Testimony of Jaime Alison Lee, J.D. Assistant Professor and Director of the Community Development Clinic at the University of Baltimore School of Law Presented to the Subcommittee on Housing and Insurance, Financial Services Committee, United States House of Representatives, May 12, 2016 Chairman Luetkemeyer, Ranking Member Cleaver, and other Members of the Subcommittee, thank you for inviting me here today. My name is Jaime Lee and I am an Assistant Professor at the University of Baltimore School of Law, where I teach the law of Business Organizations and also direct the Community Development Clinic. I respectfully submit three key points for your consideration: • Public housing rights are at risk under privatization due to extremely weak legal monitoring and enforcement. • Stronger enforcement is needed to carry out Congressional intent to preserve these rights, and to ensure that contractors provide the benefits that they are being paid to provide. • Privatization programs raise concerns about long-term affordability and about the potential exclusion of those in great need of public housing. RELEVANT EXPERIENCE I became familiar with public housing privatization as a lawyer in private practice. From 2002- 2009, I represented public housing authorities across the country who partnered with private developers under HOPE VI and other programs and assisted them with transactional, financing, and regulatory issues. After entering academia, I turned my focus to the tenant experience, publishing “Rights at Risk in Privatized Public Housing” in the Tulsa Law Review in 2015 and “Poverty, Dignity, and Public Housing,” forthcoming in the Columbia Human Rights Law Review. The matters presented arise from my research on public housing privatization in the United States, and appear to have analogs in the British programs being reviewed by the Subcommittee today. 1 EXECUTIVE SUMMARY Public housing rights are at risk, even though Congress has mandated their preservation under privatization. These rights are derived from Constitutional norms and include: • the right to remain in the housing unless there is legal good cause for eviction; • the right to contest harmful acts by a landlord, without requiring the resources to mount a formal court action; and • the right to participate (to be informed and to be heard) with respect to management decisions affecting one’s housing. These rights are at risk due to an extremely weak legal monitoring and enforcement infrastructure. • Little to no data is collected on whether these rights are being respected, and existing legal remedies are ineffective or ill-suited to the privatized context. • Low-income tenants also have no consumer power to “walk away,” and thus there is no market-like system for “weeding out” poor performers. • Stronger enforcement is needed to carry out Congress’ intent to preserve these rights and to ensure that contractors provide the benefits that they are being paid to provide. • Options for improved rights enforcement may include stronger transparency requirements; a legislative mandate for federal oversight and enforcement; and the dissemination of data that may be used to monitor rights compliance. Privatization also raises concerns about affordability and about who can access public housing. • Affordability may be jeopardized if insufficient public funding increases pressure to raise rents using legal waivers. • Legal tools that make it harder to get into and stay in privatized public housing may be used to exclude or evict those who may most need public housing. My brief review of the Large-Scale Volunteer Transfer Program in the United Kingdom appears to underscore these concerns in the following ways: • Government oversight of tenants’ rights under privatization has been greatly diminished in the UK,1 although rights enforcement is necessary, since 47% of tenants reported that nonprofit housing providers failed to live up to their promises.2 • Insufficient funding for privatized programs is also a significant concern for UK providers.3 • Access to privatized public housing is viewed as much more restrictive in the US than in the UK.4 2 DETAILED TESTIMONY Tenants’ rights are discussed below. Potential effects on affordability and accessibility are discussed beginning on page 11. THE UNENFORCED CONGRESSIONAL MANDATE Since the mid-1990’s, federal policy has promoted the privatization of public housing through the HOPE VI Program, the Choice Neighborhood Program, and the Rental Assistance Demonstration (RAD) Program. Throughout these privatization experiments, Congress has largely demanded that private housing providers (whether for-profit or non-profit) preserve traditional rights and protections afforded to public housing tenants These rights include basic affordability restrictions and other key benefits that make public housing especially valuable to low-income tenants. These rights also include legal benefits that only governmental actors would be traditionally required to provide. These rules derive from the Constitution and from democratic principles promoting an engaged citizenry. Congress has mandated, for example, that private landlords abide by Constitutional due