Housing and Urban Development: Limited Progress Made on HUD Reforms
(Testimony, 03/27/96, GAO/T-RCED-96-112).

GAO discussed management and budget problems facing the Department of
Housing and Urban Development (HUD). GAO noted that: (1) weak internal
controls, an ineffective organizational structure, an insufficient staff
skill mix, and inadequate information and financial management systems
have hampered HUD ability to carry out its mission and led to GAO
designating HUD as a high-risk area in January 1994; (2) despite some
progress in curing management deficiencies, problems persist and, as a
result, will likely continue to make HUD vulnerable to waste, fraud, and
abuse; (3) HUD and Congress must try to reduce excessive housing
subsidies, address the physical inadequacies of insured multifamily
properties, maintain the single-family insurance fund's financial
health, address public housing's social, management, and budget
problems, and contain the costs of renewing housing subsidy contracts
for lower-income families; (4) Congress and HUD also need to reexamine
and reach consensus on housing and community development policy; and (5)
HUD downsizing will likely affect its ability to limit financial
exposure, carry out its mission, and correct Department-wide management
and information system problems.

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

 REPORTNUM:  T-RCED-96-112
     TITLE:  Housing and Urban Development: Limited Progress Made on HUD 
             Reforms
      DATE:  03/27/96
   SUBJECT:  Federal downsizing
             Federal agency reorganization
             Agency missions
             Subsidies
             Housing programs
             Financial management
             Budget cuts
             Housing repairs
             Disadvantaged persons
             Management information systems
IDENTIFIER:  HUD Reinvention Blueprint
             Mutual Mortgage Insurance Fund
             
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Cover
================================================================ COVER


Before the Subcommittee on VA, HUD, and Independent Agencies,
Committee on Appropriations, House of Representatives

For Release on Delivery
Expected at
9:00 a.m.  EST
Wednesday
March 27, 1996

HOUSING AND URBAN DEVELOPMENT -
LIMITED PROGRESS MADE ON HUD
REFORMS

Statement of Judy A.  England-Joseph, Director
Housing and Community Development Issues
Resources, Community, and Economic
Development Division

GAO/T-RCED-96-112

GAO/RCED-96-112


(385624)


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

  HUD -
  FHA -
  SWAT -
  GAO -
  CBO -
  PHA -
  OMB -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss management and budget
problems facing the U.S.  Department of Housing and Urban Development
(HUD), efforts over the last year to address these problems, and the
work that remains.  When we appeared before this Subcommittee just
over a year ago,\1 we noted that current housing policies for which
HUD is responsible drive huge loan commitments and discretionary
spending and that controlling that spending would mean reexamining
these policies and HUD's mission to carry out these policies. 

Today, despite the promise of reform, reinvention, and transformation
initiatives aimed at solving HUD's problems, much more remains to be
done.  HUD is very much an agency in limbo:  Few of the proposals in
HUD's reinvention blueprint have been adopted. 

My statement today is based on our ongoing work, our reports and
testimonies over the past 4 years, and our observations on recent
congressional and departmental initiatives to address HUD's problems. 
My statement will focus on HUD's problems and progress to date in
addressing (1) its long-standing management deficiencies; (2) its
portfolio of multi- and single-family housing insured by the Federal
Housing Administration (FHA); (3) budget and management problems
plaguing the public housing program; (4) the spiraling cost of
assisted housing programs; and (5) the need for consensus on HUD
reforms. 

In summary: 

  -- Four long-standing Department-wide management deficiencies led
     to our designation of HUD as a high-risk area in January 1994. 
     These deficiencies were weak internal controls, an ineffective
     organizational structure, an insufficient mix of staff with the
     proper skills, and inadequate information and financial
     management systems.  Despite some progress, problems persist
     today.  We believe that, for the foreseeable future, the agency
     will be high-risk in terms of its programs' being vulnerable to
     waste, fraud, and abuse. 

  -- Other vexing programmatic and budget problems face HUD and the
     Congress.  These problems include how to (1) reduce excessive
     housing subsidies and address the physical inadequacies of
     insured multifamily properties; (2) maintain the improved
     financial health of the single-family insurance fund; (3)
     address the social, management, and budget problems that exist
     in public housing; and (4) deal with the spiraling costs of
     renewing housing subsidy contracts that assist lower-income
     families.  Overall, during the last 15 months, limited progress
     has been made. 

  -- The Congress and HUD have made a start at reexamining housing
     and community development policy, but reaching consensus on what
     the policy goals should be, how assistance should be provided,
     and how much the nation should spend on these activities will
     take some time.  Finally, correcting management deficiencies at
     HUD will take years to complete.  As HUD continues to downsize,
     that downsizing will likely affect its ability to limit
     financial exposure, carry out its mission, and correct
     Department-wide management and information system problems. 


