HUD FY 1998 Budget Summary

We recognize that these challenges come at a time when there are fewer and fewer public resources. If we were allowed to make the choice between fiscal prudence and meeting the needs of troubled Americans, the choice would be quite difficult. But in truth, we have no choice because we have an undeniable responsibility to balance the Federal budget, and, at the same time, we have an equally undeniable responsibility to meet the challenges that lie ahead. We must do both -- finding new ways to be more financially prudent and socially responsible, and to do this through a government that is smarter, smaller, and better.

The FY 1998 HUD Budget proposes to do both, balancing the budget while helping communities meet their most pressing needs. While addressing the full range of HUD's activities, this budget emphasizes four core challenges we expect to face in the coming years:

1. Averting a Section 8 Housing Crisis

2. Expanding Affordable Housing Opportunities

3. Making Welfare Reform Work

4. Restoring Public Trust

I. Averting a Section 8 Housing Crisis

The greatest challenge the Department and Congress will face in FY 1998 -- perhaps the largest challenge the agency has faced since its inception -- is the expiration of rental assistance contracts that provide housing for 4.4 million people, over 90 percent of whom are elderly, disabled, or families with children. Most of these families have at least one family member who works, is in job training, or is enrolled in an educational program.

For these families, Section 8 is more than a contract or subsidy; it is often the foundation from which they can build lifelong economic self-sufficiency. Renewing these contracts, within the framework of a balanced budget, is thus an essential, bipartisan task. If done right, renewing contracts will prevent many families from being put out on the street, averting an unprecedented explosion of homelessness nationwide.

HUD's FY 1998 Budget meets this potential crisis head on. HUD proposes a comprehen sive solution, initiating significant program reforms to lessen the cost of these contracts in future years while renewing all expiring Section 8 contracts -- all within the constraints of a budget that is balanced by 2002. By "walling off" the budget authority needed for contract renewals from other discretionary HUD funding, this Budget renews all expiring contracts while maintaining critical funding levels for other vital programs.

II. Expanding Affordable Housing Opportunities

While solving the Section 8 housing crisis is the most urgent task we face, the agency remains committed to addressing the broader housing affordability needs of the Nation. This Budget proposes funding that would help create tens of thousands of new affordable housing and homeownership opportunities for all Americans, including:

(1) replacing the Nation's worst 100,000 public housing units with new, more modest-scale townhouses and Section 8 certificates;

(2) providing 50,000 new, targeted rental (Section 8) certificates to help implement welfare reform;

(3) maintaining funding for HUD's innovative homeless program that moves homeless people to self-sufficiency and permanent housing through a cost-effective "continuum of care" system;

(4) constructing or rehabilitating more than 400,000 units for the neediest, most disadvantaged Americans through HOME, CDBG, FHA MF Insurance, Housing for Special Populations (elderly and disabled), and Housing Opportunities for Persons with AIDS;

(5) increasing fair housing funding to ensure the equitable enforcement of fair housing laws for all Americans; and

(6) stepping-up homeownership efforts that assist first-time homebuyers, especially in underserved areas of the country, including $50 million for additional Homeownership Zones.

III. Making Welfare Reform Work

The third significant challenge the Department faces will be working with community organizations, States, cities, and other Federal agencies to effectively implement welfare reform, which is critical to the future of families and communities that receive HUD assistance. HUD is uniquely positioned to help create the good jobs and opportunities in distressed areas that are essential to making welfare reform work.

The Department proposes an initial three-pronged response to begin implementing the Personal Responsibility and Work Opportunity Reconciliation Act of 1996:

(1) creating good jobs through our economic development programs, including the Economic Development Initiatives (EDI) program, a $100 million HUD contribution to the Clinton Administration's second round of Empowerment Zones/Enterprise Communities, and a Brownfields redevelopment partnership with EPA and Treasury to clean up and redevelop contaminated sites;

(2) using tenant-based rental assistance strategically to link welfare recipients to jobs in the growing economy through innovative uses of incremental housing assistance and regional opportunity counseling; and

(3) providing and leveraging services to help welfare recipients make the transition from dependency to work through expansion of the Bridges to Work initiative, funding for public housing supportive services, expansion of Neighborhood Networks learning centers in assisted housing and the Youthbuild program to provide access to education and job training.

IV. Restoring the Public Trust

The challenges discussed above -- all central to HUD's mission of creating housing and jobs -- can only be carried out if the Department continues to aggressively implement critical management reforms that will restore the American taxpayers' confidence in HUD as a steward of public funds. We must demand greater accountability not only from those who benefit from HUD -- tenants and landlords alike -- but from ourselves as well. While much management progress has been made in the past 4 years, much remains to be done, and to that end, top priority must be to put HUD's own house in better order.

