[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
PUBLIC HOUSING IN THE 21ST CENTURY: HUD'S VIEW ON THE FUTURE OF PUBLIC 
                      HOUSING IN THE UNITED STATES

=======================================================================



                                HEARING

                               before the

                       SUBCOMMITTEE ON FEDERALISM
                             AND THE CENSUS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JULY 18, 2006

                               __________

                           Serial No. 109-231

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                      http://www.house.gov/reform




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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
JON C. PORTER, Nevada                C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas                BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia        ELEANOR HOLMES NORTON, District of 
PATRICK T. McHENRY, North Carolina       Columbia
CHARLES W. DENT, Pennsylvania                    ------
VIRGINIA FOXX, North Carolina        BERNARD SANDERS, Vermont 
JEAN SCHMIDT, Ohio                       (Independent)
BRIAN P. BILBRAY, California

                      David Marin, Staff Director
                Lawrence Halloran, Deputy Staff Director
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

               Subcommittee on Federalism and the Census

                   MICHAEL R. TURNER, Ohio, Chairman
CHARLES W. DENT, Pennsylvania        WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       PAUL E. KANJORSKI, Pennsylvania
VIRGINIA FOXX, North Carolina        CAROLYN B. MALONEY, New York
BRIAN P. BILBRAY, California

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                     John Cuaderes, Staff Director
                          John Heroux, Counsel
                         Juliana French, Clerk
            Adam Bordes, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 18, 2006....................................     1
Statement of:
    Bernardi, Roy A., Deputy Secretary, U.S. Department of 
      Housing and Urban Development; and Orlando J. Cabrera, 
      Assistant Secretary for Public and Indian Housing, U.S. 
      Department of Housing and Urban Development................     5
        Bernardi, Roy A..........................................     5
        Cabrera, Orlando J.......................................    12
Letters, statements, etc., submitted for the record by:
    Bernardi, Roy A., Deputy Secretary, U.S. Department of 
      Housing and Urban Development, prepared statement of.......     8
    Cabrera, Orlando J., Assistant Secretary for Public and 
      Indian Housing, U.S. Department of Housing and Urban 
      Development, prepared statement of.........................    16
    Clay, Hon. Wm. Lacy, a Representative in Congress from the 
      State of Missouri, prepared statement of...................    20
    Turner, Hon. Michael R., a Representative in Congress from 
      the State of Ohio, prepared statement of...................     3


PUBLIC HOUSING IN THE 21ST CENTURY: HUD'S VIEW ON THE FUTURE OF PUBLIC 
                      HOUSING IN THE UNITED STATES

                              ----------                              


                         TUESDAY, JULY 18, 2006

                  House of Representatives,
         Subcommittee on Federalism and the Census,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m. in room 
2154, Rayburn House Office Building, Hon. Michael R. Turner 
(chairman of the subcommittee) presiding.
    Present: Representatives Turner, Clay, and Dent.
    Staff present: John Cuaderes, staff director; Jon Heroux, 
counsel; Juliana French, clerk; Adam Bordes, minority 
professional staff member; and Jean Gosa, minority assistant 
clerk.
    Mr. Turner. Good morning. A quorum being present, this 
hearing of the Subcommittee on Federalism and the Census will 
come to order.
    Welcome to the subcommittee's hearing entitled, ``Public 
Housing in the 21st Century: HUD's View on the Future of Public 
Housing in the United States.'' This is the fifth in a series 
of hearings the Federalism and the Census Subcommittee is 
holding on public and low-income housing.
    Congress first authorized the concept of public housing in 
1937 as part of President Roosevelt's public works legislative 
package. Congress originally intended public housing to serve 
working families on a temporary basis. Over the years, public 
housing has evolved in a program that has served poorer 
families who are more likely to become long-term residents.
    By the 1960's and 1970's, much of the Nation's public 
housing had fallen into disrepair and distress. By the 1980's, 
the public and many in Congress were demanding that the public 
housing system be reformed. Congress responded and made several 
minor reforms throughout the late 1980's and early 1990's. By 
1995, however, it was clear that these reforms had not done 
enough. Far too many people still lived in public housing 
developments that did not provide clean, safe and quality 
housing.
    In 1998, Congress again responded to the problem by passing 
the Quality Housing and Work Responsibility Act. This landmark 
legislation was the largest overhaul of the public housing 
system since its creation. It was a sweeping reform of the 
public housing system. On many levels, it has been widely 
praised and has been successful.
    Still, no legislation is perfect, and the Quality Housing 
and Work Responsibility Act is no different. It too has some 
shortcomings. Beginning February of this year, the subcommittee 
has held four hearings to examine the viability and efficiency 
of the Nation's assisted and public housing system. We have 
received testimony from a wide variety of stakeholders. These 
witnesses have included members of academia, public housing 
authority directors, non-profit housing developers, financiers 
and public housing tenants. These hearings have been 
interesting and informative.
    Our inquiry, however, is not complete. That is why we have 
invited the Department of Housing and Urban Development to 
testify before us today. The purpose of this hearing is to 
allow the Department the opportunity to discuss its vision for 
the future of public and assisted housing programs. Also within 
the context of this subcommittee's last four hearings, we have 
asked the Department to respond to the views and 
recommendations of our previous witnesses.
    [The prepared statement of Hon. Michael R. Turner follows:]
    [GRAPHIC] [TIFF OMITTED] 34661.001
    
    [GRAPHIC] [TIFF OMITTED] 34661.002
    
    Mr. Turner. With that, I would like to welcome once again, 
returning to our committee, the Honorable Roy Bernardi, who is 
Deputy Secretary of the U.S. Department of Housing and Urban 
Development. I would also like to welcome the Honorable Orlando 
Cabrera, who serves as Assistant Secretary for Public and 
Indian Housing at HUD. Assistant Secretary Cabrera will be 
joining Deputy Secretary Bernardi to assist him in answering 
the subcommittee's questions.
    Thank you for agreeing to testify today. I welcome you both 
and look forward to your comments. Secretary Bernardi has 
kindly prepared written testimony which will be included in the 
record of this hearing. You will notice that there is a timer 
at the witness table. The green light indicates that you should 
begin your prepared remarks, and the red light indicates that 
time has expired. The yellow light will indicate when you have 
1 minute left in which to conclude your remarks.
    Mr. Secretary, I will be very lenient, of course, with your 
time, since you have been so gracious in appearing before this 
committee. It is the policy of this committee that all 
witnesses be sworn in before they testify. Will you please rise 
and raise your right hands?
    [Witnesses sworn.]
    Mr. Turner. Please let the record show that all witnesses 
have responded in the affirmative.
    And with that, I will recognize Secretary Bernardi.

     STATEMENTS OF ROY A. BERNARDI, DEPUTY SECRETARY, U.S. 
  DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; AND ORLANDO J. 
  CABRERA, ASSISTANT SECRETARY FOR PUBLIC AND INDIAN HOUSING, 
        U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                  STATEMENT OF ROY A. BERNARDI