process and consult with residents before making certain decisions about their housing. Congressional intent has been quite clearly stated. All units under the HOPE VI and Choice Neighborhoods programs must be “developed, operated, and maintained in accordance with the requirements of the Act relating to public housing,”5 and under both RAD programs, “tenants . . . shall, at a minimum, maintain the same rights . . . as those provided under section 6 and 9 of the Act,”6 which address certain security-in-tenancy and participation protections. A host of statutory, regulatory, and administrative declarations further elaborate upon these protections,7 which are in turn made applicable to private owners via contract.8 Despite Congressional intent, the legal infrastructure to monitor and enforce them is extremely weak. It is difficult to provide empirical data on the scope of the problem precisely because there is no systematic monitoring or enforcement system. These concerns are documented, however, by numerous case studies published in law journals and other fora, as well as by anecdotal research, including consultations with lawyers across the nation who represent tenants experiencing privatization under the RAD program. This research supports concerns that some tenants today are experiencing great difficulty in obtaining information about privatization plans and implementation, echoing similar experiences under the HOPE VI program. It also reflects concerns that tenants are not benefiting from other rights promised under the law. 3 Rights In Detail: A Sample Story Some of the most valuable benefits of public housing include security in tenancy rights, and rights to participate in governance and policy-making. A hypothetical narrative offers a backdrop for discussing the nature of these benefits, their origins, and their importance. Imagine a faded complex of garden-style apartments, one or two stories in height and set around a spare courtyard. The building has continuously been owned and operated by the local housing agency as public housing since it was built many decades ago. Years of federal funding shortfalls have led to deferred maintenance, and the building is in dire need of major capital repairs. Assume that this particular community reflects national averages for the public housing population at large. Seven out of eight residents are elderly, disabled, and/or responsible for small children.9 The average household income is $13,724, even though wages are a major source of income for 28% of households.10 Only twelve percent of households depend on welfare as a major source of income.11 The residents recently elected representatives to the building’s resident council, which under federal law has the right to consult with the local agency as to how their housing is run. The residents elected Mrs. J to the council, along with other leaders who have been active in complaining to the landlord about the building’s persistent mice, bedbug, and cockroach infestations. Mrs. J and the other council representatives plan to use their positions to advocate for better housing conditions. The complex is selected to participate in a privatization program, which means that its federal funding stream can be supplemented with other kinds of financing. Agency staff has no expertise in complex real estate finance matters, so it hires a private real estate developer (who may be a for-profit or a non-profit) to assemble a financing package and oversee renovations. The government’s interest in the property makes it relatively attractive to private-sector banks and investors. The developer successfully arranges for a commercial bank loan to fund capital needs, which the bank secures through a mortgage. The company also raises equity through the tax credit program, through which investors contribute funds for renovations in exchange for significant tax savings. To meet tax credit requirements, title to the building is transferred to a company controlled by the real estate developer. To safeguard their investment, the investors and the bank demand that the company be run by people with sophisticated knowledge of the tax credit program. Since agency staff cannot fill that role, the real estate developer assumes a controlling interest in the company that owns the building. It also hires an affiliated company to manage the building’s day-to-day operations, such as addressing routine maintenance needs, collecting rents, and handling evictions. All residents have the opportunity under federal law to return to the building after renovations, and all do. They find that the roof leaks less and cosmetic repairs have been done, but also that the vermin have returned. Residents continue to lobby for better conditions, and just as the leases of Mrs. J and other resident council members are about to expire, each receives a notice that his or her lease will not be renewed. According to the landlord, Mrs. J. has repeatedly failed to pay her rent on time. Other council members are accused of disturbing other residents and failing to keep guests from writing graffiti.12 Mrs. J and the other resident leaders dispute these allegations and believe that the landlord is