In addition to continuing current reforms, the FY 1998 budget proposes to intensify our efforts in this area by:

(1) targeting funds to show that "HUD Means Business" by "borrowing" senior business executives from leading private sector companies to accelerate the aggressive implementation of essential financial and management reforms. We believe that engagement of senior HUD management with high-caliber individuals who have been on the front lines of the transformation of U.S. business over the past decade, as well as public leaders who have successfully restructured their institutions, is critical in advancing HUD's adoption of world-class strategies and techniques for managing strategic change.

(2) cracking down on bad landlords who run troubled HUD-assisted properties by undertaking a $50 million effort to punish and remove them. This effort includes proposed changes in bankruptcy laws, which will prevent irresponsible landlords from using bankruptcy to hide from HUD oversight and penalties for neglecting their contractual obligations to provide decent housing to tenants;

(3) expanding Operation Safe Home to broaden prosecution of both violent crime and white collar fraud in public and assisted housing. Operation Safe Home is a unique and highly effective crime-fighting effort led by HUD's Inspector General, in partnership with the Federal Bureau of Investigation (FBI), the Drug Enforcement Agency (DEA), and other national, State and local law enforcement. HUD is requesting a 100 percent increase in funding, doubling funding from $10 to $20 million.

(4) continuing to intervene in troubled public housing authorities by requesting a $45 million set-aside to provide technical assistance to troubled PHAs and by focusing on smaller housing authorities that are at-risk; and

(5) investing in improved technology, which is critical to the long-term restructuring of the Department's financial management systems, as well as to the streamlining of the organization. The FY 1998 Budget requests funding for up-front investments in training and technology that will enable HUD to undertake an effective downsizing of personnel to meet the goal of 7,500 HUD employees by FY 2000.

Conclusion

Despite the sometimes daunting challenges we still face -- many of which we begin to tackle in this budget -- HUD is on the right track. We have a team of dedicated and talented employees; a renewed commitment over the past four years to reinventing and reforming the agency; and most important, innovative, concerned, and thoughtful partners on both sides of the aisle in Congress and in communities nationwide who work with us each day to build a better and stronger America.

Our goal is, and must remain, creating a future unlike any that has come before, in which no person is left behind and in which no community is forgotten. A future in which all who are willing to do their part will be empowered with the tools to reach as high as their talents and hard work will take them. A future in which the bright sun of opportunity will reach those who have lived too long in the shadows.

I. Averting a Section 8 Housing Crisis

In FY 1998, HUD proposes to renew expiring Section 8 contracts on 1.8 million units that house 4.4 million low-income people. The Section 8 renewal crisis is occurring in large part, because 15- and 20-year subsidy contracts for tens of thousands of units are just now beginning to expire for the first time, while contracts with shorter terms -- less than 5 years -- are up for re-renewal. Within a decade, virtually all of HUD's roughly three million Section 8 project- and tenant-based contracts will be converted to 1-year terms.

As part of the contract renewal process, HUD also intends to stop paying excessive subsidies to owners of Section 8 properties whose rents are well above those for comparable housing in their neighborhoods. The commitment to renew all expiring rental assistance contracts while limiting project subsidies to market rents, is the linchpin of HUD's affordable housing, tenant protection strategy. The conversion of all expiring contracts to 1-year terms will eventually eliminate the need to fund amendments to existing, underfunded, long-term contracts, while bringing Section 8 budget authority and outlays into rough balance. By putting in place a renewal strategy that controls future outlays through a series of tough program reforms, the Department can protect more than four million people from unaffordable rent increases, evictions, and possible homelessness, while doing its part to help the President balance the budget by 2002.

A. Renewing Expiring Section 8 Contracts

The most critical affordable housing issue facing the Department in FY 1998 is the need to renew funding authority on 1.8 million expiring project- and tenant-based Section 8 rental contracts that provide housing for more than four million low-income people. The Department's proposed budget contains $9.2 billion in budget authority (BA) to renew for one year all subsidy contracts that will expire in FY 1998. The FY 1998 Budget also requests sufficient BA to renew all Section 8 contracts that expire between FY 1999 and 2002.



