HUD's Coming Settlement with Dallas over Segregation Caps a Trail of Lies

This is the week something should happen in the now 5-year-old dispute between the city of Dallas and the U.S. Department of Housing and Urban Development over HUD's landmark segregation complaint against Dallas. HUD and the city have been jaw-boning each other for several weeks now over what Dallas must do to get clear of this mess.

The controversy has been painted too simply, by me as well as others, as an accusation of racial segregation. It is. It isn't really. It's complicated.

An easier way to get a handle on what HUD says Dallas did with its money over a 10-year period is to think of it as misappropriation of funds. HUD says Dallas has taken hundreds of millions of dollars in federal housing aid, pausing once a year to formally swear (or "certify," to be exact) that it is spending the money on what the money is for. And then Dallas has been spending it on the opposite. It's called "false claims."

Segregation comes into it because HUD money is always supposed to be spent in a way that will decrease racial segregation in the city. In an official letter of complaint last year, HUD said a four-year investigation had shown that Dallas was spending half its de-seg money to build luxury hotels and condo towers downtown while actively seeking to keep poor black and brown people out of those buildings.

HUD said Dallas was spending the other half of its money in racially segregated neighborhoods with a very different set of rules than the ones the city imposed downtown. In already segregated neighborhoods, the city encouraged and even pushed developers using HUD money to do projects with lots of minority renters in them.

As part of its investigation, HUD did a scientific study of segregation in Dallas, using measurements that have been tested and used in court testimony around the country. The study found that between 1990 and 2000, segregation in Dallas was decreasing. Then in 2000 the City Council adopted a new downtown redevelopment initiative that HUD says was deliberately segregationist. The study found that segregation in Dallas went back up between 2000 and 2010, and HUD says that was the result of policy, not happenstance.

The city has its defenses. One, all of the HUD-financed deals downtown that did not include low-income rental rates were granted waivers by HUD, explicitly allowing them to skirt the de-seg requirements in HUD regulations.

Secondly, the spending of HUD money to provide low income housing in racially segregated neighborhoods is not without precedent nationally and not without its defenders including black elected leaders, here and elsewhere. The rubric and rationale for this kind of program is "community development."

Even though community development reduces pressure on cities to de-segregate, it has gained credence in some quarters as elected leaders, including some black elected leaders, have come to question the value of straight-up integration. For a great summary of that history, see "Fair Housing and Community Development: Time to Come Together," by Elizabeth Julian, published in 2008 in The Indiana Law Review.

Dallas might have skated along forever, in fact, or at least a lot longer, if it hadn't over-reacted and over-reached in 2008 in shooting down the LTV Tower project at 1600 Pacific. Developer Curtis Lockey proposed to convert one of downtown's dated office towers into apartments.

Lockey, a favored son at City Hall when he first proposed his deal, was granted massive public financing after careful vetting of his credit and business history. But like everything going on downtown in the late 2000s -- like everything in the world -- Lockey's project got hit by the collapse of the equity market. Along came President Obama in 2008 with something called HERA bonds designed to address the subprime mortgage crisis, and Lockey was first in line in Dallas to apply for them.

The Dallas Housing Finance Corp. couldn't wait to give Lockey everything he asked for and more. They gave him $102 million in HERA bonds, more than two-thirds of all the HERA bonds they had in their account, but along with that they also gave him a generous allowance of federal tax credits that could be traded for millions of dollars in cash equity for his deal.

Not that you will want to read all of it, but I have included their resolution below just so you will know it was the real deal. City Hall loved this guy and couldn't wait to back his deal, until ...

Oops! Seems nobody but Lockey had read the fine print on those bonds. Using the HERA bonds meant Lockey had to make almost half his project available to extremely low income people including Section 8 voucher holders. In Dallas that means poor and working black and Hispanic people.

And there was no wriggle-room. Somebody in Washington must have known all about how HUD always lets cities out of their de-seg obligations. If you took that HERA bond money and the tax credits, you had to do a project poor people could afford, end of story.

As soon as that story got out, City Hall and all of the downtown leadership went crazy. People in and out of government imprudently created a stream of emails and memos, meeting notes and even statements on TV saying they didn't want a building downtown with that much "low income" in it (wink-wink).

