ever any money is loaned by the Federal Treasury to the Housing Commission it is repaid with interest at the going Federal rate at the time of permanent bond financing. The Public Housing Administration is required by law to make annual contributions not exceeding 42 percent of the total development cost until the permanent bonds are paid off.

With this amount of annual subsidy in mind, local housing commissions arrange their permanent financing so that debt service does not exceed the sum guaranteed. Public-housing bonds, therefore, are virtually United States Government obligations. This, plus the fact that the bonds are exempt from all Federal and most State taxes, makes them desirable securities. It is rarely necessary for the PHA to fulfill its obligation to purchase housing bonds that cannot be sold to private investors.

The total development cost of Louisville's 8 permanent low-rent housing projects is $32.1 million. About $2 million ($1,949,233) of this was borne by the Public Works Administration. The remaining $30,285,000 is permanently financed by 6 bond issues."

Interest rates range from 1.32 to 4 percent and average about 2.5 percent. Amortization periods of all bonds issued prior to 1949 were limited to 60 years. Bonds for Iroquois Homes and Cotter Homes have amortization periods limited to 40 years. In a given series the number of years between the date of the first bond issued and the maturity date of the last bond issued may, of course, exceed these limits. For example, Sheppard Square has an overall span of 67 years. Part played by temporary loans

As previously described, the local housing authority makes use of temporary loans to pay the cost of constructing a project to a point where permanent financing can be arranged. These temporary loans are secured by short-term notes which are backed by the PHA's pledge to pay, if necessary, principal and interest upon maturity.

In Louisville the notes have usually been issued for 6-month periods. Each time they are renewed the new amount includes enough to pay both principal and interest on the retired note. Interest has ranged between 0.78 percent to 1.4 percent on these tax-exempt, federally backed securities. Finally, when construction of the project is about 90 percent complete, principal and interest of the last temporary note are included in the total amount of the permanent bond issue.

Source of operating funds

Practically all operating funds come from rent paid by tenants. In 1952, dwelling rent amounted to 98.4 percent of the total operating income of $1,399,451.

There was a deficit of $362,692 in overall operations that year. The reason for that deficit is that, by Federal law, rents in public housing projects must be at least 20 percent less than the lowest rent charged for similar accommodations

owned by private real-estate operators. This requirement is intended to prevent public housing from competing with privately owned apartments.

If tenants were selected on the basis of their ability to pay the maximum rent chargeable under the Housing Commission's rent schedule, rather than on the basis of the need of the applicant, it would be possible to operate without Federal subsidy.

Some would argue that eliminating annual contributions would be a good way to reduce overall Federal spending.

Others would say that even if it does cost in Federal taxes, the whole purpose of public housing is to provide accommodations for families who can't afford to pay the going price of private housing.

This is a fundamental question of public policy. Several possible answers present themselves.

What if maximum rents were paid?

A total of $1,005,035 was paid in 1952 to the 4 projects which required annual contributions from the PHA.18

Approximately $1,457,820 would be paid if top rents were charged."

This differential amounts to $452,785 and would have come close to meeting the $489,176 total bond retirement charges for the 4 projects. It would have been more than enough to meet the net operating deficit of $362,692 or the amount of the annual contribution from PHA.20

The differential reflects the LMHC's policy (which conforms to the United States Housing Act) of giving preference to applicants with the lowest income when housing need is equal to that of any other.

What if one-fourth of family income were paid in rent?

It was shown by the LMHC's annual report for the calendar year 1952 that the average rent paid for all units in the 8 low-rent projects was $32.12 per month. If this figure is applied to the proportional rent schedule published by the LMHC such a rent indicates the average public housing tenant has an annual income of $1,900. This figure includes welfare families.

Many household budget experts recommend rent payments of one-fourth of family income as a fair figure. On this basis the average public-housing family would pay $475 rent per year. Thus, the 3,572 families in these 8 units would pay $1,696,700. Combined with the $22,600 of other income, the total income would amount to $1,719,300.

This figure falls only $44,296 short of the total expenses during the calendar year 1952 ($1,763,596), which amounts to a deficit of approximately 2 percent in comparison with the 26-percent deficit (or $362,692 loss) which actually occurred.

This raises the question of whether or not rental income is too low and if rents should be increased to lessen the burden of public housing on taxpayers. To a large extent this depends on the degree to which public housing should be considered a welfare program. (Some upward adjustments were affected in certain classes of these rental units late in 1953 after this report had gone to the printer.)

Is the gap too wide?

According to the United States Housing Act, the upper rental limit for admission to public housing must be at least 20 percent below the lowest rents charged for similar, privately owned housing.

This has the effect of creating a no-man's-land in which there are many families with too much income to qualify for even the maximum public-housing rents and not enough income to pay the minimum rents charged by private landlords. There is no easy answer to this problem. Obviously, in order to decrease the gap, public-housing rent will have to go up and private rent will have to come down.

