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entitled 'Public Housing: HOPE VI Leveraging Has Increased, but HUD Has 
Not Met Annual Reporting Requirement' which was released on December 
03, 2002.



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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:



HOPE VI Financing:



GAO-03-91:



Contents:



Letter:



Results in Brief:



Background:



Housing Authorities Are Leveraging Additional Funds:



Leveraged Funds Comprise an Increasing Percentage of Funds Budgeted for 

Community and Supportive Services:



Housing Authorities Have Complied with HUDís Funding Limits and 

Budgeted Additional Funds Not Subject to These Limits:



HUD Has Not Complied with the Annual Reporting Requirement:



Conclusions:



Recommendation for Executive Action:



Agency Comments and Our Evaluation:



Appendix I: Objectives, Scope, and Methodology:



Appendix II: Examples of HOPE VI Funding Sources:



Appendix III: Comments from the Department of Housing and 

Urban Development:



Appendix IV: GAO Contacts and Staff Acknowledgments:



GAO Contacts:



Acknowledgments:



Figures:



Figure 1: The Oaks at Durkeeville, Jacksonville, Florida:



Figure 2: Projected Amount Leveraged with HOPE VI Grant Funds (with 

Trend Line):



Figure 3: HUD Data on Budgeted Funding Sources:



Figure 4: Funds Budgeted in Approved Mixed-Finance Proposals:



Figure 5: Funds Budgeted for Community and Supportive Services:



Figure 6: Percentage of Total Funds Budgeted for Community and 

Supportive Services That Are Leveraged:



United States General Accounting Office:



Washington, DC 20548:



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 nationís 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.



Figure 1: The Oaks at Durkeeville, Jacksonville, Florida:



[See PDF for Image]



Source: Printed with the permission of the Jacksonville Housing 

Authority.



[End of Figure]



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.[Footnote 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 HUDís 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.[Footnote 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 HUDís 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 HUDís 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 mixed-finance 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.



Results in Brief:



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 ďleveragedĒ 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).



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 HUDís 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, HUDís 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 HUDís 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 agencyís 

annual performance and accountability reports, and testimonies by HUD 

officials. However, neither HUDís most recent budget justification nor 

its most recent performance 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 programís 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.



Background:



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 nationís 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 Commissionís 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, 

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.[Footnote 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 mixed-finance 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 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 low-income 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.



Housing Authorities Are Leveraging Additional Funds:



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 low-income 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.



Leveraging Has Increased over the Life of the HOPE VI Program:



Our analysis of data in HUDís 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.[Footnote 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 HUDís 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.



Figure 2: Projected Amount Leveraged with HOPE VI Grant Funds (with 

Trend Line):



[See PDF for Image]



Source: GAO analysis of data from HUDís HOPE VI reporting system (as of 

June 30, 2002).



[End of Figure]



Most Leveraged Funds Come from Federal Sources:



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, HUDís data shows that 46 percent of all 

resources budgeted for HOPE VI sites come from the federal government. 

HUDís 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 federal government. Our reports have consistently described low-

income housing tax credits as federal housing assistance.[Footnote 5]



Figure 3: HUD Data on Budgeted Funding Sources:



[See PDF for Image]



Note: Numbers do not add because of rounding.



[End of Figure]



Source: GAO analysis of data from HUDís 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 HUDís HOPE VI reporting system to determine the specific 

amounts raised through low-income housing tax credits. In order to 

distinguish low-income housing tax credit funds from nonfederal funds, 

we examined 85 mixed-finance proposals that HUD had approved through 

the end of fiscal year 2001.[Footnote 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 low-income housing tax 

credits. Equity raised from low-income housing tax credits made up 27 

percent of total budgeted sources.[Footnote 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:



[See PDF for Image]



Source: GAO analysis of 85 mixed-finance proposals approved through 

fiscal year 2001.



