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Housing DC's Future

Foreword

Whether its residents relish the role or not, the District of Columbia is the nation's capital city. As such, it symbolizes what America stands for. What it does, and how it does it, is broadcast around the world. It helps shape global opinion of our down-to-earth success in achieving our lofty goals and ideals. Who lives here, votes here, pays taxes here, and governs here has the unique burden of being on display as America's urban showcase.

The city is now struggling to prepare a new 20-year Comprehensive Plan that appropriately recognizes virtually every American special interest. A combination of idealism and pragmatism, it will provide a public guide book on how the city should grow. How it grows will depend on who it attracts to live here and work here. This in turn depends on how the city's limited land is zoned for continued development. Housing, and all that goes with it, will help define the desired evolution of the city's "residential mix", the lifeblood of the capital city's 'body politic'.

This analysis is intended to provide some (updated) quantitative data to inform that ongoing debate.

[It is also the subject of NARPAC's Editorial for February, '06]


Chapter 7: FINANCIAL IMPLICATIONS

Due to the amount of quantitative graphic data presented in this new analysis (much of it from the Census Bureau's 2004 American Community Survey), this work has been broken into seven bite-sized pieces for easier loading, printing and greater reader selectivity. You can read the brief summary immediately below, and then decide to continue to the end of this chapter, or shift to another one by clicking on the chapter titles listed below.

Summary

This would not be a NARPAC analysis if it failed to try to link DC's budgetary requirements to a combination of those who live here and those who work here. Clearly, at least to us, any 20-year plan for the future of the nation's capital city must address the affordability of the whole plan, even if these requires considerable simplification. This chapter looks at some of the obvious issues, such as a) the trade-offs between residential and commercial properties to derive the needed revenues; and b) the potential availability (and transfer) of additional under- utilized federal properties. To climax the effort, NARPAC develops a "what if" spreadsheet model that allows the user to pick any combination of residents, both above and below the poverty line, as well as any change in high-density commercial property zoning, and find out whether DC gets ahead or behind the 'power curve'. Unfortunately, only NARPAC can run the model, but after reading this chapter (thoroughly), use our "Feedback" mechanism below to ask us how your choice would rank. Not unsurprisingly, NARPAC provides its own preference.

Issues addressed here:

Is Affordable Housing Affordable?
No indication of the need to be financially competitive
Robbing rich Peter's land to pay for poor Paul's land
Is the city really out of real estate for development?
Does the city's 20-year plan for city living improve its long-term financial posture?
Modeling the "net productivity" of various household combinations
"What If" Variations
NARPAC's better solution?


If this does not hold your interest, please click back to:

Chapter 1: SUMMARIZING THE PLAN
Chapter 2: PROBLEMS WITH DEFINITIONS
Chapter 3: PROBLEMS WITH NUMERICS
Chapter 4: LOOKING POVERTY SQUARELY IN THE FACE
Chapter 5: EDUCATION AND JOBS
Chapter 6: MARKET HOUSING AND MARKET CARS


Is Affordable Housing Affordable?

The CHSTFR makes estimates of the costs of providing the housing they recommend. To buy the land and produce the 19,250 affordable units over fifteen years would cost (roughly) $1,999,797,115 (!) in present dollars, which works out to roughly $133,319,808 (!) each year. To preserve and rehabilitate 1600 units each year for 15 years, as well as the remaining 6560 Section 8 units, is expected to cost $128,352,000 annually. To preserve rent subsidies on 10,000 units, supplement the subsidies for 1000 units of public housing, provide new rent subsidies for 10,627 other units will run $92,361,524 more, and helping first-time home owners $20,500,00 more. The rough total is thus $374,533,332 per year.

The CHSTFR goes to equivalent lengths to detail current direct and non-direct spending for all aspects of affordable housing. All of this $212,241,667which would all be applied to these new requirements. This leaves an additional funding requirement of $199,413,077, and the advocates demonstrate that the funding required for this affordable housing program could be made available by proper allocation from current and new DC resources including:

o dedicating a larger portion of the current Deed Recordation and Transfer Tax (DRTT) to the Housing Production Task Force (HPTF) to raise $18,000,000;

o raising the DRTT by 36% to raise another $130,181,800 annually; and

o dedicating 5% of new real estate taxes from net new residents to raise $48,231,277 yearly.

