Let me introduce you to 13 families who live in Springfield, Vt. They have been callously abandoned by the federal government. We should also be worried about the hundreds of thousands of additional families slated for the same treatment and the potential cascading effect on neighborhoods.
The Springfield story begins with an obscure program called Section 515, which is administered by the Rural Development Office of the U.S. Department of Agriculture. Section 515 provides low-interest loans that enable low-income people living in rural areas to live in decent housing. To make the rents affordable, the Section 515 program is usually paired with USDA's Rental Assistance Program so that low-income families pay no more than 30 percent of their income for housing. In the case of the 13 families living in Springfield, their incomes are so low that their monthly rental payment averages about $225 per unit, per month.
The monthly cost to maintain these homes, including the mortgage payment, real estate taxes, operating expenses and reserves is about $1,000 per unit, per month. In order to induce the developers to purchase and rehabilitate these deteriorating, historic properties, in 2004 USDA agreed to provide rental assistance to fill the gap.
In a surprise move, USDA recently sent a letter to the owners of the Springfield property announcing that due to budget cuts, they would not be sending a rental assistance check in September. USDA hoped that it would be able to resume payments in October, but there would be no retroactive payments and no guarantee as to when their rental assistant payments would resume.
USDA further decreed that the owners were prohibited from increasing the residents' rent. Essentially, owners of the Springfield property were to make up the $10,000 monthly gap from their own resources or reserves they had put away for emergencies. In fairness, USDA also said the owners could "defer monthly debt service on their Rural Development loans," which saves the Springfield project about $1,500 per month.
Bad decisions can usually be traced back to a bad process. In this case, during the current year, the USDA budget was subject to two across the board cuts totaling 2.7 percent. Then in March the USDA budget was cut by an additional five percent by sequestration. Once USDA realized that it did not have enough money to meet its rental assistance obligations to the 268,000 units it subsidizes across the United States, it probably should have solicited input from property owners and residents to see if there was a fair or creative way to minimize the impact. Instead, by simply deciding in a nontransparent way which units to cut off and which ones to fund, USDA appears arrogant and callous. Is it a onetime event? What happens if there is a budget shortfall in 2014? Should owners put in more money or send back the keys?
Most affordable housing projects in the United States utilize complex, multilayered financing. In the case of the Springfield property, the financing came from banks, investors, state funds, federal funds and the USDA. Everyone involved in the project knew that to provide decent housing for very low income families would require rental subsidies. Everyone had to take a leap of faith for the project to succeed. By unilaterally withdrawing from its obligations, USDA not only undermined this fragile financial structure but greatly undermined trust. Already, private investors are rethinking future commitments to projects that rely on federal rent subsidies.
In addition to providing quality homes, there are dozens of examples of projects like the one in Springfield, where Housing Vermont and its nonprofit community partners rehabilitated fire damaged, neglected and abandoned buildings. They not only turned eyesores into quality housing, but helped to revitalize towns and neighborhoods. Community revitalization is a slow process, but someone needs to be the catalyst and it is often nonprofit organizations and community groups who take on the most blighted properties.
The same letter that was sent to the owners of the Springfield property also went out to the owners of 650 properties containing 15,000 housing units. It sent shock waves to the owners and fear to the low income families. Nothing in the letter made either the owners or the residents feel secure or confident that USDA is developing a viable, long term plan. In its slide presentation to owners, for example, USDA offered advice such as: "Remind borrowers that now is the time to employ forceful collections on tenant contributions in order to reduce accounts receivables."
Most of the headlines about budget cutbacks facing the U.S. Department of Agriculture focus on food stamps (now called SNAP), meat inspectors and crop insurance. Rural housing hardly gets noticed. No congressman will find his airline flight home delayed because the federal government fails to provide the funding it promised poor families living in rural areas.
But perhaps President Obama will channel his community organizer and see the waste and injustice of this cutback. Without rental assistance families will lose their homes and this housing will become run down and worthless. Maybe the president can also channel his legal training and see what a damaging precedent his administration is setting.
Today's rural housing programs originated with the landmark Housing Act of 1949. They were an important part of President Harry Truman's Fair Deal. In his State of the Union Address, President Truman observed: "Five million families are still living in slums and firetraps. Three million families share their homes with others." In 1949, Americans were embarrassed by these statistics. Are we now willing to add another million people to those totals and undercut a long standing housing program that works?
John Vogel is an adjunct professor at the Tuck School of Business.