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The original documents are located in Box 1, folder "Budget (FY1977) - HUD" of the
Richard B. Cheney Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
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copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 1 of the Richard B. Cheney Files at the Gerald R. Ford Presidential Library
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
MEETING ON FY-1977 BUDGET
Thursday, November 13, 1975
3:00 p.m. (60 minutes)
Oval Office
From: James T. Lynn
I. PURPOSE
To make decisions on issues raised by the FY-77 budget
for the Department of Housing and Urban Development.
II. BACKGROUND, PARTICIPANTS AND PRESS PLAN
A. Background: The FY-77 budget submission of the
Department of Housing and Urban Development has
been reviewed by the Office of Management and
Budget and members of the White House staff.
This meeting will focus on an issue raised in
the budget submission that requires Presidential
consideration and determination.
B. Participants: James T. Lynn, James Cannon,
Paul O'Neill, and Dale McOmber.
C. Press Plan: David Kennerly photo
III. TALKING POINTS
A. Paul, what is the first issue we should discuss
today?
18.7020
OFFICE PRESIDENT
EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON, D.C. 20503
NOV 12 1975
ACTION
MEMORANDUM FOR:
THE PRESIDENT
FROM:
James T. Lynn
SUBJECT:
1977 Budget Decisions:
Department of Housing
and Urban Development
The agency requests and my recommendations with respect
to 1977 budget amounts for the Department of Housing and
Urban Development are presented in the tabulation
attached (Tab A). A summary of the principal budget
decisions reflected in my recommendation is provided as
background information (Tab B).
Four key issues have been identified for your considera-
tion (additional detail at Tab C).
I.
SUBSIDIZED HOUSING
Secretary Hills recommends that the budget provide
for 400,000 units under the Section 8 rental housing
program. She acknowledges, however, that additional
sweeteners (e.g., subsidies under the Tandem Plan,
longer subsidy terms, aid to State housing agencies)
are needed if the 240,000-unit target for new
construction is to be achieved.
OMB recommends approval for 245,000 units under
Section 8, of which only one-third would involve
new construction. When added to the 130,000 units
under the reactivated Section 235 program, subsidized
housing activity would be only slightly below the
400,000 level contained in the 1976 Budget. We
believe Section 8 support for new construction should
be kept as close to zero as politically feasible,
given the staggering costs anticipated under this
program. (In our view, this issue is closely linked
to the Tandem Plan issue which has been put before
you in a separate memorandum.)
2
II.
MORTGAGE MODIFICATION
HUD has proposed a new policy toward subsidized
housing projects with nonprofit sponsors that,
in effect, would forgive 75 percent of the
required mortgage payments. The Secretary
believes such relief is necessary to maintain
the stock of subsidized housing and avoid a
congressionally mandated program of operating
subsidies.
OMB recommends against the proposed policy on
the grounds that it would increase outlays
sharply without removing the threat of operating
subsidies. Furthermore, we recommend that HUD
take a hard line toward projects in default,
foreclosing where they cannot be made current
and reselling (with Section 8 assistance for
present tenants) to the highest bidder.
We are still discussing this issue with HUD, and
our recommendation could change if convincing
evidence to support the Department's position is
developed.
III. PUBLIC HOUSING OPERATING SUBSIDIES
HUD recommends continuing the present system of
funding public housing operating deficits, without
change.
OMB recommends revising the present system to
provide for greater tenant contributions to cover
operating costs. Although these changes would
increase median rents by 28 percent, no family
would be expected to pay more than 25 percent of
its gross income.
IV. COMPREHENSIVE PLANNING GRANTS ("701")
HUD reduced its original budget request for planning
grants from $100 million to $50 million as part of
its outlay reduction plan. The funds would be
directed towards regional organizations so that
required housing and land use plans may be completed,
qualifying the organizations for future planning
assistance. HUD also sees the program as a receptacle
for consolidating several Federal planning programs
3
under central management of the 701 organization to
increase efficiency and coordination and decrease
Government overhead costs.
OMB recommends folding the 701 program into the
Community Development Block Grant Program in 1977.
There are adequate funds available under the block
grant program to support 701 activities, and these
funds go to chief executives rather than regional
organizations lacking governmental authorities.
Numerous attempts to devise a strategy to consoli-
date Federal planning programs have been unsuccessful.
Attachments
Recommendations
and Reductions
TAB A
1977 Budget
Department of Housing and Urban Development
Summary Data
(In Millions)
Employment, end-of-year
Budget
Full-time
Authority*
Outlays
Permanent
Total
1975 actual
15,550
7,488
15,142
16,881
1976 February budget
21,239
7,055
15,200
17,174
enacted
25,879
7,810
XXX
XXX
HUD request
25,881
7,812
15,060
16,985
OMB recommendation
24,862
7,383
14,960
16,885
TQ February budget
341
1,905
XXX
XXX
enacted
626
2,140
XXX
XXX
OMB recommendation
347
1,947
XXX
XXX
1977 planning target
35,799
8,000
XXX
XXX
HUD request
51,773
8,613**
16,222
17,847
OMB recommendation
7,361
7,453
15,414
17,039
1978 OMB estimate
29,198
8,302
15,414
17,039
* Revised to show budget authority for long-term subsidy programs on a consistent basis.
** The Secretary would offset $613 million through the sale of assets ($600 million) and
miscellaneous reductions.
