Congressional Justifications for 1998 Budget Estimates

Public and Indian Housing
Public Housing Operating Fund

a/ The 1997 Appropriations Act provided funding for operating subsidies under the newly created "Preserving Existing Housing Investment" account. For fiscal year 1998, funding for operating subsidies is requested under the Public Housing Operating Fund.

b/ Includes outlays of pre-1997 obligations of "Payments for Operation of Low-Income Housing Projects" account as well as 1997 obligations of the "Preserving Existing Housing Investment" account.

c/ Reflects outlays of pre-1997 and 1997 obligations, as well as 1998 obligations of the Public Housing Operating Fund.

Summary of Budget Estimates

1. Summary of Budget Request

The fiscal year 1998 Budget proposes $2.9 billion for the Public Housing Operating Fund, which is the same level appropriated for fiscal year 1997. The $2.9 billion request does not include any funds for Indian Housing Authorities (IHAs). Funds for that purpose are being requested under the new Native American Housing Block Grants program. The Public Housing Operating Fund will provide operating subsidy payments to approximately 3,200 Housing Authorities (HAs) with a total of 1.27 million units under management as determined by the Performance Funding System (PFS). The PFS determines the level of funding necessary to enable HAs to provide a reasonable level of services, including maintenance, utilities, and protective services to residents of public housing. The requested level of funding will allow HAs to provide decent, safe, and sanitary housing for lower-income families as required by the United States Housing Act of 1937. Historically, operating subsidy requirements increase annually because the income of the people served by public housing has not kept pace with inflation in utility and other operating costs. Operating subsidies currently cover about 60 percent of operating costs. Also incorporated in the fiscal year 1998 Public Housing Opdng Fun Fund is an earned income exclusion proposal, which will assist families in public housing in making the transition from welfare to work by excluding a portion of the family's income when calculating the family's rental contribution. In 1998, HAs will receive approximately 93 percent of their PFS subsidy eligibility.

The fiscal year 1998, Public Housing Operating Fund is part of the Department's larger proposal to consolidate numerous separate public housing programs into two performance funds--an Operating Fund to address public housing operating needs and a Capital Fund to address public

Public Housing Operating Fund

Housing capital and management improvement needs. The fiscal year 1998 Budget proposes that balances for operating subsidies reflected in the "Preserving Existing Housing Investment" account be transferred to the Public Housing Operating Fund. The request also fits into the Department's overall strategy to transform public housing. This transformation has focused on the largest and most troubled HAs in the country, where swift and decisive action has occurred to correct chronic management and operational deficiencies. Tougher expectations that hold public Public Housing Operating Fund housing residents accountable for their actions are also being implemented through the Administration's "One Strike and You're Out" initiative, in which HAs are being encouraged to design policies on screening and eviction to eliminate individuals with records of illegal drug-related or criminal activity. Some HAs are already effectively screening and evicting drug dealers and other criminals from public housing. The Department is also aggressively moving to demolish older high-density public housing that has become unlivable, and replace them with smaller-scale, economically integrated public housing that will be architecturally appealing, and will serve as an anchor for neighborhoods and community renewal. The request integrates the public housing demolitions that continue across the country as part of this transformation strategy. Demolitions decrease the number of units funded under the PFS formula resulting in a decrease in the requirements on which the annual subsidies are based. It is currently estimated that 20,000 units will be demolished in fiscal year 1997 and 1998 respectively. This aggressive action to transform America's public housing will continue into fiscal year 2000, at which point 100,000 units of unlivable public housing will have been demolished over a 7-year period. Residents displaced by these demolitions will be relocated in other public or subsidized housing or receive Section 8 tenant-based rental assistance to relocate elsewhere.

In addition, the Department has published a new regulatory change which adds a provision to the PFS to provide a short transition funding period for some HAs that received approval to demolish units. The purpose of this change is to encourage and support efforts by an HA to reduce its overhead costs in a planned and orderly manner when its inventories of units are reduced by demolition. Once demolition approval occurs, units that have been vacant for 12 months, before approval, will receive 20 percent of the allowable expense level (AEL) for operating subsidies for 12 months. Units that were not vacant 12 months prior to demolition approval would receive full AEL for 12 months, then it would receive two-thirds AEL for the next 12 months, and finally it would receive one-third AEL for the last 12 months. After that point, the subsidy is cut off. Units that are replaced by Section 8 certificates or vouchers will not be eligible for transition funding. The cost of this regulatory change is $19 million in fiscal year 1998.

