HUD's FY 1998 Budget Request: Some Requests for Funding May Be Unnecessary

Published by the Government Accountability Office on 1997-03-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                    United States General Accounting Office

GAO                 Testimony
                    Before the Subcommittee on VA, HUD, and Independent
                    Agencies, Committee on Appropriations, House of

For Release
on Delivery
Expected at
                    HUD’S FY 1998 BUDGET
10:00 p.m. EST
Tuesday             REQUEST
April 15, 1997

                    Some Requests for Funding
                    May Be Unnecessary
                    Statement for the Record by Judy A. England-Joseph
                    Director, Housing and Community Development Issues,
                    Resources, Community, and Economic
                    Development Division

    Mr. Chairman and Members of the Subcommittee:

    We are pleased to have this opportunity to comment on the Department of
    Housing and Urban Development’s (HUD) fiscal year 1998 budget request.
    In our statement last year,1 we focused on HUD’s progress in addressing the
    management deficiencies that led us to designate the Department as one
    of our “high risk” areas. We also focused on various assumptions that HUD
    made in developing its budget request and on the impact of those
    assumptions on the Department’s cost estimates for multifamily
    reengineering and for renewing Section 8 contracts for low-income rental
    assistance. This year, our primary focus is on HUD’s request for over
    $9 billion to renew rental assistance contracts, as well as on some of the
    assumptions that underlie HUD’s estimate.

    Our statement discusses (1) the estimates HUD used to develop its budget
    request for renewing Section 8 assisted housing contracts, (2) HUD’s
    justification for 50,000 additional Section 8 certificates, (3) HUD’s success
    in reducing the level of uncommitted public housing modernization funds
    held by housing authorities, and (4) HUD’s request for $100 million to fund
    the second round of the Empowerment Zone/Enterprise Community
    (EZ/EC) program. Our work is based on our review of HUD’s fiscal year 1998
    budget justification materials, our discussions of those materials with HUD
    officials, and an analysis that we and HUD performed of Section 8 budget
    authority reserves at HUD state offices in Georgia and Texas.

    In summary, we found the following:

•   HUD’s fiscal year 1998 budget request for $9.2 billion in budget authority to
    renew expiring Section 8 contracts for assisted housing includes amounts
    that may not be required or could be offset. First, HUD’s request contains
    allowances for contingencies—costs that may or may not accrue or that
    cannot be precisely estimated—with an estimated value of $531 million.
    However, because HUD also allows housing agencies that administer the
    tenant-based program to retain a large portion of their unspent reserves
    for contingencies, HUD may not need funding for the contingencies noted
    above. Second, in developing this budget request, HUD may be able to
    offset (reduce) some of its current renewal needs after it has identified all
    unspent budget authority accumulated over prior years—an effort it plans
    to complete by March 31, 1997. Finally, since its budget was released, HUD

     Housing and Urban Development: Comments on HUD’s FY 1997 Budget Request
    (GAO/T-RCED-96-205, June 17, 1996).

    Page 1                                                                 GAO/T-RCED-97-108
                        has found that two housing programs that provide project-based2
                        assistance do not need to be renewed in fiscal year 1998, and therefore the
                        programs do not require the $90 million that HUD budgeted for them.
                    •   HUD also has requested $305 million in budget authority for fiscal year 1998
                        to fund 50,000 new Section 8 certificates. According to HUD, the certificates
                        will accommodate family relocation caused by the Department’s
                        Welfare-to-Work initiative, but it is unclear how HUD estimated the number
                        of units or justified their need. For example, HUD has neither given a basis
                        for choosing 50,000 as its request nor provided a plan for distributing these
                        certificates to states or urban centers according to their need. In addition,
                        HUD plans to request an additional 50,000 units over the next 4 years,
                        adding approximately $2.4 billion in renewal costs through fiscal year 2002
                        for the additional 100,000 certificates.
                    •   Over the past 3 years, public housing authorities (PHA) have decreased the
                        amount of uncommitted public housing modernization funding that they
                        have available for major modernization projects by approximately 30
                        percent. Despite this progress, approximately $925 million remains
                        uncommitted. In addition, several large troubled housing authorities have
                        larger uncommitted balances than they did 3 years ago. Despite the
                        pressure on HUD’s budget because of the increasing need to renew Section
                        8 contracts, these housing authorities will continue to be granted
                        additional funding in accordance with HUD’s formula for awarding
                        modernization grants.
                    •   HUD’s request for $100 million to fully fund a second round of the
                        Empowerment Zone/Enterprise Community program appears premature
                        as it is unlikely that HUD can commit this amount during fiscal year 1998.