1977 Budget
Department of Housing and Urban Development
Summary of Recommended Program Reductions
($ in millions)
1976
TQ
1977
1978
FTP
FTP
FTP
0
Employ.
0
BA
0
Employ.
0
Employ.
Current base
7,604
15,375
2,022
45,023
8,103
16,411
9,978
16,617
Recommended level
7,383
14,960
1,947
7,361
7,453
15,414
8,302
15,414
Reduction
221
415
75
37,662
650
997
1,676
1,203
Program reductions:
Section 8/subsidized housing -
reduce new construction
---
434
---
30,195
---
1,056
544
1,017
Comprehensive Planning -
terminate program.
----
---
-------
75
15
106
68
106
Rehabilitation Loans -
terminate program
(legislation required)
21
60
32
50
68
60
70
60
Section 802/Grants to State
Housing Agencies - rescind
1976 appropriation
(legislation required)
-----
---
---
600
---
20
15
20
GNMA: Special Assistance
Functions - no new tandem
purchases
---
---
---
5,000
42
---
595
---
Mortgage insurance programs:
Accelerate foreclosures
---
---
---
118
118
-104
90
---
Accelerate sale of single-
family properties
159
-79
42
261
261
-163
----
---
-2-
1976
TQ
1977
1978
FTP
FTP
FTP
0
Employ.
0
BA
0
Employ.
0
Employ.
Raise premiums to actuarially
sound levels
---
---
---
18
18
---
26
---
Salaries and Expenses -
reductions made possible by
program cuts
1
XXX
1
10
10
XXX
10
XXX
Payments for Operation of Low-
Income Housing Projects:
Eliminate deductions from
gross income (legislation
required)
---
---
---
87
25
---
79
---
Increase rent base: terminate
Target Projects Demonstration
Program
----
----
---
114
23
22
84
---
Housing for the elderly - reduce
loan level (off-budget)
(---)
(---)
(---)
(160)
(---)
(-)
(24)
(---)
Rent supplements - make no
amendments to existing
contracts
---
---
---
800
10
----
25
----
College Housing - terminate
program (legislation
required)
40
---
---
334
60
------
70
---
Total reductions
221
415
75
37,662
650
997
1,676
1,203
-3-
1977 Outlay Reductions
Department of Housing and Urban Development
Rehabilitation Loans
(dollars in millions)
1976
TQ
1977
1978
FTP
FTP
FTP
O
employ.
10
BA
O
employ.
O
employ.
Amount:
Current base
76
60
29
50
50
60
50
60
Recommended level
55
0
-3
0 -18
0
-20
0
Reduction
21
60
32
50
68
60
70
60
Action required:
Rescission of all balances available for the Rehabilitation Loan program.
Program impact:
The Rehabilitation Loan program adds no authority to what is already available in the
Community Development Grant program. HUD estimates that community development grant
funds going to rehabilitation will total about $307 million in 1976 and $350 million in
1977. These amounts are far greater than any one year's funding for the Rehabilitation
Loan program during its 10-year existence as a categorical program.
Other considerations:
This action will not be accepted easily by either big city mayors or the Congress.
-4- -
1977 Outlay Reductions
Department of Housing and Urban Development
Section 802 Assistance to State Housing Agencies
(dollars in millions)
1976
TQ
1977
1978
FTP
FTP
FTP
BA
0
employ.
0
BA
0
employ.
BA
0
employ.
Amount:
Current base
600
0
1/
0
600
0
20
2/
600
15
20 2/
Recommended level
0
0
1/
0
0
0
0
0
0
0
Reduction
600
0
0
600
0
20
600
15
20
1/ HUD proposes to absorb the 1976 operation within current ceilings.
2/
OMB estimate of staffing for ongoing program.
Actions required:
Propose rescission of the $15 million appropriated to liquidate contract authority in
1976 for interest subsidies to State housing and development agencies. Request no
appropriations for 1977 and beyond. Do not implement the loan guarantee provision.
Program impact:
Implementing the interest subsidies and loan guarantees would decrease the borrowing
costs of State agencies at the margin. These decreased costs would induce State
agencies to construct more subsidized housing for low- or moderate-income households.
Most immediately, it would increase the new construction component of the Section 8
Lower Income Housing Assistance Program above what it otherwise would be.
States could reduce borrowing costs for their agencies by a greater amount in the
aggregate by pledging their "full faith and credit" to the agency borrowing. However,
States are unlikely to do this in any great number.
-5-
To the extent federally sponsored new construction for low-income households is desired,
not implementing Section 802 would shut off a potential resource to assist in the
administrative burden of the Section 8 program.
Other considerations:
Rescission would be very difficult to accomplish. Congress appears determined to insure
the role of State agencies in constructing subsidized housing and to provide some
financing mechanism for new construction under the Section 8 program.
-6-
1977 Outlay Reductions
Department of Housing and Urban Development
Mortgage Purchase Assistance (Tandem) Program
(dollars in millions)
1976
TQ
1977
1978
FTP
FTP
FTP
0
employ.
0
BA
0
employ.
0
employ.
Amount:
Current base
0
---
0
5,000
42
595
Recommended level
0
---
0
0
0
0
Reduction
0
0
5,000
42
595
Actions required:
Do not release any of the $5 billion in standby mortgage purchase authority currently
available, and request no new authority for 1977 or later.
Program impact:
The Tandem program provides an interest subsidy, inducing housing construction at the
margin. OMB is pessimistic that the program has any appreciable impact on the volume
of housing starts. Most of the subsidized construction starts would occur anyway.
