Public Housing: HOPE VI Leveraging Has Increased, but HUD Has Not
Met Annual Reporting Requirement (15-NOV-02, GAO-03-91).
The Department of Housing and Urban Development (HUD) requested
that we review the HOPE VI program. Because of the scope of the
request, we agreed with the office of the Chairman, Senate
Subcommittee on Housing and Transportation, Committee on Banking,
Housing, and Urban Affairs, to provide the information in a
series of reports. This first report focuses on the financing of
HOPE VI developments. We describe the extent to which grantees
have (1) leveraged funds from other sources, particularly other
federal sources; (2) leveraged funds specifically for community
and supportive services; and (3) complied with HUD's funding
limits for developing public housing units and budgeted
additional funds not subject to these limits. Because the Quality
Housing and Work Responsibility Act of 1998 requires HUD to
report HOPE VI cost information to Congress, we also discuss the
extent to which HUD has complied with this requirement.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-91
ACCNO: A05510
TITLE: Public Housing: HOPE VI Leveraging Has Increased, but HUD
Has Not Met Annual Reporting Requirement
DATE: 11/15/2002
SUBJECT: Budgeting
Funds management
Grants
Housing programs
Public housing
HUD Hope VI Urban Revitalization
Demonstration Program
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GAO-03-91
Report to the Chairman, Subcommittee on Housing and Transportation,
Committee on Banking, Housing, and Urban Affairs, U. S. Senate
United States General Accounting Office
GAO
November 2002 PUBLIC HOUSING HOPE VI Leveraging Has Increased, but HUD Has
Not Met Annual Reporting Requirement
GAO- 03- 91
Page i GAO- 03- 91 HOPE VI Financing Letter 1
Results in Brief 4 Background 6 Housing Authorities Are Leveraging
Additional Funds 8 Leveraged Funds Comprise an Increasing Percentage of
Funds
Budgeted for Community and Supportive Services 12 Housing Authorities Have
Complied with HUD*s Funding Limits
and Budgeted Additional Funds Not Subject to These Limits 14 HUD Has Not
Complied with the Annual Reporting Requirement 16 Conclusions 16
Recommendation for Executive Action 17 Agency Comments and Our Evaluation
17
Appendix I Objectives, Scope, and Methodology 19
Appendix II Examples of HOPE VI Funding Sources 21
Appendix III Comments from the Department of Housing and Urban Development
26
Appendix IV GAO Contacts and Staff Acknowledgments 28 GAO Contacts 28
Acknowledgments 28
Figures
Figure 1: The Oaks at Durkeeville, Jacksonville, Florida 2 Figure 2:
Projected Amount Leveraged with HOPE VI Grant Funds
(with Trend Line) 10 Figure 3: HUD Data on Budgeted Funding Sources 11
Figure 4: Funds Budgeted in Approved Mixed- Finance Proposals 12 Figure 5:
Funds Budgeted for Community and Supportive Services 13 Figure 6:
Percentage of Total Funds Budgeted for Community and
Supportive Services That Are Leveraged 14 Contents
Page 1 GAO- 03- 91 HOPE VI Financing
November 15, 2002 The Honorable Jack Reed Chairman, Subcommittee on
Housing and Transportation Committee on Banking, Housing,
and Urban Affairs United States Senate
Dear Mr. Chairman: For years, some of the nation*s public housing sites
have exemplified urban decay and substandard living conditions. In an
effort to address these longstanding problems in a new way, the Congress,
in October 1992, established the Urban Revitalization Demonstration
Program, administered by the Department of Housing and Urban Development
(HUD). The program, commonly known as HOPE VI, provides grants to public
housing authorities to replace severely distressed public housing units
with attractive, economically viable communities that often combine public
housing with other affordable or market- priced housing units (see fig.
1). Through fiscal year 2001, the Congress appropriated almost $5 billion
for the HOPE VI program, and HUD used the majority of this funding to
award 165 revitalization grants to 98 public housing authorities.
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 03- 91 HOPE VI Financing
Figure 1: The Oaks at Durkeeville, Jacksonville, Florida
Before HOPE VI renovation After HOPE VI renovation Source: Printed with
the permission of the Jacksonville Housing Authority.
Page 3 GAO- 03- 91 HOPE VI Financing
To increase the number of affordable housing units developed at HOPE VI
sites, HUD encouraged housing authorities to use their HOPE VI grants to
attract, or leverage, funding from other sources, including other federal,
state, local, and private- sector sources. In our July 1998 report on the
program, we found that financial leveraging had increased over time and
that this trend was expected to continue. 1 Housing authorities that
received revitalization grants in fiscal years 1993 through 2001 estimate
that they will be able to obtain an additional $9 billion in public and
private funds for their HOPE VI sites. Projects funded with a combination
of public and private funds are known as mixed- finance projects.
The HOPE VI program is also intended to improve the lives of public
housing residents through community and supportive services, such as
childcare, transportation, job training, job placement and retention
services, and parenting classes. Although HUD, as required by law, limits
the portion of HOPE VI grant funds that grantees may spend for these
services, it encourages housing authorities to leverage additional funds
that are not subject to HUD*s limits.
As required by the Quality Housing and Work Responsibility Act of 1998
(the Act), HUD adopted a revised total development cost policy in 1999.
This policy, as specified by the Act, limits the amount of public housing
funds, including HOPE VI funds, that housing authorities may spend to
construct a public housing unit. 2 This per- unit limit, which does not
apply to leveraged funds, is equal to an amount that HUD has determined is
adequate to develop a unit of good and sound quality. The Act also
requires HUD to report annually to the Congress on the costs of public
housing units revitalized at HOPE VI sites.
