Subcommittee on Housing and Transportation

Hearing on HUD's Program, Budget and Management Priorities for FY-2002

I appreciate the invitation to testify today. I am Barbara Sard, director of housing policy for the Center on Budget and Policy Priorities. The Center is a nonprofit policy institute here in Washington that specializes both in fiscal policy and in programs and policies affecting low- and moderate-income families.

My testimony today focuses on the Administration=s budget for the Department of Housing and Urban Development in the context of the persistence of affordable housing shortages and unmet housing needs for low-income families and individuals. The testimony also discusses the critical link between affordable housing and welfare reform, and examines the Administration=s proposals concerning the Section 8 voucher program.

The strong economy during much of the 1990s helped lead to significant increases in homeownership and an eight percent drop from 1997 to 1999 in Aworst case@ housing needs among very low-income renters. (HUD defines Aworst case@ housing needs as unsubsidized renter households with incomes at or below 50 percent of area median income that pay more than half of household income for rent and utilities or live in severely substandard rental housing.) But the strong economy had its downside as well, contributing to the continuing decrease in the number of affordable housing units on the private market. Between 1997 and 1999, the total number of units affordable to renters with very low incomes C those with incomes below 50 percent of the area median C fell by 1.14 million, a 7 percent decline in just two years. The supply of rental housing is of major importance because one of every three households rents its housing.

Despite increased involvement in the labor market, millions of poor and near-poor families remain unable to afford decent housing. The most recent data from the American Housing Survey show that in 1999, 4.9 million very low-income renter households that did not receive housing assistance paid more than half of their income for rent and utilities or lived in severely substandard housing. This means that 10.9 million people, including 3.6 million children, 1.4 million elderly, and 1.3 million disabled adults, have severe housing needs that the nation=s economic progress has not remedied. Nonetheless, work effort among households with worst case housing needs has increased. In 1999, 80 percent of households with worst case housing needs that had an adult who was not elderly or disabled relied on earnings as their primary source of income, compared with 74 percent of such households in 1997.

For more than three-fourths of the households with worst case housing needs, a severe housing cost burden is their only housing problem. Some 17 percent pay more than half their income to live in physically inadequate or overcrowded housing. HUD=s analysis of worst case needs is restricted to households with incomes at or below 50 percent of area median who do not have housing assistance. HUD found that in 1999, 14.3 percent of renters had worst case needs. If one looks instead at the housing problems of all renters, without limiting the analysis to those with very low incomes and without housing assistance, fully half of all renter households had either moderate or severe housing problems in 1999.

Many communities have experienced an accelerated loss of affordable rental units in recent years due to escalating rents, conversion of rental housing to other uses, or abandonment. The number of units affordable to renters with extremely low incomes dropped by 750,000, or 13 percent, between 1997 and 1999. The number of units affordable to households with incomes between 31 and 50 percent of the area median income also declined. Some 400,000 such units either ceased to be used as rental housing or increased in price sufficiently as to become unaffordable for such households. In every region of the U.S., rental housing affordable to extremely low-income renters C those with incomes at or below 30 percent of the area median income C was in shorter supply than housing affordable to other income groups. The West and the Northeast suffered particularly from having insufficient units available for rent.

These changes in the housing market also have reduced the number of housing units potentially available to families with Section 8 vouchers. Between 1997 and 1999, the number of units with rents below the HUD-determined Fair Market Rent (FMR) dropped significantly. Vacancy rates for units renting at or below the applicable FMR fell in every region except the Midwest. Everywhere the units in shortest supply were those with three or more bedrooms and rents below FMR, making the search for housing particularly difficult for voucher holders with three or more children. Not surprisingly, in every region, suburbs had the lowest vacancies in units renting below the FMR. These are the areas that are most likely to have the greatest job growth.

In addition, there is recent anecdotal evidence from many areas that vacancy rates have declined far below the five percent level that is generally considered the minimum for a healthy rental market. For example, recent studies in Colorado have shown that the rental vacancy rate in the Denver metropolitan area in the last quarter of 2000 was 4.7 percent. In the period from September 2000 to February 2001, the rental vacancy rate outside of the Denver metro area fell from 4.1 percent C already very low C to 3.2 percent. Not surprisingly, rents have escalated in these tight housing markets. The average rent in the Denver area was $792.67 at the end of 2000, an increase of 8.1 percent in one year. Statewide, rents rose 4.9 percent, to an average of $753.⁴ It is clear that finding available low-rent housing has become a difficult proposition in urban and suburban communities alike.

