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105th Congress                                                  S. Prt.
                            COMMITTEE PRINT

 1st Session                                                     105-30
_______________________________________________________________________


  
               BALANCED BUDGET RECONCILIATION ACT OF 1997

                               __________

 COMMITTEE RECOMMENDATIONS AS SUBMITTED TO THE BUDGET COMMITTEE ON THE 
                   BUDGET PURSUANT TO H. CON. RES. 84



                        COMMITTEE ON THE BUDGET

                          UNITED STATES SENATE


                       Pete V. Domenici, Chairman

<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>


                               JUNE 1997

           Printed for the use of the Committee on the Budget



               BALANCED BUDGET RECONCILIATION ACT OF 1997



105th Congress                                                  S. Prt.
                            COMMITTEE PRINT

 1st Session                                                     105-30
_______________________________________________________________________


                    BALANCED BUDGET RECONCILIATION

                              ACT OF 1997

                               ----------                              

 COMMITTEE RECOMMENDATIONS AS SUBMITTED TO THE BUDGET COMMITTEE ON THE 
                   BUDGET PURSUANT TO H. CON. RES. 84

                        COMMITTEE ON THE BUDGET
                          UNITED STATES SENATE

                       Pete V. Domenici, Chairman

<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>


                               JUNE 1997

           Printed for the use of the Committee on the Budget


                        COMMITTEE ON THE BUDGET

                 PETE V. DOMENICI, New Mexico, Chairman
CHARLES E. GRASSLEY, Iowa            FRANK R. LAUTENBERG, New Jersey
DON NICKLES, Oklahoma                ERNEST F. HOLLINGS, South Carolina
PHIL GRAMM, Texas                    KENT CONRAD, North Dakota
CHRISTOPHER S. BOND, Missouri        PAUL S. SARBANES, Maryland
SLADE GORTON, Washington             BARBARA BOXER, California
JUDD GREGG, New Hampshire            PATTY MURRAY, Washington
OLYMPIA J. SNOWE, Maine              RON WYDEN, Oregon
SPENCER ABRAHAM, Michigan            RUSSELL D. FEINGOLD, Wisconsin
BILL FRIST, Tennessee                TIM JOHNSON, South Dakota
ROD GRAMS, Minnesota                 RICHARD J. DURBIN, Illinois
GORDON SMITH, Oregon

                  G. William Hoagland, Staff Director
              Bruce King, Staff Director for the Minority



                            C O N T E N T S

                              ----------                              
                                                                   Page
A. Overview......................................................     1
B. Summary of Recommendations....................................     2
C. Reconciliation Process and Procedures.........................     3
D. Additional Views..............................................     7
E. Title-by-Title Analysis.......................................     9
  I. Committee on Agriculture, Nutrition, and Forestry...............10
          CBO Cost Estimate......................................    12
 II. Committee on Banking, Housing, and Urban Affairs................20
          CBO Cost Estimate......................................    22
III. Committee on Commerce, Science, and Transportation..............52
          Views..................................................    53
          CBO Cost Estimate......................................    56
 IV. Committee on Energy and Natural Resources.......................67
          CBO Cost Estimate......................................    69
  V. Committee on Finance............................................71
 VI. Committee on the Governmental Affairs..........................198
          CBO Cost Estimate......................................   200
VII. Committee on Labor and Human Resources.........................213
          Views..................................................   214
          CBO Cost Estimate......................................   217
VIII.Committee on Veterans' Affairs.................................224

          CBO Cost Estimate......................................   226
F. Roll Call Vote in Budget Committee............................   241


                              A. Overview

    The FY 1998 Congressional Budget Resolution (H. Con. Res. 
84) adopted by the U.S. Senate on June 5, 1997 was the first 
step in implementing the Bipartisan Budget Agreement approved 
by the President, the Speaker of the House, the Senate Majority 
and Minority Leaders on May 15, 1997. The second major step to 
implement the Agreement is embodied in the Balanced Budget Act 
of 1997 reported from the Senate Budget Committee on June 20, 
1997.
    The Balanced Budget Act of 1997 (reconciliation bill) 
includes reforms to federal programs within the jurisdiction of 
eight Senate authorizing committees. This legislation results 
from instructions included in H. Con. Res. 84 to these eight 
committees to make changes to laws within their jurisdictions 
that would reduce federal spending $137.2 billion over the next 
five years, including reductions of $59.4 billion in 2002. 
Savings from this reconciliation bill, combined with $138 
billion in appropriation savings, and other legislation 
directed in the Agreement will place the country's fiscal books 
on a road to balance in 2002.
    The figures included in this summary print are based on 
preliminary estimates for some of the reconciled committees. 
Based on these preliminary estimates, however, the reported 
reconciliation bill achieves savings of approximately $132.6 
billion over the next five years slightly below the 
reconciliation instruction, but fundamentally following the 
blueprint of the Bipartisan Budget Agreement.
    It is the stated intent of the Congressional Leadership and 
all parties to the Agreement to take such actions as are 
necessary to assure consistency with the Agreement. Such action 
may require amendments to the Balanced Budget Act of 1997 as 
reported by the Committee to comply with both the budget 
resolution's instructions and the Bipartisan Budget Agreement.