Operating subsidies, even in the case of the best-managed HAs, will continue to be essential for the foreseeable future, though HA reliance on subsidies may decrease somewhat if HAs can increase the average income level of families in public housing. The Department continues to work with Congress on the enactment of permanent legislation that would replace Federal preferences with local preferences for tenant selection, thus allowing HAs at the local level, the choice of attracting a broader range of incomes and more working families into the developments. Other key reform legislation includes permanent enactment of ceiling rents, which would allow working families in public housing the opportunity to establish themselves as financially stable participants in the wage-earning community by not immediately raising their rents, once they begin working.

It is essential to give HAs the tools they need in order to continue to provide public housing, while at the same time reducing their dependence on operating subsidies. The Department believes that the steps it has taken to achieve deregulation in the areas of demolition, tenant selection and rental charges, and elimination of micro-management will result in operating subsidy savings, if HAs are given the resources necessary to effectively manage their projects.

2. Changes From Estimates Included in 1997 Budget

A comparison of fiscal year 1996 actual data with estimates included in the fiscal year 1997 Budget follows:

There were 1,387,387 units under management by HAs at the end of fiscal year 1996. This is 5,907 less units under management than had been projected for fiscal year 1996 in the 1997 Budget. The fewer actual units under management are mostly due to fewer completions and more demolitions than initially anticipated in the fiscal year 1997 budget. These unit estimates for fiscal year 1996 include IHA-subsidized units.

3. Changes From Orginal 1997 Budget Estimates

A comparison of fiscal year 1997 current estimates with projections included in the fiscal year 1997 Budget request follows:

The fiscal year 1997 Budget requested $2.9 billion for operating subsidies under the Public Housing Operating Fund and assumed that the PFS would be funded at less than 100 percent. The proration of HA eligibility, based on the $2.9 billion enacted for fiscal year 1997, is estimated to be 95 percent. Fiscal year 1997 outlays for operating subsidies are currently estimated to increase by $70.6 million, mainly due to a delay in enactment of fiscal year 1996 funds.

The Department estimates that 1,372,210 HA-owned units (including IHA units) will be under management by the end of fiscal year 1997 Budget. This is 6,678 less units under management than had been projected for fiscal year 1997 in the 1997 Budget.

The following table compares the principal factors comprising the fiscal year 1997 Budget estimates with the fiscal year 1997 enacted Budget.

• -The current fiscal year 1997 estimate for the PFS Base has decreased by $5.3 million from the fiscal year 1997 Budget request. This slight decrease reflects the actual fiscal year 1996 estimates of rental and utility costs. The new estimate reflects lower estimated income due to the adoption of a new policy eliminating a rental income increase factor which reduces the need for year-end rental adjustments (see following paragraph). This lower income is offset by lower estimates for Allowable Expense Levels and Utilities.
• -The availability of $134 million in miscellaneous adjustments is a result of an over estimation of the funding required for fiscal year 1996 year-end adjustments. The major component of the estimate was rental income adjustments. Rental income increased slightly in fiscal year 1996 reducing the need for these adjustments. In addition, the adjustments were offset by negative utility and investment income adjustments. The rental income estimate policy adopted in fiscal year 1996 eliminates the need for large rental income adjustments in the future.
• -The increase of $4.6 million currently estimated for non-PFS projects is based on fiscal year 1996 experience.
• -The elimination of $129.9 million in rental income adjustments in the current estimate results from a policy change in the calculation of rental income in the PFS. In the past, large adjustments were necessary when the assumption of future tenant income increases was less than the 6 percent increase used by PHAs/IHAs to calculate operating subsidy eligibility. At the end of the year, if the actual experience fell short of the 6 percent assumption for reasons beyond their control, an adjustment is made. The estimate reflected the difference between the tenant income increase assumption and 6 percent. The new policy, adopted in fiscal year 1996, eliminates the estimated increase factor in the calculation of operating subsidy eligibility, eliminating the need for large year-end adjustments. The income estimate in the PFS Base has been reduced to reflect this policy change.
• -The Department published a new regulatory change which added a provision to the PFS to provide a short transition period of funding for some HAs that have received approval to demolish units. The purpose of the change is to encourage and support efforts by HAs to reduce overhead costs in a planned and orderly manner when the inventory of units is reduced by demolition. This regulatory change will cost an estimated $17.4 million in fiscal year 1997.
• -An overall shortfall of $138.4 million is expected for fiscal year 1997. Accordingly, HAs will not receive 100 percent of their subsidy eligibility. The proration of PHA subsidy eligibility will be 95 percent.

Explanation of Increase and Decrease

As noted earlier, the fiscal year 1998 Budget proposes the continuation of operating subsidies under the Public Housing Operating Fund. Further, no funding is included in 1998 for IHAs. Funding for IHAs is included in the new Native American Housing Block Grants budget proposal. Outlays of $2.9 billion for fiscal year 1998 represent the liquidation of prior-year balances in addition to first year outlays estimates to spend out from the requested 1998 Budget authority of $2.9 billion.

The following table compares the principal factors comprising the fiscal year 1997 available budget authority and those estimated for fiscal year 1998.

As shown in the table, there is no change in budget authority requirements in fiscal year 1998. Requirements in fiscal year 1998 are the net result of many factors. The fiscal year 1998 request includes subsidizing HAs at 93 percent of PFS eligibility. The percentage of PFS eligibility at which PHAs are subsidized declined as low as 89 percent in fiscal year 1996, but is expected to reach 95 percent in fiscal year 1997.

The Department has published a regulatory change which provides a short transition period of funding for some units once they are approved for demolition and will cost an estimated

$19 million in fiscal year 1998. In addition, the earned income exclusion proposal will cost the Department $40 million in fiscal year 1998. The proposed increases in fiscal year 1998 are more than offset by savings due to demolitions, tenant income matching, and additional savings from higher income tenants expected to result from anticipated enactment of permanent reform legislation, which includes elimination of Federal preferences, establishment of ceiling rents, and other adjustments necessary to make work pay for families now dependent on public assistance. Such reforms are consistent with the Department's overall goal of deregulation. Specific factors affecting the fiscal year 1998 operating subsidy estimates are:

1. Economic Assumptions. The fiscal year 1998 estimates reflect the most recent assumptions about inflation and tenant incomes. The fiscal year 1998 estimate assumes a

3.4 percent increase in non-utility costs and pe�cen�cent increase in utility rates. The calculation of individual HA subsidy requirements includes the use of an inflation factor which is a weighted average percentage increase in local government wages and salaries for the area in which the HA is located and non-wage expenses.

2. Adjustments to Operating Subsidy Requirements. The fiscal year 1998 estimate reflects adjustments in operating subsidy requirements for various HA income and expense factors based on both existing and anticipated legislation, procedures and regulations affecting tenant rent payments and HA operating costs. These adjustments reflect the following factors.

a. Energy Incentives. The estimate reflects additional operating subsidies above the current allowable utilities expense level to encourage HAs to pursue more advantageous purchasing arrangements and to use private financing for energy improvements pursuant to Section 118 of the 1987 Housing and Community Development (HCD) Act.

b. Non-Dwelling Units. The estimate reflects additional operating subsidies for the cost of funding for units removed from the dwelling rental inventory for non-dwelling use to support resident economic self-sufficiency and anti-drug programs.

c. Family Self-Sufficiency (FSS). The estimate for Family Self-Sufficiency (Section 554 of the Cranston-Gonzalez National Affordable Housing Act), includes the salary/benefit cost associated with a full-time service coordinator for each FSS project. The estimated cost also includes the subsidy of one non-dwelling unit for each FSS project for the provision of supportive services.

d. Transition funding for some demolitions. The Department has developed a regulatory change which would add a provision to the PFS to provide a short transition period of funding for HAs that have received approval to demolish units, and have not received replacement Section 8 certificates or vouchers. The purpose of the change is to encourage and support efforts by HAs to reduce overhead costs in a planned and orderly manner when the inventories of units are reduced by demolition.

e. Utility Consumption. The estimate of utility expenses reflects regulations that require the use of a "rolling-base" consumption level consisting of average consumption levels for the most recent 3-year period. This includes energy saving improvements funded from the Modernization programportion of the Public Housing Capital Fund, which will continue to decrease subsidy requirements for utility expenses.

f. Higher Income Tenants. The Department estimates savings from higher income tenants that will result from the anticipated permanent enactment of the repeal of Federal preferences for admission to public housing being replaced by local preferences, so as to allow HA flexibility to choose higher income tenants. Another reform measure anticipated to be enacted permanently and result in savings is the establishment of ceiling rents to allow working families to stay in public housing as their incomes grow.

g. Earned Income Exclusion. The earned income exclusion will assist families in making the transition from welfare to work by excluding a portion of a family's income when calculating the family's rental contribution.

h. Tenant Income Matching. Recent legislation authorizes the Department to have access to Internal Revenue Service data for purposes of computer income matching in the assisted housing programs, thereby improving the accuracy of tenant incomes reporting. The execution of an aggressive program of computer income matching starting in 1998 is expected to generate savings of approximately $49 million in fiscal year 1998.

Program Description

Operating subsidies are provided to HAs to assist in funding the operating and maintenance expenses of their owned dwellings in accordance with Section 9 of the United States Housing Act of 1937, as amended. Annual subsidy requirements are calculated on the basis of the PFS formula which takes into account what it would cost a comparable well-managed HA to operate its units. Requirements are calculated separately for certain "non-PFS" areas (i.e., Alaska, Guam, Puerto Rico and the Virgin Islands) and HA-owned Homeownership projects due to their unique operating characteristics. The non-PFS HAs are treated individually because the PFS formula was not designed to apply to their economic markets.

Non-utility operating costs for each HA are based on what it would cost a well-managed HA of comparable location and characteristics to operate based on a PFS equation, including such variables as the local government wage rate index, ratio of three or more bedroom units to total dwelling units, and the ratio of two or more bedroom units in high rise family projects to total dwelling units. These cost levels are updated annually based on inflation and changes in the HA characteristics included in the equation. Utility expenses are estimated separately based on rules that set consumption at the average of a prior 3-year period ("rolling-base") and changes in utility rates.

Fiscal year 1998 Performance Measures

The Public Housing Management Assessment Program (PHMAP), developed in accordance with section 502 of the Cranston-Gonzalez National Affordable Housing Act, identifies HA management capabilities and deficiencies and provides non-monetary incentives to high-performing HAs. Under PHMAP, HUD evaluates a HA's performance in the following areas: vacancy number and percentage; modernization; rents uncollected; energy consumption; unit turnaround; outstanding work orders; annual inspection and condition of units; tenant accounts receivable; operating reserves; operating expenses; resident initiatives; and development.

Substantial revisions to the PHMAP were published on December 30, 1996. The new interim rule reflects revised indicators (performance measures) that will be used by the Department as a tool to rate HAs' performance and to gauge HAs' progress toward key Federal program objectives. The new eight PHMAP indicators include vacancy rate and unit turnaround; modernization; rents uncollected; work orders; annual inspection of units and systems; financial management; resident services and community building; and security. These performance measures will be used to rate all HAs at least annually as well as to determine which agencies are troubled or at risk of being troubled.

HUD defines an HA as "troubled" if it scores less than 60 out of a possible 100 under the PHMAP management evaluation system. Troubled agencies would have a maximum period of time in which to show steady improvement to avoid a declaration of breach or default and installation of an alternate administrator. In 1992, the number of troubled agencies appeared almost unmanageable. But, over the last 3 years, HUD has reduced the troubled agencies to a manageable number and confronted the remaining one in sequence, starting with the worst. Among the 40 largest housing authorities, 8 remain classified as "troubled." HUD has an intensive recovery partnership in place for each one.