Extremely low-income renter households have by far the greatest incidence of acute housing problems. Fully 87 percent of these renters C some 6.8 million households C had severe or moderate housing problems in 1999. More specifically, 65 percent of extremely low-income renters had severe cost burdens, 14 percent had moderate cost burdens, 15 percent lived in physically defective housing, and 6 percent lived in overcrowded conditions. Some had multiple problems. (These data include a substantial number of households receiving housing assistance.) The vast majority of the households living in physically defective or overcrowded housing also were paying more than 30 percent of their income to rent such inadequate housing.

What should we learn from these data? That even if a rising tide were to continue and were to lift all boats, so to speak (and there is increasing evidence that neither assumption can be relied on), the boats of far too many of our citizens would still be leaking. That is, even if their incomes did rise, without additional resources, millions of extremely low-income families will remain unable to obtain decent quality housing that they can afford. In many areas and for many families, new housing needs to be constructed or run-down housing fixed up to solve the problems of poor housing quality, overcrowding, and low vacancy rates that are driving up prices. For other areas and other families, rental assistance alone will remedy their housing problems. Any effort to produce or rehabilitate additional housing should focus primarily on extremely low-income households, as these are the households with the greatest needs.

Most families that leave welfare for work do not earn enough to afford decent quality housing. Typically, households that previously received welfare benefits and have at least one working member earn less than $3,500 per quarter. (Many studies report average earnings far below this amount.)⁵ Even if these earnings continue without periods of unemployment or underemployment, which is unlikely, families with incomes of $14,000 per year typically must pay more than half their income for decent housing if they do not have housing assistance. On average, a family must earn at least $12.47 per hour of full-time work C about $25,000 per year C to afford a two-bedroom housing unit at the Fair Market Rent. In no county, metropolitan area, or state does a family earning the equivalent of full-time employment at the minimum wage have enough income to pay the Fair Market Rent for housing with one or more bedrooms without spending more than 30 percent of income for rent and utilities.⁶ (Federal guidelines set during the Reagan Administration provide that rental housing is affordable when the costs of rent and utilities do not exceed 30 percent of a family=s adjusted income.)

Families that pay too much of their income for housing or live in severely inadequate or overcrowded housing may have to move frequently. Such moves may interrupt work schedules and jeopardize employment and also may adversely affect children=s educational progress. A recent study in Ohio found that 42 percent of families that had recently left welfare and paid more than half their income for housing moved in the six-month period after leaving welfare. (In contrast, roughly eight percent of the general population moves in a six-month period.)⁷

High housing costs can leave families with insufficient remaining income for basic necessities or to pay for child care, clothing for work, transportation, and other expenses that often must be met if families are to navigate successfully the transition from welfare to work. Without housing subsidies or other assistance to help families close the gap between housing costs and limited incomes, families may not be able to move to areas with greater employment opportunities. By helping recipients rent apartments they could not otherwise afford, tenant-based subsidies can enable poor families to move to areas with better access to jobs or to areas where parents feel safe enough to go to work and leave older children unattended or return from work at night on public transportation. (In many areas, however, vouchers must be coupled with strategies to increase the production of units that families can rent with their vouchers.)

Affordable housing also may enhance welfare reform efforts. Research increasingly suggests that vouchers and other government housing subsidies can help promote work among long-term welfare recipients when combined with a well-designed welfare reform program. Of particular note is the recently released evaluation of the Minnesota Family Investment Program (MFIP) by the Manpower Demonstration Research Corporation (MDRC). Taken as a whole, the gains it found C including reductions in poverty, increases in employment and earnings, and even increases in marriage C are among the strongest ever documented for a welfare reform undertaking in the United States. Most of the success of MFIP was due to the substantial increases in employment and earnings it generated among families receiving housing assistance, primarily Section 8 vouchers, in contrast to the limited or no gains among families without housing assistance. This is one of a growing number of studies that find significantly greater welfare reform effects among families with housing vouchers (and sometimes other forms of housing assistance) than among other low-income families, suggesting that housing assistance may enhance the effects of welfare reform strategies in promoting employment.⁸

The current shortage of affordable housing and the critical link between housing and welfare reform underscore the need for additional funds for housing vouchers as well as for the production of new rental housing. The fact that millions of families are paying a disproportionate share of their income on rent or are living in substandard housing should signal that significant investments in low-income housing programs are overdue. To fail to make such investments when as a nation we have the necessary resources will only exacerbate these problems.