Many others would represent starts pushed forward from future time periods.
Other considerations:
The Tandem funds are standby funds, and their release is at the discretion of the
Administration. This flexibility provides political advantages in timing and/or
targeting Tandem assistance to meet sudden political and/or economic needs.
-7- - -
1977 Outlay Reductions
Department of Housing and Urban Development
Acquired Property Sales
(dollars in millions)
1976
TQ
1977
1978
FTP
FTP
FTP
0
employ.
0
BA
0
employ.
0
employ.
Amount:
Current base
-710
1,038
-177
-706
-706
990
-706
990
Recommended level
-869
1,117
-219
-967
-967
1,153
-706
990
Reduction
159
-79
42
261
261
-163
0
0
Actions required:
Increase the sales targets for the disposition of single-family property acquired in FHA's
mortgage insurance operations.
Program impact:
Sales targets would be increased to 85,000 (from 73,000) in 1976 and 100,000 in 1977.
The acquired property inventory would decline to 60,000 units in 1977 instead of
increasing to 110,000 units. The increased sales of acquired single-family homes would
require greater emphasis on the "as-is" sales approach relative to the "repair and
reinsure" approach. As-is sales result in the highest return to the FHA Fund and a
quicker disposition of units from the inventory. However, deemphasizing the repair and
insure approach would reduce the use of Federal money for rehabilitation.
Other considerations:
Confrontations with public interest groups and city officials would increase if heavy
use of the as-is sales approach occurred in particular neighborhoods. Neighbors and
city officials would be pleased to the extent that the units were privately rehabili-
tated and occupied faster than they would be with the repair and insure approach.
-8-
1977 Outlay Reductions
Department of Housing and Urban Development
Federal Housing Administration (FHA) Fund/Mortgage Insurance Premiums
(dollars in millions)
1976
TQ
1977
1978
FTP
FTP
FTP
0
employ.
0
BA
0
employ.
0
employ.
-
Amount:
Current base
-463
---
-125
-466
-466
---
-466
Recommended level
-463
---
-125
-484
-484
---
-492
Reduction
0
0
18
18
26
Actions required:
Administratively increase mortgage insurance premiums to actuarially sound levels (up to
the legal maximum annual rate of 1 percent) for each FHA mortgage insurance program.
Program impact:
The change in premiums would be small and it is unlikely that the impact on demand
would be significant, although the volume of insurance could decrease a small amount.
Low-income and minority families are proportionately heavier users of the riskier
insurance programs where premiums would be increased the most. HUD believes the
increased premiums would
"
cause some groups to delay home purchase." The
Section 235 program would be reactivated in January with an actuarially sound
premium.
Other considerations:
Mortgage bankers, homebuilders, realtors, and others in the real estate industry have
become accustomed to the flat premium. The Section 235 premium is under an intensive
review by HUD so a January change is possible. HUD could review the other premium
levels with interested private parties and the Congress before changing premiums on
July 1, 1976.
-9-
1977 Outlay Reductions
Department of Housing and Urban Development
Housing for the Elderly
(dollars in millions)
1976
TQ
1977
1978
FTP
FTP
FTP
O
employ.
O
BA
O
employ.
O
employ.
Amount (off budget) :
Current base
(-15)
---
(-4)
(375)
(132)
(359)
Recommended level
(-15)
(-4)
(215)
(132)
(335)
Reduction
(0)
(0)
(160)
(0)
(24)
Actions required:
Reduce the annual loan level for Section 202/Housing for the Elderly from $375 million
for permanent financing to $215 million for construction loans.
Program impact:
The $160 million reduction would reduce the number of elderly housing units assisted
from 15,000 to 8,600 units. Nonprofit sponsors would have to obtain permanent
financing from other sources (e.g., FHA 100-percent insured loans), and pay the market
interest rates. However, the interest differential is less than one-half percent, and
the impact on rent levels would be minimal. At current rates, the difference in rent
required would be $9 per month which would lower tenant income requirements by less than
$500 per year. Treasury borrowing needed to finance $375 million in permanent loans
would raise interest on the national debt by approximately $20 million. The proposed
construction loan approach would avoid the pyramiding of long-term debt and much of the
increased borrowing costs since the loans would be repaid in 2 years rather than 40.
Other considerations:
Elderly housing has been one of the most emotional issues in Federal housing policy.
Nonprofit sponsor and elderly interest groups have been effective in obtaining
legislation that the Administration opposed.
-10-
1977 Outlay Reductions
Department of Housing and Urban Development
Rent Supplements
(dollars in millions)
1976
TQ
1977
1978
FTP
FTP
FTP
O
employ.
O
BA
O
employ.
o
employ.
Amount:
Current base
210
60
800* 268
305
Recommended level
210
60
258
280
Reduction
0
0
800*
10
25
*
$20 million in contract authority times the 40 year project life.
Actions required:
Do not request the release of any contract authority for rent supplements after 1976.
Program impact:
If additional rent supplement authority is not provided to underwrite operating costs
and rent increases, tenants would either have to pay increased rents or move. If too
many tenants moved and the owner could not find replacements, the mortgage might go into
default and be assigned to HUD. There is no basis for estimating the volume or cost of
these assignments. The assigned mortgage could be foreclosed and sold at a loss.
Adopting a policy of matching operating cost increases with Federal subsidies weakens
incentives for good management. It would also increase subsidies going to those
relatively few families already being subsidized heavily, while comparable families
receive no subsidies.
