Privatization in an Era of Economic Crisis: Using Market-Based Policies to Remedy Market Failures

Abstract

Prior to the 2008 global financial crisis, Chicago’s agenda to privatize public housing had begun its ascent. As over 20,000 residents relocated, 10 mixed-income housing developments started to replace the areas where high-rise buildings once stood. In the postrecession context, however, the promised transformation proved financially difficult—if not impossible in certain geographic areas—to complete at the scale intended or with the continuum of socioeconomic diversity expected. That shift in the economic context, along with subsequent political responses, thoroughly altered the policy strategy. Sixteen years into Chicago’s public housing reforms, the former public housing sites remained underdeveloped. Chicago’s reforms provide a worthwhile case for empirical observation and theoretical extension about the nature of privatization within a city considered America’s testing ground for neoliberal urbanism. Drawing from nearly 2 years of ethnographic research, this article contributes to the literature by explaining how, in the context of extreme volatility, the mixed-income development strategy premised on market logics became untenable. When the tools and rationales for privatization no longer held up, Chicago’s reforms had to be reconstituted. It is shown that whereas the financial crisis resulted in disastrous impacts that called into question the reliance on private-sector actors and finance capital, local political actors nonetheless continued to seek new strategies dependent on the private market for the provision of affordable housing. The mixed-income strategy needs to be restructured so that it more equitably generates a mix of housing tenures, rather than subsidizing private development in gentrifying neighborhoods where market-rate populations are already attracted to move. Alternative policy options are needed, especially during inevitable periods of economic downturn and in more distressed, racially segregated neighborhoods.

Keywords:

• Public housing
• private/for-profit sector
• development/revitalization
• markets
• gentrification

Acknowledgments

The author wishes to thank Robert Chaskin, Janet Smith, and William Sites who provided continuous feedback during the development of this research, as well as Mark Joseph whose ongoing support proved invaluable. She wishes to thank the staff at the Chicago Housing Authority and the many informants willing to be formally interviewed. Jess Rudolph and Nina Holzer at the Center on Urban Poverty and Community Development at Case Western Reserve University, are acknowledged for their help in producing the map; and to the Case Western Reserve University in general for their support while publishing this article. In addition, the author acknowledges the special issue editors, Desiree Fields and Stuart Hodkinson, and additional support from Larry Vale.

Notes

1. The U.S. Department of Housing and Urban Development (HUD) originally committed $1.6 billion in 2000 for a 10-year period. The total financial investment to date into the Plan has never been officially documented. I estimate a total cost of $8 billion over the 16 years based on taking the last Chicago Housing Authority (CHA) reported figure in December 2009 of $3.2 billion and adding the additional funding each year since then to arrive at the estimate of $8 billion (CHA, 2009; Chicago Housing Authority, 2016a).

2. In 1999 prior to launch of the Plan, the CHA owned approximately 38,000 housing units. The Plan intended to demolish 18,000 of these units (Chicago Housing Authority, 2000). As of 2016, CHA has slated 12 public housing sites for redevelopment intended to include approximately 5,000 public housing units.

3. HUD’s Housing Opportunities for People Everywhere (HOPE VI) program started in 1993 and ended in 2009. HOPE VI funds paid for the demolition of public housing units without a commitment to rebuild all units. Demolition activity beginning in 2000 has been greater in cities where African Americans are disproportionately represented among public housing residents and where local officials targeted much of their efforts to the redevelopment of public housing located in areas ripe for financial profit (Goetz, 2011).

4. The LIHTC program provides a tax structure for financing new affordable rental housing units. It also provides economic benefits to investors through federal income tax credits, tax shelters in the form of deductions and deprecations, and positive regulatory ratings under the Community Reinvestment Act (CRA).