refusing to renew their leases in retaliation for their activism. Since Mrs. J is disabled, suffers from a range of health problems, and has limited daily mobility, she 4 is panicked that she has only thirty days to find alternative housing that is affordable, close to medical, transportation, and social services, and close to her daughter, on whom she relies a great deal. This brief narrative illustrates a number of concepts. It describes how a public housing complex might typically transition from governmental ownership and management to private control under either a for-profit or a non-profit. It also illustrates certain protections commonly afforded to public housing residents and that are intended to be preserved as the housing becomes privatized. These protections can be categorized into two broad groups, referred to as “security-in-tenancy” protections and “participation rights.” Rights to Security-In-Tenancy Security-in-tenancy protections are legal assurances that a person may remain in her housing for the foreseeable future if she abides by the rules. In short, security in tenancy means that a person cannot be forced to vacate her housing unless good cause exists for terminating the tenancy, and these protections provide stability and reassurance that the resident will not lose shelter through no fault of her own. Security in tenancy protections offer both functional and emotional benefits.13 They guard against involuntary ejection from one’s home and the disruption of one’s social networks, daily functions, and emotional well-being.14 These protections are especially important for those who are disabled, elderly, or have children, who collectively make up eighty-seven percent of the public housing population,15 and for individuals who are otherwise “hard to house,” who face challenges in finding replacement housing that is affordable, accommodates their physical needs, and is convenient to essential medical, educational, and social services.16 For many who live in public housing, security in their tenancy is not a mere convenience, but a critical safeguard against homelessness and against the harshness of private lease law.17 Security-in-tenancy rights come in various forms, including rights to continued occupancy, grievance procedures, and the right to return. 1. Continued Occupancy Assume momentarily that Mrs. J lives in a private rental building that does not participate in any federal housing program. Mrs. J could go to court to disprove the landlord’s allegation that she did not pay her rent, since all states require a court hearing prior to eviction.18 Most states also offer a statutory protection against retaliatory eviction.19 Even if she is successful in the courtroom, however, Mrs. J would not secure a right to renew her lease. A tenant in private housing simply has no right to continued occupancy; a private landlord may decline to re-let a unit when the lease term ends without cause and for any reason that is not illegally discriminatory. Fortunately for Mrs. J, because she lives in public housing, she does have a legal right to continued occupancy. A public housing landlord must renew the lease to the current resident unless it has good cause not to do so. The right to continued occupancy derives from Constitutional due process requirements established during the “due process revolution” of the early 1970s.20 In Goldberg v. Kelly, the Supreme Court established that welfare benefits could not be terminated without due process under the Fourteenth Amendment.21 Goldberg was explicitly applied to public 5 housing by the Second Circuit in Escalera v. New York City Housing Authority,22 which held that under the Fourteenth Amendment, public housing benefits could not be terminated without adequate procedural safeguards, including good cause.23 The Fourth Circuit in Caulder v. Durham Housing Authority further determined that Goldberg’s protections expressly apply to public housing.24 Moreover, the Fourth Circuit found that a resident’s property interest extends beyond the initial term of the lease in Joy v. Daniels, holding that a contractual end to the tenancy is overridden by due process requirements, which demand good cause for declining to renew a public housing lease upon expiration.25 Joy’s holding is now echoed in federal regulations.26 2. Grievance Procedures Another security-in-tenancy benefit is the opportunity to grieve nearly any adverse act taken by one’s landlord.27 Grievance procedures provide a forum for dispute resolution that is more flexible and accessible than judicial proceedings and thus offer public housing residents greater security against eviction and other adverse events. Grievance procedures offer both informal discussions as well as a more formal hearing.28 Mrs. J, for example, has the legal right to first speak informally with her housing manager about her alleged nonpayment of rent.29 If the landlord does not change course, Mrs. J can then appeal the outcome of the meeting through a more formal hearing,30 administered by an “impartial” person selected in accordance with a process approved by the residents.31 Mrs. J has the right to have a lawyer or other representative at the hearing, at