Hearing on "Proposals to Improve the Housing Voucher Program."

Good afternoon, Mr. Chairman and members of the Committee. My name is Benson Roberts. I am Vice President for Policy at the Local Initiatives Support Corporation. I appreciate the opportunity to comment on the Housing Voucher Improvement Act of 2002.

LISC helps neighbors build whole communities in over 300 cities, towns and rural areas though 38 offices nationwide. In 21 years, LISC and its affiliates have raised from the private sector and provided $4 billion to help over 2,000 nonprofit low-income Community Development Corporations (CDCs) across the country to produce over 110,000 affordable homes and over 14 million square feet of commercial and industrial space. We also invest major resources in jobs and income programs, childcare facilities, youth programs, crime and security initiatives and many other programs that directly benefit low-income neighborhoods and their residents. CDCs have used LISC’s funding to raise over $7 billion in investment. We are deeply involved in and deeply committed to meeting the needs of low-income families and communities.

The Housing Voucher Improvement Act would create a new kind of project-based "Thrifty Production Voucher" in conjunction with new construction or substantial rehabilitation. Thrifty Production Vouchers could be combined as necessary with any capital subsidy program, such as Low Income Housing Tax Credits, HOME or CDBG, or the proposed affordable housing trust fund. Thrifty Production Vouchers would be limited to 25 percent of units in a property (with exceptions for single-family properties and properties serving elderly and disabled residents and, in some locations, supportive housing for families and other singles).

LISC strongly supports the Thrifty Production Voucher proposal.

Low Income Housing Tax Credits and HOME are both excellent capital subsidies for affordable housing production. Both are flexible resources administered by states and localities (HOME only). Both reach genuinely low-income families. Both are cost-effective. Both are popular among nonprofit and for-profit developers, private financing sources, and state and local government.

However, there is a limit to how far any capital subsidy program can go to serve extremely low-income (ELI) families with incomes below 30% of median. Most ELI families cannot afford to pay rent high enough to carry the operating expenses of housing, even if the development cost is fully subsidized and there is no mortgage to be repaid from rents. As a result, it is not surprising that a recent HUD study found that while nearly half of all HOME-funded rental housing serves extremely low-income households, those households in this category who lack rental assistance paid an average of 69 percent of income for rent. This finding should not be read as a criticism of HOME, but a simple and unavoidable math problem. The same issue would arise for any capital subsidy program.

The solution would be to provide some form of project-based rental assistance in conjunction with capital subsidies so that housing that is produced could serve extremely low-income tenants at rents they can afford over the long term. However, Congress has been reluctant to support project-based rental subsidies.

• Unless restricted to a modest portion of a property – e.g., 25% -- these subsidies could insulate properties from the healthy discipline of having to compete for tenants in the private market. Moreover, extremely low-income tenants could be excessively concentrated within certain properties, instead of participating in more mixed-income housing. These concerns can be easily addressed by limiting the share of a property that can receive subsidies. The project-based Section 8 amendments that Congress approved in 2000 followed this approach.

• The more difficult problem is the cost of renewing rental subsidies. Appropriators understand that they will be expected to renew rental subsidies each year for an indefinite period. Even tenant-based Section 8 vouchers are expensive to renew – about $6,000 per voucher every year. As a result, appropriators are reluctant to fund incremental vouchers to begin with.

Thrifty Production Vouchers are designed to address this cost problem.

What makes a Thrifty Production Voucher cost-effective is that the "payment standard" would be the property’s operating cost, instead of the housing authority’s payment standard based on the Fair Market Rent (FMR) that is used for regular vouchers. Like regular project-based vouchers, tenants’ share of the rent and utilities would be limited to 30 percent of adjusted income. Operating expenses would not include mortgage debt service, but would include owner-paid utilities, contributions to reserves, an asset management fee, and a modest cash flow allowance.

Since these operating costs are generally substantially below the FMR, a Thrifty Production Voucher would cost at least about one-third less than a regular voucher. If the operating cost is below the maximum, which is particularly likely in areas with high FMRs, the savings will be greater. A cap on the amount of operating expenses that could be covered would be set at 75% of the regular voucher payment standard, to ensure that Thrifty Production Vouchers live up to their name.

Based on data from properties insured by the Federal Housing Administration, HUD consultants estimated that the average per unit operating cost in 1998-2000 was $242 (in 2000 dollars). Larger units will have somewhat higher costs, but newly produced units and units in partially assisted developments will have lower costs. These data do not include taxes, utility costs, a replacement reserve, or a cash flow allowance. Even if these additional expenses were to increase the average operating cost by $200, however, this average would still be substantially less than 75 percent of the average national FY 2002 FMR for a 2-bedroom unit, which is $522.

Thrifty Production Vouchers may cost as little as 36 – 60 percent of the cost of regular project-based vouchers in areas with high FMRs, such as the San Francisco, Boston, Denver and Newark metropolitan areas.

Since subsidies would generally be limited to 25% of the units in a property, the owner could set the property’s overall operating budget, limited only by the cost cap noted above. Owners would be strongly motivated to minimize operating expenses, since they would have to bear at least 75% of any unnecessary expenses.

The ability to set the operating budget should enable owners to make a long-term commitment to participate in the Thrifty Production Voucher program. Owners would not have to worry that another entity would arbitrarily set the operating budget at an unworkably low level.

• New Thrifty Production Vouchers would be distributed under the formula used for HOME funds. This could work as follows: if Congress appropriates funding for 10,000 Thrifty Production Vouchers, the total amount appropriated would be divided among the states based on the share of HOME funds that the state and any participating jurisdictions within the state receive. Eligible, interested PHAs within the state would apply to HUD for a portion of the state’s allocation, just as PHAs now do with "fair share" allocations for regular Section 8 vouchers. (If the housing trust fund or other new production initiative were enacted, the distribution formula could be modified to be consistent with the new subsidy stream.)

