Eliminate the Poverty Trap of Means-Adjusting

Want to do something radical and transformative for affordable and public housing? Eliminate means-adjusted rents in family properties.

Not means-testing, the entry review that assures incoming households meet the program’s eligibility criteria. Means-adjusting: the post-occupancy reset of resident payments so they fall as household income falls, and rise as the reported income rises.

Though the impulse behind means-adjusting — charging no more than the poor can afford — is a charitable one that dates back to 13th-century English almshouses, its multiplicity of unintended bad consequences and perverse incentives swamps its all-too-rare intended results. Means-_adjusting_ is an administrative labyrinth, an embodiment of perverse incentives, and a poverty trap.

Administrative Labyrinth

Means-adjusting is useless without income verification, a process both tortuous and potentially endless. It’s also repetitive, and both resident and contract administrator learn how to play the game.

Residents can learn to “forget” some income, or to overlook live-in relatives’ earnings. (“Was I supposed to count Junior’s after-school job? Grandma’s part-time Wal-Mart work?”) Administrators become reluctant lifestyle forensic accountants, snooping into things that most of us would say are nobody’s business. (“Is that evening gentleman caller related to you? Does he earn anything?”)

Means-adjusting also enlists service providers to work against their entity’s economic interests: the more revenue they uncover, the less the housing authority or owner receives from the federal government, which is a much safer credit risk than an individual renter household. Why would anyone take time away from critical activities like maintenance and operations, and anger the people they believe they are in business to serve, solely to decrease the outlays of a distant and imperious federal government? Small wonder that every time GAO estimates revenue loss from income under-reporting, it runs into the multiple billions.

Perverse Incentives

Affordable housing is intended as a springboard to improving your life, yet with means-adjusting, the major activities that improve one’s lot in life are heavily penalized. Get a job or a better job? Pay a 30 percent surcharge (after tax!) in increased rents. Get married? Your spouse pays a 30-percent-of-income surcharge. Economically it’s far better to cohabit.

Poverty Trap

Means-adjusting is a poverty trap both for properties and for households.

For properties, means-adjusting resident contributions is economically unhealthy, because it virtually guarantees that properties serving the poorest will always have negative net operating income and eternally depend on government subsidy. Once a property is subsidy-

dependent, its physical condition usually atrophies, because the funder’s budget parsimony starves the property of adequate maintenance, replacement reserve depositing, and capital improvements. The residents pay amounts unrelated to comparable properties or to true occupancy cost; and the owners and managers act as economic serfs to the absent check-writer.

For people, it’s been well documented that the 30 percent surtax, when combined with other means-tested or means-adjusted benefits, gives people who are moving off unemployment a marginal tax bracket greater than 100 percent. This also works in reverse: as a good owner-friend of mine says wryly, “Get on Section 8, quit your job before you move in.” Property-based assistance also tends to trap people in the same developments, even if they want to move, because their assistance will not travel with them.

Flat, Affordable Rents

Means-adjusting is not an intrinsic component of affordability. For most of America’s involvement, affordable housing has been defined simply as quality housing at cheap rents. Public housing before 1969, HUD’s budget-based

lower-rent programs (¤221(d)(3) and ¤236), and Low Income Housing Tax Credits all set means-tested but not means-adjusted rents, and residents pay those rents in full. Even before that, the late nineteenth-century Settlement House movement was predicated on flat rents and social landlords, the forerunners of today’s housing nonprofits.

Flat rents put all the incentives in the right place. Get a job, get a better job, raise your income—no increase in rent. That was the hypothesis behind and finding of HUD’s late-1990s Jobs-Plus Demonstration program.

When rents are flat, people move to bigger apartments if they can afford them, and drop down to smaller, cheaper ones if the extra space is no longer needed. Temporary assistance for personal setbacks can be attached to particular needy households or individuals; it need not be coupled to an apartment.

A hybrid or transitional approach, if such were desired, would set the resident contribution at some initial amount at move-in, and then every year raise that resident household’s contribution by some stipulated fixed-dollar amount until it reached the property’s rents. This would work like time-limiting assistance, but without the unpleasant shock of a sudden drop.

Means-adjusting entered American affordable housing in 1969, 42 years ago. It’s overdue for repeal.

2 COMMENTS

  1. Hi David,
    At 14 of our buildings in the Bronx, we check income at initial occupancy only for the tenants who do not have Section 8. We raise rents according to NY rent regulations. It is so much better than in our tax credit projects. We have very low turnover, very good collection and, as you said, save money and hassle.

    Good thinking.
    Carol Lamberg

  2. Hi David,

    Thanks for the insight. But what does it take to mandate a flat rent for Section 8 recipients? I also want to bring up the fact that fair market rents, as HUD calculates them are not in line with market Rents for housing in safe neighborhoods and decent buildings. Also, local HA’s are reluctant to adjust rents for inflation, often passing rent increases to the renter who may already be paying 40% of their income towards rent.

    JB

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