Capital Fund Appropriations Are Up, But Capital Needs Remain High
In 2023, 6,585 public housing developments in the U.S. and territories received an average of $3,411 per unit in capital fund awards from the U.S. Department of Housing and Urban Development (HUD). With this funding, public housing authorities (PHAs) addressed a variety of capital needs, such as elevator repair, mold remediation, or roof replacements in the units they own and operate. Average per-unit awards ranged from a low of about $2,400 in Iowa to a high of about $4,500 in New York. Some developments received more funds than others based on need, even within the same state or authority. Chart 1 shows average per-unit funding by state in 2023. Not included in the map are the Puerto Rico Public Housing Administration and the Guam Housing Urban Renewal Authority, which received about $3,200 per unit and about $4,300 per unit, respectively.
Chart 1
According to HUD's development funding reports, the number of public housing units decreased by 4% between 2021 and 2023, to approximately 930,000. In part, this decrease was the result of PHAs repositioning assets from public housing to more predictable Section 8 revenue streams, through which they can potentially leverage additional outside dollars for unmet capital needs. In the past three years, the total number of average per-unit capital fund grants rose by 48%, partly reflecting an increased availability of federal funds.
Rated Capital Fund Bond Market
HUD's capital fund financing program allows PHAs to leverage a portion of future capital fund awards to secure debt service for bonds or bank loans, the proceeds of which are used to address needed repairs. Among rated transactions, new-money issuance accounted for most of the issuer participation in the program. The rise in interest rates in recent years has slowed new issuance and reduced refunding opportunities for most PHAs. As interest rates remain higher for longer, we do not anticipate a change in trend for new issuance.
Ratings on capital fund financing program bonds are high investment-grade
S&P Global Ratings publicly rates 25 transactions related to PHAs' capital fund financing program bonds. While all public ratings' outlooks are currently stable, rating changes typically reflect either fluctuations in capital fund awards received by HUD or our opinion of an authority's managerial capacity. As shown in chart 2, 92% of public ratings are 'AA-'.
Chart 2
Factors underpinning our capital fund bond ratings
Federal funding. Capital fund appropriations flow directly from HUD to the indenture trustee or collateral agent to pay debt service without passing through the PHA. This structure reduces the risk that PHAs would redirect funding for expenses other than debt service payments. Federal appropriations for the capital fund program have increased by an average of 5% annually since 2001, including one-time supplemental appropriations of $4 billion from the American Recovery and Reinvestment Act (ARRA) in 2009. Based on the federal appropriations through 2023, the federal funding history for at least 20 years or more averages 3%-5% annually (even when including declines). Given the strength of, and reliance on, this appropriation to repay debt service, we typically cap ratings on these transactions at two notches below the sovereign rating, or 'AA-'. The two-notch cap reflects the application of our "Federal Future Flow Securitization" (FFFS) criteria. A change in the assessment of factors within the FFFS criteria, such as the funding history of the federal entity, could result in a different rating cap for capital fund financing bonds. Chart 3 reflects the historical trend in budget appropriations, including the 18% year-over-year increase in the 2023 grant awards.
Chart 3
Debt service coverage (DSC). Between 2021 and 2023, the increase in appropriations led to an average increase in DSC for rated transactions of 0.88%. In calculating DSC, S&P Global Ratings uses the annual capital fund award received by the PHA, which is pledged to repay bondholders. In addition, to help analyze the potential effect of appropriation risk, we stress test coverage levels, assuming an annual reduction in appropriations consistent with the historical trend, to determine if DSC is sustained at least at 1.0x over the term of the financing. The average DSC for publicly rated capital fund transactions was about 7.28x in 2023.
Managerial capacity. In analyzing a PHA's managerial capacity, we consider four main areas:
- The strategic planning process,
- The consistency of strategy with organizational capabilities and marketplace conditions,
- Management expertise and experience, and
- Comprehensiveness of risk management standards and tolerances.
Most rated PHAs' managerial capacities reflect a track record of obligating and expending capital fund awards in a timely manner, providing sufficient oversight of development activity. An experienced PHA typically has good communication with HUD and outlines specific, attainable operational goals in its annual and/or five-year plans submitted to HUD, which also delineate clear measures for achieving those goals.