--------------------
\1 Housing and Urban Development:  Major Management and Budget Issues
(GAO/T-RCED-95-89, Jan.  24, 1995). 


   HUD'S PROGRAMS AND BUDGET
---------------------------------------------------------- Chapter 0:1

HUD is the principal federal agency responsible for programs dealing
with housing and community development and fair housing
opportunities.  Its missions reflect a broad range of statutory
mandates, ranging from making housing affordable by insuring loans
for multifamily projects and providing assistance on behalf of about
4.5 million lower-income tenants, to helping revitalize over 4,000
communities through community development programs, to encouraging
homeownership by providing mortgage insurance to about 7 million
homeowners who might not have been able to qualify for conventional
loans. 

The diversity of HUD's missions has resulted in a department that is
intricately woven into the financial and social framework of the
nation and that interacts with a diverse number of constituencies. 
For example, thousands of public housing authorities (PHA) and many
more private housing owners are key players in administering HUD's
public housing and Section 8 rental housing programs and depend on
subsidies from the Department to operate.  HUD's programs also
operate through other governmental entities, such as state housing
finance agencies, nonprofit groups, and state and local governments. 

In carrying out its missions, HUD is responsible for a significant
amount of tax dollars:  The discretionary budget outlays for HUD's
programs were estimated to be close to $31.8 billion in fiscal year
1995, over three-quarters of which was for public and assisted
housing programs.  In addition, HUD is currently one of the nation's
largest financial institutions, with significant commitments,
obligations, and exposure:  It has management responsibility and
potential liability for more than $400 billion of mortgage insurance,
an additional $485 billion in outstanding securities, and over $200
billion in prior years' budget authority for which it has future
financial commitments. 


   HUD'S MANAGEMENT DEFICIENCIES
---------------------------------------------------------- Chapter 0:2

In February 1995, we reported that HUD's top management had begun to
focus attention on overhauling the Department's operations to correct
its long-standing management deficiencies--an ineffective
organizational structure, an insufficient mix of staff with the
proper skills, weak internal controls, and inadequate information and
financial management systems.\2 The agency had formulated a new
management approach and philosophy that included balancing risks with
results, had begun implementing a substantial reorganization of field
offices, and had initiated a number of other actions that would
address the four management deficiencies. 

Over the past year, HUD has continued many of these efforts, but
problems remain.  For example, in September 1995, HUD completed its
field reorganization, which eliminated 10 regional offices and
transferred direct authority for staff and resources to the Assistant
Secretaries.  In January 1996, HUD announced additional efforts to
empower the field office personnel and continue the Secretary's
efforts to implement the "community first" philosophy by streamlining
headquarters and reducing headquarters' staffing by 40 percent over 2
years.  Many of the headquarters staff will be transferred to the
field to enhance the agency's efforts to be more responsive to local
communities.  According to the HUD Inspector General's (IG) most
recent semiannual report, while field staff endorsed the elimination
of the regional management layer, they reported that communication
and cooperation among the program offices had suffered badly and that
the promised empowerment of field staff had not materialized.\3

In the area of internal controls, the Department's new management
control program was fully implemented over the past year, according
to HUD officials.  This program is intended to tie planning with
risk-abatement strategies.  Under the program, managers, as they
develop annual management plans, are to identify and prioritize the
major risks in each of their programs and then describe how these
risks will be abated.  According to HUD officials, all of the program
offices' fiscal year 1996 annual management plans contained
management control elements, including risk-abatement strategies. 

Despite improvements, internal controls continue to be a problem.  On
June 30, 1995, outside auditors issued a disclaimer of opinion on
HUD's fiscal year 1994 consolidated financial statements because
weaknesses in internal control and "nonconformances" in systems
remained uncorrected.\4 HUD's most serious internal control
weaknesses pertain to its approximately $13 billion grant and subsidy
payments to public and Indian housing authorities, including $9.5
billion of its operating subsidies and Section 8 rental assistance. 
The auditors noted that the existing internal controls and financial
systems do not provide adequate assurance that the amounts paid under
these programs are valid and correctly calculated, considering
tenants' income and contract rents.  As a result, HUD lacks
sufficient information to ensure that federally subsidized housing
units are occupied by needy lower-income families and that those
living in such units are paying the correct rents. 

In 1995, the Department continued to make progress toward its goals
of integrating financial systems, but much remains to be done. 
During the year, HUD implemented its new administrative accounting
system and integrated the system for Public, Indian, and Section 8
housing.  In addition, all of the program offices have completed
Information Strategy Plans, which identify business and information
needs.  Despite these efforts, as of September 1995, HUD had 88
systems in operation or under development, 60 of which are generally
not in compliance with the provisions of Office of Management and
Budget (OMB) Circular A-127.\5 HUD's financial systems continue to be
identified as high-risk by OMB. 