The seriousness of the situation is further emphasized by the fact that in 1950, when the most recent study was made, the gap was not 20 percent but an average of 55 percent.

18 Dwelling rent paid was as follows: Clarksdale, $299,539; Beecher Terrace, $284,015; Parkway Village, $236,861; ard Sheppard Square, $157,620.

19 Assume that the average apartment was a 2-bedroom type, for which $45.50 is the top rent. There are 2,670 units involved. $45.50 X 12=$546; $546×2,670=$1,457,820. 20 The deficit, distributed among the 4 projects, is as follows: Clarksdale, $161,000: Beecher, $166,875; Parkway, $7,679; Sheppard, $27,138.

The LMHC attempts to support the establishment of a gap this large by saying that there is no substantial supply of private rental housing either in the lowrent or even high-rent bracket.

The lowest rents being achieved by private enterprise, as determined by the LMHC in 1950, and the corresponding gap (in percent of these rents) is shown below. Also shown is the approximate upper rental limit for admisison to the eight permanent projects, as derived by applying these percentage gaps.

NOTE. These findings were based on information obtained from the U. S. Public Housing Authority, area rent office of the housing expediter, mayors' emergency housing center, and classified ads of the Louisville Courier-Journal.

It seems logical that upper rental limits in public housing projects could be increased. The LMHC knows of countless families who live in substandard quarters and whose income is low-but not low enough to qualify them for admission to public housing.

It should be pointed out, however, that the United States Housing Act requires not more than a 25-percent differential between the highest and the lowest rents charged in housing projects. Therefore, the degree to which all rents could be increased is governed by how much rent the tenants at the bottom of the income scale could pay. Perhaps this unrealistic differential of 25 percent should be increased or removed altogether.

The other means of narrowing the gap between public and private housing is for the rent of privately built accommodations to come down and the supply to increase.

The United States Federal Housing Administration and private real-estate dealers, as well, state that the only type of residential property that even approaches being in substantial supply is the two-bedroom house that is built for sale. It appears, therefore, that if a greater number of families in the no-man'sland category is to have adequate housing, without more low-rent public housing projects, private builders will have to carry out the job they have claimed for themselves; namely, to construct houses for rent to low-income families. What if full taxes were paid?

Would public housing projects come any closer to paying their own way in regard to indirect costs if they paid full property taxes?

Six permanent projects paid, in lieu of taxes, a total of $83,242 to the city during 1952. If normal property taxes had been paid, the city would have received $418,581-five times as much. The $83,242 is equivalent to a tax rate for the 6 projects of $0.48 per $100, whereas other residential property paid $3 per $100.1

21 bee the following table:

PAYMENTS IN LIEU OF TAXES AND TAXES WHICH MIGHT HAVE BEEN PAID

1 Based on actual overall monetary value of projects, supplied by LMHC.

2 Had no debt service charges.

It is purely academic, of course, to discuss whether or not public housing should be exempt from full real-estate taxes. The city of Louisville had to declare the projects tax exempt or be willing to pay 20 percent of the annual subsidy in order to receive Federal loans for constructiing the projects and annual contributions to pay operating deficits. But if the Federal law were changed and the projects paid more than the present 10 percent it would still be impossible to pay full real-estate taxes as long as extremely low rents were charged. Taxation agreements

While the United States Housing Act provides in essence that public housing shall be declared tax exempt, the local housing commission is allowed to make payments in lieu of taxes up to and including 10 percent of the shelter rent income.

Some States, however, have laws which prohibit tax exemption in these and similar cases. Cities in these States may then assess and collect taxes on public housing projects just like any other property. However, where this is done, the act requires that before projects are built the city must agree to pay in cash to the local housing authority 20 percent of the annual deficit of each such project. The projects in Louisville qualify under the first condition, i. e., they have been declared tax exempt. Consequently, each year the Louisville Municipal Housing Commission has paid the full 10 percent of its shelter rent income in lieu of taxes. Thus the city is not required to pay the 20 percent of the annual deficit. Four instances are on record in which the courts of Kentucky have been asked to rule on the authority of Louisville to change the application of the law toward projects here. Each time the court has decided that such properties can be declared tax exempt and make payments in lieu of taxes.

The question arises as to what would have been the outcome financially if the city could have fully taxed these properties in 1952, and paid to the LMHC 20 percent of the annual Federal subsidy in cash,

Under such circumstances the city would have paid $72,538 in 1952," and would have obtained $418,581 in full real estate taxes." This represents a net gain of $364,043.

Instead, Louisville took (either by law or by choice) the $83,242 as payment in lieu of taxes, or only one-fifth the amount asked of private owners for similar property.

