Housing and Urban Development: Comments on HUD's Fiscal Year 2002
Budget Request (25-APR-01, GAO-01-663T).			 
								 
GAO discussed the Department of Housing and Urban Development's  
(HUD) fiscal year 2002 budget request. Because HUD's 2002 budget 
request was released only 2 weeks ago, GAO could only offer a	 
general discussion of its policy implications and program	 
trade-offs. GAO found that, in recent years, HUD has had	 
significant unexpended balances, making it difficult for Congress
to assess the Department's need for new appropriations. Without  
accurate and timely information about the nature, amount, and	 
availability of HUD's unexpended balances, decision-makers cannot
fully and fairly evaluate HUD's funding needs. HUD has initiated 
several short-term efforts to identify, quantify, and recapture  
some unexpended balances and has, in fact, recaptured about $3	 
billion each year between fiscal year 1998 and fiscal year 2000. 
In spite of these efforts, HUD has not yet integrated the	 
processes needed to routinely and accurately account for	 
unexpended balances into its ongoing financial, program, and	 
budget management. As a result, HUD does not have the information
it needs to (1) determine with assurance how much of th 	 
unexpended balances should be recaptured and (2) clearly factor  
these funds into its budget requests.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-663T					        
    ACCNO:   A00896						        
  TITLE:     Housing and Urban Development: Comments on HUD's Fiscal  
             Year 2002 Budget Request                                         
     DATE:   04/25/2001 
  SUBJECT:   Unexpended budget balances 			 
	     Budget administration				 
	     Budget authority					 
	     Future budget projections				 
	     American Dream Down Payment Fund			 
	     Community Development Block Grant			 
	     Housing Certificate Fund				 
	     Public Housing Capital Fund			 
	     Public Housing Drug Elimination Grant		 
	     Public Housing Operating Fund			 

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GAO-01-663T

HOUSING AND URBAN DEVELOPMENT

Comments on HUD?s Fiscal Year 2002 Budget Request

Statement of Stanley J. Czerwinski, Director, Physical Infrastructure Issues

United States General Accounting Office

GAO Testimony Before the Subcommittee on Housing and Transportation,

Committee on Banking, Housing, and Urban Affairs, U. S. Senate

For Release on Delivery Expected at 10: 00 a. m. EDT April, 25, 2001

GAO- 01- 663T

1 Mr. Chairman and Members of the Subcommittee:

We are here today to testify on the Department of Housing and Urban
Development?s (HUD) fiscal year 2002 budget request. Because HUD?s 2002
budget request was released only about 2 weeks ago, we can offer only a
general discussion of its policy implications and program trade- offs.
Accordingly, our objective today is to raise some issues for your
consideration as you evaluate HUD?s fiscal year 2002 request and to identify
opportunities for improving HUD?s management of its financial, program, and
budget processes.

First, with an eye toward examining the level of resources devoted to HUD?s
program activities, we will provide a preliminary analysis of HUD?s fiscal
year 2002 budget request. Second, we will explore the role that unexpended
balances play in HUD?s fiscal year 2002 budget request and overall
management of its programs. Unexpended balances are appropriations that HUD
received in earlier fiscal years but has not yet spent. These balances may
therefore be available for recapture. In recapturing funds, HUD deobligates
excess funding that was previously obligated but that HUD has determined
will not be needed. In some cases, HUD can use a portion of the recaptures
to fund program activities, reducing its need for new appropriations. In
other cases, the Congress can rescind- that is, take away- some of these
recaptures. Our examination will focus, in particular, on whether HUD has
taken the steps necessary to manage unexpended balances effectively. To do
so, HUD needs to identify what portion of these balances is available for
recapture and then account for that available portion when formulating its
current budget request.

2 In summary, most attention in the press and elsewhere has focused on HUD?s
request for

discretionary funding authority. That request is for $30.4 billion, which
HUD has characterized as a 7- percent increase over last year?s
discretionary budget authority. There are additional factors that must be
considered in evaluating this budget request, including HUD?s ability to
expend requested funding. The budget is also being debated at the program
level, where some programs would grow, some would shrink, and some would be
eliminated.

In recent years, HUD has had significant unexpended balances. These balances
have made it more difficult for the Congress to assess the Department?s need
for new appropriations. Without accurate and timely information about the
nature, amount, and availability of HUD?s unexpended balances,
decisionmakers cannot fully and fairly evaluate the Department?s funding
needs. HUD has initiated several short- term efforts to identify, quantify,
and recapture some unexpended balances and has, in fact, recaptured about $3
billion each year between fiscal year 1998 and fiscal year 2000. In
addition, in each of the past 2 years, the Congress has rescinded almost $2
billion of balances, using the funds for other purposes. In spite of these
efforts, HUD has not yet integrated the processes needed to routinely and
accurately account for unexpended balances into its ongoing financial,
program, and budget management. As a result, HUD does not have the
information it needs to (1) determine with assurance how much of the
unexpended balances should be recaptured and (2) clearly factor these funds
into its budget request. Our analysis of its current requests for the Public
Housing Capital Fund illustrates these points.