--------------------
\2 High-Risk Series:  Department of Housing and Urban Development
(GAO/HR-95-11, Feb.  1995). 

\3 Semiannual Report to the Congress as of September 30, 1995, HUD,
Office of Inspector General. 

\4 "System non-conformances" essentially reflect that HUD does not
have an efficient, effective, and integrated financial management
system that can be relied upon to provide timely, accurate, and
relevant financial information and reports to management. 

\5 OMB Circular A-127 prescribes policies and procedures to be
followed by executive departments and agencies in developing,
integrating, operating, evaluating, and reporting on financial
management systems. 


      GAO'S ASSESSMENT OF HUD'S
      ACTIONS
-------------------------------------------------------- Chapter 0:2.1

The Department deserves credit for its continued emphasis on
addressing its long-standing management deficiencies, including a
fundamental restructuring of the agency.  However, departmental
restructuring is still far from being accomplished.  HUD's challenge
will be to continue to sustain its focus and commitment to addressing
the agency's long-standing deficiencies while at the same time
downsizing the agency, devolving authority to field offices, and
providing greater program flexibility to communities. 

As HUD and the Congress continue to look at ways to reform the
Department, they will face the challenge of finding the proper
balance between local flexibility and authority and proper
accountability for federal funds.  Furthermore, until the Department
completes its goal of integrating financial management systems, which
remains years away, the lack of good information will plague the
Department in many areas and limit its capacity to adequately monitor
funds.  Substantially restructuring programs and providing greater
local flexibility to communities will in all likelihood also require
new systems. 


      NEED TO CONTINUE HIGH-RISK
      DESIGNATION
-------------------------------------------------------- Chapter 0:2.2

While HUD has formulated approaches and initiated actions to address
its department-wide deficiencies, these plans are far from reaching
fruition and problems continue.  In addition, we believe that until
the agency and the Congress are successful in working through the
proposals for a major restructuring of the agency, which include
consolidating hundreds of program activities, HUD has only a limited
capacity to eliminate the Department-wide deficiencies that led us to
designate it as high-risk.  Accordingly, we believe that both now and
for the foreseeable future, the agency's programs will be high-risk
in terms of their vulnerability to waste, fraud, and abuse. 


   HUD'S MULTIFAMILY HOUSING
   PORTFOLIO:  STATUS AND PROBLEMS
---------------------------------------------------------- Chapter 0:3

As of September 30, 1995, FHA's portfolio of insured multifamily
loans consisted of 15,785 mortgages with unpaid principal balances of
$47.7 billion.  About $38.5 billion of the insurance supports more
than 14,000 multifamily apartment properties.  The remainder of the
insurance supports hospitals ($4.9 billion) and nursing homes ($4.3
billion).  In addition to mortgage insurance, most of the FHA-insured
properties receive some form of direct assistance or subsidy, such as
below-market interest rates or Section 8 project-based rental
assistance.\6 HUD also provides Section 8 project-based assistance
for properties that are not insured by FHA.  According to HUD's data,
the Department has 6,391 Section 8 contracts with projects not
insured by FHA containing about 375,000 units receiving project-based
assistance.\7


--------------------
\6 Project-based subsidies are attached to specific property units,
in contrast to tenant-based subsidies, which are portable. 

\7 HUD's data also identify 5,206 Section 8 contracts for
approximately 239,000 units of housing for the elderly and the
disabled (under HUD's Section 202 program). 


      LONG-STANDING PROBLEMS
      CONTINUE
-------------------------------------------------------- Chapter 0:3.1

The fundamental problems that HUD faces in overseeing the multifamily
housing portfolio, which we discussed before this Subcommittee last
year, continue.  Specifically, for a large proportion of this
housing, the government is paying more to house lower-income families
than what is needed to provide them decent, affordable housing.  The
insured multifamily properties also expose the federal government to
substantial current and future financial liabilities from default
claims.  A 1993 study of multifamily rental properties with
HUD-insured or HUD-held mortgages found that almost one-fourth of the
properties reviewed were "distressed." Properties were considered
distressed if they failed to provide sound housing and lacked the
resources to correct deficiencies or if they were likely to fail
financially. 

The reasons for these problems are varied, including design flaws in
programs; the Department's dual role as assistance provider and
insurer; and long-standing deficiencies in staffing, data systems,
and management controls.  Program design flaws have resulted in HUD's
subsidizing rents at many properties that are far above market rents. 
In particular, this problem occurs under HUD's Section 8 new
construction and substantial rehabilitation programs, in which the
Department paid for the initial costs of development by establishing
rents above the market levels and continued to raise the rents
regularly.  HUD's dual role as assistance provider and insurer has
contributed to inadequate enforcement of the Department's standards
for the condition of properties and decisions by the agency to
increase subsidies in order to avoid claims stemming from loan
defaults.  In addition, as noted in our June 1995 report on default
prevention, inadequate management has resulted in poor living
conditions for families with low incomes in a number of insured
multifamily properties and contributed to a large number of past and
anticipated defaults on FHA-insured loans.\8


--------------------
\8 HUD Management:  FHA's Multifamily Loan Loss Reserves and Default
Prevention Efforts (GAO/RCED/AIMD-95-100, June 5, 1995). 


