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Chairman Walsh and subcommittee members, I am Dan McCarthy, Executive Director of the Albany Housing Authority in Albany Georgia. Under a management arrangement, I also direct the neighboring Lee County Housing Authority. These two agencies own and operate 1106 apartments in 26 apartment complexes, and manage 61 Housing Choice Vouchers. Their size is representative of a significant proportion of housing authorities around the nation, as well as the members of the Public Housing Authorities Directors Association (PHADA), on whose behalf I appear before you today. PHADA represents more than 1,900 housing authority Executive Directors. We appreciate your willingness to consider our views in your deliberations. Your past responses to our testimony have often resolved concerns when HUD has not been able or willing to do so, and we hope that will be the case again for the 2005 fiscal year.

Last year, PHADA testified that local housing authorities were under an assault more serious than anything we had experienced in decades. This year, HUD's assisted housing program budget proposal is worse. This funding proposal places the integrity of housing assistance programs, the institutional service delivery network, and the good faith between HUD and its partners at risk, and it ignores precedent Congressional action. In aggregate in the past four years, the administration will have proposed more than a $2 billion disinvestment for the public housing program, and this year we believe that the funding for Housing Choice Vouchers is deficient by an additional $2 billion. The burdens of that disinvestment ultimately fall on our communities and the citizens who use this housing assistance.

Public Housing Operating Fund

The Operating Fund bridges the difference between public housing rent collections and the actual costs for management, maintenance, utilities, insurance, and other overhead expenses. When Congress capped the rents housing authorities could charge at 30 percent of residents' income, it committed to pay an operating subsidy that would cover the reasonable and necessary costs of operating public housing. This year, HUD has requested no increase over the FY 2004 appropriation for formula operating subsidy distribution, and it has proposed a $15 million set aside for "graduation" incentives. We believe that the Operating Fund will be $240 million short of fully funding operating formula eligibility. This follows on the heels of losses of $310 million in the Public Housing Drug Elimination Program, an unanticipated $250 million shortfall in FY 2003, and consistent underfunding of formula eligibility for Operating Subsidy. Operating subsidy has been fully funded only two times in the last decade. Meanwhile, housing authorities continue to suffer under escalating insurance and utility costs and from an unexpected loss of funds when HUD chose to eliminate year-end utility adjustments. In the face of rising costs and a $240 million deficiency, HUD's proposal to reduce formula eligibility by a $15 million set aside for "graduation" incentives seems less than responsible.

The Urban Institute has just published a positive assessment of the Moving to Work Demonstration (MTW), which began in 1996 and originally deregulated 24 local agencies. HUD has proposed "MTW-lite," the Freedom to House Public Housing Reform Demonstration Program, under which 50 agencies would gain limited flexibility to set local policies. HUD would also identify 50 similar "control" agencies as part of this demonstration. On the heels of the positive MTW assessment report, the initiative appears timid and duplicative, aiming mainly to force 50 agencies to move to asset based management. The flexibility available to HAs includes fungibility of Operating Fund and Capital Fund grants (not Housing Choice Voucher Program funds, as in MTW), guaranteed proportional funding from those resources for the term of the demonstration, and rent setting authority, "consistent with ... provisions of the United States Housing Act of 1937." MTW gave agencies the opportunity to negotiate waivers of requirements of the 1937 Act. If MTW has been successful, devolution should parallel that available under MTW, and HUD should expand the demonstration substantially. In particular, real local rent setting authority must reach beyond the 1937 Act requirements.

Safety and Security

In the 2003 fiscal year, HUD eliminated any earmarked funding for public housing safety and security when it eliminated the Public Housing Drug Elimination Program. At that time, HUD claimed it would compensate for the loss of $310 million by raising the budget proposals for the Operating Fund in the future. That has never happened. Indeed, HUD has again proposed to eliminate the $10 million contribution to the Department of Justice's Weed and Seed initiative. PHADA urges Congress to appropriate $310 million for PHDEP or a comparable safety and security initiative in order to continue the work to make assisted housing safe and secure for its residents.

Public Housing Capital Fund

As a surrogate for a replacement reserve, the Capital Fund provides allocations to public housing for reinvestment in public housing infrastructure. Adequate capital funding permits housing authorities to make inroads in the estimated $22 billion backlog of public housing capital improvements, and avoids repeating the deferral of capital investments that produced the backlog in the first place. HUD admits that its funding proposal only addresses annual accrual needs, not any element of the backlog. That backlog is not static. Capital costs rise annually, and unaddressed capital requirements deteriorate further over time. Additionally, although the Department has encouraged HAs to use private market financing to support capital reinvestments, the Capital Fund only supports annual accruals of need. It does not support the debt service associated with private financing. HUD has touted examples of debt-supported capital reinvestment, but it refuses to provide funding adequate to address both capital needs accruals and debt service. This approach can only enlarge the capital needs backlog. As we have said every year, public housing represents a $90 billion federal, state, and local investment in some 13,000 public housing properties that require ongoing capital investment to remain viable.

PHADA recommends funding the Capital Fund at $3.5 billion and that the appropriation be solely for reinvestment in public housing infrastructure. If Congress wishes to appropriate funds for other earmarks currently included in the Capital Fund, PHADA recommends that it do so as separate initiatives.

HOPE VI Program

HUD continues its efforts to eliminate a success. The Department claims that HOPE VI has accomplished its task, despite Congressional reauthorization of HOPE VI, signed by President Bush on December 16, 2003. PHADA remains mystified by the Department's justifications. The program has produced remarkable changes in housing and HUD acknowledges that many unfunded applications are viable and fundable proposals. Clearly, there is more work to do to support major redesign of public housing stock, and HOPE VI has developed into an effective tool to carry out that aim.

PHADA recommends funding HOPE VI at $625 million, reflecting the program's success and recognizing the ongoing need for federal support in making public housing apartment complexes competitive as well as affordable.

Tenant-Based Housing Assistance

HUD is proposing another radical restructuring of the tenant-based housing assistance program both by substantial reductions in federal funding support and with substantial changes in authorizing legislation. PHADA appreciates Congress' concern with the growth in the Section 8 program's costs, and with utilization. Unfortunately, PHADA is not convinced that the proposals in HUD's budget submission will address cost difficulties in FY 2005. Thus, we believe that the funding proposal leaves a $2 billion deficiency in tenant-based assistance that will not be bridged by any efficiencies or accuracy improvements. PHADA remains convinced that funding in the FY 2005 budget proposal will not support all vouchers in use, and that it will put the assistance for between 200,000 and 250,000 families at risk. This devastating impact is unacceptable to PHADA and we hope is unacceptable to Congress. We deeply appreciate Congress' historical commitment to fund all vouchers in use, and to encourage program sponsors to use all authorized vouchers. The industry has responded to Congress's call, and the Housing Choice Voucher Program now needs Congress' support in light of success in raising utilization rates and reducing potential fund recaptures. Funding all vouchers in use should require approximately $15.2 billion in FY 2005.

Consistent with last year's testimony concerning HUD's HANF proposal, PHADA finds elements in the administration's proposal attractive. It avoids many of the administrative and institutional pitfalls present in HANF, and offers sponsors some flexibility to tailor programs to local policy preferences. However, with the proposed funding levels and administrative fee structure, it includes shortcomings that render it unacceptable at the present time.

The proposal to change the administrative fee structure is as misguided as last year's version. Tying administrative fees to Housing Assistance Payments (HAP) lacks validity on its face. Local housing market forces drive HAP payments, not the work involved in administering vouchers. Basing fees on a proportion of HAP will lead to windfalls for sponsors in high housing cost communities and severe shortfalls in low housing cost communities. Albany, Georgia has Fair Market Rents (FMRs) ranging from $326 to $689 per month and our current administrative fee is $44.45 per voucher in use per month. Macon, Georgia lies approximately 100 miles north of Albany and although it has an almost identical administrative fee of $44.48, Macon's FMRs are higher, ranging from $421 to $775 per month. In addition, Albany's average tenant payment is approximately $40 per month higher than Macon's, further reducing Albany's HAP. Basing fees on 7 percent of HAP, Albany would lose 45 percent of its administrative fee, while Macon would lose approximately 24 percent. San Francisco, California, a very high cost housing market, would likely see an increase of approximately 31 percent in its administrative fees using 7 percent of HAP. The proposed fee structure provides a perverse incentive for local programs to minimize tenant payments in order to maximize their Housing Assistance Payments and their fees. If Albany's average TTP dropped to Macon's, Albany's administrative fee would increase by 7% per voucher over what they would receive with the current average TTP. The proposed fee structure discourages housing families with earned income, encourages agencies to drive voucher costs higher, and encourages reducing the number of households served, which would tend to raise the administrative fee per voucher. While devolving policy responsibilities, the proposal retains HUD's ability to micro manage agencies through so-called bonus and incentive payments, standards over which the Secretary exercises total discretion. HUD has told PHADA that it is preparing amendments to address these concerns, and PHADA welcomes improvements that avoid incentives, disincentives, and micro-management described above. However, PHADA must continue to oppose the administration's proposal until it can evaluate any amended approaches.

Program Reform

In addition to draconian funding reductions, HUD's budget proposal includes "reforms" in both the Housing Choice Voucher and Public Housing program. In response to the Flexible Voucher Program and the Freedom to House proposals, PHADA urges the Committee to consider possible systemic changes to the current rent structure in assisted housing as the primary opportunity for reform. HUD's 2001 report, entitled Quality Control for Rental Assistance Subsidies Determination, found significant errors in determining the incomes and rents of participants in affordable housing programs, resulting in substantial erroneous applications of housing subsidy. The report's first recommendation concerned the character of assisted housing rent structures, and concluded that, "Federal laws, regulations and HUD requirements should be simplified to the extent possible." The current rent structure includes:

• Over 40 statutory and regulatory exclusions from income,
• Three levels of income to be determined by sponsors (gross, annual and adjusted),
• Forecasting all future income,
• Maintaining at least two rent structures in pubic housing,
• Assessing the value of and imputing an income from non-productive non-cash assets,
• Forecasting future medical expenses for the elderly and disabled,
• Phasing in income subject to the earned income disregard provision,
• and a burdensome and expensive infrastructure for verification, record keeping, income tracking and matching, and data submission.
  

Outcomes from the current rent structure include privileging of some income sources over others, discouraging earnings, encouraging fraud, and confusing participants, program sponsor staff and HUD officials. Participants pay widely differing amounts for rent for identical housing, and participants with similar incomes derived from different sources may pay rents that are hundreds of dollars apart. The costs for fraud, error, administrative burden, confusion, and sense of program inequity make rent reform an attractive goal that offers some opportunities for efficiencies as well. PHADA hopes that program reform will mean real rent reform that accomplishes three goals. First, we must maintain the affordability of assisted housing for eligible households. Second, we must at least avoid penalizing working households if not offer them some incentives to increase earned income. Third, we must establish rent structures in affordable housing that represent real reform, that actually simplify the rent setting process for sponsors and participants, and that return equity to the rent structure of affordable housing.

To close, let me briefly summarize PHADA's FY 2005 appropriations recommendations:

Mr. Chairman and members of the committee, thank you for your attention and your consideration of PHADA's recommendations. I would be happy to answer any questions you might have.

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