• New allocations would go to current Section 8 administrators. PHAs that do not also administer capital subsidies would be required to coordinate allocations with administrators of capital subsidies and would be eligible for new Thrifty Production Vouchers only if they demonstrate such an agreement.

• This would allow for one-stop shopping for housing sponsors, facilitate implementation of tenant mobility as described below, and respect the current roles that different public agencies play.

• Section 8 administrators that already project-base 20% of their existing voucher portfolios could exceed the cap with new allocations of Thrifty Production Voucher assistance.

• Thrifty Production Vouchers would be provided only for ELI households. The subsidy would cover the gap between the actual operating expenses (or the rent cap, if lower) and 30 percent of tenant income. Families would not lose their subsidies if their incomes increase above the ELI level. Ordinary voucher rules would apply: families would remain eligible for assistance until 30 percent of their adjusted income equals the allowable rent and utilities.

• Limiting Thrifty Production Vouchers to 25 percent of the units in a property would prevent the over-concentration of poor tenants and instill market discipline. For 1-4 unit properties, elderly, disabled, or supportive housing with project-based subsidies on more than 25 percent of the units, the Section 8 administrator could review the project’s operating budget to determine if operating costs are less than the maximum payment standard permitted.

• The initial rent subsidy term would be 15 years, with renewals through the Section 8 Housing Certificate Fund at least through year 40.

• Subsidies would be subject to appropriations after the first year, in recognition of Congressional budget rules. If Congress does not fund the rental subsidy, then sponsors would be subject only to the income targeting and rent limits required under other programs assisting the property (e.g., Housing Credits, HOME, CDBG, public housing capital funds, or a future housing trust fund). It should be noted, however, that Congress has always renewed all Section 8 subsidies.

• Sponsors would have to agree to accept rental subsidies for 40 years, subject to appropriations.

• The Thrifty Production Voucher cannot support debt service on assisted units. This means that a full capital subsidy will be needed for the ELI portion of a property. Even with Thrifty Production Vouchers, some projects may need a larger capital subsidy to serve ELI tenants. However, many sponsors are already using capital subsidies to reduce rents below market on some units. In addition, rents on at least 75% of the units would be available to support a mortgage.

• Properties located in lower-income neighborhoods could use Thrifty Production Vouchers if the PHA determines it would be consistent with the goal of deconcentrating poverty and expanding housing and economic opportunities or revitalizing a low-income community, or will prevent the displacement of extremely low-income families. Fair housing requirements would apply. Lower-income neighborhoods would be the same as Qualified Census Tracts in the Low Income Housing Tax Credit program: they have a poverty rate of at least 25 percent or at least one-half of the households have incomes below 60 percent of the area median income.

• Thrifty Production Voucher landlords could use a site-specific waiting list if the Section 8 administrator agrees and if the agency and owner comply with certain procedures to ensure fairness to applicants on the PHA’s waiting list and to meet fair housing concerns.

• Thrifty Production Vouchers would have most other features of the current project-based voucher program, including mobility, but would not replace the current project-based program, as they cannot compete in the market for existing housing and cannot cover debt service. Mobility provisions give departing tenants priority access to Section 8 vouchers.

We believe that Thrifty Production Vouchers should be attractive to the various participants in the affordable housing production system.

• Housing sponsors could use Thrifty Production Vouchers to serve at least some extremely low-income families at affordable rents that will contribute to project stability. Serving these tenants will help sponsors to compete more effectively for allocations of Low Income Housing Tax Credits, a scarce resource rationed in part based on serving especially low-income tenants.

• The requirement that PHAs coordinate with capital subsidy administrators offers developers a streamlined way to assemble a viable financing package.

• The ability to set the operating budget should enable owners to make a long-term commitment to participate in the Thrifty Production Voucher program.

• Owners would not have to worry that another entity would arbitrarily set the operating budget at an unworkably low level.

• In the unlikely event that Congress does not renew Thrifty Production Vouchers, owners would have to meet only the income targeting requirements of other housing subsidies they receive. This provision would protect the property’s financial stability.

• Private investors and lenders should be comfortable with Thrifty Production Vouchers. Although Thrifty Production Vouchers would not add to the cash flow available to pay debt service, they should add financial stability to properties that serve extremely low-income tenants, thereby reducing risks. The initial 15-year term equals the recapture period for Low Income Housing Tax Credits.

• Public housing agencies could use Thrifty Production Vouchers to grow their Section 8 programs, without increasing costs or reducing the number of families receiving tenant-based vouchers.

• Section 8 administrators would be permitted to convert existing voucher authority to Thrifty Production Voucher assistance and assist more households in light of the lower cost. PHAs that use this flexibility could exceed the usual 20 percent limit on the total number of vouchers that may be project-based, without reducing the number of families receiving regular tenant-based Housing Choice Vouchers.

• For example, a PHA that administers 1,000 vouchers is permitted to project-base up to 200 of these vouchers. For the equivalent cost of 200 regular project-based vouchers, it could serve about 266 households using Thrifty Production Vouchers (or more, if the payment standard is below the 75 percent cap). Without a budget increase (except for a small increase in administrative fees), it could serve 1,066 households; 800 families would still receive tenant-based vouchers, and 266 households receive project-based assistance.

• State and local agencies that administer HOME, Housing Credits or other capital subsidies should welcome the availability of Thrifty Production Vouchers as a valuable tool to serve extremely low-income tenants in new and rehabilitated housing. PHAs would have to coordinate the use of Thrifty Production Vouchers with capital subsidy administrators.

This concludes my testimony. I would be pleased to answer any questions you may have.

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