      HUD'S RECENT ATTEMPTS TO
      ADDRESS PROBLEMS WITH THE
      MULTIFAMILY HOUSING
      PORTFOLIO
-------------------------------------------------------- Chapter 0:3.2

During this past year, HUD has attempted to address these problems
through a legislative proposal known as "mark to market." The
proposal was applicable to about 8,500 properties that both have FHA
insurance and receive Section 8 project-based assistance.  According
to HUD's data, project-based assistance is provided for approximately
700,000 of the 855,000 apartment units covered.  The proposal was
aimed at ending the interdependence of subsidies and insurance
claims, eliminating the excess Section 8 subsidy costs, and improving
the physical condition of properties in poor condition--generally
older properties with low rents. 

Under the mark-to-market proposal, Section 8 project-based assistance
was to be eliminated or phased out for insured properties as the
contracts expire.  The proposal applied whether or not the subsidized
rents were above the market levels.  Residents living in units that
receive project-based assistance were then to receive tenant-based
assistance.  Owners would set the rents at market levels, which in
many cases would reduce the rental income and lead to defaults on the
FHA-insured mortgages.  To address this, HUD proposed reducing the
projects' mortgages if such action was needed for the properties to
be able to compete in the commercial marketplace without
project-based assistance.  HUD's goal was to replace the FHA-insured
loans with ones not insured by FHA.  Hearings were held on HUD's
mark-to-market proposal last year, but neither the House nor the
Senate acted on the proposal.\9

In the President's fiscal year 1997 budget, HUD announced several
planned revisions to its mark-to-market proposal.  Most notably, the
Department has indicated that the proposal will initially focus on a
smaller segment of the multifamily housing portfolio--those
properties with expiring contracts whose current rents are above the
market levels.  In addition, HUD states that localities will decide
whether the housing subsidies should be tenant-based or
project-based.  The extent to which this proposal will reduce
project-based assistance in favor of tenant-based is not clear. 

During this past year, HUD has also been undertaking a number of
initiatives designed to strengthen its ability to manage its
multifamily housing portfolio and address outstanding management
deficiencies in its staffing, data systems, and management controls. 
As we reported in June 1995, the initiatives that HUD intended to
carry out included (1) using contractors to collect more complete and
current information on the physical and financial condition of
insured multifamily properties and developing an "early warning
system" to more quickly identify troubled properties and (2)
deploying Special Workout Assistance Teams (SWAT) to help field
offices deal with troubled insured multifamily properties, including
the enforcement of HUD's housing quality standards there. 

However, progress continues to be slow in implementing these
improvements.  For example, the early warning system is not yet
operational nor is the initiative to contract for periodic physical
inspections.  The current plans are to contract for these inspections
beginning in fiscal year 1997.  Also, while the SWAT initiative is
regarded by HUD management and HUD's IG as effectively addressing
problems, it is limited in scope and cannot be relied upon to address
the Department's problems across the portfolio.  For example,
resource limitations preclude expanding this effort as a standard
management tool--nor does this effort address the problem of excess
subsidy costs. 


--------------------
\9 Legislation is also being considered that would authorize HUD to
conduct a mark-to-market demonstration program. 


      MANAGEMENT ISSUES FACING
      OTHER MULTIFAMILY
      PROPERTIES--NURSING HOMES
      AND HOSPITALS
-------------------------------------------------------- Chapter 0:3.3

Our recent studies of HUD's nursing home and hospital programs also
identified management deficiencies.\10 We found that HUD does not
have data that show how the programs support the Department's
mission.  For example, HUD does not collect and analyze information
on whom the nursing home program is serving or measure the extent to
which the hospital program accomplishes the Department's goals.  In
addition, our reports discuss the default risk of these multifamily
programs.  We found that the accumulation of more than $4 billion of
insured hospital projects and the large loan amounts in New York pose
risks to the future stability of the program.  Furthermore, trends in
health care and changes in state and federal health care policies
that reduce hospitals' revenues could threaten the solvency of
insured hospitals.  We also noted that the nursing home program had
recently been expanded to include assisted living facilities for the
elderly, which may result in the program's growth and in potentially
riskier loans, especially if HUD is unable to effectively underwrite
insurance for the loans and monitor their performance. 


--------------------
\10 HUD Management:  Greater Oversight Needed of FHA's Nursing Home
Insurance Program (GAO/RCED-95-214, Aug.  25, 1995) and FHA Hospital
Mortgage Insurance Program:  Health Care Trends and Portfolio
Concentration Could Affect Program Stability (GAO/HEHS-96-29, Feb. 
27, 1996). 