                        Through its programs, HUD provides rental assistance to more than
HUD’s Fiscal Year       4 million low-income tenants, has insured mortgages for about 23 million
1998 Budget and         homeowners, has provided funding to help revitalize over 4,000
Programs                communities, and helps ensure equal access to housing. In recent years,
                        approximately three-quarters of HUD’s budget outlays have been for public
                        and assisted housing programs. These programs are supported through
                        annual appropriations (i.e., discretionary authority) that are subject to
                        discretionary spending limits under the Budget Enforcement Act, as

                         HUD’s Section 8 program provides rental subsidies for low-income families. These subsidies are
                        linked to either the apartment (project-based) or the resident (tenant-based).

                        Page 2                                                                        GAO/T-RCED-97-108
                           HUD’s  fiscal year 1998 budget proposal requests about $24.8 billion in
                           discretionary budget authority and plans about $34 billion in outlays.3 This
                           request represents a 28-percent increase in budget authority and a
                           2-percent increase in outlays compared with HUD’s estimated outlay for
                           fiscal year 1997. The significant increase in budget authority reflects the
                           considerable growth from 1997 to 1998 in the number of multiyear
                           contracts that need to be renewed under the Section 8 assisted housing
                           program, including both the tenant-based and project-based programs.4 In
                           1997, HUD needed $3.6 billion in budget authority to renew contracts. HUD
                           estimates that it will need $9.2 billion in budget authority in fiscal year
                           1998 to renew contracts for over half of all units assisted under Section 8.
                           HUD’s current policy is to renew expiring Section 8 contracts for 1 year at a

                           HUD’s $9.2 billion estimate to renew Section 8 contracts in fiscal year 1998
HUD’s Request for          includes about $531 million in allowances for contingencies. Moreover,
Section 8 Contract         HUD’s estimate does not identify or account for a potentially larger amount

Renewal Funding            of excess budget authority—called contract reserves—that exists in
                           individual housing authorities’ accounts and is also available to address
Includes Duplicative       contingencies. HUD is currently identifying the amount of these other
Contingency Factors        reserves; however, instead of using them to offset its fiscal year 1998
                           budget needs, the Department plans to allow housing authorities to retain
and Unnecessary Line       much of their reserves to cover contingencies. HUD’s estimated renewal
Items                      costs also include about $90 million for programs that do not need to be
                           renewed in fiscal year 1998.

Tenant-Based Contract      HUD’s tenant-based contract renewal estimate includes allowances for
Renewal Request Includes   contingencies and assumptions that increase the budget request by about
Several Contingency        $531 million. These include (1) $162 million allowance for contingencies to
                           cover uncertainties in the number of units to be renewed; (2) $253 million
Factors                    to provide a 2-week funding allowance per housing unit to account for
                           changes in economic conditions; (3) $116 million to account for the
                           anticipated effects of welfare reform on tenants’ incomes and, in turn, on

                            Budget authority is given to federal agencies to incur obligations and to make payments from the
                           Treasury for a specified purpose. Outlays represent the issuance of checks, disbursements of cash, or
                           electronic transfers of funds made to liquidate a federal obligation.
                            For tenant-based certificates and vouchers, HUD contracts with local housing agencies, such as PHAs,
                           to operate the program. The local housing agencies pay the rental subsidies to owners of private rental
                           housing on behalf of the assisted households. For the project-based program, HUD contracts directly
                           with and provides rental subsidies to the owners of private rental housing and state housing finance
                           agencies, rather than contracting with local housing agencies. For both programs, assisted households
                           generally pay 30 percent of their income for rent.