3

Comparison of HUD?s Budget Requests for Fiscal Years 2001 and 2002

For fiscal year 2002, HUD is requesting $30.4 billion in discretionary
budget authority, which HUD has characterized as a $2 billion, or 7-
percent, increase over its fiscal year 2001 discretionary funding.
Currently, there is a lot of debate about the size of HUD?s budget request
in comparison to previous years. But the more important issue is whether HUD
has sufficient justification for the amount requested.

One key issue that needs examination is the amount of additional funding HUD
needs in its Housing Certificate Fund in light of the $4.2 billion advance
appropriation provided in fiscal year 2001 that will be available in fiscal
year 2002. According to HUD officials, this advance was to cover rental
assistance contracts expiring in the first quarter of fiscal year 2002.
However, HUD?s fiscal year 2002 budget also includes new budget authority to
cover expiring contracts. HUD?s budget request shows that it expects to end
fiscal year 2002 with a $4.2 billion unobligated balance in the Housing
Certificate Fund. HUD officials indicated that the $4.2 billion in
unobligated funds was needed in the first quarter of fiscal year 2003 to
cover the renewal of contracts that are funded on a calendar- year basis and
expire between October 1 and December 31, 2002. Hence, this $4.2 billion
would support no program activity in fiscal year 2002. The officials further
explained that in the future, budgetary resources would only need to cover
one year, rather than the 15 months covered by the fiscal year 2002 budget.
While HUD may need to carry over some unobligated funds from one fiscal year
to the next, HUD has not

4 provided rationale supporting $4.2 billion as the amount of unobligated
balances it needs

to carry over to renew contracts expiring in the first quarter of fiscal
year 2003. In addition to consideration of the overall size of HUD?s budget
request, the level of funding for individual programs should also be
considered. The budget proposes changes in a number of HUD?s programs. We
would now like to discuss some of these changes.

Housing Certificate Fund: $2 Billion Increase HUD?s budget request proposes
increasing the Housing Certificate Fund from about $14 billion to about $16
billion. This fund helps low- income families afford the high cost of rental
housing by subsidizing their rents. 1 Starting in the 1970s and 1980s, HUD
entered into long- term contracts to provide Section 8 project- based rental
assistance. According to HUD, each year, more long- term contracts expire.
As a result, HUD says it needs about $2 billion more this year for contract
renewals. Renewing these contracts requires more budget authority, but it
does not increase the number of households receiving assistance this coming
year. In addition, HUD is proposing to expand the tenant- based program to
serve approximately 34,000 more households at an additional cost of about
$200 million.

1 These subsidies are linked either to the unit (project- based) or to the
resident (tenant- based). Under the project- based program, HUD contracts
with property owners to provide housing assistance for low- income families.
Under the tenant- based program, families receive rental assistance housing
vouchers or certificates.

5 As discussed earlier, according to HUD, the funding level requested for
this program

would leave it with an unobligated balance of $4.2 billion at the end of
fiscal year 2002. Public Housing Operating Fund: $150 Million Increase The
fiscal year 2002 budget proposes increasing the Public Housing Operating
Fund by $150 million over last year?s budget. The operating fund subsidizes
the day- to- day operating expenses of public housing agencies. HUD?s fiscal
year 2002 budget increases this fund to $3.4 billion to accommodate public
housing needs such as maintenance, crime- prevention activities, and utility
costs. However, this $150 million program increase must be considered in the
light of the elimination of the $309 million Public Housing Drug Elimination
Grant program, which we will discuss later.

American Down Payment Fund: $200 Million Set- Aside HUD?s fiscal year 2002
budget introduces the $200 million American Dream Downpayment Fund. This
fund, within the HOME Investment Partnership Program (HOME), would match the
down- payment assistance provided by third parties to approximately 130,000
low- income and minority families seeking to buy their first homes. HOME is
a flexible block grant that provides support for local affordable housing
efforts. HOME funds are allocated by formula to states, counties, and large
cities. The total funding for HOME would remain the same as last year at
approximately $1.8 billion. However, HUD officials stated that the American
Dream Downpayment