   MAINTAINING THE FINANCIAL
   HEALTH OF FHA'S SINGLE-FAMILY
   INSURANCE
---------------------------------------------------------- Chapter 0:4

The financial situation for FHA's single-family mortgage insurance
program is very different than that for its multifamily program.  The
economic net worth of FHA's single-family Mutual Mortgage Insurance
Fund (Fund) continued to improve in fiscal year 1994.  We estimate
under our conservative baseline scenario that the Fund's economic net
worth was $6.1 billion, as of September 30, 1994.  At that time, the
Fund had capital resources of about $10.7 billion, which were
sufficient to cover the $4.6 billion in expenses that we estimate the
Fund will incur in excess of the anticipated revenues over the life
of the loans outstanding at that time.  The remaining $6.1 billion is
the Fund's economic net worth, or capital--an improvement of about
$8.8 billion from the lowest level reached by the Fund at the end of
fiscal year 1990.  Legislative and other changes to FHA's
single-family mortgage insurance program have helped restore the
Fund's financial health, but favorable prevailing and forecasted
economic conditions were primarily responsible for this improvement. 

Our estimate of the Fund's economic net worth represents a capital
reserve ratio of 2.02 percent of the Fund's $305 billion in amortized
insurance-in-force.  Consequently, we estimate that the Fund
surpassed the legislative target for reserves (a 2-percent capital
ratio by Nov.  2000) during fiscal year 1994. 

One area in which the Congress could make changes that would have a
positive effect on the Fund's financial health is in HUD's mortgage
assignment program.  The assignment program, created in 1959, is
intended to help mortgagors who have defaulted on HUD-insured loans
to avoid foreclosure and retain their homes by providing these
mortgagors with financial relief by reducing or suspending their
mortgage payments for up to 36 months until they can resume making
payments.  Our recent review of FHA's assignment program revealed
that the program operates at a high cost to the Fund and has not been
very successful helping borrowers avoid foreclosure in the long
run.\11 We estimated that about 52 percent of the borrowers who
entered the program since fiscal year 1989 will eventually lose their
homes through foreclosure.  We forecast that the remaining borrowers
(48 percent) will pay off their loans following the sale or
refinancing of their homes, often after remaining in the program for
long periods of time.  The costs incurred by HUD to achieve this
result exceed the costs that would have been incurred if all assigned
loans had gone immediately to foreclosure without assignment.  We
estimated that, for borrowers accepted into the assignment program
since fiscal year 1989, FHA will incur losses of about $1.5 billion
more than would be incurred in the absence of the program.  While FHA
borrowers' premiums pay for these costs, not the U.S.  Treasury, the
program's costs make it more difficult for the Fund to maintain
financial self-sufficiency. 

We reported that the Congress may wish to consider alternatives to
reduce the additional losses incurred by the program.  The
alternatives we suggested focused on making changes to the program. 
Legislation is now pending that would eliminate the current program
and replace it with an alternative that will, according to the
Congressional Budget Office (CBO), result in an estimated savings of
$2.8 billion over 7 years. 


--------------------
\11 Homeownership:  Mixed Results and High Costs Raise Concerns About
HUD's Mortgage Assignment Program (GAO/RCED-96-2, Oct.  18, 1995). 


   PUBLIC HOUSING MANAGEMENT AND
   BUDGET PROBLEMS
---------------------------------------------------------- Chapter 0:5

The nation's 3,300 PHAs do not all have severe management problems
nor do they share the same problems.  Much of the public housing
stock is in good condition and provides adequate housing for most of
the over 3 million low-income residents.  However, some PHAs we have
visited are deeply troubled in many dimensions.  These housing
authorities' problems include an unmet need for capital improvements,
physical deterioration of the housing stock, high vacancy rates, and
high concentrations of poor and unemployed people.  Moreover, before
1995, HUD's limited oversight of the most troubled housing
authorities had allowed some authorities to provide substandard
services to their residents for years.  Some of our ongoing work
deals directly with several of these interrelated problems that can
lead to serious management and budget considerations for HUD. 


      FACING BUDGET REALITIES,
      HOUSING AUTHORITIES MUST
      HELP THEMSELVES
-------------------------------------------------------- Chapter 0:5.1

Housing authorities are caught in a very difficult position.  At a
time when they need larger operating subsidies to replace declining
rent revenues, they also face appropriation realities brought on by
the need to balance the federal budget and meet the needs of other
low-income housing programs. 