                     B. Summary of Recommendations

                                   RECONCILIATION SUMMARY BY SENATE COMMITTEE                                   
                                 [Preliminary estimates in billions of dollars]                                 
----------------------------------------------------------------------------------------------------------------
          Committee                               1998       1999       2000       2001       2002       Total  
----------------------------------------------------------------------------------------------------------------
Instruction:                                                                                                    
  Agriculture, Nutrition and   OT............      0.300      0.300      0.300      0.300      0.300       1.500
   Forestry.                                                                                                    
  Banking, Housing and Urban   DR............     -0.136     -0.233     -0.365     -0.422     -0.434      -1.590
   Affairs.                                                                                                     
  Commerce, Science and        DR............         --     -3.549     -3.549     -4.549    -14.849     -26.496
   Transportation.                                                                                              
  Energy and Natural           OT............         --     -0.001     -0.002     -0.004     -0.006      -0.013
   Resources.                                                                                                   
  Finance....................  OT............     -1.137    -12.681    -19.079    -26.838    -40.911    -100.646
  Governmental Affairs.......  DR............     -0.632     -0.839     -1.042     -1.185     -1.769      -5.467
  Labor and Human Resources..  OT............     -0.242     -0.247     -0.158     -0.088     -1.057      -1.792
  Veterans Affairs...........  OT............     -0.247     -0.540     -0.659     -0.606     -0.681      -2.733
                                              ------------------------------------------------------------------
      Total instruction......  DR............     -2.094    -17.790    -24.554    -33.392    -59.407    -137.237
                                              ==================================================================
Reported:                                                                                                       
  Agriculture, Nutrition and   OT............      0.190      0.300      0.350      0.350      0.300       1.490
   Forestry \1\.                                                                                                
  Banking, Housing and Urban   DR............     -0.660     -0.206     -0.332     -0.409     -0.448      -2.055
   Affairs.                                                                                                     
  Commerce, Science and        DR............         --     -1.749     -3.449     -3.249     -7.449     -15.896
   Transportation.                                                                                              
  Energy and Natural           OT............         --     -0.001     -0.002     -0.004     -0.006      -0.013
   Resources \1\.                                                                                               
  Finance....................  OT............     -2.797    -13.459    -22.845    -24.912    -42.067    -106.080
  Governmental Affairs \1\...  DR............     -0.632     -0.845     -1.049     -1.192     -1.809      -5.527
  Labor and Human Resources    OT............     -0.239     -0.233     -0.155     -0.085     -1.080      -1.792
   \1\.                                                                                                         
  Veterans Affairs...........  OT............     -0.247     -0.540     -0.659     -0.606     -0.681      -2.733
                                              ------------------------------------------------------------------
      Total reported.........  DR............     -4.385    -16.733    -28.141    -30.107    -53.240    -132.606
                                              ==================================================================
Reported compared to                                                                                            
 instruction:                                                                                                   
    Agriculture, Nutrition     OT............     -0.110         --      0.050      0.050         --      -0.010
     and Forestry.                                                                                              
    Banking, Housing and       DR............     -0.524      0.027      0.033      0.013     -0.014      -0.465
     Urban Affairs.                                                                                             
    Commerce, Science and      DR............         --      1.800      0.100      1.300      7.400      10.600
     Transportation.                                                                                            
    Energy and Natural         OT............         --         --         --         --         --       0.000
     Resources.                                                                                                 
    Finance..................  OT............     -1.660     -0.778     -3.766      1.926     -1.156      -5.434
    Governmental Affairs.....  DR............         --     -0.006     -0.007     -0.007     -0.040      -0.060
    Labor and Human Resources  OT............      0.003      0.014      0.003      0.003     -0.023          --
    Veterans Affairs.........  OT............         --         --         --         --         --          --
                                              ------------------------------------------------------------------
      Total comparison.......  DR............     -2.291      1.057     -3.587      3.285      6.167       4.631
----------------------------------------------------------------------------------------------------------------
\1\ Final CBO Estimates.                                                                                        
                                                                                                                
Note: OT=outlays,  DR=deficit reduction. Staff estimates unless otherwise indicated.                            


