Chairman Shays, Ranking Member Towns, and Members of the Subcommittee, thank you for inviting me here this morning. If it pleases the Committee, I would like my testimony entered into the record. Thank you.

I appreciate the opportunity to discuss HUD's reform efforts and plans for the future and I look forward to building a productive, bi-partisan working relationship with you and the members of your committee over the next four years.

Before I begin, I'd like to take a moment to salute my predecessor, Secretary Henry Cisneros, for his compassion, vision, and commitment to HUD. It was a personal honor to work with him over the last four years. Today, HUD is a stronger, abler, more cohesive Department because of Henry's leadership. He is, in my opinion, the best Secretary in the history of the Department.

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The past four years have proved that when we work together we can produce real results for America. Today, because of all of our efforts, the economy is strong; jobs are up; and homeownership is up. At the same time, crime is down; unemployment is down; and so is poverty. President Clinton has America pointed in the right direction.

Yet, as the President reminded us during his State of the Union address a few weeks ago, serious challenges remain. One out of five American children still lives in poverty. Over five million families spend over 50 percent of their income on rent. Many in our middle class play by the rules and work hard every day, but they have not gained a fair share of the American Dream.

These challenges come at a time when the Federal government has fewer and fewer resources. If we had to make a choice between fiscal prudence and meeting the obvious needs of troubled Americans, the choice would be difficult -- indeed.

But in truth, we have no choice because we have an undeniable responsibility to balance the budget and, at the same time, we have an equally undeniable responsibility to meet the challenges that lie ahead -- increasing homeownership for all Americans, promoting fair housing, reducing homelessness, fostering economic growth and good jobs. We have to do both.

How can we do that, how can we meet our social and fiscal obligations? With a government that is smarter and smaller -- and a Department that is more sharply focused and better managed. HUD's proposed budget for fiscal year 1998 recognizes this need to meet both our fiscal responsibilities and social needs as we begin to address the challenges we must face in the next four years. I'd like to focus our attention on the two major issues we must resolve in the coming years -- the Section 8 crisis and HUD management reform issues.

America faces a choice: Renew or not renew.

As this Committee knows, a record number of Section 8 contracts are beginning to expire, with 1.8 million expiring in FY 1998. That's more contracts than have expired in the previous five years combined.

In 1998, if we do not renew these Section 8 contracts, what will happen? 4.4 million people could risk losing their homes -- either through evictions or unbearably sharp rent increases. Over 90 percent of these Americans are elderly persons with disabilities, or families with children. That means in Bridgeport, Connecticut over 3000 people will be at risk, and in New York City more than 110,000 could become homeless. The American people should not have to bear the high social costs, and should not have to face the potential social chaos, of an unprecedented explosion of homelessness that would surely arise if we did not fully renew these contracts. None of us would advocate a policy guaranteed topush hundreds of thousands of elderly, children and disabled Americans into homeless shelters and onto the streets and grates of our communities. That is why I believe we must renew these contracts.

Renewal must protect America's communities. Our solution must be community-friendly. The answer cannot be to divert funding away from other vital programs. To do so, would directly or indirectly undercut the needs of America's communities, many of whom are working hard to generate new jobs for welfare recipients, control homelessness and create more affordable and safe housing. A weakening of the social and economic fabric of our communities would surely be the result if we choose to fund the expiring Section 8 contracts by making draconian cuts in other HUD programs like CDBG, public housing operating support, homeless assistance and many others. The potential harm of a 35% across the board cut in programs, which is what it could take to fund the Section 8 contract renewals out of HUD's budget, could translate into: a loss of $1.9 billion in public housing operating and capital assistance; $1.61 billion in CDBG cuts; a decline of more than $500 million in the HOME program funding; a cut of $288 million in homeless assistance; and a reduction of $71 million HOPWA support.

I believe this kind of "cut-and-shift" approach -- robbing Peter to pay Paul -- would be short-sighted and self-defeating. While such an approach would avert the Section 8 crisis, we would simultaneously be triggering other community crises: in homelessness and affordable housing -- as states, counties and cities small and large would face billions in cuts in 1998 alone. For example, a 35% across the board cut of HUD's budget could translate into Bridgeport, Connecticut suffering a $6.6 million loss in HUD program funding, while New York City could confront a $416 million loss.

HUD's solution to the renewal crisis calls for tough reforms and new spending. Specifically, in the budget, we ask for $5.6 billion in new budget authority to renew the expiring Section 8 contracts, and propose program reforms that would save $2.4 billion in outlays in FY 1998 and $15 billion in outlays over the next five years.