which she can examine the rules and regulations, examine records allegedly showing her nonpayment, cross-examine the staff person to whom she handed her check every month, and present her bank records to refute the landlord’s grounds for eviction.32 She could also describe her activism efforts, as well as the landlord’s refusal to renew the leases of other resident activists and call witnesses to support her theory of retaliation.33 Both the informal and formal processes must be documented in writing,34 and the decision of the hearing officer is binding on the landlord.35 If Mrs. J remains unsatisfied, she can still pursue a court action.36 As the narrative illustrates, one benefit of grievance procedures is access to convenient, low-cost avenues for dispute resolution prior to eviction and other adverse housing actions. The procedures offer third-party adjudication in a setting that does not require legal expertise, since rules of evidence, standing requirements, and other technical courtroom requirements do not apply.37 Grievance processes can be used to facilitate dispute resolution without the time, cost, legal expertise, and emotional toll of court proceedings, and participants are free to negotiate creative and flexible remedies that suit their particular circumstances.38 A further benefit is that a resident may confront a manager with a broader range of concerns than a court proceeding might entertain. Residents can grieve not only evictions but virtually any adverse action or inaction by the landlord.39 Grievances thus provide a forum for working out a broad array of landlord/tenant conflicts, not just those presenting a legally cognizable cause of action. Grievance rights derive from Constitutional due process rights articulated during the due process revolution. In Thorpe v. Housing Authority, a resident was evicted immediately after being elected as president of a resident organization.40 Before the U.S. Supreme Court could confront the First 6 Amendment concern, HUD issued administrative guidance requiring procedural due process hearings much like those required in Goldberg, which were then refined through negotiations among HUD, legal advocates for residents, and a group of local housing agencies.41 The principle that grievance procedures can be invoked with respect to any adverse action, not just evictions, also derives from procedural due process.42 Escalera, applying Goldberg, held that grievance procedures are triggered by the assessment of minor fines against residents,43 establishing residents’ right to invoke grievances to address a wide range of issues. The principles of Thorpe and Escalera set forth the basic infrastructure for today’s grievance procedures and are now codified by statute.44 3. The Right to Return In the hypothetical narrative, Mrs. J also benefited from a security-in-tenancy benefit known as “the right to return.”45 The right to return means that residents who are displaced due to renovations must be offered an opportunity to move back into the refurbished housing.46 Unique to public housing, this right is one of its most sought-after benefits, and recent privatization programs offer a nearly universal right to return.47 The right to return resonates strongly among public housing and other low-income communities in part because of a long history of their displacement by governmental programs supporting activities such as urban renewal and the construction of highway and sports stadia.48 Early public housing privatization initiatives are part of this history. HOPE VI’s “mixed-income” policy displaced thousands of low-income black residents who could not return to the renovated sites because much of the new housing was reserved for higher-income, often white, residents.49 Private landlords imposed stricter screening requirements for the renovated units, further excluding many former residents from returning.50 Those displaced often lacked adequate support in finding replacement housing and adjusting to the loss of their homes, social networks, and services such as familiar schools, doctors, and transportation lines.51 With no federally guaranteed right to return, residents at HOPE VI sites around the country protested strenuously to secure the right at the local level,52 and advocates fought for decades for a change in federal policy. The intensity of these battles reflects the importance of the right to return, as does its reinstatement in later privatization programs, namely, the Choice Neighborhoods and RAD programs. Participation Rights: Rights To Be Informed and To Be Heard Benefits available to public housing residents also include participation rights, or rights to provide input to one’s landlord on matters that affects one’s living conditions.53 Participation rights have roots in principles of due process, although today’s participation rights extend well beyond Constitutional minimums. For example, Mrs. J’s resident council must be “recognized” by the public housing agency under federal requirements,54 which qualifies it for funding for education, training, and other activities supporting resident involvement in the governance of their housing.55 Public housing rules also encourage