Other considerations:
Since the rent supplement program serves mainly low income households, the President will
be criticized as being unconcerned with the welfare of these tenants. Pressure to
provide additional rent supplement authority after 1976 will come from low income and
minority groups and some Congressmen.
-11-
1977 Outlay Reductions
Department
of Housing and Urban Development
College Housing Loans
(dollars in millions)
1976
TQ
1977
1978
FTP
FTP
FTP
0
employ.
0
BA
0
employ.
0
employ.
Amount:
Current base
10
-15
Recommended level
-30
15
-334
-60
-70
Reduction
40
0
334
60
70
Actions required:
Rescission of all funds available for direct loans.
Program impact:
Recent studies have shown that there is no current need for a national College Housing
Program--a point the House Appropriations Committee acknowledges. Moreover, subsidized
loans financing dormitory construction represent an inefficient means of carrying out
the Administration's higher eduction policy. Such loans favor rich and poor students
alike, and discriminate against day students and students who live off campus.
Other considerations:
Individual colleges have lobbied for continuation of the loan program in order to
finance additional construction or modernization of existing dormitories. Favorable
action by the Congress will be difficult to achieve.
-12-
Summary of Budget
Decisions
TAB B
1977 Budget
Department of Housing and Urban Development
Summary of Principal Budget Decisions
Reflected in the OMB Recommendations
Fiscal Year 1976
Mortgage Purchase ("Tandem") Program
In a separate memorandum, HUD has proposed release of $3 billion in mortgage purchase
authority for multifamily housing.
OMB has recommended against release of this authority, and the budget totals
presented under Tab A do not include any outlays from additional mortgage purchases.
Housing for the Elderly (Section 202)
HUD recommends acceding to the will of the Congress, expressed in the 1976 HUD
appropriations bill, by using the $375 million in Section 202 funds to provide
permanent financing for elderly projects. The Labor-Management Committee has also
recommended release of the funds for permanent financing. Secretary Hills believes
her credibility is at stake on this issue.
OMB recommends deferring the 1976 funds until legislation can be enacted,
allowing their use for construction financing only. Although OMB acknowledges that
the chances for success are minimal, it believes the attempt should be made. Use of
the funds for permanent financing would have almost no beneficial impact on the
rents charged elderly tenants, but would require significant Treasury borrowing in
each of the next 20 years. Since construction loans would be repaid in two years, the
impact of such assistance on Treasury borrowing would be considerably less. OMB also
recommends limiting the volume of loans to $215 million in 1977--the original 1975/1976
level (off-budget outlay savings - $24 million in 1978).
FHA Mortgage Insurance Program: Property Sales Targets
HUD recommends deemphasizing the technique of selling acquired property in as-is
condition (that is, without major rehabilitation). As-is sales on a massive scale
have been criticized by some mayors. Since the repair-and-sell approach is not
able to move units out of HUD's inventory as quickly as the as-is approach, the
Department recommends a reduction in the sales target approved in the budget for
1976, from 100,000 units to 73,000 units.
OMB recommends sales targets of 85,000 units in 1976 and 100,000 units in 1977
(outlay savings - $159 million in 1976 and $261 million in 1977). HUD acknowledges
that the as-is approach is significantly more cost effective; public relations
considerations account for the Department's recommendation. OMB argues that public
relations considerations cut both ways; cities also desire to get unoccupied
properties out of the HUD inventory and back into use quickly--something as-is
sales can do much better than the time consuming repair-and-sell approach.
Rehabilitation Loans (Section 312)
HUD proposes to use the $50 million added to the 1976 budget by Congress for
rehabilitation loans. The Department would not continue the program beyond its
current expiration date of August 22, 1976.
OMB recommends seeking the rescission of all available funds (outlay savings - $53
million in 1976 and 1976 TQ). Financing private rehabilitation is an eligible
activity under the Community Development Block Grant program, and in fact, recipients
are using the funds to support rehabilitation as never before. The 312 loan program
is merely another spigot for securing Federal dollars. Congress has already extended
the program once, even though it was suppose to have been replaced by block grants.
If these funds are not rescinded, the program is likely to gain momentum and be
continued indefinitely.
Interest Subsidy Grants to State Housing Agencies (Section 802)
HUD recommends using the authority provided by Congress in the 1976 appropriation
bill ($15 million annually for 40 years, or $600 million) on an experimental basis.
The Department believes this would allow an increase in new construction under the
-2-
Section 8 rental housing program, and maintain the institutional capacity of some
State agencies to administer Federal housing assistance.
OMB recommends that the full amount provided by Congress be proposed for
rescission (outlay savings - $15 million in 1978). OMB believes Section 8 new
construction should not be encouraged. In any case, grants under Section 802 are
not required to facilitate borrowing by State housing agencies; full backing by
their State governments would reduce interest rates below what Section 802 could
achieve. Moreover, initiating the program--even on an experimental basis--would
increase the demands for Federal guarantees under Section 802, which represent a
much greater threat to the budget.
College Housing Direct Loans
HUD proposes to reopen the direct loan program on a one-shot basis in 1976 to take care
of approved projects which cannot be completed with the Federal aid already provided.
Once this has been done, HUD would propose rescission of whatever funds are leftover.