You requested that we comprehensively review the HOPE VI program. Because
of the scope of the request, we agreed with your office to provide the
information in a series of reports. This first report focuses on the
financing of HOPE VI developments. Specifically, as agreed with your
office, we describe the extent to which grantees have (1) leveraged funds
from other sources, particularly other federal sources; (2) leveraged
funds specifically for community and supportive services; and (3) complied
with
1 U. S. General Accounting Office, HOPE VI: Progress and Problems in
Revitalizing Distressed Public Housing, GAO/ RCED- 98- 187 (Washington, D.
C.: July 20, 1998). 2 Public housing authorities also receive annual
grants to fund capital improvements at public housing developments.
Page 4 GAO- 03- 91 HOPE VI Financing
HUD*s funding limits for developing public housing units and budgeted
additional funds not subject to these limits. Because the Act requires HUD
to report HOPE VI cost information to the Congress, we also discuss the
extent to which HUD has complied with this requirement.
To address these objectives, we obtained and analyzed funding information
from HUD*s HOPE VI reporting system. This system contains information on
all the revitalization grants awarded through fiscal year 2001, including
projected budgets and funding sources. To assess the reliability of this
projected funding data, we reviewed information about the system and
performed electronic testing to detect obvious errors in completeness and
reasonableness. We also reviewed all the mixed- finance proposals approved
through fiscal year 2001. (Grantees submit mixedfinance proposals, which
include information on the sources and uses of funds, when they are ready
to proceed with a mixed- finance phase of development.) In addition, we
interviewed the HUD headquarters officials responsible for administering
the program. We performed our work from November 2001 through September
2002 in accordance with generally accepted government auditing standards.
Appendix I provides additional details on our scope and methodology.
According to our analysis of HUD data, housing authorities expect to
leverage, for every dollar received in HOPE VI revitalization grants
awarded through fiscal year 2001, an additional $1.85 in funds from other
sources. However, HUD considers the amount of leveraging to be slightly
higher because it treats as *leveraged* both (1) HOPE VI grant funds
competitively awarded for the demolition of public housing units and (2)
other public housing capital funds that the housing authorities would
receive even in the absence of the revitalization grants. HUD data also
indicate that 46 percent of all resources budgeted for HOPE VI sites are
from federal sources. However, HUD does not treat funds that grantees
receive through low- income housing tax credits as federal funds. These
credits* which provide tax incentives for private investment in the
development and rehabilitation of housing for low- income households*
represent forgone federal income and, therefore, are a direct cost to the
federal government. Our analysis of the mixed- finance proposals HUD
approved through fiscal year 2001 indicates that, when low- income housing
tax credit funding is included, 79 percent of the budgeted funds are from
federal sources. The remaining 21 percent of budgeted funds are from
nonfederal sources, including private sources (12 percent) and state and
local governments (9 percent). Results in Brief
Page 5 GAO- 03- 91 HOPE VI Financing
Housing authorities that have received revitalization grants expect to
leverage $295 million in additional funds for community and supportive
services. The majority of these leveraged funds are anticipated by
authorities that received grants in recent fiscal years (1999 through
2001). Overall, housing authorities have budgeted a total of about $714
million in HOPE VI revitalization grant funds and leveraged funds for
community and supportive services. Leveraging for community and supportive
services increased dramatically after 1997, when HUD instituted incentives
to encourage this practice. Specifically, 22 percent of the total funds
budgeted by fiscal year 1997 grantees for community and supportive
services consisted of leveraged funds, while 59 percent of the total funds
budgeted by fiscal year 2001 grantees consisted of leveraged funds.
Our review of HUD- approved mixed- finance proposals shows that housing
authorities have complied with HUD*s total development cost policy when
developing public housing units at HOPE VI sites. However, housing
authorities have often budgeted additional funds that are not subject to
the funding limits in the policy. As specified in the Quality Housing and
Work Responsibility Act of 1998, HUD*s policy applies only to the use of
public housing funds, and it excludes some costs from counting against the
limits, such as those incurred for removing or replacing extensive
underground utility systems or constructing extensive street and other
public improvements. For the mixed- finance proposals we reviewed, the
average amount of public housing funds budgeted per public housing unit on
costs subject to HUD*s funding limits was $98,097. The average amount of
total funds budgeted per unit was $171,541.
Although HUD has been required to report leveraging and cost information
to the Congress annually since 1998, it has not done so. Section 535 of
the Quality Housing and Work Responsibility Act of 1998 requires HUD to
submit an annual report to the Congress on the HOPE VI program. The Act
provides that this annual report is to include, among other things, the
cost of public housing units revitalized under the program and the amount
and type of financial assistance provided under and in conjunction with
the program. HUD has not issued these required annual reports to the
Congress. However, in June 2002, HUD submitted a report to the House and
Senate appropriation committees as directed by House Conference Report
107- 272. This report includes some of the information required in the
annual report, such as the extent of leveraging. According to HUD
officials, they have also provided program information to the Congress
through budget documents, the agency*s annual performance and
accountability reports, and testimonies by HUD officials. However, neither
HUD*s most recent budget justification nor its most recent performance
Page 6 GAO- 03- 91 HOPE VI Financing
and accountability report contains detailed information on the amount of
leveraged funds or the cost of public housing units revitalized under the
HOPE VI program. To enable the Congress to better determine the program*s
cost to the federal government and assess its cost effectiveness, we are
recommending that HUD provide the annual reports on the HOPE VI program to
the Congress as required by the Act. HUD agreed with our recommendation
and plans to submit an annual report for fiscal year 2002.
In 1989, the Congress established the National Commission on Severely
Distressed Public Housing (the Commission) to explore the factors
contributing to structural, economic, and social distress in public
housing; identify strategies for remediation; and propose a national
action plan to eradicate distressed conditions by the year 2000. In 1992,
the Commission reported that approximately 86,000, or 6 percent, of the
nation*s public housing units were severely distressed. According to the
Commission, these units qualified as severely distressed because of their
physical deterioration and uninhabitable living conditions; high levels of
poverty; inadequate and fragmented services; institutional abandonment;
and location in neighborhoods often as blighted as the sites themselves.
