Philadelphia Housing Authority Receives Second Highest S&P Grade

The Philadelphia Housing Authority (PHA) was issued an “AA-“rating (ICR) from Standard and Poor’s (S&P) Rating Services due to its strong overall management and strategic plan. This is the second highest rating issued by S&P and the highest rating issued to date to a housing authority. Ratings in the “AA” category are considered high investment grades. This means PHA is considered an attractive option for investors.

“Standard and Poor’s believes the Philadelphia Housing Authority’s management has the wherewithal to balance new development and rehabilitation prudently and in a manner that makes the most use of its limited resources to improve it overall housing stock,” said Valerie White a credit analyst with S&P.

S&P’s ICR is an opinion of the overall financial capacity of an entity to meet its financial obligations. The rating sends a signal to investors of the overall creditworthiness of an entity as an investment partner. In rating housing agencies S&P relies on an overall credit analysis which takes into context the various business types in the public housing sector. Other factors in the rating including the overall history of the public housing industry, the level of government support for public housing, the earnings and financial strength of individual agency, the experience and past performance of the agency and comparison to other agencies based on size, market and business profile.

PHA is the fourth largest agency in the country with 15,000 units in 76 developments including traditional public housing, low income housing tax credit units and scattered site until It also administers more than 16,000 housing choice vouchers. Overall, PHA serves more than 84,000 residents throughout Philadelphia.

In addition to containing a strong overall management structure and strategic plan which supported its mission, the S&P rating found strong demand for PHA services as evidenced by a waiting list of more than 50,000 individuals; a strong development arm which maximizes external resources in developing mixed-finance projects; and additional financial and income support from these mixed income and mixed use sites.

S&P did recognize the trend in reduced federal funding for capital needs and operating subsidies. S&P found that the long-term capital plan needs could require significant resources which could reduce its net working capital and weaken its overall profitability ratios.

Q&A with Valerie D. White, Standard and Poor’s

Valerie D. White is a director in the tax-exempt housing and structured group of Standard & Poor’s Corporate & Government Ratings Division. As the sector leader for public housing ratings, Valerie's role includes the development of ratings criteria for PHA capacity evaluations, credit assessments, securitized capital fund transactions, and issuer credit ratings. Valerie also works on ratings for international social housing providers. In addition to the PHA transactions, Valerie rates issues in the affordable housing program, rates debt for selected large-scale state, local and municipal structured finance transactions, and is the primary analyst for a number of state housing finance agencies.

Valerie came to Standard & Poor’s after more than eight years at the New York City Housing Authority, where she served as chief of the Statistics Department, executive policy assistant for the Board of Commissioners and General Manager, and deputy director for Asset Management and Private Market Operations. Valerie holds both a B.A. in Communications and a J.D. from Fordham University. She is the author of the published note, Modifying the Escalera Consent Decree: A Case Study on the Application of the Rufo Test, 23 Fordham Urb. L.J. 377 (1996); which was cited in Escalera v. New York City Hous. Auth., 924 F. Supp. 1323 (S.D.N.Y. 1996). During her law school tenure, Valerie served as Managing Editor of the Fordham Urban Law Journal. She also holds an M.S. and a Certificate in Organization Development from New School University. In 2007, Valerie was named on the 25 Influential Black Women in Business list for The Network Journal magazine.

1. Why did Standard and Poor’s decide to issue credit ratings for housing agencies serving low-income households?

Standard & Poor's has been rating bonds issued by housing authorities since the early 1990s. Back then, the transactions were primarily affordable real estate transactions that provided additional non-public housing options. Many of these ratings were in markets, like the Pacific Northwest, where there was available land for new construction development for affordable housing. In some cases, housing authorities were able to take advantage of the low income housing tax credit (LIHTC) subsidy program which was in its early years at the time. Some were even part of multi-layered HOPE VI development projects. This era seemed to be the early stages of housing authorities finding alternative business means to meet the growing demands of the markets they served.

The 1998 Quality Housing and Work Responsibility Act of 1998 provided housing authorities with the authorization to use appropriated funds to back debt issuances. We rated our first Capital Fund Financing Program Bond (CFFP) for the Chicago Housing Authority in 2001. As part of developing the criteria for rating these bonds, we determined that public housing is a low business risk entity with an extremely strong essentiality evidenced by the high level of demand that exceeds the supply in this segment of the housing market. We were also comfortable with the long-standing government support for public housing in the form of subsidy through annual Congressional appropriations. We were able to identify trends of appropriation levels and apply certain stresses based on the recent and current funding environments to get comfortable with rating appropriated back date. Since our first CFFP rating, we have completed almost 30 public ratings for capital fund-backed bonds, including several pool transactions like the Maryland PHA pool issued by the state housing finance agency, and the Puerto Rico Public Housing Administration transaction--for which we just rated its second issuance, a subordinate tranche, a few weeks ago. We have also completed well over 100 CFFP confidential credit assessments for private loan programs for such lenders as Fannie Mae and Bank of America.