5. Federal policies facilitated the rapid growth of the secondary market for single-family housing financing. In the late 1970s, Ginnie Mae initiated the selling of securities based on pools of mortgages which integrated federally insured single-family home mortgages into the broader capital market. Later reforms in the early 1980s deregulated the financial industry which led to a rise in the value of mortgage-backed securities issued by Fannie Mae and Freddie Mac (Immergluck, 2009). The result of this deregulation was the production of a high-risk lending cycle that fueled both a housing bubble and an asset bubble in financial instruments associated with housing investment (Ashton, 2009).

6. Launched in 2013, RAD aims to meet the capital needs of public housing and other HUD-assisted stock and to resolve the challenge of HUD budget deficits. HUD approved 250,000 public housing units for inclusion into RAD. The program creates a new financing structure by converting traditional public housing units to long-term Section 8 rental assistance contracts. Critics suggest private investors will only be attracted to those projects where profits are predicted; thus, the more distressed buildings may be those left within public ownership (Smith, 2015).

7. Representatives from financial institutions included executives in tax-credit divisions of international banking and equity firms, director-level staff of private foundations, and directors at intermediary institutions. Representatives from housing development corporations included director-level executives. Representatives from government included officials from municipal and state administrations who oversaw financial, operations, and policy departments. Representatives from nonprofit organizations included legal advocates, researchers, policy analysts, community organizers, and planning consultants.

8. The Chicago Housing Authority required that I submit a formal research proposal and go through a review process (similar to the Institutional Review Board approval). In addition, this process allowed me to have access to seven current CHA staff and board members for the purpose of an interview.

9. The number of units lost to demolition because of the Plan has been presented differently by CHA reports and by researchers. I am using CHA’s official numbers here, although I acknowledge that the net loss is greater than 13,000. It is likely upward of 16,000, since CHA has demolished more units than the 2000 Plan projected by about 3,000.

10. Between 2000 and 2007, the number of units that came on line included 1,902 replacement public housing units, 1,239 affordable rental units, and 2,966 market-rate rental and for-sale units.

11. At the mixed-income site Jazz on the Boulevard, the developers held an auction in 2008 to sell the remaining 27 units. Capital was necessary to pay back the construction lender who had provided financing and was expecting to be repaid. Rather than face recapture procedures from the lender, the developers sold the units in a public auction. The units were originally priced as high as $480,000 in 2006. Units sold for around $120,000 at the auction. The development partnership dissolved and one of the partners, Thrush Development, filed for bankruptcy.

12. There are multiple phases included in the Cabrini redevelopment plan. CHA’s stated goal was to include 1,100 public housing replacement units in all of these phases. CHA has replaced 434 of these units whereas 1,417 market-rate homes have been built.

13. In most cases, the public housing units designed for CHA tenants are also tax-credit units since the mixed-finance layered approach meant that the stream of financing from the tax-credit deals also went to subsidize the public housing units. There is a set of designated affordable rental units financed through the tax-credit program that do not receive CHA rental operating subsidies, and thus are not set aside for CHA tenants.

14. CHA requested and HUD approved Amendment No. 3 to the Amended and Restated Moving To Work Agreement on March 10, 2010. In it, HUD and CHA agreed to this change: “CHA is permitted to count former public housing units that are assisted through project basing pursuant to Section 8(o) toward the requirement to replace or modernize 25,000 public housing units” (Chicago Housing Authority, & U.S. Department of Housing & Urban Development, 2011a). This change allowed CHA to make revisions to how it counted units. Many of these units had long received CHA rental operating subsidies (approximately 1,316) and already housed populations who met CHA’s eligibility criteria.

15. CHA reported in its fourth quarterly report in FY2014 that “CHA maintains a HUD-allowed operating reserve of $119 M that the agency intends to use for future capital expenditures” (2015, p. 27). The amount of operating reserves has varied in reports.

16. I arrived at the figure for units by taking CHA’s total working capital $429,783,753 at the close of FY2014, subtracting the HUD-allowed operating reserve of $119 million, and then dividing that number by the average subsidies that CHA expends to build one new unit at a mixed-income development, $300,000 (Chicago Housing Authority, 2014b, 2015).