Using “Pay For Success” to Improve the Energy Efficiency of Affordable Housing

The following blog post was written by John Griffith, Senior Analyst and Project Manager at Enterprise Community Partners, an organization that helps finance, build and advocate for affordable housing in communities across the U.S.

Pay for Success initiatives condition government payments for service providers on the outcomes they achieve. This innovative funding strategy targets taxpayer dollars to programs based on effectiveness, achieving better results for communities and allowing flexibility for providers to choose the best strategy.

Pay for Success pilot programs are beginning to take root across the country and we are seeing more Pay for Success policy language included in federal legislation. Back in December, President Obama signed into law the Fixing America’s Surface Transportation (FAST) Act, which authorizes federal highway and transit funding for the next five years. Included in the law is a small but important provision that authorizes a new “Pay for Success” demonstration within the Department of Housing and Urban Development (HUD) to improve the efficiency of water and energy systems in government-supported apartments.

Here’s how the demonstration would work. The federal government currently spends about $7 billion each year on energy bills in HUD-assisted buildings. Through certain renovations to improve energy and water efficiency, HUD could significantly cut utility costs while meaningfully reducing instances of asthma and other health problems for residents. But in today’s fiscal environment, it is highly unlikely that HUD will receive the federal funds necessary to make these cost-saving improvements on their own. HUD faces other barriers to these investments as well, including regulatory impediments and split incentives between building owners and the residents who make consumption decisions.

The agency is now authorized to enter into contracts with outside entities, like Enterprise Community Partners, who would raise private capital and work with energy service companies and others to make appropriate and economically justifiable upgrades. HUD would only pay investors back—plus a financial return—if predetermined savings were achieved over a certain period. If the savings are not achieved for whatever reason, the investors would not recoup their upfront investment and would incur losses.

By entering into these “Pay for Success” contracts, HUD now has the opportunity to overcome barriers to achieving long-term cost savings without costing the federal government anything. The demonstration will help improve up to 20,000 HUD-assisted units receiving project-based rental assistance, supportive housing for the elderly or supportive housing for persons with disabilities.

Enactment of the FAST Act was the culmination of nearly two years of advocacy, during which Enterprise worked with HUD, Stewards of Affordable Housing for the Future (SAHF) and the Low Income Investment Fund (LIIF) to help advance the proposal. The demonstration was first introduced by Reps. Dennis Ross (R-FL-15), Jim Himes (D-CT-4) Emanuel Cleaver (D-MO-5) and John Delaney (D-MD-6). Their bill, the Private Investment in Housing Act of 2015 (HR 2997) passed the House in July by an overwhelming bipartisan vote. House Financial Services Committee Chairman Jeb Hensarling (R-TX-5) included the proposal in a package of amendments to the FAST Act, and his continued leadership ensured that the provision was included in the final bill.

Sens. Susan Collins (R-ME), Sheldon Whitehouse (D-RI) and Barbara Boxer (D-CA) worked to ensure the provision was included in multiple Senate bills, including the FY16 THUD spending bill. Similar language was also included in a comprehensive energy bill introduced in March 2015 by Sens. Jeanne Shaheen (D-NH) and Rob Portman (R-OH).

The HUD demonstration has the potential to be a “win-win-win” for all involved. Residents get healthier, more energy efficient homes, investors collect a small return if the program is successful, and taxpayers enjoy the savings. Enterprise looks forward to working with HUD and our partners to successfully implement this innovative demonstration in the coming months.

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