Our work rating housing authority issues over the years lead us to believe that housing authorities were strong entities that could qualify for investment grade Issuer Credit Ratings (ICR). We published criteria in November of 2007 outlining our ratings approach for public housing authority ICRs. I am pleased to say we released our first ICR for the Philadelphia Housing Authority ("AA-") earlier this month.

2. In rating housing agencies, what are common characteristics of agencies receiving high ratings from S&P?

Creativity and aggressive business strategies coupled with prudent financial management and planning seem to be a common thread among the housing authorities that have either transactional ratings or an ICR. One of the key strengths in the Philadelphia ICR rating was the agency's strong management and the creative business strategies. The authority demonstrates the ability to plan for the current funding environment and employ alternative strategies to meet demands. This includes attracting LIHTC investment and other subsidies for community redevelopment and the establishment of non-profit subsidiaries to provide the means to carry out development plans. In addition, Philadelphia has established a long-standing and successful partnership with its state housing finance agency--which is the allocating LIHTC entity and has also served as conduit bond issuer on a number of the authority's mixed-finance projects. We have worked with a number of authorities in the West for which we have rated their transactional bond issues--including the San Diego Housing Commission, the Vancouver Housing Authority and the King County Housing Authority. These authorities have issued property-specific bonds to fund the costs of developing affordable housing to create mixed-income communities that help support additional low-income housing in their respective markets.

For the CFFP ratings, those are primarily structured transactions that rely on the appropriations trends coupled with legal protections to the bond holder in the form of certain HUD approval and legal obligations under the bonds documents. However, the past performance of the authority does come into play. Authorities that have a track record of completing modernization projects timely demonstrate one of the elements that are considered a key strength in the rating.

3. How does an S&P’s favorable rating enhance a housing agency’s portfolio in the eyes of an investor?

Standard & Poor's assigns ratings to public housing authorities or to a particular bond transaction and publishes rating reports based upon S&P published criteria. The rating reflects Standard & Poor's independent opinion of the creditworthiness of the issuer or the bonds. Many investors use our rating reports as one source of information to make investment decisions.

4. Public housing authorities have battled the Federal government over the last several years for increased funding to operate its programs. Based on your experience, how much funding must the Federal government provide to housing authorities to calm any concerns expressed by investors?

At present, Standard & Poor's still believes public housing capital fund financing program transactions are strong--however--continued declines in overall Capital Fund appropriations could have a long term impact on the credit quality of bonds in that sector. Creditworthiness for CFFP bonds is not solely a function of the amount of federal funding, but also takes into account the housing authority management performance, as well as the parameters of the HUD approvals and the legal structure of the transaction.
For PHA ICRs, it is likely that housing authorities who rely a great deal on federal subsidies may experience declines in margins as federal subsidies continue to decrease. This trend could be problematic to authorities in analyzing their earnings capacity if there are no additional income streams to supplement the overall revenue of the authority. Authorities that find other earning streams to supplement their income in the face of shrinking subsidies provide a more diverse and stronger financial business model for investor to consider.

5. There are some in the industry who believe housing agencies need to reassess how they are structured and function in order to continue to meet the needs of low income households. What are some of the tools housing agencies should use to help plan for the future?

Successful housing authorities have engaged creative business strategies that are more akin to operating as a real estate owner and operator. This concept includes finding means to augment federal subsidies through developing business opportunities that can provide other income streams including but not limited to developer opportunities, property management functions and asset assessment and sales for other-than-public housing in their communities. Like any business, identifying contingency strategies to counteract revenue declines in the federal subsidy income stream can be an avenue for housing authorities to maintain an effective level of service to the low-income and affordable housing markets in their communities.

Mortgage Crisis Briefing

The National Low Income Housing Coalition will hold a congressional staff briefing on July 23 to review its policy recommendations to help low income families impacted by the mortgage crisis. NLIHC is expected to ask for a one-time supplemental appropriation of a $300 million increase for the Emergency Food and Shelter Program.


2008 Campaign

Periodically aviewfromdc seeks to provide information about individuals under consideration for the position of vice president. In this posting we look at Pennsylvania Governor Ed Rendell and former Pennsylvania Governor Tom Ridge.

Currently Pennsylvania Governor Ed Rendell (D) and former Pennsylvania Governor Tom Ridge (R) are considered candidates for the position of vice president for their respective parties. Concerning their support for housing and community development, they are both considered to be supportive of the issues related to housing and community development but have very different approaches to address these issues. Of the two Rendell is considered the one whose star shines brightest.

Under Rendell finding for housing and community development has increased when compared to Ridge’s tenure. There has been more money pumped into improving the development of downtown areas in local communities. Rendell supported smart growth initiatives believing that if you build the core (downtown) you create more effective policies for the surrounding area.

Ridge had an interest and seemed to support housing and community development but took a different approach. He worked to create new initiatives like improving downtown through financial incentives and new technology but not at the same level of dollar support to match. He created a community development bank which was to be funded by private sector dollars versus all public dollars but it never materialized because no funding became available. His support was also not reflective in the budget most program funding levels either stayed stagnant or received cuts. Ridge also enjoyed a Republican legislature while he was in office while Rendell must contend with a bipartisan legislature.

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