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CHART 1 OPERATING COSTS AND RECEIPTS IN PUBLIC HOUSING, 1965-68

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RENTAL RECEIPTS

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1966

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A. COSTS AND RECEIPTS PER UNIT PER MONTH

B. INDEXES OF OPERATING COSTS PER UNIT PER MONTH, total and selected categories1

1. The three categories shown cover about three quarters of operating costs. Among the remaining cost items are payments in lieu of taxes, insurance, and employee benefit contributions.

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Operating Costs in Public Housing

Nature of the Crisis

15

The findings bear on three possible policies for relieving the financial crisis. One is raising rents to fully cover costs. The second involves selecting tenants to reduce costs. The third would increase federal statutory payments or supplemental appropriations.'

While the study is not intended to fully evaluate these alternatives, it does provide a basis for judging some changes that would accompany each.

A policy of raising rents to cover the cost increases in the cities studied would require approximately an 8 percent per year rent hike per unit. Total public housing operating costs in these cities rose 8.4 percent from 1967 to 1968, and the rate of growth currently may well be higher still.2

Median income of tenants in the 23 cities was $2,444 in 1968. This low figure reflects in part the high proportion of older people in public housing. Median tenant income grew by about 3 percent from 1967 to 1968, a result of both turnover of tenants and income experience of individual tenants. It seems clear that rent increases of the order of 8 percent per year would, after a few years, become an extremely heavy burden on tenants, rapidly reducing the margin between private market and public housing rentals. Of course, it may be possible to raise rents selectively or by more moderate amounts without these undesirable results.

A policy of reducing the number of minors per unit-for example, through greater emphasis on housing the elderly and less

1. The typical public housing financing formula provided federal subsidy for debt service, with the local authority required to meet operating expenses almost entirely from rents paid by the tenants. After this study was completed, an amendment offered by Senator Edward W. Brooke and incorporated into the Housing and Urban Development Act of 1969 permitted federal funding of operating expenses when these could not adequately be provided after collecting rents amounting to 25 percent of family incomes of the tenants. The 1969 Act thus established a policy of federal statutory payments to meet the increasing gap between rental receipts and operating costs.

2. For the entire U. S. public housing stock, the growth in total costs from 1967 to 1968 was 6.6 percent, or not quite so high. Yet for both the nation and the 23 cities, 1967-68 increases were above increases in most earlier years.

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Operating Costs in Public Housing

on housing large families-would probably reduce the cost of operating public housing. According to the statistical results for the 23 cities, a reduction in the average number of minors per unit by one would lower operating costs per unit per month by about 5 dollars or about 9 percent.

Such a change, as in the case of raising rents, would involve a major alteration in the character of public housing. Consider, for example, reduction of minors per unit from 2.2 to 1.2 in the 23 cities accomplished by an increase in elderly units. This would imply a rise in the percent of units with an elderly head from the actual 32 percent to approximately 60 percent. Since some share of the additional cost per minor is due to the greater number of rooms per unit needed to accommodate these minors, the full saving could be realized only through a reduction in the number of rooms per unit as well as a shift from large to small families. Meanwhile, a policy of increasing the ratio of elderly tenants also might lower median incomes in the project. This would either increase the burden of current rent levels, or require a reduction in average rents. On the other hand, it would increase the project's eligibility to obtain supplementary payments available under present arrangements. Given the extreme changes required to bring about this result and the short duration of its effect, other alternatives for dealing with this problem seem more attractive.

A policy of increasing federal statutory payments or supplemental appropriations would avoid the need for greatly increasing the rent burden on the tenants, or drastically shifting the composition of the tenants. One problem such a policy raises is how to limit the size of such subsidies so they do not remove an incentive for local authorities to be efficient in managing and maintaining public housing. The findings of the present study suggest that relating the size of the subsidy in some way to general price and wage increases might go a long way toward limiting payments to cost increases which local authorities cannot control.

It is beyond the scope of this study to develop a precise formula for tying subsidies to general price and wage changes. In

Nature of the Crisis

17

broad outline, however, such a formula might involve (a) estimating a "normal" expected cost increase based on the rate of change in prices and wages, (b) estimating a “reasonable” rent increase, perhaps based on changes in tenant incomes, and (c) limiting total subsidies to the gap between "normal" costs and "reasonable" rents. The methods devised for this study could be used to estimate both the "normal" cost increase and the expected cost to the federal government of carrying out an operating subsidy policy.

This analysis of operating costs does not have direct implications for broader changes in public housing that are being discussed widely, such as policies to increase occupant ownership. However, the study may be useful in evaluating these policies compared to present ones, particularly from the standpoint of determining financial viability.

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Chapter 2

Public Housing in 23 Large Cities

The sample of cities selected was dictated by the availability of data. Since one of the goals was to compare public housing cost differences with local price differences, cities were chosen for which the Bureau of Labor Statistics collects consumer price data. The sample of cities, the average 1965-68 size of their federally-sponsored public housing stock, and their 1965 city-wide population, appears in Table 1.

In many respects, the sample is a good one for studying public housing. The cities include about 35 percent of the nation's federally-sponsored public housing. The range of local housing authority size, in terms of number of units managed, is very wide. The cities are well stratified by region, by local price and wage levels, and by many characteristics of public housing.

One characteristic limiting the universality of the study is the size of the cities. Most of them have populations of more than half a million. Public housing operating costs are usually lower in smaller communities. Doubtless this largely is because of lower prices and wage rates in smaller towns. It may be that the financial outlook for public housing in the sample cities is somewhat worse than the outlook for public housing elsewhere.

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