The Privatization of Government—Nonprofits Be Warned, Part I

Rick Cohen

The HUD initiative to privatize public housing and a lot else has been withdrawn by the Obama Administration due to questions posed by Barney Frank and Maxine Waters to HUD Secretary Shaun Donovan at a May 25th Congressional hearing.

What? You missed it? It was easy to miss, because virtually no one other than political semanticist George Lakoff and some savvy activists who were already fending off public housing privatization efforts in California actually said or did much to counter the HUD proposal. How could a major Obama Administration effort to privatize public housing have sneaked in without spurring much reaction from housing advocates and others?


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We think there are three reasons:

  1. Despite all the right wing attacks on its allegedly left wing DNA, the Obama Administration is quite in favor of privatization in housing and in other arenas of public policy—and will continue to pursue these schemes regardless of the temporary respite achieved by Frank and Waters. But few have really caught on that the President and his advisors lean this way because it seems so at odds with what would be expected of a Democratic taking office after eight years of a conservative Republican White House in the wake of the Great Recession sparked by the worst excesses of the corporate sector (not to mention the worst man-made environmental disaster in U.S. history at the insouciant hands of BP).
  2. The ostensibly politically progressive slate of public policy activists known to be allied with and supportive of the Obama Administration are hardly opposed to privatization or, more generally, the application of corporate “market discipline” to solve public problems, notwithstanding this nation’s recent experience of the (un)reliability of corporate ethos. The “progressive” leaders of the nonprofit sector are really quite supportive of private sector “solutions” to public problems.
  3. Remarkably, much of the nonprofit sector is still unwilling to call the Obama Administration to task for policies that run counter to what they thought the administration would support. Inducedby “partnerships” forged between nonprofit sector leaders (including major foundations) and the Administration, sectoral self-censorship does no favors to the Obama Administration or the credibility of nonprofits.

Nonprofits perhaps see themselves as non-governmental beneficiaries or winners in this wave of governmental off-loading of public functions to the private sector. They ought to see the ideologically based privatization moves of the Obama Administration as tied to a financial agenda of eventually reducing governmental budget commitments to functions shifted to the private sector with no long term benefit to the nonprofit sector as for-profits grab the plum roles and contracts that nonprofits imagined they might have gotten from privatization.

What Would Have HUD Wrought?
The HUD FY2011 budget came with legislation that the Obama Administration was intent on submitting to Congress—the Preservation, Enhancement, and Transformation of Rental Assistance Act of 2010 [PDF]. Ostensibly, PETRA was meant to be part of HUD’s Transforming Rental Assistance initiative [PDF], an effort to streamline and simplify HUD’s rental subsidy programs.  According to HUD Secretary Shaun Donovan, HUD administers 13 different rental subsidy programs with different rules and regulations. 

It makes sense to group them into three program platforms—public housing, project-based subsidies, and tenant-based subsidies (vouchers)—except that the proposed legislation came with a kicker, an opt-out for public housing authorities to privatize. Lakoff cites this as the intent of the proposed bill: (to) “provide the opportunity for public housing agencies and private owners to convert from current forms of rental assistance under a variety of programs to long-term, property-based contracts that will enhance market-based discipline and enable owners to sustain operations and leverage private financing to address immediate and long-term capital needs and implement energy-efficiency improvements.”

HUD promised all kinds of tenant protections, with options to move out with tenant-based subsidies, promises to keep converted units in the affordable inventory, opportunities for tenant purchases and conversion to cooperatives, and so forth. Nonetheless, at the core of the proposal was the notion that converting out of public ownership is the ultimate solution to the nation’s longstanding public housing crisis. Donovan’s own testimony made his thinking crystal clear in this articulation of one of the five principles of the TRA: 

“Bringing market investment to all of our rental programs will also bring market discipline that drives fundamental reforms. Only when our programs are truly open to private capital will we be able to attract the mix of incomes and uses and stakeholders necessary to create sustainable, vibrant communities.”

“Market discipline that drives fundamental reforms?” This is the agency charged with trying to correct the market self-indulgence and chaos that led to the subprime mortgage debacle undermining the entire U.S. economy for the past 18 months or more. What market discipline? In the housing arena, private owners with project-based subsidies have long tried to opt out of their affordability contracts depending on market conditions: when the market looks strong, so they say, go market rate, when it’s weaker, take the HUD subsidies. 

Barney Frank’s questions to Donovan—about what happens to public housing converted to private ownership and private financing and then subject to foreclosure—got a bunch of “humina-humina” answers from the overmatched HUD Secretary. Frank pointed out that promised affordable use-restrictions could be wiped out in a foreclosure and that the legislation allowed the Secretary (this one or a future one) to give private owners latitutde about affordability requirements if financial conditions necessitated. Donovan was unable to snow Frank one iota, and the legislation is back on hold.

Public housing in this nation has long been a mess, fundamentally because government was unwilling to put necessary capital and operating funds into public housing, allowing conditions to spiral downward. President Clinton’s HUD Secretary, Henry Cisneros, boasted of demolishing more public housing units than all of his predecessors combined. Multiple administrations tried to sneak out from under one-to-one replacement requirement on demolitions. Both Bush administrations and the Clinton Administration tried to reduce the number of very low-income unit in public housing through various HOPE programs. Public housing is a longstanding policy problem, but not to be solved by simply eliminating the “public” part and hoping that the mythical deus ex machina of market discipline magically undoes decades of underinvestment and neglect. 

Be sure to read part II, Obama’s Hidden Hand of Privatization—where I’ll discuss Social Innovation, NASA, and more.