National Housing Law Project Housing Law Bulletin

HUD has outlined its Fiscal Year 1998 budget estimates in a letter to the Office of Management and Budget (OMB).¹ While overall discretionary budget authority of $32.4 billion and outlays in the amount of $36.7 billion are projected, HUD is likely to submit revisions after the November elections. Among the items for which revised estimates are probable are public housing operating subsidies, in recognition of the inescapable impact reductions in resident income will have on public housing operations as a result of welfare reform.

Although the operating subsidy estimates fail to include adjustments for rental income losses as a result of welfare reform, the Department quickly acknowledges the need to accommodate its programs to welfare reform’s realities and demands — both actual and anticipated. To this end, the Secretary sets out an urban community, low-income focus for HUD’s FY 1998 Budget with a goal of tapping into existing programs like public housing and Section 8 to assist families moving from welfare to work.

HUD’s stated dual strategy is (1) to revitalize inner city neighborhoods by encouraging the return of private investment and higher income residents and (2) to connect inner city residents with jobs in a broader geographic area. In pushing this agenda, the Department is promoting the "Bridges to Work" initiative which, for the current years, provides funding to help transport residents of low-income communities to jobs in the suburban belt and "Campus of Learners" which seeks to connect educational programs in public housing communities to local universities and other institutions of higher learning.

The budget estimates acknowledge that Section 8 contract renewals are the most daunting challenge facing the Department, with contract expirations ballooning over the next five years: 833,500 in FY 1997 and 2.8 million by FY 2002. While recognizing that, to date, Congress has renewed expiring contracts, the Secretary cautions against blind expectation of such continuing commitment in the face of skyrocketing renewal costs, rising from $4 billion for FY 1997 to $13.5 billion in FY 1998.

President’s Urban Agenda Priorities

The budget estimates reflect a continuation of departmental efforts to advance the President’s urban agenda priorities which are summarized as (1) community empowerment activities, (2) the transformation of public and assisted housing, (3) the promotion of homeownership, (4) ensuring fair housing, and (5) correcting internal management deficiencies. HUD’s letter to the OMB also recognizes the absence of political support for performance-based funds advanced in HUD budgets over the past two years. Accordingly, the Department will seek ways to consolidate and coordinate programs within existing authority without statutorily authorized performance-based funds.

While short on the detail of the components of funding proposals for each program, the budget estimates do offer a retrospective of HUD’s focus during the past year and a forecast of likely HUD direction in the coming year.

Public Housing Transformation: Phase II

The budget estimates make clear the Department’s intention to continue its four-pronged strategy of (1) demolishing the most distressed projects in favor of smaller scale developments, (2) upgrading the management capacity of troubled housing authorities, (3) rewarding those who move from welfare to work while creating educational and job opportunities for residents, and (4) providing stiffer admissions and eviction standards.

The Department recounts its achievement of program changes through administrative provisions in the FY 1996 appropriations despite the failure of the Congress to adopt comprehensive public housing and Section 8 reform legislation. These include repeal of federal preferences and the one-for-one replacement rule, rent reforms, incentives for partnering between private sector developers and lenders to demolish and replace the worst public housing, use of modernization funds for development, and mandatory conversion of public housing.² The budget estimates state that public housing’s physical, management and social advances are the result of these reforms and other departmental initiatives.

The Department measures the success of the physical transformation of public housing by quantifying its demolition and construction activities for the past three years, including the award of more than $1.4 billion in HOPE VI grants, demolitions of more than 30,000 public housing units en route to a goal of 100,000 demolitions by the end of the century and including demolitions of 14,000 of "the worst public housing units" such as Cabrini-Green and Henry Horner in Chicago, Richard Allen in Philadelphia and Allen Parkway Village in Houston.

With respect to management transformation, the appointment of judicial receivers in D.C. and Kansas City and HUD takeovers in Chicago and San Francisco are cited as contributing to advances taking place in those cities.

On the social transformation side, HUD sees as pivotal its Campus of Learners initiative, which ties public housing developments to educational institutions in their communities, and lease changes including "one-strike and you’re out" and Operation Safe Home.

FY 1998 Public Housing Budget Estimates

HUD’s goals are to reestablish stable funding for the core programs, public housing operating subsidies and modernization in the wake of cuts in both the FY 1995 and 1996 budgets. Preparing the buildings to attract and keep higher income residents — in keeping with the Congressional directive and Administration will — is offered as a rationale for increased funding for capital costs. A request of $3.1 billion is sought for modernization.

Public housing operating subsidies’ need of $3.2 billion is set out in the estimates, although, as stated earlier, revisions to this number are likely after preliminary assessments of the impact of welfare reform on the ability of public housing tenants to pay the rent.

Continued support for the HOPE VI program for revitalization of severely distressed public housing is sought. The budget estimates propose $500 million for demolition and on- and off-site hard unit reconstruction. In addition, 20,000 replacement vouchers are sought to relocate families displaced as a result of HOPE VI demolitions.

A $300 million set-aside from modernization is sought to aid the potentially 3 in 5 public housing households affected by welfare reform. The funding is to be used to retrofit community facilities on or near public housing to deliver services.

The budget estimates include $360 million for drug elimination grants, a $20 million increase over the FY 1997 request. These funds, which are awarded by competition, support community policing, youth programs and resident services. An increase for Operation Safe Home within the Drug Elimination Grant Program is also included in the estimates.

Incremental and Non-Incremental Section 8 Units Requested

The budget estimates highlight that, while continuing to advance reforms proposed in the failed authorizing bills during the past year, the Department intends to seek new legislative "initiatives that recognize the profound impact of welfare reform on public and assisted housing residents."³ The details of those initiatives are unknown at present, although HUD acknowledges the need for full utilization of all the resources at its disposal and those outside the Department to help meet the grave shortage of affordable housing. The strategy includes a request for 70,000 one-year incremental certificates through FY 2002.

