On his visit to California in September 2019, President Donald J. Trump underscored the urgency of the homeless crisis in America’s largest state. On the eve of his visit, the White House’s Council of Economic Advisers issued a special report, “The State of Homelessness in America.” It attributes the problem, correctly, “to decades of misguided and faulty policies” and proposes deregulation of the housing markets, among other solutions.

Herewith one more: the simplest, fastest, and cheapest way to end the US homeless crisis is adult foster care. This will match the national objective to take the homeless off the streets with the incentives of publicly paid providers to house the homeless.

No new funding is necessary nor is any new publicly financed housing construction. Just rechannel the existing public funding from a panoply of programs, agencies, and nonprofits to private-market caregivers. They will literally take the homeless off the streets and house them in existing homes and newly acquired private residences, with government fees financing private mortgages.

Adult foster care is a combination of boarding houses for five to six persons, whether singles or families, with one or another extent of nursing care. For the most severe cases of mental disability and drug addiction, foster care can be provided in group homes, rented or newly mortgaged, and supervised by the outside caregivers. Caregivers receive basic training and earn state licenses. The foster care fees will be differential, negotiated on a case-by-case basis with the paying agencies, depending on how hard specific cases are and how good the housing and caregivers are. This outsourcing of the welfare state matches government contracts with the private supply of services at the market price.

After decades of government efforts and tens of billion dollars spent, the homeless problem persists. This policy failure is due to the mismatch between the government objectives and the incentives of recipients.

First, the incentives for temporary housing keep the current homeless on the streets. Federal and state subsidies pay local government agencies and nonprofits to pay the homeless, in money and in kind, to stay homeless. Shelters, short-term hotels, free food, cash allowances, emergency room health care, and the like provide temporary relief and perpetual homelessness.

Second, the incentives for permanent housing crowd out the homeless from subsidized housing in favor of the non-homeless. Federal rent support comes from an array of programs called Continuum of Care. It goes to the tenants, selected by local agencies and nonprofits, who can afford to pay 30 percent of their adjusted gross income for rent, the balance of the rent covered by American taxpayers.

Conveniently, local agencies and nonprofits own and manage these apartment buildings on the federal dime. The federal government issues tax credits to state governments and local housing agencies which award them to private developers incorporated as nonprofits who, in turn, raise financing by selling the tax credits, a dollar-for-dollar reduction of the federal tax liability, to investors.

What starts as the help for the homeless ends up as corporate welfare.

Given the funding constraints, local housing agencies and nonprofits are interested in selecting the highest-paying tenants for the rental units, regardless of their actual homeless status. The selection bias is enormous. Only the upper tier of the homeless qualifies to pay the rent. Lo and behold, eligibility includes not just the actual homeless but also the applicants whom agencies and nonprofits assess to be at risk of becoming homeless without this program. Moreover, this assessment accepts self-certification.

These non-homeless can readily pay the tenant portion of the rent, and the agencies and nonprofits select them to be housed. The program intended for the homeless becomes another public housing provision for the non-homeless, a backup option for people who did not meet the criteria or quotas for other subsidized housing programs such as HUD’s Section 8 voucher program. To qualify for the latter, an applicant’s income must fall below 50 percent of the area’s median income. No income eligibility criteria exist in the Continuum of Care programs, literally opening the door to the tenants self-certified as at risk of becoming homeless, regardless of their income level.

Indeed, various studies show that, when the new housing units are added through the federal Continuum of Care programs, only as much as 10 percent of the beds go to the actual homeless, their rent-paying upper tier, and almost 0 percent to the unsheltered homeless on the street, while over 90 percent of the beds are allocated to the non-homeless. Federal subsidies pay local agencies and nonprofits to carry out this diversion of resources and keep the majority of the homeless on the streets.

Throwing more money at this policy failure is counterproductive. Already in California, the cost runs up to $40,000 a year per shelter bed. One can rent an apartment in San Francisco or a house elsewhere for this price. Still, San Francisco wants to issue a $600 million bond (it’ll come up for a vote in the city’s November election) to add shelter beds, build affordable housing, and help people with mental illness and drug addiction.

But that bond is only a down-payment on a much larger problem—or so research suggests. A report issued earlier this year by the Bay Area Council Economic Institute estimates that to house the 28,000 homeless in the nine counties of the San Francisco Bay Area would cost $12.7 billion over 10 years, at $450,000 per person, plus $3.5 billion to maintain supportive services.

Rechanneling resources to the private market to directly house the homeless in adult foster care would save public health and money. According to this 2017 report by the US Inter-Agency Council on Homelessness, the average cost of the homeless person to taxpayers runs in the range of $30,000 to $50,000 a year in federal, state, and local funding. This is largely higher than the US median wage earnings of $38,000 and the median income per adult person of about $33,000 in 2018, per the US Census Bureau.

To wit, half of America’s adult population lives on less than is spent on the average homeless citizen. And this does not include the private costs of falling public sanitation and quality of life to businesses and residents.