                C. Reconciliation Process and Procedures

Overview
    Section 310 of the congressional Budget Act (the Budget 
Act) authorizes the inclusion of reconciliation instructions in 
the budget resolution. The Budget Committee is not required to 
include such instructions, but will include them when changes 
in existing direct spending and revenue laws are necessary in 
order to implement the budget resolution.
    When the budget resolution contains reconciliation 
instructions, the Budget Committee specifies, to each committee 
to be reconciled, the total amount by which direct spending or 
revenues under existing laws is to be changed. The Committee 
may also specify the total amount by which the statutory limit 
on the public debt is to be changed. Each committee is then 
instructed to recommend the appropriate legislative changes to 
meet the instructions and to report those recommendations to 
the Senate Committee on the Budget. Once all of the committee's 
recommendations are received, the Budget Committee consolidates 
the legislative language into a single piece of legislation and 
reports it to the Senate, without substantive change.
Reconciliation Instructions in the FY 1998 Budget Resolution
    Section 104(a) of the budget resolution for fiscal year 
1998 (H. Con. Res. 84, 105th Congress, 1st Session) sets out 
reconciliation instructions to 8 Senate committees calling for 
spending reductions totaling $137.24 billion over 5 years (1998 
through 2002). Committees were to report their recommendations 
to the Committee on the Budget by June 13, 1997. The Committee 
on the Budget consolidated, without substantive change, the 
recommendations submitted and ordered the matter reported on 
June 20, 1997. As of the printing of this document, preliminary 
scoring by the Congressional Budget Office indicated that all 
committee had complied with their instructions with the 
exception of the Committee on Commerce.
Reconciliation Procedures
            In General
    Section 310 of the Congressional Budget Act of 1974 sets 
forth expedited procedures for the consideration of a 
reconciliation measure in the Senate. These procedures provide 
for a limited period of consideration and restrict the content 
of amendments offered from the floor. In particular, section 
313 (known as the ``Byrd Rule'') prohibits the inclusion of 
``extraneous'' provisions in the legislation (and any 
amendments thereto or conference report thereon).
            Motion to Proceed and Time Limits
    Since the reconciliation legislation is a privileged 
matter, the motion to proceed to the consideration of a 
reconciliation bill is not debatable. Total debate on a 
reconciliation bill is limited to 20 hours. Note that this is a 
limit on overall debate time, not overall consideration. The 
time is controlled by and divided equally between the majority 
leader and the minority leader or their designees. The 20 hours 
does not include time consumed for the reading of amendments, 
quorum calls immediately preceding a roll call vote, or roll 
call votes. Debate on debatable motion or appeal is limited to 
1 hour. The proponent of an amendment or motion is entitled to 
one-half of the allotted time. The time in opposition is 
controlled by the majority leader or his designee unless he or 
she supports the amendment or motion. If so, the time in 
opposition is controlled by the minority leader or his 
designee.
            Compliance with Reconciliation Directives
    Section 104(a) of the fiscal year 1998 budget resolution 
instructed Senate committees to submit legislation to the 
Budget Committee to reduce direct spending for two time 
periods: (i) the five-year period of 1998-2002 and (ii) the 
last year, 2002. Compliance with reconciliation directives is 
measured by the amount of savings the Congressional Budget 
Office (CBO) estimates will result from the enactment of the 
legislative recommendations submitted by the committees.
    The Budget Committee is responsible for scoring 
reconciliation bills and any amendments thereto and will make 
these determinations based upon cost estimates provided by the 
Congressional Budget Office. Because the Budget Committee must 
report the committee's recommendations without any substantive 
change, any action to bring a committee into compliance must 
occur on the Senate floor. If a committee fails to meet its 
instructions, one possible remedy is the making of a motion to 
recommit with instructions to report back forthwith with an 
amendment that brings the committee into compliance. The text 
of such an amendment need not be germane to the underlying 
bill. A committee could also be brought into compliance by the 
offering of a simple floor amendment. This amendment, however, 
would have to be germane.
            Restrictions upon the Content of Amendments
    The Budget Act provides for a number of restrictions upon 
the content of amendments offered from the floor to a 
reconciliation bill: section 305(b) requires that amendments be 
germane; section 310(d) requires that amendments be, in effect, 
deficit neutral; section 310(g) prohibits amendments that 
effect the Social Security Trust Fund; and section 313 
prohibits amendments which are extraneous to the reconciliation 
instructions. All of these restrictions are enforced in the 
Senate by points of order which require 60 affirmative votes to 
waive or overturn the ruling of the Presiding Officer by an 
appeal.

                              Germaneness

    Section 305(b)(2) imposes a germaneness requirement upon 
all amendments offered to a reconciliation bill. Germaneness is 
determined pursuant to the precedents of the Senate and rulings 
will be made by the Presiding Officer of the Senate with the 
advice of the Parliamentarian. Germaneness is a much more 
narrow concept than ``relevance'' which generally requires a 
mere subject matter relationship. There are, however, 4 classes 
of amendments whichthe precedents of the Senate deem to be per 
se germane: (i) committee amendments; (ii) amendments which only strike 
language from the bill; (iii) amendments which change numbers or dates; 
and (iv) amendments containing non-binding or precatory language within 
the jurisdiction of the committee which reported the bill. Note: 
amendments which fall into one of the per se germane classes are still 
subject to points of order set out in other sections of the Budget Act. 
Therefore, for example, while amendments containing non-binding 
language within the jurisdiction of a reporting committee may be per se 
germane, such language by its very nature has no budgetary effect and 
consequently violates section 313(b)(1)(A) as explained below.
    If an amendment does not fall within one of the classes of 
per se germane amendments discussed above, germaneness is 
determined on a case-by-case basis. Members are encouraged to 
consult with the Parliamentarian to determine if any particular 
amendment is germane.

                           Deficit Neutrality

    Section 310(d) of the Budget Act provides that an amendment 
to a reconciliation bill is out of order in the Senate if it 
would reduce outlay reductions or revenue increases below the 
level called for by the reconciliation instructions unless the 
amendment also provides offsetting outlay reductions or revenue 
increases. In other words, an amendment may not increase 
spending or cut taxes unless it is ``paid for''--that is, it 
may not worsen the deficit.
    It must be noted, however, that 310(d) provides that ``a 
motion to strike a provision shall always be in order''. This 
language thus permits language to be removed from a bill 
regardless of the budgetary effects.

                            Social Security

    Section 310(g) provides that an amendment to a 
reconciliation bill (or the bill itself) is not in order if it 
contains ``recommendations with respect to the old age, 
survivors, and disability insurance program established under 
title II of the Social Security Act''. This language generally 
has been interpreted to prohibit the consideration of any 
legislation in the reconciliation process which affects the 
receipts (taxes paid) into or the outlays (benefits paid) from 
the OASDI trust fund. As discussed below, a violation of 310(g) 
also constitutes a violation of section 313(b)(1)(F).

             Extraneous Matter: section 313, the Byrd Rule

    The Byrd rule provides a point of order against extraneous 
provisions in a reconciliation bill, an amendment thereto, and 
the conference report thereon. It is unique in that it permits 
a point of order to be raised against a ``provision''. 
Consequently, unlike other points of order which would lie 
against the bill or conference report in its entirety, a Byrd 
rule point of order, if sustained, will result in the offending 
language being stricken from the bill or the conference report. 
The Byrd rule provides a specific definition of ``extraneous'' 
in subsection 313(b). A provision will be considered extraneous 
if it:
          produces no change in outlays or revenues, unless it 
        is a term or condition of a provisions which produces 
        such a change--section 313(b)(1)(A);
          increases outlays or reduces revenues if the 
        reporting committee has failed to comply with its 
        reconciliation instruction--section 313(b)(1)(B);
          is within the jurisdiction of another committee--
        section 313(b)(1)(C);
          produces changes in outlays or revenues which are 
        merely incidental to the non-budgetary components of 
        the provision--section 313(b)(1)(D);
          causes the committee's work product to worsen the 
        deficit in any year beyond those reconciled for--
        section 313(b)(1)(E); and
          affects the receipts into or outlays from the OASDI 
        trust fund in violation of section 319(g)--section 
        313(b)(1)(F).
                          D. Additional Views

                              ----------                              


              DISSENTING VIEWS OF SENATOR PAUL S. SARBANES

    This spending reconciliation bill is plagued by the same 
misplaced priorities that characterize the FY98 budget plan as 
a whole. In particular, this bill, when combined with the tax 
breaks approved by the Senate Finance Committee and the House 
Ways and Means Committee, places a disproportionate share of 
the burden of deficit reduction on ordinary citizens. Such 
citizens will be impacted by the program cuts in this bill 
while those at the top end of the income and wealth scale will 
reap large tax benefits.
    Given the objective of a balanced budget, the inclusion of 
tax cuts in the budget plan necessitates program reductions 
substantially greater than would be needed to eliminate the 
deficit if tax breaks were not a part of the budget plan.
    The math is simple. The budget resolution provides for $85 
billion in net tax cuts over the next five years and $250 in 
net tax cuts over the next 10 years. In the framework of a 
balanced budget, these tax cuts require additional program 
reductions of $85 billion over the next five years and $250 
billion over the next 10 years over what would otherwise be 
required. The structure of the bills reported out by the tax 
Committees make it clear that those at the very top of the 
income pyramid will receive very substantial tax breaks 
(thereby absenting themselves from the deficit reduction 
effort, indeed shifting the burden to others), while ordinary 
people will carry a greater burden of program reductions to 
compensate for the tax breaks.
    May programs important to working people--e.g., Medicare 
and Medicaid--are being reduced to pay for capital gains tax 
cuts, inheritance tax cuts, and IRA expansion that will benefit 
the wealthiest people in the nation. Indeed, the tax bills 
reported from the Committees give the top 1% of the income 
scale the same percentage of the tax reductions as the bottom 
60 of the income scale.
    I cannot support the priorities reflected by these choices. 
For every dollar lost to the treasury in tax cuts, one dollar 
must be added to the treasury through reductions in programs 
that are essential to many of our citizens. Therefore, in 
assessing the spending reconciliation bill before us, we should 
ask ourselves: Whether providing tax breaks to the very well-
to-do should be a higher priority than adequate funding for 
programs essential to the wellbeing of ordinary citizens.
    I think not and therefore vote no on the measure before us.