Although the Commission did not identify specific locations as severely
distressed, it recommended that funds be made available to address
distressed conditions, and that these funds be added to the amounts
traditionally appropriated for modernizing public housing. The Commission
also encouraged the development of supportive services for residents in
distressed housing developments.
In response to the Commission*s report, Congress established the Urban
Revitalization Demonstration Program, more commonly known as HOPE VI, at
HUD. By providing funds for a combination of capital improvements and
community and supportive services, the program seeks to (1) improve the
living environment for public housing residents of severely distressed
public housing through the demolition, rehabilitation, reconfiguration, or
replacement of obsolete public housing; (2) revitalize sites on which such
public housing is located, and contribute to the improvement of the
surrounding neighborhood; (3) provide housing that will avoid or decrease
the concentration of very low- income families; and (4) build sustainable
communities. To achieve these objectives, the program provides demolition
and revitalization grants to public housing authorities (PHA). Demolition
grants fund the demolition of distressed public housing, the relocation of
residents affected by the demolition, and the implementation of supportive
services for permanently relocated residents. Revitalization grants fund,
among other things, the capital costs of major rehabilitation, Background
Page 7 GAO- 03- 91 HOPE VI Financing
new construction, and other physical improvements; demolition of severely
distressed housing; and community and supportive service programs for
residents, including those relocated as a result of revitalization
efforts. Through fiscal year 2001, HUD had awarded 177 demolition grants
totaling approximately $293 million and 165 revitalization grants totaling
about $4.5 billion.
According to HUD, HOPE VI started as an embellished modernization program
but has evolved into a comprehensive and complex transformation in how
housing authorities provide affordable housing to low- income families. A
significant stage in that evolution was the issuance of the Mixed- Finance
Rule in 1996. 3 Under this rule, for the first time PHAs were allowed to
use public housing funds designated for capital improvements, including
HOPE VI funds, to leverage other public and private investment to develop
public housing units. The rule also permitted PHAs to provide public
housing capital funds to a third party so that the third party could
develop public housing units. The third party would then own the resulting
public housing units and could receive capital or operating assistance for
the units from HUD through the PHA. HUD emphasizes that this mixed-
finance approach to public housing development is the single most
important development tool currently available to PHAs. The approach
encourages the formation of new public and private partnerships to ensure
the long- term sustainability of the public housing development and
surrounding community. The mixedfinance approach can produce developments
that include both public housing and nonpublic housing units, such as low-
income housing tax credit units or market rate units.
Mixed- finance HOPE VI projects are often undertaken in development
phases. A housing authority may not begin a phase to be financed with a
combination of public and private funds until it has submitted, and HUD
has approved, a mixed- finance proposal for that phase. The mixed- finance
proposal presents the fundamental information that HUD needs to evaluate a
mixed- finance phase. For example, it contains basic descriptive
information such as the number and types of units planned, the development
schedule, the sources and uses of funding, and the operating budget for
the phase. Because of the time that is needed to plan HOPE VI projects and
develop specific proposals, most of the proposals that HUD
3 See 24 CFR 941, Subpart F.
Page 8 GAO- 03- 91 HOPE VI Financing
approved through fiscal year 2001 were funded with revitalization grants
awarded several years earlier.
PHAs with revitalization grants can use a variety of other public and
private funds to develop their HOPE VI sites. Public funding can come from
federal, state, and local sources. For example, PHAs can use federal
resources HUD has already awarded for capital improvements at public
housing developments. These capital funds can be used for a variety of
purposes, including the development, financing, and modernization of
public housing and the replacement of obsolete utility systems and
dwelling equipment. PHAs can also use funds raised through federal
lowincome housing tax credits. Under this program, states are authorized
to allocate federal tax credits as an incentive to the private sector to
develop rental housing for low- income households. After the state
allocates tax credits to developers, the developers typically offer the
credits to private investors. The private investors use the tax credits to
offset taxes otherwise owed on their tax returns. The money private
investors pay for the credits is paid into the projects as equity
financing. In addition, PHAs may obtain some of the funding needed for
infrastructure and public improvements from state and local governments.
Private sources can include private mortgage financing and financial or
in- kind contributions from nonprofit organizations. See appendix II for
more information on the types of funds that may be invested at HOPE VI
sites.
According to our analysis of HUD data, housing authorities expect to
leverage, for every dollar received in HOPE VI revitalization grants
awarded through fiscal year 2001, an additional $1.85 in funds from other
sources. Our figure is slightly lower than the $2.07 that HUD considers to
be the projected amount leveraged per HOPE VI dollar because, unlike HUD,
we do not consider funds such as HOPE VI demolition grants to be leveraged
funds. Also, HUD data indicate that, of the total funds that housing
authorities with revitalization grants have budgeted for their HOPE VI
sites, 46 percent come from federal sources. However, this percentage does
not include funds that grantees receive through lowincome housing tax
credits, which are a direct cost to the federal government. Our analysis
of all mixed- finance proposals HUD approved through fiscal year 2001
indicates that 79 percent of the budgeted funds came from federal sources,
when low- income housing tax credit funding was included. Housing
Authorities
Are Leveraging Additional Funds
Page 9 GAO- 03- 91 HOPE VI Financing
Our analysis of data in HUD*s HOPE VI reporting system shows that housing
authorities that received HOPE VI revitalization grants in fiscal years
1993 to 2001 expect to leverage an additional $1.85 for every HOPE VI
dollar received. 4 However, HUD considers the amount of leveraging to be
an additional $2. 07 for every HOPE VI dollar received because it includes
other HUD- provided public housing funds as leveraged funds. In total,
$964 million in public housing funds have been budgeted for HOPE VI sites.
