How the District’s FY25 budget could impact affordable housing

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When one door closes, another may open. Image by Claire Uziel licensed under Creative Commons.

This is the fifth in a series of posts about how affordable housing works, by an affordable housing developer. This post walks through what DC’s proposed budget for FY2025 could mean for building affordable housing, and highlights a few opportunities amid constrained circumstances. Read the rest of the series here.

On April 3, 2024, Mayor Muriel Bowser unveiled her proposed budget for the District’s 2025 fiscal year, which begins on October 1. With a looming budget shortfall, many of DC’s housing programs face painful cutbacks. Yet District policy makers still have key opportunities to preserve the progress of recent years and implement new ideas to address our city’s long-term housing affordability crisis.

In many ways, this budget represents a challenging moment of truth for the District; after years of steady revenue growth and spending increases, the city suddenly finds itself confronting an uncertain fiscal future. Federal pandemic-era stimulus funding has expired, inflation has driven costs up, and a major drop in commercial real estate values, particularly downtown, will likely lead to declines in property tax revenues over time — all while our public-pension obligations, for police, firefighters, teachers, and others, are coming due.

Based on this reality, Bowser is emphasizing two themes for this year’s budget, “Strategic Investments” and “Shared Sacrifice”, which entail a mix of targeted expenditures, particularly on downtown revitalization efforts, and significant budget cuts. Adding to the challenge, the executive and legislative branches are embroiled in a dispute with the District’s Chief Financial Officer (CFO) over the timing of replenishing local reserve funds. While the mayor’s proposed budget cedes to the CFO’s demands via a further round of budget cuts, the DC Council is poised to reverse this decision to restore some funding, thereby extending the standoff. Amid this backdrop, the District’s housing programs — which for years had relied on steady funding increases — face a sobering new reality.

As I explained in my first column, low- and moderate-income housing cannot pay for itself. Building and preserving this dedicated affordable housing requires a complex mix of federal and local subsidies. Like any social service, affordable housing programs thus depend on a jurisdiction’s ability to invest cold, hard cash. The current budget proposal spreads pain across the board, and housing programs are no exception; several are subject to painful cuts. Most significantly, Bowser has proposed reducing funding for the Housing Production Trust Fund (HPTF), the city’s flagship program for supporting dedicated affordable housing, down to $59 million, far below the $100 million annual baseline that she committed to in 2015. While the District’s current bond capacity limitations for dedicated affordable housing projects suggest that a temporary one-time reduction in the HPTF may be manageable, this sets a precedent of reducing the operating baseline for the program that undermines its long-term ability to transform the District into a mixed-income city with a robust portfolio of dedicated affordable housing.

Other programs that Bowser has proposed reducing from the previous fiscal year — though not necessarily from their pre-pandemic baselines — are the Emergency Rental Assistance Program, which provides rent payments to low-income tenants to help avoid eviction and which the Department of Human Services is currently looking to reform to address problems of moral hazard; the Neighborhood-Based Activities Program, which contracts with third-party organizations to provide housing counseling and tenant-organizing services; and the Employer-Assisted Housing Program, which provides down-payment assistance for District government employees.

Which interventions work for which housing issues?

To better understand the interplay between the District’s budget, its housing crisis, and these various programs, it is useful to consider the diverse housing needs of DC’s population and what role the government can play in supporting each need. In testimony to the Committee on Housing on April 5, 2024, Department of Human Services (DHS) Director Laura Zeilinger introduced the concept of an upside-down triangle separated into different tiers to show the interaction between DHS housing assistance programs and homelessness. Inspired by Zeilinger’s framing, I have created my own version of this upside-down triangle, which matches housing-related policy interventions to each tier of the city’s population.

The Comprehensive Plan rewrite, Housing Production Trust Fund, DCHFA bonds, Local Rent Supplement Program, Emergency Rental Assistance Program (ERAP), and Permanent Supportive Housing program, among other initiatives, are designed to meet varying needs of different populations of District residents. Image by the author.

