Use NYC's Public Pension Funds to Supercharge Affordable Housing Production and Preservation

The next mayor and comptroller can speed New York City's recovery by working with public employee pension funds to increase investment in affordable housing, as they have in response to previous economic distress.

The COVID pandemic exposed the unprecedented severity — and the adverse consequences of — New York City's extraordinary shortage of affordable housing. The next mayor must meet this crisis head-on by increasing production and preservation of affordable housing to reduce and prevent homelessness, expand housing access and stability, and provide a foundation for improving an array of societal and familial outcomes. Increased housing investment will help jumpstart the city's economy by generating jobs and economic activity at a higher rate than just about any other kind of capital investment.

Re-energizing New York City's pension funds' historic commitment of 2 percent of its $250 billion of assets ($5 billion) for community investments would offer an opportunity to scale up the city's efforts to address its housing needs. Coupling these pension dollars with streamlined public programs can expand the preservation and new construction of smaller properties which are not easily served by the more complex Low Income Housing Tax Credit program (LIHTC). Importantly, it is in these properties where large numbers of low and moderate-income households reside.

This has been done before. In response to the housing distress experienced by New York City in the 1970s and '80s, the pension funds initiated economically targeted investments (ETIs) in 1983 with the Community Preservation Corporation (CPC) to finance the preservation of deteriorated housing. The program performed well and grew to become part of the critical infrastructure for rebuilding the city's low and moderate-income communities.

CPC was established in 1974 by the major New York City banks to work with the city to reverse the housing decline that had resulted in thousands of abandoned and deteriorating apartment buildings. By 1982, CPC had invested over $90 million to restore 11,000 apartments, with only one $300,000 loss that was fully recovered by the City's Residential Mortgage Insurance Company (REMIC). In that same year, CPC sought to expand its long-term funding resources and turned to the New York City employee pension funds. It was a good match as the pension funds' long-term liabilities — the workers' pensions — needed long-term assets to meet those obligations.

The pension funds' investments had to meet a "prudent business standard," meaning the return had to be at a market rate commensurate with the risk. CPC's request for 30-year fixed-rate mortgage funds to rebuild apartment buildings — supported by the recently enacted mortgage insurance program of the State of New York Mortgage Agency (SONYMA) — was an ideal fit.

How did the CPC investments measure up to the comptroller's "triple bottom line?" First, the investments were secure. From 1983 through the end of 2011, over $1.5 billion of CPC loans was invested by the city and state funds without a loss of either interest or principal. The losses that did occur, about $6 million, were fully covered by the SONYMA insurance. Second, the return on investments was impressive: in 2011 the city pension funds reported that the yield on the CPC investments was among the highest in its fixed income portfolio. Third, and perhaps most impressive: in that 28-year period, CPC pension fund investments financed the renovation of about 55,000 apartments in New York City.

This high level of production occurred as the pension funds invested into a well-developed system for renovating deteriorated buildings. CPC and the city had pre-approved standards for renovation scopes, loan underwriting, borrower qualifications and other items. This streamlined process enabled CPC to work with small, inexperienced property owners, who otherwise might be unable to deal with complex public programs. Loans closed expeditiously, typically six to nine months after application, and closing costs using pre-approved documents were low.

Sometime in 2012, several changes were made by the then-city comptroller that diminished the program's effectiveness. The benchmark rate was changed and a minimum rate of 5.25 percent was set for the funds' 30-year forward priced mortgages — high compared to current rates. Additionally, duplicative processes were added to transactions, delaying the funds' purchase of insured mortgages and adding carrying costs. Higher rate financing, particularly if it's above market, narrows the range of lower income properties that can be financed and/or increases the need for public subsidies.

The pension fund program has proven to be extraordinarily responsive and flexible in meeting a wide range of housing needs in historically underserved neighborhoods. It has supported the rebuilding of vacant city-owned buildings during the Koch and Dinkins eras, helped restore defaulted properties to physical and financial health in periods of recession, and financed both affordable rental and cooperatively-owned housing, as well as senior and special needs housing.

A similar need is now upon the city as it seeks to deal with the ravages of COVID. The comptroller and pension trustees might look back at 1983 as an example of how a sound "economically targeted investment" program consistent with a "prudent business standard" can work in concert with city programs. A reinvigorated pension fund program provides an opportunity for the city to diversify its sources of financing for housing, and be less dependent on bond financing. Leveraging this financing with streamlined public programs may extend city housing programs to a much broader array of buildings.

Michael Lappin was the past CEO of the Community Preservation Corporation (1980-2011). Currently he heads Lappin Associates, providing development and advisory services for affordable housing.