U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

92–859 PDF 2004

S. HRG. 108–411

PROPOSED FISCAL YEAR 2004 BUDGET

FOR THE U.S. DEPARTMENT OF HOUSING

AND URBAN DEVELOPMENT

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON

THE ADMINISTRATION’S PROPOSED FISCAL YEAR 2004 BUDGET FOR

THE U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

MARCH 4, 2003

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN E. SUNUNU, New Hampshire

ELIZABETH DOLE, North Carolina

LINCOLN D. CHAFEE, Rhode Island

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

MARK A. CALABRIA, Economist

JONATHAN MILLER, Democratic Professional Staff Member

JENNIFER FOGEL-BUBLICK, Democratic Counsel

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

TUESDAY, MARCH 4, 2003

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of:

Senator Reed ..................................................................................................... 3

Senator Corzine ................................................................................................ 4

Prepared statement ................................................................................... 43

Senator Crapo ................................................................................................... 5

Senator Allard ................................................................................................... 5

Senator Dole ...................................................................................................... 6

Prepared statement ................................................................................... 44

Senator Sarbanes .............................................................................................. 13

Senator Carper ................................................................................................. 13

Senator Sununu ................................................................................................ 20

WITNESS

Mel Martinez, Secretary, U.S. Department of Housing and Urban Development, Washington, DC ......................................................................................... 6

Prepared statement .......................................................................................... 45

Response to written questions of Senators Sarbanes and Reed not were

available at time of printing.

(III)

(1)

PROPOSED FISCAL YEAR 2004 BUDGET

FOR THE U.S. DEPARTMENT OF

HOUSING AND URBAN DEVELOPMENT

TUESDAY, MARCH 4, 2003

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 10:03 a.m. in room SD–538 of the Dirksen

Senate Office Building, Senator Richard C. Shelby (Chairman of

the Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

Chairman SHELBY. The Committee will come to order.

We are pleased this morning to welcome Secretary Mel Martinez

from the Department of Housing and Urban Development.

Ranking Member Sarbanes and I have asked Secretary Martinez

to come before the Committee today to share the details of the Administration’s proposed Fiscal Year 2004 Budget for HUD, and I

appreciate the Secretary making the time to be with us today.

Mr. Secretary, I am going to have to leave in just a few minutes

because we have a very important organizational shuffling in the

Appropriations Subcommittees. And if you are a Subcommittee

Chairman, which I have been fortunate to be, you certainly have

to be there. So, Senator Allard is supposed to come and relieve me.

But if I happen to walk out, it is not because you are doing or saying anything I don’t like.

Secretary MARTINEZ. I understand.

Chairman SHELBY. I will be back.

Secretary MARTINEZ. Yes, sir.

Chairman SHELBY. Mr. Secretary, let me begin by saying that I

think this is a valuable opportunity for me and the other Members

of the Committee. In previous years, HUD’s budget hearing was

many times held at the Subcommittee level. Since HUD is such a

crucial and important part of this Committee’s jurisdiction, I

thought it would be important to hear from you, Mr. Secretary,

here before the Full Committee.

I am pleased that Senator Allard, the Subcommittee Chairman

on Housing and Transportation, has for many years made HUD

oversight a priority and he has worked diligently there. I am looking forward to working with him and going forward on important

housing issues.

President Bush is proposing to fund HUD at $31.3 billion in

2004, an increase of $262 million over 2003. It includes several imVerDate 11-MAY-2000 09:08 Apr 15, 2004 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 92859.TXT SBANK4 PsN: SBANK4
2

portant and ambitious initiatives. I am particularly pleased to see

the Administration’s budget submission contains many important

tools to increase homeownership.

On average, American families have 44 percent of their net

wealth in the equity value of their home. Homeownership is shown

to be an important tool to lifting low-income and minority families

out of poverty. Providing homeownership opportunities for these

families not only provides them with an opportunity for wealth

building, but also increases community pride and has a stabilizing

effect on children.

The President’s American Dream Downpayment Initiative is a

great first step, I believe, in meeting this goal.

The greatest barrier to homeownership is a lack of resources for

downpayment and closing costs. The American Dream Downpayment Initiative calls for a $200 million program to provide assistance for downpayment and closing costs to families wanting to own

a home.

Additionally, the 2004 Budget proposes a new mortgage insurance product within the Federal Housing Administration. It is designed to serve a subprime market of families who, because of poor

credit history, are unable to get mortgage insurance on the private

market at a reasonable rate. This program envisions requiring families to pay a higher premium insurance rate at the outset, but offers the opportunity for reduced rates in subsequent years once a

pattern of prompt payment and better credit is established.

Another portion of the budget submission I would like to mention

is the creation of the Housing Assistance for Needy Families Program. This bold initiative would block-grant funds from the Section

8 Housing Choice Voucher Program. By allocating resources to the

States here, there is an opportunity for increased efficiency and, we

believe, the potential for enhanced coordination with other social

service programs administered at the State level. I will be interested, Mr. Secretary, in learning just how this change might be

implemented.

One area of concern I would like to mention here this morning

is, and while this doesn’t relate directly, Mr. Secretary, to your

budget submission, I think it is important that it be raised in the

context of HUD funding.

Some sources estimate that HUD is overpaying Section 8 rental

payments at an estimated rate of $2 billion a year. This is a troubling situation if that is true, but one that I know you are making

every effort to rectify and to get your hands on.

Particularly in this challenging budget in this climate today, I

think it is extremely important that you focus on efficiencies within

the Department, and I know you have talked with me about this

before. Two billion dollars a year, if that figure is right, in misdirected funds is way too high and causes all of us significant concern. The $2 billion is money that could be spent for serving other

needy communities or meeting other budgetary programs.

Mr. Secretary, we are pleased to have you with us this morning

and I look forward, as I have been, to working with you and we

are proud of what you are doing.

Secretary MARTINEZ. Thank you, Senator.

Chairman SHELBY. Senator Reed.

3

STATEMENT OF SENATOR JACK REED

Senator REED. Thank you very much, Mr. Chairman.

Welcome, Secretary Martinez.

I had the pleasure and privilege of working with the Secretary

and it has been a distinct pleasure. He is someone with enthusiasm

and commitment to the housing goals that we all share. And as I

said to you prior to the hearing, Mr. Chairman, I think I like the

budget that you sent to OMB better than the budget that OMB

sent to us, because this budget, frankly, doesn’t begin to meet the

needs of housing in the United States.

We have seen in something that is not recent, but since 1976,

HUD has lost about two-thirds of its purchasing power in terms of

its budget. And at the same time, housing costs have accelerated

throughout the United States. So, people are really caught in a

squeeze between increasing rental prices, increasing home prices,

and dwindling Federal commitment to housing, particularly housing production. Again, this budget seems to reflect that.

I am glad that programs like HOME and lead hazard control

grants have been increased a bit. But overall, the budget just does

not respond to the needs we see out there in every community of

this country for adequate, safe, affordable housing for our citizens.

Prices go up, 14 percent in my State, and they keep going up,

and still, people are without adequate housing.

We also have seen a commitment by you and the Administration,

a laudable one, to end homelessness in 10 years. But, frankly, the

funding in this budget for homeless programs is not nearly enough

to meet this 10-year goal.

In my home State of Rhode Island, homelessness has increased

by 23 percent during the past year, and the number of homeless

children has increased by 31 percent. These are statistics that we

all regret and, hopefully, we can do something about.

As I noted, the lead program has an increase of $10 million over

your fiscal year 2003 request. But that is still $39 million less than

Congress appropriated for fiscal year 2003. So, I think that the

sentiment is there, but the resources aren’t adequate.

Last year, we had a hearing, as I chaired the Subcommittee, to

meet the goal of saving children by 2010 from the exposures to

lead. It would take about $400 to $500 million a year, by calculations. Certainly, much less is being appropriated in this bill.

I am concerned that you are zeroing-out the Section 8 program.

I am also concerned that we have a cut in public housing funds.

The Administration has proposed cuts of $1.2 billion in capital

funds in the past three budget submissions, despite a $24 billion

backlog in need for public housing authorities throughout the country. In addition to that, there is a proposal to zero-out the HOPE

VI program.

So the budget, I think, again, is not adequate to the task of providing every American with access to affordable housing. I know

that is your goal. That is your commitment. That is what you want

to do. Hopefully, working with you, we can fix some of these shortfalls in funding.

I thank you, Mr. Secretary.

Secretary MARTINEZ. Thank you, Senator.

Chairman SHELBY. Senator Corzine.

4

STATEMENT OF SENATOR JON S. CORZINE

Senator CORZINE. Thank you, Mr. Chairman.

I have a full statement I would like to submit for the record.

Chairman SHELBY. Without objection it will be made part of the

record in its entirety.

Senator CORZINE. Thank you. I want to reiterate some of the concerns that I heard my colleague mention. I have serious concerns

about the 2004 Budget with respect to the Department of Housing

and Urban Development. I believe it is going to bring enormous

harm to low- and middle-income families throughout America and

I can say quite practically that will be the case to the people of

New Jersey.

It is a budget that provides no direct Federal aid to those States

facing their worst fiscal crisis on a more broad basis than what is

concerned here. We have heavy cuts going on in social programs,

including in the housing area in our State. I won’t go through

homeland security and education and other things, but I am truly

concerned about what it does to housing programs.

The fact is, in my view, if I am calculating this right, we have

$2 billion less for public housing programs through the operating

funds and the fund for the Public Housing Drug Elimination Program. The Administration’s proposals to block-grant the Section 8

program, which will likely reduce funding dramatically for this

program over a period of time, given the competing needs in the

States.

I am truly concerned, as I expressed to you last year, about the

Public Housing Drug Elimination Program. One of the things that

is most surprising to me, based on the kinds of commentary we had

from the Secretary was about the HOPE VI program. I just have

a hard time understanding what is almost universally accepted as

a successful, bipartisanly supported program is undercut tremendously, eliminated practically in all real forms.

The Empowerment Zones issues, which I am working with a

number of Republican colleagues in the House and in a number of

places across our State—it is a tough budget. I know we are in a

tough financial situation as a Nation. That is why I am so adamantly opposed to having tax cuts while we are cutting the kinds

of programs that I think are fundamental to the welfare of our Nation, both low- and middle-income families.

The Low-Income Housing Tax Credit is going to suffer enormously in the context of the dividend exclusion. Ernst & Young has

out a report that says that 35 percent fewer units would be financed. There is a programmatic effort that makes one wonder

whether we are committed to affordable, low-income housing.

I can tell you in New Jersey, this is a crisis. It is absolutely a

crisis. There are not enough homes available for families to put

people back to work, but the houses and housing is not available

in the areas where people need to work.

It is a real stretch.

So, I know the Secretary is good-willed about where he wants to

go with these things, but these budget proposals I do not think

match the words. They do not always match the kinds of comments

we have had in hearings like this before.

5

I am anxious to hear your comments with regard to the budget

constraints.

Thank you.

Chairman SHELBY. Senator Crapo.

COMMENTS OF SENATOR MIKE CRAPO

Senator CRAPO. Thank you very much, Mr. Chairman. I won’t

make an opening statement at this time. I will save my comments

until the question period.

Chairman SHELBY. Senator Allard, I am going to recognize you

and turn the hearing over to you.

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD [presiding]. Thank you, Mr. Chairman.

I want to thank you for holding this hearing. I appreciate the opportunity to learn more about the Administration’s Fiscal Year

2004 Budget request and legislative proposals for the Department

of Housing and Urban Development.

As Chairman of the Subcommittee on Housing and Transportation, I have a keen interest in this issue, and while housing is often

an overlooked portion of our jurisdiction, I believe it is one of the

most important. And I am particularly pleased to be able to have

this discussion.

I believe this is a responsible budget. As I have noted on many

previous occasions, Government agencies should be judged by their

results, not by the size of their budgets or the number of new programs. The success of HUD will be determined by how many people it helps to achieve self-sufficiency and not by how much money

it spends. By integrating performance and budget, the Administration has taken concrete steps toward providing real help while

establishing accountability.

Unfortunately, some still continue to focus only on money, as if

compassion is measured by a percentage increase or new dollars

can be the only mark of a high priority. More Government spending does not necessarily mean that more people are served, and it

certainly does not mean that anyone is better served.

I would like to commend the President and Secretary Martinez

for a number of initiatives in the budget, particularly the focus on

minority homeownership. I am pleased to join forces with them to

enact the American Dream Downpayment Initiative, which I plan

to reintroduce in the next few weeks.

I hope my colleagues on the Banking Committee will join me in

this effort to help thousands of low-income and minority families

realize the American Dream of homeownership.

As we all know, homeownership is an important means for these

families to build wealth and prosperity. I am also pleased that the

Administration has proposed the consolidation and streamlining of

a number of programs. For many years, HUD has suffered because

its leadership failed to focus on the Department’s core mission—to

provide decent, safe, sanitary, and affordable housing.

While there may be a need for a number of different programs

to address the various aspects of this mission, there was a proliferation of inefficient boutique programs. These yielded hundreds

6

of different programs at HUD, many of which are unauthorized,

duplicative, or outside of the core mission.

The Department has sorely needed to focus on the core mission

through consolidation and streamlining and I am very pleased that

Secretary Martinez is providing that leadership. I look forward to

receiving more details on the legislative proposals.

I want to conclude by welcoming Secretary Martinez back to the

Banking Committee. I know that your schedule is very full and so,

I appreciate your taking the time to be here. I am sure that your

comments will be helpful as the Committee considers the Administration’s proposal. I look forward to hearing your testimony.

Senator Dole have you had an opportunity to speak?

COMMENTS OF SENATOR ELIZABETH DOLE

Senator DOLE. Thank you very much.

Mr. Secretary, I certainly want to welcome you to the hearing.

Thank you for the outstanding work you are doing as Secretary.

I have a statement I would like to put into the record. But in the

interest of time, I believe I will submit it, and wait for questions.

Senator ALLARD. Without objection, so ordered.

Secretary Martinez, welcome. We are all looking forward to hearing your comments.

STATEMENT OF MEL MARTINEZ

SECRETARY

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Secretary MARTINEZ. Mr. Chairman, Ranking Member Reed, and

Members of the Committee, it is a pleasure to be back with you.

Thank you for your invitation to talk about our 2004 Budget, as

proposed by President Bush for the Department of Housing and

Urban Development.

I would like to offer a full version of my remarks for the record,

if I could, and just try to summarize in order to save more time

for the questions.

Senator ALLARD. Without objection, so ordered.

Secretary MARTINEZ. Thank you, Mr. Chairman.

During this time of uncertainty in the world, as the Administration continues to focus on strengthening the U.S. economy, creating

affordable housing options remains a critical component of the

President’s agenda. HUD’s proposed $31.3 billion budget offers new opportunities for

families and individuals, and minorities in particular, seeking the

American Dream of homeownership. It offers new opportunities to

increase the production of affordable housing and expand access to

housing free from discrimination.

It provides new opportunities for strengthening communities and

in generating renewal, growth, and prosperity with a special focus

on ending chronic homelessness.

Our budget creates new opportunities to improve HUD’s performance by addressing the internal management problems that have

long challenged the Department.

I know that this in particular is the subject of great importance

to Members of the Committee and I want you to know that I share

the concerns of the Members, and that this Administration has

7

been, and continues to be, committed to improving management. I

am pleased to say that we are making progress in that area and

I will return to this subject later in my testimony.

Let me begin by discussing homeownership.

The President has committed this Nation to creating 5.5 million

new minority homeowners by the end of this decade. Several new

expanded proposals in the Fiscal Year 2004 Budget will increase

the availability and production of affordable homes and help more

families to come to know the security of homeownership.

As a first step, HUD proposes to fund the American Dream

Downpayment Initiative, which, as you just indicated, Chairman

Allard, you have so kindly agreed to introduce for us. And we will

fund this Initiative at $200 million in this budget year. The Initiative will help approximately 40,000 low-income families with a

downpayment on their first home. We also reach out to low-income

families hoping to make the move into homeownership by allowing

them to put up to a year’s worth of their Housing Choice Voucher

assistance toward a home downpayment.

To promote the production of affordable single-family homes in

areas where such housing is scarce, the Administration is proposing a tax credit of up to 50 percent of the cost of construction

on new homes or the rehabilitation of an existing home.

HUD is very committed to helping families understand the homebuying process and how to avoid the abuses of predatory lending.

The Fiscal Year 2004 Budget will expand funds for counseling services from $40 million in fiscal year 2003 to $45 million. This will

allow us to provide 550,000 families with home purchase and

homeownership counseling and about 250,000 families with rental

counseling.

Our budget also strengthens HUD’s commitment to SHOP, the

Self-Help Homeownership Opportunity Program. SHOP is a key

initiative that turns low-income Americans into homeowners by

partnering with the Federal Government with faith-based and

other community organizations. The program is funded at $65 million, which will support the construction of 5,200 homes.

So along with boosting homeownership, HUD’s proposed 2004

Budget promotes the production and accessibility of affordable

housing for families and individuals who rent. We achieve this in

part by providing States and localities with new flexibility and additional resources to respond to local needs.

The HOME Investment Partnerships Program is a major tool for

helping communities meet housing affordability needs. As reflected

in this year’s program, the HOME program is successful because

it is well-managed and its flexibility ensures local decisionmaking.

Our 2004 Budget provides a 5 percent or $113 million increase over

amounts that were proposed for the HOME program in fiscal year

2003. Overall, HOME will make nearly $2.2 billion in funds available to State and local grantees to help finance the cost of land

acquisition, new construction, rehabilitation, downpayment, and

rental assistance.

To ensure greater flexibility within the Section 8 Housing Choice

Voucher Program, and to empower States to make the decisions

based on local needs, we propose converting the voucher program

to a State-run block grant called Housing Assistance for Needy

8

Families. Turning over administration of the program to the States

is the appropriate way to ensure the best service for needy families,

while improving its management by putting it closer to the people

it is intended to serve.

Our Budget includes legislative proposals that would substantially improve living conditions within public housing communities

by giving public housing authorities new ability to leverage private

capital.

The Public Housing Reinvestment Initiative would authorize

HUD to replace public housing subsidies for development or for

portions of developments with project-based voucher assistance.

Our Budget also adds a partial loan guarantee that will cover up

to $1.7 billion in loans.

This financial restructuring will allow PHA’s to secure private

financing to rehabilitate or replace aging properties on a propertyby-property basis, as other affordable housing owners do if they are

privately owned.

The Public Housing Reinvestment Initiative reflects our vision

for the future of public housing.

For 10 years, the HOPE VI program has been an avenue for

funding the demolition, replacement, and rehabilitation of severely

distressed public housing. Established to revitalize 100,000 of the

Nation’s most severely distressed public housing units, the program

has already funded the demolition of over 115,000 such units and

the production of more than 85,000 revitalized dwellings.

With the 2002 and 2003 appropriations, we anticipate being able

to demolish an additional 15,000 units and replace 15,000 more.

Just this week, we began notifying those communities that have

been awarded HOPE VI grants for the 2003 cycle. With the $2.5

billion already awarded but not yet spent, and an additional $1 billion to be awarded in 2002 and 2003, HOPE VI will continue to

serve communities well into the future.

When HOPE VI was first created, it was the only significant

means of leveraging private capital to revitalize public housing

properties. But that is no longer the case. Today, HUD has approved bond deals that have leveraged over $500 million just in the

last couple of years. PHA’s can mortgage their properties to leverage private capital.

In Maryland and Alabama, the PHA’s are combining efforts to

leverage their resources and assets to attract private capital. Some

cities, like Chicago, are committing hundreds of millions of dollars

of their own money to revitalize public housing neighborhoods.