                                                  Paul S. Sarbanes.
                ADDITIONAL VIEW OF SENATOR PATTY MURRAY

    Today the Budget Committee is scheduled to report out the 
Budget Reconciliation spending bill. Unfortunately, I was 
unable to be present for the final vote, but had I been here I 
would have voted ``Aye.''
    Several months ago, I made a commitment to the graduating 
class at North Seattle Community College, that I would be 
honored to be their 1997 commencement speaker. This commitment 
was extremely important to me and the graduating class, I 
simply could not back out at the last minute. Today's Budget 
Committee mark up was not finalized until last night.
    I am extremely troubled by some of the provisions within 
the reconciliation package as I believe that they violate the 
bi-partisan balanced budget agreement that was recently 
adopted. I am also disappointed that the Committee will not 
have final legislative language and final CBO numbers on parts 
of the Finance Committee sections. It is difficult to 
understand why the leadership is in such a rush to complete 
action on major changes to Medicare and Medicaid. This rush to 
bring this bill to the floor does jeopardize our efforts to 
enact a balanced budget.
    As we all know the Budget Committee cannot amend the 
reconciliation legislation. This will be done on the floor next 
week. At that time I will be supporting amendments that ensure 
this package is in compliance with the agreement and that it 
does not violate our commitment to our nation's senior citizens 
and our children. We must seize on this unique opportunity to 
balance the budget, reform Medicare and expand health benefits 
for children. Unfortunately, as it stands now it does not 
appear that the current reconciliation language will achieve 
these goals.
    Today's action by the Budget Committee is an important step 
in the process which is why I would have voted to report the 
measure to the full Senate. This does not mean that the package 
is one I will support when it reaches the floor. I am simply 
acting to move us closer to achieving a balanced budget.
    I am disappointed that this legislation does violate the 
agreement that we worked so hard to achieve. But, I am hopeful 
that significant improvements will be made on the floor and 
that we can send to the President a bill that he can sign.

                                                      Patty Murray.
                       E. Title-By-Title Analysis

    The following is a title-by-title analysis of the 
legislation. In each case, the analysis is that of the 
respective committee and is presented as it was submitted to 
the Budget Committee without revision. In certain cases, the 
final Congressional Budget Office estimate was not available 
when the committee made its submission. Where that occurred, 
the Budget Committee has included that CBO estimate at the end 
of the committee's analysis.
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               CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

Reconciliation recommendations of the Senate Committee on Agriculture 
        (Title I)

    Summary: The Senate Agriculture Committee reconciliation 
recommendations would increase federal Food Stamp spending by 
$1.5 billion over the 1998 to 2002 period.
    The Personal Responsibility and Work Opportunity 
Reconciliation Act (PRWORA) of 1996 limited Food Stamp receipt 
to a period of three months in any 36-month period for able-
bodied adults who do not have dependent children and who are 
not working or participating in an appropriate training or work 
activity. The title would allow states to exempt some 
individuals from this limitation and would provide additional 
federal Food Stamp Employment and Training funds to states.
    This title contains an intergovernmental mandate as defined 
in the Unfunded Mandates Reform Act of 1995 (UMRA). CBO 
estimates that the costs of complying with the mandate would 
not be significant. The title does not contain any private-
sector mandates as defined in UMRA.
    Estimated cost to the Federal Government: The estimated 
budgetary impact of the title for the 1998-2002 period is shown 
in the following table. The appendix table shows the budgetary 
impacts through 2007.
    The effects of this legislation fall within budget function 
600 (Income Security).

