Public Housing: Converting to Housing Certificates Raises Major Questions
About Cost (Letter Report, 06/20/95, GAO/RCED-95-195).

Pursuant to a congressional request, GAO reviewed the Department of
Housing and Urban Development's (HUD) legislative proposal to convert
its public housing program to a certificate program, focusing on: (1)
the cost implications of transitioning from the current public housing
program to a housing certificate program; and (2) key factors that may
affect HUD plans to provide greater housing choices for public housing
residents.

GAO found that: (1) based on an analysis of average costs, HUD believes
that housing certificates will cost less than funding public housing
developments; (2) there are wide differences in the cost of the two
options at individual housing developments; (3) the certificate program
would cost less for developments in good shape, but for those housing
developments in the worst physical condition, direct funding is less
costly; (4) the variations in costs raise important issues, including
whether the federal government should pay for the rehabilitation of
public housing developments and the added costs of certificates, and
whether housing certificates should be targeted initially to
developments where they are clearly cost-effective; (5) HUD has not
performed the detailed analysis that is needed to provide information
for deciding these issues; and (6) factors that will influence
residents' actual housing choices include the current tenants'
characteristics, their inclination to move, the availability of
affordable housing, private landlords' willingness to accept tenants
with housing certificates, and HUD compliance with and enforcement of
housing discrimination laws.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-95-195
     TITLE:  Public Housing: Converting to Housing Certificates Raises 
             Major Questions About Cost
      DATE:  06/20/95
   SUBJECT:  Housing programs
             Proposed legislation
             Public housing
             Federal aid for housing
             Rent policies
             Cost analysis
             Low income housing
             Fair market value
             Rent subsidies
IDENTIFIER:  American Community Partnerships Act
             Buffalo (NY)
             Los Angeles (CA)
             McDonough (GA)
             New York (NY)
             Alexandria (VA)
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Housing and Community
Opportunity, Committee on Banking and Financial Services, House of
Representatives

June 1995

PUBLIC HOUSING - CONVERTING TO
HOUSING CERTIFICATES RAISES MAJOR
QUESTIONS ABOUT COST

GAO/RCED-95-195

HUD's Proposal to Convert to Housing Certificates


Abbreviations
=============================================================== ABBREV

  HUD -
  GAO -

Letter
=============================================================== LETTER


B-261495

June 20, 1995

The Honorable Rick A.  Lazio
Chairman, Subcommittee on Housing and
 Community Opportunity
Committee on Banking and
 Financial Services
House of Representatives

Dear Mr.  Chairman: 

On May 1, 1995, the Department of Housing and Urban Development (HUD)
submitted to the Congress proposed legislation entitled the "American
Community Partnerships Act." If implemented, the act would transform
how this nation has historically funded public housing.  Federal
assistance would no longer flow to public housing authorities, but
instead would go to households in the form of housing certificates. 
These households would then have the choice of using their housing
certificates to either stay in public housing or move to apartments
available in the private rental market.  HUD states that this shift
in policy will result in significant savings and address several
fundamental problems with the current public housing program,
including (1) residents' lack of choice in housing, (2) the
concentration of very poor people in very poor neighborhoods, and (3)
a lack of discipline in the management of public housing because of
its insulation from the marketplace. 

In considering HUD's legislative proposal, you asked us to (1)
describe the cost implications and the issues raised by transitioning
from the current public housing program to one using housing
certificates and (2) identify key factors that may affect HUD's plan
to provide greater housing choice for the residents of public
housing. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

After calculating the average costs of converting to housing
certificates versus continuing the current public housing program,
HUD concluded that the cost of using certificates will be less than
that of funding public housing; however, these averages do not reveal
the wide differences in the cost of these two options at individual
public housing developments.  For some developments, the current
average cost to provide housing is less than half that of housing
certificates.  However, for those developments in the worst physical
condition, the reverse in true.  These wide variations in cost raise
a number of important issues, including whether the federal
government should pay for the rehabilitation of public housing
developments when their rental revenues could finance it and whether
housing certificates should be targeted initially to developments
where they are clearly cost-effective.  The actual costs of
converting to housing certificates will depend on how these and other
issues are resolved.  But HUD has not performed the detailed analysis
that would provide important information for deciding these issues. 