In light of the affordable housing shortage, the millions of families with worst case housing needs, and the apparent importance of affordable housing to sustaining progress in the transition of families from welfare to work, the Administration=s new housing budget proposals must be carefully examined. Other witnesses today will explain how proposed reductions in public housing funds may over time reduce the number of livable public housing units, and in the short run may reduce the quality of life for families with children and elderly and disabled individuals living in public housing.

I will address the Administration=s housing voucher proposals. In particular, I will discuss the proposal to increase the number of families and individuals receiving housing vouchers by less than 40 percent of the number of additional vouchers funded in 2001. In addition, I will discuss why the proposed halving of Section 8 reserve funds may, if enacted without change, result in fewer families receiving voucher assistance without an explicit decision by Congress to take such a step. Reducing Section 8 reserves also is likely to make it more difficult for families that do receive vouchers to use them, particularly in areas with greater employment opportunities.

The Administration=s budget includes a request for $197 million for 33,700 incremental vouchers. While we strongly support the funding of additional Section 8 vouchers, we respectfully suggest that this proposal is inadequate in light of the magnitude of families= needs and the essential role of vouchers in a comprehensive housing strategy.

The Administration=s proposed increase in the number of new vouchers is less than 40 percent of the number of additional vouchers funded in 2001. In the fiscal year 2001 budget, Congress provided funding for 79,000 so-called Aincremental@ housing vouchers, as well as 8,000 new vouchers for disabled applicants. Despite the labels, both sets of new vouchers represent additions to the overall supply of federal housing subsidies. If any of these 8,000 earmarked vouchers are not needed to offset the reduction of housing opportunities for disabled persons that occurs when certain developments are restricted to elderly tenants (so-called Adesignated housing@), the remaining vouchers are made available to agencies that are willing to distribute them to disabled applicants. The designation of public housing or privately-owned assisted housing as elderly-only does not displace disabled tenants in residence. It does, however, prevent new disabled individuals from residing in the buildings. Because the earmarked vouchers are not used for the relocation of current assisted tenants, but only for new applicants, they increase the supply of federally assisted housing. In fact, then, 87,000 new, incremental vouchers were funded in fiscal year 2001. In contrast, the Administration has proposed only 33,700 Aincremental@ vouchers and no additional vouchers for disabled applicants.

The HUD briefing book states, APHAs will be encouraged to provide up to $40 million in voucher funds for non-elderly disabled persons.@ It is unclear what steps HUD intends to take and what the likely results may be. The most that PHAs could be asked to do, however, would be to move disabled applicants ahead of others on their waiting lists. Encouraging PHAs to rearrange their waiting lists does not increase the supply of housing assistance B it only serves to delay further the receipt of voucher assistance by other applicants. Moreover, the chances that HUD=s actions will result in additional vouchers for disabled applicants appear to be slim, in light of HUD=s previous reluctance to prescribe conditions for approval of designated housing plans. This is of particular concern in light of HUD=s recent finding that very low income households with disabled members have a higher incidence of worst case housing problems than any other group.⁹

In addition, the Administration=s budget reduces another component of new voucher funding in comparison with the fiscal year 2001 budget approved by Congress. The Administration seeks funding for only 30,300 Atenant protection@ vouchers in FY 2002. For the current year, Congress appropriated funding for 40,300 Atenant protection@ vouchers C 10,000 more than the Administration proposes.

