Cool City sign
The Michigan State Housing Development Authority has extended its reach into the messy business of state economic development policy, which includes the Cool Cities Initiative.

Government agencies that were created to accomplish lofty civil objectives often end up functioning as little more than political machines. The Michigan State Housing Development Authority, for example, was established to increase the supply of affordable housing for low-income Michigan residents. Today the agency is engaged in activities well beyond its scope and mission. MSHDA needs to be reformed and some of its functions privatized to realign the agency with its stated objectives.

MSHDA was created in 1966 to increase the supply of low-income housing in the state. While it now administers a number of other programs with various aims, its core purposes are spelled out in its enabling legislation. According to the legislative findings, the purpose of MSHDA was to address "a seriously inadequate supply of, and a pressing need for, safe and sanitary dwelling accommodations within the financial means of low income or moderate income families or persons."

To carry out this function, MSHDA administers a number of federally authorized programs, including loan programs and the Low Income Housing Tax Credit.

The Low Income Housing Tax Credit administered by MSHDA allows developers to take a federal tax credit for a portion of the money they invest in the project. MSHDA is limited in the amount of credits it is authorized to offer, and each year more projects request these credits than MSHDA can allocate. State housing authorities are allowed to award $1.75 in credits for each state resident, which means that MSHDA can offer roughly $18 million a year. To allocate those credits, MSHDA has developed a way to pick which projects get funded.

One would expect that the projects that are best-financed and offer the most housing using the least of the limited federal resources available would receive the agency’s highest ranking. But there are other criteria for the tax credit, including "walkability," environmental impact and whether the developers have a plan to encourage greater ethnic diversity. Projects also score points if they receive other government incentives.

Michigan also sets aside some of its credits specifically to be used for "Cool Cities," a state-run program designed to encourage younger workers to reside in Michigan cities. MSHDA designates 5 percent of its credit cap, or about $600,000, to Cool Cities projects.

In addition to questionable spending priorities, the program suffers from excessive complexity. In fact, developers score points by simply being able to jump through all of the application hoops within four months of applying.

Outside of the tax credit, MSHDA devotes considerable resources to projects that have little to do with low-income housing. Instead, the agency seems more and more interested in getting into the game of economic incentives. Last year MSHDA started a Southeast Michigan Development division and Urban Revitalization division. According to its five-year action plan, MSHDA also envisions itself as being the "convener" of state incentives.

These divisions are costly. There are four divisions within MSHDA that can be considered part of the economic development scheme. The 67 employees working in these divisions cost MSHDA approximately $5.2 million annually.

In fact, with pressure building on state finances, MSHDA adopts employees laid off in other agencies. When the state cut positions from the Michigan Economic Development Corporation last year, MSHDA picked them up. As a result, MSHDA’s general operating expenses ballooned by 25 percent in fiscal year 2006.

MSHDA has its hands in projects that have little to do with increasing the stock of low-income housing. For example, MSHDA provides financing to the Michigan Broadband Development Authority. Last year, MSHDA had to write off $8.6 million from its line of credit to the MBDA because of MBDA’s poor performance.

Whether MSHDA can ever effectively provide affordable housing through central planning is dubious. But it certainly won’t be successful if it continues to digress from its assigned mission. Federal policy allows for MSHDA to administer rental assistance programs and lending programs geared toward increasing the stock and quality of low-income housing and helping people with low incomes to pay for housing. This is where MSHDA’s focus should lie. How MSHDA can use a degree of privatization to advance its objectives will be discussed in the next edition of Michigan Privatization Report.

James M. Hohman is a fiscal policy research assistant at the Mackinac Center for Public Policy.

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