Half Of All Rated Capital Fund Bonds Scheduled To Mature Within 10 Years
The rated universe of capital fund bonds has shrunk in recent years, as some bonds matured and ratings on others were withdrawn at the request of the issuers. Seven publicly rated bond issues are scheduled to mature by the end of 2027, while five are maturing by the end of 2031 and the remaining 13 will mature by 2043. The DSC for bonds maturing in the near term is less exposed to future years' potential reductions in federal funding. Given recent activity trends and an absence of new transactions that leverage capital fund appropriations, we do not expect bond maturities to significantly deviate from those presented in chart 4.
Chart 4
Table 1
| Capital fund bond issuers and key rating drivers | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Authority | Capital fund bond rating | Fiscal 2023 capital grant award ($) | Fiscal 2023 DSC (x) | S&P Global Ratings assessment of managerial capacity | ||||||
| Boston Hsg Auth MA | AA-/Stable | 36,413,003 | 5.71 | Very strong | ||||||
| Brockton Hsg Auth MA | AA-/Stable | 4,637,868 | 6.91 | Strong | ||||||
| Buffalo Municipal Hsg Auth NY | AA-/Stable | 13,743,780 | 13.92 | Adequate | ||||||
| Clinton Hsg Auth (City of) MO | AA-/Stable | 388,010 | 4.98 | Strong | ||||||
| Cuyahoga Metropolitan Hsg Auth OH | AA-/Stable | 19,189,795 | 6.54 | Very strong | ||||||
| District of Columbia Hsg Auth DC | A+/Stable | 25,036,454 | 4.53 | Adequate | ||||||
| Elmira Hsg Auth NY | AA-/Stable | 1,251,526 | 7.07 | Strong | ||||||
| Fort Wayne Hsg Auth IN | AA-/Stable | 2,174,953 | 8.48 | Strong | ||||||
| Hartford Hsg Auth CT | AA-/Stable | 3,531,369 | 7.33 | Strong | ||||||
| Lackawanna Mun Hsg Auth NY | AA-/Stable | 1,666,200 | 5.76 | Strong | ||||||
| Lucas Metropolitan Hsg Auth OH | AA-/Stable | 8,347,574 | 9.49 | Strong | ||||||
| Meridian Hsg Auth MS | A+/Stable | 3,153,129 | 3.00 | Strong | ||||||
| Montgomery County Hsg Auth IL | AA-/Stable | 469,114 | 4.60 | Strong | ||||||
| New Bedford Hsg Auth MA | AA-/Stable | 7,140,651 | 3.71 | Strong | ||||||
| New Haven Hsg Auth (of the City of) CT | AA-/Stable | 3,033,147 | 7.55 | Very strong | ||||||
| New York City Hsg Auth NY | AA-/Stable | 708,753,000 | 12.58 | Adequate | ||||||
| Newark Hsg Auth NJ | AA-/Stable | 23,161,630 | 10.55 | Strong | ||||||
| Paducah Hsg Auth KY | AA-/Stable | 2,381,624 | 5.06 | Adequate | ||||||
| Pawtucket Hsg Auth RI | AA-/Stable | 2,401,000 | 6.63 | Strong | ||||||
| Puerto Rico Pub Hsg Admin PR | AA-/Stable | 174,391,169 | 4.41 | Strong | ||||||
| St. Louis Hsg Auth MO | AA-/Stable | 8,977,188 | 8.54 | Strong | ||||||
| Syracuse Hsg Auth NY | AA-/Stable | 7,511,575 | 13.71 | Strong | ||||||
| West Haven Hsg Auth CT | AA-/Stable | 1,551,868 | 6.93 | Strong | ||||||
| Woonsocket Hsg Auth RI | AA-/Stable | 4,034,077 | 6.80 | Strong | ||||||
| DSC--Debt service coverage. | ||||||||||
Related Research
- Through The ESG Lens 3.0: The Intersection Of ESG Credit Factors And U.S. Public Finance Credit Factors, March 2, 2022
- Federal Future Flow Securitization, March 17, 2017
This report does not constitute a rating action.
| Primary Credit Analysts: | John T Mariotti, Englewood + 1 (303) 721 4463; john.mariotti@spglobal.com |
| David Greenblatt, New York + 1 (212) 438 1383; david.greenblatt@spglobal.com | |
| Secondary Contacts: | Nora G Wittstruck, New York + (212) 438-8589; nora.wittstruck@spglobal.com |
| Caroline E West, Chicago + 1 (312) 233 7047; caroline.west@spglobal.com |
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