Housing certificates by design are intended to provide public housing
residents greater opportunity to select where they want to live. 
However, actual choice in housing depends on many factors, including
the characteristics of the current tenants and their inclination to
move, the availability of affordable housing, the willingness of
private landlords to accept tenants with housing certificates, and
the extent to which housing discrimination laws are followed and
enforced. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Approximately 3,300 public housing authorities own and operate about
13,200 public housing developments with about 1.4 million units. 
These housing authorities vary in size and condition.  Over 2,400
authorities, or over 70 percent, are small, with fewer than 300
units.  On the other hand, there are about 210 authorities, or about
7 percent, with more than 1,000 units.  These large authorities
account for about 63 percent of the total number of public housing
units.  By HUD's assessment, most of the public housing authorities
are reasonably well managed; however, HUD considers 92 authorities,
or about 3 percent, to be "troubled." Thirteen of the troubled
authorities are large urban housing authorities, managing about 14
percent of the total public housing stock and most of the stock that
is in the worst physical condition. 

HUD plans to carry out the transformation of public housing in three
stages and to complete it by 2002.  During the first stage, which
would begin in 1995, HUD would consolidate the amounts provided for
the multiple public housing programs into two funds--one to pay for
capital and management improvements of public housing authorities and
public housing developments and another to subsidize the operations
of these authorities and developments.  To be eligible for funding,
public housing authorities would be required, during this stage, to
develop a strategic plan that, among other things, identifies the
rehabilitation needed for their public housing developments and
establishes a timetable for completing it.  Under HUD's proposal,
these improvements would be paid for by the federal government from
the capital fund. 

During the second stage, HUD proposes to replace the capital and
operating funds established in stage one with a program of
project-based assistance, which would be tied directly to units.\1
Project-based assistance, which would be authorized for 1 year, is
intended to help public housing authorities gain experience in
managing and operating their housing when they are dependent on the
revenues generated from the properties' rents, rather than from
capital and operating subsidies provided by the current system and
continued during stage one.  The rents set by public housing
authorities for their properties during stage two would reflect the
properties' market values and any services provided by and paid for
by the public housing authority, such as child care, so long as the
rents are not greater than the fair market rent\2 established by HUD
for the area. 

During the third stage, project-based assistance would be replaced by
tenant-based assistance, namely, housing certificates provided
directly to the assisted households.  The public housing residents
would then have the choice of either staying in their public housing
unit or moving to privately owned rental housing that meets certain
cost and quality standards.  HUD's proposal recognizes that some
public housing developments, even after they are rehabilitated, will
still be located in modest neighborhoods and, because they were built
in an earlier era, will still lack certain amenities offered in
privately owned rental housing.  These developments, therefore, will
tend to have market values below their area's fair market rent. 
Consequently, in order to enhance the competitiveness of these public
housing developments with other rental housing, HUD has proposed
giving families a "shopping incentive" that would reduce their share
of the rent by the same percentage that the market rent of the public
housing unit is below the area's fair market rent. 


--------------------
\1 To receive this assistance, a household must live in a designated
unit. 

\2 The fair market rent for an area is the amount that would be
needed to pay the gross rent (shelter plus utilities) of privately
owned decent, safe, and sanitary rental housing of a modest
(nonluxury) nature. 


   COST IMPLICATIONS OF REPLACING
   THE PUBLIC HOUSING PROGRAM WITH
   HOUSING CERTIFICATES
------------------------------------------------------------ Letter :3

The Secretary of HUD testified on April 6, 1995, before your
Subcommittee that it cost $440 per month on average to house a family
with a housing certificate, compared to an average of $481 per month
in public housing.  HUD used these averages to conclude that
significant savings could result from converting the public housing
program to one using housing certificates.  However, these averages
do not reveal the range of costs across public housing authorities
and their developments resulting from differences in the age and
condition of these developments, the efficiency of public housing
management, and the housing markets in which these developments are
located. 

In computing the costs of the current public housing program, HUD
used the sum of the 1995 appropriations for operating subsidies,
funding for the modernization of properties, and grants to eliminate
drug use to obtain an average per unit monthly cost.  This
computation tends to skew the average cost of public housing upward
because of the high costs associated with the relatively small
percentage of the public housing stock that is in the worst physical
condition.  This portion of the stock requires a disproportionate
share of the modernization funding and is likely to have higher than
average operating costs.  On the other hand, because HUD's analysis
considered the capital costs of public housing as sunk costs, it made
no attempt to add an imputed debt service charge\3 to the cost of
public housing.  After an adjustment for vacant units, the analysis
showed an average per unit cost for an occupied unit of public
housing to be $481 per month.  In the calculation of the average per
unit cost of housing certificates, the analysis used the fair market
rent at the 40th percentile,\4

which resulted in an average per unit cost of $440 per month. 

These averages do not disclose the wide variations in the costs of
the programs among public housing authorities and their developments. 
The data used in HUD's analysis show that for some public housing
authorities, such as the one in Buffalo, New York, housing
certificates would cost about $500 per unit per month.  This is about
40 percent less than the current $900 average cost to operate an
occupied unit at this housing authority.  Conversely, for other
housing authorities, HUD's analysis shows just the opposite result. 
For example, in Los Angeles, California, HUD estimates the per unit
cost of the certificate program to be about $1,100 per month,
compared to $930 for public housing.  For other housing authorities,
the cost variations are even greater.  For instance, in the case of
McDonough, Georgia, housing certificates were estimated by HUD to
cost about $700 per unit per month, compared to $240 for public
housing. 

