By Eric Fruits
Cascade Policy Institute,
Government is pretty bad at running government, but it’s even worse at running business. In Oregon, government runs a lot of business. The state’s a liquor wholesaler. Metro runs a zoo, a convention center, solid waste processing, and is the landlord for arts organizations. The City of Portland runs a water utility. In every case, consumers pay more and get less than they would if these businesses were privately run. Most projects rarely meet deadlines and often run substantially over budget.
Over the past few years, local governments have jumped into a new business: housing construction. In 2016, Portland voters approved the city’s $258 million affordable housing bond. Two years later, voters passed Metro’s $653 million affordable housing bond. Combined, the measures promised to build or “preserve” 5,200 units of affordable housing.
“Preserve” is a slippery concept. Rather than building new units, the money from the measure can be used to buy existing units, and the politicians can claim they kept their promise to voters. Although Portland’s program has been up and running for more than three years, the city has opened only two projects. Both projects — The Ellington Apartments and 105th and E Burnside — were already completed or near completion when the city acquired them. The city didn’t add 314 new units; it acquired 314 units that were already in the pipeline. In other words, the city spent more than $50 million in bond money to add exactly zero new units of affordable housing.
Looking to the future, Mayor Ted Wheeler claims bond funds will provide a total of 1,424 affordable units. But, looking closer, 30% of those units were or are already used as housing. If the city’s projections are correct in its estimated mix of new and “preserved” housing, Portland’s bond will produce fewer than 1,000 new units.
Since Portland’s program ramped up, not a single new construction project has been completed. The first project, at the site that was once the Safari strip club on SE Powell Boulevard, was acquired by the city at the end of 2017, with construction expected to begin early last year. Somewhere along the way though, the project got bogged down in red tape and a year later the site still sits empty.
In contrast, across the street from the Safari sits a former bowling alley that has been converted to a Target store. The bowling alley closed in May 2017, and the new Target opened its doors in October 2018. Redevelopment can happen fast with the right incentives. Government rarely has the right incentives.
Portland and Metro’s affordable projects are OPM projects— “other people’s money.” No one’s as careful with other people’s money as they are with their own, and the government is no different. Profit-seeking developers simultaneously try to minimize costs while maximizing revenues. It’s an act of balancing incremental benefits with incremental costs. They have an understanding of how much things cost and how much consumers are willing to pay for those things.
Government has an entirely different set of incentives. On the one hand, because of vouchers and other subsidies, affordable housing tenants are less price sensitive than market rate housing tenants. Because of the shortage of subsidized affordable housing, there’s always a waiting list. On the other hand, government is not as cost-conscious as profit-seeking builders.
“Community engagement” efforts draw out timelines and add to costs. Research for the Oregon Housing and Community Services (OHCS) Department reports projects that had four or more community meetings cost 8% more on average compared to those that had three or fewer community meetings. Preference is given to minority- and women-owned firms, with costs as only one of many factors in contractors. Projects subject to prevailing wage requirements that mandate union wages cost 9% more per unit than those that did not pay prevailing wages. Other policies, such as those that encourage use of environmentally sustainable or energy-efficient building materials, also add to the costs but provide no measurable benefits.
All these additional costs add up. The OHCS study reports the average affordable housing project in the state costs $225,000 per unit. In contrast, projects funded with the Portland bond are projected to have an average cost of $284,000 per unit, while Metro projects are anticipated to come in at a staggering $365,000 per unit. Neither Portland nor Metro have demonstrated any interest in bringing these costs down. They seem to miss the obvious observation that by lowering costs, they can deliver more units.
A professor of mine remarked that politicians and bureaucrats aren’t bad people — they just have different incentives. Unfortunately, those misplaced incentives can cause real harm, especially when taxpayer money is used to compete against private enterprise. This is true with liquor wholesaling, running convention centers, and delivering water. And it’s doubly true with housing construction. The Portland area housing bonds are well on their way to being yet another case of over-promised, under-delivered.
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