For the 1998 fiscal year, 30,000 such certificates will be used for implementation of the new welfare program, Temporary Assistance of Needy Families (TANF), to be distributed by collaboratives comprised of state or local welfare agencies and public housing authorities; 15,000 certificates will be dedicated to permanent housing for the homeless; 15,000 will serve the needs of persons with disabilities including people in need of housing as a result of revised PHA allocation plans following designation of housing of for elderly-only occupancy; and finally, 10,000 certificates are dedicated for portability and for litigation settlements.

These incremental units will supplement a request for 58,000 non-incremental certificates: 20,000 to accommodate the needs of households facing displacement as a result of public housing demolitions and 38,000 for those who may lose their homes as a result of changes in the status of the HUD multifamily inventory.

Assisted Housing Transformation

For the multifamily inventory HUD sees its role as (1) repairing the structural and financial condition of the troubled portfolio; (2) rewarding welfare-to-work efforts of residents and creating educational and job opportunities as with public housing; and (3) modifying FHA’s "delivery systems" consistent with industry needs.

The Department recounts its two-year effort to produce plans to reengineer the FHA-insured, Section 8 multifamily housing portfolio and the well-documented conclusion that many properties are oversubsidized.

Although acknowledging the demonstration authorized in the FY 1996 Appropriations Act and the expanded demonstration for FY 1997, HUD highlights uncertainties about the owners’ tax consequences when debt for the oversubsidized properties is restructured as preventing implementation of its proposal, which it claims can achieve annual savings of more than $2 billion.

To address the daunting needs of this stock, the Department has included in the budget estimates 58,000 non-incremental units as noted above. Of the non-incremental certificates to be requested, 17,000 will be devoted to families in projects with owners prepaying their FHA-insured mortgages; 5,000 will keep rents affordable for families whose rents may increase to market as a result of the Department’s multifamily debt restructuring; 5,000 will be devoted to families in HUD-held buildings in order to avert their displacement pending determination of the ultimate disposition of those buildings; 5,000 will be reserved for families in buildings with expiring contracts whose owners will not renew; and the remaining 6,000 will be used to "protect families who live in buidlings that are the focus of HUD’s efforts to enforce property and other contractual obligations."⁴

Community Development Needs

The Department sounds themes repeated over the past four years of providing local communities the flexibility to design programs that most efficiently meet their needs by reducing federal requirements, while at the same time imposing greater accountability. The Administration claims to have leveraged successfully billions of dollars in private investment in and job opportunities for inner city neighborhoods through a variety of initiatives. These include (1) Empowerment Zones and Enterprise Communities, which offer tax incentives and other funding to generate jobs; (2) the Economic Development Initiative (EDI), designed to operate as a catalyst for private investment in economic development activities in inner city neighborhoods; (3) homeownership zones; and (4) Youthbuild, which promotes low-income housing construction while providing skills training and employment for disadvantaged young people.

Homeless and Other Special Populations

Citing funding increases in the Administration’s first two years and service to almost a million more homeless persons from 1993 to 1995, the budget estimates herald the success of the "continuum of care" approach. This Administration initiative offers an integrated approach to service delivery, including outreach, transitional and permanent housing, and supportive services. The new budget will seek authority to consolidate the six separate McKinney Act homelessness programs into a single $1.1 billion formula-based program. Special emphasis will be given to populations with multiple diagnoses.

HUD seeks $214 million for Housing Opportunities for Persons With AIDS to facilitate the development of long-term comprehensive strategies to assist person with HIV/AIDS and their families for which funding will be distributed competitively.

Affordable Housing Production and Community Planning and Development

HUD touts removal of "regulatory impediments" to the HOME program and creation of relations with pension funds and state housing finance agencies, for both production of new units and preservation of existing ones, as one hallmark of the past few years. For the coming fiscal year, authority will be sought to introduce a loan guarantee component into the HOME program.

The consolidation and streamlining of housing and community development requirements into the comprehensive "Consolidated Plan" are viewed as cornerstones of the Administration’s community development agenda. To continue community planning and development as a priority, the Department plans to seek level funding of $4.6 billion. This funding can advance the welfare reform agendas of states and localities by providing funding for supportive services to help families move from welfare to work. In addition to seeking expanded Empowerment Zone authority, a specific request of $750 million is sought for economic development activities in distressed areas, including $500 million requested for HUD’s Economic Development Initiative, $150 million for an undefined homeownership initiative, and $100 million for clean-up and redevelopment of "brownfield sites" (abandoned industrial or commercial sites that either are or are perceived to be contaminated), partly in partnership with the Environmental Protection Agency (EPA). A set-aside of $35 million is sought from the $500 million EDI request for interagency metropolitan strategies involving HUD, the Department of Transportation, the EPA and the Department of Commerce.

Next Steps

OMB is expected to respond to HUD’s budget estimates in a late November "passback," setting out the Administration’s idea HUD’s FY 1988 budget ought to be. HUD then has an opportunity to respond to OMB before submitting its final budget after the first of the year.

1. Letter from Henry Cisneros, Secretary of HUD, to Franklin D. Raines, Director, OMB (Sept. 16, 1996) (hereafter "budget estimates") (on file in the Project’s D.C. office). OMB Circular A-11 (June 13, 1996) requires that federal operating agencies submit budget estimates to the OMB before the close of the previous fiscal year.
2. Letter from Henry Cisneros, supra note 1, at 9.
3. Id.
4. Id. at 14.