[End of Figure]



Leveraged Funds Comprise an Increasing Percentage of Funds Budgeted for 

Community and Supportive Services:



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.[Footnote 

8] The $418 million in HOPE VI funds accounts for 9 percent of total 

revitalization grant funds awarded. HUDís annual notice of funding 

availability--which sets forth the programís 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 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 yearís grantees for supportive services has varied over 

the life of the program.



Figure 5: Funds Budgeted for Community and Supportive Services:



[See PDF for Image]



Source: GAO analysis of data from HUDís HOPE VI reporting system (as of 

June 30, 2002).



[End of Figure]



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 programís 

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 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:



[See PDF for Image]



Source: GAO analysis of data from HUDís HOPE VI reporting system (as of 

June 30, 2002).



[End of Figure]



Housing Authorities Have Complied with HUDís Funding Limits and 

Budgeted Additional Funds Not Subject to These Limits:



Housing authorities have complied with HUDís 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.[Footnote 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 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 HUDís cost policy.[Footnote 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.[Footnote 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 HUDís established funding limits.[Footnote 12] However, total funds 

of $1.3 billion were approved in the mixed-finance 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 HUDís funding limits was 

$98,097, while the average amount of total funds budgeted per unit was 

$171,541.[Footnote 13]



HUD Has Not Complied with the Annual Reporting Requirement:



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 

107-272. 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 agencyís performance and accountability 

reports, and testimonies by HUD officials. However, neither HUDís 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 HUDís 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, HUDís 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.



Conclusions:



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. 

However, HUDís 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 HUDís 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 programís cost to the 

federal government and its cost effectiveness.



Recommendation for Executive Action:



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 HUDís development cost limits 

and those that are not.



Agency Comments and Our Evaluation:



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 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 GAOís 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:

Signed by David G. Wood:



[End of section]



Appendix I: Objectives, Scope, and Methodology:



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 HUDís 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 HUDís 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 HUDís 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 

HUDís 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 HUDís Office of 

Public Housing Investments and reviewed HUDís 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 HUDís 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 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 HUDís Office of Public Housing Investments and reviewed 

HUDís 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 HUDís 

funding limits for developing public housing units and have budgeted 

additional funds not subject to these limits, we reviewed HUDís 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 HUDís 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 HUDís 

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 HUDís 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 HUDís 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 

HUDís 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.



[End of section]



Appendix II: Examples of HOPE VI Funding Sources:



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 ďentitlement communities.Ē 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 

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 low-income 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.



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 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 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.



[End of section]



Appendix III: Comments from the Department of Housing and Urban 

Development:



U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT WASHINGTON, D.C. 

20410-5000:



OFFICE OF THE ASSISTANT SECRETARY FOR PUBLIC AND INDIAN HOUSING:



OCT 18 2002:



TO: David Wood, Director, Financial Markets and Community Investment, 

U.S. General Accounting Office:



FROM: Michael Liu, Assistant Secretary for Public and Indian Housing:



SUBJECT: Comments on GAO Draft Report, ďPublic Housing: HOPE VI 

Leveraging Has Increased but HUD Has Not Met Reporting RequirementsĒ 

(Report to the Chairman, Subcommittee on Housing and Transportation, 

Committee on Banking, Housing and Urban Affairs, United States Senate):



HUD respectfully submits the following information for consideration in 

the section of the GAO report designated for Agency Comments.



HUD would like to thank the U.S. General Accounting Office for its 

thorough and perceptive review of the HOPE VI Program and the 

opportunity to respond to this first report addressing the financing 

component of the program. In general, we find the report to be fair and 

accurate in its assessment of HOPE VI financing and would like to offer 

additional comments and information.



We are pleased about GAOís conclusion that HOPE VI leveraging has 

increased, as this validates the significance HUD has placed 

historically on leveraging as a fundamental program component. HUD 

regards the significant increases in leverage as a remarkable 

achievement, rising from an average leverage of $0.58 in 1993 to $2.63 

in 2001. Taking GAOís report into consideration, HUD fully intends to 

continue emphasizing the importance of leveraging in the success of the 

HOPE VI program and working to further increase the amount of funds 

leveraged. Specifically, HUD will continue to encourage the use of 

equity from low-income housing tax credits as a source of financing. In 

addition, HUD plans to emphasize leveraging of resources that are free 

from any government support.