                           Page 3                                                                          GAO/T-RCED-97-108
                             the rent that housing authorities can collect from these tenants. Neither
                             HUD’s budget justification materials nor our discussions with HUD officials
                             provided specific justification or support for these allowances.

                             According to HUD officials, the contingency allowance of $162 million is for
                             possible errors in the estimated number of units that need to be renewed.
                             Although HUD obtained the estimated number of units from its Central
                             Accounting and Program System (HUDCAPS),5 in commenting on a draft
                             of this testimony, HUD’s Deputy Secretary said that not all contracts are
                             included in HUDCAPS. For example, the accounting system does not
                             include contracts in process from prior year funding, contracts not yet
                             awarded for funded units, and housing units that have been converted
                             from project-based to tenant-based assistance. Accordingly, HUD officials
                             believe that they need a 2-percent contingency in the budget to address
                             these unknown costs.

                             Second, the average unit cost of $6,386 that HUD used to develop its total
                             fiscal year 1998 estimate of tenant-based renewal needs includes a
                             contingency factor to account for unexpected program costs. According to
                             HUD officials, unexpected program costs occur when, for example, rents
                             increase or tenants’ incomes decrease. We estimate that this contingency
                             factor provides 2 additional weeks of funding for each unit and increases
                             the total request for contract renewal funding by $253 million.

                             A third contingency factor accounts for the impact of welfare reform on
                             tenants’ rent contributions. HUD estimates this impact to be about $92 per
                             unit, per year and includes it in the average annual cost of tenant-based
                             units, thus increasing HUD’s contract renewal request by about
                             $116 million. HUD officials told us that this amount compensates for the
                             reductions in tenants’ contributions to rents anticipated when tenants lose
                             their welfare benefits. These reductions increase HUD’s contribution to the
                             rental payment.

Unspent Budget Authority     In recent years, HUD has been reconciling PHAs’ Section 8 contract accounts
Also Is Available to Cover   to determine how much unspent budget authority is available to renew
Contingencies                expiring contracts. The Department expects to complete this process by
                             March 31, 1997. By the end of fiscal year 1996, HUD had identified
                             approximately $1.6 billion in unspent budget authority—or excess
                             contract reserves—which it used to extend the funding for expiring

                              HUDCAPS is the agency’s new tenant-based program management and accounting information
                             system implemented in Sept. 1995.

                             Page 4                                                                  GAO/T-RCED-97-108
Section 8 tenant-based contracts. This action, which took place too late in
the budget process to be reflected in the fiscal year 1997 budget, shows up
for the first time in the fiscal year 1998 budget. In the meantime, HUD has
identified additional reserves, a portion of which it believes can be used to
further reduce the amount of budget authority needed to renew contracts
in fiscal year 1998. HUD plans to calculate this reduction and provide this
information to the Congress after completing the reconciliation process.

HUD  officials told us that the Department will use the following process to
determine the amount by which it can reduce its fiscal year 1998 budget
request. After HUD finalizes the amount of the reserves, it will continue its
policy of allowing housing authorities to limit the portion of their reserves
that can be used to extend expiring contracts. This policy limits HUD’s
ability to offset its budget request for contract renewals with accumulated
unspent budget authority and raises the amount of budget authority that
HUD must request. Specifically, HUD has determined that a housing
authority can use its reserves to extend contracts only if the housing
authority first retains a minimum of 50 percent of the funding needed to
fully fund all of the housing authority’s Section 8 units for 1 fiscal year.
Although not all housing authorities have sufficient excess contract
reserves to do this, HUD officials believe that this policy ensures that in
most cases reserve funds will be available to cover increased program
costs or other contingencies such as potential increases in rents or the loss
of tenants’ income.

