National Housing Law Project Housing Law Bulletin

OMB Delivers One-Two Punch to Low-Income Housing

Overall Funding Levels and General Guidance

The passback includes only three-quarters of the funding proposed by HUD in its FY 1998 budget estimates.² HUD requested a total of $32.5 billion in discretionary budget authority.³ Although this represented a 60-percent increase over the $19.4 billion funding levels enacted for FY 1997, the bulk of the increase in the request — almost $9 billion — was attributable to the tremendous jump in the budget authority for renewing Section 8 contracts due to expire in FY 1998. That increase in budget authority would not have increased HUD's outlays for Section 8 in FY 1998 above its Section 8 outlays in FY 1997.

In recommending only $24.6 billion in total discretionary spending, the OMB passback would visit a blistering 25-percent cut below what HUD deems to be its program need for the coming fiscal year. The reductions are to be carried out through the combination of a virtually universal program-by-program, across-the-board 5-percent cut from FY 1997 funding levels and other devices, including level funding for Section 8 contract amendments, possibly shortchanging renewals, and zero funding for other programs perceived as new.⁴ Should funding levels of this magnitude emerge as the Administration's final position going to Capitol Hill, 1997 promises to be a very long and difficult year for housing advocates.

Missing Support for Low-Income Housing Programs

Even in the face of the overwhelming lack of support for HUD programs that OMB's proposed funding portends, its general guidance claims to embrace departmental transformation efforts. At the same time, OMB acknowledges that budgetary influences — including the pressure to balance the budget by the year 2002 and the continuing need to downsize — will force changes to the Department's plans.⁵ Addressing budget constraints by targeting limited housing resources to the elderly, disabled and working families, to the exclusion of the very poor, is a pervasive theme in much of the OMB recommendation.

New Voluntary Housing Block Grant

By far the most radical policy recommendation in the passback is the proposal to create a "voluntary" single-formula grant adjusted annually for inflation for public housing and both tenant-based and project-based Section 8. The passback suggests that such a grant is better in a number of ways than the current housing programs. OMB contends that its proposed system assures accountability by measuring performance against nationally set standards and by giving achievers (i.e., state and local government recipients) more flexibility to operate housing programs. In addition, OMB argues that its proposed block grant structure provides a framework for states and localities to coordinate housing assistance with welfare changes. The block grant design would relieve HUD of burdensome oversight obligations in the face of its shrinking staff coupled with the wide dispersal of housing assistance responsibility. OMB suggests that under the proposed block grant "family mobility and choice" are promoted and more assistance would be targeted to those low-income families with the fewest housing options because they cannot afford available housing.⁶

How the block grant would be funded. The combined budget authority requested by HUD is $21.689 billion for the discrete programs that would make up the block grant,⁷ not including contract renewals, for which the Department is seeking $12.25 billion.⁸ However, the passback proposes funding only at a level of $17.554 billion, not including renewals. Further, OMB suggests that over five years its new block grant proposal would yield $336 million in savings.

How the block grant would operate. Although the passback contains only broad outlines, this is how the so-called "Family Housing Assistance Grants" would work.⁹ Eligible grantees would be HOME entitlement communities or, where none exists, the states. With HUD approval, grantees could opt to deliver housing assistance through the Family Housing Assistance Grant. This radical restructuring means that participating jurisdictions, for example, could use PHAs to manage public housing but would be free to choose alternative management, including nonprofits or other entities. Where PHAs are the selected management entity, the "contracts must be performance-based, tied to national objectives."¹⁰

Welfare revision themes pervade the block grant. In OMB's view, this grant structure — which it compares to the "Moving to Work" demonstration established in the FY 1996 appropriations act — would assist states and localities in tying housing assistance for families with children to the welfare revisions, thus facilitating the pursuit of local goals informed by local conditions.¹¹ OMB believes efficiencies and cost effectiveness in the operation of housing programs will be stimulated by the requirement that grantees "manage a fixed, predictable funding amount, within a framework of national standards and performance goals. . . ."¹²

In fact, OMB suggests that if, by the year 2000, jurisdictions covering half of housing assistance now provided through public housing, certificates and vouchers and project-based Section 8 opt for the voluntary block grants, outlay savings will generate enough funds to provide incremental assistance to 100,000 new families between FY 1998 to 2000. This new assistance would be used as an additional carrot to entice jurisdictions to participate. The thrust of the passback — creating the ability to serve more families by providing smaller subsidies — is couched in terms of affording jurisdictions the flexibility to address problems with a local perspective.

