Home, Sweet (Privatized Military) Home

The goals of faster and cheaper military housing may have been achieved through privatization, but problems including unreliable builders and an unwillingness to fix persistent problems including mold has led to legal action by tenants.

It is now mostly forgotten that President Clinton and Vice President Gore actively promoted privatization. In fact, Gore headed the National Performance Review (NPR) which was assigned to promote privatization of government functions, although the preferred the term was “commercialization” and, rather than speak of “people” or “citizenry,” the NPR used the term “customer.”

One initiative, begun by President Clinton and continued under the Bush II administration, was privatizing military housing. In 1996, when the initiative began, the DoD owned, operated, and maintained over 300,000 family housing units.

By the Bush II years, privatized housing for the military was well underway. In late 2007, the Marine Corps Times reported that privatized military housing had been a good deal. “By partnering with the private sector, the services have invested $1.66 billion in family housing, while the private sector has invested more than $20 billion.”

According to a 2009 Government Accountability Office (GAO) report, the military was providing $600 million to support the construction of privatized housing. The GAO observed, “The Army believes that its increased investment in [housing] will make it easier for the developer to obtain additional financing to build or renovate enough houses to meet the expected increase in housing demand.”

However, the privatization process has been more complex than a private company’s building or buying houses that would then be rented or sold to soldiers. Instead, under privatization, the military leases land to a private developer for 50 years. The developer will either build new homes or renovate existing homes on the leased land. The houses are then leased primarily to military service members and their families. According to the GAO, “in a typical privatized military housing project, a limited liability company or partnership is formed for the purpose of carrying out a specific housing project or projects.

The GAO report also observed, that if the military makes “an investment in the limited liability company or partnership, the department may possess some decision-making authority for certain major decisions with regard to the project.” (italics added) How that retained public decision power might play out remains to be seen.

For now, however, lurking within this complex process are many questions: If private sector housing for the military is not produced in adequate amounts and quality by the private market and is only produced if there is public financing, what does this mean for the project’s future success? In what way does the private sector promote the success of the venture? Many of these projects are not “greenfield” projects in which building takes place on land that does not have buildings on it. Instead, the DOD is using privatization to move aging and inadequate military family housing from its inventory to the private developers’ inventory.

In a deal structured in this way, is the transfer of land from public to private ownership essentially a government “fire sale”? What will happen as the new or renovated construction ages? Will the private investor walk away when it receives all the benefits it can easily get from the deal and before its bottom line suffers from the increased financial liability of aging housing? Is the land leased for 50 years so that the private developer can qualify for a tax subsidy that lets the developer write off its investment in much less time than 50 years? If that is the case, isn’t the tax break actually a public subsidy for the private contractor?

Let the Bad Times Roll

The Clinton-Gore embrace of commercialized public services took place during relatively good times. However, more useful lessons about policy can be learned from bad times. An example of those lessons can be found in a 1998 study by Dr. William C. Baldwin, a historian in the US Army Corps of Engineers Office of History.

Baldwin studied housing for military families after World War II, a period in which Congress was unwilling to spend money on military housing. To meet the need for family housing a number of schemes were tried, including mortgage guarantees, leasing, rental guarantees, barter, and privatization. According to Baldwin, “Each program fell victim to a variety of maladies ranging from the smallest technical details to the largest political and diplomatic trends.”

Among the forces Baldwin identified that affected the success of military housing, the most important was paying attention to the parties’ incentives. For example, in one program, the developer set rents based on the amount of money the developer needed to pay off the mortgage, maintain the property, and make a profit. Military families liked the housing, but the rent exceeded renters’ housing allowances. Examples like this show there is something to say for a Baldwin analysis that examines how policies fail.

Failure can be a powerful teacher. The 2009 GAO study of military housing, written soon after the 2008 financial crash forced sober analysis. The authors of that study saw credit drying up and developers’ credit ratings decline just as large numbers of troops were returning to the United States and needed housing.

Today’s Military Housing

Now, half a decade after the 2009 GAO study of military housing, the trend has been toward privatized housing. For example, family housing at Goodfellow Air Force Base at San Angelo, Texas is privatized. Hunt Companies owns the housing and is “responsible for maintaining, repairing, constructing and managing the community.” Privatized military housing exists throughout the country and is promoted with attractive photos of houses, families, and amenities.

However, military officials define the goals of military housing privatization in financial terms, as obtaining “private capital to leverage government dollars, make efficient use of limited resources, and use a variety of private-sector approaches to build and renovate military housing faster and cheaper for American taxpayers.”

The goals of faster and cheaper may have been achieved, but the military housing initiative has also been subject to problems and repeated negative oversight reviews. For example, a 2006 Government Accountability Office (GAO) report found a number of concerns with privatized military housing. For example, the GAO found that contractors had failed to provide reliable information to the government, had failed to forward money the contractor owed the government, had been unable to meet projected occupancy rates, and had lower than expected revenues. These failures made the projects’ financial failure likely.

A second problem – toxic mold – has dogged military housing for years, and resolving that problem has been made more difficult because of privatization. Tenants with serious mold problems in privatized housing have sued Lincoln Military Housing, the private partner that “manages about 4,400 rental units in the region in a public-private partnership with local military bases.”

Lincoln’s lawyers claimed Lincoln had immunity from being sued because it was carrying out what used to be a government function. As a result, it argued, Lincoln was entitled to the same protection from lawsuits – “sovereign immunity” – that governments have traditionally enjoyed. The trial judge rejected that argument; however, the existence of that claim complicates the trial.

Privatization trends will continue to evolve over time. Indeed, it would not be surprising at some point to see a return to President Kennedy’s decision that privatization creates unnecessary complications and that the best and most direct way to build and maintain military housing is through public funding.