     ESTIMATED BUDGETARY IMPACT OF THE RECONCILIATION RECOMMENDATIONS OF THE SENATE COMMITTEE ON AGRICULTURE    
----------------------------------------------------------------------------------------------------------------
                                                           Outlays by fiscal years, in millions of dollars--    
                                                     -----------------------------------------------------------
                                                        1997      1998      1999      2000      2001      2002  
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING                                                
                                                                                                                
Food Stamp Spending Under Current Law...............    23,794    24,450    25,884    27,226    28,645    29,417
                                                     ===========================================================
Proposed Changes:                                                                                               
    Section 1001: Hardship exemption................         0       110       110       110       120       130
    Section 1002: Additional funding for employment                                                             
     and training...................................         0        80       190       240       230       170
                                                     -----------------------------------------------------------
      Total Changes.................................         0       190       300       350       350       300
                                                     ===========================================================
Spending Under Title I..............................    23,794    24,640    26,184    27,576    28,995    29,717
----------------------------------------------------------------------------------------------------------------

    Basis of estimate: The Personal Responsibility and Work 
Opportunity Reconciliation Act (PRWORA) of 1996 limited Food 
Stamp receipt to a period of three months in any 36-month 
period for able-bodied adults who do not have dependent 
children and who are not working or participating in an 
appropriate training or work activity. An individual can 
reestablish eligibility for another three-month period after a 
month of working or participating in an allowable employment or 
training program. The Secretary of Agriculture can provide a 
waiver from the provision for areas that have an unemployment 
rate greater than ten percent or insufficient jobs. The 
Department of Agriculture estimates that currently about 35 
percent of the people who otherwise would be affected by this 
provision live in areas that are covered by a waiver.
    Title I contains two provisions that address this component 
of current law. The first would allow states to exempt a 
certain number of individuals from the requirements. The second 
provides additional federal money for Food Stamp Employment and 
Training.

Section 1001: Exemption

    Under this provision, each state would be allowed to 
continue food stamp benefits past the three month limit for 15 
percent of the state's covered individuals, as estimated 
annually by the Secretary of Agriculture based on Food Stamp 
Program administrative data. Covered individuals would be 
defined as individuals who are covered by the time-limit 
provision by virtue of their age, work status, and household 
circumstances, do not live in an area that is covered by a 
waiver, and are not receiving benefits under a three-month 
period of eligibility.
    Based on CBO's analysis of the Food Stamp administrative 
data and projections of Food Stamp participation, CBO assumes 
that approximately 1.1 million Food Stamp recipients would, in 
fiscal year 1998, be able-bodied, between the ages of 18 and 50 
with no children in the home, and not working or complying with 
an appropriate work activity. Of these individuals, CBO assumes 
that 75 percent would not be in a three-month period of 
eligibility and, of the remainder, 65 percent would not reside 
in a waiver area.
    Under these assumptions, the Secretary would identify 
approximately 550,000 individuals nationwide as covered 
individuals, and would distribute the number among the states. 
States could, therefore, allow a total of about 82,000 people 
(15 percent) to receive food stamps each month who would 
otherwise be ineligible. CBO assumes that only about 74,000 
people would actually continue to receive benefits because a 
few states would choose not to implement the exemption. 
Continuing food stamps for these newly exempt individuals (at 
an average cost of about $120 a month) would increase Food 
Stamp outlays by $100 million in 1998, $130 million in 2002, 
and $580 million over the 1998-2002 period.