the establishment of formal channels of communication with agency officials.56 Residents have formal notice-and-comment rights with respect to plans to sell, renovate, or privatize their housing57 and with respect to proposed changes in lease terms, rent requirements, and house rules.58 Residents are also entitled to fill one seat on the local agency’s board 7 of directors.59 Mrs. J and her fellow residents might well benefit from these types of participation rights. They might use their funding to support community organizing trainings and protests against the evictions of the resident leaders.60 The resident council could employ its federally-mandated channels of communication with agency officials to publicize the retaliatory evictions.61 Participation rights must be viewed with some skepticism, as they provide only for communication between residents and decision-makers, and do not guarantee residents any control or power over decisions.62 Residents’ bargaining power in such settings is often limited by race, their status as beneficiaries, and a lack of traditional markers of credibility such as education. Nevertheless, participation rights remain valuable, as they can increase residents’ collective negotiating power in advocating for better housing conditions.63 Rights to federal funding and to information disclosure are especially useful in facilitating resident mobilization and collective action to promote change.64 Rights At Risk: No Effective Monitoring Or Enforcement Despite Congressional intent to preserve these rights, and the existence of legislative, regulatory, and contractual mandates to do so, there are critical weaknesses in the existing accountability framework. 1. Federal Monitoring Is Inadequate Current monitoring schemes seem highly unlikely to uncover potential rights violations simply because they do not ask about them. HUD possesses broad monitoring authority, yet it collects practically no information about security-in-tenancy and participation rights.65 HUD is statutorily required to evaluate66 whether local housing authorities have provided participation opportunities for residents,67 but HUD’s assessment tool simply does not evaluate this factor. Security-in-tenancy rights receive even less attention, and are simply absent from the statutory list of what HUD must monitor.68 In another example, HUD assesses performance under one program with respect to eight compliance categories.69 Four categories address financial and administrative concerns, and three assess whether the landlord filled out required reports.70 Of the hundreds of questions asked, not a single one inquires into security-in-tenancy or participation rights. At best, these rights might be covered under the generic category of “resident complaints” concerning “non-life-threatening conditions.”71 HUD’s systemic monitoring efforts are supplemented by the administrative complaint process,72 which enables residents to initiate complaints, but lacks regulations or guidance explaining how they may do so,73 and leaves it to HUD’s discretion whether to respond or not.74 Even in one program in which participation rights are singled out for monitoring and enforcement, HUD’s responsiveness to complaints is reportedly inconsistent.75 2. Federal Enforcement Mechanism Are Inadequate HUD can theoretically exercise a range of contractual remedies against private landlords, including termination,76 and HUD may generally exercise any permissible remedy against a private owner.77 8 However, HUD cannot be compelled to act,78 and even if it does, significant challenges exist to the effective exercise of remedies. Three specific remedies are repeatedly emphasized in privatization contracts.79 One is that HUD may petition a court for specific performance or an injunction. Court action is likely to be too costly to pursue, however, except where violations are repeated and egregious. A second remedy is the reduction or termination of subsidies, which poses obvious risks. Since HUD is in a collaborative relationship with private actors and relies on them to provide services, it may shy away from enforcing in this manner. Moreover, a landlord penalized by a reduction in subsidy may simply further spend less on services rather than sacrifice profit. Severe fiscal sanctions may even threaten the project’s financially viability, leading to a bankruptcy, workout, or foreclosure process that could displace residents and jeopardize long-term affordability.80 Subsidy-reduction sanctions are so risky that residents have occasionally filed suit to prevent HUD from exercising this remedy.81 The third contractual remedy is to remove the housing asset from the contractor’s control and to place it into the hands of either a court-appointed receiver or the enforcing agency itself.82 This remedy poses logistical challenges of identifying a receiver capable of both administering a complex array of public housing requirements and implementing widespread organizational change that will endure once the receivership ends. Receivers have been appointed by HUD over local agencies in the past with success,83 although instituting a receivership is exponentially more complicated in a