HUD  officials could not explain whether these contingencies could be
addressed by the various allowances for contingencies that we described
earlier, and they did not have a basis for specifying that the 50-percent
level was an appropriate amount for housing authorities to retain. While
these costs may occur and establishing some contingency amount for
them may be reasonable, the 50-percent reserve is in itself a contingency
allowance and apparently duplicates the other contingency factors that
HUD has built into its budget request. In commenting on a draft of this
testimony, the Deputy Secretary agreed that housing authorities’ reserves
are a source of contingency funding. He said that the size of the reserve
depends on the nature of an authority’s portfolio of tenant-based
assistance and that these reserves are an area that is under review by the

Page 5                                                      GAO/T-RCED-97-108
Premature Funding         HUD’s  budget request for Section 8 contract renewal funding includes two
Requests Increase HUD’s   line items for project-based housing assistance that HUD has since
Project-Based Contract    determined do not require renewal in fiscal year 1998. These two line
                          items total almost $90 million in requested budget authority. The first item
Renewal Estimate          is a request for $54 million and is part of HUD’s portfolio reengineering
                          program to restructure some project-based contracts.6 The $54 million
                          provides new Section 8 budget authority for projects that HUD’s budget
                          assumes will be reengineered before their current Section 8 contracts
                          expire. However, because these contracts provide below-market rents, HUD
                          officials told us that reengineering these projects is highly unlikely until
                          the contracts expire in fiscal year 2000, if then. As a result, this line item
                          does not need to be included in the fiscal year 1998 request. The second
                          item is a request for $35 million to renew expiring vouchers set aside for
                          disabled persons. HUD officials stated that this money is not needed
                          because the contracts were fully funded in fiscal year 1995 and do not
                          expire until fiscal year 2000; consequently, funds are not needed in fiscal
                          year 1998.

                          For fiscal year 1998, HUD has requested $305 million in budget authority to
Justification for         fund 50,000 incremental (new) certificates to help families required to
Increasing Size of        move because of the Department’s Welfare-to-Work initiative. However, it
Section 8 Program Is      is unclear how HUD determined that 50,000 vouchers would be needed to
                          help families relocate or how HUD would distribute the new certificates to
Unclear                   states and urban centers where this need is likely to be felt. HUD officials
                          told us that the Department has not analyzed the potential need for this
                          new kind of assistance, but on the basis of studies by HUD and others of the
                          general need for affordable housing, they believe that the overall need
                          nationwide for more assisted housing justifies these incremental

                          Furthermore, the 50,000 units are part of a larger, 5-year plan to increase
                          the tenant-based program by 100,000 units. HUD officials told us that this
                          plan is part of the administration’s continued commitment to expand the
                          availability of tenant-based rental assistance, within the context of a
                          budget that reaches balance in fiscal year 2002. The cumulative effect of
                          adding these new units would be to increase renewal costs by
                          approximately $2.4 billion through fiscal year 2002.

                           Portfolio reengineering is HUD’s program to restructure the Federal Housing Administration’s insured
                          debt on multifamily property.

                          Page 6                                                                        GAO/T-RCED-97-108
                       For fiscal year 1998, HUD is requesting $2.5 billion for public housing
Balances of            capital activities, the same amount it received in fiscal year 1997. These
Uncommitted            funds are distributed to public housing authorities, which are then
Modernization          responsible for committing and spending these funds to modernize their
                       public housing units. In 1994, we reported that housing authorities had an
Funding Have           aggregate backlog of $1.4 billion in modernization funds.7 The backlog
Decreased, but Some    comprises funds that have been available to the housing authorities for
                       more than 2 years but have not been committed for use—HUD officials
Housing Authorities’   believe that 2 years is an adequate period within which to spend funds for
Balances Have          capital purposes. Currently, housing authorities have approximately
Increased              $925 million in backlogged funding.