Section 1002: Additional funding for employment and training

    Under current law, the Food Stamp Employment and Training 
component of the Food Stamp Program has two federal funding 
sources. The federal government provides a stated amount 
annually in funds that do not require a state match. States may 
also draw down an unlimited amount of additional funds at a 50 
percent match rate. In 1996, the federal government provided 
about $75 million dollars in federal-only funds and about the 
same amount as a match to state funds.
    Section 1002 would increase the federal-only Food Stamp 
Employment and Training funds by $140 million in each of fiscal 
years 1998 to 2001 and by $80 million in fiscal year 2002. In 
addition to the increase in federal-only employment and 
training funds, CBO estimates that this section would increase 
Food Stamp benefits and slightly reduce federal matching funds 
for employment and training. In total, CBO estimates that 
Section 1002 would increase federal outlays by $910 million 
over the 1998-2002 period.
    The bill would create new procedures for states to use in 
drawing down federal-only funds. Under current law, states draw 
down money based on their costs, regardless of who they serve 
in what type of employment and training service. Under the 
bill, the Secretary of Agriculture would set two levels of 
reimbursement rates, and states would receive federal funding 
on a per-placement basis. The federal government would pay a 
state the higher amount when it placed an individual who is 
subject to the 3-month time limit in the type of activity that 
would allow him to retain his food stamps. The federal 
government would pay the lower amount when a state placed the 
same individual in another type of service, or when it served 
any person who is not subject to the time limit. The type of 
reimbursement the state received would not depend on whether 
the individual lived in an area covered by a waiver. The bill 
also would require that states spend at least 75 percent of the 
federal-only money on the types of employment and training 
services that would receive the higher reimbursement rate. 
Furthermore, in order to receive any federal-only funds a state 
must continue to spend state funds at a minimum of 75 percent 
of its fiscal year 1996 level.
    The requirement that states spend 75 percent of the 
federal-only money on designated services would induce states 
to spend more on these types of services. By 2000, CBO 
estimates that states would spend an additional $100 million on 
such services. In the first few years, however, states would 
draw down less than the full amount of federal-only money 
because many would have to restructure their Employment and 
Training programs to focus on the types of services that would 
be eligible for the higher rate. The amount that a state does 
not drawn down would be available for reallocation in future 
years and to other states.
    Additional spending for employment and training services 
will also result in payment of additional Food Stamp benefits. 
CBO assumes that states would spend 50 percent of the new money 
in areas that are not covered by a waiver in fiscal year 1998, 
and 70 percent by fiscal year 2000 and later. CBO assumes that 
the Secretary of Agriculture would set the higher reimbursement 
rate at about $90 per placement per month and the lower rate at 
half that amount. Under these assumptions, CBO estimates that 
20,000 individuals in an average month would remain eligible 
for Food Stamps at a cost of $25 million in fiscal year 1998. 
By 2001, CBO expects that 60,000 individuals would remain 
eligible at a cost of about $90 million. In 2002 the amount of 
new federal funds is somewhat lower, so fewer people would 
remain eligible (55,000) at a lower cost ($85 million).
    Because the bill would require states to maintain their 
effort at only 75 percent of their 1996 amount and provides 
such a large amount of new federal funds, CBO expects that the 
aggregate states would withdraw about 20 percent of what they 
otherwise would have spent on employment and training services. 
Because these funds would have received a federal match, CBO 
estimates that federal outlays would be lower by $17 million in 
1998 and $19 million in 2002.
    Estimated impact on State, local, and tribal governments: 
This title contains an intergovernmental mandate as defined in 
UMRA, but CBO estimates that the cost of complying would not 
exceed the threshold established in that act ($50 million in 
1996, adjusted annually for inflation). The bill would require 
states to continue spending at least 75 percent of FY 1996 
expenditures for employment and training and workfare programs 
under Food Stamps in order to continue receiving federal 
funding for those programs. Under current law, CBO estimates 
that state spending, in aggregate, would meet this maintenance-
of-effort requirement and therefore the total cost of this 
mandate would not be significant. States meeting this new 
requirement would receive additional funds for Food Stamp 
employment and training programs totaling $140 million in 
fiscal year 1998 and $640 million over the period 1998 to 2002.
    Estimated impacts on the private sector: The bill contains 
no private-sector mandates as defined in UMRA.
    Comparison to other estimates: On June 16, CBO prepared an 
estimate of the House Agriculture Committee's reconciliation 
recommendations. That bill also contains a new exemption and 
additional funds for employment and training. The cost estimate 
of the exemption provisions are the same in the two estimates. 
The estimates of the changes to federal spending resulting from 
the additional employment and training funds differ because of 
key differences in the policies.
    First, the House increases Food Stamp Employment and 
Training funding but does not change the program's structure: 
states would continue to be reimbursed based on their actual 
costs. The CBO baseline assumption about per-placement costs is 
$100 per month per person. In the Senate bill, the Secretary of 
Agriculture would set two reimbursement amounts that states 
would draw down on a per-placement basis. CBO assumes that the 
Secretary would set that rate at $90 a month for the higher 
rate and $45 per month for the lower rates. These amounts are 
lower than the CBO baseline amount because the Administration 
assumes a lower amount in its legislative proposal on the 
provision, which is similar to the Senate provision.
    Second, the House bill requires that 75 percent of the 
federal-only funds be spent on people subject to the time 
limit. The Senate bill requires that 75 percent of the federal-
only funds be spent on people subject to the time limit in the 
types of services that would allow them to retain Food Stamp 
eligibility. This difference results in lower federal spending 
in the first few years, as states must restructure their 
employment and training services in order to draw down all the 
federal-only money, and in higher Food Stamp outlays in later 
years because more people retain benefits.
    Third, the House bill requires that states maintain their 
spending at their 1996 level in order to receive any of the 
additional federal-only funds provided in this bill. The Senate 
requires that states maintain 75 percent of their 1996 level in 
order to receive any federal-only funds. This difference 
results in lower spending in the Senate version because states 
would withdraw more of their effort.
    Estimate prepared by: Federal Cost: Dorothy Rosenbaum; 
Impact on State, Local, and Tribal Governments: Marc Nicole; 
and Impact on the Private Sector: Ralph Smith.
    Estimate approved by: Paul N. Van de Water, Assistant 
Director for Budget Analysis.