Just as calculating aggregate averages for the two housing options
obscures wide variations among public housing authorities, computing
an average per unit cost across an entire stock of developments
within a public housing authority does not recognize significant
variations in costs among individual developments.  To identify these
variations and the issues they raise, we reviewed financial data on
operating and rehabilitation costs for 40 developments located in
nine public housing authorities across the country.  From these 40,
we chose 5 to illustrate the range of conditions we found in our
review.\5 These five examples are discussed in detail in appendix I,
along with the cost implications of using housing certificates and
related issues. 

These examples disclose a broad range in the cost of operating public
housing and providing housing certificates.  At one extreme, certain
developments located in New York City, New York; Los Angeles,
California; and Alexandria, Virginia, cost about half as much to
operate currently as public housing as what they could be rented for
in the private market.\6 Moreover, the operating costs for these
developments are below the fair market rent in the area.  If the
public housing program is converted to use certificates, developments
with these characteristics raise such questions as (1) whether the
federal government should use the capital fund to pay for any needed
modernization (which can run into the millions of dollars per
development), as is contemplated in the proposed legislation, or
whether these costs should be paid for out of revenues generated by
the developments; (2) what, if any, restrictions should be placed on
the use of the additional revenues such developments could generate
for the public housing authorities, particularly as units become
vacant and rents may no longer be restricted to the fair market rent;
and (3) how the federal government will pay for the additional
expenses caused by increasing rents from a level necessary to cover
operating costs to the fair market rent.  (See example 2 in app.  I.)

At the other extreme are public housing developments whose operating
costs after rehabilitation would be several times higher than the
cost of housing certificates.  These developments generally need
extensive renovation, and while they can be found in housing
authorities across the country, they are frequently associated with
the large troubled urban authorities.  Also, the market values of
some of these developments is well below their operating costs.  A
critical question related to these developments is under what
circumstances, if any, the federal government should use the capital
fund to subsidize their rehabilitation.  Another question is whether
to target these developments in a conversion to housing certiciates,
since these developments represent the greatest opportunity for cost
savings.  (See example 5 in app.  I.)

Between these extremes are developments with various relationships
between their operating costs, market values, and fair market rents. 
These developments raise other issues.  Among the more significant
are (1) how the added cost of the proposed "shopping incentive" will
be financed; (2) how the objective of the "shopping incentive," which
in part is to make public housing developments more competitive with
private rental properties, can be reconciled with one of the overall
goals of HUD's proposal--reducing the concentration of very poor
people in very poor neighborhoods; (3) whether the federal government
should pay the additional costs of subsidizing families in public
housing developments when the market values of these developments
exceeds the fair market rents; and, (4) if current public housing
residents move to higher-quality housing through the use of housing
certificates, whether the additional costs will be paid for through
increased federal subsidies or will be offset by housing fewer
families.  (See examples 1, 3, and 4 in app.  I.)

The issues arising from our review of selected housing developments
are largely unanswered by HUD's proposal.  The answers will, of
course, determine the actual costs of converting from the current
public housing program to a program that uses certificates.  But HUD
has not done a detailed cost analysis, for individual housing
developments, that takes into account their rehabilitation needs,
operating costs, and market values and therefore would clarify the
prospective costs for individual developments--critical information
in deciding the issues on which overall costs depend. 


--------------------
\3 The federal government has already paid for the construction of
public housing.  Accordingly, there are no mortgages on public
housing developments nor any associated debt payments. 

\4 A fair market rent set at the 40th percentile of an area's rental
housing would reflect the fact that about 40 percent of the market
area's rental housing can be obtained at this rent level. 

\5 The 40 developments were identified by nine urban housing
authorities nationwide in response to our request that they identify
their more marketable and least marketable developments.  We
categorized these developments into five groups based on common
characteristics.  From these five groups, we chose five developments
to present as examples. 

\6 We defined operating costs to include current operating expenses
and amortized costs for the rehabilitation of the property and
funding of a reserve account for nonroutine expenditures. 