The $964 million includes capital funds and $150 million in HOPE VI
demolition grant funds. Grantees would have received the capital funds
regardless of whether they received a HOPE VI revitalization grant, and
the demolition grants are another category of HOPE VI funds. When the $964
million in public housing funds are not included as leveraged funds, the
overall projected leveraging per HOPE VI dollar is reduced from $2.07 to
$1.85.
Even when public housing funds are excluded from leveraged funds, our
analysis of HUD data shows that leveraging has increased over the life of
the HOPE VI program. According to HUD*s HOPE VI reporting system, housing
authorities that received a revitalization grant in fiscal year 1993
expected to raise an additional $0.58 (excluding public housing funds) for
every HOPE VI grant dollar awarded to them. By fiscal year 2001, housing
authorities expected to augment every HOPE VI revitalization grant dollar
awarded to them with an additional $2.63 from other sources (excluding
public housing funds). Though mixed- finance development was not an
official option for housing authorities until 1996, housing authorities
were permitted, prior to 1996, to use a mix of public funds to redevelop
distressed public housing sites. According to HUD officials, the amounts
leveraged by housing authorities should increase over time, as potential
investors become more familiar with the HOPE VI program and housing
authorities become more sophisticated in seeking and securing other
sources of funds. Figure 2 shows that amounts leveraged by housing
authorities have generally increased over time.
4 Although some of the projected leveraged funding is for grants awarded
in the early years of the program, the amounts are still estimates because
only 15 grants have been totally completed. Leveraging Has Increased
over the Life of the HOPE VI Program
Page 10 GAO- 03- 91 HOPE VI Financing
Figure 2: Projected Amount Leveraged with HOPE VI Grant Funds (with Trend
Line)
Source: GAO analysis of data from HUD*s HOPE VI reporting system (as of
June 30, 2002).
Our analysis of the mixed- finance proposals that HUD approved through
fiscal year 2001 shows that 79 percent of the funding comes from federal
sources. However, HUD*s data shows that 46 percent of all resources
budgeted for HOPE VI sites come from the federal government. HUD*s HOPE VI
reporting system contains funding projections for all revitalization
grants awarded through fiscal year 2001. As shown in figure 3, the
reporting system divides budgeted resources into four categories, as
follows:
HOPE VI funds* HOPE VI revitalization grant funds awarded to a housing
authority;
other public housing funds* other HOPE VI funding, such as demolition
grants, and resources HUD allocates to housing authorities, such as
capital funds;
other federal funds* all other federal sources of funding; and
nonfederal funds* funds from state and local governments, private funds,
and equity raised from low- income housing tax credits.
The sale of low- income housing tax credits to investors generates private
capital to acquire, construct, or rehabilitate housing targeted to
households earning less than 60 percent of median income; therefore, HUD
defines the funds generated as private funds. However, tax credits
represent forgone federal income and, therefore, are a direct cost to the
Most Leveraged Funds
Come from Federal Sources
Page 11 GAO- 03- 91 HOPE VI Financing
federal government. Our reports have consistently described low- income
housing tax credits as federal housing assistance. 5
Figure 3: HUD Data on Budgeted Funding Sources
Note: Numbers do not add because of rounding. Source: GAO analysis of data
from HUD*s HOPE VI reporting system (as of June 30, 2002).
Because housing authorities do not have to report individually each source
included in the nonfederal funding category, we could not use the data in
HUD*s HOPE VI reporting system to determine the specific amounts raised
through low- income housing tax credits. In order to distinguish lowincome
housing tax credit funds from nonfederal funds, we examined 85 mixed-
finance proposals that HUD had approved through the end of fiscal year
2001. 6 These proposals list all of the funding sources and amounts
separately. As shown in figure 4, our analysis shows that 79 percent of
all the budgeted funds come from federal sources* HOPE VI funds, other
public housing funds, and other federal funds, including equity raised
from
5 For example, in January 2002 we compared the cost of the low- income
housing tax credit program to that of other federal housing programs and
reported that the tax credit program cost the federal government $3.5
billion in forgone tax revenue in fiscal year 1999. See
Federal Housing Assistance: Comparing the Characteristics and Costs of
Housing Programs, GAO- 02- 76 (Washington, D. C.: Jan. 31, 2002).
6 Of the 87 mixed- finance proposals HUD approved through fiscal year
2001, 85 proposals contained the documentation we needed to perform our
analysis.
Page 12 GAO- 03- 91 HOPE VI Financing
low- income housing tax credits. Equity raised from low- income housing
tax credits made up 27 percent of total budgeted sources. 7 Nonfederal
funds comprised 21 percent of all budgeted resources* 12 percent from
private sources and 9 percent from state and local sources.
Figure 4: Funds Budgeted in Approved Mixed- Finance Proposals
Source: GAO analysis of 85 mixed- finance proposals approved through
fiscal year 2001.
Overall, housing authorities that received revitalization grants in fiscal
years 1993 to 2001 have budgeted a total of about $714 million for
community and supportive services*$ 418 million in HOPE VI funds (59
percent) and $295 million (41 percent) in leveraged funds. 8 The $418
million in HOPE VI funds accounts for 9 percent of total revitalization
grant funds awarded. HUD*s annual notice of funding availability* which
sets forth the program*s current requirements and available funds* sets a
limit on the amount of grant funds that housing authorities can spend on
supportive services. All of the notices since 1999 have included
incentives that encourage housing authorities to leverage additional funds
for
7 The amount of tax credit equity listed in each approved budget does not
represent the full cost to the federal government, because the amount of
equity raised is less than the amount of tax credits provided for a
project.
