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

4. Privatization – A Permanent Program • FY’05 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? • 3:1 leverage • Privatization Life Cycle Cost better than Milcon • Maximize private sector debt (50/50 Rule) • Government involvement and risk minimized Obviously, no change

7. 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

9. 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)

10. 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.

11. 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)

12. Questions?