OMB believes the HUD proposal stands the best chance of avoiding an ongoing
college housing program, which both agencies agree is not warranted. While all
unused balances in this account could be removed without a rescission, thus avoiding
the threat of an impoundment suit, such action would antagonize the Congress and
prompt adverse legislation. Both HUD and OMB acknowledge, however, that the Congress
might refuse to rescind the unused balances and thereby mandate an ongoing program.
Mobile Home Safety and Construction Standards
HUD recommends appropriations in 1976 ($1 million) and 1977 ($3 million) to get the
mobile home enforcement program off the ground. The Department believes that use
of Federal money at the outset would improve the chances for getting the States to
take on the enforcement responsibility.
OMB recommends that fees rather than appropriated funds be used to launch the program
(outlay savings - $3 million in 1977). In OMB's judgment, the States would be less
inclined to take on the cost of enforcement if the Federal Government is already
paying for it.
-3-
Fiscal Year 1977
Community Development Grants
HUD recommends the full amount authorized--$3,248 million--for block grants in
1977. Even with full funding, the program would be under great pressure since
the amounts required under the statutory allocation formula are larger in 1977
than in either 1976 or 1978. HUD believes failure to request the maximum would
prompt congressional action to extend hold-harmless or provide additional funds
under the antecedent categorical programs (principally, urban renewal).
OMB concurs with the HUD recommendation. However, OMB estimates that outlays under
the program will not occur as rapidly as HUD projects, and recommends reducing the
budget estimates by $300 million (33 percent) in 1976 and $500 million (24 percent)
in 1977.
Federal Housing Administration Mortgage Insurance Premiums
OMB recommends revising insurance premiums so as to put each program (including the
recently reopened Section 235 program) on a sound actuarial basis, where existing
law permits (outlay savings - $18 million in 1977 and $26 million in 1978). Most
of the impact would be on the poor and minority groups who are the primary users
of the unsound programs. On the other hand, there is no evidence to indicate that
the in-kind subsidies provided through subsidized mortgage insurance produce benefits
commensurate with the cost to the taxpayers.
HUD has determined what premiums are needed for actuarial soundness, and believes
the impact on FHA insurance would be small (although some families could be priced
out of the market). Even so, the Department does not recommend any premium changes
until the issue can be studied further.
Rent Supplements
HUD requests an additional $30 million in contract authority ($1.2 billion in budget
authority) which would be used to increase the Federal subsidy on existing rent
supplement projects. The Department maintains that additional subsidies are needed
to offset rising operating costs which could otherwise lead to defaults and
subsequent insurance claims.
-4-
OMB recommends against requesting any additional contract authority in 1977
(outlay savings - $15 million in 1977 and $40 million in 1978). OMB believes
that adopting a policy of meeting increased operating costs with increased
Federal payments ("operating subsidies") would weaken the incentives for good
management, and have serious consequences for the budget in future years.
Homeownership Counseling
HUD requests $6 million to launch a categorical counseling program for homeowners.
The Department maintains that counseling is cost-effective, and failure to
initiate a separate program is embarrassing politically.
OMB recommends against a separate counseling program (outlay savings - $3 million
in 1977 and $6 million in 1978). HUD's own study of counseling indicates that
it does not save the Federal Government money (as many in HUD argue). While
counseling may be beneficial from society's standpoint, public and private
agencies at the local level have both the incentive and capacity to underwrite it
(as indeed they underwrite similar educational programs--driver's education, home
economics, home repairs, etc.). A Federal program on the other hand, would
establish a new group of social/welfare agencies dependent upon HUD for their
continued existence.
-5-
Issue Papers
TAB C
1977 Budget
Department of Housing and Urban Development
Issue #1: Subsidized Housing
Statement of Issue
How many units of new and existing housing should be supported under HUD's subsidy
programs in 1976 and 1977?
Background
The 1976 Budget provided for approval of 400,000 units under the Section 8 rental
housing program.
The decision to reopen the Section 235 homeownership program anticipates approval
for 130,000 units in both 1976 and 1977.
Alternatives
In addition to the 130,000 units to be approved under Section 235:
#1. Allow approval for 245,000 units under Section 8, none of which would involve
new construction.
#2. Allow approval for 145,000 existing units under Section 8 and 100,000 newly
constructed units under the Tandem Plan.
#3. Allow approval for 85,000 new and 160,000 existing units under Section 8
(OMB recommendation).
#4. Allow approval for 240,000 new and 160,000 existing units under Section 8
(HUD request).
Analysis
Obligations/Outlays
1975
1976
TRQ
1977
1978
1979
1980
1981
($ Millions)
Ob.
0
Ob.
0
Ob.
0
Ob.
0
Ob.
0
Ob.
0
Ob.
0
Ob.
0
Alt. #1
8,266
--
11,300
26
--
39
11,710
493
10,775
1,020
9,500
1,560
9,970
2,050
10,470
2,590
Alt. #2
8,266
--
9,950
26
--
31
9,790
465
7,280
1,060
6,020
1,520
6,300
1,810
6,600
2,140
Alt. #3
8,266
--
24,220
26
--
32
25,280
383
25,020
985
24,560
1,620
25,680
2,290
26,960
3,020
Alt. #4
8,266
--
32,975
26
--
32
55,475
383
56,720
1,340
57,740
2,400
60,630
3,710
63,660
5,120
Units (000's)
Alt. #1
92
375
--
375
318
245
245
245
Alt. #2
92
375
--
375
318
245
245
245
Alt. #3
92
375
--
375
318
245
245
245
Alt. #4
92
530
--
530
473
400
400
400
Employment (FTP's)
Alt. #1
N/A
893
892
905
226
262
298
334
Alt. #2
N/A
821
820
837
144
166
188
210
Alt. #3
N/A
1,121
1,120
1,298
622
661
700
739
Alt. #4
N/A
1,555
1,554
2,354
1,639
1,708
1,777
1,846
The principal points at issue are: (1) How many subsidized units should be approved
in total? (2) What should be the mix between new construction and existing housing? (3)
What program should be used to support new construction?
Number of Units
HUD and OMB agree that there is no programmatic basis for selecting any particular level
of activity; the decision will be made on political and budgetary grounds.
A 375,000-unit target (Alternatives #1 - #3) would be slightly below the 400,000-unit
target adopted in the 1976 Budget.
A 530,000-unit target (Alternative #4) would represent an unprecedented commitment
to subsidized housing (the previous high was 427,000 in 1972).
-2-
New Construction Versus Existing Housing
The following table shows the lifetime cost of subsidizing a single unit under various
programs (assuming rent levels increase 5 percent annually) :
Total Cost
Present Value
New Construction
Existing
New Construction
Existing
Section 8
Tandem
Section 8
Section 8
Tandem
Section 8
Rent Subsidy
$266,309
$
---
$113,854
$ 71,472
$
----
$29,943
Tandem Subsidy*
5,000
5,000
4,132
4,132
Total
$271,309
$5,000
$113,854
$ 75,604
$4,132
$29,943
Total (rents increase 10%/year)
($861,288)
($5,000)
($367,806)
($211,098)
($4,132
($88,224)
* Not available at present for Section 8 units.
Proponents of a new construction program point out that (1) 10 million households
live in units that are too expensive, too small, or poorly equipped; and (2) the multi-
family sector of the housing industry is producing at less than 50 percent of its
equilibrium level.
Opponents of a new construction program point out that (1) HUD's own study found
housing deprivation to be an income, rather than a housing problem; and (2) with vacancy
rates at an historical high, there is not a shortage of rental housing except where local
rent control ordinances or fuel shortages have discouraged construction.
The added cost of encouraging construction of a single unit under Section 8
(discounted present value) is:
Rents Increase 5%
Rents Increase 10%
Subsidy Cost of New Construction
$75,604
$211,098
Less: Subsidy Cost of Existing Units
29,943
88,224
Cost of Construction Stimulus
$45,661
$122,874
Existing units have a more immediate impact on the budget, but outlays on new
units catch up by the third year.
-3-
Alternatives for Encouraging New Construction
Clearly, the Tandem Plan represents a more cost-effective vehicle for encouraging
new construction ($4,132 VS. $45,661 per unit).
Suspending commitments for new units under Section 8 would be embarrassing to the
Administration since this program has been heralded as the best means for promoting
national housing goals.
HUD Request: Alternative #4, although the Department does not believe 240,000 new
Section 8 units could be approved without Tandem subsidies, longer subsidy terms, and
aid to State housing agencies. Secretary Hills has indicated to the Economic Policy
Board that she would find Alternative #3 acceptable.
OMB Recommendation: Alternative #3. OMB believes that the volume of new construction
supported under Section 8 should be kept as close to zero as politically possible, and
in no case should additional sweeteners (such as Tandem subsidies) be extended to the
program. Although OMB does not believe release of additional Tandem assistance for the
multifamily housing sector is justified, we would recommend that in the event such a
release is approved, it be accompanied by termination of Section 8's new construction
component.
-4-
1977 Budget
Department of Housing and Urban Development
Issue #2: Mortgage Modification for Nonprofit Sponsors
Statement of Issue
Should HUD adopt a policy of restructuring mortgages on subsidized housing projects
sponsored by nonprofit groups?
Alternatives
#1. Adopt a policy of restructuring mortgages on nonprofit-sponsored subsidized
projects by deferring payment of (or writing down) up to 75 percent of total
debt service requirements (HUD request).
#2.
Continue the present ad hoc policy toward troubled projects.
#3.
Adopt a policy of foreclosing on any assigned mortgage which cannot be made
current after a specified period of time, and sell such projects with
Section 8 commitments to protect the tenants (OMB recommendation).
Analysis
Budget Authority/Outlays*
1975
1976
TRQ
1977
1978
1979
1980
1981
($ Millions)
BA/O
BA/O
BA/O
BA/O
BA/O
BA/O
BA/O
BA/O
Alt. #1:
HUD estimate
--
+217
+114
+217
+87
+84
+64
+64
OMB estimate
--
+361
+184
+1,082
+1,250
+917
+632
+621
Alt. #2
--
--
--
--
--
--
--
--
Alt. #3
--
--
--
-118
-90
-90
-115
-110
* Change from the current policy (Alternative #2) .
HUD and OMB disagree over how many projects would qualify for mortgage modification,
and this disagreement accounts for the difference in outlay estimates under Alternative #1.
-5-
HUD estimates that 20 percent of all nonprofit-sponsored projects would be given relief.
OMB believes that virtually all subsidized housing sponsors will seek relief from HUD,
and the Department will be unable to prevent many of these sponsors from getting it. OMB's
outlay estimates are based on the projection that 75 percent of all nonprofit sponsors and
33 percent of all limited dividend sponsors will qualify for modification.
HUD and OMB agree that the primary causes of defaults on insured multifamily mortgages
are: (1) socio-economic factors which have prevented tenant income from keeping pace with
rising operating costs, (2) poor underwriting by HUD that deliberately underestimated
operating expenses to make projects appear feasible, and (3) poor management--especially
where nonprofit sponsors are involved.
Alternative #1. HUD would defer up to 75 percent of the nonprofit sponsor's mortgage
payments until the end of the mortgage term, provided (a) the sponsor had not intentionally
defaulted, and (b) the project was not on a declining course. HUD acknowledges that
"mortgage modification" is tantamount to writing down the mortgage, since the chances of
the deferred amount ever being repaid are nil.
Advantages:
Would postpone a congressionally mandated program of operating subsidies.
Would remove the threat of legislation prohibiting foreclosures.
Would avoid the political consequences of foreclosing on charitable groups.
Disadvantages:
Would tighten HUD's link to the project, leaving the door open to operating
subsidies in the future.
Would maintain existing ownership which in many cases lacks both the ability to
properly supervise management and the inclination to support management decisions.
Would reduce incentives for sponsors to operate projects efficiently or remain
current on their mortgages.
-6-
Would have a significant and immediate impact on the budget since relief could be
provided only after HUD has paid a claim equal to the outstanding balance of the mortgage
on each project desiring Federal relief.
Alternative #2. Presently, HUD handles hopeless projects on a case-by-case basis.
Hopeless projects sponsored by churches and other politically influential groups generally
are kept in assignment indefinitely with what amounts to forbearance by HUD.
Advantages:
Would have the same advantages as a writedown policy, since HUD--as lender--could
forbear to the same extent it could write-down.
Disadvantages:
Would have the same disadvantages as a writedown policy, except that the budget
impact would be less (since an announced policy of leniency toward nonprofit sponsors
would be more of a come-on than the present ad hoc policy).
Would court congressional action, since the present policy does not give the
appearance of a "permanent" solution to the nonprofit problem.
Alternative #3. HUD would foreclose on any project which could not be made current
within a set period of time (say, 12 months). Foreclosed projects would be resold to the
highest bidder, with provisions in the sales agreement earmarking Section 8 subsidies for
existing tenants.
Advantages:
Would end HUD's link to the project once and for all, thus removing the threat of
further subsidies in the future.
Would have a favorable impact on the sponsors' incentive to operate projects
efficiently.
Would have a favorable impact on the budget in the short run by discouraging defaults
and increasing revenues from property disposition; to the extent the use of Section 8
subsidies does not increase the subsidized housing program level, the favorable impact would
not be offset in later years.
-7-
Disadvantages:
Would place an undesirable stigma on charitable groups, causing political problems.
Would significantly increase the threat of congressionally mandated operating
subsidies (which could be postponed by either of the other options).
Would increase the threat of congressional action to prohibit foreclosures.
HUD Request: Alternative #1. The Department acknowledges that a foreclose-and-sell
policy is considerably more cost effective. However, the Secretary believes that a
mortgage modification policy is warranted in order to (1) maintain the existing stock
of subsidized projects, and (2) forestall a congressionally mandated program of operating
subsidies.
OMB Recommendation: Alternative #3. OMB does not believe mortgage modification can
forestall Section 236 operating subsidies (although it might delay them for a few years).
Experience under the public housing program (which involves the ultimate writedown--100
percent) indicates that capital subsidies are not enough to keep subsidized projects
afloat.
OMB is continuing to explore the problem of multifamily defaults with HUD. In the event
additional evidence to support Altenatives #1 or #2 is developed, the OMB recommendation
might change.
-8-
-
Department of Housing and Urban Development
1977 Budget
Issue #3: Public Housing Operating Subsidies
Statement of Issue
Should rental charges in public housing be increased in order to reduce the need
for Federal operating subsidies?
Background
The median family income of public housing tenants on September 30, 1974,
was $3,142, and the median family rent was $51 per month (19.4 percent of median
family income; 22 percent of median family income less adjustments).
In addition to paying for all construction/acquisition costs, HUD provides
operating subsidies to local housing authorities (LHA's). Operating subsidies have risen
from $12.6 million in 1969 to $475 million in 1975--an annual rate of increase exceeding
80 percent.
A Performance Funding System (PFS) uses a set of objective standards to determine
the level of operating subsidies going to LHA's. The standards apply only to operating
expenses; LHA revenues are estimated using actual receipts in a base year, and a 3 percent
inflation factor.
Alternatives
#1. Continue the performance funding system without change in 1977 (HUD request).
#2. Include a rent standard on the revenue side equal to 25 percent of adjusted
income.
#3. Include a rent standard, and propose legislation eliminating deductions
from gross income (OMB recommendation).
#4. Propose legislation that would phase out operating subsidies over a 10-year
period.
-9-
Analysis
1975
1976
TRQ
1977
1978
1979
1980
1981
Budget Authority/Outlays
BA
0
BA
0
BA
0
BA
0
BA
0
BA
0
BA
0
BA
0
($ Millions)
Alt. #1 (HUD req.)
440
330
500
463
80
138
576
485
661
548
740
667
821
759
901
839
Alt. #2
440
330
500
463
80
138
497
462
580
474
656
583
735
674
812
752
Alt. #3 (OMB rec.)