Then City Hall made a worse mistake. Instead of going to Lockey and saying, "Hey, man, let's do something else," they put him through a humiliating ruse, a bum's rush of new requirements they were making up as they went along in order to kill his deal and make it look like it was his fault.

And when I say, "Lockey," I need to clear something up. Curtis Lockey was the guy who put the deal together. He had raised tens of millions of dollars from banks and investors based on the city's assurances. When the city kicked the pins from under his deal, they screwed not just Lockey but all of his investors -- something city officials even chortled about in one email. In battling for damages, Lockey has been trying to get his investors paid back as much as fighting for his own money.

Lockey has pursued a number of legal strategies. One is a "false claims" whistle-blower lawsuit, which is so complicated and arcane -- and unsuccessful so far -- that I'm not going to try here to explain it.

Separately and independently of that, he went to HUD and told them Dallas had been practicing racial segregation downtown for a decade, had been using HUD's de-seg money to do it, and his own deal was the proof.

Lockey's deal was never the sum or total of the city's segregation problems. Far from that, it was the keyhole through which the closed-door reality was revealed.

The city could always have argued that, hey, we only did what HUD allowed us to do downtown in order to make the deals viable, and what might look like two sets of books on de-seg north and south is really our attempt to carry out the worthy goal of community development in the south. They did say that. They're still saying that. And it might have held some water had it not been for the Lockey deal.

The Lockey deal is the city with its pants down. The Lockey deal and the Lockey deal alone reveals what was really going on at City Hall and in the downtown private sector leadership, where people looked on poor tenants and Section 8 vouchers as a threat worse than fire. Their argument would be -- and maybe you agree with this -- that the city simply couldn't pull off the kind of fancy-schmancy turnaround it was trying to do downtown if downtown became a neighborhood for poor people. But there's a simple answer there: Don't take federal de-seg money to do it and don't lie about what you're doing with the money.

Taking the money, lying about what it's being used for. Never a good thing.

I know from talking to Lockey over the years he has always considered the anti-Section 8 panic to be a flat-out racist argument. He saw his project as an affordable home for the people who do all the work downtown, close to major transit and other institutions, and he saw their presence downtown as driving a lot of the retail the city always says it wants, like supermarkets and maybe a big box store or two. Those are never going to be viable downtown just for the fancy-schmancy market.

Be that as it may. City Hall showed its hand in the Lockey deal, revealed its inner motivation, betrayed that it had guilty knowledge of the real impact of its actions on segregation. Without Lockey, HUD would never have investigated Dallas, and without Lockey Dallas might have been able to push back on HUD anyway.

But with Lockey's evidence, all of that double-books stuff north and south, all of the pressure on developers to seek waivers on low-income requirements, all of it takes on a very pointed appearance. I think that's why the city has been so adamant about getting HUD to drop Lockey from the settlement about to be announced. Only Lockey makes Dallas guilty of anything.

If Dallas can persuade HUD to drop its demand that the city compensate Lockey, effectively kicking Lockey to the curb, then Dallas can portray the settlement the way The Dallas Morning News did in an anticipatory editorial last week: just a bunch of meddlesome bureaucrats in Washington changing the rules on us midstream, and we have to go along with this crap to make sure we stay on the federal gravy train.

But there is the real problem - the gravy train. If HUD ditches Lockey, what does that say from here on out about the gravy train? It says a major federal agency will not only wink at its own massive expensively produced evidence of misappropriation, but that agency will slit the throat of the whistle-blower on the courthouse steps in order to get a settlement.

Why would HUD do it? Think back to those waivers. It's true that HUD seems to have a lot of complicity over the years and little inclination to change things. The change agent was Lockey. He put HUD in a position where they had to do something. Maybe they weren't happy.

This isn't just about HUD and de-seg money. It's about the federal government and all of the billions of dollars it spends in all of its programs. What happens to you if you lie to them, play them, take their money and spend it on the exact opposite of what they told you to spend it on?

Nothing? Wow. That would be something.

Resolution Declaring Intent to Issue Bonds Executed 12-11-2008[1] by Schutze