NA = Not Applicable SUMMARY OF BUDGET ESTIMATES 1. SUMMARY OF BUDGET REQUEST A total of $8.98 billion is requested for the Housing Certificate Fund in fiscal year 1999. This request includes $7.2 billion for contract renewals, $1.3 billion for Section 8 Amendments, $60.3 million to support 10,655 incremental units, $373.3 million for Multifamily Enforcement and to fund 32,000 units for tenant protection activities, and $20 million for Regional Opportunity Counseling. The incremental units are part of an overall request for over 100,000 incremental units of tenant-based assistance. An estimated $24.6 million is included in the contract renewal budget authority to fund Family Self-Sufficiency Coordinators. The total budget request of $1.3 billion for Section 8 Amendments will be augmented by $463 million in recaptures of previously obligated budget authority. This will provide a total of $1.8 billion for Section 8 Amendments. 2. CHANGES FROM 1997 ESTIMATES INCLUDED IN THE 1998 BUDGET The decrease in the number of tenant-based renewals in 1997 is attributable to (1) the renewal of first quarter contract expirations in the fourth quarter of fiscal year 1996, and (2) the use of approximately $1.1 billion in project reserves to extend over 166,000 contracts that were expiring. The demand for Tenant Protection was lower than anticipated for fiscal year 1997. A total of $190 million was provided for Section 8 Rental Assistance by the fiscal year 1997 Appropriations Act. A total of $99.8 million was reserved supporting 13,304 units. The 1997 Appropriations Act also provided $850 million for Section 8 Amendments. A total of $780 million was reserved. 3. CHANGES FROM ORIGINAL 1998 BUDGET ESTIMATE The Congress did not enact 50,000 incremental units or $20 million for Regional Opportunity Counseling as originally requested in the 1998 Budget. In addition, the Department�s Contract Renewal needs for fiscal year 1998 were adjusted from the original estimate. During fiscal year 1997, the Department conducted a comprehensive review of the costs of the tenant-based Section 8 contract renewal program. The focus of this effort was an analysis and reconciliation of Section 8 reserve accounts maintained by housing authorities throughout the Nation. The reconciliation effort, completed in March 1997, revealed substantial excess reserves, indicating a need for more accurate unit costs consistent with the actual obligation of funds over the term of the contract. In the past, long term contracts up to 15 years required large per unit reserves set aside as a cushion against inflation and unanticipated changes in housing markets and tenant income during the full term of the contract. In recent years, the Department has largely issued single year contracts which allow more precise calculations of funds needed for renewal. Thus, the long-standing methodology for allocating funds was producing large reserves than Public Housing Authorities actually required. In fiscal year 1998, Congress established a separate account for recaptured reserves, and all reserves in excess of a two month contingency were placed in this new account. In addition, the methodology for reserving funds was changed in fiscal year 1998 to a method which is based on actual, historical cost data. The current estimated renewal cost of a rental certificate or voucher is $5,499 or $887 less than the per unit cost of $6,386 on which the 1998 Budget estimate was based. This cost is based on actual 1997 disbursements, adjusted for inflation. The 1998 current estimate reflects a change in the funding cycle from a fiscal year basis to a calendar year basis for tenant-based units. This is required because decreased terms combined with lower estimated unit costs result in less flexibility for housing authorities at the beginning of their fiscal year. In order to ensure available funding for housing authorities with expiring contracts during the first quarter of the fiscal year, the Department proposed a change in the funding cycle. The change to a calendar year cycle, combined with the change in the per unit cost, results in a net reduction of $2.2 billion to renew expiring contracts in 1999 when compared with the 1999 estimate included in the 1998 Budget. As a result of the usage of project reserve funds in 1997, and the forward funding of 1997 expirations with 1996 funds, $1.9 billion in 1997 appropriations carried over to 1998 and will be used to reduce budget authority requirements by that amount. The Housing 2020 legislation submitted in April 1997 differed in some respects from the assumptions reflected in the 1998 Budget and Congressional Justifications. As the legislation further evolved in the Banking and the Appropriations Committees during the summer, the Administration�s request for 1998 expiring Section 8 project-based contracts was revised and a later estimate was provided to Congress. The 1998 Budget had assumed that new budget authority would be appropriated for the renewal of contracts that are restructured proactively prior to the year in which they expire. The estimate was revised to amend Section 8 (b)(b) of the United States Housing Act of 1937 to rescind only the amount saved when rents are reduced by proactively amending or terminating contracts, and to require the reuse of the budget authority recaptured to provide tenant-based or project-based replacements for terminated contracts that will be sufficient to fund them to the end of their previous terms. Thus, the appropriations request is based on the existing pattern of contract expirations, and any that come in proactively will be provided for from the recaptures occasioned by the restructurings. The mark-to-market