    Mr. Bernardi. Good morning, Chairman Turner. It is a 
pleasure to be here, not only myself, but on behalf of 
Secretary Alphonso Jackson, for the opportunity to share our 
views on the current and future direction of public housing in 
the United States.
    The need for affordable housing and structural problems of 
the public housing program call for reconsideration of how this 
asset is best used to serve the most people. The management and 
operation of the public housing program has evolved into a 
system characterized by complexity, inflexibility and 
centralized control. This has resulted in a program that is not 
easily adapted to the specific needs of a single community or a 
troubled development.
    By the 1990's, our existing system had produced 100,000 
troubled and severely distressed public housing units. It has 
taken the Department over a decade to address this legacy of 
good intentions and failed policy through the HOPE VI program, 
the Capital Fund program and other initiatives. The HOPE VI 
program alone has resulted in the demolition of 78,000 plus 
severely distressed units, the construction or rehabilitation 
of 50,400 public housing tax credit and market rate units, and 
the successful relocation of over 63,000 families. And the work 
in this program is ongoing.
    While the goal of the public housing program should be to 
ease the burden of low income Americans by providing them with 
a simple and affordable housing option, the current system 
unfortunately makes this helping hand its own heavy burden. We 
need to find a better solution for transitioning people to 
self-sufficiency, so others can benefit from public housing. 
The current system discourages honesty and work by making 
eligible income the basis on which rent is determined. In 
addition, the process for calculating rent and verifying income 
are onerous, often inaccurate, and can result in significantly 
different rents for similar households.
    Our current rent system has become a trap for lowered 
aspirations and often is viewed as a lifetime entitlement for 
tenants who might otherwise achieve greater independence. We at 
HUD propose a much different future for public housing, having 
evaluated the shortcomings of the current system.
    I want to be very clear about the status of elderly and 
disabled within any proposed reforms. Nothing we intend to do 
will change the protected status of elderly and disabled 
residents within the public housing program.
    Necessary changes. The statutory and regulatory environment 
governing public housing should be simple, flexible and 
progressive. Central among these policy shifts will be the 
transition to asset management. This approach will focus on the 
sustainability of each property and allow housing authorities 
to become true asset managers in line with the private sector. 
Moving a portfolio of 1.2 million units to this asset 
management model is essential for promoting stability and 
private financing options.
    Housing authorities should be authorized to simplify how 
they charge tenant rent and set rents based on local 
conditions, increased expectations and efforts to promote self-
sufficiency. Again, the elderly and disabled should be 
protected classes within this system and exempt from these 
increased expectations.
    More housing authorities need opportunity to access 
flexibility, responsibility and authority that Moving to Work 
status provides. Housing agencies and the Moving to Work 
program are experimenting with term limits in concert with rent 
reform and employment incentives. Such bold reforms allow more 
families to achieve self-sufficiency, ultimately serving more 
Americans.
    Our vision for public and rent-assisted housing includes 
the opportunity for home ownership. HUD has had a successful 
home ownership voucher program that has paved the way for low 
income Americans to become homeowners. Home ownership 
counseling, strong and committed collaborations among PHAs and 
assistance from local non-profits and lenders have proven to be 
essential in making this program work.
    Mr. Chairman, over 8,000 low income families moved from the 
Section 8 rental program and used their Section 8 assistance to 
become home owners during the program's first 4 years. By the 
end of fiscal year 2007, the program will provide home 
ownership opportunities for some 10,000 families.
    Another key home ownership initiative put forward by the 
Secretary is legislation to revitalize the Federal Housing 
Administration. FHA has been invaluable to helping first time 
and minority home buyers who are low and moderate income 
achieve home ownership. Legislation in the House and Senate, 
H.R. 5121 and S. 3535, would make valuable changes to again 
allow greater access to home ownership with safe, amortizing 
mortgage loans for more low income families.
    In closing, public housing is valuable to low income 
Americans, but needs reform to ensure deserving families get 
the affordable housing they need. I know, Mr. Chairman, you 
have held numerous meetings and numerous hearings on this 
matter. I am sure that we will be talking about improper 
payments, that we have a nice track record here at HUD for 
that. We will be talking about Moving to Work, we will be 
talking about asset management, and I am just very pleased to 
have with me Assistant Secretary for Public and Indian Housing, 
Orlando Cabrera. He and his staff are working very, very hard 
to necessitate the changes that we feel are necessary, and 
working in conjunction with your committee, hopefully working 
together, so we can utilize this asset and provide more 
opportunities for more people, but at the same time, moving 
people from public housing to Section 8 to low income to tax 
credit programs, and then eventually to self-sufficiency.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Bernardi follows:]
    [GRAPHIC] [TIFF OMITTED] 34661.003
    
    [GRAPHIC] [TIFF OMITTED] 34661.004
    
    [GRAPHIC] [TIFF OMITTED] 34661.005
    
    [GRAPHIC] [TIFF OMITTED] 34661.006
    
    Mr. Turner. Thank you, Mr. Bernardi. I want to congratulate 
you and Secretary Jackson on your diligence. I know from your 
background as a former mayor, you have looked to not just the 
issue of how to manage public housing, but how do you impact 
the lives of the people who are in public housing, how do they 
receive the assistance that they need.
    Throughout your testimony, you highlight, and I know that 
Secretary Jackson also is committed to the issue of transition 
and self-sufficiency, that public housing be an opportunity, 
not merely just an issue of warehousing or of an opportunity 
for providing fixed housing for fixed populations, but an 
opportunity for people to receive the services and the 
intervention that they need, so that they can transition to 
economic independence.
    HUD's commitment to ending what had been a period of 
economic segregation in our large warehousing projects to 
economic diversity is a very important issue. And I want to ask 
you a policy question first. We have been joined by Mr. Clay.
    I'm sorry, does Mr. Cabrera have a statement also?
    Mr. Cabrera. Only if the chairman would like to hear it.
    Mr. Turner. I would absolutely love to hear it. I am sorry, 
from the opening I thought perhaps you did not, Mr. Cabrera.
    Mr. Cabrera. Not at all. If it is easier and you would like 
me to waive, I am happy to.
    Mr. Turner. No, I would be glad to hear your opening 
statement and also acknowledge we have been joined by Mr. Clay, 
our ranking member.

                STATEMENT OF ORLANDO J. CABRERA

    Mr. Cabrera. Thank you, Mr. Chairman.
    Mr. Chairman and Ranking Member Clay, thank you for 
inviting us to testify today about the future of public housing 
in the 21st century. My name is Orlando Cabrera, and I am the 
Assistant Secretary for Public and Indian Housing at HUD.
    After reviewing the testimony of all of the witnesses that 
have appeared before you, one might conclude that public 
housing is in a state of crisis. I would suggest that it is 
not, and it is in a state of much needed change.
    In brief, public housing is joining the world of multi-
family housing in terms of financial management and oversight. 
The most effective means to illustrate this change, in my 
experience, is using financial analysis. Yet it is the one 
least used when discussing public housing, which traditionally 
has been perceived as a social program.
    First, a very brief and very general history of public 
housing finance might help. Public housing first came about as 
a way to provide decent housing for lower income workers in our 
cities. Nationwide, but particularly in our larger cities, most 
of the developments that are used as public housing today are 
about 70 years old and were the stock used to house those 
workers.
    The Federal Government paid to construct the units and the 
rents covered the operating costs, because the units were 
relatively new. And because the families that were housed were 
mostly the working poor, the basic arithmetic worked in most 
cities for about 20 years.
    In the early years, there was no Federal operating subsidy, 
and as such, there were few Federal operating requirements. By 
the early to mid-1960's, this simple financial model began to 
break down mostly because those assets aged. Operating costs, 
including deferred maintenance, began to rise and tenant 
incomes began to decline. PHAs were still free to set rents 
flexibly, only it required higher rent burdens on increasingly 
poorer tenants.
    In 1968, Congress passed the Brook amendment, which fixed 
rents at 25 percent of tenant incomes. While Brook protected 
the tenant, it hastened the financial crisis for many large 
PHAs in many ways. It wasn't for another 6 years that Congress 
established a comprehensive operating subsidy program and 
another decade or more until it established a comprehensive 
program for capital improvements.
    Once we began to finance public housing operations and 
capital improvements through appropriation, we discouraged 
public housing authorities from operating in accordance with 
sound real estate practices, charging adequate rents and 
creating capital reserves. For some years, that persisted until 
it became clear that public housing's capital stock had aged so 
much and was in such dire need of capital improvement that the 
issue had to be revisited. Capital investment occurred during 
the late 1970's and early 1980's, but essentially very little 
change when it came to improving public housing stock.
    In 1994, Congress passed HOPE VI to address the most 
distressed public housing authorities. PHAs began to demolish 
the obsolete inventory and rebuild with affordable units as 
opposed to public housing units. Then in 1996, Congress passed 
the Quality Housing and Work Reform Act, creating new operating 
fund and capital fund programs. The Congress directed HUD to 
develop these programs through negotiated rulemaking.
    A byproduct of QHWRA was that Congress began to reconsider 
the business model that public housing had used for decades. 
Much of this issue centers around the adequacy of the former 
business model and the possibility of new business models. It 
commissioned a study known as the Harvard Cost Study. The 
Harvard Cost Study examined the way that PHAs were funded. It 
looked at the cost of operating other HUD housing programs in 
similar markets. It recommended a new formula for determining 
operating subsidy, replacing a system that traditionally 
disfavored the Nation's newer population centers, in the south 
and southwest, from those parts of the country that were losing 
population.
    Based on Harvard's research, Congress directed HUD to 
undertake asset management, and HUD did. The operating fund 
rule was produced after a 2-year negotiated rulemaking process 
and set forth the path for change. The former business model 
for public housing essentially paid public housing authorities 
an operating subsidy based on a formula that assumed a set 
number of units with the same cost per unit, regardless of the 
nature of each individual development that the public housing 
authority owned. No manager of real estate would use this 
model, because it would be impossible to know the true cost of 
actually operating the units under management.
    The new model contemplates that public housing authorities 
run their units in a way that actually recognizes the economics 
of running each of the developments that is under a public 
housing authority's management. First, asset management does 
not apply to PHAs that have fewer than 250 units. Second, asset 
management requires public housing authorities to make 
decisions based on the economics of managing units first. 
Third, asset management requires public housing authorities to 
know the cost of running their business. Fourth, asset 
management encourages local flexibility by minimizing HUD 
involvement in operations. Finally, asset management will mean 
that the operating subsidy formula will change. Seventy-percent 
of PHAs are gainers under the new formula, while about a 
quarter are decliners.
    As part of phasing in asset management, the negotiated 
rulemaking committee recommended and HUD ultimately adopted a 
concept called stop loss that applies only to those PHAs that 
are declining in subsidy and elect to apply for stop loss. Stop 
loss means that a PHA that declines its subsidy may elect to 
apply for stop loss designation, which will mean that their 
pre-operating subsidy rule allocation level will remain the 
same because they have achieved stop loss status. They have 
become efficient.
    Stop loss is a very small component of asset management. 
Comparatively, few of the Nation's PHAs will apply for stop 
loss simply because they do not decline significantly. 
Moreover, the stop loss assumes that an applicant PHA has 
elected to accelerate their move toward asset management. Many 
witnesses who have testified noted that asset management was 
prescriptive. Some went further and alleged that asset 
management was micromanaging. My sense is that most of the 
comments relate to stop loss, not asset management.
    Asset management, as previously mentioned, is a move toward 
greater local control and flexibility and less centralized 
control at HUD. Stop loss is a small subset of asset 
management. Effectively, it guarantees that a decliner can lock 
in its former subsidy level at the expense of other gainers and 
declining PHAs. So in order to achieve stop loss, HUD has 
required that stop loss applicable PHAs demonstrate that they 
are achieving efficiency on their own and within their budgets 
without external subsidy.
    Another aspect of asset management that is fundamental is 
better financial reporting. Asset management was developed 
after consulting with accountants in order to achieve a model 
that better conforms with generally accepted accounting 
principles consistently applied. Achieving a better conforming 
financial structure means that PHAs will be better equipped to 
access financial markets, because the former model was not a 
model that most stakeholders in the financial community, namely 
rating agencies, investment bankers, bond insurers and others, 
might better assess PHAs as entities.
    The transition toward asset management begins in earnest in 
2007 and full conversion should be in place by 2011. It is a 4-
year process. Assuming that asset management is successfully 
implemented, the 21st century for public housing means that 
PHAs will evolve using a variety of business models, not just 
one. It means that PHAs will be better positioned to access 
debt and capital markets in order to improve the condition of 
existing units, units where it makes sense to rehab, or more 
likely than not, develop new affordable housing units that 
serve their communities. Ultimately, the issue is change and 
adaption.
    Thank you for your time and attention. I am ready to answer 
any questions that you may have. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Cabrera follows:]
    [GRAPHIC] [TIFF OMITTED] 34661.007
    
