HUD unveils plan to improve its operations Housing and Urban Development (HUD) Secretary Andrew Cuomo has announced a major reform plan to improve program operations for the department, whose reputation has been tarnished in recent years by reports of scandal and mismanagement.

A HUD report outlining the management reform plan admits that the department has become "the poster child for inept government," adding that "when over 5 million people cannot afford decent housing and hundreds of thousands go homeless, we cannot afford to waste even $1 on inefficiency or corruption."

The report says HUD has two missions: empowering people and communities, and restoring the public trust in the department's competence. "The agency's problems have been long in the making," the report says. "We recognize that it will take a tremendous commitment of time, energy, discipline and focus to reinvent the systems and the values that have undermined HUD's credibility and capability."

The basic elements of the reform plan include a restructuring of operations by function, rather than solely by program, modernization of financial management systems, and establishment of performance-based systems for HUD programs and employees. The department will set up "storefront" customer service offices in local communities and "back office" processing centers to handle paperwork.

Currently, HUD's administration of its housing programs is divided between the Office of Public and Indian Housing and the Office of Housing. Depending on the program, for example, both offices process Section 8 payments to rental housing owners.

Under the reform plan, some of the real estate management functions of the two offices will be consolidated. All properties will be physically inspected and financially audited by outside contractors. HUD will use the inspection and audit reports to focus its own staff resources where they are most needed.

HUD also plans to crack down on waste, fraud and abuse through the creation of a new Enforcement Authority, centralizing enforcement functions now handled by separate program offices.

Report shows impact of low-income housing tax credit The low-income housing tax credit has had a major impact on rental housing production, according to a study of the program by E&Y Kenneth Leventhal Real Estate Group, a unit of Ernst & Young. The study was commissioned by the National Council of State Housing Agencies (NCSHA).

According to the study, the tax credit has been responsible for the creation of almost 900,000 apartment units over the past decade, or about 40% of all multifamily rental housing produced in that period.

The study also found that the credit has become more efficient and cost-effective, with investors paying a higher price for the credits and putting more money into affordable housing. In 1987, $1 of tax credits attracted about $0.42 in net equity from investors, while the same dollar in 1996 raised $0.65 in equity. The increase in the price paid for tax credits corresponded to a significant reduction in investor yields -- an indicator of program efficiency. In 1990, institutional investors in tax-credit projects expected an aggregate after-tax internal rate of return of about 18% but, by the end of 1996, the expected return had dropped to about 10% to 12%.

The report also concludes that tax-credit projects are exceeding statutory requirements for low-income use and income targeting. An analysis of a sample of tax-credit developments found that the average tenant income was 38% of area median income, compared with the statutory limit of 60% of area median. The average low-income use restriction period in 1995 was 42 years, or almost three times the statutory minimum of 15 years.

"The low-income housing tax credit program has, by any measure, exceeded everyone's expectations, including Congress, housing advocates and the development community," says Fred Copeman, national director of affordable housing services for Ernst & Young and head of the team which conducted the study.

"The Ernst & Young study, like the General Accounting Office study released in March, should reassure Congress of its wisdom in creating the housing credit and entrusting its administration to the states," says NCSHA Executive Director John T. McEvoy. "The Ernst & Young report showcases how remarkably this unique, pioneering federal-state partnership has worked to produce desperately needed, decent affordable apartments for lower-income American working families."

McEvoy also calls for an increase in the $1.25 per capita limit on state tax credit allocations, which hasn't been changed since the credit was created in 1986.

Barry G. Jacobs is NREI's Washington Correspondent and editor of Housing and Development Reporter.

* Restructuring of operations by function, rather than solely by program * Modernization of financial management systems * Establishment of performance-based systems for HUD programs and employees