Adult foster care would be more effective and efficient. The cost of adult foster care to taxpayers would amount to $25,000 to $30,000 per person a year. This includes $7,000 for Medicaid, $3,000 for mental and substance abuse treatment, $3,000 for food, $5,000 for room (half of what the government contributes in rent support in single units in Continuum of Care programs), and $7,000 to $12,000 in the caregiver fee, depending on each case.

That’s not cheap, but it’s much cheaper than the current public cost. And it should eradicate homelessness instead of perpetuating it. The fee of $7,000 to $12,000 per person, when housing six persons, would provide $42,000 to $72,000 in income to the caregiver—along with a healthier life to the tenants, and physical, fiscal, and moral relief to the public.

For the best results, there should be a tripartite contract between government agencies, private caregivers, and the housed homeless who become clients. Living conditions, the degree of care, terms, mutual responsibilities, fees, penalties, etc., should be specified, including the rights to enforce and reject substance abuse rehabilitation and psychiatric treatment.

The tripartite contract would ensure the double control, by the payer government and by the clients. The bidding for contracts by foster caregivers would be competitive. Relatives who had erstwhile abandoned their hardcore kin to the streets could now join the ranks of compensated caregivers and compete for their precedence over professional strangers.

Competitive bidding and the tripartite contracts would help find the best match between specialized caregivers and clients with specific needs. Differential fees case by case will remove the selection bias. The hardest clients will find homes, not just the easiest. Families who experience temporary hardships and become homeless because of a job displacement, medical problems, or domestic issues, but who are potentially productive and self-supporting, would especially benefit. Foster homes would stabilize their life and health; help them recover and retain their jobs and income; and enable them to save money and find their own housing. They will temporarily enter and permanently exit adult foster care." 

Housing itself is part of the matching. The homeless who are employed—some 20 percent of the total—or who would find employment thanks to being housed could choose to pay extra for better accommodations. Caregivers should receive a bonus for each client uplifted toward self-reliance. They could receive bonuses for finding their clients vocational or on-the-job training and for help with securing jobs. As for incentives, successful rehabilitation of clients from drug addiction would merit a special bonus. Caregivers would lose payments and competitive-bidding reputation if their clients returned to the streets or shelters.

Supervisory foster care in group homes can serve as the last resort for the severest cases of the homeless, those with mental illnesses and drug addiction. Various agencies report than from 20 to 39 percent of the homeless have severe mental illness and from 16 to 26 percent suffer from drug addiction.

Some may be too dangerous to house in the caregivers’ homes. For these clients, group foster homes with the outside supervision by special caregivers is a more practical solution. Supervisory caregivers can rent houses or take new home mortgages financed by their foster care fees. This approach would enhance both home ownership and adult foster care.

The role of special caregivers may be most suitable for active and retired police officers who currently supplement their income through low-paying private security jobs and can leverage their skills and experience for more rewarding pay and human service. Bonuses should apply for successful drug rehabilitation of clients and for finding them jobs that they can perform.

Adult foster care in supervised group homes may be more expensive than that in the caregivers’ homes. Still, other alternatives, from shelters to incarceration or mental institutions, are as or more expensive and, most important, ineffective. The average cost of incarceration was about $32,000 per person in 2015.

Institutionalization in mental facilities would cost on an annual basis from $280,000 to $300,000 per inmate depending on the complexity of psychiatric treatment, and past government attempts of cost reduction per diem have led to more extended lengths of stay by providers. Adult foster care, supervisory or in homes, with medications and outpatient treatment is a more efficient alternative.

Several policies can complement and improve adult foster care for the homeless, the first and foremost being deregulation of housing markets, removing rent control and zoning and environmental restrictions for new construction.

According to the Trump White House’s homelessness report, deregulation can reduce US homelessness by 13% in the eleven major metropolitan areas, and by as much as 54% in San Francisco, 40% in Los Angeles, 38% in San Diego, 36% in Washington, 23% in New York, and 22% in Seattle. Deregulation would increase the stock of affordable housing in the long run.

While new construction may take years, rent decontrol could have an immediate effect. This is a broad policy which would benefit many housing seekers, including the working segment of the homeless families in major cities. Another immediate effect that could benefit many would be the abolition of the minimum wage, at least for the homeless, or at least the introduction of a sub-minimum wage for them. Low-skill workers with mental, psychological, and substance abuse problems or physical disabilities, and former inmates could start their career and transition to regular life using adult foster care as an uplifting platform.

The role of government agencies is to ensure that public money is well spent and there is minimal fraud and zero abuse. At some future point, an Airbnb-type coordinated network of caregivers might emerge and enhance the matching and accountability. Clients would apply from public library computers, caregivers with vacancies would respond, and government agencies would administer the contract. As for now, market incentives will send foster caregivers to the streets to pick up clients, bring them to the local agency offices to sign a contract, and take them off the streets to their new home, once and for all, for the good of all.

Yes, all of this constitutes an outside-the-box approach to solving California’s chronic homelessness problem. But does anyone believe the status quo is working?

Michael S. Bernstam, a Hoover Institution research fellow, is an economic demographer who studies the centrality of income redistribution for the taxonomy and evolution of economic systems, long-run economic growth, demographic transition, social revolutions, conflict, and other social changes.

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