portfolio reengineering legislation was enacted in Title V of the fiscal year 1998 Appropriations Act as "Multifamily Assisted Housing Reform and Affordability Act", on October 27,1997. The final shape of the legislation included transition provisions for 1998 that extended with some modification of the provisions of Section 211 and 212 of the 1997 Appropriations Act affecting Section 8 contract renewals and the FHA demonstration program for portfolio reengineering. These provisions included: (1) continuation of a freeze on the rents of project-based contracts renewed (under Section 211) at rents less than or equal to 120 percent of FMRs, (2) a cap on the percentage of tenant-based contracts used in conjunction with projects restructured in fiscal year 1998 and (3) a requirement that expiring contracts for projects with below-market rents that are renewed as project-based be maintained at their existing rents, even if the existing rents are above 120 percent of FMRs. The Administration�s latest request to the Committees fully anticipate all of the provisions included in the final legislation. EXPLANATION OF INCREASES AND DECREASES The decrease in budget authority is attributable to the use of $3.7 billion of project reserves from Public Housing Authorities to offset the increase in the number of expiring contracts from 1,786,238 to 2,046,231 units. Gross budget authority needs without this offset are $10.8 billion, while net needs are $7.2 billion. The Department proposes to renew these assistance contracts for a 1-year term. In addition, the Department is proposing 10,655 incremental units, $373 million for Tenant Protection and Multifamily Enforcement, $1.3 billion for Section 8 Amendments and $185 million for Section 8 transformation. PROGRAM DESCRIPTION AND ACTIVITY 1.Contract Renewals. Contract renewals provide funding to renew expiring Section 8 rental assistance contracts covering certificates, vouchers, and moderate rehabilitation (renewed as certificates or vouchers), Loan Management, New Construction/Substantial Rehabilitation, Property Disposition, and Preservation. In fiscal year 1999, $7.2 billion is requested to renew expiring contracts for an estimated 2,046,231 units. The Budget assumes that $3.65 billion of recaptured excess Section 8 reserves that were recaptured by the Department in fiscal year 1997, will be used to reduce the amount of new budget authority required for renewals in 1999. These funds are held in the "Section 8 Reserve Preservation Account" pursuant to the 1997 Supplemental Appropriations Act. The table below summarizes the trend in renewal activity for the period, 1997 through 2003. More detailed tables for Contract Renewals can be found at the end of this Justification. a/In fiscal year 1997, $1.1 billion in project reserves was utilized to extend contracts, thereby reducing the use of new renewal budget authority by a like amount. b/In fiscal year 1998, $1.9 billion in carryover will offset contract renewal requirements. c/In fiscal year 1999, $3.7 billion in project reserves recaptures will offset contract renewal requirements. 2.Section 8 Amendments. The need for Section 8 amendment funding results from insufficient funding being provided for long-term project-based contracts funded primarily in the 1970's and 1980's. During those years, the Department provided contracts for terms of up to 40 years. Estimating funding needs over such a long period of time proved to be problematic, and as a result many of these Section 8 contracts were inadequately funded. The current practice of providing contracts for 1-year term helps to ensure that the problem of inadequately funded contracts is not repeated. However, older long-term contracts must still be provided additional funding to maintain the current inventory of assisted project-based rental housing. For fiscal year 1999, $1.8 billion is proposed for Section 8 Amendment contracts. This amount is expected to be offset by $463 million of recaptures of remaining balances of authority on some projects as they reach their contract expiration date, thus the requested amount is $1.3 billion. 3. Incremental Rental Assistance. For fiscal year 1999, the Department is requesting $60.3million in budget authority to support a total of 10,655 incremental certificates and vouchers. This assistance will be used for various Section 8 programs including the family unification program, portability reimbursements, witness relocation and the settlement of litigation. Family Unification Program. This program provides rental assistance to eligible families whose lack of adequate housing is a primary factor in the imminent placement or the delayed discharge of the family�s child or children into or from out-of-home care. Portability. Families receiving tenant-based assistance can move from the jurisdiction of the initial housing agency that issues the rental voucher or certificate to the jurisdiction of any receiving housing agency in the United States that administers the rental assistance program. The resulting transfer of administration and funding for the voucher from one PHA to another significantly increases administrative problems for affected Housing Authorities (HAs). Therefore, some of the funds provided for incremental rental assistance would be used to eliminate the need for the two-way billing process between the sending and receiving HAs. Incremental rental assistance would be provided to the receiving housing agencies that have had an influx of "move-in,", resulting in the release of the portable voucher for re-use by the sending housing agency. Other. Incremental rental assistance will also be used for the settlement of litigation, and for witness relocation. The Department is also requesting approximately 34,000 homeless vouchers and 8,800 Elderly vouchers. These are described more fully under the Homeless Assistance Grants and HOME Partnership Program justifications respectively. In addition, 50,000 vouchers are requested for Welfare to Work. These are described in a separate justification. 