Blue Pog Democrat 🔰

Frank Braconi, who is an actual economist, inadvertently asked me a softball question about why the operating expenses of non-profit housing owners are usually double those of for-profit owners. I also note that public housing operating expenses are usually triple those of private, for-profit owners. Amazingly, even with the orders of magnitude of additional spending, the non-profit buildings tend to have worse physical conditions and the public housing buildings are well known to be the worst of all. With apologies in advance that this post may be too technical and into the weeds for some, here we go. As Frank surely knows, there are these standard economic concepts called Principal Agent and Moral Hazard. Let's examine these in terms of the three kinds of housing ownership. In for-profit housing, the owner/manager is the Principal Agent and its motivation is the long term maximization of income and return on capital reinvestments. When it comes to "purchased items" this owner carefully negotiates and bids costs with suppliers, minimizes waste, avoids costly violations and fines, fears foreclosure and litigation and reserves capital to reinvest in well-planned component replacement and money saving innovations. Examples include heat timers, utility submetering and complex self-insurance structures, to key off Frank's questions below. Utility submetering, for one, reduces consumption by 2/3 in practice: a huge savings! There is very little Moral Hazard here because the Principal Agent is the direct beneficiary of the cost savings and it is not a judgment-proof entity. In non-profit housing, we encounter our first Moral Hazard. The owner is an entity that by virtue of being the owner of last-resort, has an soft loss backstop from the public. The non-profit's manager, acting as Principal Agent, still has to do all the work of a manager but is only compensated by a salary, also a hazard. So in the non-profit scenario, the manager will do everything to maximize its salary but only impose as much careful effort as is needed to prevent the building from literally collapsing. Since this type of property doesn't have to pay real estate taxes, an amount which usually would be around half of net income, all of that money can be squandered on careless and indifferent negotiation and purchasing with suppliers. It should surprise no one that careless purchasing often comes with emoluments for the Principal Agent, another Moral Hazard. This owner is also less risk averse, because when fines and violations arrive resulting in eventual litigation judgments, there is no owner to worry about the outcome. They become just another delayable payable. Conditions naturally deteriorate but at least the building doesn't fall over. And finally we have the public owner who truly has no "skin in the game." Perversely, the public owner cares mostly about how to MAXIMIZE the operating costs because the Principal Agent and Moral Hazard problems are here in full effect. The salary to manage public housing is a pittance, so the Principal Agent may only earn their fair compensation through emoluments. The legendary graft at agencies like NYCHA is well documented and consistent at public housing throughout the world. Moreover, prevailing wage regulations already force any operating expense that includes a service to cost at least double, even before any mischief takes place. Of recent note, the well publicized case of the NYCHA employee-plumber Jakub Markowski who allegedly earned $465k via overtime rigging. When the property earns fines and violations, develops truly dangerous conditions or employees behave with utter gross negligence, only the taxpayer is on the hook and no one ever loses their job or pension thanks to the representatiion of powerful labor syndicates. With this incentive structure, it should be no surprise at all that building conditions are atrocious and it costs $527k to renovate a single public housing unit.