April 30, 1997 - From the April, 1997 issue

Century Housing’s Changing Goals: The Perils of Privatization

By Carlyle W. Hall, Jr., Esq. Affordable Housing Advocate and Plaintiffs’ Attorney in Keith vs. Volpe

Privatization has become a favorite buzzword as a solution for government inefficiency and waste, as programs once administered by public agencies—from public golf courses to prisons—are turned over to non-profit and for-profit entities. The hope is that the new entity will save dollars and run a tighter ship while remaining true to the program's mission and still providing for substantial public accountability.

But privatization is not without its perils. The Century Freeway Housing Program's recent transfer of more than $100 million in formerly public moneys and assets to a newly established non-profit, the Century Housing Corporation, established one of the largest non-profit entities in the affordable housing field, and vividly demonstrates these perils.

For the past few months, the affordable housing community has been abuzz, wondering what is going on at Century. A battle has erupted in federal court over Century's announced desire to cease operations as a provider of gap subsidies for affordable housing in the largely impoverished, heavily minority Century Freeway corridor communities. Instead, Century now proposes to serve as a conventional lender charging near market rate interest for both housing and non-housing loans throughout the Los Angeles metropolitan region. 

The Los Angeles City Council recently passed a resolution unanimously condemning Century's proposals. When other affordable housing community members (such as the Southern California Association of Non­Profit Housing Providers, or SCANPH) have expressed their concerns about Century's proposals, they have been met by Century with threats of SLAPP suits for alleged "defamation" and "interference with [Century's] prospective business relationships." When the plaintiffs in the Century Freeway litigation, who are represented by this writer, opposed Century's proposals in court, Century countered with a motion for sanctions against the attorneys. 

The 1981 Consent Decree 

Keith v. Volpe, the Century Freeway case that spawned the Century Housing Corporation began in 1972. Among other matters, the plaintiffs protested the loss of more than 8,800 housing units affordable to lower income families in the freeway corridor cities that would result from the I-105 freeway's construction. After a court injunction delayed freeway construction for seven years, the federal and State defendants agreed to a landmark settlement, widely hailed at the time as providing for building a new kind of freeway "with a heart."

Besides providing a dedicated median strip for the construction of what has become the MTA's Green Line light rail transit facility, the Consent Decree mandated an extensive affirmative action program for jobs and businesses involved in the freeway's construction and a massive affordable housing program. Unique in the nation, the affordable housing program required deep gap subsidies—reaching all the way down to very, very low income families earning less than 25% of median county income—to produce replenishment housing within the corridor communities. Funded 92% by federal government appropriations from the gas tax and the remainder from State tax moneys, the housing program mandated that the "maximum number" of affordable units be constructed with these Consent Decree funds. Additionally, the Consent Decree established several "watchdog" monitoring agencies (including the Century Freeway Affirmative Action Committee and the Corridor Advocate) to ensure that the Decree's intended beneficiaries would actually receive all promised benefits. 

Initially, the housing program projected that some 3,700 affordable units could be built with the Consent Decree funds, with many more units achievable if those funds were "leveraged" with other moneys. But delays and inefficiencies plagued the program from the beginning. 

The Restructured Program 

In 1988, the court ordered the housing program restructured, reducing the federal government's role in approving housing projects and establishing a new-locally based State agency, the Century Freeway Housing Program (CFHP), within the Department of Housing and Community Development. CFHP was ordered thereafter to put its subsidies into affordable housing projects as "soft seconds" (behind the secured first trust deed funds typically provided by banks and other conventional lenders), leveraged or matched on a 1 to 1 basis with other public and private moneys. 

New moneys were added to the Consent Decree funds, most notably in 1993, following the civil disturbances in Los Angeles, when the plaintiffs agreed to limit the future financial obligation of the federal and State governments to pay for the continued administrative costs of the program in return for an additional infusion of money and assets into the program. 

Privatization of the Housing Program 

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In late 1994, G. Allan Kingston, then CFHP's Director, commissioned a study showing that continuing inefficiencies and waste in CFHP's administration of the program would cause either the loss of many potential affordable units or the premature demise of the program. The parties thereupon engaged in numerous discussions and evaluations of the program, leading to a further court order in July 1995 "privatizing" the program. 

Of somewhat more than $300 million in taxpayer dollars appropriated over time for the program, more than $ 100 million in assets remained unspent at that time. The privatization order transferred these assets to a new non-profit corporation, Century, in return for Century's intervening in the case as a defendant and agreeing to be bound by all then-existing Consent Decree obligations of the housing program. The parties also agreed to study ways that the Consent Decree might be modified in the future, with the concurrence of the parties, in order to achieve greater efficiencies and to possibly take advantage of the program's new non-profit status. 

When the parties could not agree on the composition of the non­profit's board of trustees, this decision was turned over to Judge Harry Pregerson, who had presided over the case since its inception. To the surprise of many, in September 1995, Judge Pregerson appointed a board comprised principally of insiders, persons formerly associated with administering CFHP's program, and bankers, lawyers and businesspersons. Allan Kingston, the former head of CFHP, was appointed as both CEO and a trustee

Shortly thereafter, Kingston hired one of these industry insiders, Dan Lopez, to be the chief consultant to assist the parties in studying possible privatization opportunities. In March 1996, by which time he had been a Century board member for almost 6 months, Lopez unveiled his report.

Privatization Runs Amok 

The Lopez report's recommendations were staggering in their nature and breadth. First, Lopez proposed termination of all further "watchdog'' services by the Consent Decree support entities, on the premise that they were no longer needed because Century's new board of trustees was now managing the program. Second, Lopez proposed vastly altering the Consent Decree's substantive restrictions, so as to give Century's board the "flexibility" to manage the Consent Decree funds as it henceforth saw fit. 

In particular, Lopez proposed—and Century's board approved—a "business plan" in June 1996 adopting a radically different style and substance of operations. Instead of continuing to disperse the remaining Consent Decree funds to subsidize affordable housing through the provision of “soft seconds,” Century would become a lender of secured first trust deed moneys, in competition with banks and conventional lenders, charging near market-rate interest of almost 8% on its funds. To minimize their risks and maximize their opportunities to "grow" the so-called the Consent Decree "endowment," Century would make future loans on both housing and non-housing projects (including commercial movie theaters, shopping centers and the like) throughout the entire Los Angeles/Orange County metropolitan region.

Century thereupon relocated from its former modest offices in Inglewood to what recent newspaper stories have labeled "plush" new quarters in the Corporate Pointe area of Culver City. And it requested that Judge Pregerson modify the Consent Decree to grant it full authority to implement the Lopez report recommendations. Century's trustees urged Pregerson that, because he had appointed them, he should now "trust" them by giving them the requested "flexibility." 

Plaintiffs vigorously opposed Century's proposals, pointing out that they would effectively remove meaningful accountability for the future of the program. Plaintiffs' eminent expert witnesses, John Maguire, the former head of the Los Angeles City Redevelopment Agency's housing program, and Jennifer Bigelow, former Director of SCANPH, testified that the loss of further Consent Decree deep gap subsidies for affordable housing would be a severe blow to the corridor communities, coming at a time when other government subsidy programs for affordable housing are threatened. They also questioned how Century could qualify for tax exempt "charitable" status, since its principle operations were being redesigned to become a profit-making engine. 

Last month, Judge Pregerson granted Century's motion to modify the Consent Decree in all requested respects. Plaintiffs anticipate filing an appeal to the Ninth Circuit.

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