Declining rent revenue is a direct result of targeting housing
assistance to those with very low incomes.  For instance, incomes of
residents in public housing have dropped nearly half--from 33 percent
of the area median in 1981 to about 17 percent today--thereby
decreasing the availability of rental income to offset operating
costs.  In addition, the average vacancy rate increased from 5.8
percent in 1984 to 8 percent in 1995, further reducing the rental
income available to PHAs.  Making it more difficult to make ends
meet, annual appropriations have not covered PHAs' operating subsidy
needs for several years.  The pending fiscal year 1996 appropriations
bill that was vetoed by the President would have provided only 89.7
percent of their operating needs. 

In a survey of 21 judgmentally selected housing authorities, we found
that one of the first responses to insufficient operating funds is to
reduce spending on maintenance.\12 This compounds PHAs' problems by
perpetuating the cycle of decreased maintenance, increased vacancies,
and decreased rental income. 

Can this cycle be broken?  We believe that provisions in pending
legislation, various proposals from HUD, and other programs could act
together to alleviate some of the pressures on housing authorities. 
Both the proposed legislation and HUD's latest transformation plan,
known as "Blueprint II," would foster admitting and retaining a
higher proportion of working families and thus raising the total
rental income.\13 However, policymakers need to recognize that in
some cities, this policy change could cause some people with very low
incomes to wait longer to receive housing assistance. 

We believe that these legislative and regulatory changes will help
maintain PHAs' financial health.  However, HUD and the Congress need
the cooperation of the public housing authority industry.  Many
housing authorities have told us that the current system is too
cumbersome and is detrimental to promoting their fiscal health.  Like
organizations in the private sector, we believe PHAs are realizing
that they must take the initiative and seek out management practices
that can improve performance and efficiency.  We are currently
finding that many PHAs are initiating innovative practices to cut
costs and increase revenues.  These practices include privatization,
consolidation, and partnerships.  We will report later in the year on
the use and applicability of these practices for all PHAs. 


--------------------
\12 Housing and Urban Development:  Public and Assisted Housing
Reform (GAO/T-RCED-96-25, Oct.  13, 1995). 

\13 Renewing America's Communities from the Ground Up:  The Plan to
Continue the Transformation of HUD, HUD (1996). 


      HUD'S OVERSIGHT HAS BECOME
      MORE ACTIVE
-------------------------------------------------------- Chapter 0:5.2

We have concluded in the past that HUD's program for assisting
troubled housing authorities should take a more active role in
addressing their performance.  We also reported last year that HUD
had made limited use of its legal authority to declare troubled
housing authorities in breach of their contracts with the
Department.\14 Moreover, the overall results of HUD's focused
technical assistance program that targeted the large, troubled
authorities have been inconsistent.  During the past year, 4 troubled
authorities have come off the original list of 17, and 4 others have
made substantial improvements in their performance scores.  However,
the other nine authorities--accounting for over 70 percent of all
housing units managed by troubled authorities--have not shown
appreciable improvement.  Furthermore, the performance of four of the
nine declined this past year, despite HUD's intervention and
technical assistance. 

HUD appears to be taking a more active role in this area.  In
addition to having some success with several large housing
authorities, three times in the last 10 months--in Chicago, New
Orleans, and San Francisco--HUD has made use of its authority to
either declare an authority in breach of its contract or to take
control upon the resignation of the authority's board of
commissioners. 

However, taking over troubled housing authorities has not come
without a price.  HUD's top policymakers in public housing are
simultaneously engaged in the everyday problems of managing HUD and
overseeing several problem housing authorities.  For example, HUD's
Acting Assistant Secretary for Public and Indian Housing functions as
the New Orleans Housing Authority's Board of Commissioners and leads
HUD's takeover team in San Francisco.  Approximately 11 local and
headquarters HUD staff are at the New Orleans Housing Authority, and
a similar staff will be placed at the San Francisco Housing
Authority.  In addition, the potential for other emergency takeovers
looms in the future as reduced funding puts pressure on public
housing managers to do more with less.  Additional takeovers will
considerably strain HUD's already-stretched management team at a time
when a major reform of low-income housing may also require its
attention. 


--------------------
\14 Housing and Urban Development:  Public and Assisted Housing
Reform (GAO/T-RCED-96-25, Oct.  13, 1995). 


   HIGH COST OF PUBLIC AND
   ASSISTED HOUSING PROGRAMS
---------------------------------------------------------- Chapter 0:6

Last year, when we appeared before this Subcommittee, we discussed a
CBO report that detailed how the number of assisted families almost
doubled from 1977 through 1994, rising from about 2.4 million to
about 4.7 million.\15 According to CBO, the annual real outlays (in
1994 dollars) more than tripled during this period, rising from about
$6.6 billion to about $22 billion. 