Minimum standards and performance goals are uncertain. Although the passback suggests only some minimum standards and performance goals against which participating jurisdictions would be assessed, a consistent theme is serving working families. The passback suggests that jurisdictions could use their grants to serve more families by altering the terms of assistance (read "reduce aid") to families without a working member. Recommended goals include measurable success in moving families from welfare to work and in decreasing the number of long-term homeless families. In addition, OMB proposes judging grantees on increases in the number of families being assisted and reductions in the geographic concentration of assisted families.

Similarly, the passback proposes for discussion a number of minimum standards grantees might be required to meet in order to receive full funding and flexibility. The non-exhaustive list includes: (1) designing programs that make the housing assistance portable across both local and state jurisdictional boundaries; (2) utilizing preferences and eligibility criteria that equitably treat families in similar circumstances; (3) restricting full benefits to families headed by a full-time worker; (4) providing a benefit level that makes units affordable at the 40th percentile of local market rents; (5) restricting initial eligibility to families either working or enrolled in a welfare revision program whose incomes are below 50 percent of adjusted area median income; (6) tying continued eligibility to minimum state standards for welfare benefits, "HUD rules regarding personal behavior" and progress toward independence; (7) serving the same or an increased number of families; and (8) assisting currently assisted households.

Why would a jurisdiction participate? While urging HUD to fashion incentives to promote participation, OMB would offer a few financial and administrative carrots, including authorizing the waiver of CDBG and HOME requirements for a substantial percentage of those funds for an interim transition period and revising funding priorities for programs like HOPE VI to provide an advantage to jurisdictions choosing to participate in the Family Housing Assistance Grant. In addition, OMB proposes discretion for HUD to target Low Income Housing Tax Credits to participating jurisdictions, restricting any tax relief for multifamily project owners to properties in participating jurisdictions, and authorizing payment of rehabilitation costs from the FHA insurance fund for certain properties prior to the properties' restructuring.

One important point to note is that OMB's proposal is "voluntary" only in the sense that local governments may volunteer to take the public housing, Section 8 and HOME funds that would be spent in their jurisdictions for these purposes. If the local governments do exercise that option, PHAs and Section 8 landlords would not have any veto power. For them, the system would be mandatory, not voluntary; and for tenants and applicants, there is nothing at all voluntary about the program.

Ramifications of jurisdictions' failure to participate. While final incentives for participation remain vague, the passback is clearer on the penalties for jurisdictions which decline to participate in the Family Housing Assistance Grant. Subsidies would be reduced for both the public housing and Section 8 programs. For Section 8, subsidies would be limited to the cost of a housing voucher, with annual inflation adjustments limited to less than inflation, compared with the current limit of 120 percent of Fair Market Rent. For the project-based Section 8 program, debt would be restructured, followed by mandatory conversion to vouchers as projects expire. Public housing funding (already only 90 percent of need) would be capped at FY 1997 funding levels, without further adjustment. Of course, housing for elderly and disabled persons would be protected from these crippling restrictions.¹³

Prevention of Resident Displacement

Despite HUD's request for $12.25 billion to renew Section 8 contracts expiring in FY 1998, the passback recommends funding at $9.186 billion, alleging that a $1.6 billion surplus in existing contract renewal funds can be tapped for this purpose. Contract amendments are frozen at last year's level of $850 million, despite HUD's indication of a need for $1.244 billion. OMB indicates that its own and HUD's policy recommendations for restructuring rental assistance should obviate the need for more funding.

OMB proposes additional funding in the amount of $305 million to support 50,000 additional families in FY 1998. From FY 1998 through 2000, OMB proposes a total of 140,000 vouchers, with 40,000 of these earmarked as "replacement subsidies for low-income tenants in selected housing projects where the existing subsidy will cease."¹⁴ OMB recommends that HUD reassess its estimate of vouchers needed to replace subsidies as its project-based portfolio is restructured. OMB proposes to achieve additional savings — of $21 million next year, rising to $107 million by 2002 — through capping the rent subsidy for one-person households for all new and turnover units at the Fair Market Rent for an efficiency rather than for a one-bedroom apartment.¹⁵ More single people may become homeless if, already subject to food stamp eligibility elimination and other effects of welfare reform, they simply cannot find efficiency units to rent.

Preserving Existing Housing Investment

Although acknowledging that public housing operating and capital costs must be funded prior to any start-up of the block grant, OMB proposes $2.8 billion for operating subsidies and $2.85 for modernization. These figures represent reductions from last year's already inadequate funding levels of $120 million and $150 million, respectively, on those accounts; and represent almost 14- and 24-percent reductions, respectively, from HUD's budget request of $3.2 billion for operating subsidies and $3 billion for modernization funding.

Program savings are expected from increased tenant rent collections as well as alleged economies resulting from states' and communities' participation in the Family Assistance Grant program.

As has become usual in recent years, OMB recommends no funding for the Title VI preservation program to maintain affordable subsidized units reaching the end of their 20-year prepayment restrictions.

Funding Rejected for Perceived "New" Programs and CDBG Set-Asides

The passback lists 14 programs which it identified in HUD's budget estimates as "new," and rejects funding for all but two of them: the Brownfield Redevelopment Initiative and Round II of the Empowerment Zones/Enterprise Communities, both of which are designed to spur economic development activity. The recent Bridges to Work initiative is among the programs for which funding is rejected. This initiative is designed to assist in the transportation costs of low-income people getting to where more jobs are available. Funding would also be denied to HUD's Economic Development Initiative that is designed to stimulate private investment in neighborhood economic development projects.¹⁶ Other than Native American Housing Grants, Youthbuild and the Lead-based Paint Abatement program, considered by OMB as part of HUD's core programs, the passback omits funding for CDBG set-asides, including the Tenant Opportunity Program (TOP) which funds resident participation activities in public housing.¹⁷

Programs for the Homeless

Programs for homeless people are also recommended for level funding of $823 million for the third straight year, despite HUD's recommendation of $1.120 billion. The passback includes a legislative proposal contemplating a national competitive grant for jurisdictions for large one-time, multi-year funding for homeless programs. The thrust of the grant is that homeless programs would fund themselves at the end of the multi-year grant period, though OMB was vague as to how this would be accomplished.¹⁸

How the Passback Fails Low-Income Residents and Applicants

From the standpoint of both funding levels and policy recommendations, the passback proposes a blistering attack on the vulnerable populations most in need of housing assistance. First, an overall 25-percent reduction below HUD's estimate of need promises to inflict the greatest punishment on those least able to withstand it. The passback proposes addressing the havoc such a substantial cut would wreak by, for example, giving discretion to block grant jurisdictions, targeting full assistance only to families that include a full-time worker, and spreading a reduced amount of assistance over a larger aggregate number of households. This strategy fails to acknowledge the universally accepted reality that affordability is the number one problem for households in need of federal housing assistance. Shallow subsidies will rarely secure decent housing for those with extremely low incomes — the types of families often served by HUD's programs.

In some instances, projected savings from both the policy recommendations and budget gimmicks raise vexing questions. For example, OMB includes its annual projection of increased rent collections in public housing by matching tenant reported income with IRS data. OMB's budget authority savings forecast — $49 million in FY 1998, up to $120 million by 2002 — is not supported by past experience in this regard. Similarly, OMB's projected savings from placing a maximum rent subsidy limit for a one-person household at the efficiency level rather than the one-bedroom level for new and turnover units, may be unrealistic. As noted above, this move to contain costs could actually contribute to increased homelessness. The freeze for five years on operating subsidies at FY 1997 levels for PHAs whose local governments do not participate in the Family Housing Assistance Grant will only hurt residents who will face severely curbed services and maintenance to make up the deficit. Operating subsidies should minimally reflect 100 percent of the cost of running an efficient, well-maintained housing authority, including any future any income loss from welfare changes, and funding to implement rent reforms such as ceiling rents and earned income disregards that will encourage work and self-sufficiency by making a fairer rent structure.

Block grants, as proposed in the Family Housing Assistance Grants, have typically been a prelude to reduced funding for the same services or sometimes even added services.

The prospect of vesting states and HOME entitlement communities with responsibility for operating the low-income housing programs is troublesome. Unlike with welfare programs, such jurisdictions, with few exceptions, have limited or no experience in providing housing assistance, especially housing assistance for very poor people. Once funding decisions are left with cities and comparable jurisdictions, history bears out that the poorest, most vulnerable populations will lose.

Even nationally prescribed performance goals and minimum standards cannot forestall the siphoning off of funds from those most in need. Moreover, OMB validates this direction by themes that run through the passback of rewarding those moving to self-sufficiency to the detriment of those who, sometimes through no fault of their own, cannot make this transition. Furthermore, OMB's proposed performance goals and minimum standards fail to provide for any citizen participation in their formulation and condition continued eligibility for housing assistance on such vague precepts as compliance with "HUD rules regarding personal behavior."¹⁹

Another troubling aspect of the passback is the continued savaging of project-based assistance in favor of vouchers. History again demonstrates that, as funding is separated more and more from the physical structures, it is more readily diverted from low-income to moderate-income households. Poor people and their neighborhoods will receive a decreasing share of subsidy resources.

Next Steps in the Process

HUD was given one week, until December 4, 1996, to appeal OMB's determination. As a part of that appeal, the Department must provide as support complementary offsets and extensive additional information about the effect of budget increases or policy changes on specific departmental performance goals. As a prelude to that appeal, Secretary Cisneros forwarded a strong letter expressing "serious concerns" about both the funding levels and the block grant proposal.²⁰ The Secretary first noted that OMB's proposed funding level of $15.1 billion (including Section 8 contract renewals and amendments) is fully a billion dollars less than that enacted by a Republican Congress for FY 1997, and more than $2 billion less than the FY 1996 level. Citing the Department's "progress" in transforming public and assisted housing, the Secretary calls the housing block grant a "serious mistake" that would "literally stop our reforms in their tracks." Apparently chastened by the political response to that component of HUD's 1995 Reinvention Blueprint that proposed a similar concept ("we learned some hard lessons"), the Secretary argues that the block grant is unlikely to expand mobility or promote cost-effective management of shrinking funds, and would further invite a Republican Congress to "block and cut." This promises a lively December negotiation before the Administration's HUD budget is locked in place.

Despite the strong opposition already expressed by Secretary Cisneros, the Department's formal appeal is expected in early December. The pending appointment of a new Secretary adds an additional element of uncertainty to the final outcome of this year's budget-setting process.

1. OMB, Department of Housing and Urban Development FY 1998 Passback (undated, about Nov. 27, 1996). This 47-page document, hereafter also referred to as the passback, is on file at National Housing Law Project's Oakland office.
2. See letter from HUD Secretary Henry Cisneros to Franklin D. Raines, Director, OMB (Sept. 16, 1996) (on file at the Project's Oakland office); HUD Provides Fiscal Year 1998 Budget Estimates to OMB, 26 HOUS. L. BULL. 156 (Nov. 1996).
3. Budget authority is the authority to make commitments to spend money in the current fiscal year and future fiscal years. Outlay is the term used to describe the actual amount spent in any fiscal year. Outlays result from budget authority granted for the fiscal year plus long-term budget authority enacted and committed in past years.
4. Passback, at 46.
5. Passback at 1.
6. Id. at 6.
7. This compares with $11.23 billion enacted for FY 1997.
8. OMB Passback, Table at 4.
9. Id. at 8.
10. Id. at 7.
11. Once operational, the Moving to Work demonstration will authorize 30 PHAs to test strategies for delivering housing assistance more cost effectively, including providing incentives for working families and operating without constraints in several areas now regulated by federal law. See HUD FY 1996 Appropriations Act (H.R. 3019) Contains Important Substantive Changes, 26 HOUS. L. BULL. 66 (May 1996).
12. OMB Passback at 4.
13. Id. at 7.
14. Id. at 11.
15. Id. at 9.
16. Id. at 25.
17. Id. at 26.
18. Id. at 28.
19. Id. at 8.
20. Letter from HUD Secretary Henry Cisneros to Franklin D. Raines, OMB Director (Dec. 3, 1996).