Doing Good with the Pension Fund


Chevy Chase. -- Want to guess whose piggy bank the nation's housing secretary is shaking to create low-income housing for the masses?

The American pensioner, that's who.

The piggy bank is loaded -- pension funds account for $4 trillion in assets. That's fully one-third of all assets in the United States.

God knows there's a need for "affordable housing" in the land. The country is shy at least 4 million rental units for poor families. Baltimore is one of the many cities where both welfare and working families are trapped in poverty by high rents.

It would be foolhardy for Henry G. Cisneros, secretary of the Department of Housing and Urban Development, to count on the federal budget to wipe out the housing deficit. It's not exactly a prime moment to climb Capitol Hill in search of gigantic new federal housing programs. So it's logical that he would opt, instead, for a relatively small federal program and then use that to create leverage to tap the nation's pension plans for really big-time money.

Hence, with much fanfare, Mr. Cisneros this week formally launched a "national partnership" between HUD and six large pension-fund investors. The aim? To create 3,000 low-income housing units with mortgages funded primarily by pension capital.

How does the program work? Quite simply, the government promises to offer generous rent subsidies to poor families who inhabit apartment buildings that are built, or rebuilt, through mortgages made by cash-rich pension plans.

In a program pushed quickly through Congress and federal regulatory channels, rent subsidies totaling $100 million will go into the apartment buildings being financed with pension money. It's all part of a plan to breathe new life into HUD's old Section 8 program, which has pumped federal rent subsidies into rental units for years.

So far it seems that the subsidy bait is working. A number of pension plans stepped forward recently to compete for the chance to do deals through the new HUD program. Six pension && investors have already signed on.

The $100 million program is just the beginning, Mr. Cisneros said in an interview Tuesday.

Once this pilot project proves itself, HUD hopes to garner $500 million a year in government rent subsidies as a lever to create $7.5 to $10 billion worth of new or refurbished rental housing for the poor.

Pension plans are Johnnys-come-lately to real-estate investment. Only in the late 1970s did they begin moving timidly into bricks, mortar and mortgages. Today pension portfolios hold $110 billion worth of property, but most of that is in trophy office towers, industrial buildings and regional shopping malls. The gigantic Mall of America in Minneapolis, for example, is backed by teachers' pension money.

Until recently, when more pension plans have been dabbling in middle-income apartments, pension investment in residential real estate has been almost unknown. That's why it came as a surprise two years ago when the California Public Employees Retirement system (CalPERS) announced it would team with local homebuilders to back new home developments designed for middle-income buyers throughout the state.

Now CalPERS, along with money managers from pension plans in Philadelphia, New York and elsewhere are coming forward to partake in the new Cisneros initiative. Why the sudden interest in placing pensioners' money in housing for low- income families?

The answer is two-fold.

For one thing, HUD fashioned the new Section 8 initiative to give pension plans generous rent subsidies that will help keep new and refurbished apartment buildings filled. A tenant who is getting much of his monthly tab paid by the government is unlikely to move.

For another thing, there are mounting political pressures on pension-plan investors to think not only about rates of return but also social objectives. The CalPERS home-building initiative was forged during the depths of the last recession, when developers and builders found it hardest to get bank financing and the California economy hit bottom.

Pension-plan trustees, with a "fiduciary responsibility" to protect the interests of present and future retirees, have traditionally favored traditional investments in stocks and bonds rather than real estate of any description. But they are feeling pressure to put more weight on political objectives. Labor Secretary Robert B. Reich -- whose department oversees pensions -- has fallen in love with the idea of using pension money for social purposes. And jobs can be created from the apartment houses HUD would build with pension money.

Ideally, pension money would house the homeless, create jobs and spur economic development while earning handsome returns for retirees. But let's look at the record.

Pension plans have proved none too savvy at investing in real estate. Since the commercial real-estate market took a tumble in 1989, pension funds have lost hundreds of millions of dollars on their office towers and other properties. And the numbers on potential yields from the new low-income apartment ventures are still very scarce.

Some socially purposeful investment funds, such as the AFL-CIO Housing Investment Trust have fared well financially, but nothing on the scale envisioned by Mr. Cisneros has ever been attempted. HUD should proceed with caution as it stalks new capital to house America's poor.

Real-estate investments, even more than stocks and bonds, are subject to the cycles of boom and bust. It may be too soon to count on America's pension piggy banks to find long-term capital for HUD.

PD Ellen James Martin is a business reporter on leave from The Sun.

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