Housing Privatization: New Directions and Developments

1
Housing Privatization New Directions and
Developments

• Bob Helwig, Deputy DirectorOffice of the
  Secretary of DefenseHousing Competitive
  Sourcing Office
• January 24, 2005

2
Overview

• Eliminating the Budget Cap
• Combining Authorities
• Using Credit
• Whose Money is It, Anyway?

3
Brief History of the Budget Cap

• 850 M Budget Authority would run our in Nov 04
• DOD had proposed cap elimination in FY04 Failed
• DOD proposed 1 B increase in FY 05
• CBO estimated the budget cost at 7-8 B
• Budget Committees agreed with CBO
• House passed app. bill to increase cap (effect?)
• SASC increased cap 1 with modifications
• HASC increased cap but not until FY 06!
• MHPI Patron Saint saved MHPI

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Privatization A Permanent Program

• FY05 National Defense Authorization Act
• Eliminates caps on budget authority for both
  accompanied and unaccompanied housing
• Eliminates the 2012 termination date, making the
  MHPI authorities permanent.

5
The OSD Role in Housing Privatization

• Satisfy the 2007 goal to eliminate inadequate
  housing
• Defend the program from those who would do it
  harm
• Ensure good projects for the next 50 years

6
Future MHPI Project Review Process?

• Concept, Solicitation, Award, Scoring, Transfer
  of Funds
• Written briefs with cc of notifications and
  approvals?
• Valid Housing Requirements
• Sorry, no change
• OSD policy/guidance
• Ease a bit to ensure 2007 goal?
• 31 leverage
• Privatization Life Cycle Cost better than Milcon
• Maximize private sector debt (50/50 Rule)
• Government involvement and risk minimized
• Obviously, no change

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Combining Authorities

• Lease and Limited Partnership?
• Lease and Direct Loan/Guarantee?
• Lease, Limited Partnership, and Guarantee?
• Lease, Limited Partnership and Direct Loan?
• Lease, Direct Loan and Differential Lease
  Payment?

8
New Credit Rules

• Interest Rate Increases
• Stepping up the interest rate over time can
  reduce the subsidy rate, thereby reducing the
  scored amount.
• Led to multiple step-ups to maintain 1.05 DSC to
  minimize the score.
• Had an effect on the risk profile such that MHPI
  loans no longer reflected risk profile presumed
  in OMB scoring calculator
• New Rule
• Loans with interest rate step ups must start at
  200 bp under OMB discount rate and there may only
  be one step-up

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Credit Subsidy Buckets for Direct Loans

• The 1997 Raines Memo set forth the scoring rules
  for the early projects
• Established risk and recovery rates for direct
  loans and limited guarantees
• All loans and limited guarantees treated the
  same one bucket for all risks and recoveries.
• OMB has directed that we create a risk and
  recovery model that reflects different risk.
• New model will have four risk and recovery
  classifications (buckets)

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New Risk and Recovery Rates

• At concept stage, projects will be assigned to a
  bucket depending upon four risk and recovery
  characteristics geography, financial structure,
  occupancy, and housing condition
• Each bucket will have a different risk and
  recovery rates which drive the overall subsidy
  rate.
• OMB will agree up-front to the bucket assignment.
• At award, assuming project characteristics are
  unchanged OMB will be inclined to score the
  project according to the initial bucket
  assignment.

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Whose Money is it ?

• MHPI provides authority to transfer Milcon
  housing funds into the Family Housing Improvement
  Fund (FHIF)
• Silent on the issue of parceling funds identified
  for specific installation
• Dynamic markets, modeling uncertainties, and
  subsidy minimization affect project subsidy
  calculations, and drive transfers of funds
  between projects
• Appropriations committees have stated position
  that they decide where government money is spent.
• Requires great care in notifying committees on
  use of funds saved due to MHPI. (Risk of
  Rescissions)

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Questions?