8 Numbers do not add because of rounding. Leveraged Funds
Comprise an Increasing Percentage of Funds Budgeted for Community and
Supportive Services
Page 13 GAO- 03- 91 HOPE VI Financing
supportive services. There is no cap on the amount of leveraged funds that
housing authorities can spend on supportive services. Housing authorities
are encouraged to obtain in- kind, financial, and other types of resources
necessary to carry out and sustain supportive service activities from
organizations such as local Boards of Education, public libraries, private
foundations, nonprofit organizations, faith- based organizations, and
economic development agencies. As shown in figure 5, the amount of funds
set aside by each year*s grantees for supportive services has varied over
the life of the program.
Figure 5: Funds Budgeted for Community and Supportive Services
Source: GAO analysis of data from HUD*s HOPE VI reporting system (as of
June 30, 2002).
Although the majority of funds budgeted overall for supportive services
are HOPE VI funds, the amount of non- HOPE VI funds budgeted for
supportive services has increased dramatically since the program*s
inception. As shown in figure 6, the percentage of total supportive
services funding made up of leveraged funds jumped significantly after
1997. Specifically, while 22 percent of the total funds budgeted for
supportive services by fiscal year 1997 grantees consisted of leveraged
funds, 59 percent of the total funds budgeted by fiscal year 2001 grantees
consisted of leveraged funds. This increase may be attributable, in part,
to the fact
Page 14 GAO- 03- 91 HOPE VI Financing
that, starting in fiscal year 1998, HUD began to consider the leveraging
of additional resources (for physical improvements and supportive
services) as one of its criteria for evaluating grant applications. Since
1999, HUD has specifically considered the extent to which PHAs have
leveraged funds for supportive services.
Figure 6: Percentage of Total Funds Budgeted for Community and Supportive
Services That Are Leveraged
Source: GAO analysis of data from HUD*s HOPE VI reporting system (as of
June 30, 2002).
Housing authorities have complied with HUD*s limits on the amounts of
public housing funds that may be used to develop public housing units at
HOPE VI sites. They have also budgeted funds from other sources that are
not subject to these limits. As required by the Quality Housing and Work
Responsibility Act of 1998, HUD adopted a revised total development cost
policy in 1999. 9 This policy, as specified in the Act, limits the amount
of public housing funds, including HOPE VI funds, that housing authorities
can spend to construct public housing units. These funding limits are the
amounts that HUD has determined are adequate to develop units of good and
sound quality. As mandated in the Act, some demolition, site remediation,
and extraordinary site costs* costs that HUD has determined
9 The current policy is contained in PIH Notice 01- 22. Housing
Authorities
Have Complied with HUD*s Funding Limits and Budgeted Additional Funds Not
Subject to These Limits
Page 15 GAO- 03- 91 HOPE VI Financing
are not purely development- related costs* are excluded. Specifically,
demolition and site remediation costs are prorated with respect to the
number of new public housing units being developed on the site. For
example, if a PHA is planning to demolish 300 public housing units and to
put 100 new public housing units back on the site, it has to consider only
one- third of the demolition and remediation costs when comparing public
housing development costs with the funding limit. Extraordinary site
costs* such as removal or replacement of extensive underground utility
systems, construction of extensive street and other public improvements,
and dealing with flood plains* are also excluded. An independent engineer
must verify extraordinary site costs. Our analysis of 77 (out of 87)
approved mixed- finance proposals shows that housing authorities have
complied with HUD*s cost policy. 10
The actual costs of developing units at HOPE VI sites are often higher
than the public housing funds budgeted for developing public housing
units. 11 In the 64 mixed- finance proposals for which there was
sufficient detailed information to perform our analysis, $525 million in
public housing funds, including HOPE VI funds, were subject to HUD*s
established funding limits. 12 However, total funds of $1.3 billion were
approved in the mixedfinance proposals. Therefore, the average amount of
public housing funds (including HOPE VI funds, capital funds, and other
public housing development funds) budgeted per public housing unit subject
to HUD*s funding limits was $98,097, while the average amount of total
funds budgeted per unit was $171,541. 13
10 The documentation on housing authorities* compliance with HUD*s cost
policy was not available for 10 of the 87 mixed- finance proposals
approved through fiscal year 2001. 11 Though HUD*s total development cost
policy applies only to public housing funds, other investors in HOPE VI
sites provide cost control. For example, state agencies that award tax
credits review proposed projects, monitor the reasonableness of project
costs, and take responsibility for ensuring that projects stay in
compliance with rent and unit restrictions and that approved projects
receive only the tax credits necessary to make the project work. The
Internal Revenue Service is responsible for monitoring compliance with
federal guidelines and state performance.
12 The detailed total development cost* limit information we needed to
perform our analysis was not available for 23 of the 87 mixed- finance
proposals approved through fiscal year 2001.
13 The two per- unit figures are in 2002 dollars.
Page 16 GAO- 03- 91 HOPE VI Financing
HUD has been required to report leveraging and cost information annually
to the Congress since 1998; however, it has not done so. Section 535 of
the Quality Housing and Work Responsibility Act of 1998 requires HUD to
submit an annual report to the Congress on the HOPE VI program. As
provided by the Act, this annual report is to include, among other things,
the cost of public housing units revitalized under the program and the
amount and type of financial assistance provided under and in conjunction
with the program.
Agency officials in charge of the HOPE VI program acknowledge that HUD has
not issued the annual reports to the Congress required under the Act. They
noted that they have provided program information through other means. In
June 2002, HUD submitted a report to the House and Senate appropriation
committees as directed by House Conference Report 107272.
This report discusses best practices and lessons learned in the HOPE VI
program between 1992 and 2002. It also includes some of the information
required in the annual report, such as the extent of leveraging.
HOPE VI officials also noted that they have provided information to the
Congress through other means that the agency has deemed appropriate, such
as budget documents, the agency*s performance and accountability reports,
and testimonies by HUD officials. However, neither HUD*s most recent
budget justification nor its most recent performance and accountability
report contains detailed information on leveraging or the cost of public
housing units developed under the HOPE VI program. Although HUD*s fiscal
year 2003 budget justification provides information on the amount of
outside funds leveraged by HOPE VI funds, it does not describe the sources
of these funds or provide cost information. Further, HUD*s fiscal year
2001 performance and accountability report focuses on four key outputs of
the HOPE VI program: families relocated, units demolished, new and
rehabilitated units completed, and units occupied. The report does not
provide information on HOPE VI leveraging or the cost of units developed
under the program. Agency officials responsible for administering HOPE VI
agreed that preparing the annual report as required under the Act would
help provide the Congress and other interested stakeholders with useful
information with which to assess the cost effectiveness and results of the
program.
The Congress faces difficult choices when deciding how to provide
affordable housing. One of the objectives of the HOPE VI program is to
leverage program funds, and such leveraging has increased over the life of
the HOPE VI program* albeit primarily from other federal sources. HUD Has
Not
Complied with the Annual Reporting Requirement
Conclusions
Page 17 GAO- 03- 91 HOPE VI Financing
However, HUD*s HOPE VI reporting system does not identify funds that
housing authorities obtain specifically from low- income housing tax
credits, which are a direct cost to the federal government, as federal
funds. Furthermore, applying HUD*s total development cost policy does not
provide a comprehensive picture of the actual costs of developing units at
HOPE VI sites. This policy, which HUD established in accordance with the
Quality Housing and Work Responsibility Act of 1998, was not intended to
determine the actual cost of development at HOPE VI sites. Instead, it is
designed to determine cost limits for the development of public housing
with public housing funds. The type of data that HUD is required to report
annually to the Congress would provide information needed to evaluate the
program*s cost to the federal government and its cost effectiveness.
We recommend that the Secretary of Housing and Urban Development provide
annual reports on the HOPE VI program to the Congress as required by law
and include in these annual reports, among other things, information on
the amounts and sources of funding used at HOPE VI sites, including
equity raised from low- income housing tax credits, and
the total cost of developing public housing units at HOPE VI sites,
including the costs of items subject to HUD*s development cost limits and
those that are not.
We provided a draft of this report to HUD for its review and comment. In a
letter from the Assistant Secretary for Public and Indian Housing (see
app. III), HUD stated that it found the report to be fair and accurate in
its assessment of HOPE VI financing. HUD also agreed with our
recommendation to submit annual reports and noted that it plans to submit
an annual report for fiscal year 2002 by December 31, 2002. According to
the agency, the fiscal year 2002 report will include the amounts and
sources of funding used at HOPE VI sites, including equity raised by low-
income housing tax credits categorized as private sources, and the total
cost of developing public housing units at HOPE VI sites. HUD also
provided clarifications on several technical points, which have been
included in the report as appropriate.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 15 days
after the date of this letter. At that time, we will send copies of this
report to the Recommendation for
Executive Action Agency Comments and Our Evaluation
Page 18 GAO- 03- 91 HOPE VI Financing
Ranking Member, Subcommittee on Housing and Transportation, Senate
Committee on Banking, Housing, and Urban Affairs; the Chairman and Ranking
Minority Member, Senate Committee on Banking, Housing, and Urban Affairs;
the Chairman, Vice Chairman, and Ranking Minority Member, Subcommittee on
Housing and Community Opportunity, House Committee on Financial Services;
and the Chairman and Vice Chairman, House Committee on Financial Services.
We will also send copies to the Secretary of Housing and Urban Development
and the Director of the Office of Management and Budget. We will make
copies available to others upon request. This letter will also be
available at no charge on GAO*s home page at http:// www. gao. gov.
Please call me at (202) 512- 8678 if you or your staff have any questions
about this report. Key contributors to this report are listed in appendix
IV.
Sincerely yours, David G. Wood Director, Financial Markets and
Community Investment
Appendix I: Objectives, Scope, and Methodology
Page 19 GAO- 03- 91 HOPE VI Financing
Our objectives were to describe the extent to which housing authorities
with HOPE VI revitalization grants have (1) leveraged funds from other
sources, particularly other federal sources; (2) leveraged funds
specifically for community and supportive services; and (3) complied with
HUD*s funding limits for developing public housing units and budgeted
additional funds not subject to these limits. We also determined the
extent to which HUD has reported cost information to the Congress.
To determine the extent to which grantees have leveraged federal and
nonfederal funds, we analyzed data from HUD*s HOPE VI reporting system and
reviewed all mixed- finance proposals approved through September 30, 2001.
Specifically, we obtained data as of the quarter that ended June 30, 2002,
for all 165 revitalization grants awarded through fiscal year 2001. We
used this data to determine the projected amount of funds leveraged per
HOPE VI dollar. In addition, we analyzed HUD*s data to determine the
percentage of total funding that grantees expect to derive from HOPE VI
revitalization grants, other public housing funds, other federal funds,
and nonfederal funds. To assess the reliability of HUD*s data, we reviewed
information about the system and performed electronic testing to detect
obvious errors in completeness and reasonableness. To determine the
federal and nonfederal funds actually obtained by grantees, we requested
excerpts from all of the mixed- finance proposals approved through the end
of fiscal year 2001. For example, we requested the budget that shows the
sources and uses of funds and the total development cost limit analysis.
Although HUD reported that it had approved 87 mixed- finance proposals
through September 30, 2001, it was able to provide the documentation we
needed to analyze funding sources only for 85 proposals. The two remaining
proposals lacked sufficient budget information for us to perform our
analysis. The 85 mixed- finance proposals we reviewed were for phases to
be constructed under 48 different revitalization grants and represented 13
percent of all funds budgeted through June 30, 2002, and 16 percent of all
revitalization grant funds budgeted over the life of the program. To gain
an understanding of the mixed- finance development approach, we
interviewed headquarters officials in HUD*s Office of Public Housing
Investments and reviewed HUD*s Mixed- Finance Guidebook.
