Presented by John Hiscox
PHADA Vice President for Legislation and
Executive Director of the Macon, Georgia Housing Authority
April 22, 1998
Mr. Chairman, members of the subcommittee, my name is John Hiscox. I am the Executive Director of the Macon, Georgia Housing Authority. My agency administers 2,282 public housing units and 1,750 Section 8 certificates and vouchers. I am testifying this morning in my official capacity as Vice President for Legislation of the Public Housing Authorities Directors Association (PHADA). As you know, PHADA represents the professional administrators of about 1,650 housing authorities across the United States. On behalf of the organization's entire membership, thank you for giving PHADA the opportunity to testify on the FY 1999 HUD budget. We appreciate the fact that this subcommittee has given organizations such as ours the chance to be heard.
Rescission of Section 8 Reserves
Before getting into the substance of my testimony for FY 1999, I wanted to briefly comment on the FY 1998 supplemental appropriations legislation that is pending before a House-Senate conference committee. As you know, the House bill, H.R. 3579, would rescind more then $2 billion in Section 8 reserves to offset increased federal assistance for our troops in Bosnia in addition to helping to pay for disaster assistance needs around the country.
Mr. Chairman and members of the subcommittee, PHADA strongly opposes this part of H.R. 3579. As you know, last year the Department of Housing and Urban Development was able to identify a significant amount in Section 8 reserves ($9.9 billion) that could have been used to renew existing contracts. These reserves were recaptured from our individual housing authority accounts and used for a variety of purposes, including $3.6 billion for last year's disaster relief. Only $3.7 billion, or 37 percent of the total, was placed in a special HUD "Section 8 Preservation Account" to be used for Section 8 contract renewals. Congress supported and even encouraged this policy when it was first implemented about one year ago. We had a deal on these reserves and it was fair.
Congress endorsed the creation of the Section 8 Preservation Account because it recognized that Section 8 contract renewals will cost in the neighborhood of $13-$15 billion annually in just the next few years. With this in mind, HUD proposed in its FY 1999 budget that the $3.7 billion in the Section 8 Preservation Account be used to pay for part of the cost associated with contract renewals. The total cost for renewals next year is roughly $11 billion. The $3.7 billion in the fund would at least somewhat buffer the impact of this increase on the budget.
If the House bill were to be enacted, however, more than half of the funds remaining in the Section 8 Preservation Account would be seized for other purposes, thus placing hundreds of thousands of families at risk of losing their housing assistance. Indeed, PHADA agrees with HUD Secretary Andrew Cuomo, who last month noted in testimony before this subcommittee that the House bill would set a "dangerous precedent" and could ultimately result in the displacement and homelessness of 210,000 low-income American families. It is our obligation to point out as well that many of these people are the most vulnerable members of society, including the elderly, the disabled, and single mothers raising children, many of whom are now working their way off welfare up the ladder of self sufficiency. For this latter group, the stable, affordable housing made possible by Section 8 is critical to their success in escaping welfare, in part because it enables housing choices in close proximity to employment.
Like the Clinton Administration and the Senate, PHADA questions whether the rescission is even necessary. The Office of Management and Budget and the Senate have not proposed offsetting cuts in their supplemental spending legislation in recognition of the fact that the military and disaster relief spending is of an emergency nature and would not violate the Balanced Budget Act of 1997.
When considering this factor, we would ask the House to look at an analogy of a family facing a personal crisis. If a tornado or hurricane destroys a family's house, that family does not suddenly decide to stop paying its children's tuition. Rather, the family seeks some kind of other financial aid to pay for the disaster. The same principle should hold true in this case as well. And while PHADA's members acknowledge that increased military and disaster aid funding is certainly warranted in this instance, we do not believe the equally valid needs of 210,000 poor American families should be jeopardized when there is some bipartisan agreement that offsets are not even required.
Finally, I hope this body can see the obvious hypocrisy in helping families that are made homeless by a flood in a manner that will only serve to make other families homeless. In my state, tens of thousands of families have had their homes destroyed or damaged by this year's floods. Yet, I would wager that none of them, having experienced this tragedy firsthand, would want it visited on their poor neighbor who was above the high water mark, but instead would lose their home to termination of Section 8 Assistance. I implore you, don't let this flood strike twice!