Tenant protection vouchers provide continuing housing assistance when public housing is demolished or private owners terminate their HUD contracts. If such vouchers are distributed only to families that previously received federal housing assistance, they are not Aincremental@ vouchers because the number of federally-assisted units is not increased. (In such cases, the number of families with voucher assistance increases while the number of families with public housing or project-based Section 8 assistance decreases by an equivalent amount.) When PHAs receive vouchers to replace previously unoccupied and uninhabitable public housing units, however, tenant protection vouchers represent a real increase in the number of households receiving federal housing assistance.

It is possible that HUD anticipates fewer public housing demolitions and/or fewer Section 8 opt-outs in FY 2002 than in recent years, and thus less need for tenant protection vouchers. HUD has not provided a rationale for the reduced request for tenant protection vouchers, and it is not clear if or why there would be less need for such vouchers next year.

It is important to note, however, that the proposed budget language deletes the HOPE VI program (Section 24 of the US Housing Act) from the list of the purposes for which tenant protection vouchers may be issued. This may indicate that HUD is not intending to provide new voucher funding to replace previously unoccupied units that are demolished with HOPE VI funds. (HUD=s policy has been to provide such replacement vouchers when requested by a PHA.) In addition, HUD may be expecting that new voucher funding needed to relocate families in conjunction with HOPE VI demolition or revitalization grants will come from the HOPE VI account. This, however, would force PHAs that did not want to reduce the amount of HOPE VI grant funds available for construction of replacement public housing units to relocate families using existing resources B either vacant public housing units in other developments or vouchers that become available through turnover. If displaced public housing tenants get priority for these existing housing resources, families on the agencies= waiting lists will have to wait longer to receive housing assistance. Either possibility would mean a net reduction in the supply of federally-assisted housing, as the number of newly constructed or rehabilitated public housing units plus new vouchers would be less than the number of public housing units demolished.

The Administration=s budget proposes to reduce PHAs= reserves for the Section 8 voucher program from two months to one month of annual budget authority in FY 2002. This proposal would Asave@ $640 million in budget authority, which the Administration uses to offset the cost of renewing Section 8 contracts in FY 2002. While this proposal may appear to be harmless, for the reasons discussed below it may result in a silent reduction in the number of families receiving voucher assistance. It also may discourage PHAs from taking the actions necessary to use all their voucher funds and to facilitate families= moves to better neighborhoods. In 1999, senior HUD staff expressed their belief that the two-month reserve is necessary and that reducing it to four weeks would represent Aa serious threat to housing the baseline families.@¹⁰ HUD has not released any analysis indicating a basis to change this conclusion.

As described below, reserves play an important role in the Section 8 program even for the agencies that do not draw on them. The Administration=s proposal to reduce Section 8 reserves by half may undercut efforts to increase the utilization of voucher funds and to make families= search for housing more successful.

At best, the Administration=s proposal would result in only a one-time savings of budget authority and make no difference in outlays. (There would be no effect on outlays if all PHAs can serve the anticipated number of families with only one month of reserves. This is unlikely to be the case, however, for some PHAs, as explained below.) The BA savings would result from recapturing reserve funds that are not spent in FY 2001 and not having to reallocate these funds in FY 2002. After FY 2002, the status quo of one month of reserves would be maintained, and there would be no further BA savings. This means that for the FY 2003 budget, an additional $640 million in BA (plus inflation) will be required to renew Section 8 contracts in comparison with FY 2002, on top of the increase that will otherwise be required to renew additional expiring contracts and maintain assistance to the same number of families. Today=s Asavings@ may set up tomorrow=s program cut.

There may be a compromise solution that would allow the one-time recapture of some Section 8 budget authority while ensuring that funds are available to those PHAs that need them. Instead of continuing to commit $640 million in budget authority to a second month of reserve funding for each PHA, some lesser amount could be placed in a HUD headquarters reserve. Funds from the headquarters reserve would be available to those agencies C probably less than half of all PHAs C that need more than one month=s reserve to provide voucher assistance to the number of families they are authorized to serve. Through such a mechanism the problems detailed below could potentially be avoided.

In addition to stating clearly that HUD is permitted to hold a certain amount of appropriated funds in a headquarters reserve, it would be important for Congress to direct HUD to establish a simple and reliable method for PHAs that need additional funds to obtain them to serve the number of families authorized by HUD. As explained below, if PHAs do not trust HUD to make needed funds available, they are unlikely to incur additional costs in their voucher programs, and as a result problems with using vouchers are likely to increase.

