IV. The Financial Exposure of the Housing Authority and the Federal Government

The preceding sections of this study have systematically described the environments in which mandated public housing residents will be competing for entry-level jobs and have estimated both the competition they will face and the probability of success. One of the primary values of such information lies in what it can say with respect to the financial risks that welfare reform may pose for public housing authorities, which is the principal focus for this section. To the extent that mandated residents are unsuccessful in obtaining work and do have their welfare benefits terminated, both their incomes and their contributions to housing authority rent revenues will decrease substantially. Conversely, success in the job market can yield increases in both resident incomes and housing authority rent revenues.

The financial impact of welfare reform will also depend on the ability of the housing authorities to compensate for any losses of rental income by implementing and collecting minimum rents, instituting preferences favoring tenants with more income, and offering ceiling rents and other incentives to attract and retain such households.

Finally, this section explores the possible impact of welfare reform on the Federal government. Under current policy, income losses to the housing authority would be covered through increases in Federal operating subsidy. By the same token, such subsidies would be reduced if tenants are paying more for rent. If the latter were the case, the Federal government would actually save subsidy dollars.

A. Rent Receipt Decreases
Under A Worst Case Scenario

In both Norfolk and Richmond, about one million dollars in annual rent receipts come from mandated households. Yet this amount constitutes a relatively small share of total rent revenues because mandated households are in a minority and because their rents payments are generally lower than other RRHA and NRHA residents. Among all study HAs, the proportion of rent revenues at risk as a result of welfare reform varies from a low of 8 percent in Columbus to a high of 30 percent in Los Angeles. As in Richmond and Norfolk, this variation reflects both the proportion of housing authority residents who are mandated and the average rents paid by these households compared to the rents of other housing authority residents.

In a worst case scenario, the mandated residents of RRHA developments would find themselves with neither wage nor TANF income when the time limit on their assistance is reached. If housing authorities had no way of mitigating the rent impacts of such income losses, $1.11 million or close to 16 percent of the $8.2 million that RRHA receives from tenants in annual rent receipts could evaporate (see Table 7).⁵⁵ Only one-quarter of RRHA's 4,398 residents are mandated and their average rent payment of $97 is relatively low compared to that of other groups of residents.⁵⁶ Thus, over $7 million in annual rent receipts should be unaffected under this scenario when welfare reform time limits are reached.⁵⁷ The average monthly rent paid by mandated households reflects the fact that Virginia's assistance payment standard is below the median when compared with other states.⁵⁸

Under the present Performance Funding System, in the worst case scenario, RRHA could petition the Federal government to make up the loss to cover the difference between operating costs and tenant contributions to rent.⁵⁹ Thus, despite decreased rent revenues, the ultimate effect of welfare reform on RRHA could be negligible but the aggregate effect from many HAs on HUD's budget could be sizable.

Of NRHA's $6.6 million in rent revenues, a little more than $1 million, or about 17 percent, is generated from the 898 mandated households.⁶⁰ As in Richmond, most of NRHA's rent receipts are not affected, even under a worst case scenario. Whereas the average rent of non-mandated residents is $174 monthly, mandated residents pay $105 on average.

B. Possible HA Responses To Lost Revenues

Minimum rents compensate for some portion of the lost rent receipts if mandated house-holds are unable to replace their income from assistance. With higher mini-mum rents, a larger portion of rent receipts would be preserved. In Columbus, for example, even under a worst case scenario, the $50 minimum rent policy would prop up rents sufficiently to prevent any loss of revenues. If Dallas chose to charge a $50 minimum rent instead of the current $25, it, too, would experience no reduction in rental income even under a worst case scenario in which no mandated residents found jobs. In Los Angeles, the minimum rent of $25 is only a small fraction of the rent currently paid by mandated residents and even if it were raised to $50, it would staunch only a small share of the loss under a worst case scenario. However, revenues from minimum rents are not guaranteed because some residents may be unable to pay even them if they find themselves with no source of cash income after welfare reform runs its course. Aside from adopting minimum rents, renting to households with more income can also compensate for losses when assisted households are unable to replace their income. In the cases of Norfolk and Richmond, instituting new resident preferences favoring higher rent-paying households is viewed as a more promising way of boosting rent revenues than instituting ceiling rents that are deemed to be unrealistic because of current restrictions on how they are set.

