Secretary LYNN. The kind of formula that we would intend using in our new construction program is one that really achieves, we believe, substantial equity as among the people at all different horizontal levels of lower income, starting from the lowest up to people who need housing assistance at all, because if you go to a concept of looking at a given market area and that what it costs to obtain safe housing there, and you look at a decision of what is a fair proportion of a person's income, no matter what it is, low or moderate, or whatever it might be, and say that is what he should spend on housing, and then work a program along those lines, it seems to us you achieve vertical equity. Senator BIDEN. I would like to go into detail later with you as to the specifics.

Secretary LYNN. We would welcome it.

Senator BIDEN. I would like to get to the last things. Number 1, vou time and again talked about market forces that are going to produce this renaissance and I guess I sound as if I am facetious.

The market forces that are going to better the housing situation for subsidized and public housing use, maybe at a later date, or maybe it is in your report, you could really specify what those market forces are, if they are something other than the increasing real income of the American people and the change in the feast and famine of credit for mortgages.

Is there anything more substantive or in addition that leads you to believe that these market forces are going to work in that direction? Secretary LYNN. First of all, Senator, they have been working. Right now we have a tight mortgage situation, but we would like to avoid it by some of the techniques we are suggesting. The truth of the matter is that when you look at the level of housing production in the last couple of years in the United States, it is more than anyone would have dreamed of even 5 years ago.

In other words, what we are saying is the market forces can be seen by the number of units that are being built in this country. Up to 3 million units last year, if you include the mobile homes in it, and that is more than double what we had in prior years.

I am saying the mechanisms are working. We want them to work better. But you still need special assistance for the people at the lower end of the scale, because the market forces do not help them directly. All the market forces do is provide enough housing for them to move in if they have the money to pay for it.

Senator BIDEN. I would like to get back to that again. The last yes, I am still a bit perplexed as to why, even if this program is as good as you think it is, and has as many positive points as its proponents say it does, I am still perplexed as to why we cannot go forward with the study that has to be done in order to assure that this is a workable program, and at the same time take care of the ongoing, which can be stopped in 1976, for example, if your proposals are right, take care of the programs that are onstream now and in fact there is not any great disagreement as to their being at least a good deal more benefit than harm produced by the program.

What worries me is the inbetween time. What happens to all those people who are out there?

Secretary LYNN. Senator, we are proposing a program for the inbetween time. We don't like section 236, because it now has a very drastic notch effect in addition to being extremely expensive. It is a program that has become quite unworkable in many areas of the country, and there are a number of other reasons we don't like it. We feel the same way about section 235. What we want to do is work the marketplace, again, in a different way during this period.

We want in the main through our new construction program to go to a developer who is going to be building, and he is building for that conventional market, and say, give us some of your units, and if we have people with income here and it takes this much for you to make out with regard to this thing, we will pay the difference, so we do intend having construction during this period of time.

The question is: What is the most cost-effective way and the best way to handle the interim situation.

Senator BIDEN. My time is up. I would like to come back later, if I

may.

The CHAIRMAN. Senator Brooke?

Senator BROOKE. Thank you, Mr. Chairman.

Mr. Secretary, I am sorry I didn't hear your statement. I had an amendment on the floor. I have several questions. I shall try to keep them short and concise, and I would appreciate the same from you.

What is your estimate of the total additional rental income which would accrue to local housing authorities if all of the changes in public housing rent requirements which are contained in your bill were adopted?

Secretary LYNN. Give me a minute, please.

Senator BROOKE. As you know, I am very much concerned about the proposed changes in the public housing rents requirements contained in title III of your proposed legislation. As I understand it, you would abolish the provision contained in the present law which permits a 10percent deduction in defining income for elderly families.

Secretary LYNN. And the 5-percent deduction for other families. Senator BROOKE. Yes, and you would repeal the so-called Brooke amendment which provides that welfare agencies may not reduce welfare assistance to public housing clients as a result of the one-quarterof-income limit on rent contained in the first Brooke amendment. Secretary LYNN. Yes.

Senator BROOKE. And you would require that a tenant pay rent equal to at least 40 percent of the operating cost of his dwelling unit; is that correct?

Secretary LYNN. Yes.

Senator BROOKE. I am concerned about how these proposed changes will affect public housing tenants. They may result in substantial rent increases for some tenants. In this regard, I wrote to you asking for information on the effect of these and similar proposals. I would request that your response to my letter may be made a part of the record at this point.

The CHAIRMAN. That will be done. [The letter follows:]

THE SECRETARY OF HOUSING AND URBAN DEVELOPMENT,
Washington, D.C.

Hon. EDWARD W. BROOKE,

U.S. Senate,

Washington, D.C.