4. Section 8 Transformation. The Administration will study further steps to transform, consolidate and downsize the administration of HUD programs. The Department currently administers approximately 21,000 Section 8 Housing Assistance Payments (HAP) contracts executed between HUD and private owners of multifamily housing developments. These developments are financed by HUD-insured, HUD-held or direct loans. HUD staff currently perform a wide variety of duties relative to the subsidy contracts and the mortgages on these properties. Many of the duties performed by HUD staff could be performed by non-HUD personnel. These include conducting annual physical inspection, reviewing project financial statements, conducting management and occupancy reviews, reviewing management agents, reviewing insurance draws and releases from replacement reserves, reviewing owner verification of tenant income and eligibility, and pre-validating monthly subsidy payments. The Department will study the feasibility of procuring the services of contract administrators to assume many of these specific duties, in order to release HUD staff for those duties that only the government can perform and to increase accountability for subsidy payments. The estimated 915,000 units involved represent current units under HAP contract less the anticipated reduction due to opt-outs, terminations, and mark-to-market activities. The Department would solicit for competitive proposals from eligible public agencies to assume these contract administration duties. The solicitation would specify exact duties, performance measures, and the method of selection and award. Evaluation would be based upon the responder�s capabilities and proposed contract price. 5.Tenant Based Programs. PUBLIC AND INDIAN HOUSING (a) Regional Opportunity Counseling. The Department is committed to increasing the housing opportunities available to low-income families. The Budget request includes $20 million to pay for special counseling conducted by public housing agencies in partnership with local non-profit agencies to expand housing opportunities and deconcentrate the number of families living in high poverty neighborhoods. The program is authorized under the administrative fee provision, Section 8(q)(2)(A)(ii) of the United States Housing Act of 1937. It is estimated that this will fund 10-20 sites. Some of the results the Department expects to receive by providing intense regional opportunity counseling include: (1) expanded landlord participation in Section 8 and increases in the number and diversity of neighborhoods in which Section 8 recipients locate; (2) assisting and encouraging Section 8 families to move to low poverty neighborhoods that offer high quality housing, education, and employment opportunities; (3) addressing existing barriers to mobility and choice in the Section 8 program, including administrative barriers to portability; (4) promoting greater cooperation and joint problem-solving among Section 8 programs operating in a metropolitan housing market; and (5)creating or strengthen institutions which administer the +Section 8 program on a regional basis, including the provision of regional mobility counseling. (b) Incentive to Reduce Poverty Concentrations of Certificates and Voucher families. PHAs that demonstrate that increasing numbers of families with children are using the program in low poverty census tracts (measured in relation to the location of rental housing affordable within the programs Fair Market Rents) would be eligible for a �bonus� administrative fee. This bonus will encourage PHAs to undertake additional outreach efforts to landlords in low-poverty areas to find more housing options for housing and certificate holders and to better present to families their full range of housing opportunities under the program. The bonus would apply to families that locate housing outside the PHA�s service area. (c)Family Self-Sufficiency (FSS) Coordinators. In 1990, the National Affordable Housing Act established the family self-sufficiency program. Under the FSS program, families receive job training and employment that should lead to a decrease in their dependency on welfare programs and begin the journey on the road to economic self-sufficiency. In establishing the program, Congress mandated that any housing agency that received any funding for rental vouchers and certificates in fiscal year 1993 and subsequent would be required to establish a self-sufficiency program equal to the number of rental vouchers or certificates received. Since that time Congress has appropriated funds to support approximately one service coordinator in approximately 375 PHAs over a 3-year period. The PHAs that received the special funding for FSS service coordinators were the agencies that administered fewer than 1,000 rental vouchers and certificates. The Department is committed to administering the FSS program for families receiving assistance under the rental voucher and certificate programs and is including $24 million in the contract renewal budget authority to allow the smallest housing agencies to hire FSS coordinators. 