440
330
500
463
80
138
410
437
490
395
564
489
640
581
714
657
Alt. #4
440
330
500
463
80
138
518
468
528
479
518
529
493
512
450
481
Increase in rent levels:
Alt. #1
+3%
+3%
+3%
+3%
+3%
Alt. #2
+14%
+3%
+3%
+3%
+3%
Alt. #3
+28%
+3%
+3%
+3%
+3%
Alt. #4
+13%
+14%
+14%
+15%
+15%
HUD and OMB agree that:
Public housing projects have an enormous capacity to soak up Federal operating
subsidies, and for this reason an objective, defensible method for determining an
individual LHA's entitlement is essential.
Public housing tenants (only 5 percent of the eligible population) are better off
than comparable families outside public housing, since rents in these projects need not
cover construction and financing costs.
Alternative #1 would not be controversial and, consequently, would do nothing to
encourage adverse congressional action.
Alternative #2 would:
Provide a more equitable means of allocating operating subsidies among LHA's.
Encourage rent increases for some families, but still leave everyone at the 25
percent rent/income ratio that is considered acceptable for rental programs.
Intensify political pressure on Congress to get rid of performance funding.
-10-
In addition to the effects listed under Alternative #2, Alternative #3 would:
Increase rent for the typical family already at the 25-percent-of-income ceiling
by $6.60/month (13 percent).
Carry a much greater risk of congressional action, since new legislation would be
required.
Alternative #4 would:
Allow substantial savings in outlays and Federal employment (approximately 800
full-time permanent positions are budgeted for LHA-owned projects in 1977) over time.
Impose a heavy burden on low-income families, even with a 10-year phase-in of
rent increases (although these families would still be better off than comparable
families outside public housing).
Generate tenant unrest, rent strikes, and vandalism which could send some LHA's
into bankruptcy.
Have little chance of being approved by the Congress.
HUD Request: Alternative #1.
OMB Recommendation: Alternative #3. OMB believes that increases in rental charges
are warranted from both a fiscal and equity standpoint, and would not impose an undue
burden on public housing tenants.
-11-
Issue Paper
Department of Housing and Urban Development
1977 Budget
Issue #4: Comprehensive Planning Grants ("701")
Statement of Issue
What should be the funding level for the Comprehensive Planning (701) Program in 1977?
Background
- The Housing and Community Development Act of 1974 requires that, in order to be
eligible for further comprehensive planning grants after August 22, 1977, each 701
applicant must have prepared housing assistance and land use plans.
- Community development block grants can fund all the planning activities currently
funded by 701.
Alternatives
#1. Provide funding of $50 million for 1976 and 1977. This would require deferral
of $25 million from 1976 to 1977 and new budget authority of $25 million in
1977 (HUD request).
#2. Release the full $75 million appropriation in 1976 and fold the program into
the Community Development Block Grant Program in 1977 (OMB recommendation).
Analysis
1975
1976
TRQ
1977
1978
1979
1980
1981
Budget Authority/Outlays
BA
0
BA
0
BA
0
BA
0
BA
0
BA
0
BA
0
BA
0
($ Millions)
Alt. #1 (HUD req.)
100
97
75
112
0
29
25
40
50
50
50
50
50
50
50
50
Alt. #2 (OMB rec.)
100
97
75
117
0
34
0
43
0
7
0
0
0
0
0
0
(HUD original request
before outlay reduction
revision)
(100) (97) (75) (117) (0) (34) (100) (63) (100) (97) (100) (100) (100) (100) (100) (100)
-12-
The 701 program is one of about 100 Federal planning assistance programs. Most of
the other programs have narrower goals toward which planning is directed; 701 is unique
in its wide flexibility. Numerous attempts have been made to consolidate or better
coordinate these various programs, but with little success. The greatest obstacle to
consolidating programs is delineating the recipients: Most funds do not go to State/
local elected officials, but instead to State/local government agencies, planning
districts, areawide bodies, water and sewer districts, river basin committees, etc.
Consolidation of several programs would almost certainly require elimination of some
of these recipients.
Arguments for continuing the 701 program:
- Areawide bodies, which comprise about 75 percent of the recipients of 701, are
not eligible for community development grants.
- 701 May be credited with funding many State and local charter revisions and
governmental reorganizations.
- 701 Provided an early impetus for States to undertake land use planning.
Arguments against continuing the 701 program:
- The community development grant program is of sufficient magnitude to easily
replace 701.
- The original purpose of 701--to encourage hesitant local governments to undertake
planning that would otherwise not be done--is outdated; local governments today possess
the interest and the capability to undertake planning in areas they consider important.
- The 701 program, by heavily funding areawide bodies which are outside the
political process, conflicts with a key Administration policy and the purpose behind
the community development grant program--to direct funds to elected officials who will
determine their use.
HUD Request: Alternative #1.
(1) 701 Funding is essential if regional planning activities providing for more
organized growth in the future are to continue.
-13-
(2) 701 Is a potential coordinator and manager of other Federal planning activities:
Operation of other planning programs by a single agency would be more efficient
and could be absorbed within present personnel ceilings. This would result in
savings to the Government in administrative costs.
OMB Recommendation: Alternative #2.
(1) All the activities funded by 701 may be funded by community development grants.
(2) There is no need to continue funding areawide bodies since local governments
which comprise their membership could finance their activities. Further, it
is of no benefit to the Federal Government to fund a planning effort, no matter
what the national priority, if that plan will not be activated. If it is
determined that an issue is timely or significant enough to warrant Federal
funding, the assistance can be provided through community development grants
and should be directed at those with the power to activate the plan--the State
and local governments.
-14-