   PROMOTING GREATER CHOICE IN
   HOUSING
------------------------------------------------------------ Letter :4

A key element of HUD's plan is to give the residents of public
housing greater choice in deciding where they will live.  Under the
plan, public housing residents who are not satisfied with their
housing will be able to use their housing certificate to rent another
public housing unit or a privately owned apartment.  To the extent
that current residents exercise their choice by moving out of very
poor neighborhoods, a basic goal of the plan will be achieved. 
However, the outcome depends on several issues, including (1) the
extent to which tenants desire to move, (2) the availability of
affordable apartments in the neighborhoods that tenants choose, (3)
the willingness of landlords to accept tenants with housing
certificates, and (4) the extent to which laws intended to prevent
discrimination are followed and enforced.  Since these factors tend
to be locally determined, the degree of choice and the related issue
of the extent to which very poor people are concentrated in very poor
neighborhoods will probably vary from one housing authority to
another. 


      TENANTS' DESIRE TO MOVE WILL
      VARY
---------------------------------------------------------- Letter :4.1

The decision to move is often a very personal one, motivated not only
by the quality of a person's present housing but also by the
proximity to work, the availability of shopping and medical care, the
location of family and friends, and the level of security.  Officials
of housing authorities we visited in New York, New Jersey, Virginia,
and California stated that it is unlikely that many elderly tenants
will move, because they are satisfied with their current housing.  In
addition, we observed a variety of housing developments, serving
families with children, that were in good condition and in desirable
locations, where tenants' choice to move would not likely be based on
their dissatisfaction with their current housing. 

The elderly population represents a significant percentage of the
people in public housing.  HUD estimates that more than a third of
the 1.4 million units of public housing are occupied by the elderly. 
It is generally recognized by public housing officials nationwide
that this housing tends to be in reasonably good condition.  Also,
while public housing developments serving families have frequently
been depicted as distressed, crime-ridden, and poorly located, in
fact, many provide decent, safe, and sanitary housing. 


      AVAILABILITY OF AFFORDABLE
      UNITS AFFECTS CHOICE
---------------------------------------------------------- Letter :4.2

A key factor in any plan to bring the forces of the market to bear on
public housing is the availability of alternative housing that is
affordable to public housing residents.  Recent data show that the
national vacancy rate for rental apartments has exceeded 7 percent. 
However, this average figure does not reflect significant variations
among housing markets throughout the country.  Generally, the lower
the vacancy rate in an area, the more difficult it will be for
assisted households to find alternative housing.  In the New York
City housing market, for example, where about 11 percent of the
nation's public housing stock is located, the vacancy rate is less
than half the national average, making alternative housing more
difficult to find. 


      LANDLORDS' ACCEPTANCE OF
      HOUSING CERTIFICATES IMPACTS
      CHOICE
---------------------------------------------------------- Letter :4.3

The ability of public housing tenants to exercise choice in their
housing decisions depends not only on the availability of affordable
housing but also on the willingness of private landlords to accept
their housing certificates.  Landlords electing to accept tenants
with housing certificates do so voluntarily and, in so doing, also
agree to the program's requirements.  Identifying ways to improve
landlords' willingness to accept housing certificates was the subject
of a study commissioned by the National Multifamily Housing
Council.\7 To achieve this objective, the study recommended that
housing certificates operate as much like the regular market as
possible, though it was recognized that in some areas, eliminating
all government involvement would be unwise. 

Under the American Community Partnerships Act, HUD has proposed
provisions that would make housing certificates more consistent with
the operation of the regular market.  These provisions are aimed at
attracting additional owners of private-market rental housing to rent
to families using housing certificates.  HUD has proposed changing
requirements that have discouraged landlords' broader participation
in the current housing certificate and voucher programs.  Key
provisions that would facilitate private landlords' acceptance of
housing certificates include

  eliminating the "take one, take all" requirement, and replacing it
     with the requirement that owners must lease a "reasonable"
     number of units to certificate holders;

  making it easier for owners to terminate the lease of a certificate
     holder, in accordance with state and local law (e.g., for not
     paying rent; for repeated, serious violations of the lease; for
     any criminal or drug-related activities, etc.); and

  clarifying that owners can screen and select families for admission
     according to the owners' standards (but following the Fair
     Housing Act's requirements). 


--------------------
\7 Abt Associates, Inc., Final Report on Recommendations on Ways to
Make the Section 8 Program More Acceptable in the Private Rental
Market, (Cambridge, Mass.:  Mar.  1994). 