6 Fund requires that states, counties, and large cities use $200 million of
their formula

block grant funding for this down- payment program. Public Housing Capital
Fund: $700 Million Decrease The largest decrease in HUD?s fiscal year 2002
budget proposal is the $700 million reduction in the Public Housing Capital
Fund. This fund provides formula grants to public housing agencies for such
activities as rehabilitation and modernization. The budget provides $2.3
billion for this fund. Based on a contracted study, HUD believes this amount
will be sufficient to meet all new capital needs. Furthermore, HUD states
that public housing agencies have large amounts of unspent capital funds
from previous years that they can use to address any backlog of capital
needs. HUD states that the purpose of the reduction in this program is for
the public housing agencies to draw down capital funds that have been
obligated but not expended. However, HUD plans to implement the $700 million
cut across- the- board, which may have the unintended consequence of
penalizing those public housing agencies that have few or no unexpended
balances because they spent their funds in a timely manner.

Community Development Block Grant Program: $311 Million Decrease HUD?s
fiscal year 2002 budget proposes eliminating selected set- asides in the
Community Development Block Grant (CDBG) program. The CDBG program provides
state and local communities with a flexible source of funds for economic
development and community revitalization. Most of the funding (about $4.4
billion) is distributed by

7 formula and would remain at the fiscal year 2001 level. HUD?s budget would
cut almost

half of the CDBG set- asides. The principal targets for elimination are the
Economic Development Initiative set- aside, which supports local job-
creation projects, and the Neighborhood Initiative Demonstration, a
congressional set- aside that funds local neighborhood- improvement
strategies. HUD?s budget suggests that the types of projects funded by these
set- asides would still be eligible for funding under the formula portion of
the CDBG program.

Public Housing Drug Elimination Grant Program: $309 Million Decrease HUD?s
fiscal year 2002 budget proposes the elimination of the Public Housing Drug
Elimination Grant Program, which provides formula grants to local public
housing agencies to help reduce drug activity in public housing. HUD cites
three reasons for eliminating the program: (1) It duplicates activities
eligible under the Public Housing Operating and Capital Funds, (2) other
federal programs and funds are also available for these activities, and (3)
HUD?s Inspector General has identified certain inappropriate uses of such
funds. HUD?s budget suggests that public housing agencies could utilize
operating or capital funds for these anti- drug activities, although, as
previously mentioned, HUD has also proposed that the Capital Fund be reduced
by $700 million. In addition, the operating fund would be reduced by $10
million, which is scheduled for transfer to HUD?s Inspector General to
continue Operation Safe Home. To date, Operation Safe Home has been funded
by the Public Housing Drug Elimination Grant program that HUD is proposing
to eliminate.

8

HUD?s Management of Unexpended Balances Is Crucial in Considering Its Fiscal
Year 2002 Budget Request

For years, unexpended balances have clouded HUD?s budget needs because HUD
has not adequately determined what portion of them is available for
recapture. While these balances have been very large, HUD has not had the
information needed to quantify the amount available for recapture from them.
With such information, HUD could then take the steps necessary to recapture
the extra funds. We have worked with HUD and the Congress to identify funds
available for recapture. As shown in figure 1, from fiscal year 1998 through
fiscal year 2000, HUD recaptured over $3 billion a year in unexpended
balances. However, HUD officials told us they did not estimate any
recaptures for fiscal year 2002.

9

Figure 1: Total HUD Recaptures for Fiscal Years 1998 - 2002

Dollars in billions Source: HUD?s SF- 133 Budget Execution Reports and
President?s Fiscal Year 2002 Budget Appendix .

In response to our previous recommendations, HUD has also established short-
term task forces to quantify and recapture unexpended fund balances. For
example, in March 1998, we recommended that HUD review unexpended balances
and ensure that excess balances were recaptured from its project- based
Section 8 program, in which HUD contracts with owners to provide housing for
low- income families. 2 In response, in September of that year, HUD
initiated a review of unexpended balances in all of its programs to
determine whether these balances could be recaptured. According to HUD
officials, this review identified and recaptured unexpended balances, but
the effort was suspended.

2 Section 8 Project- Based Rental Assistance: HUD?s Processes for Evaluating
and Using Unexpended Balances Are Ineffective (GAO/ RCED- 98- 202, July 22,
1998) and Housing and Urban Development: Comments on HUD?s Fiscal Year 1999
Budget Request (GAO/ T- RCED- 98- 123, Mar. 12, 1998).

