The Privatization of Government—Nonprofits Be Warned, Part I

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The HUD initiative to privatize public housing and a lot else has been withdrawn by the Obama Administration due to questions posed by Barney Frank and Maxine Waters to HUD Secretary Shaun Donovan at a May 25th Congressional hearing.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

  • PaulinNorCal

    you touch on a great point but unfortunately get wrapped up in the straw man of division. This does nothing to help our country, its citizens or the disenfranchised who need champions. (non-profits in particular) There really is no right or left, remaining in American politics short of the divisive abortion issue which both sides stir up people but have no interest in resolving – it works too well for both sides to the point where other issues get glossed over. The Democrats are at least as in bed with big money as are Republicans and the economic crisis can easily be linked at least in part to the Obama Administration’s current key financial geniuses who were coincidentally the main figures in the cause of the mortgage/housing crisis. Then Obama puts them in charge of the nation’s finances?!? The right/left discussion helps no one but the entrenched powers who continue to profiteer while the country is in agreement on 95%+ of most issues but they divide on just a few things. How sad that Obama is summarily pushing through traditionally “right wing” darlings such as offshore drilling with pretty much zero resistance and/or news coverage while any Republican would never have been able to get away with it!

  • rick cohen

    I can imagine lots of things that could and should be done to improve public housing through increased flexibility in management and leveraging additional financing. But that wouldn’t take the place of a national commitment to adequate funding of public housing. Nonetheless, I think you’re right that the divide between the two major parties is much less of a divide than it used to be, and your comments adumbrate what you’ll see in Part II of this piece. Thanks for the comments.

  • Jack Cann

    Note quite accurate for several reasons: 1) PETRA still very much alive; 2) This administration didn’t invent “privatized” public housing. Private parties have owned public housing (housing developed and subsidized under the public housing provisions of the National Housing Act) for years under HUD’s Mixed Finance program. 3) The proposal is NOT to privatize public housing, although that is certainly a potential outcome – the proposal is to provide sufficient additional subsidies that public housing agencies could borrow funds for rehabilitation – collectively something on the order of $20B, to address what HUD claims to be $30B in badly needed rehabilitation nationally. The problem is that the properties will be pledged as security, and a future cut back of appropriations would put them seriously at risk. But many are already at even greater risk from Congressional failure to provide adequate operating and capital funding. 4) Housing activists (more of them from flyoverland than California) are way more aware of the issues involved than George Lakoff; have a far better understanding of the complexities involved; have been challenging HUD about this issue for far longer; and have had a far bigger effect.

    Big complicated problems don’t lend themselves well to Lakoff’s simple-minded framing.

  • rick cohen

    1. The article said that the PETRA legislation is “on hold”, not dead 2. Never said that the Obama Administration invented privatization of public housing, much less that this would be the first such initiative.
    3. Private financing is not necessarily a subsidy and usually quite the opposite. The issue of needed appropriations is a problem of appropriations themselves, the fact that our nation is still unwilling to put up the money that it should be devoting to the longstanding capital and operating deficits faced by public housing authorities. You and I agree that Congressional failure (and White House failure) to provide adequate funding is the heart of the problem. I don’t think that the strategy pitched by Secretary Donovan–with far more holes than answers in how it would actually operate–adds up to “subsidy” that would take the place of Congressional and White House attention.
    4. I was actually surprised to see Lakoff on this issue. While there is lots of complexity to this issue, I was actually raising the HUD issue to point out one thing that Lakoff’s “simple-minded framing” piece does help us understand (which will be in Part II), that is, the larger wave of privatization efforts that is occurring at multiple levels of government with bipartisan support–and the possible consequence that issues that should be addressed through public action and public decisions end up possibly being shifted to private arenas with decisions less public-oriented than they should be. I think of the scrambling that had to happen to induce private owners of 221(d) and 236 subsidized properties to keep their units affordable when affordability restrictions began to expire. One would hope that PETRA might have had some of these questions worked out a bit better than they seem to have been when Secretary Donovan tried to answer the Frank/Waters questions.

    Thanks so much for your comment.

  • Nikki Zeuner

    Thanks for a great article. Your report brings back to my mind the importance of emphasizing the difference between nonprofits and for-profits, as pointed out in government and market failure theories 30 years ago.

    While our sector is private, nonprofits do have accountability to their communities, their boards and the government, when it comes to administering public funds. For-profits do not. That’s why, for example, Sec. 330 community health center funds go to nonprofits, with boards representing the population served, and not to any old doctor’s office.

    So, even if we lose the battle against privatization, maybe we should affect policy, in a way that public housing corporations become nonprofit entities, instead of businesses, with checks and balances on profit distribution and other standard accountability measures? Food for thought….

  • Tim Glynn Burke

    I’ve enjoyed reading this post and comments.

    PaulinNorCal thinks you focus too much on the left/right tension. I might have misunderstood your intent, but I

  • rick cohen

    Dear Nikki and Tim: Thanks so much for your comments, much appreciated. Nikki, your food for thought is worth examining. It would be useful for deeper thinking about how to make the HUD scheme–modified, one hopes–heighten community accountability. Your comparison with the community health centers is very useful.

    Tim, I know your work and it’s great to see you commenting on NPQ columns. Your comments relate to Nikki’s in a way. Nonprofits always face tons of competition. They often–in housing, for example, since you cite the Acquisition Fund–enter the market when the for-profit sector has left (or milked it), and a signal piece of evidence of their impact is the revitalization of market forces. That usually leads to for-profits reentering the market and competing (with deeper pockets) with the nonprofits that helped make the market work. But the for-profits do not operate with the kind of accountability that nonprofits are supposed to operate with (I say “supposed to” because obviously some groups don’t live up to their nonprofit bona fides). I think that’s why the Acquisition Fund serves both nonprofit and for-profit developers, but it offers nonprofits a maximum loan-to-value of 130% and for-profits only 95%. Nonprofits and for-profits both can develop affordable housing, but they have different functions vis-a-vis the communities they serve–even though some nonprofits fail to deliver that and some for-profits do a great job in responding to community needs.

    If looked at over a long(er) timeframe, nonprofits have been the vanguard in many instaances of “bring(ing) the marginalized into mainstream markets,” creating the conditions for for-profits to re-enter those markets and do some of the same. Nonprofits can’t do it all for sure, but they aren’t simply interchangeable with for-profit competitors, differentiated only by a different tax status.

    This deserves a longer dialogue. Maybe you should write something about this for the Quarterly???

    Thank you both for your comments.