The voucher statute authorizes a HUD headquarters reserve. In merging the certificate and voucher programs into a voucher-based model, Congress authorized the HUD Secretary to set aside up to five percent of annual Section 8 budget authority as an Aadjustment pool.@ The stated purpose of the set-aside is to permit PHAs to increase their voucher payments so that the change from a certificate to a voucher form of assistance does not require families to pay too much of their income for housing.¹¹ Despite this authorization, the appropriations committees and the Congress have in the past directed that funds that were not obligated to PHAs were to be recaptured and rescinded.

The paramount goal in considering the Administration=s proposal to reduce Section 8 reserves should be to keep the commitment to renew fully all expiring Section 8 contracts. This requires the appropriation of sufficient funds to provide voucher assistance to the total number of families that Congress has authorized over the years. A technical change in Section 8 reserves must not operate as a largely invisible means to shrink the size of the Section 8 voucher program. If access to reserves is restricted, agencies with annual budgets that do not include sufficient funds to meet increased costs may be required to reduce the number of families served and possibly to terminate rental assistance payments to property owners, causing families to lose their housing. Even for agencies that do not need to draw on reserve funds to maintain assistance to families, the reduction in reserves may discourage adjustments in voucher payments to meet rising rent and utility costs. If agencies do not increase voucher payments despite increased housing costs, more families may be unable to use their vouchers or may be restricted to areas of poverty and minority concentration. As a result, the Administration=s proposal to reduce Section 8 reserves by half may undercut efforts to increase the utilization of voucher funds and to make families= search for housing more successful.

Below is a brief explanation of why up to two months reserves in addition to annual funding may be important for the effective operation of the voucher program.

Most Section 8 voucher contracts between HUD and PHAs are annual. Under the current system of renewing voucher contracts, a PHA receives a budget allocation in advance of the calendar year based on its prior fiscal year=s average cost per month for each family assisted.¹² HUD adjusts the prior year=s average cost for inflation and multiplies the adjusted average cost by the number of vouchers the PHA is authorized to administer. If a PHA=s costs in 2002 are much higher than the base year=s costs plus the inflation factor that was used to calculate the PHA=s budget, it will not have enough funds in 2002 to pay landlords unless it reduces the number of families it serves.

The negotiated rulemaking panel that helped HUD develop the new renewal policy recognized the weakness of a methodology that calculates the cost of renewing voucher contracts based on previous average costs. (I was a member of that panel.) To remedy this problem, access to reserves is a linchpin of the new renewal policy. Each year, HUD generally sets aside an amount equal to two months of each PHA=s annual budget as program reserves. If a PHA has not used any of its reserves in the previous year, the existing reserve is merely adjusted to be equal to two months= worth of a given year=s budget. PHAs that have not been found by HUD to have serious management deficiencies may draw on at least one month=s reserve, and a second month with HUD approval, to meet the costs of assisting the authorized number of families. (If a PHA uses its reserves to serve additional families, in excess of the number authorized by HUD, HUD will not reimburse the PHA and the PHA will have to operate with reduced reserves.)¹³

A PHA=s average cost to provide housing assistance through the voucher program may increase from year to year for a number of reasons. (Average costs also may decrease, but decreased costs do not require the use of reserves.) The most obvious is an increase in the voucher payment standard, which determines the maximum amount a PHA contributes for a family=s rent and utility costs. Generally, PHAs may set the payment standard between 90 and 110 percent of the HUD-determined Fair Market Rent, and may set the payment standard higher or lower with HUD approval.

HUD publishes FMRs annually. When rent and utility costs are increasing, it is likely that FMRs will increase as well. When HUD increases the applicable FMR, a PHA is likely to increase its payment standard. A PHA also may exercise its discretion to increase its payment standard in light of escalating housing and utility costs. If PHAs in areas hit by rapidly rising rents and/or utility costs are forced by a reduction in reserves to choose between a needed increase in the payment standard and a reduction in the number of families they can assist, families in need of housing assistance as well as those that already have vouchers may suffer as a result. If a PHA responds to the quandary by keeping payment standards down, families that receive vouchers may not be able to use them and those that already have voucher assistance will have to pay an increased share of income if rent or utility costs increase. If a PHA instead chooses to increase its voucher payment standard, families on the waiting list will have to wait longer to receive assistance.