Difficult budget choices persist, most notably for renewing
assistance under HUD's Section 8 programs.  According to HUD's
recently released plan to continue its reinvention, over the next 7
years the Department will face a significant challenge to its budget
as Section 8 contracts providing affordable housing to hundreds of
thousands of families expire and require renewal.  HUD estimates that
while outlays will remain relatively flat, the needed budget
authority will balloon from $2 billion in fiscal year 1995 to $20
billion in fiscal year 2002 (assuming 1-year renewals).  HUD notes
that while contract renewals do not contribute significantly to the
budget deficit, the demand for ever-increasing levels of budget
authority cannot be met at a time of extremely tight fiscal
constraints unless fundamental policy and procedural changes are
made. 

HUD's plan states that, to date, decisionmakers have met this
challenge, in part by shortening the terms of contract renewals from
5 years in the early 1990s to 4 years in fiscal year 1994, 3 years in
1995, and now 2 years in 1996.  Shorter terms substantially reduce
the amount of budget authority needed to renew a Section 8
contract.\16 However, HUD concluded that even shortening contract
renewal terms to 1 year may not be sufficient to cover the budget
authority needs resulting from the cascade of expiring contracts in
the next half decade.  HUD noted that a very real danger exists for
its budget allocation to be sharply reduced because of the deep
reductions in the discretionary budget caps that are now under
consideration.  If these reductions occur, according to HUD, the
budget authority available for the Department's other discretionary
programs, such as community development block grants, programs for
the homeless, and public housing, could be drastically reduced or
even eliminated. 

We agree that these large figures present difficult choices for
policymakers who must consider competing needs.  These choices become
even more difficult because they come at a time when, according to
HUD, the "worst case" needs for housing have not been met for a
record 5.3 million households.\17


--------------------
\15 The Challenges Facing Federal Rental Assistance Programs, CBO
(Dec.  1994).  These programs include public housing, Section 8
tenant-based and project-based assistance, and Section 236 assistance
(generally, subsidized interest payments to help produce rental
housing). 

\16 Moreover, the report states that the Department has proposed a
series of reforms to reduce outlays from Section 8 programs.  These
reforms include increasing the number of working families served
(thus reducing the subsidy needed per household), reducing the
administrative fee, and marking the oversubsidized project-based
inventory to market rent levels as a means of reducing HUD's subsidy
costs over the long term. 

\17 Rental Housing Assistance at a Crossroads:  A Report to Congress
on Worst Case Housing Needs, HUD (March 1996).  Households with
"worst case" needs for housing pay over 50 percent of their income
for rent or live in severely inadequate housing. 


   FUTURE FEDERAL HOUSING AND
   COMMUNITY DEVELOPMENT POLICY
---------------------------------------------------------- Chapter 0:7

HUD's serious management and budget problems have greatly hampered
its ability to carry out its wide-ranging responsibilities.  Both
houses of Congress and HUD have proposed major but different reforms,
including the ultimate reform--the complete dismantling of HUD.  With
the high stakes involved--the tens of billions of dollars that HUD
spends each year, the millions of vulnerable families (including
millions of households that do not receive assistance from HUD
because of budget constraints), and the overwhelming needs of
distressed communities--it is not unexpected that deciding the future
direction of housing and community development policy and of HUD will
take some time.  Balancing business, budget, and social goals is a
Herculean task. 

Legislation to reform HUD has been introduced in both houses of
Congress.  HUD has continued to refine its vision for a reformed
agency through successive versions of its "blueprint." What is needed
now is for the Congress and the administration to agree on the future
direction of housing and community development policy.  This
agreement should weigh the inherent trade-offs involved in

  -- understanding the magnitude of the needs of poor families and
     individuals, communities, first-time home buyers, and others
     that HUD currently serves;

  -- deciding who it is that federal housing and community
     development policy will serve and the priority of competing
     needs;

  -- deciding the mechanisms for delivering services (e.g., block
     grants) to meet those needs, and the federal, state, and local
     roles in service delivery; and

  -- determining how much to spend. 


-------------------------------------------------------- Chapter 0:7.1

Mr.  Chairman, this concludes our prepared remarks.  We will be
pleased to respond to any questions that you and other Members of the
Subcommittee may have.  We in GAO look forward to working with the
Congress to help address the issues before it. 


SELECTED GAO PRODUCTS
=========================================================== Appendix I

FHA Hospital Mortgage Insurance Program:  Health Care Trends and
Portfolio Concentration Could Affect Program Stability
(GAO/HEHS-96-29, Feb.  27, 1996). 

Homeownership:  Mixed Results and High Costs Raise Concerns About
HUD's Mortgage Assignment Program (GAO/RCED-96-2, Oct.  18, 1995). 

Multifamily Housing:  Issues and Options to Consider in Revising
HUD's Low-Income Housing Preservation Program (GAO/T-RCED-96-29, Oct. 
17, 1995). 

Housing and Urban Development:  Public and Assisted Housing Reform
(GAO/T-RCED-96-25, Oct.  13, 1995). 

Housing and Urban Development:  Public and Assisted Housing Reform
(GAO/T-RCED-96-22, Oct.  13, 1995). 