6. Tenant Protection Set-asides. HOUSING The Housing Certificate Fund will also serve a dual role of supporting families in FHA-insured, privately owned assisted housing projects affected by changes in project status. It is intended that eligible families who, through no fault of their own, are affected by HUD's management of the multifamily inventory be aided through the Housing Certificate Fund. The $373 million requested for fiscal year 1999 for Housing�s Tenant Protection will be used to provide funding for an estimated 17,000 Preservation Prepayment Voucher requirements, and 15,000 Property Disposition, Opt Out/Termination and Portfolio Re-engineering protection requirements. Included within the total is approximately $130 million for additional costs due to Multifamily Enforcement activities (including the cost of relocating affected families). Also, HUD is reviewing its policies on eligibility and type of Tenant Protections (enhanced vouchers, relocation assistance, etc.) available to impacted families. An administrative reserve of the $373 million estimate is included in the fiscal year 1999 estimate to accommodate expanded eligibility/cost per unit requirements as they are identified. LEGISLATIVE SAVINGS PROPOSALS. Over the past few years, the Administration and Congress have initiated efforts to slow Section 8 outlay growth. Actions have already been taken to reduce outlays by 1) limiting Annual Adjustment Factor (AAF) on high-cost project-based units and 2) reducing AAF for stayers. The Department is also requesting extensions of the following appropriations provisions: 1) lowering PHA fees and 2) lowering Fair Market Rent (FMR) from 45th to 40th percentile. The Budget reflects a number of proposals to restrain the growth of Section 8 outlays through program and administrative reforms. For fiscal year 1999, the Department�s legislative proposals for additional savings are described below. 1.Eliminate Preferences for Section 8. The Department proposes to continue to permit local flexibility in selecting income-eligible tenants for turnover and new units. In most cases, the tenant must still be very-low-income. The housing must not discriminate and must publish the selection criteria�usually first come, first served. Federal preferences had required that preferences be given to households who are: (a) paying more than 50 percent of income in rent; (b) being displaced; or residing in severely substandard housing. Fiscal year 1999 savings are expected to be $65 million from this proposal. HUD�s proposed legislative language will continue to target a substantial portion of Section 8 units to families with the most acute housing needs-those with incomes below 30 percent of area median income. 2.Eliminate Shopping Incentive. The subsidy for housing vouchers is calculated by deducting the subsidized family�s contribution toward rent (30 percent of "adjusted income") from the Payment Standard for a particular unit. Under current practice, a family may choose to rent a higher cost unit than the HUD standard new entrant stays in a unit below the HUD standard, this proposal would not allow the new entrant to receive the savings. Instead, the savings return to the Department. The new entrant still has the right to move to another lower cost unit and receive a savings. Fiscal year 1999 saving are estimated to be $9 million. 3.Minimum Tenant Rents. The Department proposes to require all tenants in assisted housing to pay a minimum rent each month of $25 with exceptions determined by the Secretary or PHAs. Fiscal year 1999 saving are expected to be $40 million. 4. Occupancy Standards. The Department proposes to provide a lower rent subsidy for a new one-person voucher/certificate holder or a mover based on the cost of an efficiency apartment instead of a one-bedroom. This proposal is initiated for the portable tenant-based program. A person could still rent a one-bedroom by paying the difference. Fiscal year 1999 savings are expected to be $27 million from this proposal 5. Income Verification. Savings will result from identifying tenants who under-report their incomes. By not fully disclosing income received, tenants pay a smaller amount for rent and thus, require HUD to pay a larger portion. Savings of $100 million are expected to start in fiscal year 2000. 6. Enforce Rent Reasonableness. The Department anticipates that its Section 8 Management Assessment program (SEMAP) rule will result in improvements in PHAs performance in carrying out their responsibility to ensure that Section 8 rents do not exceed comparable unassisted rents in the local market. Fiscal year 1999 savings are expected to be $30 million. Performance Indicators. Four indicators have been determined for the Housing Certificate Fund as indicated below: Indicator #1 For SEMAP, improve numbers in each performance category: 1998 a/ 1999 a/ a. Increase number of agencies passing with distinction; b. Increase the number of agencies passing, and c. Decrease number of agencies failing. a/ SEMAP will be implemented in fiscal year 1999 and produce baseline data in fiscal year 2000. Indicator #2 Increase the number of incremental units in HUD rental assistance programs available to serve the worst case housing needs of very low-income families. 1998 b/ 1999 b/ Indicator #3 Increase the percentage of families with children who move from welfare to work while assisted by tenant-based Section 8 (pertains to non-elderly, non-disabled families) 1998 b/ 1999 b/ b/ Baseline data is being developed. Indicator #4 By fiscal year 2000, reduce the isolation of low-income groups within a community or geographic area by increasing the percentage of Section 8 families with children living in low-poverty census tracts. 1998 1999 60 62 The attached table provides detailed description of the Housing Certificate Fund: Housing Certificate Fund(FY1997-FY2003)

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