RRHA has ways of cushioning itself against the impact of even a worst case scenario in which no mandated residents found jobs. RRHA's minimum rent policy acts as a major shield against the impact of welfare reform.⁶¹ Under this policy, residents with no reported source of income must still contribute $50 monthly. This is about one-half, on average, of rent now paid by mandated residents. Because of the minimum rent, the HA would be able to make up $531 annually per mandated unit of its expected loss under a worst case scenario.⁶²

Housing Authorities can also compensate for lost rent receipts by instituting a preference for households who can pay higher rents.⁶³ RRHA's Executive Director sees a close connection between welfare reform and rent reform and indicated that the Housing Authority is eager to attract tenants who can contribute to a better socioeconomic balance. To that end, RRHA has a current preference for working families. Because working families contribute more, RRHA is becoming less reliant on subsidy to cover unit costs. By recruiting such families, the HA has already experienced a significant increase in its rent receipts. In 1996, close to 300 working families became RRHA tenants and 169 other new tenants satisfied a higher income preference on the basis of their SSI and SSDI entitlements. Each working household recruited provides a rent cushion for another paying minimum rent.

RRHA believes that it has at least temporarily exhausted the ranks of potentially higher rent-paying households on its waiting list. It also believes that rent incentives would have to be offered to replenish the supply of such households. But the current ceiling rent of $538 for a 2-bedroom unit, set at the Section 8 FMR level, may not be an adequate draw for such households. Most RRHA tenants pay rents that do not approach this ceiling, and even wage-earning, non-mandated households pay rents which are less than one-half of the ceiling rent. Only 30 HA households had their rents reduced when ceiling rents were instituted. Households that would find ceiling rents attractive would have to be earning over $20,000. The Housing Authority is now considering establishing more realistic ceiling rents that are tied to actual operating costs at particular management centers and to the marketability of particular developments.

As with RRHA, the minimum rent policy in effect at NHRA partially compensates for rent receipt decreases under a worst case scenario in which no mandated residents were able to find employment after their assistance ended. NRHA's $25 minimum rent is one-half of Richmond's and, as a result, the majority of current rent receipts from mandated tenants would still be lost. With its $25 minimum rent policy, the HA is able to make up $260 annually per mandated household of its expected loss under a worst case scenario without the minimum rent. However, if NRHA had adopted a $50 minimum, it would have been able to make up $537 annually per mandated unit.

The decision to adopt a $50 minimum assumes that residents without income from assistance or wages would be able to pay a higher minimum rent. Despite Richmond's experience, when a $50 across the board minimum was briefly instituted elsewhere, a number of housing authorities reported that it created a hardship among tenants. If large numbers of residents are unable to pay minimum rents when the welfare reform clock runs out, minimum rents will provide less of a cushion for rent revenues lost as a result of welfare reform. Most tenants with very little or no cash income have been able to pay minimum rents at the two housing authorities. Though both housing authorities are able to provide temporary relief to residents who are unable to make such payments, such relief has been largely unnecessary. Minimum rents are set sufficiently low that virtually every household assessed at the minimum rent level can find the cash to make such payments. It seems likely that income from unreported sources, including the underground economy and support from friends and family members, accounts for the ability of some households with no reported income to make minimum rent payments. Although income from wages, benefits and transfers is verifiable, as is the loss of such income, it is much more difficult to account for other kinds of income in a systematic way.

As in Richmond, NRHA Commissioners have changed tenant preferences to alter the socioeconomic mix at the HA. NRHA now targets the employed, those who have graduated from an institution of higher education or a job training program, and those who are currently enrolled in such programs. To balance its traditional mission of providing housing of last resort with more recent fiscal imperatives, the Housing Authority would like to select one-half of the people on the waiting list from traditional preference categories and one-half from the new preference categories. So far, 120 new households have been selected on the basis of the latter. With a 10 percent annual unit turnover and about 50 evictions per year, the HA can reach between 200 and 300 families yearly using the new preference categories.⁶⁴ The composition of NRHA'S waiting list would allow it to continue to draw people from the new preference categories for the foreseeable future.⁶⁵

Like RRHA, NRHA believes that rent flexibility in the form of minimum and ceiling rents is the key to making welfare reform work. In addition to the minimum rent of $25, it has a ceiling rent capped at an amount no higher than that necessary to cover operating costs including utilities.⁶⁶ Participants in the Economic Empowerment Demonstration have had the option of either electing to pay ceiling rents that allow the housing authority to recover operating costs, but not debt service or interest, or having their rents frozen at pre-employment levels and the difference applied to an escrow account..

Both housing authorities are also concerned about the effect on rent collections of income sanctions applied to residents. As it now stands, residents whose TANF grants are reduced as a result of non-compliance with work related activities, should end up having their rent reduced. As the Federal statute now requires, a reduction in income leads to a downward adjustment in rent. However, this reduction has the perverse effect of softening the income sanction. Housing authorities have supported HUD's efforts to have sanctions disregarded when setting rents, but so far Congress has not acted.