                       Failing to commit modernization funds in a timely manner means that
                       vacant and deteriorated public housing remains unsuitable for habitation
                       and that the programs are not serving the needs of low-income families.
                       We reported in 1994 that 22 large housing authorities had been granted
                       $4.8 billion in fiscal year 1991 and prior years’ approved funds and that of
                       that amount, $808 million, or 17 percent, remained uncommitted as of
                       September 30, 1993. Since we issued that report, HUD has worked with
                       housing authorities to reduce their backlogs. As of September 30, 1996, the
                       same 22 large housing authorities we reported on almost 3 years ago had
                       been granted a total of $8 billion in fiscal year 1994 and prior years’ funds.
                       Of that amount, $785 million, or about 10 percent, was in the combined
                       backlogs of these 22 authorities. While these housing authorities’ approved
                       funds increased 68 percent during this time, their total backlog decreased
                       3 percent. HUD officials told us that they have been successful in helping
                       housing authorities reduce their backlogs by providing greater flexibility,
                       by streamlining regulations, and providing technical assistance,
                       particularly to the troubled or near-troubled housing authorities.

                       Notwithstanding HUD’s overall success in reducing the modernization
                       backlog, the sizes of the backlogs at several large housing authorities have
                       actually increased since we reported in 1994. For example, the
                       Washington, D.C., Housing Authority, as of the end of September 30, 1996,
                       had a backlog of $115 million, or 39 percent of its fiscal year 1994 and
                       prior years’ approved funds. For the same period, the New Orleans
                       Housing Authority had a backlog of $72 million, or 32 percent of its total
                       approved funds, and the San Francisco Housing Authority had a backlog
                       of $31 million, or 15 percent of its approved balance. Of the 22 PHAs
                       reviewed, 6 have larger backlogs than they did 3 years ago, including the 3

                         Public Housing: Information on Backlogged Modernization Funds (GAO/RCED-94-217FS, July 15,

                       Page 7                                                                     GAO/T-RCED-97-108
                         PHAs noted above. Of these six PHAs, four had a backlog that was higher as
                         a percentage of their total than they had in 1994. In commenting on a draft
                         of this testimony, the Deputy Secretary said that he expects HUD to rectify
                         the backlog of those four PHAs by fiscal year 1998. Moreover, he said that
                         HUD is holding new modernization funding for these four PHAs until they
                         have adequate capacity to administer the funding effectively.

                         Regardless of the size of its backlog or its capacity to effectively commit
                         funds, a housing authority still receives an annual modernization grant
                         under the program’s allocation formula. Although HUD can, under the
                         regulations, recapture modernization funding that has gone uncommitted
                         for more than several years, officials told us that this seldom occurs. Thus,
                         the effect of formula funding is to increase the backlog of modernization
                         funding—notwithstanding HUD’s hold on the funds—for those PHAs that
                         continue to be unsuccessful in committing their modernization grants.
                         This, in turn, increases HUD’s need for new budget authority.

                         HUD’s fiscal year 1998 budget proposal includes $100 million for a second
The Empowerment          round of the Empowerment Zone/Enterprise Community (EZ/EC) program.
Zone/Enterprise          According to HUD’s budget request, the Department anticipates fully
Community Program        committing these funds during fiscal year 1998. However, many steps must
                         be taken before HUD can grant these funds. For example, legislation must
May Not Need Full        be passed to authorize the second round of designations.8 Subsequently,
Funding in Fiscal Year   HUD must write related regulations, invite communities to apply for
                         program grants, allow time for communities to prepare and submit their
1998                     applications, evaluate the applications, and select the communities that
                         would receive these funds. During the first round of this program, HUD
                         required 16 months after the Congress passed the legislation to designate
                         the EZs and ECs.

                         Unless the Congress passes authorizing legislation soon, HUD is not likely
                         to be ready to use the majority of these funds during fiscal year 1998. This
                         means that HUD’s request of $100 million in fiscal year 1998 could be
                         premature. HUD’s director and deputy director of economic development
                         told us that although they have not prepared a schedule for the second
                         round, they anticipate that they can draw from experiences in the first
                         round to accelerate the community designation process. In addition, these
                         officials said that they would prefer to have the funding available at the
                         same time that they are revising the regulations and program guidance so

                          Legislation was proposed by the administration during the 104th Congress, but it was not enacted. In
                         January and February 1997, authorizing legislation was introduced in the Senate and the House of
                         Representatives, respectively, but has not yet been enacted.