0 1

2 3

4 5

1998 1999 2000 2001 Est. 2002

Est. Recaptures

10 In September 1999, as part of our review of HUD?s fiscal year 2000
request, we again

recommended that HUD identify programs with a history of unexpended balances
and work to determine their obligation status and availability for
recapture. 3 In response, HUD established an unexpended balance task force
to study these balances in all its programs. As part of this effort, HUD
contracted for studies of five programs 4 with large unexpended balances to
determine the reasons that funds were underutilized in these programs and to
identify possible solutions. However, the studies focused primarily on the
reasons for slow expenditure of funds and did not provide HUD with enough
information to determine whether the unexpended balances were available and
could be used to reduce future program needs. For example, in the study of
the Public Housing Capital Fund, the contractor evaluating the program
reported that there were not enough data to evaluate the use of all
unexpended capital program funds.

Such information could help HUD better determine the extent to which
unexpended balances could be used to offset the funding reductions it is
proposing for this program. For fiscal year 2002, HUD is requesting $2.3
billion to fund the Public Housing Capital Fund program, $700 million less
than last year. HUD said its request is based on the assumption that
unexpended balances in this program can cushion the cut. However, HUD has
been unable to determine the amount of recapturable funds in the program.

3 HUD?s Fiscal Year 2000 Budget Request: Additional Analysis and
Justification Needed for Some Programs (GAO/ RCED- 99- 251, September 3,
1999) and Housing and Urban Development: Comments on HUD?s Fiscal Year 2000
Budget Request (GAO/ T- RCED- 99- 104, Mar. 3, 1999). 4 HUD contracted to
study the Section 202 Supportive Housing for the Elderly Program, CDBG,
Public

Housing Capital Fund, and Section 8 Project- Based and Tenant- Based
programs under the Housing Certificate Fund.

11 The Capital Fund consolidates the funding for a number of HUD?s public
housing

programs, including the Public Housing Development program, the
Comprehensive Grant program, and the Major Reconstruction of Obsolete
Projects program, as well as the Public Housing Debt Service Account. HUD,
however, does not have an information system that integrates the obligation
data from all these different parts of the Capital Fund. HUD also lacks
aggregate information on the status of individual capital fund activities
undertaken by public housing agencies. Without such information as the
amount of funds housing agencies have under contract, when projects will be
completed, and what project plans have fallen through, HUD will not be able
to routinely quantify unexpended balances that might be available for
recapture. HUD officials agreed that such detailed information was needed,
but they pointed out that public housing agencies are not required to submit
such details on the status of their capital projects.

Conclusions

In conclusion, the ability of the Congress to assess HUD?s overall funding
needs for fiscal year 2002 is complicated by its incomplete analysis of
unexpended balances in its programs. The most significant example is the
$4.2 billion unobligated balance stemming from HUD?s treatment of the
advance appropriation for the Housing Certificate Fund. HUD has started to
move in the right direction by beginning to study unexpended balances and
attempting to factor them into its budget request. However, it has not yet
adequately determined what portion of these balances can be used to offset
the need for new appropriations. As requested by both the Subcommittee
Chairman and Ranking Member, we will continue to work with the Subcommittee
and HUD to further

12 clarify these issues for congressional oversight and to encourage HUD to
develop

systems, integrate and analyze needed information, and appropriately factor
unexpended balances into its budget requests. However, until HUD routinely
and fully determines what portion of its unexpended balances is available
and clearly presents this information in its budget requests, the
Department?s need for new appropriations will remain unclear, and the
Congress will continue to have difficulty evaluating HUD?s funding requests.

Recommendations for Executive Action

In order for HUD to fully account for unexpended balances in its funding
requests, we recommend that the Secretary (1) develop systems that routinely
provide timely, reliable information on the status of unexpended funds for
the purpose of quantifying the amount available for recapture or rescission;
(2) routinely incorporate this information into the management and operation
of programs; and (3) consistently use this information in formulating its
budget request, clearly demonstrating how it is taking these balances into
account when setting forth its budget needs. For example, for the Public
Housing Capital Fund, HUD should (1) develop information systems to
aggregate data on the obligation status of individual housing agencies?
capital fund projects, (2) use that information to reallocate funds among
public housing agencies as needed, and (3) adjust its budget request for the
Public Housing Capital Fund accordingly.

_ _ _ _ _

13 Mr. Chairman, that concludes our prepared statement. We would be happy to
answer

any questions that you or Members of the Subcommittee may have.

Contact and Acknowledgments

For future contacts regarding this testimony, please contact Stanley
Czerwinski or Carol Anderson- Guthrie at (202) 512- 2834. Individuals making
key contributions to this testimony included Christine Bonham, Elaine
Boudreau, Diane Brooks, Don Cowan, Michael Curro, Dwayne Curry, Denise
Fantone, Rick Hale, John McDonough, John McGrail, Michael Mgebroff, Kirk
Menard, and Alwynne Wilbur.

(391002)
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