    [GRAPHIC] [TIFF OMITTED] 34661.008
    
    [GRAPHIC] [TIFF OMITTED] 34661.009
    
    Mr. Turner. Thank you, Mr. Cabrera. We do not have a copy 
of your written testimony, so if you would please provide us 
with a copy of that, I would greatly appreciate it.
    Mr. Cabrera. Sure.
    Mr. Turner. And I would like to recognize our ranking 
member, Mr. Clay, for his comments and questions.
    Mr. Clay. Thank you very much, Mr. Chairman. I thank you 
for holding today's hearing to receive the administration's 
views on public housing issues, and I certainly welcome our 
witnesses's testimony. I would love to submit my statement in 
its full text into the record.
    Mr. Turner. Without objection, so ordered.
    [The prepared statement of Hon. Wm. Lacy Clay follows:]
    [GRAPHIC] [TIFF OMITTED] 34661.010
    
    [GRAPHIC] [TIFF OMITTED] 34661.011
    
    Mr. Clay. Thank you.
    Let me start with Mr. Bernardi. How are you this morning?
    Mr. Bernardi. Fine, sir.
    Mr. Clay. It is good to see you.
    You know, I believe we need to rid public housing of 
dilapidated developments and allow for new developments to 
replace them. According to the St. Louis Housing Authority, 
however, there are more than 700 units that need repair or are 
uninhabitable in their public housing program.
    Can you speak on ways in which HUD can work to improve its 
capital development efforts for PHAs to ensure that housing can 
be replaced or repaired in a timely manner?
    Mr. Bernardi. Yes, Ranking Member Clay. I know you are 
familiar with our HOPE VI program that went into place in 1994. 
There were 100,000 severely distressed units throughout the 
country. The HOPE VI program in its infancy took applications 
from PHAs around the country. I am pleased to say that from an 
unlimited amount of dollars that could be expended with a 
particular PHA, changes were made. Now I believe the maximum 
limit is $20 million for a PHA to address that situation.
    At the same time, we encountered some difficulties in the 
process that many PHAs, while they had the ability to manage a 
housing authority, were not developers and didn't really know 
how to go about putting into place the demolition of properties 
and then the reconstruction of those properties. That is a 
program that we have at HUD.
    Unfortunately, a tremendous amount of money is still in the 
pipeline, money that has been appropriated has not been 
expended. But that program continues to exist, and that is the 
main program that I believe that we have that addresses the 
concern of severely distressed public housing to either 
rehabilitate that or to take it down. But what is awfully nice 
about HOPE VI is that in its lifetime, I believe it has 
leveraged like $9 billion of non-public moneys. So you can see 
the cooperation and the utilization of other entities to 
provide quality housing.
    Then the housing that evolves from that, sir, is not just 
affordable housing, it is mixed income housing, it is housing 
on a voucher program. So it really lends to what I believe we 
all would like to see, an integration, if you will, of lower 
income folks into the mainstream of the community when it comes 
to housing.
    Mr. Clay. Tell me why the money is still stuck, for lack of 
a better term, why is it still stuck in the pipeline and not 
really in the hands of the housing authorities to do the 
repairs?
    Mr. Bernardi. There are some instances, and I am sure 
Secretary Cabrera can give you those chapter and verse, but 
there are some instances like Atlanta, for example, and I 
believe in Chicago, where they have done wonderful things. As I 
mentioned earlier, you really need, and now we require that 
when an application is submitted you have a developer online. 
Previously many of these, they were public housing authorities 
who made the application and then the process just bogged down 
as they looked to move it forward, trying to find the right 
development, the right partners.
    Mr. Clay. You know that the housing authorities will give 
us a different angle than that.
    Mr. Bernardi. That is true, but in some instances, sir, 
when that money has been in the pipeline for 3, 4 and 5 years, 
there has really been very little action, that gives us pause. 
We have always thought, I feel very strongly it is a good 
program. But there is still a couple of billion dollars, I 
believe, in the pipeline. And we need to make sure that is 
expended.
    And then some day, I believe it was then-Secretary 
Martinez, now Senator Martinez, said, we need to improve on 
this and we need to talk about perhaps maybe a HOPE VII. We are 
taking a look at it. Our folks in Public and Indian Housing are 
studying it, and they can give you good examples of how it is 
working, but in other areas where we can improve.
    Mr. Clay. Let me ask Mr. Cabrera, then, Mr. Bernardi 
mentioned HOPE VI several times. The President's budget for 
fiscal year 2007 proposes once again to zero fund the HOPE VI 
program, a program given high marks by many housing experts. 
How is Congress expected to improve the operation and 
performance of our public housing programs if we are constantly 
fighting for adequate funding among these programs? And how can 
the private sector reliably partner with PHAs seeking HOPE VI 
program funds when the long term viability of the program 
remains in question?
    Mr. Cabrera. Well, one way is to leverage the capital fund. 
The capital fund is a fund that is open in the marketplace, in 
other words, PHAs can use the capital fund to do demolition and 
disposition of their properties, and they have.
    The second way is doing precisely what Secretary Bernardi 
just said. One of the things we have discovered is that PHAs, 
as a general rule, are on a learning curve when it comes to 
development. They understand how to manage public housing units 
pretty well, they have been doing it for a while. But 
development is not something that they have been doing for a 
very long time.
    An issue with HOPE VI, and I think the real context of the 
conversation is this, I think Deputy Secretary Bernardi has 
mentioned HOPE VI favorably in many cases, as has Secretary 
Jackson and the President. I want to distinguish that, though, 
from an effective use of funds. Of the $5.5 billion that has 
been allocated to HOPE VI, approximately $2 billion has not 
been used.
    Adding to that, some of those developments are 10 years 
old. Usually what you would see is that in those cases where 
the PHAs apply competitively for HOPE VI money, those PHAs 
applied on their own, generally not venturing with a developer 
with the experience in construction. So therefore, they have 
been hampered in their development.
    On the other hand, when you look at Atlanta, and that is a 
great example, Renee Glover appeared before you, she understood 
this. So she partnered with a variety of developers and got 
things moving. That model, I think, is predominating now. I 
think what you have seen in the last 2 years is PHA moving in 
that direction and realizing that development is a whole 
different ball of wax in management.
    So essentially the short answer here is it is a learning 
curve. It isn't simply an issue of appropriation. It is an 
issue of how you utilize the appropriation on the ground level 
as a PHA.
    Mr. Clay. I agree with that, but I am still hearing two 
conflicting premises coming from this administration. One, the 
President zeroes out in his budget HOPE VI. Then I hear you 
today saying that all but $2 billion of the $5 something 
billion has been spent because housing authorities have been 
created.
    Mr. Cabrera. No, the $2 billion is approximately somewhere 
between 30 percent and 40 percent of the entire appropriation. 
That is a significant number. I think this is what folks are 
wrestling with. In other words, great, it is a nice idea, but 
if you can't get the money used, you wind up in a position 
where the program comes into question.
    Mr. Clay. Now, there has not been a misunderstanding 
between HUD and the PHA? Initially, the PHAs were not under the 
assumption that they could come up with their own development 
and then told in the middle of the ball game, oh, you had 
better find a private partner? Has that happened?
    Mr. Cabrera. Mr. Ranking Member, you know, I have only been 
here since November, so I don't know if it has happened in the 
past 11 years. It might have, it might not have.
    Mr. Clay. I see.
    Mr. Cabrera. But I think the real issue amongst most PHAs, 
and I think most PHAs would say that yes, there is a remarkable 
difference between development and management and yes, it is a 
better policy than not to work within the framework of someone 
who knows construction than not to work within that framework.
    Mr. Clay. I know that in St. Louis, we have been able to 
find a pretty good partnership between PHAs and private 
developers, McCormick Barron being one of them.
    Mr. Cabrera. We have had other large, major cities with 
HOPE VI developments that have struggled mightily with this 
issue because they did not partner. Now they have come to the 
issue of the partner.
    Mr. Clay. So if other cites come forward with a partnership 
then the $2 billion is still on the table?
    Mr. Cabrera. Yes.
    Mr. Clay. Mr. Bernardi, did you have something to add?
    Mr. Bernardi. I wanted to address the budgetary concerns 
that you raised, Ranking Member Clay. As you know, we have a 
finite number of dollars with which to run all of our programs 
at HUD. The fact of the matter is, since 1998, 42 percent of 
our budget was consumed by tenant-based and project-based 
vouchers. In the 2007 budget, that percentage will go from 42 
to 62 to 64 percent. I make that distinction to let you know 
that we are being pulled in many directions with a finite 
number of resources.
    So logic tells us that if you have $2 billion that has not 
been expended in a particular program, albeit it a very good 
program and a program that works well in most cases, at the 
same time, we have other programs that we need to fund, so it 
is a balancing act, as you know, from budget year to budget 
year.
