A proposal to cut the basic allowance for housing for uniformed military personnel would negatively affect the quality of 54 ratings that Moody's Investors Service maintains relating to 24 privatized military housing projects, the rating agency said Monday.
Reducing the BAH, along with cutting the number of active-duty soldiers in the Army, were among the proposals in the fiscal 2015 budget preview that Defense Secretary Chuck Hegel presented last week. These measures are part of a larger strategy to lower defense spending, Moody's said.
The BAH is an allowance that military service members receive in addition to regular pay. Service members can use the allowance for housing part of the rated projects or for other housing in the local markets. Rents for the projects' housing units are equal to the BAH paid to the service member tenant, so the allowances provide "credit strength to the projects by largely eliminating tenant credit risk for occupied units," Moody's said.
While the BAH has been designed to offset 100% of service members' housing costs since 2005, Hegel proposed reducing the allowance to cover 95% of housings costs, with soldiers paying the rest of the costs out of pocket. Additionally, the Department of Defense would stop subsidizing rental insurance. Reversing the 100% policy could lead to additional reductions of the BAH in the future and signals that the DOD "cannot achieve targeted fiscal cuts without curbing increases in compensation," the rating agency said.
The projects whose ratings would be affected by the BAH reduction are carried out under the DOD's Military Housing Privatization Initiative. They consist of 88,144 housing units and have $9.6 billion in outstanding debt. In each of the projects, a private entity owns and operates housing units on or near military bases under a long-term lease with DOD, Moody's said.
The projects Moody's rates have benefited from steady growth in BAH revenues, and the proposed policy change could negatively impact debt service coverage. If the BAH is reduced, rental revenue would decline unless leases are amended to require tenants to make out-of-pocket payments for the difference between the rents and the allowance. Adding an out-of-pocket contribution would add an element of credit risk to the MHPI projects, and it would make the initiative less attractive, the rating agency said.
The DOD proposes reducing the current active-duty Army force to 440,000 to 450,000 people from 520,000 people. Reducing the number of Army uniformed personnel will affect the 11 MHPI projects Moody's rates that are associated with Army bases. However, the rating agency said it couldn't estimate the credit effect of the reduction on specific projects until the DOD announces how the cuts are distributed among bases.