privatized context.84 Receivers must be identified who have expertise in both complex real estate financing matters and in public housing administration, and investors and lenders may well object to ceding control over their investment and seek to block the appointment.85 In sum, strong contractual remedies exist, but face such steep implementation challenges that they are likely to be exercised only when violations are especially egregious. In the vast majority of situations, these remedies may be too risky or costly. Less severe remedies also exist, although they are not explicitly articulated in the contracts. HUD commonly employs intermediate-level sanctions against poor-performing local agencies, which it conceivably might also apply to private landlords.86 For example, HUD might require a local agency to increase its reporting, meet certain performance standards within specified timelines, and require attendance at trainings.87 Such soft incentives may spur change at local agencies, since HUD programs are often the agency’s sole mission and HUD funds are often their sole source of income. Private landlords, on the other hand, may be less reliant on HUD and thus less susceptible to indirect HUD pressure. Other intermediate-level sanctions are equally unlikely to be effective against private landlords. For example, when dealing with a poorly-performing local agency, 88 HUD might prohibit the agency from taking on new financial commitments, require it to submit any new business contracts with outside parties to HUD for approval, and impose third-party oversight of certain aspects of the agency’s operations.89 It is unlikely that HUD would inject itself so intrusively into private-sector business dealings, however, and equally unlikely that private landlords would readily submit to such intrusions. 9 3. Resident Enforcement Through Participation Is Inadequate While participation rights, if well-enforced, could provide another avenue through which residents could force private landlords to respect their rights, their potency is limited in the privatized setting. A key benefit of participation rights is that they provide formal channels of communication between a local agency and resident representatives, such as through the resident council and the residents’ seat on the agency’s board of directors. If Mrs. J lived in conventional public housing, she could potentially use these channels to challenge the manager’s systemic eviction of resident leaders, using her position on the resident council to make agency supervisors and the board of directors aware of the manager’s actions. The agency, as the manager’s employer, would be in a position to terminate or sanction the manager for her bad acts. Where landlords and managers are employed by private companies, however, agency staff wields only attenuated control over their behavior. An agency cannot fire, sanction, or threaten to fire the individual, but can only seek to pressure the private company to take action against her. Thus, the lines of communication between residents and local agency officials may be significantly less likely, in a privatized setting, to improve how residents are treated.90 Private ownership also dilutes the power of participation rights in other ways. Participation rights include legal rights to information, which is frequently useful in catalyzing mobilization efforts, through which residents act collectively to exert pressure on the landlord to change its behavior.91 Privatization, however, means that control over individual housing projects is no longer centralized in the local agency, but dispersed among numerous private landlords. This diversity of ownership may make it more challenging to mobilize a sufficient number of residents against any one landlord. Unlike government landlords, private landlords are also generally not subject to sunshine laws92 and may shield their principals, as private citizens, from becoming the objects of public protests.93 Moreover, while community organizing and other mobilization activities may be protected in conventional public housing under the First Amendment,94 such speech rights have not explicitly been publicized and may not be protected in privatized public housing. 4. Market-Like Enforcement Is Inadequate Finally, it might be argued that private landlords will voluntarily offer enhanced benefits in order to more effectively compete for tenants.95 In this view, if tenants value the benefits, they will seek out landlords who offer them and reject those that do not, and thus the profit-motive will encourage landlords to provide public housing benefits. The flaw in this argument is that competition for tenant dollars does not exist in the public housing sector, since low-income tenants have few or no alternative housing options and little or no ability to reject landlords who provide unsatisfactory service.96 As Wendy Netter Epstein explains, systemic market failures exist in the realm of public-private contracting, including a lack of competition, which lead to contracts that do not internalize the full costs of providing public services and causes beneficiaries to bear the excess cost in the form of poor service.97 10