      HOUSING CHOICE AFFECTED BY
      DISCRIMINATION
---------------------------------------------------------- Letter :4.4

Discrimination in the rental market is an issue that is difficult to
quantify.  However, to the extent that it exists, whether it be
against female heads of households, families with children, or
members of particular races, it would negatively affect residents'
choice in housing.  Conversely, of course, to the extent that housing
discrimination laws are followed and enforced, residents' choice
would be encouraged. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

HUD's recommendation to transform public housing to a tenant-based
housing certificate program is a fundamental shift in federal housing
policy that has significant implications for public housing
authorities, their residents, and the federal government.  To date,
HUD's cost analysis, used in part to support the recommendation, has
relied on average costs and does not reveal the wide differences in
the costs of the two approaches for individual housing developments. 
For some public housing developments, the cost of operating is about
half of what the government would have to pay once it provided
tenants with housing certificates.  For other developments in the
worst condition, rehabilitation expenses plus operating costs are
several times higher than what certificates would cost.  With such
divergent cost implications, a transformation from the public housing
program to one using housing certificates raises issues that are
largely unanswered in HUD's proposal.  Therefore, the ultimate cost
of converting to housing certificates is not known. 

HUD has not required that public housing authorities do a detailed
cost analysis of individual housing developments, which would provide
critical information in deciding these issues, though the Department
is planning to require that housing authorities collect some of this
information during stage one of the transformation.  If such an
analysis took into account individual developments' rehabilitation
needs, operating costs, and market values, it would reveal the cost
implications for individual developments and public housing
authorities.  It would also provide the data necessary to assess the
other issues raised in this report.  In doing so, it would clarify
the choices available to the Congress in allocating housing funds. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :6

We discussed the contents of this report with HUD's Assistant
Secretary for Policy Development and Research and with other senior
Department officials.  These officials neither agreed nor disagreed
with the manner in which we characterized the cost implications and
other implications of converting to housing certificates.  However,
they acknowledged that converting to housing certificates would have
different cost implications for various housing developments.  They
also stated that HUD's proposal to transform public housing was never
intended to focus on individual developments or public housing
authorities.  Rather, HUD's intention was to present a major shift in
housing policy that was revenue neutral and focused on the benefits
of individual choice. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :7

In addition to discussing with HUD officials the proposal to
transform the public housing program and reviewing the agency's
documents and reports on the costs of public housing and the
estimated costs of the housing certificate program, we judgmentally
selected and contacted nine public housing authorities throughout the
country.  We asked that they identify their more marketable and least
marketable developments.  We obtained both general and detailed
information about the individual housing developments--for both
elderly people and families--that these authorities manage, their
actual costs of providing public housing, and their costs related to
the proposed certificate program.  Specifically, we obtained detailed
data on 40 developments managed by the nine authorities in the
following locations:  Alexandria, Virginia; Baltimore, Maryland;
Chicago, Illinois; Cleveland, Ohio; Jersey City, New Jersey; Los
Angeles County, California; City of Los Angeles, California; New
York, New York; and Seattle, Washington.  These data included
developments' operating incomes and expenses, the costs to
rehabilitate these developments to market standards, estimates of
rents that could be charged for the rehabilitated units, and other
pertinent information.  We then categorized developments with similar
characteristics into five groups, from which we then chose five
examples to highlight the kinds of issues HUD's proposal raises.  HUD
officials agreed that our grouping of projects was reasonable for the
purpose of illustrating these issues.  Our sample size and selection
criteria were not intended to allow for projections of how many
public housing developments fall within each group, nor were our five
examples intended to be all-inclusive.  These examples are presented
in appendix I. 

We also visited four of the housing authorities to discuss the
implications of the data we collected in greater detail and to obtain
their input on key factors affecting housing choice for the residents
of public housing.  We also reviewed recent reports pertaining to
national vacancy rates and factors affecting the mobility of assisted
renters. 

We conducted our work between March and May 1995 in accordance with
generally accepted government auditing standards.  We did not
independently verify the financial data on operating costs nor the
estimates of rehabilitation needs of the public housing developments
used as examples in this report. 

We are sending copies of this report to the appropriate congressional
committees, the Secretary of Housing and Urban Development, and the
Director of the Office and Management and Budget.  Copies are
available to others on request.  If you or your staff have any
questions, please call me on (202) 512-7631. 

Sincerely yours,

Judy A.  England-Joseph
Director, Housing and Community
 Development Issues


COST IMPLICATIONS OF TRANSFORMING
PUBLIC HOUSING
=========================================================== Appendix I

The Department of Housing and Urban Development's (HUD) plan to
transform public housing to a market-driven, certificate-based system
will present different and wide-ranging cost implications for the
nation's 3,300 public housing authorities.  For some, but currently
unknown, number of these authorities' 13,200 developments, the cost
comparisons will show the real housing value that public housing
units deliver.  For other developments, the cost comparisons will
highlight the questionable value--from a cost perspective only--of
continuing to overpay for public housing when viable, less costly
private rental apartments are available. 

The following examples illustrate the range of cost implications that
HUD's plan could have for housing developments.  These examples are
for illustration only and should not be used to project overall costs
of the plan.  To control for tenants' income and for purposes of
consistency, each example assumes that assisted households would make
no contribution toward their rent. 