This framework is broken into five groups, which descend by population size and increase by need for government support:

  1. The majority of District residents, who, whether renters or homeowners, are living in homes that are built and owned by the private market, and are generally not subsidized or income-restricted. Approximately 193,450 households (2022 ACS data, Author’s calculations).
  2. Low- and moderate-income residents earning 31–80% of area median income, or AMI ($154,700 in 2024 for a family of four) who qualify for subsidized, income-restricted housing and home-purchase programs. Approximately 77,695 households (2022 ACS data, Author’s calculations).
  3. Extremely low-income residents earning up to 30% of AMI, who need deeply subsidized housing. Approximately 55,825 households (2022 ACS data, Author’s calculations).
  4. Households at risk of eviction or loss of housing, which can happen regardless of income. Approximately 18,000 households per year.
  5. People experiencing homelessness, who cannot access permanent, stable housing. Approximately 4,139 households.

When talking about the housing crisis, or affordable housing, we often lump all of the above groups (or some combination of groups) together. But each of these segments of the population face different housing problems, and each thus requires a different set of policy interventions.

First, for regular market renters and homebuyers, the issue is the high cost of market-rate housing. The fundamental solution for this group, which Greater Greater Washington has long advocated for, is to build more housing, period. This is something leaders across this country — from Maryland and Michigan to California and Montana to just across the Potomac in Arlington and Alexandria — are finally starting to figure out. The housing market is not immune to the fundamental dynamics of supply and demand, a topic I will return to in future columns.

Building market-rate housing is crucial not only for increasing supply to reduce housing costs, but also for restoring the District’s fiscal health. New home construction helps to grow our tax base and diversify our economy, reducing our reliance on tax revenues from downtown office buildings and the federal government. There are no silver bullets to the District’s current fiscal and economic challenges, but a major push to build more housing is about as close to one as we can get. The primary policy vehicle for doing so is changes to land-use regulations, in particular the zoning code. The general public and the DC Council will shape how much housing is allowed in the District via the rewrite of the city’s Comprehensive Plan, which will begin in 2025.

Second, for low-income renters and homebuyers, the District must continue investing in capital subsidies to build and preserve dedicated affordable housing. Capital subsidies are upfront payments in the form of loans or grants to finance acquisition and construction costs in exchange for long-term dedicated affordability protections, ensured through covenants. The two primary capital subsidy programs in the District are the HPTF, which provides low-interest construction loans, and bonds from the DC Housing Finance Agency, which provide access to federal 4% Low Income Housing Tax Credits. Both capital subsidy programs are one-time expenditures repaid over time, and therefore can be thought of as investments for building out the District’s long-term affordable-housing infrastructure. Additional smaller capital subsidy programs, such as the HOME Investment Partnerships Program (HOME) and the Community Development Block Grant Program (CDBG), are managed by the DC Department of Housing and Community Development (DHCD).

Third, for extremely low-income renters, capital subsidies are not sufficient. As I explained in a previous column, 30% AMI rents do not sufficiently cover the costs of operating and maintaining a residential property. This means that 30% AMI housing units require ongoing operating subsidy to stay afloat. The primary means by which the District subsidizes operations for 30% AMI units is the Local Rent Supplement Program (LRSP), which mimics the federal housing voucher system. With LRSP vouchers, extremely low-income tenants — District residents who make below $32,500 annually — pay 30% of their income in rent, and the voucher covers the difference between what the tenant pays and the market rent. This is a very expensive program on a per-unit basis, as the operating subsidy over a 20-year period can run up to $720,000 per voucher/household, compared to approximately $200,000 per unit for a capital subsidy from the Housing Production Trust Fund for a permanently affordable 50% AMI unit. Because of this high cost, the District’s budget constraints in FY25 and beyond will make it difficult to significantly expand the supply of dedicated affordable units for extremely low-income households using LRSP.

Fourth, for households at risk of eviction, the Emergency Rental Assistance Program (ERAP) and other eviction prevention programs managed by the Department of Human Services (DHS) can provide a crucial lifeline. Before the pandemic, ERAP was a relatively small program, funded at $8 million per year and designed to provide support to tenants in emergency financial situations that had put them at risk of eviction. During the pandemic, ERAP was superseded by temporary federal emergency rental assistance programs, including the Covid-19 Housing Assistance Program and the Housing Stabilization Grant program in 2020 and STAY DC in 2021. These programs wound down as the pandemic receded, and in last year’s FY24 budget the District used $33.5 million in leftover federal stimulus funds to augment $9.5 million in local funding for ERAP, for a total funding level of $43 million.