To determine the extent to which grantees have budgeted leveraged funds
specifically for community and supportive services, we analyzed financial
data from HUD*s HOPE VI reporting system reported as of June 30, 2002.
Specifically, we used this data to identify the amounts of HOPE VI
revitalization funds and leveraged funds budgeted for supportive services
overall and by grant year. We also used this data to determine the
Appendix I: Objectives, Scope, and
Methodology
Appendix I: Objectives, Scope, and Methodology
Page 20 GAO- 03- 91 HOPE VI Financing
proportion of HOPE VI funds budgeted for supportive services relative to
the total amount of HOPE VI revitalization grant funds awarded. Moreover,
we used this data to identify trends in the use of leveraged funds for
supportive services. To determine why the use of leveraging increased
after 1997, we interviewed headquarters officials in HUD*s Office of
Public Housing Investments and reviewed HUD*s guidance to grantees and the
notices of funding availability for fiscal years 1993 through 2001.
To determine the extent to which grantees have complied with HUD*s funding
limits for developing public housing units and have budgeted additional
funds not subject to these limits, we reviewed HUD*s total development
cost policy and established what costs are subject to the policy and what
costs are excluded. We then analyzed all 87 mixed- finance proposals
approved through fiscal year 2001 to determine if they complied with HUD*s
cost policy. We were not able to determine compliance for 10 of the 87
proposals because the documentation provided did not contain the level of
detail required. In order to compare the per- unit cost of a public
housing unit according to HUD*s cost policy with the actual cost of
developing the unit, we again analyzed the mixed- finance proposals. For
64 of the 87 mixed- finance proposals, we determined the per- unit cost of
a public housing unit according to HUD*s cost policy, which includes only
public housing funds and excludes certain costs. For the same 64
proposals, we then determined the actual per- unit cost by dividing the
total funds budgeted by the total number of units. We were not able to
perform these analyses for 23 of the 87 proposals because the Office of
Public Housing Investments could not provide the detailed total
development cost limit analysis needed. For example, in some cases, the
office was able to provide only the information necessary to calculate the
per- unit cost of a public housing unit for an entire HOPE VI project, as
opposed to the particular phase for which we had the approved budget.
To determine the extent to which HUD has reported cost information to the
Congress, we reviewed the HOPE VI reporting requirements in the Quality
Housing and Work Responsibility Act of 1998. We then interviewed
headquarters officials in HUD*s Office of Public Housing Investments to
determine the type of program information the Department has reported to
the Congress, and in what format. Finally, we reviewed HUD*s fiscal year
2003 budget justification and its fiscal year 2001 performance and
accountability report.
We performed our work from November 2001 through September 2002 in
accordance with generally accepted government auditing standards.
Appendix II: Examples of HOPE VI Funding Sources
Page 21 GAO- 03- 91 HOPE VI Financing
Public housing authorities (PHA) with HOPE VI revitalization grants use
funds from a variety of federal and nonfederal sources to develop their
HOPE VI sites. Federal sources include additional public housing funds,
other HUD funds, and low- income housing tax credits. Nonfederal sources
include state and local funds, private donations, and tax- exempt bonds.
Listed below are brief descriptions of some of these funding sources.
Federal sources: Capital Fund Program (CFP)
Under CFP, HUD provides annual formula grants to PHAs for capital and
management activities, including the development, financing, and
modernization of public housing. The funds may not be used for luxury
improvements, direct social services, costs funded by other HUD programs,
or ineligible activities, as determined by HUD on a case- by- case basis.
Community Development Block Grant (CDBG) Program
The CDBG funding that HUD provides is split between states and local
jurisdictions called *entitlement communities.* Funds are awarded on a
formula basis to entitled metropolitan cities and urban counties. States
distribute the funds to localities that do not qualify as entitlement
communities. CDBG funds can be used to implement a wide variety of
community and economic development activities directed toward neighborhood
revitalization, economic development, and improved community facilities
and services.
Comprehensive Grant Program (CGP)
Under CGP, HUD provided funds, on a formula basis, to help large PHAs
(those with at least 250 units) correct physical, management, and
operating deficiencies and keep units in the housing stock as safe and
desirable homes for low- income families. The Quality Housing and Work
Responsibility Act of 1998 shifted CGP into the Capital Fund.
Comprehensive Improvement Assistance Program (CIAP)
Under CIAP, HUD provided competitive grants to help smaller PHAs (those
with fewer than 250 units) to correct physical, management, and operating
deficiencies and keep units in the housing stock as safe and desirable
homes for low- income families. The Quality Housing and Work Appendix II:
Examples of HOPE VI Funding
Sources
Appendix II: Examples of HOPE VI Funding Sources
Page 22 GAO- 03- 91 HOPE VI Financing
Responsibility Act of 1998 shifted assistance to smaller PHAs from the
competitive CIAP to a formula grant under the Capital Fund in 1999.
Historic Rehabilitation Tax Credits
Historic rehabilitation tax credits are available to rehabilitate
certified historic structures that will need substantial rehabilitation.
Eligible applicants receive a tax credit equal to 20 percent of the amount
of qualified rehabilitation expenditures.
Home Investment Partnership Program (HOME)
Through HOME, HUD provides annual formula grants to states and localities
to fund a wide range of activities designed to build, buy, or rehabilitate
affordable housing or provide direct rental assistance to lowincome
people. Specifically, states and localities use HOME funds for grants,
direct loans, loan guarantees or other forms of credit enhancement, rental
assistance, and security deposits.