FY 1999 Budget Priorities
I will now proceed on to our FY 1999 budget priorities. Over the course of the last few years, housing authorities have absorbed some of the largest spending reductions of all domestic discretionary programs. Funding for public housing operating subsidies, modernization, and Section 8 assistance have all been dramatically reduced. The cuts have been particularly distressing with respect to modernization. Funding for that line item has fallen from a pre-rescission level of about $3.7 billion in FY 1995 to just $2.5 billion now.
Housing authorities have been able to absorb some of the cuts because of some of the temporary administrative reforms Congress first enacted about three years ago. Indeed, over the last few years, this panel has taken a lead role in addressing some of the longstanding problems that, until recently, plagued the public housing program. Among other things, you have suspended federal preferences and the one-for-one-replacement law. You gave HAs more flexibility to design their own ceiling rents and earned income deductions, as well as approving modest minimum rents. You also removed several impediments in the Section 8 program, including the onerous "take one take all" and "endless lease" statutes. PHADA supported all of these initiatives, believing that they will go a long way toward improving the program from both a societal and fiscal standpoint. We commend you for taking appropriate actions. They are already bearing fruit in the form of increased income, reduced expenditures and more socially viable developments.
Still, even with some of the additional flexibility, we simply cannot withstand any further spending reductions unless we are given more leeway in terms of how we set our rents, whom we admit and how we administer our programs. In addition, we need permanent statutory changes; we cannot continue operating on a year-to-year basis never knowing for sure whether current law will remain constant.
In our testimony before the House and Senate authorizing committees over the last three years, PHADA has offered specific recommendations that would give housing authorities permanent relief in the area of rent-setting and income targeting, which we believe would truly deregulate housing authorities in a manner that will result in real and effective cost savings. In our view, Congress has two distinct choices; it can either free housing authorities from the restrictive policies that drive up operating costs and result in communities containing over-concentrations of poverty. Alternately, Washington can continue dictating how much we charge residents for rent and whom we admit, and otherwise micro-manage our programs in a thousand ways, but then you must provide adequate funding. Straddling the fence on these choices, in the form of short funding and token deregulation, is a certain recipe for both programmatic and fiscal bankruptcy.
While we are optimistic about the prospects for an authorizing bill before the 105th congressional session ends, we hope this subcommittee will extend its previously enacted reform provisions for yet another fiscal year if Congress fails to enact an authorizing package before adjournment. In any case, we suggest that, at a minimum, Congress enact the following changes into law in order to save money and improve the public housing program:
PHADA Priorities (Reform Provisions for FY 1999)
Operating Subsidy
I would now like to comment on the issue of operating subsidy. When the Federal government took complete control of HA admissions and rents between 1968 (Brooke Amendment) and 1981 (Housing and Community Development Amendments Act of 1981), the previously self-sufficient public housing program was financially bankrupted. To compensate, the Performance Funding System (PFS) operating subsidy was instituted in 1975, guaranteeing that PHAs would receive at least a minimum operating income determined by formula (the AEL, or allowable expense level). Since PHAs had lost control of their income, the Federal government pledged to cover the difference between the AEL and PHA income with PFS operating subsidy. Until the last couple of years, the bargain held firm.
Now PFS subsidy, our lifeblood, is endangered. As I noted a few moments ago, funding for the Performance Funding System (PFS) has basically remained stable the last few years without any adjustments for inflation. In FY 1996, for example, PFS was only funded at about 90 percent of the amount required to fund PHAs eligibility. In fiscal years 1997-98, housing authorities were still being shortchanged, receiving approximately 94-95 percent of their total needs. This is despite the fact that Allowable Expense Levels are being trended at rates significantly below general inflation.
In its initial FY 1999 budget submission to the Office of Management and Budget, HUD said that about $3.1 billion was needed to fully fund PFS. Later, in its FY 1999 "post passback initiative", HUD adjusted its estimates to $2.95 billion. In its final budget submitted to Congress this past February, however, the estimate was again adjusted downward to about $2.818 billion plus $113 million in FY 1998 carryover money that HUD said could be used next fiscal year.
To be fair, there is some good news here. The limited reforms I discussed above, combined with welfare reform and a healthy economy, have resulted in increased resident incomes and rents. This, in turn, limits the demand for operating subsidy, as PHADA predicted (in the face of much scepticism) that it would.