Together with a $3,000,000 commercial linkage fee, this would raise the needed $199,413,077.

While the draft Comprehensive Plan omits these details, it is clear from its recommendations that the plan has endorsed them as plausible means to raise these needed funds. NARPAC has no reason to challenge these sources, only the silliness of providing such excessive numeric detail, and the dubious wisdom of getting the city further into the housing business.

In this latter regard, we cannot resist noting that this rough total equates to a $5,887.22 annual subsidy for each of 63,618 dependent households. Given directly to each householder, this could provide a major increase in affordable rent money, or better yet, affordable mortgage payments!

Despite the nine-significant-figure accuracy of these estimates, the larger issue about whether the city can reasonably expect to generate sufficient revenues from these new householders to cover these costs as well as their needs for city services, is completely ignored.

No indication of the need to be financially competitive

As with most single-purpose advocacy groups, and some long-range planners as well, the soundness of the city's financial structure is left to others to determine. While this may be appropriate for bicycle trails or local parks, or even for affordable housing, it is not appropriate for the broader issue of the how the city pays its bills. As shown on the graphic below in their most basic forms:

a) residents collectively provide about 58% of All DC's locally generated revenues, from some 81% of the city's available taxable land. The reverse of this, of course, is that the city derives 42% of its revenues from commercially-zoned land, largely energized by commuters; and

b) poor residents including their poor kids consume some 64% of locally-generated funds, and non-poor kids use up another 20%. Note that the non-residential demands for city services are relatively minor compared to the revenues they generate.

The two fundamental issues regarding DC's financial security involve the "productivity" of both residential and commercial land in generating revenues (and the shares devoted to each) versus the staggering costs of providing services to the poor and educating the city's kids, poor or not. There is no way that a comprehensive housing plan, which essentially describes residential productivity, can address only the housing needs of those in the lower segments of the income scale. The piper must be paid from the a) upper segments of the income scale, and possibly more important, by commercial enterprise, largely populated by commuters. These issues are discussed in more detail further along.

The second issue involves the revenue-generating potential of the elusive-to-define "middle class" or "middle-income" cohort amongst the city's residents. It involves two deeply ingrained myths passed on from one advocacy group to another. First, there is a persistent view that a "large" share of DC's "middle class" skipped town in the '70s, and that the rest are on the verge of jumping ship unless DC does this or that. The graphic below shows the number of federal income tax returns from DC residents since 1960, as well as the average Adjusted Gross Income (AGI) per tax return. There is neither a drop in returns or in average AGI to support the notion of some sort of mass exodus.

Moreover, there is no support for the notion that the "middle class" contributes substantially to total city revenues. As mentioned early, NARPAC believes that their contribution to classic American values (such as raising kids with two parents) is far greater than their net monetary contribution to city needs beyond their own Colloquially, those middle income families are (and should be) too involved in paying for their kids' education, to cover the "human support services" to the poor and needy. The next chart shows how both federal and local income tax revenues currently vary across the spectrum of DC taxpayers. (Note that the more progressive federal income tax rates further emphasize the unique contribution of the "upper(most) class". But in both cases, the revenues provided by the two central income groups are at best no more than 20% of the total revenues raised.

The Housing Task Force briefers talked metaphorically about fears of the "barbell" phenomenon" (known to some older folks as the "dumbbell") in which two massive end-clusters are separated by a highly stressed handle (bar), generally suggesting (at best) two "separate but equal" groups with little to connect them. But the chart suggests this is a very poor analog. There are, it seems to NARPAC, two "hammers": the single heavy numeric mass of taxpayers at the low end of the income spectrum, and the heavy monetary mass of the tax revenues juxtaposed with its centroid near the top end of the scale. In fact, three quite different patterns can be developed not from tax returns (somewhat harder to get) but from "income productivity " (household income times the number of households) in each income category. This is shown below for DC and its closest neighboring counties in Maryland:

Looking at the two extreme income brackets, DC derives over 30% of its income from the richest 6% of its households, while Montgomery County ("Monty") gets 34% from its top 10%. In fact, Prince George's (PG) has the most egalitarian tax base, deriving less than 10% of its revenues from the top 3%. At the bottom extreme DC gets 6% of its income from 33% of its households, PG does better by getting 4% of its income from the bottom 18%; and Monty settles for 2% of its income from the bottom 13% of its households.