As Congress considers the Department's FY 1998 Budget request, it is important to keep in mind that by renewing existing subsidy contracts, the Congress would maintain government spending for the 4.4 million affected people at or near current levels. By allocating new budget authority for renewals, the Congress merely extends existing subsidies for an additional 12 months; this act does not, in and of itself, result in significantly higher levels of spending.

By implementing a series of tough program reforms, HUD will be able to keep future spending in check. These measures include, but are not limited to: (1) reducing excessive subsidies and lowering rent increases to private landlords (discussed more fully below); (2) reducing the subsidy standard for tenant-based assistance (to the 40th from the 45th percentile of recent movers); (3) lowering Section 8 administrative fees for public housing authorities; (4) tightening income verification procedures in assisted housing programs to ensure that tenants are paying their full share of the rent; (5) eliminating federal preferences for occupancy in Section 8 project-based units; and (6) reducing the payment standard (FMR) for single persons from the cost of a one-bedroom unit to the lower cost of an efficiency unit in the local market. These program reforms are estimated to reduce the overall growth in Section 8 outlays by more than $14 billion between FYs 1998 and 2002.

To summarize, the real crisis surrounding the renewal of expiring Section 8 contracts -- unaffordable rent increases, widespread evictions, an enormous loss of affordable housing, and a potential explosion in homelessness -- will only be realized in the event that these contracts are not renewed. The combination of full renewal and the implementation of the cost-containing program reforms is an effective strategy for averting what would otherwise be a disaster, where more than four million people would be put at risk of homelessness.

B. Ending Excessive Subsidies to Landlords

Nearly three million Section 8 contracts, supporting more than six million Americans will expire over the next 5 years, including the 1.8 million mentioned above that will expire in FY 1998. Of the three million expiring contracts, 850,000 are for units in apartment buildings that are insured by the FHA. For a majority of these FHA-insured and Section 8 subsidized units, the Federal government subsidizes rents that are in excess of market rents.

The expiring contracts must be renewed to maintain the affordability of this housing for thousands of low-income families. However, as a matter of fairness and fiscal prudence, the excessive subsidies to landlords must be ended once and for all. Unless the Department goes about the reduction of above-market rent subsidies the right way, tens of thousands of affordable housing units could be lost from the stock due to foreclosure, as owners become less able to pay the inflated FHA-insured loans from their reduced income streams. Should Section 8 subsidies be lowered without a concomitant write-down in the size of their mortgages, massive defaults and foreclosures could end up costing FHA an estimated $7 billion in insurance claims. Foreclosures of this magnitude would devastate families, neighborhoods, and entire communities, and must be prevented.

HUD has been working with the Congress, States and localities, resident groups, property owners, lenders, and non-profits to develop innovative solutions to address this complex problem. In its FY 1998 Budget, HUD advances a proposal that is designed to protect residents and communities from large-scale displacement and abandonment. At the same time, the proposal produces significant outlay savings by reducing excessive Section 8 rental subsidies and writing down the size of the remaining FHA-insured mortgages.

Under HUD's portfolio reengineering proposal, mortgage debt would be reduced to an amount that could be supported by market, or street rents. For projects with seriously deferred maintenance, the write-down of FHA debt would allow the owner to seek additional conventional mortgage financing for essential rehabilitation.

The Department's portfolio reengineering proposal generates $1.25 billion in discretionary savings between FYs 1998 and 2002 by terminating excessive subsidies and reducing Section 8 contracts to market levels. The proposal also generates 5-year mandatory savings of $700 million, due largely to the proactive restructuring of FHA-insured debt. Without the partial write-down of project mortgages, thousands of owners would be forced to default on their loans, causing large losses to the FHA insurance fund.

II. Expanding Affordable Housing Opportunities

Facing the renewal challenge directly is the most immediate element of HUD's affordable housing strategy, but it is not the only element. The gap between the supply and demand for affordable housing by America's most vulnerable populations is growing rapidly. Between 1991 and 1993, the number of poor households with the most acute housing needs -- those who live in seriously substandard housing and/or pay more than half their income for rent -- grew by 400,000, to a total of more than 5.3 million households. For a Department whose name begins with "housing," it is imperative that HUD advance a budget that increases the supply of affordable housing.

The FY 1998 HUD Budget maintains the Department's commitment to CDBG and HOME, the building blocks of local affordable housing strategies; holds funding levels at or slightly above 1997 enacted levels for homeless programs and public housing capital and operating funds; and continues funding the development of housing for vulnerable populations, including persons with AIDS.

The Department also requests funding for 50,000 incremental rental certificates to enable the most innovative housing authorities to work with their community partners and State and local welfare agencies to make welfare reform work, by helping work-ready aid recipients secure affordable housing in job-rich metropolitan locations.