DEAR SENATOR BROOKE: This is in response to your letter of September 10, 1973, concerning various legislative proposals which would significantly affect the rents paid by public housing tenants.

Attached are our responses to the questions you have asked. I am sure that you understand that some of our answers, of necessity, are really informed opinions. In my few months here at HUD, I have become keenly aware of the shortcomings in our data-collection system as it pertains to public housing. As you can see from our answers, we need data on many aspects of LHA operations that we are not currently obtaining. I hope to rectify this situation over the next few months.

I have responded to your specific questions in the same order as in your letter. I hope you find that these answers are adequate for your purposes. Please let me know if I can provide further information or assistance.

Sincerely yours,

JAMES T. LYNN.

QUESTIONS AND ANSWERS-RENTS PAID BY PUBLIC HOUSING TENANTS

1. Question. What is the current inventory of public housing units and their value?

Answer. The number of LHA owned dwelling units under management as of June 30, 1973 was 979,400. The original Federal investment in these units was approximately $12 billion.

2. Question. How many and what types of LHAs were in "serious financial condition" as of June 30, 1969, June 30, 1972 and June 30, 1973? What percentage of total public housing units were operated by these housing authorities on these two dates? Is the number of local housing authorities in “serious financial condition" likely to increase or decrease in FY 1974 if the current "interim formula" for operating subsidy is retained?

Answer. The financial soundness test which established a ratio of locallyproduced income to expenditures and under which certain LHAs were considered in "serious financial condition" was first installed in 1970. Therefore information regarding LHAs in "serious financial condition" on June 30, 1969, is unavailable. The following comparison between 1970 and 1972, however, may be of interest.

Financial information for June 30, 1973, from which comparable figures could be developed has not yet been compiled; however, payments of operating subsidies from 1973 funding are being made to 51.3 percent of all housing authorities and these authorities operate 83.7 percent of the total number of units in management. This means, essentially, that these authorities are no longer able to generate enough rental income to cover their operating expenditures and are dependent upon the Federal Government for day-to-day support.

The number of LHAS in "serious financial condition" is likely to increase in FY 1974 whether or not the interim formula is retained.

3. Question. Does the designation of “serious financial condition" take into account deferment of services and maintenance by local housing authorities?·

What is HUD's estimate of the backlog of deferred maintenance in LHAs as of June 30, 1973?

Answer. Our test to determine "serious financial condition" does not take into account deferred services or maintenance. We are presently determining the amount of maintenance that has been deferred by LHAS.

4. Question. What are the causes of financial deterioration in LHA's other than loss of rental revenue due to implementation of the “Brooke Amendments?” Answer. Aside from the Brooke Amendments, the principal cause of financial deterioration is increases in operating costs. A projection of present trends indicates an ever-increasing gap between expenses and income which would increase LHA operating deficits even further. Recent inflationary cost increases will cause the gap to widen at a faster rate.

One reason that expenses are increasing faster than LHA income arises from the tendency on the part of many housing authorities, often in response to urging from local government or special interest groups, to accord priority for admission to families with the lowest income and with multiple social problems instead of selecting families representing a cross-section of the eligible low-income market. Although all LHAs have not engaged in this practice, it is sufficiently widespread to have a noticeably depressive effect on tenant family income.

Other contributing factors are the aging of projects and, in the case of many larger cities, the inner city environment as reflected in vandalism, security costs and a negative attitude with respect to payment of rent and to the care and maintenance of property.

5. Question. What is HUD's estimate of the current annual requirement for Federal operating subsidies if no change is made in statutory rent requirements and the "interim formula” for operating subsidies is adjusted to reflect increases in operating costs at a 5 percent inflation factor (rather than the current 3 percent factor)?

Answer. The estimated annual operating subsidy requirement, as reflected in the Fiscal Year 1974 budget, is $280 million for the non-leased low-rent housing program. That estimate is based on the Fiscal Year 1973 interim formula and includes a 3 percent inflation factor for both income and expenditures. If the inflation factor for expenditures was increased to 5 percent (while the inflation factor for income remained unchanged), an additional subsidy requirement of approximately $16 million would be required for a total of $296 million for Fiscal Year 1974.

6. Question. Are there any LHAs expected to be unable to meet their financial obligations in FY 1974?

Answer. No. If the interim formula is extended to cover FY 1974, LHA operating budgets will be approved within funds available pursuant to the formula and from available operating reserve funds. Since an LHA must limit its expenditure level to that approved in the operating budget, LHAS ordinarily should not incur obligations beyond their financial ability during the course of the year. However, if an LHA is faced with a deficit beyond available operating reserves because of unforeseen expenditures or because of an unforeseen drop in tenants' rent, the LHA may be unable to meet its financial obligations.