The lower half of the chart shows the same variations for household types. While DC's family households (44% of the total) generate 50% of the income, PG gets 73% of its income from its family households, and Monty does even better. Within the family household category, DC gets perhaps 37% of its income from married couples, while that fraction rises to 48% for PG and 72% for Monty. Hence DC ends up counting on getting 50% of its income from non-family households. The reader can divine more comparisons. Possibly more important, however, these differences in household character are bound to generate different priorities and local governments try to satisfy their taxpayers.

NARPAC generally resists trying to consolidate these figures into "income classes", but the next chart aggregates the upper half of the previous chart set into "lower", "middle", and "upper income" groups to again illustrate the differences between neighboring jurisdictions. DC's lower income group (below $75K household income) contains 69% of the households and generates 31% of the city's income. In Montgomery County, 46% are in the lower income group and produce 18% of the city's income. Similar differences exist in the upper income category (over $150K). Possibly most interesting, PG gets 43% of its income product from its middle income group ($75K to $150K) which contains 30% of its taxpayer households, while both Monty and DC fare less well. As has been mentioned elsewhere DC depends the most on its upper 11% which produces some 41% of the city's income product.

Finally, this phenomenon can be addressed by an odd looking chart which plots cumulative percent of taxpayers (starting from the bottom) vs percent of revenues. The advantage of this "non-dimensional" approach is that it eliminates differing population sizes as well as different income levels (vs time, for instance). However, if each taxpayer contributed equally, those lines would all be straight rather than steeply bowed. Here (unfortunately) the sample is not the same, but the trend is similar for DC in 1970 and DC in 2003, compared to the entire US in 1999, and Maryland in 1995 (need a bigger staff, NARPAC?):

Across this "diverse" but "inclusive" (!) spectrum, the share of total income tax revenues generated for the "bottom 80%" of all taxpayers varies only from 23% to 29% in more recent years at local, state ore national level. It may be significant that the DC'70 (green) line is somewhat higher, but it could also mean that the number of very wealthy District residents was considerably lower then. In any event, the curves are remarkably similar, and NARPAC concludes that the revenue value of the "middle class" is by no means as important as its other virtues.

Robbing rich Peter's land to pay for poor Paul's land

Not surprisingly, advocates like to invoke the notion of improving "the balance" (of whatever) by shifting things in the direction they espouse. Here again, this can be expected in an advocacy document, but assiduously avoided in the Comprehensive Plan. For instance, the CHSTFR rightly recognizes the need to 'increase density" of land use if it is to accommodate a 20% increase in population. Recommendation 1.2, no less, suggests six practical ways to modify zoning to provide additional space or density, and thereby "increase balanced development". Five of them make eminently good sense to NARPAC:

o allow development of affordable housing on public lots currently underutilized or abandoned (see ahead for comments on so using surplus school property);

o allow (encourage?) more accessory apartments, granny flats, single room occupancy, and "cohousing" facilities;

o offer "density bonuses" for specific affordable housing but without large-scale rezoning;

o grant "density bonuses" at transit stops, and thereby promote use of public transportation; and

o permit increased density along major corridors for mixed-use, thereby promoting neighborhood economic opportunity (nice term!).

Unfortunately, the CHSTFR spoils this riff by also suggesting "rezoning commercially-zoned land to residential, particularly along long commercial 'strips' with high vacancy rates and patterns of disinvestment" (NARPAC should have such grace!). The Comprehensive Planning draft now picks up this theme unmodified. Here are the rubs: there is no valid evidence that current land uses in DC are imbalanced towards commercial development; there is no obvious reason to believe that these abandoned strips would make quality living areas; and there is a conflicting planning goal (fifth/last bullet above) to increase "neighborhood economic opportunity" which might better occupy these 'strips'.

But the key issue is whether the "core city" is "unbalanced" with 2400 acres of commercial zoning and over 10,000 acres of residential zoning? And in which direction? One cannot overlook the fact that commercial sites require so few expenditures for city services while providing higher revenues through higher property taxes than residential properties. (see ahead).

As noted earlier above, possibly the simplest way to "afford" affordable housing, and its generally unaffordable occupants, is to turn up a few more acres of very high density commercial property, even if it is populated by commuters rather than residents. On the other hand, three quarters of DC's commercially zoned land is "barely commercial" by city standards, and NARPAC would welcome a recommendation to raise the density of DC's underutilized properties.

Is the city really out of real estate for development?

No discussion of the city's financial posture can be complete without yet again addressing the issue of the city's other 300-pound gorilla, the Federal Government. DC residents generally refrain from pointing to the obvious and real costs of sustaining half the entire region's poor households. But they never tire of pointing out the negative financial impact of the over-riding, free-loading, commuter-loving, federal government and its foreign and non-profit camp followers. DC's CFO (vastly overrated, some say) continuously feeds the flames by annually re-estimating how much tax revenue is foregone by the direct and indirect Federal presence. The city and its demagogic local politicians apparently feel that the Federal Government is the Great Unfeeling Interloper on District Land intended by some Supreme Authority for local use.

NARPAC notes that the Constitution has it the other way around, by setting aside this tract for federal use. We believe DC residents are here by the sufferance of the federal government. DC would be destitute if the federal government removed its trappings and made, say, Camden, New Jersey our national capital city instead. Until it does, we believe that DC residents should belly up to their responsibility to add to the prestige of our nation's capital, rather than detracting from our national image.

The graphic below sorts out all of the District's 29,786 acres (not including its roads and other rights of way), and shows how much revenue is generated (or lost) by its current land owners. To be sure, some revenues are foregone. But DC does not tax its own government buildings and facilities on 2/3rd as much land as the Feds occupy; and surely would not tax the 8000-odd acres of federal parkland that is fully available for local residential use. (In fact, DC's new Comprehensive Plan insinuates that local residents should control them!).

But two aspects are of primary importance for this exercise: 1) DC makes lousy use of much of its own land, generating some 60% of its property taxes from 13% of its taxable land; and 2) a large number of the new housing units proposed in the Plan will be built on federal properties now being transferred to DC for disposition. And there are well over a thousand more underutilized acres (including two former military airports!) that could eventually be transferred for the city's further economic development. The nation's capital city is not rich land-poor, it is poor people-rich.

To quantify this last assertion, consider the following: the CFO complains that by not being able to tax such properties as federal government buildings (e.g., White House and Capitol), non-profit organizations (e.g., The World Bank or the Brookings Institution), or foreign governments (e.g., the British or Japanese Embassies) the city is losing $400M per year in badly needed revenues. Throw in the world-class national parks (e.g., the Mall and Rock Creek Park) and we are being snookered out of another $225M (!). At the same time, the annual DC budget for coping with poverty is $2100M, and poverty-related federal grants bring in another $1300M. Does anyone really think it is time to sell off the Smithsonian, or kick Congress out of DC to pay DC's bills?

Does the city's 20-year plan for city living improve its long-term financial posture?

While the affordable housing advocates can propose tax revenue sources to fund the $200M needed to provide 19,000 below-market housing units, the city's planners had surely better take into account where that $200M is coming from, and just how much more those 19,000 lower income bracket households are going to require in city services, particularly the almost 8000 at or below the poverty threshold. In this final section, NARPAC returns to its fascination with trying to quantify the budgetary impact of the proposed changes in city lifestyle.

Building on the earlier section on financial implications, it is possible in a very simplified manner to allocate both the revenues and the expenditures amongst their major claimants. This is shown on the four-chart cluster below. In the upper left chart, the four major sources of revenues from DC residents are grouped by their median household income (MHI) brackets, and divided into the four tax categories (property, income, sales, and "other"). Obviously, some aggregating of the many DC tax categories in involved. This again shows that a few wealthy residents are picking up a good percentage of the tab.

The upper right chart shows the equivalent distribution of tax expenditures for residents in the same set of MHI brackets. As NARPAC has never stopped pointing out, the vast majority of city services (health and schooling) are devoted to those most in need, of which DC has way more than their share. The amount spent roughly equally among all resident households (light blue) is relatively small. Furthermore, there is a real cost of running (and financing) the government which is allocated proportionately across each working dollar spent. It should be visually obvious that residential tax revenues fall far short of paying for residential services.

The lower left hand chart shows the distribution of taxes raised from commercial enterprises in the city compared to those from its residents. These business-related, commuter-heavy properties are essential to DC's financial well being. Each sector is broken into "hi" and "lo" elements to point out that there is, not surprisingly, a very large difference in the "productivity" of the city's highest density and wealthiest sectors from "the rest". It is important to understand that less than 10% of DC's residential property generates 30% of its revenues, and that 25% of DC's commercially-zoned properties generates over 80% of its revenues. Looking for a better "balance" to support low- to middle-income diversity, inclusiveness and vibrance? Tinker with the high-end of both the residential and commercial mixes.