Nevertheless, PHADA has serious concerns that the Department's operating subsidy request will not be sufficient to meet current needs. HUD has a very shaky track record in estimating PFS. Worse, HUD has sometimes in the past appeared to be manipulating figures toward a predetermined end. Simply put, we fear that HUD's budgetary recommendation may be based on faulty assumptions that were simply forced to fit in the Department's overall budget picture.
For example, one of our sister organizations, the Council of Large Public Housing Authorities (CLPHA), recently pointed out that HUD's budget assumes that 75,000 units will have been demolished by the end of FY 1999. HUD's operating subsidy estimates are correspondingly based on this assumption. However, HUD noted in its how budget justifications that actual demolitions through FY 1997 totaled only about 18,000. Could it be that some of these units nominally slated for demolition are actually more solid than these estimates?
We are also concerned that the Department's estimate of increases in tenant income may prove too optimistic. HUD predicts an increase of about 4 percent for FY '99. While some HAs have seen tenant incomes rise in the three-to-four percent range in the last year, the increases have not occurred across the board. In addition, we are concerned that resident incomes will drop as welfare assistance is phased-out or even terminated in some states; residents will then pay significantly lower rents that will ultimately have to be made up by the operating subsidy. HUD Policy Development and Research at one point estimated that the "transfer cost" of welfare reform to HUD programs would cost billions of dollars a year, but we see not a dime of this impact reflected here.
Lastly, it must be remembered that a significant part of a PHAs budget consists of items such as utility rates over which we have little control. While all these costs will undoubtedly rise again this year, HUD's budget proposal would basically flatline the operating assistance each HA receives. Clearly, this will make it even more difficult for our members to serve their residents. Continued indefinitely, it will bankrupt us all.
To summarize on PFS, PHADA strongly urges the Congress to continue to honor its commitment to fund PFS at 100 percent of formula eligibility, at least until such time as PHAs are sufficiently deregulated to take charge of their own fiscal destiny. Further, we urge that the appropriations for this purpose be set for FY 1999 at the $3.1 billion level contained in HUD's original budget submission to OMB. Since actual expenditures are limited by formula, there is no risk of overspending. In the unlikely event that funds appropriated exceed the formula allocation, any residual would, as in the past, be applied to future year's need.
Public Housing Modernization
Second only to operating subsidy, PHADA's highest priority is the public housing modernization account. As you know, funds in this program are used for major work items such as replacing boilers and roofs, removing dangerous lead-based paint, and renovating obsolescent properties -- many of which are half a century old. The dollars that are used by housing authorities under the modernization program go the very heart of public housing -- providing safe and decent shelter to families in need.
As I mentioned a few moments ago, funding for modernization has been reduced by more than $1 billion over the last few years. Please make no mistake about it, these cuts have had a serious impact on our members' ability to address both their backlog and accruing needs. We can no longer incur these kinds of budget reductions in modernization if we are serious about preserving our $90 billion investment in public housing physical plant. Accordingly, PHADA is recommending that funding for public housing modernization be set at $3.2 billion, as opposed to the insufficient amount of $2.55 billion requested by HUD.
Despite the fact that we are proposing a substantial growth in spending, I would point out that PHADA's recommendation would not result in an overall net increase in the HUD budget. This is because we are recommending that the entire funding for the HOPE VI program be folded back into modernization, from which it was originally taken. This would result in a total modernization outlay that is lower than the combined total of mod and HOPE VI. I will outline our rationale for this change in a moment.
CIAP/Small PHAs
First, I want to emphasize that PHADA supports provisions in H.R. 2 which include small HAs in the capital formula. Right now, housing authorities with fewer than 250 units can only obtain modernization funds through the competitive Comprehensive Improvement Assistance Program (CIAP).
While CIAP is very helpful, there is not enough money in the program available to meet the needs of small HAs. In my home state of Georgia, for example, we have 155 PHAs with less than 250 units and 99 of them applied for funding in 1996. The total of all applications exceeded $172 million, but there was a little less than $15 million available to share among them. Emergency modernization, such as replacing furnaces with burned out combustion chambers that vent carbon monoxide gas, consumed $13.5 million of the total. For all but a handful, other capital improvements were out of the question. The situation eased somewhat in 1997 because the Georgia HUD office campaigned for funds recaptured from other jurisdictions, but the total amount ($35.7 million) was still less than a single HOPE VI grant to one large Georgia PHA.