HUD is also seeking additional tools from Congress, such as the

Public Housing Reinvestment Initiative. HOPE VI has been a successful program that was created to serve a specific purpose. It is

time to look to the future and pursue new opportunities, working

with the Congress, as we together look for creative ways to learn

from HOPE VI and move to new areas of opportunity for urban

revitalization.

Regulatory barriers on the State and local level have an enormous impact on the development of rental and affordable housing.

Within the 2004 Budget, HUD builds on its commitment to work

with States and with local communities to reduce these regulatory

barriers.

9

Through the new Office of Regulatory Reform, HUD will spend

an additional $2 million next year to learn more about the nature

and extent of the regulatory problem and how to reduce the effects

of excessive barriers to rental and affordable housing.

The President has made it a top priority to reduce costly regulatory barriers on the Federal level and we are committed to doing

so at HUD as well.

State and local governments depend upon HUD grants to support

community development projects that revive troubled neighborhoods and spark reinvestment and renewal. In fiscal year 2004,

HUD will strengthen its core grant programs by ensuring that

grantees have even greater flexibility to address locally determined

priorities.

The Community Development Block Grant Program will provide

$4.4 billion in funding to meet local needs in more than one thousand jurisdictions. In 2004, HUD will make the program more

effective by studying ways to reward communities that commit to

results-oriented, outcome-based performance plans.

Through the Fiscal Year 2004 Budget, HUD will strengthen its

effort to protect the Nation’s most vulnerable—those individuals

and families who truly need Government assistance: The budget

fund services benefiting adults and children from low-income families, the elderly, those with physical and mental disabilities, victims of predatory lending practices, and families living in housing

contaminated by lead-based paint hazards.

I want to highlight this Administration’s unprecedented commitment to those who have no place to call home.

Across the scope of the Federal Government, funding for homeless specific assistance programs increases 14 percent in the Fiscal

Year 2004 Budget proposal. This Samaritan Initiative is an important new element of the Administration’s strategy to end chronic

homelessness within a decade.

The Samaritan Initiative includes a proposed competitive grant

that would be administered jointly by HUD, the Department of

Health and Human Services, and Veterans Affairs. For 2004, HUD

provides $50 million for the housing component of this initiative,

while HHS and VA will each provide $10 million for services such

as substance abuse treatment and primary health care.

To increase the community’s flexibility in combatting homelessness, the 2004 Budget proposes to consolidate the current three

competitive homeless assistance programs.

Finally, in recognition of the effectiveness of the recently reactivated Interagency Council on Homelessness, the Department will

provide $1.5 million to operate the Council in the fiscal year 2004,

which represents a 50 percent funding increase.

HUD has made great progress over the past 2 years in making

the Department work better for the taxpayers and for every American who seeks a place to call home. HUD fully embraces the President’s Management Agenda and is on target to meet its challenging

goals of improving overall efficiency and effectiveness.

The steps the Department has taken thus far have gone a long

way to restoring the confidence of the Congress and the public in

HUD’s management of its financial resources.

10

I can assure the Members that this commitment to the highest

standards of ethics, management, and accountability will continue

during the coming fiscal year.

I would like to thank each of you for your support of my efforts

and I welcome your guidance as we continue to work together.

The steps that the Department has taken thus far have gone a

long way toward restoring the confidence of the Congress and the

public in HUD’s management and the way we manage our financial resources.

I would like to thank each of you for your support and I look forward to our continued effort to work together.

Thank you very much.

Senator ALLARD. Thank you, Mr. Secretary, for your comments

and your remarks.

I think an agency or a department needs to be aware of the

needs of the American people as they emerge. I think we have a

group of individuals out here whose needs are emerging. We need

to think about how we are going to deal with these groups. These

are the members in our reserve forces and our National Guard

units. These are volunteer individuals who are being called up to

serve this country who have home payments they have to make.

They have to leave their jobs. Their employers have to make sacrifices, too.

And as the threat of war with Iraq amounts to thousands of

armed forces and National Guard units have been activated for

duty, both domestically and in the Middle East, many of these

troops may face financial difficulties because they have been called

away from their jobs to serve their country.

I understand that the Soldiers’ and Sailors’ Civil Relief Act of

1940 provides service men and women with financial relief on their

rent and their mortgage payments and an additional provision

limits the interest rate to 6 percent. What additional resources will

be available for those serving our Nation so that they do not risk

foreclosure?

Secretary MARTINEZ. Mr. Chairman, I think, based on the current state of the law, that those are the limits of what we can do.

Post-nine/eleven, when the war on terror began, I joined with

Secretary Rumsfeld in initiating a reactivation of the Soldiers’ and

Sailors’ Civil Relief Act. And that did provide the kinds of assistance that you describe.

However, in the current environment, where mortgage rates are

at 6 percent on a very competitive basis, perhaps it would be one

possibility to consider, and I think you are addressing a very, very

important point, the fact that perhaps 6 percent as a minimum or

as a benchmark would not be appropriate. Perhaps something

lower than that would be the kind of significant help that I believe

the Act intended to have.

So, I would welcome any suggestions from the Committee of how

we might work together to deal with this new reality.

I think you are correct that these people are giving of themselves

and, in reality, are under financial hardship. I have heard of very

encouraging things going on in certain communities. I know the

homebuilders in Central Florida, for instance, are banding together

to provide home repair services and things like that at no cost to

11

those service men and women who have been called to service, but

the families that are left behind are still left with a leaky roof or

a heater that doesn’t work. And they are providing, as a community service, just on an ad hoc basis, some assistance.

More can be done, and I would welcome the opportunity to work

with you as we think through this problem and how we might be

able to provide assistance, especially working with the Department

of Defense, as to how they might identify the problem areas that

families are encountering.

Senator ALLARD. There is a need here for some interagency communication. I am glad to hear that as part of your comments.

I was going to ask you if there was any other tools other than

perhaps reducing that 6 percent that you could think of. It doesn’t

sound to me like you have any at this point.

Secretary MARTINEZ. I do not have at this point.

Senator ALLARD. It sounds like you are looking for some guidance from this Committee.

Secretary MARTINEZ. Right. Also, actually, I think we probably

should talk to the people in the Defense Department as to what

they encounter as these forces are activated because I am sure that

there are some systemic problems that they all may encounter.

So, I would propose to get with my colleagues in the Defense Department and then get back to the Committee with perhaps some

other ideas of how we might be of assistance.

Senator ALLARD. I think we need to give that some thought and

see what we can do because obviously, some Americans are in

need, but they are also doing a huge service for this country and

we shouldn’t forget them.

As you know, I have been very supportive of efforts to consolidate

and eliminate programs that are duplicative or troubled. I believe

we should streamline Government programs and make them as

cost-effective and efficient as possible.

Accordingly, can you please explain the rationale behind placing

environmental clean-up programs such as BEDI under the jurisdiction of the Environmental Protection Agency rather than at HUD?

And can you also comment on the proposed elimination of the

HOPE VI program?

Secretary MARTINEZ. First, on the BEDI program. Essentially, it

was a $25 million program. The Environmental Protection Agency

has had, for a long time, a much larger program of environmental

clean-up on economic development and their funding levels, I believe, are significantly higher than those at HUD.

It was felt as an Administration-wide policy that combining these

programs under one roof would be a better way to manage them.

I would argue that perhaps the better place to combine them

might be at HUD. I did not win that argument, but in any event,

I believe we do have a way at HUD of dealing with communities

in a very comprehensive way. And while environmental clean-up

perhaps is more suited to the EPA’s mission, the economic development portion probably is better suited to what we do at HUD.

In any event, it was felt that the better part of good judgment

was to combine all of these in one place, which I think is sound

policy, and that our small program of only $25 million would be

12

better served by going together with the remaining programs that

EPA has, which are much larger.

On the issue of HOPE VI, I alluded in my opening comments

about that. I believe HOPE VI has been a largely successful program. I believe there are some things about HOPE VI that have

given us all concern—the displacement of families, even during the

construction phase, but certainly in long-term, whether there are

not enough people that are in assistance situations and living in

a given project when the project gets redeveloped, still have an opportunity to live there, is a concern.

There are a number of other concerns about it. But I believe,

overall, it has been a very, very successful program and it has done

a lot of good.

As we look to it, we currently have an incredible amount of the

monies that were—in fact, about 50 percent of the monies that

have been allocated to projects have yet to see the light of day. It

has taken a long time for these projects to get off the ground and

to actually come to fruition.

For instance, in Chicago, we continue to work with them, and although they are making steady progress, there is still a significant

amount of dollars that are funded to the Chicago Housing Authority that have yet to be developed.

So, we believe that this is a good time, in a time of significant

budgetary constraints, and at a time when difficult choices had to

be made, that perhaps because of the continuing nature of the existing funding levels to HOPE VI that are still out there, that it

was a good opportunity for us as this program came for reauthorization, that we should jointly come up with what should be the

future of the type of HOPE VI program, how we should look to the

future to revitalize communities to continue to improve public

housing.

We have put forth some private-type initiatives I believe have

merit. But I do think that we need to continue to work together

to look at how we revitalize public housing, how we revitalize

urban areas, utilizing the model of a HOPE VI, but also learning

from some of the areas where we could all agree we would identify

as shortcomings. And so, it is a competitive grant program. There

is no one out there currently expecting a HOPE VI, other than

those who are in the current process, or maybe even into next year.

And so, we felt like, in a time of making difficult choices, this

was a choice that was reasonable to make. As the program was up

for reauthorization, we think we should stop and take a good look

at where we are on something like a HOPE VI, and we should determine where we would want to take it into the future.

We intend to have proposals to you in the coming months on

some ideas that we would have of how to reinvigorate an urban revitalization program like a HOPE VI.

Senator ALLARD. I was going to call on Senator Reed next for

questions, but we have a couple of Members, Senator Reed, that

have shown up.

Senator REED. Let me yield to Senator Sarbanes.

Senator ALLARD. Senator Sarbanes and also Senator Carper. We

will see if they would like to make an opening statement and then

we will come back to you.

13

Senator REED. Fine, Mr. Chairman.

Senator ALLARD. Senator Sarbanes.

COMMENTS OF SENATOR PAUL S. SARBANES

Senator SARBANES. Mr. Chairman, I will defer my statement. I

think I come after Senator Corzine. I will wait until then.

Senator ALLARD. Okay.

Senator Carper.

COMMENTS OF SENATOR THOMAS R. CARPER

Senator CARPER. Thank you very much, Senator Allard.

I want to welcome Secretary Martinez. We are grateful that you

are here and I will just wait until it is my turn to ask questions.

Thank you.

Senator ALLARD. We are back to you, Senator Reed.

Senator REED. Thank you, Mr. Chairman.

Again, Mr. Secretary, thank you so much for your testimony

today. Also thank you because Newport, Rhode Island, was one of

those grantees for a HOPE VI grant. That brings me back to the

whole issue of HOPE VI.

You have said it is a worthwhile program. My understanding is

that your Department had to make some difficult decisions and

turn down some very worthy requests. So the need is still out

there. I wonder again why this program that has demonstrated

success is being zero-funded?

Secretary MARTINEZ. Well, we have a situation where the pro- gram is up for reauthorization. We have about $2.5 billion that still

remains unexpended, another billion that will be coming through

the next two cycles, the ones that your area in Rhode Island is benefiting from, and then still next year to come.

We have only had 14 out of 165 projects that have been com- pleted to date. More than half, as I said, of the $4.5 billion that

have been allocated remain unexpended.

So, we still see that, although it has great promise, the promise

has yet to be fulfilled. And that in a difficult budget cycle, in a time

when we had to make difficult choices, we also felt like we should

take a moment to look at what should be the future of a program

like this and where we should take it into future years in terms

of dealing with the distressed public housing of America.

I know that there continue to be needs. There is no question but

that is true.

It was established in 1992. It was supposed to demolish 86,000.

We have more than funded that, and then some. So it just seems

to me that it is one of those programs that had a beginning, a middle, and now this is the end of it, and we should think together

about how we approach it into the future.

Senator REED. One of the concerns I have is that there doesn’t

seem to be anything that will follow on, and particularly when it

comes into the context of the public housing authorities with their

significant backlog in repairs that they have to do, let alone this

type of innovative mixed-use, mixed-income housing that was part

of HOPE VI. Was there any thought to taking the HOPE VI funds

and simply putting them back into the backlog for public housing

repairs?

14

Secretary MARTINEZ. No, sir, that was not considered.

Senator REED. Well, again, it just seems that we had a program,

HOPE VI, that was operating effectively. Even though the money

was rolling out slowly, the projects were worthy and the vision was

good. And now, we have not simply shifted funds to another approach, we have just taken the money off the table.

Let me pick up another issue with respect to public housing, Mr.

Secretary. And that is, I wrote, along with many colleagues, to you

urging HUD to restore some of the funding to PHA’s lost because

of the $250 million shortfall in the operating fund. At the time of

the letter, I understand that you did not want to increase the

PHA’s allocations above 70 percent of their needs until the fiscal

year 2003 bill was complete, the appropriations bill, and funding

was assured. Now that we have passed the bill a few weeks ago,

have you increased the share of funding available to PHA’s?

Secretary MARTINEZ. Yes, sir, we have. We are grateful that the

Congress allowed us to maneuver the situation to a point where we

were able to do that. And so, we have been able to fund, or will

be in the process of funding what we believe will be very close to

a 90 percent allocation to all public housing entities that are in line

for those funding levels.

So the initial assessment was based on the status of the budget

situation. But clearly, we now are able to forecast and confidently

predict that we will fund approximately 90 percent, give or take,

in that range.

As you understand, this was a long-term fiscal deficiency in the

Department that we felt was necessary to try to correct.

And in doing so, we fell into a shortfall problem. But the funding

level at a 90 percent level is not dramatically atypical if you look

at a 10-year history of public housing funding from what has occurred over a period of time. Some years it has been 100 percent.

The exception rather than the rule has been 100 percent. Most

years, it has been somewhere between 90 and 100 percent funding.

Senator REED. Are we going to have this same problem this coming year, Mr. Secretary?

Secretary MARTINEZ. No, sir. In fiscal year 2004, we will not see

that problem occur and, in fact, part of what I am very pleased to

be able to report to you is that we have fixed the problem that had

been carried over for a number of years and we have taken care

of it. I do not believe that we will see this problem arise into the

future.

Senator REED. What level do you anticipate funding public housing authorities, the operating subsidy?

Secretary MARTINEZ. For the 2004 fiscal year, we anticipate 100

percent funding.

Senator SARBANES. When are you going to the 90 percent?

Secretary MARTINEZ. That will be for the 2003 fiscal year.

Senator SARBANES. Yes, but when are you going to do it?

Secretary MARTINEZ. Within 4 weeks, I am told.

Senator REED. My time has expired.

Senator ALLARD. Senator Crapo.

Senator CRAPO. I will pass at this point, Mr. Chairman.

Senator ALLARD. Senator Corzine.

Senator CORZINE. Thank you.

15

First of all, Mr. Secretary, I appreciate your testimony. I want

to reiterate the questions that my colleague from Rhode Island

spoke to with regard to HOPE VI. This has been an extraordinarily

successful program, I think by the assessment of HUD, and outside

objective analysts about changing the lives of individuals that are

associated with these projects.

I think you are familiar with the lowering of poverty rates, unemployment rates, people off welfare, all those things that would

be objective standards of quality of a program.

And it is hard for me to understand why we have something that

is working as well as this, particularly in the context of moving

away from distressed public housing. I feel a little bit like I did last

year about the public housing drug programs.

I hope that we are not cancelling programs that a lot of people

feel have had great success, zeroing-out programs. I know that you

are working through this. I just want to be on record that this

HOPE VI effort is something that I think, on a bipartisan basis—

as a matter of fact, your own language in most testimony over the

last period of time that you have been the Secretary, has been very

supportive of this. And this seems inconsistent with many of those

remarks.

Second, on the Drug Elimination Program, last year, we made a

very substantial argument that the money that was being zeroedout of that program was going to be made available in other areas

through expenditures. Can you bring us up to date whether that

is actually taking place, and how it is taking place?

Secretary MARTINEZ. What we have done is allow the housing authorities to utilize the current and ongoing operating subsidy that

they receive. It was increased by $250 million, almost 100 percent

of the amount that was in the Drug Elimination Program.

We have allowed them to utilize that subsidy money for those

kinds of programs that they were doing before in the drug elimination arena if they were good and successful programs.

Senator CORZINE. Have you taken surveys to the local public

housing authorities to address whether the money is being used in

those ways or in other ways to assure that the purposes for which

I think many people had argued on both sides of the aisle that

the Drug Elimination Program was positive for, there were some

complaints about specific activities—gun registration programs

and things.

Secretary MARTINEZ. Right. Local authorities have the discretion

to utilize the funds as they see fit. We do not survey their utilization of it, but it is available to them if they make the decision to

utilize them for a drug program if they believe is successful.

In making their choices that they have to make, anybody has to

make, in deciding how to utilize funds, they are capable of doing

that if they wish to do so and it is purely a local decision.

Senator CORZINE. Do you think it is no longer an issue that HUD

should be addressing?

Secretary MARTINEZ. No. I believe it is important. Public safety

in public housing is an important issue. I believe it has its roots

and its solutions at the local level.

We do provide a fairly—well, one would argue whether it is adequate or not—but the levels of funding and the operating subsidies

16

that we provide to local public housing, which was increased to an

amount equal almost to the amount of the Drug Elimination Program, allows them to utilize it in that way if that is what they

choose to do.

We would also encourage public housing authorities if they have

a local public safety problem or a drug problem, that it is the responsibility of local mayors and local public safety agencies to not

disregard public housing residents as something akin to secondclass citizens not deserving of public safety protection and not

deserving of other local programs that do drug elimination or

whatever the program may be.

So, I think a concerted effort working with local communities is

the way to approach the problems that residents of public housing

may be affected with.

I think there is too much of a segregating effort in any community that has a substantial amount of public housing. I think those

people need to be integrated into the mainstream of life of their

communities.

And people who live in public housing should have every right

to police protection that every other citizen in that community has.

Senator CORZINE. Not at this point, but after the hearing, I won- der if I could get some specifics about how that $250 million that

you suggested was being spent on programs that were the same,

actually occurred.

Secretary MARTINEZ. I would be happy to provide that.

Senator CORZINE. We had a hard time piecing that together.

Are you familiar with the Ernst & Young discussion with regard

to the dividend tax cut proposal that the President has put down

and its potential for causing a 35 percent drop or so in the number

of affordable rental units?

Secretary MARTINEZ. I am aware that the Ernst & Young report

describes those kinds of figures and reaches those conclusions.

Senator CORZINE. And also potentially undermines the President’s own single-family tax credit proposal.

Secretary MARTINEZ. I know that those are the conclusions of the

Ernst & Young report.

Senator ALLARD. The Senator’s time is expiring.

Senator CORZINE. Have you had time to study and see whether

you have different views or different comments on it?

Secretary MARTINEZ. Senator, I have looked at the report and not

thoroughly studied it yet because I just received it a couple of days

ago. But in fact, those analyses of that report would have to come

from the Department of the Treasury, who really does tax policy.

At HUD, we do not do tax policy. So in terms of dealing with the

specifics of the report and the issues that it raises, I believe even

in those areas where it deals with housing, that Treasury would be

the better place to have a comprehensive response to the specifics

of the tax policy.

I do believe that it is the position of the Administration that the

impact described in that report is greater by that report’s judgment

than those that the Department of the Treasury would forecast in

terms of the impact on housing.

Senator CORZINE. We will come back.

Senator ALLARD. Thank you, Senator.

17

I am going to be fairly tight on the time because I want to give

everybody an opportunity to ask one question. We all have a lot of

committees going on at the same time. Then we will have another

round of questioning and you can come back if you want.

Senator Crapo, you passed. Do you have another question that

you want to bring forward?

Senator CRAPO. I would like to ask some questions at this point

if I could, Mr. Chairman.

Senator ALLARD. Go ahead.

Senator CRAPO. Thank you, Mr. Chairman, and Mr. Secretary, I

appreciate your being here with us today.

I too have some concerns about the budget. There has been a lot

of discussion already with regard to the HOPE VI program and the

fact that it has not been funded. But I am concerned about HUD’s

responsiveness to the Congress and in particular, some of the other

programs as well that have been zeroed-out.

For example, one of the concerns that is very important to me

is the Rural Housing and Economic Development Program that is

scheduled to have no funding at all in the Fiscal Year 2004 Budget.

I would like to ask you to explain to me why that program is not

receiving the funding that it has received in the past. And if we

have time, I want to go on to the Brownfields issue as well.

Secretary MARTINEZ. In regards to the rural housing program,

Senator, every year that I have been at HUD, and I think even perhaps from years before that, it has been the judgment of the Office

of Management and Budget that it is a program that belongs in the

Department of Agriculture and not at HUD. And so, they consistently zero it out in the budget cycle. Congress consistently funds

it and we move on.

I met with Senator Bond a few days ago and he is particularly

concerned about that as well. I understand your concerns. It is just

a matter of basic policy judgments that are made by the Administration that it is a program that should be better managed from

the Department of Agriculture.

Senator CRAPO. Did the Department propose funding for this in

the Agriculture budget, though?

Secretary MARTINEZ. I am not sure if that is the case or not. I

am sorry. I cannot answer that.

Senator CRAPO. You can see the concern there.

Secretary MARTINEZ. Sure.

Senator CRAPO. If it is zeroed-out in HUD’s budget, and if it is

not put into the Agriculture budget, then the Administration is

basically proposing to take it out.

I do believe I agree with Senator Bond, and I suspect many of

the other Senators, that this is a very critical part of our housing

need in this country. Idaho, for example, has a tremendous need

for rural housing support. I would encourage you to reevaluate

whether to zero-out that budget.

What about the Brownfields Redevelopment Program? It also has

been zeroed-out.

Secretary MARTINEZ. The program is funded in the EPA budget.

That has been transferred over to the EPA and it was funded in

the EPA budget. It was felt that it should be consolidated in one

place for better management of the program, with the funding all

18

in one location, rather than have some at HUD and some at the

EPA. But that is funded in the EPA budget.

Senator CRAPO. Do you know whether the levels of funding were

equal as they transferred over from HUD?

Secretary MARTINEZ. Yes.

Senator SARBANES. On Brownfields?

Secretary MARTINEZ. On Brownfields. It is a $10 million increase.

It is a drop from $25. So, I was wrong on that. I thought it was

at the same level, but it apparently is only at the $10 million level.

Senator CRAPO. So it was at $25 million and now it is down to

$10 and transferred to the EPA.

Secretary MARTINEZ. That is correct.

Senator CRAPO. Well, I will conclude my questioning with that.

It is just that I am concerned that some of the important priorities

that Congress is setting are not being addressed in the budget.

I am sure we will have opportunities to address this at a further

point. But I really would encourage you to go back and take another look at the Rural Housing Economic and Development Program because that is a critical program to States—I think every

State has rural areas, but particularly a State like Idaho.

Senator ALLARD. Senator Dole.

Senator DOLE. Mr. Secretary, let me repeat that from all I have

heard and read, you are doing an excellent job in heading the Department. However, the challenges that you have faced at HUD, I

know, have been daunting and it is hard for some to gauge the

quality of the work that you and your team bring to the table with

an agency that has had so many fundamental problems.

Clearly, the General Accounting Office, the HUD Inspector General have acknowledged the improvements that you have instituted

in many areas where there have been issues that have plagued

HUD for some time. According to the GAO, HUD has designated

programmatic and financial management information systems as

one of the Department’s major management challenges.

Many of the problems that HUD seems to be facing right now

and struggling with seem to be caused by inadequate information

technology systems. For instance, the issue of the operating subsidy

shortfall announced in January was attributed to an internal financial management system failure.

According to budget documents, $300 million has been spent in

each of the last 3 years for information technology. That is $900

million. Can you tell us if this $900 million has really moved us

closer to resolving these problems? And how much more do you estimate would be needed to fix the problems?

Secretary MARTINEZ. Senator, thank you for your comments.

I think we have made very significant progress in information

technologies at HUD. I must say that I believe that pattern was

begun even prior to my arrival at HUD. But it is something that

has been dramatically different from the situation that existed just

a few years ago.

I believe the funding that has been provided by the Congress for

us to address that issue has, in fact, provided us the opportunity

to fix something like the operating subsidy shortfall in the public

housing program where we do not think that we will have that

problem in the future ever again.

19

We believe the commitment that has been made to adequately

fund those issues at HUD is paying off and making a difference.

In terms of future funding needs, I am not prepared to go beyond

what the current budget provides. But over the next 5 years, we

are talking about $380 million. We also are talking about modernization efforts that will reduce the cost in 2007 and 2008. I believe

that the levels you suggest will continue for the next 5 years. But

we do believe that in 2007 and 2008, we will begin to reduce the

cost of continuing our IT upgrading.

I will be glad to provide you a little more detailed information

in a written question if you would like.

Senator DOLE. Fine. Thank you. I would appreciate that.

According to the January 2003 GAO Report, the Department is

seeking to further reduce the number of noncompliant computer

systems from 17 to 14 in this fiscal year 2003, and then you would

hope to be fully compliant with Federal financial standards, all systems compliant by 2006. Are you confident that that 2006 goal is

realizable? What steps are being taken to reach that goal? Who will

be accountable?

Secretary MARTINEZ. Our management people are very much focused on continuing to improve those financial systems. We cannot

assimilate them all into one system. We are always going to have

to have a multiplicity of systems because of the very different tasks

that we accomplish at HUD, with FHA being in one area and very

different issues as it relates to maybe personnel, payroll types of

systems.

So, necessarily, we are going to have different systems.

But we believe that the consolidation that has taken place has

been very productive, very positive. It has allowed us to meet now

audits on a recurring basis that have had no serious deficiencies

or flaws. That is 2 years running, which I am very proud to see

because I do not think that that had ever occurred in recent years

at HUD.

So those kinds of progress that we have seen in the past, I think

can continue and enhance.

I would love to have our CFO, Angela Antonelli, who is here, and

probably very anxious to answer these questions more fully than

I am able to, and Vickers Meadows also, the Assistant Secretary

for Administration, to more fully brief you on some of the details

of these efforts because I think we are doing really some very good

things and making substantial progress in what I think, by anyone’s admission, it would be systemic problems at HUD for many

years, that we are really putting behind this.

Senator DOLE. Yes, I understand that.

Senator ALLARD. Senator Dole, I think that is a good point that

you bring up. I think in our Subcommittee on Housing and Transportation, it is something that we need to follow up with. I would

also be interested in getting a briefing on this as we move forward

because we do have that 2006 deadline.

Senator DOLE. Right. Thank you.

Senator ALLARD. Senator Sununu, do you have a statement?

20

COMMENTS OF SENATOR JOHN E. SUNUNU

Senator SUNUNU. I do not have a statement. I have just a few

questions at the appropriate time.

Senator ALLARD. We will put it there.

Senator Sarbanes.

Senator SARBANES. Welcome, Mr. Secretary.

Secretary MARTINEZ. Senator.

Senator SARBANES. Mr. Secretary, I like you very much, personally. I wanted to say that right at the outset.

[Laughter.]

Secretary MARTINEZ. This is not off to a good start, Senator.

[Laughter.]

Senator SARBANES. I still remember your confirmation hearing

when we discussed the work that you had done in Orlando, and my

perception of a commitment you had to help people who weren’t

able to make it, and a genuine concern about affordable housing.

But somehow, in the internal workings of the Administration, you

are really getting jammed into the corner in terms of the resources

you have with which to address the challenges that confront you.

It all came home to me as I looked over this budget request for

the fiscal year we are going into. I am quite concerned about a

number of areas which I hope to explore with you this morning.

Now, presumably, the people lined up behind you there in the

seats are supporting you to the hilt. I would certainly hope so.

However, I can hardly say that about the OMB. And there is always a struggle and tension between the Department and the

OMB, as we well know.

But I do not see how HUD is going to do its job given the erosion

that is taking place in your budget. And that becomes doubly significant when we realize that so much of what is done in housing

and community development requires a partnership between your

Department, the State governments, the local governments, the

nonprofit sector, and the private for-profit sector, because a lot of

the programs have been arranged in a way that all of these interests interrelate.

So the end result is often dependent on HUD funding, the HUD

catalyst or the HUD glue to hold this all together. And these outside groups and governments really have to look to HUD to provide

an infusion of funding, often at the outset, but certainly as the

process moves along, in order to ensure success.

I want to explore with you some of these problems. I may have

to use another round in order to do it, although I hope that some

of this time will get attributed to an opening statement which I did

not give.

It is our perception of the budget that the Section 8 vouchers are

not being fully funded and that we are actually not going to be able

to fund all vouchers in use.

Public housing is again taking a hit. The capital fund for repair

of public housing units is being cut. And yet, there is a huge backlog in repairs. We have an inventory of public housing out there,

and if it is maintained and repaired, it can continue to provide affordable housing.

Senator Crapo raised the issue about the rural housing, which

seems to be going down the drain as best I can understand the

21

budgets. Although we are told to go look in somebody else’s budget

for rural housing funding, thus far, we have not been able to find

it there.

It is a little bit like this EPA problem that just came up a minute

ago. And while it is not a big amount of money, it is important.

For example, you are getting out of the business of Brownfields

redevelopment. You tell us the EPA is going to do this, but HUD

was doing it at $25 million and they are going to do it at $10 million a year, which is more than a 50 percent cut.

Others have talked about the HOPE VI program. Actually, I

want to focus on that for just a moment. You approved yesterday,

and we are most appreciative of it, the application from Frederick,

Maryland, for a HOPE VI project.

Now this I think is a perfect example of how some HUD money

can produce, once it works its way out of the system, a very significant infusion of resources in order to address the lack of affordable

housing.

In this instance, we are seeking to transform two severely distressed public housing developments and their surrounding neighborhoods, the city, county, State, and private sectors all committed

significant resources. The city contributed several off-site parcels of

land to the project to build a community center, have a recreational

facility and park, and fund infrastructure improvements.

They joined with the county in a tax increment financing district

to support economic development and job opportunities.

The State committed tax credits to help raise private equity. It

is calculated that a $16 million HOPE VI grant, and you approved

$15 million, so I do not quarrel with you on that, but that that

money will leverage an additional $55 million—$55 million—in

non-Federal and private funds.

So, you put in $15 million. We are going to get another $55 million from other sources. We are going to put $70 million into this

community.

The proposal in the end was carefully worked out, had the support of the public housing residents that are in these distressed

projects. It has the support of Interfaith Housing of Western Maryland, which is a very highly regarded nonprofit that works as a

housing advocate. It has the support of the NAACP—it was all very

carefully done.

This project will construct low-density public housing, homeownership properties, and market-rate rental units. Two-thirds of

the current households will be able to remain in or return to the

site. And in addition, provisions have been made so that the remaining tenants will be placed in existing public housing or provided with other units.

This project has been very carefully put together and I think that

is why it merited your approval. But it seems to me a dramatic

example of how the HOPE VI program can work.

Now, I listened as the others were asking you questions about

this program and you said, well, we have a problem with relocation

of tenants. If we have a problem, we should solve it. It was solved

in this instance, apparently, and solved very well. It has also been

solved in other successful HOPE VI projects.

22

You say that it takes a long time for the projects to be completed—well, that may be true. Sometimes it takes a while to put

together this kind of community support and this kind of package.

But there is example after example of where this program works

very well. HOPE VI is getting rid of severely distressed housing.

Housing that is depressing the neighborhood. We are drawing a lot

of resources in. We marshal community support.

I do not quarrel with you that there are certain problems in administering the program. But it seems to me that it represents a

very important initiative. And the way to go at it is not to simply

drop the program and the initiative, but to tighten it up or improve

it in terms of its functioning so you get the kind of results we see

in communities around the country.

So on that one, let me ask why are we letting that program go

by the boards? It is a tool that has been used and can be used to

address these severely distressed neighborhoods where there is an

absolute depressant effect on many of our urban areas and even

not so urban areas across the country.

Secretary MARTINEZ. Senator, I understand that the program is

not unsuccessful, and my comments were not directed at trying to

suggest that it is not meritorious.

First of all, the backlog in the output was only to suggest to you

that there is still a lot to be done in HOPE VI, that the time that

it takes for these projects to get off the ground will still allow an

awful lot of what you are just describing to take place over the next

several years, with still two more rounds currently in the budget

cycle that will take place as we go forward. That is a timeframe

that we should utilize to see how we can continue to develop better

ideas and other ideas of how something like a HOPE VI can continue to work.

It does take a long time for the projects to come together. The

displacement of people, which was not an issue in Frederick, Maryland, because Frederick, Maryland, is not a large urban center. It

is not the same experience that they had in Chicago, for instance,

where there have been multiplicities of lawsuits from tenant

groups or so-called those self-appointed representatives of tenants.

That is not to say it is a bad program. That is only to say that

in a very difficult budget cycle, a program that was up for reauthorization, that it had concluded—as I said, it began in 1992 and

it was to run for 10 years. This year, it was up for the reauthorization cycle.

It seemed to us that in making difficult choices, this was a place

where we could begin to think anew and begin to think of how we

could go forward with some program that would be patterned after

the HOPE VI, but maybe yet even with better and more improved

ideas.

Senator SARBANES. Well, what is that program?

Secretary MARTINEZ. I am sorry?

Senator SARBANES. What is that program?

Secretary MARTINEZ. Senator, we do not have that to present to

you today.

Senator SARBANES. So, you are going to end the HOPE VI program that was held out there to eliminate the distressed housing,

but there is nothing to replace it.

23

Secretary MARTINEZ. Not today.

Senator SARBANES. At least at this point. Is that correct?

Secretary MARTINEZ. That is correct.

Senator SARBANES. Do you advise your children to quit one job

before they get another? As a matter of advice, would you say, or

do you usually counsel them to make sure that they have another

job lined up before they leave the one they have?

Secretary MARTINEZ. They usually do not leave a job with 50 percent of the funding that they were given for the prior job still

unspent. They usually have spent all their money by the time the

job is concluded.

Senator SARBANES. Well, as Jack Reed pointed out, you have all

these projects all over the country, many of them meritorious. It is

not as though you are lacking applicants with some merit. You can

cite me an example of Chicago that has been tied up, but you have

a lot of other places that are coming in with meritorious projects

that you could move on.

Secretary MARTINEZ. I do not think there is any question, Senator Sarbanes, that if we did not have choices to make that were

difficult in this budget cycle, that HOPE VI would not have been

where it is today.

Senator ALLARD. Senator Sarbanes—12 minutes. I do not mean

to be rude. I was going to call on Senator Carper, but we may have

lost him. Let me go ahead and call on Senator Sununu and we will

come back. I am sorry.

Senator SUNUNU. Thank you, Mr. Chairman.

I want to pick up briefly on that point, just so that I understand

the financial ramifications and that I understand exactly where we

are on HOPE VI.

Mr. Secretary, what are the unobligated balances for HOPE VI,

the money that has been appropriated, but not obligated for the improvement revitalization of public housing demolition and identifying new units?

Secretary MARTINEZ. We have 14 projects of the 165 that have

been completed. More than 50 percent, or $2.5 billion, remains

unspent.

Senator SUNUNU. $2.5 billion.

Secretary MARTINEZ. Correct.

Senator SUNUNU. Is there any money that is going to be added

to that over the next couple of years?

Secretary MARTINEZ. About another billion dollars will be added

to that.

Senator SUNUNU. I think that is important because the suggestion that, suddenly, with the absence of a new appropriation in

2004, and we do not know if that is going to happen or not, but

the suggestion of the absence of an appropriation in 2004 prevents

us from being able to transition to a different program, prevents us

from being able to continue part of the mission of HOPE VI, I think

is inaccurate.

Senator SARBANES. Would you yield so that we can be very clear

on that point? Is that $2.5 billion money that has been committed for projects that have been approved and not yet spent? Or is that $2.5 billion

you have on hand that could be used for newly approved projects?

24

Secretary MARTINEZ. There is $2.5 billion that has been approved

but unspent.

Senator SARBANES. That funding has been committed to projects.

Secretary MARTINEZ. Committed but unspent.

Senator SARBANES. Yes.

Senator SUNUNU. It has all been obligated?

Senator ALLARD. They are obligated dollars. Is that correct, the

$2.5 billion?

Secretary MARTINEZ. That is correct. They are obligated dollars.

There is $500 million coming in the 2003 budget cycle that still is

not committed. We have just committed half a billion dollars this

week, and there is another half billion yet uncommitted. There is

$2.5 billion committed, but unspent.

Senator SARBANES. So if one of Senator Sununu’s communities is

putting together a HOPE VI application now, the only money available that they can compete for is the $500 million that is in this

year’s budget. Is that correct?

Secretary MARTINEZ. In 2003, yes. In the 2003 budget. Now an

additional source of funding may be if some community, by failure

to act over a period of time, the monies might be recaptured.

Senator SARBANES. I thank the Senator for yielding, but I think

there was an impression being given that there was $2.5 billion

available within the Department to commit for projects.

Senator SUNUNU. My first point is that there is $3.5 billion available and your point is that there—$3.5 billion in the pipeline and

$500 million, as you point out, is uncommitted, completely uncommitted at that point, so it is still available for competition.

The second point is that there is a legislative proposal, and I do

not know that it is a good one or a bad one, but it is a legislative

proposal, for the PHRI, the revitalization initiative that would involve access to private financing.

Again, I do not know if this is a good proposal or a bad proposal.

It is a new proposal, and it is intended to provide access to private

financing and encourage public/private partnerships to revitalize

public housing.

I just think that those points are important to make, especially

when, as was noted by others today, there are severe problems,

management problems, backlog problems, and within the HOPE VI

program.

Finally, I know and I understand, and I want everyone here to

understand, that I recognize the value that HOPE VI has provided

in a number of communities. And that shouldn’t surprise anyone

in the least. Even if it is a poorly managed, poorly designed, poorly

constructed, and poorly implemented program, if you or I were

spending $500 million a year, we had darn well better be able to

show some progress, some families, some communities, some areas

of the country that have benefited by that $500 million.

That doesn’t mean that it is a good program or not a good program. It just means that we spent a tremendous amount of money.

And the real questions we need to answer, and that I think the

Secretary and his staff need to answer, is why is this not the best

use of $500 million to revitalize distressed areas, to demolish programs, to encourage private financing?

25

That is the burden that is on you and I would hope we would

answer.

But it is not just a question of finding some community where

we have spent $10 million or $50 million or $100 million because,

unfortunately, even the most poorly managed program is going to

provide some positive results somewhere, even if the money has

been spent inefficiently.

I also want to comment about the initiatives that were mentioned earlier, the programs that were eliminated in the budget in

addition to HOPE VI, the Section 8 Loan Guarantees, Brownfields

was mentioned, the Empowerment Zones are another example.

I simply want to offer the following observation.

I do not know whether all of these proposals or requests to terminate the programs are appropriate or not. I will comment about

one, and that is Brownfields.

My intuition is that the Brownfields initiative belongs in the

EPA. We passed good bipartisan Brownfields legislation last year.

It increases funding for Brownfields initiatives to the highest level

ever across the country. Yes, we have had a small Brownfields initiative within HUD. I think it is fair to argue that that Brownfields

program is better managed, that those dollars will do more for

more people and more communities if managed under the EPA.

Now that is my intuition. I do not know that that is necessarily

right or wrong. But I do respect the fact that your proposals in

these areas are designed to, at least, engage us in a debate and a

discussion as to whether or not these programs are being operated

and run in the right place and, frankly, whether or not they are

the right programs to have today.

We shouldn’t just keep appropriating money to the same programs because they are the programs that we have already run,

and if we expect you to do a better job, if we expect to meet emerging needs and housing needs better, I would hope that you are at

least engaging us in some debate and discussion about structuring

programs, creating new programs and, ultimately, eliminating programs that aren’t the best use of taxpayers’ money.

An issue was raised earlier that I think you addressed on the

problems in the operating subsidy, $250 million.

It is my understanding that your response was that you intend

to fund at 90 percent of the operating subsidy for 2003, and that

you intend to avoid this problem in 2004. My question is, can you

be more specific as to how you intend to avoid this problem again

in 2004?

Secretary MARTINEZ. We became aware of a shortfall in the operating subsidy in the year 2002. We at that time informed the OMB

and the Congress and the public housing industry. We believe that

our management has now been able to put in place the types of

oversight and the types of systems that will prevent a shortfall

from occurring in the future. And we believe that we have solved

this potential problem from ever occurring again.

I believe that by the management changes that we made and the

systems that are now in place, that we have corrected what has

been a long-term problem that was creating, frankly, a very bad accounting practice that was simply taking $250 million from the

26

next year’s money, just to cover the shortfall, and it was essentially

deferring the problem to yet the next year.

Senator SUNUNU. So the funding levels you are requesting in this

budget submission, coupled with the management changes that you

describe, are enough to give you confidence that this problem will

be entirely avoided in fiscal year 2004?

Secretary MARTINEZ. That is my confident answer to you.

Senator SUNUNU. Final question. Senator Dole mentioned the information technology initiatives. I appreciate the amount of money

that has been put forward to try to deal with improvements in information technology.

One problem that I had become aware of and done some work

on in the House when I was on the Budget Committee was the

issue of overpayments in the Section 8 program that is the result

of the lack of systems in place to confirm or to verify applicants’

income.

The amount of overpayments at various points over the last 4 or 5 years have been anywhere from $500 billion to $900 billion a

year. It would seem to me that this is an area where better management of information systems can make an enormous difference

in order to make sure that you are not providing an overpayment.

That gives you more money obviously to meet the Section 8 and the

voucher needs that are out there, that we all know are out there.

To what extent have management changes or the application of

information technology enabled you to address the income verification and Section 8 overpayments?

Secretary MARTINEZ. Senator, there has been an overpayment

and underpayment issue. It has been an inaccurate payment problem, so it has been on both ends of the balance sheet. We have

worked very diligently to try to correct those problems. I am not

at liberty to give you the specific details.

[Pause.]

I am going to ask Michael Liu, if I could, my Assistant Secretary

for Public and Indian Housing, to give you a more specific answer

on that.

Senator SUNUNU. Thank you.

Mr. LIU. Senator, Secretary Martinez has put together a special

team which has been in operation now for over a year at HUD to

specifically address this important issue. We have progressed on a

number of fronts.

Number one, we are in the process of developing a better system

to assist our housing agencies both in public housing and Section

8, where they can deal with the up-front income verification issue

of applicants to the programs. That seems to be the key problem

that we have.

Number two, we are putting out a notice on the Section 8 and

public housing side that will require public housing agencies to use

State data on wage and income to compare with their information

that they receive from applicants where that State information is

available.

Number three, we are also engaging with the States around the

country on getting agreements with them to share their information on wage and new-hire information with HUD, and we are

going to distribute that to the housing agencies for their view.

27

Finally, we have gone out and provided intensive reviews of the

largest public housing agencies and Section 8 agencies in the country to get a baseline of what their issues are, what their problems

are, and are providing them technical assistance.

We have set a goal that by the end of fiscal year 2003, that we

will have reduced our error rate by 15 percent. And further, by

2005, we would have reduced our problem by at least half of what

it has been.

So, we have been very methodical and very focused on this issue.

Senator SUNUNU. Thank you very much.

Senator ALLARD. Now, I want to call on Senator Carper, but before I do, we had a discussion about the dollars being transferred

to the Department of Agriculture. I had my staff look it up. There

is $25 million in rural housing in your budget, Mr. Secretary. We

have noted that there was an increase on the agriculture business

for rural housing of $500 million. That is a 25 percent increase in

that part of their budget.

So it sounds to me like in that particular instance, they have

more than picked up the rural housing that was decreased in your

Department over in the Department of Ag.

Secretary MARTINEZ. If I may add another answer to that, sir. In

the area of Brownfields, I am also informed that the Brownfields,

as Senator Sununu pointed out, under the EPA program, in this

Administration, has increased from $100 million to $210 million.

So while HUD had a very small program and maybe the transfer

was only $10 million, overall, the commitment, the budgetary commitment to Brownfields redevelopment has gone from $100 million

to $210 million.

Senator ALLARD. Senator Carper.

Senator CARPER. Thank you, Mr. Chairman.

Before I finish, Mr. Secretary, and I am not going to ask you to

do this initially, but you may be thinking about it, I want you to

share with us some of the Administration’s proposals as they pertain to increasing the opportunity for homeownership, which is one

of my passions and I understand it is one that you and the President share, and I just want to better understand how your budget

speaks to that concern.

Others have already raised some of the questions that I had.

We have one HOPE VI project in the State of Delaware. It has

been a slow start-up. The project was approved about 3 years ago

when I was Governor. Finally, we broke ground on it last fall and

we hope that significant progress will be made on the project this

year and it will be a good thing for Wilmington and for the families

that are able to be there.

This is probably not a good analogy, but I am going to use the

analogy of Superfund.

We toiled for years with Superfund, unhappy with how slow we

were and how slow the process was in cleaning up Superfund sites.

And finally, what seemed like 5 or 6 years, we figured out how to

start cleaning up sites and have made a whole lot of progress in

the last decade.

There is a lot still to go, but maybe part of what is going on here

with HOPE VI is that it takes us and the local communities a

while to get it, to figure out how to use HOPE VI and to move it

28

along. As I understand it, HUD’s own goal for relocating residents

I guess in HOPE VI was exceeded I think in the report sent last

December, exceeded by about 5 percent.

I am told that HUD’s own goal for constructing 5,500 units in

2002 was actually exceeded by 20 percent or by an additional 1,000

units. HUD’s own goal of having 5,000 units occupied in 2002 was

actually exceeded by a little more than 23 percent, with over 6,100

units occupied. I think those numbers were given to us by your

own people.

So, you heard from a lot of other people here about HOPE VI.

I believe it is a project or program that is worth preserving. And

I am told that the Urban Institute is conducting a rather large

study of HOPE VI to get recommendations for the continuation of

the program or its improvement. I do not believe the results of that

study are in, and I would just urge that we wait on that and to

learn from that study.

Any comment?

Secretary MARTINEZ. No. I think that is an excellent idea. I am

not here to trash HOPE VI, by the way.

Senator CARPER. I noticed.

Secretary MARTINEZ. I know that Senator Corzine remembers

well my comments on it. It is a great joy to travel to communities

and see what used to be, and see the pictures of the old and then

the new and the revitalized areas of many of our urban centers.

I just think that we need to engage in an energetic debate about

what it should be and how we should think beyond the 1992 box

that began HOPE VI, how we might get it to more communities

around the country rather than have it be so focused on maybe

some of the same communities, how we deal with people who might

have moved out of a project—we only know 14 of them have been

completed out of 165. So, therefore, there is a whole lot of people

who got moved to somewhere else, told that they will be able to

move back, who still haven’t moved back to anything.

There are things about it that we can think through and improve. I am willing for us to look at that Urban Institute report.

I am sure it will have a lot of credibility as to how we might do

this even better.

I do not mean to monopolize your time, but thank you.

Senator CARPER. Well, thank you. I used to hear a phrase a lot—

perhaps you did too—if it ain’t broke, don’t fix it. I do not like that

little saying. We changed that in Delaware to, if it is not perfect,

make it better. And that might apply here as well.

Let me just refocus, if I can, on Section 8’s and block-granting

the voucher program.

I was involved, as a Governor through the National Governors

Association working with the Clinton Administration and Congress,

in taking the AFDC and block-granting it to create a different kind

of program that we called TANF, as you know—Temporary Assistance for Needy Families.

The States were initially reluctant to agree to take an entitlement program and to block grant it and say, that is it, in terms

of the funds that you are going to have for cash assistance for welfare in the future. And we ultimately did so because we believed

that there was going to be a drop-off in the number of families that

29

would be participating, that would need cash assistance over the

coming years.

It turns out that that is exactly what has happened. Nationwide,

the rolls for cash assistance are down by about half, even in the

midst of a recession that we are coming out of.

There is a difference between taking a block-grant approach to

AFDC and turning it into TANF. And I think taking this voucher

program, Section 8 rental assistance program, and block-granting

that, because I am not sure that the kind of caseload reduction that

we have seen in TANF is going to be replicated in Section 8.

I would just have us be mindful of that fact as we go forward

in this area. I do not think the block-grant approach anticipates

any changes in inflation, any decreases in caseload.

Any comments with respect to that analogy?

Secretary MARTINEZ. Yes, Senator. I would say that many of your

former colleagues and governors around the country are welcoming

that opportunity because of the positive experience with TANF. We

are calling this HANF because we believe it is a parallel program.

I am not sure I can speak to caseload reduction, but I can certainly speak to a couple of issues that I think would be much better

managed.

No one can suggest that for over a billion dollars a year to be

recaptured from housing money, that then gets allocated to perhaps other needs, it is a good thing for the needy families of America who need better housing.

I believe that by providing local and State governments with the

opportunity and flexibility to manage the program, and certainly

we will avoid that recapture issue.

I also find that a program that requires the rent levels to be adjusted out of Washington with a lot of paperwork and usually a 6

month delay, say a community all of a sudden bumps up against

a rent level where people cannot with a voucher go get a place to

rent because there is nothing on the marketplace.

They cannot just make that adjustment at the State level. They

have to come all the way to Washington, to HUD, a very inefficient

place, by the way, which we hope every day to make more efficient,

but yet not there. And it might take 5 or 6 months for the local

agency to then have that adjusted rent level.

So, I think, just on those two examples, this is a retail program

and it could be better managed at the State level with the same

commitment I heard—and I remember someone this morning made

the comment that over time, money would be lost from housing.

I think that it can be very clearly written into the legislation and

the enacting legislation that I would ensure that this money remain in housing. And I believe that that could happen.

I believe that Section 8, while it is a good program, it is broke.

I mean, that it is not working exactly great when we see the underutilization of vouchers. It really breaks my heart to think about

that money being recaptured and then not necessarily going—

where you know that there are so many places where people are

saying, we desperately need more vouchers, where other places,

they cannot use them.

Senator CARPER. Mr. Secretary, as we debate whether to go forward on this path, keep in mind the concerns that I raised, please.

30

And the other thing that I would ask is if we keep in mind

whether or not a block-grant structure may affect the willingness

on the part of landlords to participate in the program. There are

some concerns that they will not if we have a fragmented system

with 50 different programs out there. Would you take just a minute

on homeownership and tell me what is in the budget that really

speaks to that?

Secretary MARTINEZ. Yes, Senator. Thank you very much for the

opportunity.

We believe that the President very passionately believes in

homeownership as a key to reaching the American Dream for many

American families.

We have a commitment of $200 million to the American Dream

Downpayment Initiative which would provide, through the HOME

program, downpayment assistance to families for the first-time

homebuyers, obviously in the right income brackets, to buy their

first home.

In addition, a very important component of homeownership from what the Government can do is the $45 million in homeownership

training and education.

We believe that families need the counseling, particularly families that are immigrants to this country, speak English as a second

language, that they can use—and all poor families, really—the understanding of how to go about the home-buying process, how to

order their finances, how to fix their credit problems.

We also continue to fund SHOP, which provides homeownership

opportunities. The tax credit program that the President has in

this year’s budget for single-family construction would also enhance

the availability of affordable single-family housing in distressed

areas of our communities.

The second part of the program which is equally important is the

private-sector partnership. And in that arena, we have a very

strong partnership with Fannie Mae, with Freddie Mac, and with

the Nation’s mortgage banking community.

In addition to that, the homebuilders, the realtors, all of the people really in the home-buying and home-financing industry coming

together to offer partnership where now we have a large number

of partners working with us diligently to try to create 5.5 million

more homeowners through the next decade.

We have benchmarks in place. We will have a yearly report

which will come out in June to tell us how we have done in the

past year and ensure that this goal is not just a goal, but, in fact,

can be a reality.

Senator ALLARD. Senator Carper, your time is expired.

Senator CARPER. Thank you, sir.

Senator ALLARD. Now, I will turn it over to the Chairman.

Chairman SHELBY. Thank you, Senator Allard, for presiding. As

I told the Secretary earlier, we have been in an appropriation

shake-up of the subcommittees. The shake-up is okay.

[Laughter.]

I am glad to be here.

Mr. Secretary, in March 2000, the HUD Inspector General—I

know you were not there then—issued a report detailing the serious financial and managerial concerns that they have with Puerto

31

Rico’s Public Housing Administration. More than $21.8 million in

wasteful or fraudulent expenses were identified by the Inspector

General of HUD. In addition, the Inspector General found that the

Public Housing Administration was not complying with the Federal

procurement requirements. Schemes involving kickbacks and

fraudulent activities have led to the indictment of several public

housing employees there. That is a lot of money.

Where is HUD today in making a determination that Puerto

Rico’s Public Housing Administration should go into administrative

receivership and have HUD make decisions on behalf of the PHA?

If this is not under consideration, what other options exist? And

what, if any, progress has been made since the Inspector General’s

report—not our report, but your Inspector General’s report in 2002

regarding this? Has any effort been made—I know I am asking you

several questions here—to recover the $21.8 million in ineligible

expenses identified by the Inspector General? Do you want to bring

somebody else up?

Secretary MARTINEZ. Yes, sir. Michael Liu, Assistant Secretary

for Public and Indian Housing. Let me make a stab initially, and

then I might turn it over to him to complete the answer.

Chairman SHELBY. Yes, sir.

Secretary MARTINEZ. I just returned from Puerto Rico. I was

there last Thursday and Friday.

At the very beginning of my time at HUD, I met with Governor

Calderon of Puerto Rico, who was also a newly elected Governor.

We identified these as very serious problems that needed to be addressed. The first thing we addressed was the HOPE VI program

that they had there. They had an ongoing HOPE VI which was in

such a state of mismanagement and disarray, that we felt it necessary for HUD to take over the administration of that program.

We did so and we have now initiated that HOPE VI, which was

a construction project to be completed.

Chairman SHELBY. Has it changed a lot since you took it over?

Secretary MARTINEZ. It has changed dramatically. And frankly,

we are now considering turning it back over to the Puerto Rico

Housing Authority.

We have done a couple of other administrative things. I am going

to let Mr. Liu give you some details.

Chairman SHELBY. We would like that.

Secretary MARTINEZ. But I also want to tell you something very

innovative and positive that we did in Puerto Rico, which is that

we have just now for the first time on a pilot basis—Puerto Rico

is different from every other housing authority in America. It is a

commonwealth-wide housing authority administration. We now

have partnered with four municipalities in Puerto Rico to give

them management over their housing authorities at the very local

level, which we think will break up a lot of the issues and problems

that have chronically plagued the Puerto Rico Housing Authority.

We are going to do this with four cities on a pilot level. We may

expand it later.

The second thing, or the last thing I will say before I turn it over

to Mr. Liu, is that we, Senator, have the confidence that new management of the Puerto Rico Housing Authority and Mr. LaBoy, who

has come into being to direct that agency, is doing a very, very

32

good job. We have a great deal of confidence that the problems of

the past are not being repeated.

However, we do concern ourselves with that greatly. And I would

not have hesitated to put him under Federal receivership as I did

with the New Orleans Housing Authority when that was in a situation that we felt there was no other choice.

So, we did it in the case of New Orleans. We continue to work

with the government of Puerto Rico in a way that we felt would

get us to a better day. We think we are coming to that moment

now. And I will let Mr. Liu get into some of the details on the

issues that you raised.

Chairman SHELBY. Thank you.

Mr. LIU. Mr. Chairman, real quickly.

Chairman SHELBY. Identify yourself for the Reporter.

Mr. LIU. Yes, sir. Michael Liu, Assistant Secretary for Public and

Indian Housing.

Chairman SHELBY. Okay.

Mr. LIU. In regard to the monies that you have mentioned, a

good portion of that was tied to the HOPE VI, one of the HOPE

VI contracts that we had with a contractor there that the public

housing authority did. With the cooperation of this management of

the public housing authority, we pursued that individual, that firm,

to the last resort through the courts.

We lost.

In conjunction with our Inspector General, the Inspector General

has agreed that we have exhausted all possible courses of action

there. They have recommended and agreed that we dispense with

$12 million of that obligation. However, in return for $7 million

from the housing authority on the sale of a piece of property that

is in transaction right now.

In the other areas of procurement, we have worked very hard in

providing technical assistance and in monitoring their procurement

practices. As the Secretary mentioned, we now feel very firm that

they are on the right track.

Chairman SHELBY. Have you been working with the Inspector

General regarding the initial report 2 years ago, 3 years ago?

Mr. LIU. Yes, sir, we have been.

Chairman SHELBY. He is on top of things?

Mr. LIU. Yes, sir.

Chairman SHELBY. Okay.

Senator Reed.

Senator REED. Thank you very much, Mr. Chairman.

Mr. Secretary, let me associate myself with the remarks of Senator Carper about the Section 8 voucher program because I think

that the issue here is the ever rising cost of housing.

As I understand the current program, the reimbursement is

based on actual housing costs. And the danger in the block grant

is that the monies may not keep up with these rising costs of housing, leading the States to either cut back on the number of people

served or to somehow decrease the subsidy.

And as I look at the budget, the fiscal year appropriation for the Housing Certificate Fund was $17.09 billion and the President’s request is $17.058 billion. There is already a slight reduction from

what was appropriated last year.

33

If my numbers are right, I wonder how we are going to keep

up—I guess the basic question is, how are you going to ensure that

this block grant doesn’t result in less people being served than are

currently being served?

Secretary MARTINEZ. Senator, the block-grant proposal would

fund the precise number of units that are being funded today. It

would not fund a lesser number. It would just allow the States to

do the management of it in a more direct way. But it would not

be the intent to result in an immediate cut in the funding to Section 8 vouchers.

We have, Mr. Liu tells me, $700 million additional in the Section

8 voucher program. So, I just do not think that we anticipate a reduction in the funding levels.

Senator REED. I guess if the issue is management, of being efficient in terms of distributing the vouchers, identifying recipients,

that is one thing. But how do the States manage to increase housing costs without increased monies?

Secretary MARTINEZ. I suppose from time to time, the housing

costs would have to be accounted for in increases on the levels of

funding that they would receive from year-to-year. I do not think

they would be frozen in time. It would just be a management tool.

Senator REED. Well, I think, again, Senator Carper eloquently

described the concerns that he has and I share.

Secretary MARTINEZ. Senator, if I may.

Senator REED. Yes, Mr. Secretary.

Secretary MARTINEZ. I just think it would be an appropriate debate for us to have. I think it is an innovative way. I think it is

revolutionary. I think it will dramatically have many things that

would be positive. But we do keep in mind those things that you

mentioned and I hope we can continue to debate this topic.

Senator REED. One of the concerns I have is that if you look back

historically, GAO did a report when Congress block-granted social

programs in 1981 and found that almost every program faced huge

cuts in the following years in terms of their appropriations because

the block grant was easier to cut than individualized, specified, targeted programs.

Secretary MARTINEZ. Right.

Senator REED. So let me put that in context. And I agree with

you that this is something that we have to watch very carefully.

Let me turn for a moment again to the issue of public housing

operating funds. I might be confused and I would appreciate your

direction here.

The fiscal year 2003 appropriation bill was $3.57 billion. But $250 million of that I assume was used to the shortfall.

Secretary MARTINEZ. Correct.

Senator REED. So, effectively, we are going into 2003 with about

$3.327 billion to cover costs which we know are at least that much.

And the request this year is just for $3.574 billion.

It just seems to me that there is $250 million here that we pulled

from the 2003 budget to last year’s budget. And yet, we are not increasing the request by anything on the order of $250 million

extra.

Secretary MARTINEZ. We had a 1-year shortfall that was funded

by the—was it special defense appropriations?

34

[Pause.]

By the operating subsidy on this year, is being funded. We then,

going forward, will be able to function with that budget level because what we have done is fix the problem that was creating that

shortfall on a year-to-year basis.

I do not think we have a $250 million shortfall going forward like

we have had in the past.

Senator REED. Just one final question, Mr. Secretary. You have

talked about moving the Brownfields program from your Department to EPA. My assumption is that EPA’s responsibility on

Brownfields are remediation of the site, State compliance, not housing directly. When those funds are going over to EPA, does EPA

now have the responsibility and the obligation to directly use these

resources for residential housing?

Secretary MARTINEZ. Sir, our program did not do residential

housing, either. It was economic development in Brownfields areas.

So it was really for economic development opportunities. The EPA

will do the same thing.

Senator REED. So, they will do the same thing.

Secretary MARTINEZ. Economic development.

Senator REED. Thank you, Mr. Secretary.

Chairman SHELBY. Senator Allard.

Senator ALLARD. Mr. Chairman, I cannot let this go by without

asking you about the Government Performance and Results Act.

Secretary MARTINEZ. GPRA.

Senator ALLARD. I ask every member of HUD that comes here to

testify about this question because I am interested in making sure

that we move forward with that. Would you please discuss how the

Administration is utilizing this approach through the President’s

Management Agenda? How does the integration promote accountability? How will this outcome focus to help benefit those people in

HUD who are relying on the programs, as well as the taxpayer, if

you will?

Secretary MARTINEZ. Senator, if I may allow Angela Antonelli,

our Comptroller, to answer that question. I will defer to her. My

notes do not have GPRA today.

Senator ALLARD. Okay. Very good.

[Laughter.]

Ms. ANTONELLI. Senator Allard, performance measurement, as

you know, is a very high priority within the President’s Management Agenda and budget and performance integration.

Consistent with that, we have made every effort to align our programs and our dollars with the Department’s strategic goals and

objectives. And attached to all of that are performance measures on

how we hold our programs accountable.

We produce, as part of the GPRA, the Annual Performance Plan.

We will be producing our 2004 APP and delivering that to Congress

very shortly.

As you know, the APP has performance measures attached to all

of our programs. Through the Performance and Accountability Report, we report annually to Congress and just delivered the 2002

Performance and Accountability Report to Congress. That reports

on our performance for 2002.

35

So it is something that we take very seriously. We are working

very hard within the Department to continue to improve the quality of our measures and we will continue to do that in the 2004

APP. And we certainly welcome any comments from this Committee with regards to the quality of that and the extent to which

we continue to improve that.

Senator ALLARD. Thank you.

The General Accounting Office has repeatedly cited human capital as a weakness at HUD. The problem is exacerbated by HUD’s

aging workforce. Apparently, it is the oldest in the Government.

I am aware that you recently completed a Resource Estimation

and Allocation Process called REAP that would help match needs

with skills. What were the results of the REAP and how is HUD

using that to address its human capital deficiencies?

Secretary MARTINEZ. Senator, I am happy to report that we have

been able to ‘‘staff up,’’ if you will. One of our goals has been to

continue to revitalize and reenergize our workforce. We have established an internship program where we now are bringing in talented young people with a new and positive skill set.

We find that the aging workforce, while it is a double-edged

sword, on the one hand, you may be losing very experienced employees. But then again, we may be gaining new ones with the new

skill sets the 21st Century sometimes requires. We are working

hard at making a positive out of that.

We are employing the REAP as a guide. We have reached staffing levels that are really adequate for the moment. We are looking

forward to stabilizing that. We staffed up a little quickly. We now

need to slow down in our hiring. So it is always a moving target,

if you will. But I am pleased that we have been able to move our

staffing levels from 9,100 to the 9,300, which has been authorized

and utilizing REAP so that we do it in keeping with our needs, but

also the critical hire list. We continue to work on improving our

controls of how we do that process.

Senator ALLARD. Now, I know that you are working to try and

increase homeownership among minorities. You use the 5.5 million

by the end of the decade. I know that you were very much working

together on the American Dream Downpayment Initiative. Do you

have other programs going out there to help meet that goal of 5.5

million by the end of the decade?

Secretary MARTINEZ. Well, certainly, we do the ongoing programs

that HUD has. But on the specific, the Downpayment Initiative

Program that you have kindly agreed to sponsor. It is also the educational component and it is also the tax credit proposal which provides an additional amount of affordable single-family homes in

distressed areas in our communities all working together. But I

also think we rely greatly on our partners in the private sector because, really, that is going to provide a tremendous infusion of not

only dollars, but manpower and know-how, in providing families

that are desirous of becoming homeowners the opportunity to do so.

Senator ALLARD. Thank you, Mr. Chairman. I see that my time

is about ready to expire.

Chairman SHELBY. Senator Corzine.

Senator CORZINE. Thank you, Mr. Chairman.

36

Mr. Secretary, I want to go back to this Ernst & Young study

with regard to the dividend tax cut proposal, particularly since you

have mentioned tax credits now twice within the context of homeownership.

The tax credit efforts also apply in some of the Fannie Mae and

Freddie Mac programs. Before the proposal on the dividend exclusion, was there any discussion with HUD on what the implications

of that would be from either Treasury or OMB?

Secretary MARTINEZ. Senator, let me first of all let you know that

I have been informed that the Mortgage Bankers Association will

be releasing a study early next week saying that they find no major

effect from the low-income tax credit proposal on housing.

My early discussions with even the homebuilders, while initially

there was some concern, later, as they further studied it, I believe

their concerns have been dissuaded.

I believe that the Ernst & Young report raises some very valid

and serious concerns. But I do not believe it is a unanimous voice.

And I do know that the Department of the Treasury has a very different point of view on that specific issue.

Senator CORZINE. I guess my question was, was that a consideration? Did we think about the housing implications and whether or

not that would work to the advantage or the disadvantage? Did we

think about that when we were putting together an overall budget

proposal?

Secretary MARTINEZ. Senator Corzine, as I told you earlier, the

tax proposals of the Administration are really a product of the Department of the Treasury and not the Department of HUD. And in

fact, we piggyback with them on issues like the single-family housing tax credit. But it is not a program that either HUD designs or

develops.

Senator CORZINE. Right. I hope that you and Treasury Secretary

Snow can get on the same page on these as it impacts these housing programs.

I won’t beat up on this. I want to put in a word for the Enterprise Zone activities which are zeroed-out.

I, like you, come from the private sector. I think leverage is a terrific opportunity when the Federal Government will put down a

dollar and gets 10 dollars. As I suggested the last time, I would

love to take you to Cumberland County and see where $123 million

has been leveraged by about $10 million of public investment.

Several hundred new housing units renovated, rehabilitated, reconstructed. New jobs. And without that kind of funding for a program, it is hard to understand how economic development can go

forward. I suspect that this individual situation may be reflective

of other things around the country and we are interested in economic growth.

This is a great example of public/private partnership, as we

heard earlier on HOPE VI and other areas. I would think that that

would be consistent with the philosophy of the Administration.

I have a question, though, that ties with something that you said

in your opening statement, where you made a very real and, I believe, sincere, commitment to promoting homeownership among

minorities. But in some ways, I do not understand how that relates

to something that I think HUD has recently proposed in a rule that

37

would repeal requirements for recipients of Community Development Block Grants to demonstrate a commitment to diversity.

Under the Johnson Executive Order 11246, companies with 50 or more employees in Federal contracts of more than $50,000 are

required to file with the Federal Government written affirmative

action plans.

Those plans did not mandate hiring quotas, but did require companies seeking Federal contracts to demonstrate a plan and a goodfaith effort toward hiring women and minorities. I understand

HUD is proposing to exempt organizations that receive Community

Development Block Grants, more than $4.4 billion allocated in fiscal 2003 from their obligations under the Executive Order.

First of all, I would love to hear your comments about it. But is

HUD’s position that there is no longer a need for this commitment

to diversity as exhibited in this Executive Order?

Secretary MARTINEZ. Senator, I am sorry to say I am unaware

of the issue that you raise. I will look into it and be glad to consider responding to you in writing. But I am not familiar with that

issue whatsoever.

Senator CORZINE. I think it is one of those things that was included on a January 6, 2003 proposal from HUD, if I am not mistaken, that was associated with some of the faith-based initiatives

that have come.

Secretary MARTINEZ. The faith-based initiative attempts to break

down barriers and bring more people into opportunities for partnership with the Federal Government.

There is nothing that I am aware of in that particular regulatory

change that would in any way either attempt or by design or accidentally, limit participation by people from a broad spectrum of

race and creed and other backgrounds.

Senator CORZINE. I certainly would want clarity with regard to

this as it relates to Community Development Block Grants because

I think it is a major shift in policy——

Secretary MARTINEZ. Senator Corzine, I am looking back here to

Assistant Secretary Roy Bernardi the Assistant Secretary who

manages the Community Development Block Grant Program. He is

unaware of this issue. It is not something that we are aware of.

Senator CORZINE. We need to sort this out because our legal people are suggesting to me that this January 6 order with regard to

Community Development Block Grants actually changed the basic

framework of this.

Secretary MARTINEZ. Would that be an order from HUD or——

Senator CORZINE. According to the research that my people have

been able to develop.

Secretary MARTINEZ. Okay. What we should do is perhaps have

your people communicate with us and we can get together and try

to ascertain what that is about.

Senator CORZINE. Thank you.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Thank you very much, Mr. Chairman.

Mr. Secretary, a number of times here you have used a phrase—

I am trying to recall exactly the phase. It was, I believe, ‘‘Given the

current situation we confront on the budget.’’ Was that the phrase

you used as you were responding to the question about why there

38

are some cutbacks and why you are not funding the HOPE VI and

so forth? What was that phrase that you used?

Secretary MARTINEZ. I guess, I am not sure exactly the phrase,

but what I am alluding to is that we are in a time of unprecedented needs from a standpoint of national defense. We are at a

time when the economy has not been as flourishing as we would

all like it to be. And so, it is a difficult budget year.

Senator SARBANES. Is that a euphemism on your part for what

you heard from OMB? Is that phrase designed to mask, as it were,

an OMB directive?

Secretary MARTINEZ. No, sir. I think it is reflecting the current

reality in which our country is living.

Senator SARBANES. So when you went to OMB to begin with, did

you already factor that into your request, or was that consideration, this kind of broader view of the macroeconomic situation,

was that in effect fed back to you by OMB?

Secretary MARTINEZ. I believe that the development of the President’s Budget, which HUD is a part of, is a product of the interaction of the Department, OMB, and the overall priorities that the

President sets out.

And that my role in the Administration is to, number one, do a

good job with HUD in terms of preparing a thoughtful budget, and

then allow it to be part of the process which at the time you were

reminiscing about earlier when I was at my confirmation hearing,

I had no idea just exactly what those three letters meant to my

world, but as you well know, are significant.

OMB does play a very large role in the preparation of the President’s Budget.

Senator SARBANES. Do you think Secretary Rumsfeld, when he

puts forward his budget, factors in these broader considerations, or

do you think he puts forward a budget that reflects what he judges

to be the needs within his area of responsibility?

Secretary MARTINEZ. I believe your question to be more rhetorical in nature than seeking an answer from me. But I think you

should know that I am not going to comment on how Secretary

Rumsfeld puts together his budget request because I think that

that is something that should be answered by him.

Senator SARBANES. Let me ask you a couple of questions about

public housing. First, what is the view of the Department with respect to expanding the current stock of public housing? Not vouchers. I am not talking about vouchers now. Second, what is the view

of the Department with respect to maintaining the current stock of

public housing?

Secretary MARTINEZ. If you mean by the expanding of public

housing, it is new construction for public housing.

Senator SARBANES. Right.

Secretary MARTINEZ. I do not believe that our approach to that

is any different than it has been for many years, which is that, essentially, there is not a public housing production program at HUD

today, nor has there been one to my knowledge for quite a number

of years.

In terms of the existing stock of public housing, I think we have

a continuing commitment commensurate with budget levels that

39

have been around again for some period of time to continue to modernize and upgrade public housing.

I know from my experience many years ago in the local housing

authority, that even then, in the early 1980’s, we had great concern

about what was called modernization and the need to continue to

do new roofs or to somehow or another continue to maintain the

stock of public housing.

I think that our view of that is that we continue to make that

commitment and continue to do what we can to improve public

housing within the constraints of——

Senator SARBANES. Do you think that your commitment of resources for the modernization of the existing stock of public housing is at a level sufficient to sustain it? Or do you think you are

falling behind the need so that you are going to lose some of the

stock because it will simply deteriorate into a condition in which

it is either not usable or too expensive to bring up to standards?

Secretary MARTINEZ. I believe that what we are doing to maintain public housing is adequate to maintain it.

We also are opening avenues of new opportunities for public

housing agencies to do a lot for themselves in order to provide and

acquire private financing which will allow them to do the necessary

maintenance and upkeep, and upgrade.

I think that these innovative ideas are going to provide the independence for the housing authorities to do on a project-by-project

basis or even on a single apartment complex basis, the kinds of

improvements that they have not been able to do in the past.

So, I believe we are freeing up the imagination and the creativity

of our local housing authorities in partnership with local lending

institutions and all to improve that.

Senator SARBANES. Now does that approach involve an assurance

to the public housing authority of vouchers from HUD?

If the public housing authority is going to go out and borrow a

lot of money to put into the maintenance or modernization of its

public housing, which I take it is what you are suggesting, to what

will the lender look for repayment of this debt that the public housing authority will be assuming?

Secretary MARTINEZ. My intuition tells me that what they look

to is to the stream of income that would be coming by the rents

that are collected. But this is not just an idea. This is actually occurring and happening. Today, Chicago has committed $300 million

in new, innovative financing. Philadelphia, $120 million. The District of Columbia, $33 million.

These are all happening today in a way that I think are going

to be very successful and then encourage even more of our public

housing entities to do the same thing.

Senator SARBANES. And they are going to, in effect, carry the

debt simply by the rents?

Secretary MARTINEZ. The way in which financing usually takes

place is that the lender will look for a stream of income coming to

the borrower that will then allow that borrower the reasonable

prospects of repaying the loan, that I think is what occurs here.

Senator SARBANES. Where is that stream of income coming from?

Is it just the rents? That was my question.

40

Secretary MARTINEZ. A certain percentage of the capital fund,

rent, and other income.

Senator SARBANES. What is the other income?

Secretary MARTINEZ. It would be management fees. It would be

other activities that public housing entities sometimes enter into.

In different communities, they have different opportunities to do

things which derive income for them. It is a private financing

mechanism.

Senator SARBANES. Well, I would like to see this financing arrangement. It doesn’t assume any stream of income coming to the

public housing authority from HUD?

Secretary MARTINEZ. I think that, inevitably, the public housing

authority receives rental—I mean they receive monies, operating

subsidies, from HUD every year. The rent that is paid by the tenants, and the subsidies that are given provide a stream of income

that appears to be sufficient for these financial institutions to make

a commitment.

Senator SARBANES. All right. So, then, it is critical to making

this work, that a stream of income from HUD is assured or guaranteed, is it not?

Secretary MARTINEZ. The current system is working in these

three cities, and I am sure in others. And whatever guarantees the

financial institutions obtain was sufficient to allow them to make

the loans.

Senator SARBANES. We will have to take a careful look at that.

I am concerned that you are setting up a system to replace capital

grants for modernization by shifting the housing authorities into a

borrowing arrangement. And it is not clear to me once they go into

the borrowing arrangement, where the funds will come from to

handle the repayment. It seems to me—will HUD eventually drop

out of that picture?

Secretary MARTINEZ. I do not think so, sir.

Senator SARBANES. Is HUD putting an income stream into those

situations that you just described?

Secretary MARTINEZ. I think HUD’s participation with public

housing authorities and the way that it has been done in the past

is not anticipated to be changed dramatically by these arrangements. It is just allowing them a new vehicle, a new way that they

can improve the stock of housing by having yet another avenue

available to them.

Senator SARBANES. Well, you have cut the Capital Fund each

year now since you have been at HUD. And of course, the budget

submissions for cutting the Capital Fund have been significantly

greater than what the Congress has in the end done. The Congress

has swallowed some of the cuts, but we have really restored a great

deal of them.

In three budget submissions, you have proposed $1.2 billion in

cuts to the Public Housing Capital Fund. I do not see how we are

going to sustain this housing—I think it would be a policy lacking

in common sense to allow existing public housing stock that,

through reasonable measures, could be sustained as available affordable housing, simply to fall into disrepair, and I am quite concerned about that.

41

It is a policy argument whether we should build more public

housing, and I understand that. As you pointed out, we have not

done that in recent years because we have gone down the Section

8 path. But I do want to know what the basic attitude is toward

sustaining the public housing. There are some people who argue

that they want to do it all in and go completely to vouchers.

I take it that is not your position.

Secretary MARTINEZ. That is not my position. It is not currently

anything under discussion by this Administration. Some would

argue that that would be a healthy way to go. But that is not something that I am particularly advocating or it is nothing that is indicated by any of the things that you suggest.

Senator SARBANES. Of course, if you went that way, you would

give up a lot of currently available housing stock, a lot of which is

helping us to meet the problem of affordable housing.

Secretary MARTINEZ. Yes. I am not suggesting that that is something that we should engage in.

Senator SARBANES. Well, my time is expired.

Chairman SHELBY. Thank you, Senator Sarbanes.

I noticed in the budget, Mr. Secretary, that you are calling for

$17 million for the manufactured housing program. That is a 30

percent increase in funding over recent years.

Since HUD’s budget for this program is paid, I think it is paid

for entirely by label fees and the industry is not as healthy as it

was several years ago, I am curious as to how you justify such a

significant increase, whereas, I understand that you are estimating

that industry will sell 281,000 homes in 2004.

Secretary MARTINEZ. The numbers arise, Mr. Chairman, by our

determination of the fees by taking the appropriate amount and dividing it by the number of units that we expect to be produced.

Chairman SHELBY. I understand that, the label. Your 281,000

homes projected for 2004 seems rather high considering that in the

calendar year 2002 we just finished, the most recent data available

there, only 168,000 homes were sold. This would be over a 100,000

increase. Of course, the industry would like it. But they feel like

that is an inflated figure.

Do you want to respond?

Secretary MARTINEZ. Housing Commissioner Weicher.

Chairman SHELBY. Okay.

Mr. WEICHER. Thank you, Mr. Chairman. I am John Weicher. I

am the Assistant Secretary for Housing and the Federal Housing

Commissioner.

Chairman SHELBY. Yes, sir.

Mr. WEICHER. The 281,000 unit figure comes from the forecast

of DRI. It is the only private forecast that we know. That is their

forecast for the volume of manufactured homes in 2004. We get the

$17 million figure by multiplying that by the fee per unit, which

we established by regulation last year. We are not proposing to

change the fee in reaching that number.

Chairman SHELBY. Thank you.

Senator Sarbanes, do you have any other questions?

Senator SARBANES. Mr. Chairman, no. I do think, and I will discuss it with you, we should give some thought to doing budget sessions on specific programs because I think it is clear today that you

42

do not really have a chance to get as far in depth with respect to

the budget as might be desirable.

I think the prospect of just doing the entire HUD budget at one

hearing doesn’t give us that chance. So maybe we should give some

thought to whether we should just focus on particular aspects of it

and then explore that with the Secretary and whichever Assistant

Secretary is responsible.

Chairman SHELBY. Senator Allard is not here, but his staffer is

here. He is the Chairman of the Subcommittee over that, and we

might look at it.

Senator SARBANES. Good. Thank you very much.

Chairman SHELBY. Mr. Secretary, we appreciate your appearance

here today and your candor.

Secretary MARTINEZ. Thank you.

Chairman SHELBY. We wish you well. And let’s build housing for

every American, if we can.

Secretary MARTINEZ. Thank you, sir. It is good to be with you.

Chairman SHELBY. Thank you.

Secretary MARTINEZ. Thank you very much.

Chairman SHELBY. The Committee is adjourned.

[Whereupon, at 12:15 p.m., the Committee was adjourned.]

[Prepared statements and response to written questions follow:]

43

PREPARED STATEMENT OF SENATOR JON S. CORZINE

Thank you very much, Mr. Chairman. I want to reiterate the concerns outlined

by the Ranking Member and my colleagues about the Administration’s 2004 Budget

for the Department of Housing and Urban Development (HUD) and the enormous

harm this budget will have on low- and middle-income families throughout America.

Regrettably, this seems to be the norm for this Administration, rather than the

exception. The budget of the ‘‘Leave No Child Behind’’ President has no significant

aid for America’s public schools. They have offered a trickle down economic plan

that by their own admission offers very little in the form of immediate stimulus,

but will add $1.5 trillion to our already enormous Federal deficit.

It is a budget that provides no direct Federal aids to States facing their worst fiscal crisis in four decades. Now many will be forced to cut funding for vital programs

like Medicare and Head Start. And it fails to adequately fund important homeland

security measures like first responders and ensuring the security of chemical plants,

many of which can be found in residential communities.

It is not a stretch to assert that this Administration’s budget will likely leave this

country worse off tomorrow than we are today—there is no doubt that at least fiscally, America is worse off now than before this Administration was in place. But

nowhere are this Administration’s misplaced priorities more demonstrable than in

its HUD budget and its housing programs.

Over the past 2 years, the President has slashed $2 billion from the public housing program, slashed funds for the Public Housing Operating Fund and eliminated

funding for the Public Housing Drug Elimination Program (PHDEP).

The Administration’s proposal to block grant the Section 8 program will likely reduce funding for the program and undermines the program’s mission to assist the

most low-income families afford housing. At a time in which more and more families

are struggling to afford housing and voucher utilization is on the rise, underfunding

the Section 8 program is a misguided step.

But the HUD budget is not just about slashing public housing programs. It is also

about rescinding Federal support for community revitalization projects that are

transforming our Nation’s urban core, including those in my State, New Jersey.

I am nothing short of outraged at the proposed elimination of the very successful,

bipartisan HOPE VI program; funding for Round II Empowerment Zones and cuts

for Brownfield redevelopment. Each of these programs has been successful in communities throughout America.

The Hope VI program has been particularly vital in New Jersey, where its helped

transform some of the Nation’s oldest public housing stock into safe, livable mixedincome communities for families.

The Cumberland County EZ in my home State has created hundreds of jobs, renovated, rehabilitated, and constructed more than one hundred housing units, and

funded more than 60 programs that are expected to leverage more than $123 million

in private, public, and tax-exempt bond financing. The Cumberland County EZ is

leveraging $10 in non-Federal funds for every $1 of Federal financing.

Why does the President want to eliminate such successful programs?

Secretary Martinez, you yourself seem to be developing a serious credibility gap.

At your confirmation hearing, and in subsequent questioning, you articulated HUD’s

support for PHDEP—a year later you eliminated it, without saying a word to Congress. Last year, you said the HOPE VI program was ‘‘overall . . . a great program

that has done an awful lot of good, and we [Bush HUD] are delighted.’’ Now a year

later, like we witnessed with PHDEP, you are completely eliminating funding for

that program.

The constant here appears to be that your Agency, Secretary Martinez, continually seems to be used as a funding source to offset the costs of this President’s

‘‘Leave No Millionaire’’ behind tax-cutting agenda. It is the reverse Robin Hood scenario, robbing programs that help the poor to pay the cost for programs that make

the richest Americans wealthier. Even the President’s proposal to exclude taxes on

corporate dividends hurts housing efforts, particularly the Low-Income Housing Tax

Credit (LIHTC). The tax credit will likely become less attractive to investors should

this dividend exclusion be enacted.

A recent report by Ernst & Young, LLP, indicated that 35 percent fewer units

financed by the LIHTC would be produced every year if the dividend tax cut were

enacted. Again, the poor gets hurt for an initiative that primarily benefits the

wealthiest of Americans.

In closing, Mr. Chairman, I would like to state a few facts about the housing crisis

we are facing in America and in my State, New Jersey. There, 34 percent of households are renters, and today the average family would have to work 146 hours at

minimum wage to afford the Fair Market Rent for a 2-bedroom apartment. Waiting

44

lists for Section 8 in New Jersey are as long as 3 years—and even with vouchers,

the lack of affordable housing stock makes it difficult for families to find housing.

Those numbers are similar in urban communities throughout America.

Secretary Martinez, the housing crisis in this country is very real—but your HUD

budget seems to give short shift to the housing crisis, or the families affected by

this crisis. And that is a shame, because it is your job to care.

Thank you, Mr. Chairman.

—————

PREPARED STATEMENT OF SENATOR ELIZABETH DOLE

I would like to express my appreciation for your holding this hearing today and

join you in welcoming Secretary Martinez to discuss the Administration’s Department of Housing and Urban Development budget request.

Let me begin by making it very clear that I believe that Secretary Martinez

should be congratulated for the good work he has done at HUD. Secretary Martinez

took over an Agency which was in disarray. Staffing cuts had been made by the previous Administration to adhere to arbitrary staffing goals. Unfortunately, some of

the Agency’s most senior and experienced staff was lost due to downsizing. The

HUD Inspector General’s Office referred to this as ‘‘the brain drain’’ and noted that

serious long-term effects would be felt.

In addition, a series of management reform initiatives in the previous Administration moved and consolidated staff in new areas of the country. This unfortunately

created enforcement gaps exploited by criminals who took advantage of HUD and

took advantage of ordinary citizens. I am reminded of a North Carolina saying that

goes, ‘‘you cannot fall off the floor’’—and in some sense that could have applied here.

Secretary Martinez had nowhere to go but up with such a trouble-ridden Department, but he has clearly exceeded all expectations.

I have reviewed the General Accounting Office’s January 2003 review of HUD.

The GAO states on the first line of the first page of the report that, ‘‘HUD has made

progress since January 2001 in addressing identified weaknesses in its high-risk

program areas and management challenges, but significant challenges remain.’’ I

look forward to this opportunity to discuss with the Secretary those significant challenges which remain, and assess the extent to which these will be addressed in the

Fiscal Year 2004 Budget.

A top priority for the proposed budget is achieving the goal of homeownership for

low- and moderate-income families. I believe this is a laudable goal on the part of

this Administration. While the United States enjoys an all-time high national homeownership rate of 68 percent, there are sectors of the population for whom homeownership remains frustratingly unattainable. In fact, the homeownership rate for

African-Americans and Hispanics is in the 40th percentile. This is an unacceptable

disparity that we must work to change, for my friends and my neighbors in North

Carolina and throughout the country.

The benefits of homeownership for families, communities, and the Nation are profound. When individuals and families own their home, they establish roots in their

communities and have a greater stake in the growth, safety, and development of

their towns and cities. It is through initiatives to further grow homeownership that

we empower individuals and families by helping them build wealth and improve

their lives.

While most of the Fiscal Year 2004 HUD Budget is allocated for important programs such as rental assistance and public housing, I have always believed that

programs designed to lead their beneficiaries to independence are the best use of

taxpayer dollars. Increasing the rate of homeownership for Hispanic and AfricanAmerican communities is one such goal that is clearly demonstrated in the programs contained in the Fiscal Year 2004 HUD Budget, and I am committed to working with Secretary Martinez and my colleagues on this and other related issues. We

need to ensure that HUD becomes known first and foremost for its programs that

improve the lives of America’s families, and not for bureaucracy and inefficiency.

Thank you.

45

PREPARED STATEMENT OF MEL MARTINEZ

SECRETARY, U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

MARCH 4, 2003

Overview

Chairman Shelby, Ranking Member Sarbanes, and distinguished Members of the

Committee, thank you for the invitation to join you this morning. I am honored to

outline the Fiscal Year 2004 Budget proposed by President Bush for the U.S. Department of Housing and Urban Development (HUD).

HUD has achieved measurable success since 2001 in carrying out its mission and

meeting the many challenges confronting a Cabinet-level Department. Today, HUD

annually subsidizes housing costs for approximately 4.5 million low-income households through rental assistance, grants, and loans. It helps revitalize over 4,000 localities through community development programs. The Department provides housing and services to help homeless families and individuals become self-sufficient.

HUD also encourages homeownership by providing mortgage insurance for more

than 6 million homeowners, many of whom would not otherwise qualify for loans.

Supported by HUD’s proposed $31.3 billion Fiscal Year 2004 Budget, this very

important work will continue. Housing remains a critical component of both the

President’s plan to promote economic growth and his focus on meeting the common

challenges faced by Americans and their communities.

The President does not intend to change his 2004 Budget based on the program

or Agency levels included in the 2003 Omnibus bill the Congress adopted in midFebruary. The President’s 2004 Budget was developed within a framework that set

a proposed total for discretionary spending in 2004, and each Agency and program

request reflected the Administration’s relative priority for that operation within that

total. While we recognize that Congress may believe there is a need to reorder and

adjust some of these priorities, the Administration intends to work with Congress

to stay within the 2004 overall amount.

HUD’s proposed budget offers new opportunities for families and individuals—and

minorities in particular—seeking the American Dream of homeownership.

It offers new opportunities for renters by expanding access to affordable housing

free from discrimination.

It provides new opportunities for strengthening communities and generating renewal, growth, and prosperity—with a special focus on ending chronic homelessness.

And our budget creates new opportunities to improve HUD’s performance by addressing the internal management issues that have long plagued the Department.

Increasing Homeownership Opportunities

Americans place a high value on homeownership because its benefits for families,

communities, and the Nation as a whole are so profound.

Homeownership creates community stakeholders who tend to be active in charities and churches. Homeownership inspires civic responsibility, and owners vote

and get involved with local issues. Homeownership offers children a stable living environment that influences their personal development in many positive, measurable

ways—at home and in school.

Homeownership’s potential to create wealth is impressive, too. For the vast majority of families, the purchase of a home represents the path to prosperity. A home

is the largest purchase most Americans will ever make—a tangible asset that builds

equity, credit health, borrowing power, and overall wealth.

Due in part to a robust housing economy and Bush Administration budget initiatives focused on promoting homeownership, more Americans were homeowners in

2002 than at any time in this Nation’s history. The national homeownership rate

is 68 percent. That statistic, however, masks a deep ‘‘homeownership gap’’ between

non-Hispanic whites and minorities: While the homeownership rate for non-Hispanic whites is nearly 75 percent, it is less than 50 percent for African-Americans

and Hispanics.

The Administration is focused on giving more Americans the opportunity to own

their own homes, especially minority families who have been shut out in the past.

In June 2002, President Bush announced an aggressive homeownership agenda to

increase the number of minority homeowners by at least 5.5 million by the end of

this decade. The Administration’s homeownership agenda is dismantling the barriers to homeownership by providing downpayment assistance, increasing the supply

of affordable homes, increasing support for homeownership education programs, and

simplifying the home-buying process.

Through ‘‘America’s Homeownership Challenge,’’ the President called on the real

estate and the mortgage finance industries to take concrete steps to tear down the

46

barriers to homeownership that minority families face. In response, HUD created

the Blueprint for the American Dream Partnership, an unprecedented public/private

initiative that harnesses the resources of the Federal Government with those of the

housing industry to accomplish the President’s goal.

Additionally, HUD is proposing several new or expanded initiatives in fiscal year

2004 to continue the increase in overall homeownership while targeting assistance

to improve minority homeowner rates.

As a first step, HUD proposes to fund the American Dream Downpayment Initia- tive at $200 million. This was first introduced in fiscal year 2002, this program targets funding under the HOME program specifically to low-income families wanting

to purchase a home. The fiscal year 2003 appropriations provided for $75 million

for this initiative, which will be sufficient to begin the program. The Fiscal Year

2004 Budget provides funding to assist approximately 40,000 low-income families

with downpayment and closing costs on their homes.

The HOME Investment Partnerships Program (HOME) plays a key role in addressing the shortage of affordable housing in America. As reflected in this year’s

program assessment, the HOME program is successful because it is well-managed

and its flexibility ensures local decisionmaking. In 2004, a total of $2.197 billion is

being provided to participating jurisdictions (States, units of local government, and

consortia) to expand affordable housing, which represents a 10 percent, or $200 million, increase for HOME from the 2003 enacted level. The funds dedicated to expanding and improving homeownership will be spent rehabilitating owner-occupied

buildings and providing assistance to new homebuyers. Based on historical trends,

36 percent of the homeownership-related funds will be used for new construction,

47 percent for rehabilitation, and 14 percent for acquisition.

Recipients of HOME funds have substantial discretion to determine how the funds

are spent. HOME funds can be used to expand access to homeownership by subsidizing downpayment and closing costs, as well as the costs of acquisition, rehabilitation, and new construction. To date, HOME grantees have committed funds to

provide homebuyer assistance to more than 288,000 low-income households.

To promote the production of affordable single-family homes in areas where such

housing is scarce, the Administration is proposing a tax credit of up to 50 percent

of the cost of constructing a new home or rehabilitating an existing home. This new

tax credit targets low-income individuals and families; eligible homebuyers would

have incomes of not more than 80 percent of their area median.

HUD is committed to helping families understand the home-buying process and

how to avoid the abuses of predatory lending. Housing counseling has proven to be

an extremely important element in both the purchase of a home and in helping

homeowners keep their homes in times of financial stress. The Fiscal Year 2004

Budget will expand funds for counseling services from $40 million in fiscal year

2003 to $45 million. This will provide 550,000 families with home purchase and

homeownership counseling and about 250,000 families with rental counseling.

The Fiscal Year 2004 Budget strengthens HUD’s commitment to the Self-Help

Homeownership Opportunity Program (SHOP). SHOP provides grants to national

and regional nonprofit organizations to subsidize the costs of land acquisition and

infrastructure improvements. Homebuyers must contribute significant amounts of

sweat equity or volunteer labor to the construction or rehabilitation of the property.

The Fiscal Year 2004 Budget request for $65 million triples the funding received

in 2002, reflecting President Bush’s commitment to self-help housing organizations

such as Habitat for Humanity. These funds will help produce approximately 5,200

new homes nationwide for very low-income families. Funds are provided as a setaside within the Community Development Block Grant account.

The Federal Housing Administration (FHA) is the Federal Government’s single

largest program to extend access to homeownership to individuals and families who

lack the savings, credit history, or income to qualify for a conventional mortgage.

In 2002, FHA insured $150 billion in mortgages for almost 1.3 million households,

most of them first-time homebuyers, which represents a 21 percent increase over

the previous year. Thirty-six percent were minority households.

FHA offers a wide variety of insurance products, the largest being single-family

mortgage insurance products. FHA insures single-family homes, home rehabilitation

loans, condominium loans, energy efficiency loans, and reverse mortgages for elderly

individuals. Special discounts are available to teachers and police officers who purchase homes that have been defaulted to HUD and who promise to live in their

homes in revitalized areas.

HUD is proposing legislation for a new mortgage product to offer FHA insurance

to families that, due to poor credit, would either be served by the private market

at a higher cost or not at all. It is anticipated that borrowers will be offered FHA

loan insurance under this new initiative that will allow them to maintain their

47

home or to purchase a new home. The new Mutual Mortgage Insurance Fund (MMI)

mortgage loan program is expected to generate an additional $7.5 billion in endorsements for 62,000 additional homes.

Through its mortgage-backed securities program, Ginnie Mae helps to ensure that

mortgage funds are available for low- and moderate-income families served by FHA

and other Government programs such as VA and the Rural Housing Service of the

U.S. Department of Agriculture.

During fiscal year 2002, Ginnie Mae surpassed a total of $2 trillion in mortgagebacked securities issued since 1970. Reaching this milestone means that more than

28.4 million families have had access to affordable housing or lower mortgage costs

since Ginnie Mae’s inception. HUD is proud of Ginnie Mae’s accomplishments and

its important role in helping to support affordable homeownership for low- and moderate-income families in America. HUD’s role in the secondary mortgage market

provides an important public benefit to Americans seeking to fulfill their dream of

homeownership.

The Fiscal Year 2004 Budget supports five HUD programs that help to promote

homeownership in Native American and Hawaiian communities.

The Native American Housing Block Grants (NAHBG) Program provides funds to

tribes and to tribally designated housing entities for a wide variety of affordablehousing activities. Grants are awarded on a formula basis that was established

through negotiated rulemaking with the tribes. The NAHBG program allows funds

to be used to develop new housing units to meet critical shortages in housing. Other

uses include housing assistance to modernize and maintain existing units; housing

services, including direct tenant rental subsidy; crime prevention; administration of

the units; and certain model activities.

The Title VI Federal Guarantees for Tribal Housing Program provides guaranteed

loans to recipients of the Native American Housing Block Grant who need additional funds to engage in affordable-housing activities but who cannot borrow from

private sources without the guarantee of payment by the Federal Government. Because the grantees have not applied for all funds appropriated in prior years, the

amount of subsidy required in fiscal year 2004 is reduced from $2 million to $1 million, and the loan amount supported is reduced from $16.6 million to $8 million.

Prior-year funds remain available until used.

The Indian Housing Loan Guarantee (Section 184) Program helps Native Americans to access private mortgage financing for the purchase, construction, or rehabilitation of single-family homes. The program guarantees payments to lenders in the

event of default. In fiscal year 2004, $1 million is requested in credit subsidy for

100 percent Federal guarantees of approximately $27 million in private loans.

The Hawaiian Homelands Homeownership Act of 2000 established the Native Hawaiian Home Loan Guarantee Fund, which is modeled after Section 184. The Fiscal

Year 2004 Budget will provide $1 million in credit subsidy to secure approximately

$35 million in private loans.

Modeled after the NAHBG, the Native Hawaiian Housing Block Grant (NHHBG)

was authorized by the Hawaiian Homelands Homeownership Act of 2000. The Fiscal

Year 2004 Budget will provide $10 million. Grant funds will be awarded to the Department of Hawaiian Home Lands and may be used to support acquisition, new

construction, reconstruction, and rehabilitation. Activities will include real property

acquisition, demolition, financing, and development of utilities and utility services,

as well as administration and planning.

Promoting Decent Affordable Housing

Ideally, homeownership would be an option for everyone, but even with its new

and expanded homeownership initiatives, the Administration recognizes that many

families will have incomes insufficient to support a mortgage in the areas where

they live. Therefore, along with boosting homeownership, HUD’s proposed Fiscal

Year 2004 Budget promotes the production and accessibility of affordable housing

for families and individuals who rent. This is achieved, in part, by providing States

and localities new flexibility to respond to local needs.

HUD has three major rental assistance programs that collectively provide rental

subsidies to approximately 4.5 million households nationwide. The major vehicle for

providing rental subsidies is the Section 8 program, which is authorized in Section

8 of the U.S. Housing Act of 1937. Under this program, HUD provides subsidies to

individuals (tenant-based) who seek rental housing from qualified and approved

owners, and also provides subsidies directly to private property owners who set

aside some or all of their units for low-income families (project-based). Finally, HUD

subsidizes the operation, maintenance, and modernization of an additional 1.2 million public housing units.

48

HUD is proposing a new initiative—Housing Assistance for Needy Families

(HANF)—under which the funding for vouchers, which has been allocated to approximately 2,600 public housing authorities (PHA’s), would be allocated to the

States. States, in turn, could choose to contract with PHA’s or other entities to administer the program. The funding for both incremental and renewal vouchers will

be contained in the HANF account.

There are a number of advantages to providing the voucher funds to the States.

The allocation of funds to States rather than PHA’s should allow for more flexibility

in efforts to address problems in the underutilization of vouchers that have occurred

in certain local markets. The allocation of funds to the States will be coupled with

additional flexibility in program laws and rules, to allow States to better address

local needs and to commit vouchers for program uses that otherwise would go unused. In the former Housing Certificate Fund, more than $2.41 billion has been recaptured over the last 2 years from the Housing Choice Voucher Program. These

large recaptures have resulted in a denial of appropriated housing assistance for

thousands of families, which will be avoided under HANF. The administration of the

HANF program should run more smoothly, with HUD managing fewer than 60

grantees compared to approximately 2,600 today.

Allocation of the funds to the States should allow for more coordinated efforts

with the Temporary Assistance for Needy Families (TANF) Program, and the OneStop Career Center system under the Workforce Investment Act, successfully

administered by the States, to support the efforts of those now receiving public

assistance who are climbing the ladder of self-sufficiency.

HUD proposes that fiscal year 2004 be a transition year in which PHA’s would

continue to receive voucher funds directly while States ramp up in preparation for

administering the HANF program. Up to $100 million would be made available to

assist States with this effort. In addition, States could apply for incremental vouchers if they are ready to do so, and could request waivers that would assist in the

implementation of their programs. The HANF account would contain $13.6 billion in funding for voucher renewals and incremental vouchers. This would include funding for up to $36 million in incremental vouchers for persons with disabilities, additional incremental vouchers to the

extent that funding is available, $252 million for tenant protection vouchers to prevent displacement of tenants affected by public housing demolition or disposition of

project-based Section 8 contract terminations or expirations, and $72 million for

Family Self-Sufficiency Coordinators.

For fiscal year 2004, the Administration proposes separate funding for vouchers

under the new HANF account. The Project Based Rental Assistance Account will retain funding for renewals of expiring project-based rental assistance contracts under

Section 8, including amounts necessary to maintain performance-based contract

administrators. An appropriation of $4.8 billion is requested for these renewals in

fiscal year 2004, which is a $300 million increase over the current fiscal year. In

addition to new appropriations, funds available in this account from prior-year balances and from recaptures will augment the amount available for renewals and will

be available to meet amendment requirements for on-going contracts that have

depleted available funding, as well as a rescission of $300 million.

It is anticipated that approximately 870,000 project-based units under rental assistance will require renewal in fiscal year 2004, an increase of about 50,000 units

from the current fiscal year, continuing the upward trend stemming from first-time

expirations in addition to contracts already under the annual renewal cycle. The

HANF account funds an estimated 30,300 units in subsidized or partially assisted

projects requiring tenant-protection vouchers due to terminations, opt-outs, and prepayments.

Public Housing is the other major form of assistance that HUD provides to the

Nation’s low-income population. In fiscal year 2004, HUD anticipates that there will

be approximately 1.2 million public housing units occupied by tenants. These units

are under the direct management of approximately 3,050 PHA’s. Like the Section

8 program, tenants pay approximately 30 percent of their income for rent and utilities, and HUD subsidies cover the remaining costs.

HUD is programmatically and financially committed to ensuring that the existing

public housing stock is either maintained in good condition or is demolished. Maintenance is achieved through the subsidy to PHA’s for both operating expenses and

modernization costs. Legislation to implement a new financing initiative is included

and enhanced in the Fiscal Year 2004 Budget. This will allow for the acceleration

of the reduction in the backlog of modernization requirements in public housing

facilities across the Nation.

The formula distribution of funds through the Public Housing Operating Fund

takes into account the size, location, age of public housing stock, occupancy, and

49

other factors intended to reflect the costs of operating a well-managed public housing development. In fiscal year 2004, HUD will increase the amounts provided for

operating subsidies from $3.530 billion to $3.559 billion, plus $15 million to fund

activities associated with the Resident Opportunities and Supportive Services

(ROSS) Program.

The Public Housing Capital Fund provides formula grants to PHA’s for major repairs and modernization of its units. The Fiscal Year 2004 Budget will provide

$2.641 billion in this account. This amount is sufficient to meet the accrual of new

modernization needs in fiscal year 2004. Of the funds made available, up to $40 million may be maintained in the Capital Fund for natural disasters and emergencies. Up to $30 million can be used for demolition grants—to accelerate the demolition of thousands of public housing units

that have been approved for demolition but remain standing. Also in fiscal year

2004, up to $40 million will be available for the ROSS program (in addition to $15

million in the Operating Fund), which provides supportive services and assists residents in becoming economically self-sufficient.

To address the backlog of capital needs, the Department is including a legislative

proposal in its 2004 Budget called the Public Housing Reinvestment Initiative

(PHRI) that will allow PHA’s to use their Operating Fund and Capital Fund grants

to facilitate the private financing of capital improvements. This initiative also will

encourage development-based financial management and accountability in PHA’s.

These objectives would be achieved by authorizing HUD to approve, on a property-by-property basis, PHA requests to convert public housing developments (or

portions of developments) into project-based voucher assistance. The conversion of

units to project-based vouchers will allow the PHA’s to secure private financing to

rehabilitate or replace their aging properties by pledging the property as collateral

for private loans for capital improvements.

The Fiscal Year 2004 Budget enhances this proposal, which was made in last

year’s budget request, by also proposing a guarantee of up to 80 percent of the

principal of loans made to provide the capital for PHRI. There was substantial interest by PHA’s and others in last year’s budget proposal; the loan guarantee should

greatly facilitate the involvement of private lenders. The budget includes $131

million in subsidy for this guarantee, which would allow the guarantee of almost

$2 billion in loans and significantly accelerate the improvement in public housing

conditions.

The PHRI reflects our vision for the future of public housing.

For 10 years, the HOPE VI program has been the Government’s primary avenue

for funding the demolition, replacement, and rehabilitation of severely distressed

public housing. With $2.5 billion already awarded but not yet spent, and an additional $1 billion to be awarded in 2002 and 2003, HOPE VI will continue to serve

communities well into the future.

When HOPE VI was first created, it was the only significant means of leveraging

private capital to revitalize public housing properties. But that is no longer the case.

Today, HUD has approved bond deals that have leveraged over $500 million in the

last couple of years. PHA’s can mortgage their properties to leverage private capital.

In Maryland, PHA’s are forming consortiums to leverage their collective resources

and assets to attract private capital. Cities such as Chicago are committing hundreds of millions of dollars of their own money to revitalize public housing neighborhoods. HUD is also seeking additional tools from Congress such as the Public

Housing Reinvestment Initiative.

HOPE VI has served its purpose. Established to revitalize 100,000 of the Nation’s

most severely distressed public housing units, the program has funded the demolition of over 115,000 severely distressed public housing units and the production of

over 60,000 revitalized dwellings. There are also more effective and less costly alternatives. The average cost per rebuilt HOPE VI unit is approximately $120,000, compared to $80,000 in HUD’s HOME program. Only 20,000 new HOPE VI units have

been completed to date. On average, 5 years pass between the time a HOPE VI

award is made and a new unit is occupied. In contrast, during the same period,

HUD’s HOME program produced 70,000 new rental units with an average construction time of about 2 years. It is time to look to the future and pursue new opportunities, such as those I have noted, which can more effectively serve local communities.

Among HUD’s other rental assistance programs, FHA insures mortgages on multifamily rental housing projects. In fiscal year 2004, FHA will reduce the annual

mortgage insurance premiums on its largest apartment new construction program,

Section 221(d)(4), for the second year in a row—from 57 basis points to 50 basis

points. With this reduction, the Department estimates that it will insure $3 billion

in apartment development loans through this program, for the annual production

of an additional 42,000 new rental units, most of which will be affordable to

50

moderate-income families, and most of which will be located in underserved areas.

Additionally, because this program is no longer dependent on appropriated subsidies, FHA avoids the uncertainty and the suspensions that have plagued the program in prior years. When combined with other multifamily mortgage programs,

including those serving nonprofit developers, nursing homes, and refinancing mortgagors, the FHA anticipates providing support for a total of some multifamily

178,000 housing units.

In addition to the extensive use of HOME funds for homeownership, the HOME

program has invested heavily in the creation of new affordable rental housing. The

program has, in fact, supported the building, rehabilitation, and purchase of more

than 322,000 rental units. Program funds have also provided direct rental assistance to more than 88,000 households.

The Native American Housing Block Grant (NAHBG) and Native Hawaiian Housing Block Grant (NHHBG) are also used for a wide variety of affordable-housing

activities. Several other HUD programs contribute to rental assistance, although not

as a primary function. For example, the flexible Community Development Block

Grant (CDBG) Program can be used to support rental housing activities.

Regulatory barriers on the State and local level have an enormous impact on the

development of rental and affordable housing. HUD is committed to working with

States and local communities to reduce regulatory and institutional barriers to the

development of affordable housing. HUD plans to create a new Office of Regulatory

Reform and commit an additional $2 million in fiscal year 2004 for research efforts

to learn more about the nature and extent of regulatory obstacles to affordable housing. Through this Office, researchers will develop the tools needed to measure and

ultimately reduce the effects of excessive barriers that restrict the development of

affordable housing at the local level.

Strengthening Communities

HUD is committed to preserving America’s cities as vibrant hubs of commerce and

making communities better places to live, work, and raise a family. The Fiscal Year

2004 Budget provides States and localities with tools they can put to work improving economic health and promoting community development. Perhaps the greatest

strength of HUD’s economic development programs is the emphasis they place on

helping communities address locally determined development priorities through decisions made locally.

The mainstay of HUD’s community and economic development programs is the

CDBG program. In fiscal year 2004, total funding requested for the CDBG is $4.732

billion. Funding for the CDBG formula program will increase $95 million from the

fiscal year 2003 enacted level, to $4.436 billion. Currently, 865 cities, 159 counties,

and 50 States plus Puerto Rico receive formula grant funds.

HUD is analyzing the impact of the 2000 Census on the distribution of CDBG

funds to entitlement communities and States. Based on this review, revisions to the

existing formula may be proposed so that funds are allocated to those communities

that need them the most and will use them effectively. Any proposals will, of course,

consider measures of need and fiscal capacity, as well as other factors.

Of the $4.732 billion in fiscal year 2004, $4.436 billion will be distributed to entitlement communities, States, and insular areas, and $72.5 million will be distributed by a competition to Indian tribes for the same uses and purposes. This budget

presumes legislative changes proposed in fiscal year 2003 to fund CDBG grants to

insular areas as part of the formula, and to shift administration of the Hawaii Small

Cities Program to the State. The remaining $224 million is for specific purposes and

programs at the local level and is distributed generally on a competitive grant basis.

As it did in fiscal year 2003, the Fiscal Year 2004 Budget again proposes $16 million for the Colonias Gateway Initiative (CGI). The CGI is a regional initiative,

focusing on border States where the colonias are located. Colonias are small, generally unincorporated communities that are characterized by substandard housing,

lack of basic infrastructure and public facilities, and weak capacity to implement

economic development initiatives. The Fiscal Year 2004 Funds will: Provide startup seed capital to develop baseline socio-economic information and a geographic information system; identify and structure new projects and training initiatives; fund

training and business advice; and provide matching funds to develop sustainable

housing and economic development projects that, once proven, could be taken over

by the private sector.

HUD participates in the privately organized and initiated National Community

Development Initiative (NCDI). The Fiscal Year 2004 Budget will provide $30 million for the NCDI and Habitat for Humanity, in which HUD has funded three

phases of work since 1994. A fourth phase will emphasize the capacity building of

community-based development organizations, including community development

51

corporations, in the economic arena and related community revitalization activities

through the work of intermediaries, including the Local Initiatives Support Corporation and the Enterprise Foundation.

The Fiscal Year 2004 Budget provides $31.9 million to assist colleges and universities, including minority institutions, to engage in a wide range of community development activities. Funds are also provided to support graduate programs that

attract minority and economically disadvantaged students to participate in housing

and community development fields of study.

Grant funds are awarded competitively to work study and other programs to assist institutions of higher learning in forming partnerships with the communities in

which they are located and to undertake a wide range of academic activities that

foster and achieve neighborhood revitalization.

The Fiscal Year 2004 Budget requests $65 million for the Youthbuild program.

This program is targeted to high school dropouts ages 16 to 24, and provides these

disadvantaged young adults with education and with employment skills through

constructing and rehabilitating housing for low-income and homeless people. The

program also provides opportunities for placement in apprenticeship programs or in

jobs. The fiscal year 2004 request will serve more than 3,728 young adults.

The Community Renewal Tax Relief Act of 2000 authorized the designation of 40

Renewal Communities (RC’s) and 9 Round III Empowerment Zones (EZ’s), and provided tax incentives which can be used to encourage community revitalization efforts. Private investors in both RC and EZ areas are eligible for tax benefits over

the next 10 years tied to the expansion of job opportunities in these locations. These

programs allow communities to design and administer their own economic development strategies with a minimum of Federal involvement. No grant funds have been

authorized or appropriated for RC’s or Round III EZ’s. Round II Empowerment Zone

communities have received grant funding in the past, but after 4 years of funding,

still have balances of unused funds available. Of course, all of the tax and other benefits associated with Zone designation remain intact. Also, both HOME and CDBG

funds can be used for the same activities.

The Administration is deeply engaged in meeting the challenge of homelessness

that confronts many American cities. Across the scope of the Federal Government,

funding for homeless-specific assistance programs increases 14 percent in the Fiscal

Year 2004 Budget proposal. We are fundamentally changing the way the Nation

manages the issue of homelessness by focusing more resources on providing permanent housing and supportive services for the homeless population, instead of simply

providing more shelter beds.

HUD is leading an unprecedented, Administration-wide commitment to eliminating chronic homelessness within the next 10 years. Persons who experience

chronic homelessness are a sub-population of approximately 150,000 individuals

who often have an addiction or suffer from a disabling physical or mental condition,

and are homeless for extended periods of time or experience multiple episodes of

homelessness. For the most part, these individuals get help for a short time but

soon fall back to the streets and shelters. Research indicates that although these

individuals may make up less than 10 percent of the homeless population, they consume more than half of all homeless services because their needs are not comprehensively addressed. Thus, they continually remain in the homeless system.

As a first step, the Administration reactivated the U.S. Interagency Council on

Homelessness. Reactivating the Council has provided better coordination of the

various homeless assistance programs that are directly available to homeless individuals through HUD, HHS, VA, the Department of Labor, and other agencies. And

$1.5 million is earmarked within the Homeless Assistance Account for the operations of the Council in fiscal year 2004.

HUD and its partners are focused on improving the delivery of homeless services,

which includes working to cut Government red tape and make the funding process

simpler for those who provide homeless services. The Fiscal Year 2004 Budget continues to provide strong support to homeless persons and families by funding the

HUD homeless assistance programs at the record level of $1.528 billion.

Several changes to the program are being proposed that will provide new direction

and streamline the delivery of funds to the local and nonprofit organizations that

serve the homeless population.

The Fiscal Year 2004 Budget includes funding for a new program to address the

President’s goal of ending chronic homelessness in 10 years: The Samaritan Initiative. Funded by HUD at $50 million, the Samaritan Initiative will provide new

housing options as well as aggressive outreach and services to homeless people

living on the streets. This program is part of a broader, coordinated Federal effort

between HUD, HHS, VA, and the Interagency Council on Homelessness.

52

In order to significantly streamline homeless assistance in this Nation and increase a community’s flexibility in combating homelessness, HUD will propose legislation to consolidate its current homeless assistance programs into a single program.

The Administration is also proposing legislation that would transfer intact the

Emergency Food and Shelter Program (EFSP) that administered by FEMA to HUD.

The transfer of this $153 million program would allow for the consolidation of all

emergency shelter assistance—EFSP and the Emergency Shelter Grant Program—

under one agency. EFSP funds are distributed to a National Board, which in turn

allocates funds to similarly comprised local Boards in eligible jurisdictions. Eligibility for funding is based on population, poverty, and unemployment data. The

Board will be chaired by the Secretary of HUD and will include the American Red

Cross, Salvation Army, and the United Way, as well as other experts.

In addition to funding homeless supportive services, the fiscal year 2004 funds

services benefiting adults and children from low-income families, the elderly, those

with physical and mental disabilities, victims of predatory lending practices, and

families living in housing contaminated by lead-based paint hazards.

Nearly two million households headed by an elderly individual or a person with

disabilities receive HUD rental assistance that provides them with the opportunity

to afford a decent place to live and oftentimes helps them to live independent lives.

The Fiscal Year 2004 Budget will provide the same level of funding for Housing

for the Elderly and Housing for Persons with Disabilities as was requested for fiscal

year 2003. The effectiveness of the Housing for the Elderly Program was evaluated

this past year using the Office of Management and Budget’s new Program Assessment Rating Tool (PART), and received low performance scores. The Administration

recognizes the need to improve delivery of housing assistance to the elderly (Section

202) and will examine possible policy changes or reforms to strengthen performance.

Funding for housing for the elderly is awarded competitively to nonprofit organizations that construct new facilities. The facilities are then provided with rental assistance, enabling them to accept very low-income residents. In fiscal year 2004,

$773 million plus $10 million in recaptures will be provided for elderly facilities.

Many of the residents live in the facilities for years; over time, these individuals

are likely to become frailer and less able to live in rental facilities without some

additional services. Therefore, the program is providing $30 million of the grants

for construction to convert all or part of the existing properties to assisted-living facilities. Doing so will allow individual elderly residents to remain in their units. In

addition, $53 million of the grant funds will be targeted to funding the services coordinators who help elderly residents obtain needed and supportive service from the

community.

The budget for fiscal year 2004 proposes to separately fund grants for Supportive Housing for Persons with Disabilities (Section 811) at $251 million. The disabled facilities grant program will also continue to set aside funds to enable persons with

disabilities to live in mainstream environments. Up to 25 percent of the grant funds

can be used to provide Section 8-type vouchers that offer an alternative to congregate housing developments. In fiscal year 2004, $42 million of the grant funds

will be provided to renew ‘‘mainstream’’ Section 8-type vouchers so that, where appropriate, individuals can continue to use their vouchers to obtain rental housing

in the mainstream rental market. The Housing for Persons with Disabilities Program also received low performance scores when it was evaluated using the PART.

The Department proposes to reform the program to allow faith-based and other nonprofit sponsors more flexibility in using grant funds to better respond to local needs.

In addition, the reformed program would recognize the unique needs of people with

disabilities at risk of homelessness, and give priority to serving this group as part

of the Administration’s Samaritan Initiative to end chronic homelessness.

One of the targeted uses of new incremental vouchers under the Section 8 program is for nonelderly disabled individuals who are currently residing in housing

that was designated for the elderly. Disabled individuals are provided Section 8

vouchers to continue their subsidies elsewhere. If a sufficient number of applications

for these vouchers are not received, the PHA’s may use them for any other disabled

individuals on the PHAs’ waiting lists. In fiscal year 2004, the Department will allocate $36 million for the nonelderly disabled to fund approximately 5,500 vouchers.

HUD will also provide $297 million in fiscal year 2004 in new grant funds for

housing assistance and related supportive services for low-income persons with HIV/

AIDS and their families. This is an increase of $5 million over the fiscal year 2003

level and is based on the most recent statistics prepared by the Centers for Disease

Control and Prevention. Although most grants are allocated by formula, based on

the number of cases and highest incidence of AIDS, a small portion are provided

through competition for projects of national significance. The program will renew all

existing grants in fiscal year 2004 and provide new grants for an expected three new

53

jurisdictions. Since 1999, the number of formula grantees has risen from 97 to an

expected 114 in fiscal year 2004.

HUD’s Lead-Based Paint Program is the central element of the President’s program to eradicate childhood lead-based paint poisoning in 10 years or less. In fiscal

year 2004, funding for the Lead-Based Paint Program will increase to $136 million

from $126 million provided in the President’s request for fiscal year 2003. Grant

funds are targeted to low-income, privately owned homes most likely to expose children to lead-based paint hazards. Included in the total funding is $10 million in

funds for Operation LEAP, which is targeted to organizations that demonstrate an

exceptional ability to leverage private sector funds with Federal dollars, and funding

for technical studies to reduce the cost of lead hazard control. The program also conducts public education and compliance assistance to prevent childhood lead poisoning. The President’s budget requests an additional $25 million for a new, innovative lead hazard reduction demonstration program to eliminate lead-based paint

hazards in homes of low-income children, funded under the HOME program. This

new program will provide creative ways of identifying and eliminating lead-based

paint hazards—methods that will serve as models for existing lead hazard control

programs, such as replacing old windows contaminated with high levels of lead

paint dust with new energy-efficient windows.

Also included is $10 million for the Healthy Homes Initiative, which is targeted

funding to prevent other housing-related childhood diseases and injuries such as

asthma and carbon monoxide poisoning. Working with other agencies such as the

Centers for Disease Control and the Environmental Protection Agency, HUD is

bringing comprehensive expertise to the table in housing rehabilitation and construction, architecture, urban planning, public health, environmental science, and

engineering to address a variety of childhood problems that are associated with

housing.

HUD is requesting $17 million in fiscal year 2004 to meet the expanded costs of

its Manufactured Housing Standards Program. This is a $4 million increase over the

current fiscal year. These funds will meet the costs of hiring contractors to inspect

manufacturing facilities, make payments to the States to investigate complaints by

purchasers, and cover administrative costs, including the Department’s staff. Fees

have been set by regulation to support the operation of this program.

Ensuring Equal Opportunity in Housing

In this land of opportunity, no one should be denied housing because of that individual’s race, color, national origin, religion, sex, familial status, or disability. The

Administration is committed to the fight against housing discrimination, and this

is reflected in HUD’s budget request for fiscal year 2004.

HUD is the primary Federal agency responsible for the administration of fair

housing laws. The goal of these programs is to ensure that all families and individuals have access to a suitable living environment free from discrimination. HUD

contributes to fair housing enforcement and education by directly enforcing the Federal fair housing laws and by funding State and local fair housing efforts through

two programs: The Fair Housing Assistance Program (FHAP) and the Fair Housing

Initiatives Program (FHIP).

The Fiscal Year 2004 Budget will provide $29.7 million—an increase of $4 million

above the fiscal year 2003 level—under FHAP to support State and local jurisdictions that administer laws substantially equivalent to the Federal Fair Housing Act.

The increase will provide: (1) An education campaign to address persistently high

rates of discrimination against Hispanic renters (as identified by the 2000 Housing

Discrimination Study); (2) funding for a Fair Housing Training Academy to better

train civil rights professionals and housing partners in conducting fair housing

investigations; and (3) additional funding for expected increases in discrimination

cases processed by the State and local fair housing agencies as a result of increased

education and outreach activities. The Department supports FHAP agencies by providing funds for capacity building, complaint processing, administration, special enforcement efforts, training, and the enhancement of data and information systems.

FHAP grants are awarded annually on a noncompetitive basis.

The Fiscal Year 2004 Budget will provide $20.3 million in grant funds for nonprofit FHIP agencies nationwide to directly target discrimination through education,

outreach, and enforcement. The FHIP for fiscal year 2004 is structured to respond

to the finding of the 3-year National Discrimination Study and related studies,

which reflect the need to expand education and outreach efforts nationally as a result of continuing high levels of discrimination.

Fighting predatory lending is an important activity for FHIP agencies, as reports

continue to show that the abusive lenders frequently target racial minorities, the

54

elderly, and women for mortgage loans that have exorbitant fees and onerous

conditions.

Educational outreach is a critical component of HUD’s ongoing efforts to prevent

or eliminate discriminatory housing practices. HUD will continue its work to make

individuals more aware of their rights and responsibilities under the Fair Housing

Act. A major study titled ‘‘How Much Do We Know’’ emphasized the continuing need

for public education on fair housing laws; in fiscal year 2004, FHIP organizations

throughout the country will continue to fund a major education and public awareness campaign in support of study findings.

The colonias have many barriers to fair and affordable housing in both rental and

homeownership. Many of the residents are recent immigrants unaware of their

rights under the Fair Housing Act. Funds will be targeted to FHIP agencies that

provide education and enforcement efforts in those areas. FHIP-funded fair housing

organizations with grants targeted to the colonias will provide residents with information on the Fair Housing Act and substantially equivalent laws and respond to

allegations of discriminatory practices.

FHIP will continue to emphasize the participation of faith-based and community

partners. Recognizing the tremendous impact that education has on the implementation of fair housing laws, virtually any entity (public, private, profit, and nonprofit) that actively works to prevent discrimination from occurring is eligible to

apply for funds under this initiative.

Faith- and community-based partnerships in FHIP will empower citizens by: (1)

Encouraging networking of State and local fair housing enforcement agencies and

organizations; (2) working in unison with faith-based organizations; and (3) promoting a fair housing presence in places where little or none exists today. HUD will

emphasize partnerships with grassroots and faith-based organizations that have

strong ties to those groups identified in the 2000 Housing Discrimination Study as

being most vulnerable to housing discrimination, particularly the growing Hispanic

population.

Promoting the fair housing rights of persons with disabilities is a Departmental

priority and will remain an important initiative within FHIP. Fair Housing Act accessibility design and construction training and technical guidance is being implemented through Project Fair Housing Accessibility First (formerly called the Project

on Training and Technical Guidance). The project, which is now in its second year,

will provide training at 48 separate venues to architects, builders, and others on

how to design and construct multifamily buildings in compliance with the accessibility requirements of the Fair Housing Act. During that same period, Project Fair

Housing Accessibility First will maintain a hotline and a website to provide personal

assistance to housing professionals on design and construction problems.

Promoting the Participation of Faith-Based and Community Organizations

HUD’s Center for Faith-Based and Community Initiatives (Center) was established by Executive Order 13198 on January 29, 2001. Its purpose is to coordinate

the Department’s efforts to eliminate regulatory, contracting, and other obstacles to

the participation of faith-based and other community organizations in social service

programs.

The Center will continue to play a key role in fiscal year 2004 in facilitating intraDepartmental and interagency cooperation regarding the needs of faith-based and

community organizations. It will focus on research; law and policy; development

of an interagency resource center to service the faith-based and community partners; and expanding outreach, training, and coalition building. Additionally, the

Center will participate in the furtherance of HUD’s overall strategic goals and objectives—particularly as they relate to partnership with faith-based and community

organizations.

On December 12, 2002, the President issued Executive Order 13279, ‘‘Equal Protection of the Laws for Faith-Based and Community Organizations.’’ Its intent is to

ensure that faith-based and community organizations are not unjustly discriminated

against by regulations and bureaucratic practices and policies. The Order directs the

Center to: (1) Amend any policies that contradict the Order; (2) where appropriate,

implement new policies that are necessary to further the fundamental principles

and policymaking criteria set forth in the Order; (3) implement new policies to

ensure that the collection of data regarding the participation of faith-based and

community organizations in social service programs that receive Federal financial

assistance; and (4) report to the President the actions it proposes to undertake to

implement the Order.

In compliance with Executive Orders 13198 and 13279, the Center will continue

to participate in implementing HUD’s strategic goals and objectives, as well as the

following key responsibilities: Conduct an annual Department-wide inventory to

55

identify barriers to participation of faith-based and community organizations in the

delivery of social services; initiate and support efforts to remove said barriers; widen

the pool of grant applicants to include historically excluded groups; identify and

reach out to faith- and community-based organizations with little or no history of

working with HUD; work with HUD program offices to strengthen and expand their

faith-based and community partnerships; and educate HUD personnel and State

and local governments on the faith-based and community initiative.

Embracing High Standards of Ethics, Management, and Accountability

Improving the performance in HUD’s critically needed housing and community

development programs begins at home in the Department, by embracing the high

standards of ethics, management, and accountability. The President’s Management

Agenda is focused on how we can better manage to fulfill our mission by addressing

the Department’s longstanding major management challenges, high-risk program

areas, and material management control weaknesses. Accountability begins with

clarity on the Department’s goals, priorities, and expectations for performance results. We have integrated the goals of the President’s Management Agenda with our

budget, our annual management operating plans, and our management performance

evaluation processes, to better assure accountability and results.

A key focus of the President’s Management Agenda is to address deficiencies in

HUD’s management of its financial and information systems and human capital,

which have hindered the Department’s ability to properly control and mitigate risks

in the rental housing assistance and single-family mortgage insurance programs.

There are no quick fixes for these longstanding problems, but we continue to pursue

a deliberate and methodical improvement process that is clearly demonstrating

progress in improving HUD’s program delivery structure and performance results.

Financial Management and Information Systems

A primary focus of the past 2 years has been on addressing the Department’s

most significant financial management systems deficiencies in the FHA, and on stabilizing and enhancing HUD’s existing core financial management systems operating environment. The FHA Subsidiary Ledger Project is proceeding on-schedule as

a multiyear, phased effort to replace FHA’s commercial accounting system with a

system that fully complies with Federal requirements, including budgetary accounting and funds control and credit reform accounting. A major project milestone was

accomplished with the successful implementation of the new FHA general ledger

system in October 2002. Enhanced funds control capabilities of the new system are

scheduled for implementation in 2004, and FHA will continue to adapt and further

integrate its 19 insurance program feeder systems over the next several years to

achieve full systems compliance by 2006.

While FHA awaits the completion of these systems improvements, they have been

working with the HUD Chief Financial Officer on a Department-wide effort to improve HUD’s funds control. HUD’s handbook on policies and procedures for the

administrative control of funds had not been updated since 1984. We updated and

strengthened these policies and procedures in a new Administrative Control of

Funds Handbook issued in December 2002.

With respect to HUD’s core financial management system, the HUD Central Accounting and Program System (HUDCAPS), we have been focused on stabilizing and

enhancing systems operations to support the accelerated preparation and audit of

HUD’s consolidated financial statements. We eliminated two reportable conditions

from the OIG’s fiscal year 2000 financial statement audit related to: (1) The reliability and security of HUD’s critical financial systems, and (2) controls over fund

balance with Treasury reconciliations. We prepared mid-year financial statements

in fiscal year 2002 and have begun the preparation of quarterly statements in fiscal

year 2003. Our year-end audit and reporting process was accelerated by 1 month

for fiscal year 2002, and we have plans for further acceleration the next 2 years to

meet the OMB mandate for issuance of our fiscal year 2004 audited financial statements by November 15, 2004.

HUD has received unqualified audit opinions on the Department’s consolidated financial statements for the last 3 consecutive years—a strong indicator of financial

management stability and accountability. However, the audit of our fiscal year 2002

financial statements was not trouble free. It contained 3 material weakness and 10

reportable conditions. Addressing these remaining internal control deficiencies is a

high priority for the Department.

While HUD’s core financial management system, HUDCAPS, is substantially compliant with Federal financial management systems requirements, it is inefficient

and expensive to maintain. We initiated the HUD Integrated Financial Management

Improvement Project (HIFMIP) to study options for the next generation core finanVerDate 11-MAY-2000 09:08 Apr 15, 2004 Jkt 000000 PO 00000 Frm 00059 Fmt 6621 Sfmt 6621 92859.TXT SBANK4 PsN: SBANK4
56

cial management system to replace HUDCAPS. Previous HUD systems integration

improvement efforts failed to fully meet their intended objectives due to inadequate

planning and commitment. HUD is taking the time to properly plan this project. A

HIFMIP Executive Advisory Committee was convened in January 2003—with representation from the Principal Staff of HUD’s major organizational components, including FHA and GNMA, and an advisory role has been provided for the HUD OIG.

A new Assistant CFO for Systems was hired in October 2002, and Project Manager

was hired for HIFMIP in February 2003. The HIFMIP Vision is scheduled for completion by January 2004, and feasibility studies with a systems recommendation by

July 2004.

HUD’s overall fiscal year 2004 information technology (IT) portfolio will benefit

from our continuing efforts to improve the IT capital planning process, convert to

performance-based IT service contracts, strengthen IT project management to better

assure results, extend the data quality improvement program, and improve systems

security on all platforms and all applications. HUD is also continuing to pursue

increased electronic commerce and is actively participating in the President’s ‘‘eGovernment’’ projects to better serve all of our citizens and realize cost-efficiencies

through standardized systems solutions in common areas of information and processing need.

Human Capital Management

HUD’s staff, or ‘‘human capital,’’ is its most important asset in the delivery and

oversight of the Department’s mission. Effective human capital management is the

purview of all HUD managers and program areas, and improvements have been

geared toward meeting HUD’s primary human capital management challenges.

HUD has taken significant steps to enhance and to better utilize its existing staff

capacity, and to obtain, develop, and maintain the staff capacity necessary to adequately support HUD’s future program delivery. Building upon the REAP and

TEAM management tools, a new staff resource estimation and allocation system implemented in 2002, HUD will complete a Comprehensive Workforce Analysis in 2004

to serve as the main component to fill mission critical skill gaps through succession

planning, hiring, and training initiatives in a Five-Year Human Capital Management Strategy.

HUD is working to determine where application of competitive sourcing to staff

functions identified as commercial would result in better performance and value for

the Government. We have worked with OMB to ensure the appropriate amount and

mix of competitive sourcing opportunities, taking into account the workforce we

have inherited, including the significant downsizing and extensive outsourcing of

administrative and program functions over the past decade. HUD’s Competitive

Sourcing Plan identifies some initial opportunities for consideration of possible

outsourcing, in-sourcing, or direct conversion studies to realize the President’s goals

for cost efficiency savings and improved service delivery. HUD will continue to assess its activities for other areas where competitive sourcing studies might benefit

the Department.

Strengthening Controls Over Rental Housing Assistance

HUD’s considerable efforts to improve the physical conditions at HUD-supported

public and assisted housing projects are meeting with success. HUD and its housing

partners have already achieved the original housing quality improvement goals

through fiscal year 2005 and are raising the bar with new goals. However, HUD

overpays hundreds of millions of dollars in rental housing subsidies due to the incomplete reporting of tenant income and the improper calculation of tenant rent

contributions. Under the President’s Management Agenda, HUD’s goal is to reduce

rental assistance program errors and resulting erroneous payments 50 percent by

2005. HUD has established aggressive interim goals for a 15 percent reduction in

2003 and a 30 percent reduction in 2004.

To achieve our erroneous assistance payments reduction goal, we have taken steps

to reestablish an adequate HUD monitoring capacity in the field to oversee intermediary performance. Field staff is conducting intense, on-site monitoring reviews

to detect and correct income verification and subsidy calculation errors. We are also

working to provide intermediaries with improved program guidance and automated

tools to more efficiently and effectively administer the rental assistance programs.

Program simplification proposals are also under consideration, along with a pending

legislative proposal for increased authority to perform more effective computer

matching with tenant income data sources to enable intermediaries to perform upfront verifications of income used in rent and subsidy calculations. Updated error

measurement studies will be performed on program activity in 2003 through 2005

to assess the effectiveness of our efforts to reduce program and payment errors.

57

Improving FHA’s Single-Family Housing Programs Risk Management

FHA manages its Single-Family Housing Mortgage Insurance Program area in a

manner that balances program risks with the furtherance of program goals, while

maintaining the financial soundness of the Mortgage Mutual Insurance (MMI) Fund

that supports these programs. The MMI Fund is financially sound and the singlefamily housing programs are contributing to record homeownership rates, with a

focus on homebuyers that are underserved by the conventional market. Nevertheless, overall program performance and the condition of the MMI Fund could be further improved if all lenders, appraisers, property managers, and other participants

in FHA’s program delivery structure fully adhered to FHA program requirements

designed to reduce program risks and further program goals.

In the past 2 years, FHA has initiated or completed numerous actions to improve

the content, oversight, and enforcement of its program requirements, including consideration of alternative business processes. FHA developed 16 rules to address deceptive or fraudulent practices. This includes the new Appraiser Watch Program,

improvements to the Credit Watch Program that will identify problem loans and

lenders earlier on, new standards for home inspectors, a final rule to prohibit property ‘‘flipping’’ in FHA programs, and rules to prevent future swindles like the

203(k) scam that threatened the availability of affordable housing in New York City.

These reforms, and the greater transparency they ensure, will make it more difficult

for unscrupulous lenders to abuse borrowers. The HUD budget ensures that consumer education and enhanced financial literacy remain potent weapons in combating predatory lending.

In addition, FHA continues to enhance its staff capacity for administering this

program area, and continues to achieve favorable property disposition results

through its performance-based management and marketing (M&M) contracts. M&M

contracts have resulted in a steady decline in FHA’s property inventory, from 36,000

homes at the end of fiscal year 2000 to 30,113 at the end of fiscal year 2002. The

loss per claim on insured mortgage defaults has been cut from 37 percent to 29.5

percent.

Conclusion

As we implement our proposed Fiscal Year 2004 Budget, we will also judge our

success by the lives and communities we have helped to change through HUD’s mission of compassionate service to others: The young families who have taken out

their first mortgage and become homeowners, the homeless individuals who are no

longer homeless, the neighborhoods that have found new hope, the faith-based and

community organizations that are today using HUD grants to deliver social services,

and the neighborhoods once facing a shortage of affordable housing that now have

enough homes for all.

Empowered by the resources provided for and supported by HUD’s proposed

Fiscal Year 2004 Budget, our communities and the entire Nation will grow even

stronger. And more citizens will come to know the American Dream for themselves.

I would like to thank each of you for your support of my efforts, and I welcome

your guidance as we continue our work together.

Thank you.