                         Page 8                                                                         GAO/T-RCED-97-108
                that HUD and the potential program participants can be assured that the
                program will receive the funds they need.

                In commenting on a draft of this testimony, the Deputy Secretary strongly
                disagreed with our conclusion that funding the EZ/EC proposal is
                premature. He said that it is not credible for HUD to conduct a demanding
                competition without funds in hand to reward winners. Nevertheless, we
                continue to believe that HUD likely will not need most of these funds until
                fiscal year 1999.

                HUD may not need all the budget authority that it has requested for the
Conclusions     Section 8 program in fiscal year 1998 because it has built in several
                allowances to cover unexpected costs, while at the same time it has access
                to unspent budget authority from prior years that also can be used to
                address unexpected costs. Because Section 8 contract renewals are such a
                large proportion of HUD’s budget request this year and in the foreseeable
                future and because we have questions about the need for the several
                contingency factors that HUD has included in its budget request for
                contract renewal authority, we believe that this request bears close

                HUD’srequest for $100 million to fund the EZ/EC program appears premature
                because the time required to pass legislation, write regulations, and select
                program participants is likely to extend into fiscal year 1999.

                The Congress may wish to consider not funding the various contingency
Matters for     allowances that HUD has proposed in its fiscal year 1998 budget request for
Congressional   tenant-based Section 8 contract renewals until HUD provides the Congress
Consideration   a more complete justification of the need for each contingency allowance,
                including HUD’s policy that allows housing authorities to retain large
                excess contract reserves. As part of that justification, HUD should advise
                the Congress to what extent, if any, each of the allowances or reserves
                duplicates other allowances or reserves.

                Because HUD has determined that $90 million in project-based contract
                renewals is not needed in fiscal year 1998, we recommend that the
                Congress consider not appropriating this amount for such contract

                Page 9                                                     GAO/T-RCED-97-108
                  The Congress may also wish to review HUD’s need for budget authority in
                  fiscal year 1998 of $100 million for the second round of the EZ/EC program
                  and to seek assurances from HUD that the program will be ready to commit

                  We provided a draft of this testimony to HUD for its review and comment.
Agency Comments   In commenting on the draft, HUD’s Deputy Secretary said that he was very
                  concerned that we may have made misinterpretations that portray the
                  Department in an unnecessarily negative way. For example, he said that
                  our characterizing several categories of funding as contingencies is not
                  totally accurate. He believes that these budget categories represent
                  legitimate budgeting techniques or that they should not be categorized as
                  contingencies. He did agree, however, that PHAs’ excess contract reserves
                  are a source of contingency funding, and he said that HUD will report the
                  final balances in PHAs’ reserve accounts to the Appropriations Committees
                  when they are known.

                  We disagree with the Deputy Secretary that our testimony misinterprets
                  agency actions. During our work, we requested justification and support
                  for various budget items included in HUD’s budget request. We also met
                  with HUD officials to obtain a better understanding of their justification for
                  the specific budget items we questioned. HUD officials were unable to
                  provide adequate justification, and until they can provide it we believe that
                  the Congress should continue to question the areas we identified in our

                  Where appropriate in our testimony, we have recognized the Deputy
                  Secretary’s concerns or we have added information to clarify our remarks.
                  Where we and HUD disagreed regarding an estimated figure, we have used
                  HUD’s figures which show a lower contingency allowance in each case.

                  Page 10                                                     GAO/T-RCED-97-108
Page 11   GAO/T-RCED-97-108
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              Page 12                                                    GAO/T-RCED-97-108
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(385661)   Page 13                                                 GAO/T-RCED-97-108
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