Modeling the "net productivity" of various household combinations

Finally, if both planners and advocates are willing to look away from their pet trees toward the relatively broad issues and trends in the forest, it is possible to illustrate whether proposed actions will improve or weaken DC's long-term financial posture. Using an interactive spreadsheet model, which may appeal to only a small fraction of NARPAC's readers, it is possible to demonstrate how changes in this or that will impact on the overall balance between revenues and expenditures. This is shown on the lower right hand chart in a somewhat strange manner. The rising red line adds up cumulative spending on each MHI bracket of residents, starting at the low end. The green line adds up the cumulative revenues derived from each MHI bracket, also starting at the low end. The question is whether revenues exceed spending at the right hand end of the chart, since there is obviously a deficit at the left end. The chart is a little bit confused by adding the "big gorillas" in both spending and revenues (poverty and commercial) at the beginning (left end) of the cumulative chart. Housing units are added (moving to the right) starting at the low end and moving up the scale. The objective is to get the green line above the red line. This depiction also shows that the magnitudes of those two "gorilla inputs" are roughly the same as the cumulative inputs from 250,000 households. In this "base case" for what is to follow, it is clear that only the existence of wealthy residents at the top end of the MHI scale allows the green and red lines to intersect, and thus balance the budget.

[Getting behind the Power Curve is a term familiar to aircraft buffs that recognize that "power" generally increases with speed (green line: moving left to right), while "drag" often stays high as flight slows (red line). As a result, if a pilot slows down too much, he gets "behind the power curve", and the slower he goes, the greater his power deficiency becomes.]

"What If" Variations

From here it is a small step to devise a model which shows the graphic results for any chosen variation in the two "gorilla bars" and/or any level of change in the number of households in each MHI bracket. Examples are shown below. The first pair simply shows the set-up of NARPAC's model, with an input table on the right, and the result shown on the left. The sample here is our (arbitrary) Case C varies from the Base Case (A) by added to DC's housing inventory only the 19,000 proposed affordable housing units, without balancing them with the proposed 36,000 market rate units. In this case, the costs rise faster than the revenues, and the budget balance shifts from a +$135M to a -$331M: an unacceptable net loss to the city budget balance of some $466M.

The next set of four charts presents three other cases in chart form, and tabulates a total of ten, including these three. In short, Case B simple cuts poverty by 20% and increases commercial revenues by 20%, with no changes to the current city households. It generates a favorable balance of +$656M, some $521M higher than the base case. Case E returns to the CHSTFR proposal and adds 26,000 upper-end housing units (not 36,000) in proportion to the current mix in the higher MHI brackets. In this case the favorable baseline balance is increased from the starting $135M to $273M, not a very big improvement for a 100,000 increase (nearly 20%!) in city population. Case G further improves the financial balance by essentially shifting the new housing 'up a notch", but adding no new units for MHI's below $30K, as well as no new units for households above $200K MHI. It is one pass at solidly increasing the middle class, and holding fixed the high and low ends of the "barbell". It is a successful shift in the favorable balance to a bit over $500M.

The lower right hand corner tabulates the results of all ten variations, ending up with a few more houses at the top end, more than the currently suggested increase in employment, and a modest cut in the overall levels of DC household poverty.

NARPAC's better solution?

"Case K" is then repeated in the chart below, showing the input table in detail. It results in a very substantial favorable shift in the financial balance to over $1,100M. In fact, NARPAC sees no reason why these should not be the goals for the national capital city 20 years hence.


Go back to:

Chapter 1: SUMMARIZING THE PLAN
Chapter 2: PROBLEMS WITH DEFINITIONS
Chapter 3: PROBLEMS WITH NUMERICS
Chapter 4: LOOKING POVERTY SQUARELY IN THE FACE
Chapter 5: EDUCATION AND JOBS
Chapter 6: MARKET HOUSING AND MARKET CARS


Any serious reader who wishes an (informal) hard copy of this text and/or charts can provide a mailing address by using the "feedback" feature immediately below. Please signify "all" or a specific chapter. Expect some modest delay, please.

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This page was updated on Feb 5, 2006


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