In addition, a rent strike may cause an LHA to be short of cash to meet its obligations even though its expenditures are within an approved budget.

7. Question. Will the Federal Government have to take over any LHAs in FY 1974 due to their inability to meet their financial obligations if statutory rent requirements are not changed and no additional Federal operating subsidy beyond the “interim formula" is made available? Will the deterioration of housing services and properties require Federal intervention?

Answer. The Department is not obligated to "take over" any LHA under current law. The Department, at its option, may take over the operation of an LHA in the event of a serious breach or default of the Annual Contributions Contract. Our policy is that a "take over" of an LHA would serve no purpose if the problem is due to lack of funds since it would open up no new funding source.

We do not anticipate intervening in the affairs of any LHA. If an LHA were grossly mismanaging its affairs and housing services and properties were seriously deteriorating as a result, Federal intervention would consist of a coordinated effort directed toward having the LHA correct the situation through the marshalling of local governmental and community assistance.

8. Question. What is HUD's estimate of the total additional revenue which will accrue to local housing authorities as a result of the adoption of the "Widnall Amendment?"

Answer. $90-$120 million.

We have assumed that monthly unit operating cost means total routine and non-routine operating costs. Based on this assumption, we have made two computations of minimum rent. The lower is based on costs including project-supplied utilities only, while the higher is based on costs including an add-on for tenantpurchased utilities. We believe this add-on to be appropriate since gross rent has traditionally included the cost of all utilities.

9. Question. What additional rental income would be generated:

(a) if only the new income definition contained in the Widnall Amendment (including the abolition of the 5% and 10% deductions from gross income) were adopted?

(b) if only the provisions requiring a minimum rental equal to 40% of operating costs for non-welfare tenants were adopted?

(c) if only the Widnall welfare rent provisions were adopted?

(d) if only the Sparkman welfare rent provisions were adopted?

(e) if only the "aggregate rental" provisions were adopted?

Answer. (a) $35,000,000.

(b) $11,000,000 to $15,000,000.

(c) $68,000,000 to $80,000,000 under our interpretation of the Widnall welfare rent provisions. However, these provisions are somewhat ambiguous and it could well be a different interpretation, having different financial consequences, would prevail.

(d) The welfare rent provision of the Sparkman proposal is that "the rental of any dwelling unit occupied by a family receiving welfare assistance payments shall not exceed the greater of (A) 40 percentum of the operating costs attributable to the dwelling unit . . ., or (B) the maximum amount of welfare assistance which that family receives . . . for . . . housing expenses" Our interpretation of this language is that it provides for a maximum rent, not for a minimum one, and that it gives the local housing authorities the power to determine whether amounts less than the statutory maximum will be charged. In making this determination, the housing authority would not be bound by any minimum and could charge rents to welfare families that could be as low as zero.

Since there is no requirement of a minimum rental, it is not possible to estimate precisely the dollar impact of this provision. Indeed, it is likely that it will cause a decrease in rental income instead of an increase although even this cannot be ascertained with any certainty. In the first place, an LHA might charge rentals below the maximums set forth in the Sparkman proposal. More importantly, an LHA could not charge rent of more than 40 percent of operating expenses in those states which make flat grant welfare payments with no specified housing allotment. While this may not have been the intent of the provision's drafters, no other interpretation is possible. Thus, in the flat grant states, maximum rents for welfare families would be changed from 25 percent of income to no more than 40 percent of operating expenses, which could prove to be a substantial decrease. Accordingly, a decrease in LHA rental income could result.

This decrease would be offset, at least partially, by increased rents in those states which still pay identifiable housing allotments to welfare families. We have no assurance that these states will not reduce their housing allotment, however. Therefore, it is quite possible that there would be some decrease in LHA rental income if the Sparkman welfare rent proposal was enacted into law.

(e) Minimal.

10. Question. What percentage of the additional rental income which would be generated by adoption of the Widnall Amendment would come from:

(a) elderly, non-welfare families?

(b) non-elderly, non-welfare families?

(c) welfare families?

How does this compare with the percentage of rent paid by each of these groups presently?

Answer. Although we do not have information regarding the average rents paid by welfare families vs. average rents paid by non-welfare families, we can estimate the proportionate impact of the Widnall Amendment for elderly versus non-elderly families. Approximately 60 percent of the additional rental income would derive from the non-elderly and 40 percent from the elderly. By comparison, roughly 70 percent of LHA rental income comes from those 60 percent of all public housing tenants who are not elderly while the remaining 30 percent of rentals are paid by the 40 percent of tenants who are elderly.