The Clinton Administration believes that the resumption of funding for incremental rental assistance to support welfare reform can be accommodated in a tight budget that also renews all expiring Section 8 contracts. HUD is committed to this joint undertaking, and to implementing tough program reforms to control future spending, while helping the President bring the Federal budget into balance.

A. Expanding Rental Housing Opportunities

• Transforming Public Housing
  

HUD's FY 1998 Budget contains funds to build upon former Secretary Henry Cisneros' legacy to radically transform the social, physical, and management environment of public housing. Legislation is now in place that permits housing authorities to adopt rent and tenant selection policies that reward work and limit rent hikes when a wage earner gets a raise. These policies enable housing authorities to attract a more diverse population into their developments, including families with a broader range of incomes and work experiences.

The foundation of the physical transformation of public housing is HUD's commitment to demolish 100,000 of the worst public housing units in the country, including the most obsolete and dangerous high-rise projects that have become warehouses for the poor, isolating their residents from the mainstream society and economy. The Budget maintains scheduled demolitions and implements the Congressional directive to voucher out rather than modernize the most costly and unlivable projects. During the next 4 years, the Department will focus on ensuring that demolition is accompanied by effective revitalization and replacement of units. Beginning in FY 1998, more management resources will be devoted to the timely replacement of failed projects with less dense, more modest-scale, mixed income developments that renew residents' hopes, strengthen neighborhoods, and stabilize communities.

The FY 1998 Budget requests a total of $524 million for the HOPE VI program to revitalize severely distressed public housing. Out of the total, $421 million in HOPE VI funds would pay for the demolition, site restoration, and on- and off-site replacement of obsolete public housing units. The remaining $103 million in HOPE VI funds would pay for Section 8 rental certificates to relocate 10,000 families whose obsolete and uninhabitable units are scheduled for demolition. Importantly, because 40 percent of the units slated for demolition are currently vacant and uninhabitable, the combination of new construction and tenant-based assistance available under HOPE VI actually increases the total number of assisted housing opportunities available to low-income households.

In addition to funding HOPE VI, the FY 1998 Budget requests a total of $5.4 billion to fund the modernization and operating needs of public housing authorities across the country. Funding requests of $2.5 billion for the capital account and $2.9 billion to fund operations are slightly higher than 1997 enacted levels ($162 million and $85 million, respectively). Funding for Indian Housing Authorities, which previously was included in these accounts, is now proposed for separate funding in a new Native American Block Grant program that was authorized by the Congress last year. The Budget also proposes $290 million for the public housing Drug Elimination Grants program to help housing authorities implement anti-drug initiatives, and fight crime in and around their developments.

HUD's transformation initiative would not be complete without a major effort to strengthen public housing management practices. Items that need to be addressed include: putting in place innovative recovery strategies for all large, severely troubled housing authorities; implementing a more effective system to monitor and oversee smaller, troubled authorities; strengthening the management assessment program for public housing (PHMAP); and starting a similar system to assess the effectiveness of housing authority administration of their Section 8 tenant-based assistance programs (SEMAP).

By reforming rent rules to reward work and self-improvement, demolishing the worst projects, modernizing older developments to continue to provide decent housing to families, replacing projects with smaller-scale, less dense, mixed income communities, providing portable rental assistance to families who want to relocate into private housing, and strengthening management practices, HUD is committed to bringing the public housing program into a new century, to support the needs and aspirations of residents and communities.

a. Increasing the Supply of Affordable Rental Housing

Although affordability continues to be the principal cause of the steep rise in worst-case housing needs, nearly half a million households in the country live in severely substandard housing while millions more occupy housing needing substantial repairs. According to HUD's American Housing Survey, substandard housing is not limited to any single category of place or region. About 40 percent of all inadequate housing units are in central cities; suburbs account for about a third of the total, and the remaining quarter are in non-metropolitan areas.


b. HUD is committed to continuing to play a significant role in the production process.

Through an array of supply-oriented programs, such as FHA's multifamily insurance programs, CDBG, HOME, and programs for special populations and places, including the elderly, persons with disabilities, and persons with AIDS, and a new Native American Housing Block Grant, HUD's proposed FY 1998 Budget will provide the resources to help communities build or rehabilitate more than 400,000 affordable rental units, not counting more than 100,000 certifi cates and vouchers that enable households to secure existing housing at affordable rents (see Table 1 for FY 1998 requested funding and estimated production levels).