In 1989, the Congress established the National Commission on Severely Distressed Public Housing (the Commission) to explore the factors contributing to structural, economic, and social distress in public housing; identify strategies for remediation; and propose a national action plan to eradicate distressed conditions by the year 2000. In 1992, the Commission reported that approximately 86,000, or 6 percent, of the nation’s public housing units were severely distressed. According to the Commission, these units qualified as severely distressed because of their physical deterioration and uninhabitable living conditions; high levels of poverty; inadequate and fragmented services; institutional abandonment; and location in neighborhoods often as blighted as the sites themselves. Although the Commission did not identify specific locations as severely distressed, it recommended that funds be made available to address distressed conditions, and that these funds be added to the amounts traditionally appropriated for modernizing public housing. The Commission also encouraged the development of supportive services for residents in distressed housing developments. In response to the Commission’s report, Congress established the Urban Revitalization Demonstration Program, more commonly known as HOPE VI, at HUD. By providing funds for a combination of capital improvements and community and supportive services, the program seeks to (1) improve the living environment for public housing residents of severely distressed public housing through the demolition, rehabilitation, reconfiguration, or replacement of obsolete public housing; (2) revitalize sites on which such public housing is located, and contribute to the improvement of the surrounding neighborhood; (3) provide housing that will avoid or decrease the concentration of very low-income families; and (4) build sustainable communities. To achieve these objectives, the program provides demolition and revitalization grants to public housing authorities (PHA). Demolition grants fund the demolition of distressed public housing, the relocation of residents affected by the demolition, and the implementation of supportive services for permanently relocated residents. Revitalization grants fund, among other things, the capital costs of major rehabilitation, new construction, and other physical improvements; demolition of severely distressed housing; and community and supportive service programs for residents, including those relocated as a result of revitalization efforts. Through fiscal year 2001, HUD had awarded 177 demolition grants totaling approximately $293 million and 165 revitalization grants totaling about $4.5 billion. According to HUD, HOPE VI started as an embellished modernization program but has evolved into a comprehensive and complex transformation in how housing authorities provide affordable housing to low-income families. A significant stage in that evolution was the issuance of the Mixed-Finance Rule in 1996. Under this rule, for the first time PHAs were allowed to use public housing funds designated for capital improvements, including HOPE VI funds, to leverage other public and private investment to develop public housing units. The rule also permitted PHAs to provide public housing capital funds to a third party so that the third party could develop public housing units. The third party would then own the resulting public housing units and could receive capital or operating assistance for the units from HUD through the PHA. HUD emphasizes that this mixed-finance approach to public housing development is the single most important development tool currently available to PHAs. The approach encourages the formation of new public and private partnerships to ensure the long-term sustainability of the public housing development and surrounding community. The mixed- finance approach can produce developments that include both public housing and nonpublic housing units, such as low-income housing tax credit units or market rate units. Mixed-finance HOPE VI projects are often undertaken in development phases. A housing authority may not begin a phase to be financed with a combination of public and private funds until it has submitted, and HUD has approved, a mixed-finance proposal for that phase. The mixed-finance proposal presents the fundamental information that HUD needs to evaluate a mixed-finance phase. For example, it contains basic descriptive information such as the number and types of units planned, the development schedule, the sources and uses of funding, and the operating budget for the phase. Because of the time that is needed to plan HOPE VI projects and develop specific proposals, most of the proposals that HUD approved through fiscal year 2001 were funded with revitalization grants awarded several years earlier. PHAs with revitalization grants can use a variety of other public and private funds to develop their HOPE VI sites. Public funding can come from federal, state, and local sources. For example, PHAs can use federal resources HUD has already awarded for capital improvements at public housing developments. These capital funds can be used for a variety of purposes, including the development, financing, and modernization of public housing and the replacement of obsolete utility systems and dwelling equipment. PHAs can also use funds raised through federal low- income housing tax credits. Under this program, states are authorized to allocate federal tax credits as an incentive to the private sector to develop rental housing for low-income households. After the state allocates tax credits to developers, the developers typically offer the credits to private investors. The private investors use the tax credits to offset taxes otherwise owed on their tax returns. The money private investors pay for the credits is paid into the projects as equity financing. In addition, PHAs may obtain some of the funding needed for infrastructure and public improvements from state and local governments. Private sources can include private mortgage financing and financial or in-kind contributions from nonprofit organizations. See appendix II for more information on the types of funds that may be invested at HOPE VI sites. According to our analysis of HUD data, housing authorities expect to leverage, for every dollar received in HOPE VI revitalization grants awarded through fiscal year 2001, an additional $1.85 in funds from other sources. Our figure is slightly lower than the $2.07 that HUD considers to be the projected amount leveraged per HOPE VI dollar because, unlike HUD, we do not consider funds such as HOPE VI demolition grants to be leveraged funds. Also, HUD data indicate that, of the total funds that housing authorities with revitalization grants have budgeted for their HOPE VI sites, 46 percent come from federal sources. However, this percentage does not include funds that grantees receive through low- income housing tax credits, which are a direct cost to the federal government. Our analysis of all mixed-finance proposals HUD approved through fiscal year 2001 indicates that 79 percent of the budgeted funds came from federal sources, when low-income housing tax credit funding was included. Our analysis of data in HUD’s HOPE VI reporting system shows that housing authorities that received HOPE VI revitalization grants in fiscal years 1993 to 2001 expect to leverage an additional $1.85 for every HOPE VI dollar received. However, HUD considers the amount of leveraging to be an additional $2.07 for every HOPE VI dollar received because it includes other HUD-provided public housing funds as leveraged funds. In total, $964 million in public housing funds have been budgeted for HOPE VI sites. The $964 million includes capital funds and $150 million in HOPE VI demolition grant funds. Grantees would have received the capital funds regardless of whether they received a HOPE VI revitalization grant, and the demolition grants are another category of HOPE VI funds. When the $964 million in public housing funds are not included as leveraged funds, the overall projected leveraging per HOPE VI dollar is reduced from $2.07 to $1.85. Even when public housing funds are excluded from leveraged funds, our analysis of HUD data shows that leveraging has increased over the life of the HOPE VI program. According to HUD’s HOPE VI reporting system, housing authorities that received a revitalization grant in fiscal year 1993 expected to raise an additional $0.58 (excluding public housing funds) for every HOPE VI grant dollar awarded to them. By fiscal year 2001, housing authorities expected to augment every HOPE VI revitalization grant dollar awarded to them with an additional $2.63 from other sources (excluding public housing funds). Though mixed-finance development was not an official option for housing authorities until 1996, housing authorities were permitted, prior to 1996, to use a mix of public funds to redevelop distressed public housing sites. According to HUD officials, the amounts leveraged by housing authorities should increase over time, as potential investors become more familiar with the HOPE VI program and housing authorities become more sophisticated in seeking and securing other sources of funds. Figure 2 shows that amounts leveraged by housing authorities have generally increased over time. Our analysis of the mixed-finance proposals that HUD approved through fiscal year 2001 shows that 79 percent of the funding comes from federal sources. However, HUD’s data shows that 46 percent of all resources budgeted for HOPE VI sites come from the federal government. HUD’s HOPE VI reporting system contains funding projections for all revitalization grants awarded through fiscal year 2001. As shown in figure 3, the reporting system divides budgeted resources into four categories, as follows: HOPE VI funds—HOPE VI revitalization grant funds awarded to a housing other public housing funds—other HOPE VI funding, such as demolition grants, and resources HUD allocates to housing authorities, such as capital funds; other federal funds—all other federal sources of funding; and nonfederal funds—funds from state and local governments, private funds, and equity raised from low-income housing tax credits. The sale of low-income housing tax credits to investors generates private capital to acquire, construct, or rehabilitate housing targeted to households earning less than 60 percent of median income; therefore, HUD defines the funds generated as private funds. However, tax credits represent forgone federal income and, therefore, are a direct cost to the federal government.