All across the country, smaller HAs are experiencing the same kinds of problems. H.R. 2 would help correct the situation by providing them with a more steady stream of badly-needed capital funding. In addition, such a change might help HAs leverage other outside sources of money that could be used to offset the costs of their ongoing modernization needs. We therefore urge you to support this provision and make it permanent law.
HOPE VI
Next, I would like to discuss the HOPE VI program. As you know, the administration has touted this program as being instrumental in ridding the country of some of its worst public housing developments. I want to make it clear that PHADA fully supports the goals and objectives behind the HOPE VI program. Nevertheless, we have serious concerns about the way it has been administered, especially during the first few years of the program.
To put it bluntly, many of the initial grants were allocated to some of the most historically mismanaged, politically-influenced and PHMAP troubled HAs in the country. Not surprisingly, some of the recipients have not used their funds in a sound or cost effective manner. Moreover, in some cities, the per-unit costs have reached or exceeded $150,000-$200,000. Senator Barbara Mikulski, one of the program's original authors, expressed reservations that HOPE VI costs in her home town of Baltimore may be as high as $300,000 per unit.
At the same time that some of the large HOPE VI grantees are not using their funds wisely, smaller HAs are struggling to provide basic services. I go back to the example of my home state where many smaller HAs were not able to obtain funds for emergency needs while one large Georgia agency had received tens of millions of dollars in HOPE VI grants when its unspent modernization backlog approached almost $100 million. It is unconscionable for a single HOPE VI grant for one development in one PHA to exceed the total available to 155 well-managed small PHAs in the same state. It is equally unconscionable to use HOPE VI to develop mixed income golf course communities with six-figure unit costs when small PHAs can't even replace a dangerous furnace.
While we obviously have problems with the way the program has been administered, I must observe that PHADA believes HUD has made significant improvements under the leadership of Elinor Bacon, Deputy Secretary for Public Housing Investments. For example, funding is now open to all types of agencies, not just large HAs. The competition now appears to be honestly run, perhaps in response to a strong HUD IG audit report. In addition, HUD is working to getting a handle on the per-unit cost issue and setting limits on what grantees may spend. The result is smaller, saner, more competently administered projects that may actually serve some useful demonstration purposes.
Nevertheless, PHADA strongly believes that it would make more sense for Congress to fold the current funding for HOPE VI back into the modernization account (from whence it came, the creation of HOPE VI having been matched by a corresponding reduction in modernization) instead of awarding funds through the competitive grant process. Housing authorities should then be permitted to use their CGP funds for purposes currently allowable under HOPE VI, including demolition, replacement housing, and mixed use developments. We believe this would allow HAs to then decide how to best use their funds as part of a comprehensive planning process, a process that would then be disciplined by the common sense necessity to balance the cost of HOPE VI with their other needs. When combined with other reforms I have already outlined (such as allowing small HAs to receive formula modernization funds) this would result in a rational system for preserving and, when feasible, recycling the nation's $90 billion capital investment in public housing.
Public Housing Drug Elimination Program
Finally, another priority for our membership is the preservation of the Public Housing Drug Elimination Program (PHDEP). Originally established in the late 1980's, this program has been one of the most successful under HUD's jurisdiction. Too many public housing neighborhoods have been ravaged with drug-related criminal activity, but many of our members have been able to turn the tide with PHDEP. In addition, PHDEP funds can sometimes be multiplied by a factor of three to five times with local leveraging. We, therefore, urge you to continue funding for this critically-needed funding at $310 million in FY 1998, the same amount allocated in the current fiscal year.
We further urge you to continue making PHDEP funds available on the basis of competitive grants. While PHADA generally favors formula grants, competition in PHDEP favors PHAs who can demonstrate real need, a rational plan to address that need and administrative competence. Formula distribution would give funds to virtually all PHAs, including those that have never attempted to apply. It would, however, reduce the amount available to any individual PHA to a level that would gut the program. PHADA urges you to continue to fund PHDEP, and keep it as a competitive grant.
Mr. Chairman and members of the subcommittee, that concludes my formal testimony. Once again, thank you for providing PHADA the opportunity to testify at today's hearing. I would be happy at this point to answer any questions.