Block Grants:  Issues in Designing Accountability Provisions
(GAO/AIMD-95-226, Sept.  1, 1995). 

HUD Management:  Greater Oversight Needed of FHA's Nursing Home
Insurance Program (GAO/RCED-95-214, Aug.  25, 1995). 

Property Disposition:  Information on HUD's Acquisition and
Disposition of Single-Family Properties (GAO/RCED-95-144FS, July 24,
1995). 

Housing and Urban Development:  HUD's Reinvention Blueprint Raises
Budget Issues and Opportunities (GAO/T-RCED-95-196, July 13, 1995). 

Public Housing:  Converting to Housing Certificates Raises Major
Questions About Cost (GAO/RCED-95-195, June 20, 1995). 

Purpose of, Funding for, and Views on Certain HUD Programs
(GAO/RCED-95-189R, June 20, 1995). 

Multifamily Housing:  HUD's Mark-to-Market Proposal
(GAO/T-RCED-95-230, June 15, 1995). 

Multifamily Housing:  HUD's Proposal to Restructure Its Portfolio
(GAO/T-RCED-95-226, June 13, 1995). 

Government Restructuring:  Identifying Potential Duplication in
Federal Missions and Approaches (GAO/T-AIMD-95-161, June 7, 1995). 

HUD Management:  FHA's Multifamily Loan Loss Reserves and Default
Prevention Efforts (GAO/RCED/AIMD-95-100, June 5, 1995). 

Program Consolidation:  Budgetary Implications and Other Issues
(GAO/T-AIMD-95-145, May 23, 1995). 

Government Reorganization:  Issues and Principles
(GAO/T-GGD/AIMD-95-166, May 17, 1995). 

Multifamily Housing:  Better Direction and Oversight by HUD Needed
for Properties Sold With Rent Restrictions (GAO/RCED-95-72, Mar.  22,
1995). 

Housing and Urban Development:  Reform and Reinvention Issues
(GAO/T-RCED-95-129, Mar.  14, 1995). 

Housing and Urban Development:  Reforms at HUD and Issues for Its
Future (GAO/T-RCED-95-108, Feb.  22, 1995). 

Housing and Urban Development:  Reinvention and Budget Issues
(GAO/T-RCED-95-112, Feb.  22, 1995). 

High-Risk Series:  Department of Housing and Urban Development
(GAO/HR-95-11, Feb.  1995). 

Housing and Urban Development:  Major Management and Budget Issues
(GAO/T-RCED-95-86, Jan.  19, 1995, and GAO/T-RCED-95-89, Jan.  24,
1995). 

Reengineering Organizations:  Results of a GAO Symposium
(GAO/NSIAD-95-34, Dec.  13, 1994). 

Federally Assisted Housing:  Expanding HUD's Options for Dealing With
Physically Distressed Properties (GAO/T-RCED-95-38, Oct.  6, 1994). 

Rural Development:  Patchwork of Federal Programs Needs to Be
Reappraised (GAO/RCED-94-165, July 28, 1994). 

Federally Assisted Housing:  Condition of Some Properties Receiving
Section 8 Project-Based Assistance Is Below Housing Quality Standards
(GAO/T-RCED-94-273, July 26, 1994, and Video, GAO/RCED-94-01VR). 

Public Housing:  Information on Backlogged Modernization Funds
(GAO/RCED-94-217FS, July 15, 1994). 

Homelessness:  McKinney Act Programs Provide Assistance but Are Not
Designed to Be the Solution (GAO/RCED-94-37, May 31, 1994). 

Section 8 Rental Housing:  Merging Assistance Programs Has Benefits
but Raises Implementation Issues (GAO/RCED-94-85, May 27, 1994). 

Lead-Based Paint Poisoning:  Children in Section 8 Tenant-Based
Housing Are Not Adequately Protected (GAO/RCED-94-137, May 13, 1994). 

HUD Information Resources:  Strategic Focus and Improved Management
Controls Needed (GAO/AIMD-94-34, Apr.  14, 1994). 

Multifamily Housing:  Status of HUD's Multifamily Loan Portfolios
(GAO/RCED-94-173FS, Apr.  12, 1994). 

Housing Finance:  Expanding Capital for Affordable Multifamily
Housing (GAO/RCED-94-3, Oct.  27, 1993). 

Government National Mortgage Association:  Greater Staffing
Flexibility Needed to Improve Management (GAO/RCED-93-100, June 30,
1993). 

Multifamily Housing:  Impediments to Disposition of Properties Owned
by the Department of Housing and Urban Development (GAO/T-RCED-93-37,
May 12, 1993). 

HUD Reforms:  Progress Made Since the HUD Scandals but Much Work
Remains (GAO/RCED-92-46, Jan.  31, 1992). 


*** End of document. ***