Our FY 1998 budget proposal offers a solution to the renewal crisis in a way that protects America's communities. Under our proposal, none of the 4.4 million at-risk Americans would go homeless and none of America's communities -- none of our communities -- would face unbearable and punitive cuts in other critical HUD programs -- all within the constraints of the President's five year glide path to balancing the budget. In particular, our approach stresses tough savings reforms.

Our proposed reforms would:

• Increase the number of working families to fill vacant units.
• Limit the annual rent increases for project-based units.
• Maintain $25 minimum rents in public and assisted housing.
• Reduce administrative fees for public housing authorities.
• And, most importantly, end excessive subsidies to landlords.

The problem of excessive subsidies to landlords is a special problem for Section 8 contracts that will expire on some 500,000 units over the next few years in apartment buildings that are insured by the Federal Housing Administration, or FHA. All of these units have rents well in excess of the market rents in their neighborhoods. We are determined to end excessive subsidies on these properties. But we must do so in a way that protects families, preserves affordable housing and does not lead to massive defaults and foreclosures that could cost FHA billions in insurance claims.

The Department's portfolio re-engineering proposal, what we call "Mark-to-Market," generates $1.25 billion in discretionary savings between FYs 1998 and 2002 by reducing rents to market rate, providing tenants with choice, extending affordability and rehabilitating apartments in disrepair. It also generates five-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.

I am confident that our Mark-to-Market approach is a good starting point for a constructive, bi-partisan dialogue with this Congress, that gets a comprehensive fix for this problem in place this year. It shows clearly that HUD is prepared to make the necessary reforms in order to control program costs while protecting families.

I would like to make very clear, however, for this Oversight Committee, that the need for the requested 30 percent increase in our budget is not the result of agency mismanagement but the inevitable consequence of bi-partisan actions taken over many years to renew and maintain Section 8 housing assistance for low-income Americans.

By squarely, honestly and in a bi-partisan manner facing this crisis now -- and making the tough decisions needed to control spending -- we can take critical steps to correct a historic problem and reform the way HUD does business.

The Section 8 program was forged in a bipartisan spirit and it must be fixed with that same bipartisan spirit. I look forward to working with this Committee and this Congress to pass a comprehensive and community-friendly solution.

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While averting the Section 8 crisis is HUD first priority, our second challenge is restoring the public's trust in HUD.

As I said earlier, government must find ways to be smaller and smarter. We must remain committed to worthwhile goals but not to failed means. We must be willing to admit that some programs don't work. We must recognize the right roles for government and the private sector.

Our 1998 budget reflects these believes. In the budget, to help ensure our partners at the local level are spending HUD funds wisely, honestly and efficiently, we propose:

• to crack down on bad and irresponsible landlords;
• to clean up troubled public housing authorities; and
• to intensify existing efforts to clear crime, drugs and gangs from public housing.

I understand in a very personal way the need to reform HUD's management. I entered housing -- not as a government official -- but as a builder, operator and manager, responsible for meeting a payroll and balancing a budget. HUD needs to continue to reinvent and adopt a private sector mentality. To that end, we will be targeting efforts to show that "HUD Means Business." The agency will borrow -- for a limited time -- business executives and experts from leading companies to help us implement the financial and management reforms we must make.

I am proud to continue the task that Henry Cisneros began four years ago -- bringing this agency back from the brink of public disrepute by modernizing and preparing it for a new century. And I also recognize that while genuine progress has been made in the past four years -- progress acknowledged by a number of outside experts -- much remains to be done.

While I know we will discuss some of these issues in your questions, let me note a few of the areas that most concern me:

• HUD continues to be listed as a high-risk agency by the General Accounting Office. While the GAO acknowledges progress -- citing "substantial efforts over the past two years" -- they are right to say that a lot more must be done. In short, HUD's public purpose is too vital -- especially in this time of sweeping economic and social transformation as we move from an industrial to an information age -- to be compromised in any way by waste, fraud, abuse and poor management. We must go further.
• HUD continues to have problems with its financial control and management systems. While we've made improvements in the past few years, these changes are not sufficient if we are going to make sure this agency effectively and efficiently serves the Nation.
• While HUD is right on target for reducing the size of its staff -- from 13,200 in 1992 to 10,400 today and ultimately down to 7,500 in 2000 -- we must, in the next few years, bring our long-term mission in line with our reduced and dwindling resources.

As I pledged in my confirmation testimony in the Senate, management reform will be a top priority for me. It is perhaps a thankless task, but I believe the moment is ripe, as the most recent GAO report makes clear, for a close collaboration between HUD and Congress to clean up the agency for the long-run.

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I look forward to building a positive, constructive relationship with this Committee and with the entire Congress to meet the housing and economic development challenges facing us as we head towards a new millennium. And I look forward to your questions.

Thank you.