Four costs are presented in each example.  The first is the
property's current per unit operating cost.  These can vary widely
depending on such variables as the property's location and amenities
and the extent to which maintenance and modernization expenses have
been deferred.  Also, according to HUD's Director, Office of Assisted
Housing, current operating costs are somewhat understated because
they do not adequately account for the costs of employee benefits,
solid waste disposal, services such as child care and tenant
counseling, and security.  The second cost--the revised operating
cost--presented in each example, is the sum of current operating
costs; the rehabilitation and modernization expenses necessary to put
the unit in a market-ready condition, as estimated by the housing
authority; and a reserve for future nonroutine expenses.  The third
cost is the market value of the unit.  This is the approximate
monthly rent that the unit could bring in the private market,
according to the opinions of and surveys made by housing authority
officials and local real estate agents.  The fourth cost--the fair
market rent--is the maximum monthly rent that HUD would pay for
households using housing certificates. 


   EXAMPLE 1
--------------------------------------------------------- Appendix I:1

As shown in figure I.1, this development has the following monthly
per unit costs:  current operating costs of $290, revised operating
costs of $425, a market rental value of $575, and a fair market rent
of $700. 

In this example, the federal government is currently subsidizing that
portion of the public housing authority's current operating costs
($290) not covered by the tenant's rent contribution.  If the federal
government pays for the modernization of this 100-unit property out
of grant funds, it will cost about $850,000, or about $8,500 per
unit.  Conversely, if the federal government either makes a direct
loan or insures a private loan for the modernization costs and
requires a reserve for nonroutine expenses, the revised operating
costs will be about $425 per month.  Once this modernization is
completed, as called for under HUD's proposal, the public housing
authority would be able to charge a market rent of $575, or $150 more
than the revised operating costs.  Last, if a household chose to use
its housing certificate to move to private rental housing, it could
receive a subsidy up to the fair market rent of $700.  This is $125
more than the market rent of the public housing unit. 

For this example, the federal government minimizes its cost by
retaining the development as public housing.  If the housing is
rehabilitated and maintained as public housing, it has a monthly per
unit cost of $425.  This can be considered a good value for the
federal government, since the unit's market value of $575 exceeds the
monthly revised operating costs by $150. 

   Figure I.1:  Example in Which
   Unit's Market Value and Fair
   Market Rent Exceed Operating
   Expenses

   (See figure in printed
   edition.)

HUD's plan raises the following issues concerning the costs of this
development. 

  Should the federal government pay to rehabilitate public housing
     properties when these properties could generate sufficient
     revenues to pay for these expenses?  In this example, under the
     proposal the federal government would pay the $850,000 in
     rehabilitation costs.  Alternatively, these costs could be
     financed by a loan that could be paid back through the
     additional revenues generated at the property's market rent.  If
     the federal government pays for the rehabilitation costs, the
     public housing authority would still have operating costs of
     about $290, plus an amount set aside for reserve, yet be able to
     rent the unit for $575, thus generating about $285 in additional
     revenues for the public housing authority.  Conversely, if the
     federal government required that the rehabilitation be finance
     through a loan, the public housing authority's revised operating
     costs, including funding for a reserve, would be $425.  This
     would generate $150 in additional revenues for the public
     housing authority. 

  Should the federal government subsidize public housing units at
     market rents, as proposed in stages two and three of HUD's
     proposal, when these rents exceed the public housing
     authorities' operating expenses?  If yes, should any federal
     restrictions be placed on public housing authorities' use of the
     additional revenues that would be generated? 

  How, under the proposal, will increases in federal subsidies
     resulting from converting to housing certificates be paid for? 
     In this example, these increases could result from (1)
     subsidizing the public housing authority at the market value of
     its units, versus its operating costs; (2) providing public
     housing residents with a "shopping incentive," since the market
     value of the unit is less than the fair market rent; and (3)
     providing tenants with housing certificates enabling them to
     move to a unit with a monthly rent at or near the $700 fair
     market rent.  Possible alternatives for paying for these costs
     include increased spending by the federal government or a
     reduction in the number of families assisted. 


   EXAMPLE 2
--------------------------------------------------------- Appendix I:2

Figure I.2, highlights the characteristics of our second example.  As
shown in the figure, this development has the following monthly per
unit costs:  current operating costs of $490, revised operating costs
of $720, a market rental value of $1,450, and a fair market rent of
$850. 