Recently, HUD has increased FMRs substantially in many areas to help deconcentrate the areas in which voucher holders locate within a metropolitan area and to enhance the likelihood that families will succeed in using their vouchers. In January 2001, HUD increased the FMR to the 50th percentile (from the 40th percentile) in 39 metropolitan areas that contain about 500 PHAs. HUD made this change based on data indicating that in these areas, Section 8 users were overly concentrated in a small number of census tracts. In calendar 2002, these PHAs will receive renewal funding based at least in part, and possibly entirely, on their costs prior to the FMR increase. They are unlikely to have sufficient funds within their annual budgets to provide assistance to the number of families they are authorized to serve without using reserves.

Similarly, beginning in October 2000 HUD has permitted PHAs with voucher success rates below 75 percent to increase their payment standards as if their FMRs had been increased to the 50th percentile. Agencies that have used this new flexibility to increase their voucher payment standards, enabling voucher holders to find qualifying units, also will need to access reserves to avoid reducing the number of families served. Reducing reserves in 2002 may undermine the programmatic gains achieved through these changes.

HUD has indicated that the FY 2002 FMRs are likely to be substantially higher in many areas due to increased rents and utility costs. To implement the increased FMRs without reducing program size, more PHAs are likely to need to draw on reserves, as their 2002 budgets will be based on the lower costs they incurred in 2000 or 2001.

Small PHAs and the families they serve are particularly vulnerable to a reduction in Section 8 reserves. About 1,800 of the 2,600 PHAs that administer the voucher program have fewer than 250 vouchers. Such small agencies have virtually no cushion in their regular annual budgets to accommodate a sharp cost increase, even for a few families. If an unusual number of large families come to the top of the waiting list or a few families move with their vouchers from inexpensive rural communities to more expensive cities or suburbs in search of work, an agency=s average costs could substantially exceed its budget. In such a case, the PHA must rely on reserves to assist as many families as it is authorized to assist.

Similarly, an agency may issue vouchers to additional families to achieve full utilization of its voucher funds, expecting that not all families will succeed in finding units. If more families than anticipated do succeed, however, a small PHA will not have the flexibility in its regular budget to meet its full obligations. It will need to draw on reserves to make payments to owners until some families leave the program through attrition.

In addition to the general factors that may affect a PHA=s need to access reserves C such as rising costs or small agency size C reducing reserves in 2002 may be particularly risky. 2002 will be the first full year of complete merger of the certificate and voucher programs. (HUD rules required up to a two-year lag to convert families from the certificate program to the new voucher program. Conversion will not be complete until October 2001.) Because subsidies were generally capped at the FMR in the certificate program, but may exceed the FMR in the voucher program, it is reasonable to anticipate that conversion will cause some increase in average costs. This is likely to be the case even in areas that have not experienced rapid increases in rent and utilities in the last two years. Renewal funds in 2002 are based on a PHA=s actual costs in 2000 or 2001, when most families were still under the certificate program. As a result, many PHAs may need to access reserves to continue providing assistance to families previously on the Section 8 certificate program as well as to new families that receive vouchers that become available through turnover.

There also is an important subjective factor that must be considered in assessing the likely impact of the proposed reduction in reserves to one month. To avoid exhausting their budgeted resources, many PHAs would be likely to avoid increasing their average costs. If they are limited to one month=s reserves rather than the extra cushion that two month=s reserves provides, PHAs may be discouraged from increasing their voucher payment standards. This may be especially true if HUD were to return to the practice of making PHAs provide burdensome justification of the need to access reserves before granting permission. If PHAs decline to increase payment standards in order to avoid having to request access to reserves, with the resulting risk of HUD delay or denial, fewer units will fall within the price range accessible to families with vouchers. Families may have less success in using their vouchers and voucher holders may be further concentrated in poor neighborhoods. The net result may be that PHAs are unable to use all the funds appropriated for the voucher program, reducing the number of families receiving federally-assisted housing.