In regard to the issue of HOPE VI annual reports, we provide the 

following clarifying information. As GAO identified in the report, an 

annual report on the HOPE VI program is required under Section 24 of 

the U.S. Housing Act of 1937, as amended. The annual report requirement 

became law on October 21, 1998. Thus, annual reports should have been 

filed for fiscal years 1999, 2000, and 2001 (fiscal year 2002 just 

ended).



The Conference Report on the Departments of Veterans Affairs and 

Housing and Urban Development, and Independent Agencies Appropriations 

Act for fiscal year 2002, enacted November 26, 2001, directed HUD to 

file by June 15, 2002 a report on the lessons learned in HOPE VI, 

including best practices, the extent of leveraging and neighborhood 

economic development, and the extent to which HOPE VI can be a model 

for treatment of the distressed project-based section 8 stock. This 

report to Congress was filed on June 14, 2002.



As required by Section 24 of the Act, the annual report is to set forth 

the number, type and cost of public housing units revitalized; the 

status of projects identified as severely distressed public housing; 

the amount and type of financial assistance provided under and in 

conjunction with the HOPE VI Program; and the recommendations from HUD 

for statutory and regulatory improvements. This information was 

provided to Congress in the report submitted on June 14 or previously 

through other communications with Congress. Notwithstanding these 

points, HUD will compile and submit the fiscal year 2002 annual report 

by December 31, 2002.



Based on HUDís careful and thorough review of the report, the 

submission of HOPE VI annual reports appears as the primary 

recommendation. HUD agrees with the recommendation to submit annual 

reports, in accordance with the format required by Section 24 of the 

Act, and will submit an annual report for FY 2002 by December 31, 2002. 

Currently, HUDís HOPE VI reporting system does not provide the level of 

detail requested by GAO. However, we believe the system data will 

provide the information Congress has requested under the law. The:



FY 2002 annual 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.



We look forward to reviewing the ongoing results of your study on the 

various components of the HOPE VI program. Again, we thank you for your 

diligent and thoughtful review of the program.



Attachment: Attachment 1 - Additional Comments on the GAO Report:



[End of section]



Appendix IV: GAO Contacts and Staff Acknowledgments:



GAO Contacts:



David Wood, (202) 512-8678

Paul Schmidt, (312) 220-7681:



Acknowledgments:



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.



GAOís Mission:



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exists to support Congress in meeting its constitutional 

responsibilities and to help improve the performance and accountability 

of the federal government for the American people. GAO examines the use 

of public funds; evaluates federal programs and policies; and provides 

analyses, recommendations, and other assistance to help Congress make 

informed oversight, policy, and funding decisions. GAOís commitment to 

good government is reflected in its core values of accountability, 

integrity, and reliability.

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FOOTNOTES



[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.



[3] See 24 CFR 941, Subpart F.



[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.



[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.



[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.



[9] The current policy is contained in PIH Notice 01-22.



[10] The documentation on housing authoritiesí compliance with HUDís 

cost policy was not available for 10 of the 87 mixed-finance proposals 

approved through fiscal year 2001.



[11] Though HUDís 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.



GAOís Mission:



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exists to support Congress in meeting its constitutional 

responsibilities and to help improve the performance and accountability 

of the federal government for the American people. GAO examines the use 

of public funds; evaluates federal programs and policies; and provides 

analyses, recommendations, and other assistance to help Congress make 

informed oversight, policy, and funding decisions. GAOís commitment to 

good government is reflected in its core values of accountability, 

integrity, and reliability.



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expanding archive of older products. The Web site features a search 

engine to help you locate documents using key words and phrases. You 

can print these documents in their entirety, including charts and other 

graphics.



Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as ďTodayís Reports,Ē on its 

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20548: