WASHINGTON -- In the 1930s, they were hailed as the salvation of the inner city. Now many are broken-down hulks, homes to gangs, drug dealers, and addicts.

But, almost 60 years after construction began, the bill for high-rise public housing projects is still due. The federal government quietly pays principal and interest on billions of dollars of federally guaranteed tax-exempt bonds issued to finance the projects; it will continue doing so well into the 21st century.

While the story of the projects' decay has been told in articles and recent books, such as The Promised Land by Nicholas Lemann, there also is a story in how the projects came to be financed with tax-exempt bonds and why the financing technique has left the federal government with a tab that it will take decades to settle.

In all, local housing authorities sold about 2,100 bond issues totaling $10.46 billion for the projects between 1949 and 1984. There are still 1,983 issues outstanding worth $5.59 billion. There is no exact figure for the hundreds of cities that took part, according to the Department of Housing and Urban Development.

How It Happened

Direct federal funding, not tax-exempt bonds, was supposed to pay for the projects, according to a 1986 report, Financing Public Housing: Past, Present and Future, by Jane Lang, a former general counsel of the Department of Housing and Urban Development.

The story begins in the early 1930s, when the the National Industrial Recovery Act, passed as part of President Franklin Roosevelt's New Deal, directed the federal government to acquire land for public housing projects and offer grants and loans to developers to build the units. But in 1935, a federal court ruled that the government did not have the powr to condemn land for housing, Ms. Lang said in her report.

That decision "stimulated the creation of local housing authorities to assume this role," Ms. Lang's report states. By 1937, when Congress approved the comprehensive National Housing Act, 29 states had readied themselves by passing enabling legislation to establish 46 local public housing authorities. The 1937 act created the Federal Public Housing Authority which, for the next 12 years, lent money to the local authorities to build the projects.

But in 1949, Congress decided the projects should pull in more private money and directed the authorities to sell tax-exempt municipal bonds to raise the full amount of project costs.

Funds from private investors could be obtained cheaply, because interest rates on authority bonds were running at least than 1%, according to Ms. Lang.

The bonds, which usually had 40-year maturities, were issued under the housing act's Section 11b, rather than under the tax-exempt bond section of the Internal Revenue Code, Section 103 -- a fact that would come back to haunt the program about 30 years later.

Each authority issuing bonds contracted with the federal government to receive loans that would cover repayment of the debt. That in effect set up a federal guarantee on the bonds.

In 1974, as long-term interest rates began going through the roof, a federal interest rate ceiling on the bonds forced local housing authorities to stop issuing bonds and start selling notes, which were rolled over each year until the federal government stopped their sale and began retiring existing project notes in 1979.

Even without interest rate problems, the bonds would have been doomed by 1984. In that year, Congress passed legislation mandating that all future tax-exempt bond issues comply with all requirement of Section 103 of the IRS code, including bonds issued under the Housing Act's Section 11b. Because the 11b bonds could not meet arbitrage restrictions and other curbs, they could not be considered tax-exempt, and they were no longer issued.

Meanwhile, the housing projects had become pockets of crime and drug dealing. Officials in the housing community now believe the basic idea of the projects was riddled with problems.

"You just can't pile tons of poor people on top of each other and expect it to work," said a lobbyist who asked not to be identified.

The projects were located in poor sections of town, and each had large populations of very low-income people. Buildings were constructed on the cheap and oft had design details that bred crime -- outdoor elevators, for example.

Beyond that, there were frequently no support services to help tenants cope with problems. As buildings deteriorated, local authorities had little or no money for repairs.

A major reason for those problems, the lobbyist said, is a near-total absence of private-sector involvement -- other than the sale of bonds to investors. Without the profit motive, there was little incentive to keep the project going, to keep things from deteriorating, the lobbyist said.

In The Promised Land, published in 1991, Mr. Lemann offers an indepth look at how one family, the Hayneses, fared when they moved from Clarksdale, Miss., to Chicago, and ended up in a public housing project known as the Robert Taylor Homes. Mr. Lemann chronicled their problems with poverty, crime, and drugs, and how, in the end, several members of the family moved back to Claksdale.

Mr. Lemann singled out the housing project as a primary culprit for the family's problems.

"The one government program that can fairly be accused of having gone wrong in a way that deeply harmed the Haynes family is public housing, especially the deadly effect of having no tenant screening in massive high rises that are segregated and filled with large families," Mr. Lemann wrote in the afterword of The Promised Land.

"The atmosphere of these federally funded projects -- the rampant crime, the drugs, the sense of absolute apartness from the rest of American society, the emphasis on an exaggerated and misguided version of masculinity that glorifies gang membership and sexual conquest -- clearly helped to cause the troubles of most of [the Haynes] children."

Revenues Decay With Projects

The decay of the public housing projects had a drastic effect on the financial situation of the bonds issues to build them.

The federal government had expected the local authorities would eventually receive enough income from the projects to pay off their loans. But operating revenues declined with the projects and the number of their tenants. The government had to conclude it wouldn't see a return on the money it had spent and is continuing to spend on the bonds' debt service.

"My understanding is that, at the beginning, [Washington] thought loca authorities would generate enough revenues to pay back the loans," said a HUD official. "But if just hasn't happend that way."

The official said some authorities send money, but "nowhere near enough." That has left the federal government facing a bill that HUD places at about $14 billion between now and 2015, when the last bonds mature.

As with the projects themselves, hindsight has made it easy for many to say that in this case bonds were a bad idea from the start.

"It seems kind of silly to begin with," since the cost to the federal government now is much higher than it would have been with a program of grants and loans, a HUD spokesman said.

But, some lobbyists argued, bonds can still be good financing tools for housing.

Mary K. Nenno, associate director for policy development with the National Association of Housing and Redevelopment Officials, said the experience with the public housing projects does not mean there is no place for municipal bonds in the housing arena.

Tax-exempt financing "was and is a very useful finansing device," Mr. Nenno said. "The advantage of using bonds is not only that you spread the cost out [over many years] but you also bring private investment money into the program."

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