INDIRECT COSTS

As pointed out previously, public housing costs more than just the money it takes to build and operate the projects. This additional expense borne by Louisville taxpayers is the money that it costs to provide municipal services for the 15,700 residents of the 8 projects managed by the Louisville Municipal Housing Commission and the 1 Federal project (Fincastle).

As shown previously, the best estimates of general and educational services provided for public housing tenants amounted to $1,311,717 in 1952. It can be shown that the average resident pays only about two-thirds of his way as far as city services are concerned. If this same rule were applied to public housing tenants they should have paid $856,733 (or two-thirds of the cost, above).

When the payment of the LMHC for all projects in lieu of taxes ($172,546) is deducted, it is indicated that public housing residents collectively get a free ride of $693,187 in such services, provided by taxpayers generally.

The proportionate share of each family in this free ride is $182 (in city taxes exclusive of real estate taxes). It is doubtful if any such amount is paid by any taxpaying resident of the project. When nontaxpaying welfare families are excluded from such calculations the proportionate share per family increases sharply.

Why is it that indirect costs are so much greater for residents of public housing than for other residents of the city? Perhaps no single answer can be found, but several lines of thought suggest themselves.

This is the equivalent of 20 percent of the annual Federal subsidy, as provided by law. 23 The figure of $418.581 is obtained by the method followed by the Jefferson County Tax Assessor's Office. This means the present actual value of the buildings is depreciated at the rate of 1.5 percent per year (the accepted rate for fireproof construction); the figure so obtained is multiplied by 53 percent (the going rate of assessment in Jefferson County); the resulting figure is divided by $100; and that result is multiplied by $3 (the present tax rate).

This process is repeated for each of the 6 permanent projects, totaling $418,581, as shown in the table in footnote 21.

1. The amount paid in lieu of taxes is so small that the net effect is an additional tax burden on citizens living outside the projects. This, of course, is no fault of the LMHC, which is paying exactly and fully according to law. It does result, however, in making partial public charges of those people who receive living quarters for which they do not fully pay.

2. The disproportionately high number of schoolchildren living in public-housing projects have to be educated, and the money must come from funds collected by taxes. When an unusually large number is found in an area where less than normal taxes are paid, the impact is unduly increased.

3. The concentration of welfare cases helps to increase the impact. Again, these people have to be cared for wherever they are found. But, like education, these projects constitute areas where more service is needed and less taxable value is available to support them.

These items and others which result in high indirect costs must be added to the annual Federal subsidy in figuring total costs of the projects.

The fact that there is cost attached-even more cost than is readily apparentdoes not necessarily mean that the program is bad or should be condemned.

It does mean, however, that the public should realize that the program is not self-supporting.

The subsidy, the indirect costs, the dependent nature, and other aspects of the public-housing program would seem to require that it be put in a quasi-public welfare category. The program should therefore be treated as a partial welfare measure. The same principles which guide welfare administration should be employed in public housing. These include:

1. Examination by the public of how much it can afford, as well as how much is needed.

2. Continued urging by the public for rehabilitation of tenants so that they will consider residence in a housing project as a temporary opportunity subsidized by the public.

3. Recognition by the public that it has a stake in the housing program and that it must pay part of the bill.

4. Recognition by the city government that it has an obligation to discharge, as in any other welfare case, and to provide for proper education of project children.

5. Knowledge by the public of how much it is paying for this program, and by the residents of how much they are receiving from it.

ACKNOWLEDGMENTS

The Louisville Chamber of Commerce is indebted to Mr. Nicholas H. Dosker, administrator and counsel of the Louisville Municipal Housing Commission for making available through the office of the commission many of the facts contained in this study. It also wishes to thank Mrs. Karl Lang, chairman of the commission; Mr. Charles Alfred, housing manager; and Mr. Harold M. Booth, Jr., chief accountant for the commission, for their help in reviewing the rough drafts and checking for accuracy prior to publication.

Finally, it wishes to thank those members of the 1953 executive committee of the chamber for their patient efforts in studying and checking each revision of this report before it was published. Research Division, Louisville Chamber of Commerce, Third and Liberty, Louisville 2, Ky.

Senator CAPEHART,

NEW YORK, N. Y., March 30, 1954.

Senate Office Building, Washington, D. C. HONORABLE SIR: I know that various bills are before the House and Senate regarding the rehabilitation and financing of mortgages. Therefore, wish to call your attention to the following facts which exist in the city of New York:

As you no doubt know, there is a race prejudice existing among the banks with regard to the financing of mortgages. If there are any Puerto Ricans or Negroes in the building, it is almost impossible to refinance a mortgage.

At the present time, I have 2 buildings, 1 earns 21⁄2 times the interest and amortization requirements. The other building earns 34 times the interest and amortization requirements, and yet, it is impossible to get a mortgage from any savings bank or institution, because there are Puerto Ricans in the locality or in the building. Such conditions should not exist. If our institutions are not