NRHA is concerned about how much PFS would fill the gap created by any loss of rental income if it instituted income disregards. The Housing Authority also is concerned that a block grant funding system would not compensate for any loss of rental income.⁶⁷ If the HA felt secure that PFS would compensate for lost rent receipts, it would be inclined to exercise the greater discretion it now has in this area to grant an income incentive to all new workers, it could, for example, not count the income of a second wage earner in calculating the rent contribution, or not count income increases of less than $1,000 per year.

Both housing authorities could end up having some of their rent receipts sheltered as a result of the 20 percent across the board "hardship" exemption that each State is able to apply under TANF. This exemption is above and beyond the exemption for TANF households who have children under 18 months or care for disabled household members but it is too early to know how Virginia will select those who would qualify. Among those who would be eligible are households with children under six with no suitable child care arrangements and victims of domestic abuse. RRHA reports that domestic abuse is an issue for a significant number of its households.

Because of educational and other deficits among residents, DSS believes that the TANF 20 percent exemption would be easy to fill in Norfolk. However, the State is keeping this exemption in reserve, taking the position that even people with multiple barriers should make the effort to participate in work related activities. Thus, even if some mandated households become exempt from the time limits on assistance, in the near term, they are subject to sanctions if they do not participate in work-related activities. In Richmond, if the Housing Authority benefited from a proportionate share of the 20 percent exemption, about $271,000 in rent receipts could end up being sheltered and in Norfolk close to $227,000 would be sheltered.

HAs with substantial operating reserves have an additional cushion against a worst case scenario. Furthermore, housing authorities are eligible to receive revenues from community development block grants and other funding sources, some of which can be used for public housing.

C. Estimates of Income From Work

Two estimates of work participation are used in this study. One is more optimistic and one more conservative and as a consequence they lead to very different predictions about the impacts of welfare reform on HA rent receipts, tenant income, and the Federal budget. Richmond is the only one of the eight housing authorities studied where the majority of residents are estimated to work, based on the more conservative estimates of work participation. In fact, in most of the other housing authorities work participation would fall below one-quarter of mandated residents. Based on the more conservative estimate, five of the eight housing authorities studied would end up with lower levels of rent revenue after the welfare reform clock runs out. Estimated revenue impacts range from an increase of $697 per mandated unit, the case in Richmond, to a decrease of $1,216 per mandated unit, the case in Los Angeles. Using the more optimistic estimate based on the assumption that mandated residents will be able to work at the same level as non-assisted households whom they resemble, all of the housing authorities but one -- Norfolk is the exception -- would end up with increased rent revenues. When the more conservative estimates are computed at the neighborhood level as they were in the three Ohio cities, Cleveland alone would suffer a further decrease in rent revenues over the decrease based on MSA job growth estimates.

What happens to HA rent receipts as a result of welfare reform depends on whether mandated residents find jobs. Given that the welfare reform time limits on cash benefits in Virginia will not be reached until the Year 2000, any estimates of future job prospects must rest upon analytic techniques such as extrapolating from job participation rates of those resembling the population affected by welfare reform or combining available information on projected numbers of entry-level job seekers and new entry-level jobs at the time when the welfare reform clock runs out.⁶⁸

Estimating employability by extrapolating from the work participation rates of a similar group of people is possible using 1990 Public Use Microdata (PUMS) from the Census Bureau,⁶⁹ as described in Appendix C. Doing so rests on the assumption that when the welfare reform clock runs out, assisted households will participate in the labor market to the same extent as similar households represented in PUMS. But while resembling PUMS households in salient respects, the labor force participation rate of mandated households may also be influenced by characteristics that reduce their employability but are more difficult or impossible to measure using PUMS data. The motivation to work is one such characteristic. Although differences in motivation have seemingly been legislated out of existence by welfare reform requirements, experience suggests otherwise. The fact that there are currently mandated households who have already been sanctioned for failure to comply with the rules of Virginia's JOBS program suggests that motivation to work is not entirely subject to legislated work participation requirements.⁷⁰

It is also optimistic to assume that PUMS work participation rates can be applied to mandated residents to the extent that doing so presumes the latter face no greater obstacles than their competitors when it comes to finding child care and transportation that will make jobs more accessible.

The PUMS sample shows that some of those who met the work criterion⁷¹ worked considerably more than 30 hours a week and some worked during the entire year.⁷² Thus, the labor force participation rates of proxy households in PUMS data should be interpreted as an upper bound on the possible participation rate of mandated households.⁷³ The PUMS estimates of work participation rates, taking into account changes in the economy since 1990, are given in Table 8.