Low- Income Housing Tax Credits (LIHTC)
Under the LIHTC program, states are authorized to issue federal tax
credits for the acquisition, rehabilitation, or new construction of
affordable rental housing. The credits are generally sold to outside
investors to raise development funds for a project. These outside
investors use the tax credit to offset taxes otherwise owed on their tax
returns. To qualify for credits, a project must have a specific proportion
of its units set aside for lower- income households, and the rents on
these units must be limited to 30 percent of qualifying income. The amount
of credit that can be provided to a project is determined by size of the
allocation, eligible costs, number of tax credit units, type of credit,
and investor pricing. Credits are provided for 10 years. State housing
credit agencies usually award tax credits through competitive rounds. Each
state receives an annual allocation of $1.75 per capita. States must
reserve a minimum of 10 percent of the credits for nonprofit developers.
Major Reconstruction of Obsolete Projects (MROP)
Under MROP, which last funded new development in 1994, HUD provided funds
to PHAs to perform major reconstruction of obsolete public housing or to
maintain or expand the supply of housing for low- income families.
Projects formerly funded as MROP are now funded through the Capital Fund.
Appendix II: Examples of HOPE VI Funding Sources
Page 23 GAO- 03- 91 HOPE VI Financing Operating Fund
Through the Operating Fund, HUD provides PHAs with a subsidy, on a formula
basis, to fund the operating and maintenance expenses of the developments
they own or operate. It enables PHAs to keep rents affordable for lower-
income families and to cover a variety of expenses, including maintenance,
utilities, and tenant and protective services.
Public Housing Drug Elimination Program (PHDEP)
Eligible PHAs received PHDEP grants from HUD to reduce or eliminate drug-
related crime in and around public housing. Grantees were encouraged to
develop a plan that included initiatives that could be sustained over a
period of several years for addressing the problem of drug- related crime
in and around public housing. The program was eliminated in the fiscal
year 2002 HUD budget.
Renewal Community/ Empowerment Zone/ Enterprise Community Initiative (RC/
EZ/ EC)
In urban areas that HUD has designated as Renewal Communities, Empowerment
Zones, and Enterprise Communities, grants and tax incentives are provided.
They stimulate the creation of new jobs empowering low- income persons and
families receiving public assistance to become economically self-
sufficient, and they promote the revitalization of economically distressed
areas.
Nonfederal sources: Affordable Housing Program
The program subsidizes long- term financing for very low- , low- , and
moderate- income families. The Federal Home Loan Banks provide from their
annual net earnings low- cost funding and other credit to stockholder
members on a districtwide competitive basis. Members* which include
commercial banks, savings institutions, credit unions, and insurance
companies* use this credit to meet the housing finance and credit needs of
their communities.
Housing Trust Funds
Housing trust funds are distinct funds established by cities, counties,
and states that permanently dedicate a source of public revenue to support
the
Appendix II: Examples of HOPE VI Funding Sources
Page 24 GAO- 03- 91 HOPE VI Financing
production and preservation of affordable housing. There are at least 257
housing trust funds in the United States. Housing trust funds support a
variety of housing activities for low- and very low- income households,
including new construction, preservation of existing housing, emergency
repairs, homeless shelters, housing- related services, and capacity
building for nonprofit organizations.
Private Sources
Nonprofit and faith- based organizations, developers, private banks and
lending institutions, universities, large corporations, independently
owned businesses, and residents of the HOPE VI projects provide resources
for various purposes. For example, developers may have equity at risk, and
future residents provide down payments on homeownership units.
Universities donate land and assist in developing educational programs.
National corporations provide training and employment for public housing
residents.
State and Local Sources
State and local governments provide a range of resources, including
capital improvement funds for infrastructure and community facilities and
direct financial contributions or provision of in- kind services. Some
municipalities provide tax- foreclosed properties for redevelopment,
matching funds for community and supportive services, and assistance with
zoning and other local requirements.
Tax- Exempt Bond Financing
Eligible issuers, such as housing finance agencies and local governments,
sell bonds to investors with interest not subject to federal income tax
and use proceeds to finance below- market rate* mortgage loans. The lower
interest rate on the bond is passed on to borrowers as a reduced mortgage
interest rate. The uses of the proceeds raised through tax- exempt bond
financing include acquisition, rehabilitation, and construction.
Tax Increment Financing
Tax Increment Financing (TIF) allows a municipality to provide financial
incentives to stimulate private investment in a designated area (a TIF
district) where blight has made it difficult to attract new development.
The TIF program can be used to support new development or the
rehabilitation of existing buildings in industrial, commercial,
residential, or mixed- use
Appendix II: Examples of HOPE VI Funding Sources
Page 25 GAO- 03- 91 HOPE VI Financing
development proposals. Funding for TIF eligible activities is derived from
the increase in incremental tax revenues generated by new construction or
rehabilitation projects within the boundaries of the TIF district. States
determine what activities are eligible with TIF funds, and these
activities may include land acquisition, site preparation, building
rehabilitation, public improvements, and interest subsidy.
Appendix III: Comments from the Department of Housing and Urban
Development Page 26 GAO- 03- 91 HOPE VI Financing
Appendix III: Comments from the Department of Housing and Urban
Development
Appendix III: Comments from the Department of Housing and Urban
Development Page 27 GAO- 03- 91 HOPE VI Financing
Appendix IV: GAO Contacts and Staff Acknowledgments Page 28 GAO- 03- 91
HOPE VI Financing
David Wood, (202) 512- 8678 Paul Schmidt, (312) 220- 7681
In addition to those named above, Anne Dilger, John McGrail, Sara
Moessbauer, Lisa Moore, Ginger Tierney, Paige Smith, Mijo Vodopic, Carrie
Watkins, and Alwynne Wilbur made key contributions to this report.
Appendix IV: GAO Contacts and Staff
Acknowledgments GAO Contacts Acknowledgments
(541010)
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