    Mr. Clay. Are there any considerations on the table for 
some type of creative, I want to say creative financing or in 
some ways have public housing authorities make money? Have you 
seen any examples of that?
    Mr. Bernardi. We have public housing authorities that 
utilize their capital dollars and I believe even their 
operational dollars to go out into the marketplace to bond and 
receive resources, so that they can repair and build.
    Mr. Clay. Like the authority in Atlanta.
    Mr. Cabrera. May I add to the Deputy Secretary's answer?
    Mr. Clay. Sure.
    Mr. Cabrera. I would go a step further. We have public 
housing authorities that are running units that are not within 
any restriction in terms of who they serve. So we have some 
public housing authorities that actually make a good amount of 
money basically being real estate managers. And they are using 
that money for development wherever they can.
    Mr. Clay. That is an interesting concept. I thank you, and 
I thank the chairman. I am sure I will get another opportunity.
    Mr. Turner. Absolutely. I want to thank my ranking member, 
Mr. Clay. As this committee has undertaken the issues of urban 
revitalization, public housing, he has been a leader both in 
his community and on this committee in making certain that we 
flesh out the issues as to how on the Federal level we can best 
assist those in our local communities in addressing our public 
development issues.
    Mr. Bernardi, I had signaled to you that I was going to ask 
you a policy question. As you know from the hearings we have 
had, we have had a broad range of topics that we have 
discussed. So my questions will be very diverse in the areas 
that I ask you. And the first one is a policy question. To ask 
you this policy question, I am going to tell you a story first 
of when I served as mayor of Dayton. In our very first hearing, 
when we had former Secretary Cisneros and former Representative 
Lazio, I told them this story and asked them their comments, 
which sparked a specific policy debate that I want to direct 
toward you.
    When I served as mayor of the city of Dayton, we had 
undertaken a fairly significant housing strategy with our view 
that we needed economic diversity not only in public housing 
but in our neighborhoods. And in looking at not only how we 
could use home dollars and other low income tax credit vehicles 
for providing quality, affordable housing, but ways in which we 
could bring market housing into our neighborhoods, specifically 
our inner ring around our downtown, where some of our more 
historic neighborhoods presented an opportunity for attracting 
capital.
    In one of those neighborhoods, there was a public housing 
development that was a site for significant criminal activity, 
complaints from the neighborhood, complaints from those who 
lived within the development. And it was also strategically 
located as a piece of property that had significant economic 
redevelopment value.
    Being aware that the public housing authority had a 
significant vacancy rate overall in its property management, I 
approached the public housing authority and inquired about the 
availability of this property for demolition and redevelopment 
and was surprised to hear from the then-director of the public 
housing authority that the housing authority was in the process 
of applying for funds to refurbish and redevelop this facility. 
They were actually going to be seeking the city's support for 
that. And they were not interested in looking at this as a 
development opportunity that could be leveraged in partnership 
with the city in development for some of their other housing 
issues and needs.
    The reason I was given by the director of the public 
housing authority was that the individuals that were living 
within this facility were not likely to move to the other 
vacancies that the public housing authority had because they 
were on the economic borderline of self-sufficiency and that 
there was significant amount of affordable housing available in 
the neighborhood in which this was located, that they would 
probably transition to independence rather than transition to 
other public housing facilities.
    When I inquired, well, isn't that the goal, I was told that 
the cost to the public housing authority in the overhead charge 
that they are able to apply to operate this facility was 
important for them to be able to maintain their staff and 
functions, for them to be able to provide their services to 
their other facilities. That is a facility that is 
transitioning, where ultimately, through change of leadership, 
there was a desire on the part of the community and the housing 
authority to partner with the community in ways that site might 
be redeveloped.
    That brought us to the public policy point on which former 
Secretary Cisneros and Representative Lazio disagreed. That is, 
there are some who believe that once a piece of ground has been 
public housing ground, that it should be forever public housing 
ground, regardless of the change in demographics in the 
community, regardless of the ability for the land to serve both 
those who are in public housing and the community itself. And 
that the goal of providing affordable housing in public housing 
and assisted housing is not diminished by recognizing that a 
real estate portfolio of a public housing authority is a 
dynamic portfolio that can shift.
    Could you please tell me what your view and perhaps the 
current view of HUD is with respect to the transitioning of 
property where it perhaps has become dilapidated, needs to be 
addressed as insufficient for satisfying the needs of those who 
live there, and whether or not communities can work in 
partnership with their public housing authorities for 
transitioning of land that at one point made perfect sense to 
be public housing but perhaps needs to be mixed use and mixed 
income or mixed housing and commercial?
    Mr. Bernardi. Mr. Chairman, the proposals that we have on 
the flexible voucher program and the asset management program I 
think will give me an opportunity to answer your questions. The 
fact is, the 3,400 plus public housing authorities throughout 
the country, they are not all the same. Dayton is not like 
Syracuse, it is not like St. Louis. St. Louis is different from 
Atlanta.
    The fact is, we need to provide more flexibility and more 
responsibility to the public housing authorities to manage 
their operations given what is best in their particular locale. 
I can liken that to, asset management is so important to us, 
where each entity provides exactly what it takes to operate 
that entity, is the money that is being utilized there, is it 
being utilized to the best possible advantage, the best 
possible services, are the tenants being taken care of 
properly?
    What we presently have is we have each public housing 
authority without asset management, where they present to HUD 
and have for years, here is what it costs for us to operate our 
certain number of units and certain number of buildings. We 
need to break that down. That is not unlike a developer, in my 
opinion, who has three properties. Two are very profitable and 
doing very well and one is not. But to continue to lump them 
together, you indicated a particular piece of property in 
Dayton that the public housing authority had and I think you 
absolutely were trying to do the right thing, could you work 
together, and if you can't work together you can't get things 
done.
    That doesn't mean, nor would we propose that we would want 
to lower the number of units that are available. But if a 
structure is not performing, if a structure needs to be razed, 
if you can move individuals within that same neighborhood, if 
you will, and provide them with affordable housing there, but 
you also mentioned that someone indicated to you, well, these 
folks would go out and become independent renters or 
homeowners, that is what we would all like to accomplish, that 
is what we are here for.
    The fact of the matter is that our budget keeps increasing 
every year at HUD, as I mentioned earlier to Ranking Member 
Clay. But we don't serve more people, we don't have more units. 
I believe I am correct in stating that.
    So what we really need to do, and our philosophy is with 
asset management and with the programs that we have, reducing 
improper payments and also the Moving to Work status, which we 
feel very comfortable with, which gives the housing authorities 
tremendous flexibility to provide employment opportunities, to 
provide term limits and rent reforms. Right now the rental 
structure that we have in place, it really lends to 
individuals, not stating the number of people that are in a 
unit, either not reporting or under-reporting income. We have 
an awful lot to do.
    In my opinion, again speaking for myself and HUD, we need 
to be as productive as we possibly can with every single unit 
and every single structure that is out there. The way to do 
that is to push as much as we can to the local housing 
authorities. Obviously with the checks and balances in place, 
but you can't have a big brother from Washington. We provide 
resources every year and we see basically the same results. I 
think everyone would like to see that change.
    Mr. Turner. Thank you.
    Former Secretary Cisneros, whom I have great deal of regard 
for and who has certainly been a leader in the issue of 
economic diversity and addressing the issue of the condition of 
distressed public housing projects, espoused the view plainly 
and straightforwardly that once a piece of real estate has been 
designated as public housing land, it should forever be public 
housing land. I appreciate your view, which is consistent with 
former Representative Lazio's that it is a dynamic asset 
portfolio that we have to reflect, and that public housing is 
an integral part of a community, not separate from a community, 
and should be looked at in the overall development plan.
    Which raises the next aspect of the exact same development 
that you actually mentioned in what you believe is important 
for the community to look to, and that is the preservation of 