A comprehensive analysis of the potential problems that may be caused by reducing Section 8 program reserves by half requires current data on reserve use as well as projections using current cost data. HUD will hopefully make such data publicly available.

Data models that were developed for the 1999 negotiated rulemaking on the Section 8 renewal formula may, however, be instructive. HUD had consultants model the likely need for reserve usage under the renewal system ultimately adopted (as well as under other proposed methods). Based on actual costs in the mid-90s, the model showed that approximately 15 percent of PHAs would need to use one month or more of their reserves in order to serve the authorized number of families during the period between incurring increased costs and receiving increased funding. Due to the factors enumerated above which are likely to cause actual average costs to increase to an unusual extent in 2002, the projection that about 15 percent of PHAs would need more than one month=s reserves to maintain program size under the current renewal funding system is likely to understate the number of PHAs that may need to use a second month of reserve funds in 2002.

The model also showed that if PHAs experience Aextreme variation@ in costs, with average monthly costs changing from $460, to $650, to $690, to $500 over a four-year period, such PHAs would need all two months of reserves in year 2 to maintain program size, and in year 3 the two months of reserves (assuming HUD had replenished the reserve account) would be insufficient to provide assistance to the authorized number of families. If such PHAs did not receive additional funds on top of their two months of reserves, they would have to reduce the number of families served in year 3. If enough households did not leave the program to reduce program size by attrition, some families= subsidies would have to be terminated. In either case, such PHAs would not be able to issue vouchers in year 3 to any families on the waiting list; they would have to reduce the number of families served to try to stay within budgeted funds plus available reserves. If PHAs incur increased average costs but have only one month=s reserve available, they would be forced to reduce the number of families served more rapidly than under this model. If attrition is not sufficient to keep program costs within the annual budget plus one month reserves, payments to property owners would have to be terminated and families would lose their housing.

A decade of prosperity has done little to alleviate America=s housing needs. The recent reduction in the number of families with severe housing needs is good news, but at the same time the decrease in the number of affordable rental units on the private market has accelerated. Half of all renters -- about one-sixth of the households in this country -- have moderate or severe housing problems; 4.9 million very low-income households without housing assistance pay more than half their income for housing or live in severely substandard housing. Relatively few of these households are likely to benefit from the Administration=s proposed tax credit to reduce the costs of homeownership. The Administration=s HUD budget request largely fails to respond to this unmet need for affordable rental housing.

The Administration=s request for 33,700 incremental vouchers is a positive step but one that does not go far enough in light of the magnitude of unmet needs. The requested increase is less than 40 percent of the 87,000 additional vouchers approved for fiscal year 2001 (79,000 Afair share@ vouchers and 8,000 for the disabled). Further, the proposed reduction of 10,000 Atenant protection@ vouchers compared with fiscal year 2001 may reflect a real decrease in the supply of federally assisted housing.

The proposed increase of $2.2 billion to renew expiring Section 8 contracts does not represent more households receiving federal housing assistance. This increase in budget authority is like a mirage: it looks good until one looks at it closely, and then it disappears. No additional families receive federal housing assistance as a result of this increase in budget authority B it is merely the necessary means to transform multi-year obligations into annual funding. Indeed, the $2.2 billion requested increase for Section 8 renewals may be less than is required, as it relies on the offset of $640 million from public housing agency reserves for the voucher program. To realize this offset the Administration proposes to reduce PHA reserves from two to one month. This proposed reduction may require PHAs with significant cost increases to reduce the number of families they serve.

Rather than renewing all expiring Section 8 contracts as it purports to do, the Administration=s budget may require a reduction in the number of families served by the voucher program. In addition, if the reduction in program reserves deters PHAs from increasing voucher payments when rents and utility costs increase, fewer families may be able to obtain housing with their vouchers and more voucher funds would not be utilized.

In this era of budget surpluses, we can and should help provide more families with the decent, affordable housing they cannot obtain on the private market. A greater share of households with so-called worst case housing needs are working than ever before, but their earnings are not sufficient to enable them to obtain decent housing they can afford. Lack of affordable housing may undercut the success of welfare reform by making it more difficult for families to obtain and retain employment. If we really want to leave no child behind, we must increase our investment in low-income housing substantially through production and rehabilitation of rental housing and additional housing vouchers.

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