Again in this example, the federal government is currently
subsidizing that portion of the current operating costs ($490) not
covered by the tenants' rent contribution.  Modernization costs for
this almost 1,100-unit project are estimated at over $17 million, or
about $15,500 per unit.  The federal government, as in the first
example, could either pay the $17 million in the form of a grant, or
it could make a direct loan or insure a private loan.  If
modernization costs are financed through a loan and this cost
together with a reserve for nonroutine expenses is added to the
current operating costs, the revised operating costs are about $720
per month.  This is still well below the fair market rent ($850),
which the housing authority would be permitted to charge current
residents under HUD's proposal.  Moreover, the revised operating
expenses are less than half of the unit's market value, which the
housing authority conceivably could charge new tenants as units
become vacant unless the rents are capped to ensure that lower-
income households continue to be served by the property. 

For this example, as was the case in the first example, the federal
government minimizes its cost by retaining the development as public
housing.  This unit provides a good value for the federal government,
since the unit's revised operating costs of $720 are $130 below the
$850 fair market rent permitted under HUD's proposal.  Moreover, the
unit offers the residents an excellent value since the unit's market
value of $1,450 is double the revised operating costs ($720) and $600
above the fair market rent. 

   Figure I.2:  Example in Which
   Unit's Market Value Exceeds
   Both Operating Costs and Fair
   Market Rent

   (See figure in printed
   edition.)

HUD's plan raises the following issues concerning the costs of this
development. 

  As with example 1, a question is raised over whether it is prudent
     to adopt housing certificates for properties where the federal
     government is getting substantially more housing value than it
     is currently paying for. 

  Second, as with example 1, should the federal government pay to
     rehabilitate public housing properties when these properties
     could generate sufficient rental revenues to pay for the
     rehabilitation?  In this example, these costs are estimated at
     over $17 million. 

  Third, and again as with example 1, a question is raised over
     whether any federal restrictions should be placed on the
     increased revenues that the public housing authority could
     generate when the revised operating costs are below both the
     fair market rent and the market value of the property.  In this
     example, the public housing authority could theoretically
     receive an additional $130 per unit per month ($850 minus $720)
     for current residents and an additional $730 per unit per month
     ($1,450 minus $720) if vacant units were rerented at their
     market value. 

  Finally, like our first example, this example raises the question
     of how additional federal subsidies would be paid for if the
     public housing authority is permitted to charge the fair market
     rent and tenants would receive that amount. 


   EXAMPLE 3
--------------------------------------------------------- Appendix I:3

As shown in figure I.3, this development has the following monthly
per unit costs:  current operating costs of $165, revised operating
costs of $595, a market rental value of $595, and a fair market rent
of $515. 

In this example, the federal government is currently subsidizing that
portion of the current operating costs ($165) not paid by the
tenants.  If the federal government pays for the modernization of the
59-unit property out of grant funds, it will cost about $2.3 million,
or about $39,000 per unit.  Conversely, if the federal government
either makes a direct loan or insures a private loan for the
modernization costs and requires a reserve for nonroutine expenses,
the revised operating costs will be about $595.  Once this
modernization is complete, the property would also have a market
value of about $595.  The fair market rent for the area in which this
property is located is $515 per month, which is $80 below the
property's projected revised operating costs.  However, the property
houses elderly people, who may have difficulty paying the additional
rent and who generally are less likely to be able or willing to use
housing certificates to move to alternative housing.  If the property
is rehabilitated, its market value of $595 would be a good value for
its residents, since this is $80 more than the fair market rent.  The
federal government, on the other hand, is getting a market value
equivalent to its housing subsidy cost.  However, again, because this
unit's value is above the fair market rent, the federal subsidy costs
are greater than if the project's residents were provided housing
certificates. 

   Figure I.3:  Example in Which
   Unit's Market Value and
   Operating Costs Are Equal and
   Both Exceed the Fair Market
   Rent

   (See figure in printed
   edition.)

HUD's plan raises the following issues concerning the cost
implications for this development. 

  As with the prior two examples, should the federal government pay
     for the cost of modernization through a grant when the property
     could finance the rehabilitation through rental income? 

  As long as the current residents remain in this project, should the
     federal government continue to subsidize their rents above that
     which would be allowed with housing certificates? 

  Finally, how will the added costs of subsidizing current residents
     in this property be paid for? 


   EXAMPLE 4
--------------------------------------------------------- Appendix I:4

Figure I.4 illustrates our fourth example.  In this example, the
development has the following monthly per unit costs:  current
operating costs of $550, revised operating costs of $625, a market
rental value of $600, and a fair market rent of $700. 

In this example, the federal government is currently subsidizing that
portion of the public housing authority's current operating costs
($550) not covered by the tenants' rent contribution.  If the federal
government pays for the modernization of this 150-unit property out
of grant funds, the cost will be about $340,000, or about $2,300 per
unit.  Conversely, if the federal government either makes a direct
loan or insures a private loan for the modernization costs and
requires a reserve for nonroutine expenses, the revised operating
costs will be about $625 per month.  Once this modernization is
completed, the property would have a market value of $600 per month,
or about $25 less than the cost to operate the property.  Last, if a
household chose to use a housing certificate to move to private
rental housing, it could receive a subsidy up to the fair market rent
of $700. 