the opportunities for the public housing that is at the site. 
The public housing authority in Dayton had placed in its long-
term strategy that this would be a facility that would 
transition, that would be demolished, and the real estate would 
transition to a mixed use. Their long-term plan included 
seeking Section 8 vouchers for replacing those units that were 
not one to one replaced.
    Because this site was one that they had begun the process 
of determining that it would be demolished rather than 
refurbished, they did not refill each and every unit as they 
became vacant, which would be consistent with any asset 
management or property management, you would want to lower your 
costs, the impacts on the families, the impacts of relocation. 
And now they are concerned that the policy that they were 
pursuing of getting the units replaced with Section 8 vouchers 
and other units that they have, that they might be penalized 
for their process of having a long-term strategy and plan, and 
that the Section 8 vouchers may not be available to them for 
units that they did not fill in planning for the ultimate 
decommissioning of this facility.
    We have heard this concern from other PHAs that as they do 
the asset management planning and they plan for a facility to 
be decommissioned, that reducing the population of that 
facility actually penalizes them, resulting in less 
qualification for Section 8 vouchers and then units for their 
management. Are you familiar with this concern and could you 
give us some thoughts on that?
    Mr. Bernardi. A little bit, and then I will defer to 
Assistant Secretary Cabrera. It would seem to me that we do not 
replace one for one when it comes to our HOPE VI program. What 
we are trying to do, as you mentioned, is to place individuals 
into affordable, market-rate, low income tax credit housing. I 
don't think the goal here is to keep the amount of units that 
you have or to add to these units. I think the big picture 
needs to be that we would like to lessen the number of units 
that we have over a period of time, if you want to look 10 or 
20 years into the future. We want to be able to provide 
opportunities for individuals to have short-term housing, but 
at the same time, have the services that they need, the 
counseling, the employment opportunities, so they can be self-
sufficient. I believe the overwhelming majority of Americans, 
that is what they would like to do.
    Now, as far as the replacement of Section 8 vouchers for 
the individuals who are not part of the HOPE VI reconstruction, 
I believe they have those vouchers and they are portable. But I 
will leave that to Assistant Secretary Cabrera.
    Mr. Cabrera. It is helpful when one looks at an issue like 
that to segregate things into two pots.
    Mr. Turner. Before you continue, this is not a HOPE VI 
site.
    Mr. Cabrera. I didn't assume it was. I assumed it was just 
a straight demo dispo of some kind. So let's assume that it is 
a piece of property that is being currently used as public 
housing. Let us further assume that there are tenants there. 
They have been now approved for demolition. So that means that 
they more probably than not receive tenant protection vouchers 
for those people who were in those units. And those vouchers 
would be used as any other Section 8 program.
    But the reason I wanted to create these two pots is, public 
housing works at the exclusion of Section 8. It is a distinct 
program. So once those tenants have now moved on into units, 
the PHA would typically demolish the improvement and build 
something back, using whatever subsidy it wishes to use, 
private activity bonds, tax credits, if the State, in this case 
I am assuming it is the State of Ohio, has a State program for 
soft money for gap financing, great.
    But they will build those units. Those units, when they are 
built, are either going to be given some public housing 
attribute, some or all of them, or they are not. They are going 
to be affordable housing units. Affordable housing units serve 
a wider band of demographics, but vouchers can be used at 
affordable housing units. Once they have gone and become 
temporary vouchers, they are inside of the baseline and they 
will not or should not be lost.
    So I am somewhat at a loss for the concern. I think the 
concern might be coming from another place, which is that there 
is this sense, and it is the correct sense, that we have seen 
the Section 8 program grow so enormously that there are 
stresses building at the fringes over how much more it can 
grow. The Section 8 program has grown 100 percent in 2006 
dollar terms since 1990; 100 percent. I am not talking about 
1990 dollars versus 2006 dollars. I am talking about 1990 
dollars in 2006 value versus 2006 value today. That is enormous 
growth.
    So I think one of the things you might be hearing is 
tension over the reality that it can't keep growing, because it 
is beginning to impact the other programs within the agency, 
not the least of which is the capital fund, the operating fund. 
And this causes enormous policy stress.
    Mr. Turner. That gets me to my next question, and that is, 
Secretary Bernardi, recognizing this stress that is occurring 
and that people have seen the concern of this sort of pac-man 
future of Section 8 as it eats away overall at HUD's ability to 
look in the future for its budget, what are some of the things 
that HUD is looking toward, recognizing this growing impact on 
HUD?
    Mr. Bernardi. We need to make sure that our statutory and 
regulatory environment is conducive to what the public housing 
authorities need to undertake. I think the simplicity, 
flexibility, being progressive, I think public housing 
authorities maybe should look to consolidation. As a former 
mayor, I realized full well when you didn't have the resources 
that you could consolidate in such a way that you would be able 
to provide the same kind of service and increased service at 
least the same cost, if not a lesser cost.
    I think it is going to be very, very important, the asset 
management program that we have put in place, that the housing 
authorities utilize that resource. That will give them the kind 
of control that they are going to need to utilize their 
resources so that they can stretch them farthest way possible.
    Mr. Turner. The number of PHAs, although our hearings were 
not budgetary in their focus, many budgetary issues arose. And 
many of the PHAs claimed that at the end of last month, HUD 
informed them that the proration of the public housing 
operating fund for 2006 would be significantly lower than had 
previously been announced. The PHAs argued that they had been 
funded at 92 percent of their eligibility for the first 6 
months of 2006. Under the new rule, the annual proration would 
be reduced retroactive to the first of the year to 85.5 
percent, and that would have significant budgetary consequences 
for the PHAs, since they had planned obviously a certain level 
spent, as they had been going through the year at a certain 
level, that the magnitude of the impact then would be felt 
solely in a half of the year.
    Would you want to comment on their concerns?
    Mr. Cabrera. Currently we are looking at the issue. The 
issue is really being driven by utility costs. Utility costs 
exceeded what was expected by, as I understand it from the 
industry and frankly internally, approximately $300 million. 
That is a lot of money when you look at the entire operating 
subsidy budget.
    That is an issue I believe we are going to need to bridge, 
and certainly we are spending an awful lot of time trying to 
bridge it as I speak.
    Mr. Turner. My staff has pointed out that a concern is that 
apparently in the budgetary document that HUD submitted to 
Congress for 2007 the Department estimated that utility costs 
would actually decrease from 2006 to 2007 and the budget 
document further estimates that the total 2-year increase in 
utility costs from 2005 to 2007 will amount to just 2.4 
percent. I don't know if you have anyone with you who wants to 
speak on that. And I won't ask you a specific question on the 
budget numbers, other than to reflect that the staff had 
provided us these numbers. Do you have concerns about the 
current method in which HUD is looking at its future energy 
cost structure that impacts PHAs and their management? And what 
might you be doing to address that?
    Mr. Cabrera. We are looking at the whole spate in terms of 
the budgetary concerns. So I would say that it is basically 
part and parcel of my previous answer. We are looking at the 
whole enchilada.
    Mr. Turner. OK. Switching to a random series of topics, 
rent simplification, Mr. Secretary, you mentioned that as an 
issue. Many of the PHAs raised it as an issue.
    The Boulder Housing Partners gave us some pretty compelling 
information about what they are experiencing in rent 
calculation. In fact, they went on to state that, they gave us 
a story, and the documentation that went with it, in looking at 
rent calculation of a elderly and disabled resident who, in 
order to calculate the medication deduction was prescribed 
things from bananas to vitamin C and that their staff has an 
enormous task in looking at receipts for various purchases in 
order to determine what the rent calculation is.
    I believe they were saying that 10 percent of their overall 
budget is devoted to the activities of rent calculation. They 
speculate that perhaps you might be looking at 3.2 million 
different rents in the process of calculation, and that there 
really isn't anyone served by having either the residents have 
to go through this process, which has to feel very violating at 
times, or the staff to go through the process of individually 
calculating a rent based upon expenses and income, rather than 
looking at some standard deductions and income proofs that 
would allow both the dignity of the resident, instead of having 
to come in with bags of receipts, and the staff time of the 
facility to be freed up and perhaps income confirmation but 
expenses by looking at standard deductions. Could you comment 
on that?
    Mr. Bernardi. The rent reform is a major part of what we 
are putting forward to change the system. It is a very onerous 
system when it does come to rent. We need to be looking at flat 
rent, maybe percentage of income tiered rents. We need to look 
at this a little differently to allow individuals who perhaps 
earn additional dollars, maybe they should have an escrow 
account so they can realize that savings. The rent needs to be 
matched to local conditions. I don't believe that as a housing 
authority you are looking to charge rents so that you can have 
a better bottom line. I think you need to take care of the 
individuals as opposed to the agency.
    We had improper payments back in 2000 that totaled about 
$3.2 billion. That has been cut better than half now by our 
review of tenant files, our extensive outreach and training, 
cooperation with States when it comes to data on HHS, using 
their income verification efforts along with ours. But in the 
final analysis, the rent structure needs to be changed. We need 
to make sure that people aren't working the system against us. 
A fair rent has to be charged, but I think it has to be 
transparent. I think it has to be flexible, and it is not 
flexible now.
    Mr. Turner. Mr. Clay.
    Mr. Clay. Thank you, Mr. Chairman.
    Mr. Bernardi, our Section 202 and 811 programs for the 
elderly and disabled are vital to elderly and disabled 
individuals, as these households represent about 75 percent of 
public housing's population. I believe these programs represent 
those with the greatest needs and must be our first priority 
when contemplating any future policy changes. Yet HUD's fiscal 
year 2007 budget request would have made significant cuts to 
funding for these programs. Fortunately, this funding was 
restored in the House during the appropriations process.
    What is the administration's rationale for trying to cut 
these programs?
    Mr. Bernardi. Ranking Member Clay, the difficulty in the 
budget process, Secretary Jackson testified that difficult 
choices had to be made. I mentioned earlier the amount of 
dollars that we are spending on our tenant-based and project-
based. It is approximately $22 billion of our 2007 budget out 
of a $32 billion budget. That is 62, 63 percent. Just back in 
1998 it was 42 percent.
    In the 202 and 811 program, for the elderly and for the 
disabled, the budget that has been proposed is not going to 
affect the individuals that are part of the process, or the 
maintenance of what we have. Unfortunately, what it does affect 
is creating additional units. We fund all the renewals and the 
issue is construction funding, as I was saying. There are funds 
that are unexpended in those accounts.
    But in the final analysis, even giving you that kind of 
information, it is very difficult to balance all of our 
programs, our home program, our homeless program, housing 
opportunity for persons with AIDS, our manufactured housing. We 
have significant challenges, and we would like to be able to 
fund them all, if we could.
    Mr. Clay. We do have significant challenges. I know that in 
the coming years, we will experience a huge wave of retirees, 
with the aging and graying of the baby boomers, which tells me 
that we ought to be prepared for that onslaught of new elderly. 
Would it be helpful if you all were allowed to shift some of 
this funding? Like you said, there are surpluses in some 
programs. Do you do that now? Do you shift the funding, the 
dollars from one program to the next?
    Mr. Bernardi. We try the best that we can to make sure that 
all of the funding requests, that they are in programs that are 
functioning to full capacity as possible. We mentioned the HOPE 
VI program earlier and the amount of money that is in the 
pipeline.
    The fact remains, you are absolutely correct, with the baby 
boomers coming to their time right now in the next few years, 
myself included, there is an awful lot of senior citizen and 
elderly housing that is going to be necessary. I would hope, 
though, that would be an opportunity in many instances where 
you would have the private sector, in conjunction with 
Government, working on that.
    Mr. Clay. Let me ask you about another situation. In St. 
Louis, there are over 700 units out of 3,700 in the project-
based public housing program unavailable because of demolition 
or modernization efforts. While we want to continue improving 
our housing choices for our families, many communities face a 
chronic shortage of vouchers or project-based units. Would you 
agree that modernization and development efforts for new 
Section 8 housing are often too slow to meet demand?
    Mr. Bernardi. Well, the demand obviously outstrips the 
resources that we have. But to do the modernization, 
unfortunately when you do demolition you are going to have 
situations where you are not going to be able to replace unit 
for unit. More resources would be nice, but with limited 
resources, I believe we are doing the best we can.
    Mr. Clay. Is the modernization project approval process 
broken, and other processes, are they broken as far as how HUD 
interacts with public housing authorities?
    Mr. Bernardi. No, I don't believe so. I think the 
relationship that our Assistant Secretary and his staff has 
with public housing authorities is a very good one. It is 
ongoing. There is constant communication. The situation calls 
for additional resources, and we put those resources to play 
where we can.
    Mr. Clay. Mr. Cabrera, would you like to comment?
    Mr. Cabrera. Yes, I would have to say that it probably is 
working better now than it has in a very long time, for a 
variety of reasons. Public housing authorities, like anyone 
competing for a resource, and I don't mean competing for a HUD 
resource, I mean competing for resource, when they put together 
these deals, they have to look at a variety of pools.
    The first place they look is not HUD. The first place they 
look when they want to develop units is the low income housing 
tax credit. And the reason is because it is not debt, it is 
equity. Therefore, they are not going to owe any money. Yet 
they will have units that can serve their residents.
    So that is a competitive process. In the case of Missouri, 
my good friend and now former executive director, Erica Dover, 
put together a wonderful program that helped PHAs, I believe, 
that in Missouri there was a setaside for PHAs.
    But what happens is, you can't stop there, because the low 
income housing tax credit by law cannot finance a deal by 
itself. It has to be brought into context with other 
components, other money. That money can be State money in the 
form of gap financing, that money can be local money. Here is 
some money that can't or typically is not used if it is done 
directly. It is very rare to see that kind of development come 
up with CDBG. Why? Because it is a dollar for dollar reduction 
in eligible basis, which means you get less tax credits. So you 
are more likely to see a loan come from a State than CDBG.
    You look for other moneys, from non-profits and NGO's. So 
it is a difficult process to get those units up. But it is 
multi-layered, it is a cake.
    I would like, Mr. Ranking Member, I wonder if I might be 
indulged to go back to the 811 issue for a moment. I can't 
speak to 202, 202 is housing, not me. But 811 is in part me. 
And what is happening in 811 is the voucher programs actually, 
that budget has increased significantly. So the issue in the 
debate currently, in that group of stakeholders, is do we want 
more vouchers so that folks who have disabilities can go out 
and look for units where they can or where they want to, or do 
we want to build the units where they will be? That is a debate 
that has been going on for some time.
    But certainly in the budget, the 811 voucher allocation or 
appropriation is higher, considerably higher than it was the 
prior year.
    Mr. Clay. I appreciate what both of you all have said and 
how you have answered the question about the process, saying 
that it is not broken. However, when we hear from PHAs, they 
indicate to us that the process is broken, which tells me that 
there is probably a breakdown in communication between your 
offices and their operations. Perhaps we could do a little 
better job of working with each other in that circumstance.
    Mr. Cabrera. Mr. Ranking Member, I think most people in the 
stakeholder community would tell you that they have my e-mail 
address. The reason is because I give it when I give speeches. 
And they have my number. And they are not shy about calling, or 
for that matter yelling.
    So at the end of the day, I think what happens is, it is 
3,400 PHAs. When you look at the pool of 3,400 PHAs, and those 
undertaking modernization, most of them would say, no, this is 
going pretty smoothly. If you were to talk to Chicago, they 
would say, oh, it is going quite smoothly, because we have 
moved faster on deals than has ever been the case before. If 
you look at other cap fund deals throughout the country, they 
would tell you the same thing.
    So my sense of life is it is moving much faster. Is it 
perfect? No, but I don't think that it can ever be.
    And the other truth of the matter is, sometimes we run into 
PHAs that are not equipped to deal with the process of getting 
a loan. The reason they are not equipped is they do not have 
the experience of having done it. So they don't have, for 
example, a lawyer. This happens a lot. They don't have a 
financial advisor. So they will come in on their own looking 
for a loan, and that can actually exacerbate the problem.
    Mr. Clay. I thank you for that response. In my final 
question, GAO has done work on the amount of improper payments 
made under HUD housing programs. One, can you describe for us 
the extent to which fraud or mismanagement has drained the 
resources of HUD's housing programs; and two, are there 
significant managerial challenges that pose a barrier to 
adequate oversight of agency expenditures?
    Mr. Bernardi. As I mentioned earlier, Mr. Ranking Member, 
back in 2000, the improper payments totaled $3.2 billion. 
Through the hard work of our folks at PIH and in conjunction 
with HHS and income verification with the States, we have been 
able to reduce that by better than, I think almost 60 percent. 
We have a rating system, and OMB has given us, I think we are 
the only agency in the Federal Government in improper payments 
that has a green light, if you will. We are making good 
progress. Of course, we want to eliminate it all. We are 
working toward doing that.
    But at the same time, I would like to couple my response 
with, we really need some rent reform. The system is in place 
right now, it just tends to have people try to beat the system 
as opposed to having a system in place that is fair. If people 
make additional dollars, that does not necessarily mean it does 
now, that has to go toward rent. I think people need to see a 
light at the end of the tunnel, if you will, where they can 
utilize those resources, have an escrow account and then move 
from public housing Section 8 low income housing tax credits on 
to self-sufficiency.
    Mr. Clay. Thank you for your response, both of you. I 
appreciate it, Mr. Chairman.
    Mr. Turner. Thank you, Mr. Clay.
    Two other questions of items that have come up in testimony 
that we have had from other PHAs. In the Moving to Work 
program, the current rule for Moving to Work work requirements 
is, I believe, 8 hours per month. There are some PHAs who 
indicated, who are in the Moving to Work program, their desire 
to increase that, both with community support and through 
agency support. And they cited difficulty in the administrative 
process and working with HUD in order to increase those 
requirements.
    In your both adamant policy commitment and also your 
eloquent statements of transition, this is a direction that 
certainly would assist those who are transitioning to 
independence. Could you please comment on the PHAs' efforts to 
increase those requirements and provide that assistance to 
residents?
    Mr. Bernardi. I will start it off, and then give it to 
Assistant Secretary Cabrera. I think we have about 30 Moving to 
Work programs--27--27 programs. It has proven in our judgment 
that if it works real well that they experiment with term 
limits, with rent reform and employment incentive. We need to 
do more of that. I know that our PIH department works very 
closely with the housing authorities to maximize that Moving to 
Work program. I know that others would like to have that same 
opportunity.
    Mr. Cabrera. If it were an issue, it is an issue of a 
baseline. If a PHA wants to exceed the baseline, I don't 
believe that PIH would ever say no.
    The issue in Moving to Work has more to do with 
flexibilities for PHAs to function in a looser regulatory 
framework than not. So my experience, I was reading the 
testimony and I was struck by Mr. Moses' testimony when he said 
the jury is still out. I think if you ask PHAs, the jury is not 
out. The jury has come back and said, please, please, please, 
give us Moving to Work. The reason is because in the cases of 
the high performers, it gives them the ability to deal with 
those things most critical to them: operating flexibility and 
attending to their units.
    This is the thing that sometimes gets lost in the 
conversation. Moving to Work has been equally important in 
those PHAs that have traditionally been troubled. The reason 
that they have become helpful is because usually when they have 
been troubled they have been in receivership and you can use 
the flexibility of Moving to Work to restructure them so that 
they are healthy when you move them back to normalcy.
    So I think on the whole Moving to Work has been a rather 
resounding success in most cases.
    Mr. Turner. From many PHAs, we hear concerns of the impact 
of drug dependency being classified as a disability. As PHAs 
attempt to have senior housing that includes a disability 
component, many times the clash between those who have been 
classified as having a drug disability, a drug dependency and 
therefore a disability, in a facility that is predominantly 
focused on senior housing as being disruptive and an issue of 
safety for the residents that are there.
    We have heard this from many PHAs. I wondered if HUD had 
taken up this issue, what your thoughts might be and if you are 
undertaking a policy review of what might be able to be done 
there.
    Mr. Cabrera. We are not currently undertaking a policy 
review. Part of this issue comes back to what I noted during my 
opening statement. Looking at PHAs through a financial prism is 
quite different than looking at PHAs through a social prism. 
The thing is, public housing is just one component of a very 
large issue. That includes issues of drug dependency. HUD is 
not, and I don't believe anybody would say it is, well equipped 
to address drug dependency amongst its tenants or anyone else. 
It might be equipped as one of the places the media by which a 
drug dependency program could be undertaken.
    Mr. Turner. The question doesn't relate to how to intervene 
to provide assistance to someone who has drug disability. The 
question is, the drug disability as a classification carries 
with it a disability designation which then permits someone to 
be eligible for housing that is both senior housing and 
disabled housing. And that drug dependency as a disability 
causes a disruption and thereby has been a threat to those 
senior residents who are typically not seeking housing that 
might have that interruption or influence in their community.
    Mr. Cabrera. Mr. Chairman, I am sorry. I misunderstood the 
question. It is a very short answer. We are not currently 
looking at that issue.
    Mr. Turner. It is one that we have been looking at with 
PHAs, and that we may be looking at whether or not there is a 
legislative fix to provide PHAs the flexibility to be able to 
say that drug dependency is a disability in areas where they 
are attempting to provide senior housing perhaps it is not 
compatible. I raise the issue expecting that you probably did 
not have a policy aspect on the table, but that you might also 
want to concurrently look at the issue.
    Mr. Bernardi. We would be happy to convene some of our 
people and have a discussion on that with your folks.
    Mr. Turner. Great. Thank you.
    I would like to recognize our Vice Chair, Mr. Dent from 
Pennsylvania.
    Mr. Dent. Thank you, Mr. Chairman. I appreciate your 
holding this hearing. I also thank you, gentlemen, for being 
here today. I know that you have also discussed a little bit 
about the HOPE VI program, and I didn't hear those comments. 
But I just wanted to point out again, I appreciate the 
Department's help with the HOPE VI project that is currently 
underway in my district. It appears to be attracting 
considerable private sector investment.
    As you know, the administration has recommended not to fund 
HOPE VI in its recent budget proposals. The main question is to 
Mr. Cabrera. What is your experience with HOPE VI and if so, 
what is it about the program that you seem to think might 
attract that much private investment?
    Mr. Cabrera. My experience with HOPE VI when I was the head 
of Florida Housing was that it tended to consume a lot of 
resources that were not HUD resources with the resources that 
Florida Housing was allocating, and not necessarily producing 
units in a timely way. One reason for that is something, 
Congressman, we were discussing just a bit ago. So I am going 
to rehash something, and I am afraid I am going to bore Ranking 
Member Clay and the chairman.
    HOPE VI's issue is one of initial choice when a PHA applies 
for HOPE VI. If a PHA, which is not a development entity 
traditionally, and to the extent they have become one, have 
become one recently, last 5 years or so, undertakes a HOPE VI 
deal on its own, typically it runs into a problem with reality. 
And reality is running a construction program is very different 
than managing units.
    So what we have seen over time is HOPE VI deals that have 
been put together as joint ventures with precisely what you 
said, which is with the private sector, and I include non-
profits, incidentally, in the private sector. They tend to move 
better. They tend to perform better. The problem with HOPE VI 
over time has been that one, where originally, and Deputy 
Secretary Bernardi mentioned it earlier, you had a situation 
where you didn't even have to show readiness to proceed. And in 
the case of redevelopment, readiness to proceed is everything. 
If you are not ready to proceed, it is your sure path to bad 
things.
    So what becomes important is the ability for the PHA 
community to become more comfortable in partnering with the 
private sector. One of the problems there has less to do with 
Congress or Federal policy and more to do with State policy. 
Many States, most States, all States have statutes that 
essentially charter PHAs. Many of those statutes have not been 
visited in 40 years. So PHAs are sometimes working under a 
rubric where they believe they can only go so far in terms of 
risk-taking. So they believe they have to do it themselves. 
Other times, it is just choice. They want to do it themselves. 
More often than not, the successes have been when they worked 
with the private sector.
    Mr. Dent. So I guess part of your concern with the HOPE VI 
is the timeliness of expenditure of the funds, if I understood 
you correctly, among other things?
    Mr. Cabrera. Yes.
    Mr. Dent. Detroit had a situation, they had three HOPE VI 
grants, I believe, and I don't know how quickly those moved, 
but that was something like 8 years ago.
    Mr. Cabrera. They are great examples, Congressman. Thank 
you. In one case, it is 10 years ago and in the other two 
cases, it is 8 and 6. Only recently after HUD has taken Detroit 
Housing Commission into receivership, with the cooperation of 
the Mayor, have those units been able to move, or those 
developments been able to move.
    Mr. Dent. Is there an effective measure that HUD might be 
able to implement to regulate the timeframe in which a grant 
must be utilized?
    Mr. Cabrera. It is certainly, I think the fair answer to 
that is probably yes. I think one effort that was made by my 
predecessor, Assistant Secretary Liu, was to attack the issue 
of readiness to proceed. Because essentially it means 
everyone's skin is in the game.
    When you approach development, the issue is precisely what 
you identified, which is time. When you have private sector 
involvement in that, their issue is, get it built as quickly as 
possible, because if you take longer than it should, it is 
going to cost you a boatload of money. So you don't necessarily 
need to do that by regulation in terms of giving them a 
deadline. You need to do it by regulation in terms of making 
sure all the pins are set prior to shooting your bowling ball 
down the alley. So that is really where Assistant Secretary Liu 
focused correctly, and it has been very effective in the last 3 
years.
    Mr. Dent. Mr. Chairman, I yield back.
    Mr. Turner. Thank you, Mr. Vice Chairman. I have one more 
easy question for you, Mr. Secretary, then I will open it for 
you and Mr. Cabrera to make any closing statements that you 
want. And that is, you had mentioned affordable housing tax 
credits. We talked to many PHAs who have undertaken tax credit 
projects as part of their overall portfolio. My understanding 
is that in the affordable housing tax credit process that HUD 
does not have a significant role in the administration of that 
program and yet it is obviously part of the Federal plan for 
housing. Do you believe that there could be greater 
coordination between the affordable housing tax credit program 
and HUD's public housing programs?
    Mr. Bernardi. We obviously like to be involved as much as 
we possibly can. But at the same time, the affordable housing 
tax credit program goes to the States and the States distribute 
it. As far as getting involved in the distribution process, 
that is a format that the States use. I think they take a look 
at what is needed and which housing authorities are going to 
utilize it in the best possible way.
    Other than that, I can't see us involving ourselves any 
further.
    Mr. Cabrera. I would like to take my hat off as Assistant 
Secretary for a little bit and put my hat on as former 
executive director of Florida Housing. HUD has a very important 
role to play with respect to the low income housing tax credit 
in four ways. The Secretary basically designates difficult 
development areas. The Secretary can name which qualified 
census tracks are in play for what is called the 40 percent 
bump. And HUD puts together the rent caps for low income 
housing tax credit developments.
    The beauty of the low income housing tax credit is it is 
largely autonomous. Because people focus on the developer. The 
developer is not where the game is with low income housing tax 
credit. The investor is.
    If your deal goes sideways because you did something wrong, 
the folks who have to deal with the IRS aren't the folks at the 
development. It is the folks who put the money into the deal. 
And the recapture provisions are so harsh that there is 
assurance that there is performance.
    From our perspective, certainly, and I think my staff would 
tell you, I have made it my mission to make sure that folks are 
better educated on how it works, so that at the very least, 
from PIH's perspective, we do no harm. That is the issue. We 
get out of the way. Learning to get out of the way is very 
important.
    So I think my focus has been, look, we need to know this 
specifically with public housing, our area of public housing 
investment. Because it gets used so often, it gets used when we 
deal with HOPE VI, it gets used in other modernization. So it 
is a good thing. But at the end of the day, I think the biggest 
role we can play is understanding the limited nature of our 
role.
    Mr. Turner. I appreciate both your answers to that. I am a 
big fan of the affordable housing low income tax credit. It has 
been a great vehicle in my community, specifically in the area 
of senior housing. I appreciate your perspective on that.
    With that, I want to ask, we have had a series of 
questions, and you might have some thoughts that you want to 
add to the record before we close, or any statements that you 
might want to make and things that we have not asked that you 
have expected or prepared for.
    Mr. Bernardi. Chairman Turner, I want to thank you, and I 
want to thank you for holding not only this hearing but the 
previous hearings that you have held in a very important part 
of the American process. We need to make sure, and we at HUD 
are committed to making sure that low income Americans have the 
opportunity for decency and quality housing. Where we will be 
20 years from now, hopefully this hearing and other hearings 
that you put forth will be able to provide greater assistance 
to the people that are in need. We know there are waiting 
lists, and we need to make sure that every person that has 
access to affordable housing has the opportunity some day to be 
out there on their own, independent, either renting or 
purchasing a home.
    We are committed to the mission, and that mission is to 
utilize the resources in the best possible way. We need 
changes, and I think we have brought forth those changes today, 
with the asset management, with the changing of the rent 
structure. We are taking a look again at our HOPE VI program. 
And Assistant Secretary Cabrera mentioned the low income 
housing tax credits.
    It is an area that is forever evolving, but at the same 
time, it is staying the same. We can't do that. Everything 
changes. We need to change our approach. We need to work even 
more closely with the interest groups and the executive 
directors throughout this country to make sure that the housing 
that we provide is not permanent housing, that it is a way 
station, if you will, to self-sufficiency for more Americans. 
And I want to thank you.
    Mr. Cabrera. First of all, Mr. Chairman, thank you very 
much. I would like to thank Ranking Member Clay and Congressman 
Dent as well.
    I guess from my perspective, in terms of looking, I would 
like to focus on the future and what we worry about, what we 
deal with most. That is, we are currently dealing with a public 
housing delivery system that is 70 years old, with in many 
cases, 70 year old improvements. Our issue is dealing with 
these things, dealing with these improvements as either 
performing real estate or under-performing real estate. That is 
going to create a forum where people can have broader 
conversations than have been had traditionally, conversations 
about what do we want to do with precisely what you mentioned 
in Dayton.
    Just coming back to Secretary Cisneros, should a piece of 
dirt have an encumbrance on it that is essentially in 
perpetuity. And my answer would be, well, it depends. It 
depends on what you want to do, it depends upon where that is 
situated. You have to make economic decisions. Most of what we 
are talking about here has to do with economic decisionmaking. 
Public housing authorities have traditionally not had to mostly 
focus on thinking about economics. They have thought about a 
lot of things, but they haven't really thought about economics 
and structure. They are moving to a point where they have to 
access markets. And markets only understand things in the way 
that markets understand things.
    So we can't have PHAs that are incomprehensible to, for 
example, rating agencies or bond insurers. Because otherwise, 
they won't have access to money. With 70 year old improvements, 
they need that access.
    The second thing is, we really and truly need to deal with 
issues like rent reform, like income. Because those are two 
issues that were in H.R. 1999 that are critical to change. The 
reason that they are critical is because they evince local 
control over these issues.
    Much of what you have heard us discussing is an impulse to 
move as much as possible toward a local control on the theory 
that the local PHA, No. 1, can be trusted because they are tied 
to their communities, they are accountable to their 
communities, but No. 2, they know better what their real estate 
market is than we do. We are working in some cases with respect 
to rent on 2 year old, not some cases, in most cases, 2 year 
old information when it comes to rent setting. And that is a 
very big change from where we were before.
    So coming back to it, I think we are focusing on issues of 
change, of financial management and of a commitment to local 
control.
    I would like to thank your staff, who was kind enough to 
sit with us for about an hour on the phone and have a good 
chat. With that, I will close. Thank you very much.
    Mr. Turner. Thank you, Mr. Cabrera. I appreciate your 
dedication and the expertise you bring to HUD. Mr. Secretary, I 
greatly appreciate both your bringing your service as a mayor 
to HUD and also your thoughtfulness to the people who HUD 
serves and looking holistically at HUD's programs as a part of 
an overall impact on a community.
    Please pass on our appreciation to Secretary Jackson for 
his leadership of HUD and his commitment. As you and I 
discussed, he toured Dayton and we were very appreciative of 
his thoughts as he looked to our development challenges. We 
certainly would invite and welcome you there so we could show 
you some of the things that we have both accomplished and see 
as challenges in the future that go to some of the topics we 
have discussed today.
    I thank you for your preparation. I know that all of you 
have a pretty strong to-do list. So whenever you take time away 
to come here and speak on these topics, you not only spend time 
preparing, but also spend time with us. It gives us greater 
insight into what we need to do for our job. So I appreciate 
your willingness to share your knowledge and your time.
    I would also like to thank my colleagues for their 
participation in this hearing. In the event that there are 
additional questions that we did not have time for today, the 
record shall remain open for 2 weeks for submitted questions 
and answers. We thank you all. We are adjourned.
    [Whereupon, at 11:35 a.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
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