Bowser’s FY25 budget proposes $20 million for ERAP, reflecting a significant loss of federal funding but a doubling of local funding. This was partially funded, per Bowser, by reducing funds from the Housing Production Trust Fund. So while numerous reports have claimed that Bowser cut ERAP funding significantly, the reduction in question has come from a wind-down of federal funds, not a lack of local commitment.

DHS has also announced its intent to propose reforms to the ERAP program to roll back emergency changes enacted in 2020 that were intended to get funds out the door more quickly. The agency’s rationale is that while these changes made sense during the pandemic, more extensive vetting of applications is once again necessary to ensure that limited funds are prioritized for the District’s residents who are most at-risk of eviction. Reforms could include removal of the self-certification process, which allows tenants to attest to economic hardship without documentation of income loss, and requiring tenants in federally subsidized housing to pursue HUD-standard income recertification, which reduces the tenant-paid portion of rent in the event of income loss, prior to applying for ERAP. In addition to ERAP, other key eviction-prevention programs include legal support for navigating eviction court proceedings and DHS-managed court diversion programs.

Fifth, people experiencing homelessness need pathways to stable housing. This requires both expanding and maintaining the existing short-term shelter system for both individuals and families, a major accomplishment of Bowser’s first term, as well as providing long-term housing via the District’s Permanent Supportive Housing (PSH) program. PSH units are designated specifically for households experiencing homelessness in accordance with the Housing First model, which prioritizes placing people in permanent housing as a first step rather than a final step toward stability. The program provides a long-term operating subsidy, mainly via LRSP, and direct support from a case manager working for a DHS-approved third-party service provider.

To combat homelessness, the District has massively expanded the PSH program in recent years from approximately 300 units in 2016 to approximately 10,000 in 2024. While scaling up the program so quickly has certainly been an impressive milestone in the District’s efforts to end homelessness, there have been growing pains. In particular, a minority of PSH tenants have caused significant disruptions in their new homes, and property managers and offsite case managers are generally not equipped to manage these challenging situations. One approach to addressing this issue is to focus on site-based PSH buildings with dedicated wrap-around services for households needing greater support. However, with a slimmer District budget, the continued growth of the PSH program through both operating subsidies for housing and expanded case management services is more challenging.

Less money, but still there are opportunities

Overall, the District’s fiscal woes create major challenges for ongoing efforts to address our affordable-housing crisis. For many years, the District counted on steady revenue growth to fund an increasing number of new and expanded government programs. As Bowser highlighted when unveiling this year’s budget, from 2015 to 2024 the District’s operating budget grew by an astounding 70%:

Source: FY25 Budget: Strategic Investments and Shared Sacrifice

Unfortunately, the 2015-2024 era of “easy” money is likely over for the foreseeable future. DC leaders can no longer simply throw money at perceived problems, including housing initiatives. But we shouldn’t lose hope. The work now should be focused on evaluating and reforming programs to make sure District residents are getting the most bang for their buck.

Some reforms, such as removing exclusionary zoning regulations, could both help solve the affordable-housing crisis and improve the District’s fiscal position, by generating revenue to invest in the programs that produce and support income-restricted, subsidized housing — a good reminder that market-rate and dedicated affordable housing development are not in competition and in fact support each other. In other cases, reform means looking more carefully at outcome-based metrics to determine whether programs are meaningfully advancing long-term goals in a sustainable way.

Pursuing these efforts now can help lay a robust foundation for the long-term success of our various housing programs, well after the current era of budget cuts has passed. The District has made it through fiscal challenges many times before, and we will make it through again. But what we do along the way will matter greatly in determining what type of city — and what housing opportunities — we leave for the next generation.

Patrick McAnaney is the Director of Development at Somerset Development Company, which specializes in building and preserving affordable and mixed-income housing in the District of Columbia and Maryland. He lives in Petworth.