and advocate, I understand our country’s housing crisis well. As someone on the frontlines, engaging with thousands of low income people every day on Affordable Housing Online's Facebook page, I also understand how much pain is being felt on the streets of America. And lastly, I understand economic and political variables that can limit funding for housing programs. But we need to think harder about these problems and react more thoughtfully than the media sometimes allows us. My favorite uncle always told me that problems are simply opportunities in disguise. We have an opportunity to maintain the positive effects of higher income residents in public housing while boosting affordable housing opportunity for low income people and not using taxpayer money for those that don’t need it.