For this example, the federal government would have to subsidize the
rent on the property at a level $25 per unit per month above its
market value.  However, the revised operating costs of $625 would
still be $75 per month below the fair market rent. 

   Figure I.4:  Example in Which
   Unit's Market Value Is Less
   Than Both Revised Operating
   Costs and Fair Market Rent

   (See figure in printed
   edition.)

HUD's plan raises the following issues concerning the costs of this
development. 

  First, what criteria or parameters should be used for deciding when
     to rehabilitate a public housing unit when the revised operating
     costs exceed the unit's market value? 

  Second, how should the rehabilitation expenses be paid for?  For
     example, should the portion of the rehabilitation costs that
     cannot be financed through rental income be financed by the
     federal government through a grant?  Such an approach might
     allow part of the rehabilitation costs to be financed at the
     property's market rent of $600 and the remainder to be paid for
     through a grant. 

  Finally, as in the case of our other examples, a question is raised
     concerning how to pay for increases in federal subsidies
     resulting from converting to housing certificates.  In this
     example, these increases could result from (1) subsidizing the
     rehabilitation of the property at least partly through a grant,
     since the property's revised operating costs are above its
     market value; (2) providing public housing residents with a
     "shopping incentive," since the market value of the unit is less
     than the fair market rent; and (3) providing tenants with
     housing certificates enabling them to move to a unit with a
     monthly rent at or near the $700 fair market rent. 


   EXAMPLE 5
--------------------------------------------------------- Appendix I:5

As shown in figure I.5, this development has the following monthly
per unit costs:  current operating costs of $340, revised operating
costs of $1,600, a market value of $300, and a fair market rent of
$880. 

This example typifies properties that have fallen into very serious
disrepair, for which the costs of extensive renovation cannot be
justified on the basis of the market rents that the rehabilitated
units could generate.  In this example, the federal government is
currently subsidizing that portion of the public housing authority's
current operating costs ($340) not covered by the tenants' rent
contribution.  If the federal government pays for the modernization
of this property with over 4,000 units out of grant funds, the cost
could be over $500 million, or more than $125,000 per unit. 
Alternatively, if this rehabilitation is financed by a direct loan
and a reserve is established for nonroutine expenses, the revised
operating costs would be about $1,600.  Once the rehabilitation is
completed, the property's market value is about $300 per month. 
Last, if current residents were issued housing certificates and chose
to move to private rental housing, they could receive a subsidy up to
the fair market rent of $880. 

From a cost perspective, rehabilitating the property in this example
makes no economic sense.  Specifically, the federal government would
incur an inordinately high cost to rehabilitate the unit, after which
its market value of $300 per month would be less than one-fifth the
cost of operating the unit.  Moreover, if the property is
rehabilitated, tenants would be left in a unit whose market value is
far less than the value of the housing they could obtain with housing
certificates at the fair market rent of $880. 

This example highlights the type of property that, because of its
high rehabilitation costs, inflates the cost of public housing when
compared to the cost of housing certificates.  Assuming this property
is located in an area where there is an adequate supply of rental
housing to accommodate housing certificate holders, then the rational
economic decision would be to provide residents with the
certificates. 

   Figure I.5:  Example in Which
   Operating Costs for
   Rehabilitated Housing Exceed
   Both Fair Market Rent and
   Market Value

   (See figure in printed
   edition.)

HUD's plan indicates that upwards of 100,000 units of public housing
would likely be demolished.  Properties such as the one illustrated
by example 5 would be likely candidates.  However, this example still
raises certain issues, including how rehabilitation should be paid
for if the local government wants to retain all or a portion of this
housing?  For example, should the federal government be willing to
subsidize the rehabilitation only up to the property's market value
and require the local government to finance the remainder of the
cost? 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Jim Wells, Associate Director
Dennis Fricke, Assistant Director
Eric Marts, Assistant Director
Bill Bley, Assignment Manager
Susan Sacco, Senior Evaluator
Stephen Jones, Staff Evaluator
Patrick Doerning, Senior Operations Research Analyst
John Skeen, Managing Editor

NEW YORK FIELD OFFICE

Tom Bittman, Core Group Manager
Tom Repasch, Senior Evaluator
Sheila Murray, Staff Evaluator
Rosa Pagnillo-Lopez, Staff Evaluator

LOS ANGELES FIELD OFFICE

Jim Moses, Core Group Manager
Gary Hammond, Senior Evaluator
Galen Van Rensselaer, Staff Evaluator