One other basis for estimating the percentage of mandated RRHA and NRHA residents who will be successful finding jobs is to use information on entry-level job growth predicted for the future and on the number persons expected to be looking for entry-level job when the welfare reform clock first runs out (see Table 4). Predictions of new entry-level jobs are typically made by state employment commissions, and include both jobs that will be new to the local economy and normal turnover. In a number of states, these predictions have now been extended out to the year 2005. They reflect recent trends in employment, but they do not incorporate extreme economic shifts brought about by such things as a depression. Unlike PUMS, the estimates derived with this method incorporate TANF recipients new to the labor force, and, therefore, include more entry-level job seekers than the PUMS estimates. However, although they utilize job growth predictions, these estimates do not incorporate the impacts on the economy of an influx of new entry-level job seekers, namely the TANF population. Thus, they do not consider expansions in the number of jobs which could incorporate increases in the size of the labor force.

Using the assumption of work participation based on job growth, ratios of entry-level jobs to entry-level job seekers can be computed. These ratios can be converted into work participation rates by adopting the assumption that each entry-level job seeker, mandated residents included, has an equal chance of obtaining an entry-level job and that all open jobs will be taken if there are fewer jobs than there are seekers. Thus, for example, if it can be assumed that mandated public housing residents are able to get jobs in the same proportion as other entry-level job seekers, 61 percent of residents in Richmond and 28 percent in Norfolk could be successful.

The estimate based on projected job growth (the ratio estimate) and the estimate based on the job participation patterns of people who resemble mandated residents (the PUMS estimate) lead to different estimated revenue impacts of welfare reform⁷⁴ because they are based on different estimates of work participation. The ratio estimates are lower. Thus, the ratio estimate can be viewed as more conservative and the PUMS estimate as more optimistic.⁷⁵

Richmond is the only one of the eight housing authorities studied where the majority of mandated residents are estimated to find work, based on the more conservative estimate of work force participation. In fact, in most of the other housing authorities, work participation rates would fall below one-quarter. But based on the more optimistic assumption that mandated residents will behave like households they resemble, the majority of mandated residents are expected to find work in six of the eight housing authorities studied.

While it makes sense to consider the more conservative or lower of these estimates when projecting the fiscal impact of welfare reform on the HUD budget because this estimate calls for a greater response, the more optimistic estimate sets another kind of mark since it is the best case estimate. There is no way of judging which of these estimates will come closer to actual work participation rates, but the assumption is that they will fall somewhere between the more conservative and the more optimistic estimate.

In order to apply work participation rates to mandated public housing households for the purposes of estimating the impact of welfare reform on rent receipts, it is necessary to also impute a wage income. One source of such information is the HAs themselves. The income earning capacity of current non-welfare wage earners may be a good indication of the income earning capacity of mandated residents since the two groups share many similarities including place of residence. Among all eight housing authorities studied, wage income varies from a high of $13,705 in Los Angeles to a low of $8,467 in Norfolk.⁷⁶

According to the more conservative estimate, five of the eight housing authorities studied would end up with lower levels of rent revenue than they now receive from mandated tenants. Based on this estimate and no change in housing authority minimum rent policies, there would be an increase over current rent revenues of as much as $697 annually per mandated unit, the case in Richmond, and a decrease of as much as $1,216 annually per mandated unit, the case in Los Angeles. Besides Richmond, Columbus and Dallas would also come out ahead. Using neighborhood level estimates of work participation based on predicted future job growth, rent revenues in Cleveland would drop further, from a decrease of $191 per mandated unit, the MSA level estimate of revenue impact, to a decrease of $466 annually per mandated unit.⁷⁷ In Columbus, rents will remain positive, going from $439 per mandated unit to $416 annually per mandated unit. In Toledo, though rents would still show decreases from current levels, the decrease would be moderated, going from $527 to $372 per mandated unit.

Adopting the more optimistic assumption, every housing authority with the exception of Norfolk would exceed current rent revenues from mandated households, in some cases by a substantial margin. Thus, Dallas and Columbus would increase their receipts from mandated residents by $1,501 and $1,329 annually, respectively. Four of the housing authorities that would experience a deficit under the more conservative assumption would end up with an increase under the more optimistic assumption, including Los Angeles which is estimated to experience the greatest decrease under the less optimistic assumption regarding work participation.

Los Angeles is the only HA where a majority of mandated residents, 61 percent, would have to work in order for the HA to break even, but according to the more conservative estimate of work participation, only one-quarter of those who would need to work, in order for the authority to break-even, are estimated to find jobs. In Columbus, Dallas and Cleveland, less than one-quarter would have to work, and even assuming the more conservative estimate, mandated residents are estimated to exceed this break-even work participation rate in Columbus and Dallas though not in Cleveland. Even under the more conservative assumption about work participation, only one-half of the Richmond and Dallas residents estimated to have jobs would actually need to work in order for these housing authorities to break even. According to the more optimistic estimate of work participation, only Norfolk residents are estimated to work at less than the break-even level.