                                                  APPENDIX TABLE--FEDERAL BUDGETARY EFFECTS OF TITLE I                                                  
                                                        [By fiscal year, in millions of dollars]                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                            Total       
                                                               1998   1999   2000   2001   2002   2003   2004   2005   2006   2007 ---------------------
                                                                                                                                    1998-2002  1998-2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     DIRECT SPENDING                                                                    
                                                                                                                                                        
Section 1001: Hardship Exemption:                                                                                                                       
    Budget authority........................................    110    110    110    120    130    130    130    140    140    140       580      1,260 
    Outlays.................................................    110    110    110    120    130    130    130    140    140    140       580      1,260 
Section 1002: Additional funding for Employment and                                                                                                     
 Training:                                                                                                                                              
    Budget authority........................................    150    190    210    210    150    120    130    130    130    130       910      1,550 
    Outlays.................................................     80    190    240    230    170    120    130    130    130    130       910      1,550 
Total, Direct Spending:                                                                                                                                 
    Budget authority........................................    260    300    320    330    280    250    260    270    270    270     1,490      2,810 
    Outlays.................................................    190    300    350    350    300    250    260    270    270    270     1,490      2,810 
--------------------------------------------------------------------------------------------------------------------------------------------------------

                          Title I--Agriculture

                          descriptive language

Section 1001. Hardship exemption
    A state agency may provide a hardship exemption for a 
portion of those individuals in a state who are no longer 
eligible to receive food stamp benefits due to the work 
requirement time limits under section 6(o)(2) of the Food Stamp 
Act.
    The average monthly number of hardship exemptions a state 
agency may grant is limited to 15 percent of the estimated 
number of individuals in the state to whom the work requirement 
time limits apply. These ``covered individuals'' are defined as 
those: not excepted (e.g., because of age, disability, etc.); 
not living in an area for which a waiver has been granted under 
section 6(o)(4) of the Food Stamp Act; not complying with the 
work requirement; and not in their first (or second) 3 months 
of eligibility under the work requirement. If a state chooses 
to provide exemptions under this new rule, it can do so in any 
way--including defining categories of recipients who will be 
exempted--so long as it adheres to the 15 percent limit.
    For FY 1998, the Secretary will determine the estimated 
number of covered individuals from which each state may exempt 
15 percent, using the FY 1996 survey conducted under the 
Integrated Quality Control System and other information deemed 
necessary by the Secretary due to the timing of the survey and 
its limitations. The estimate will reflect adjustments for 
those covered by current-law exceptions (e.g., age, 
disability), those covered by waivers, those complying with the 
work requirement, and those in their first or second 3-month 
periods of eligibility. In later fiscal years, the number of 
covered individuals in a state from which the state may exempt 
15 percent will be estimated by adjusting the FY 1998 number to 
reflect changes in the state's food stamp caseload in the prior 
year and the Secretary's estimate of changes in the proportion 
of food stamp recipients living in areas covered by waivers.
    If a state's food stamp participation, during a fiscal 
year, varies from the prior year's caseload by more than 10 
percent, the Secretary will adjust, upward or downward 
accordingly, the estimated number of covered individuals which 
the state may exempt to reflect the increase or decrease.
    If a state exempts more or less than an average of 15 
percent of individuals who are no longer eligible to receive 
food stamp benefits in a fiscal year, the Secretary must 
decrease or increase the number of allowable exemptions, in the 
next fiscal year, to compensate for the number of the state's 
exemptions over or under 15 percent in the previous year.
    The Secretary can require documentation from states to 
ensure compliance with the rules governing the hardship 
exemption.
    The Committee intends to give states flexibility in 
administering the 15 percent hardship exemption. States would 
not, for example, be required to terminate individuals from the 
food stamp program prior to awarding them exemptions. Persons 
completing their third month of benefits could be given 
exemptions for the fourth month without first having their food 
stamp benefits terminated.
    Those states wishing to grant the exemptions provided under 
this legislation may benefit from assistance from the 
Department as to the effect of exempting certain categories of 
food stamp recipients. To help states evaluate options 
available to them, the Committee encourages the Department to 
prepare technical assistance materials that give examples of 
criteria that states might wish to apply in granting hardship 
exemptions, together with the Department's best estimate of the 
percentage of the caseload that would be covered by each of 
these criteria. The Committee encourages the Department to 
provide states with as much information of this kind as 
possible before the beginning of fiscal year 1998. The 
Committee also encourages the Department to continue reviewing 
information from states and update the information it provides 
to the states.
Section 1002. Additional funding for employment and training
    New money is added to the existing mandatory unmatched 
federal grants to states for the Employment and Training 
program for food stamp recipients. Current grant levels--
totaling $81 million for FY 1998, $84 million for FY 1999, $86 
million for FY 2000, $88 million for FY 2001, and $90 million 
for FY 2002--are increased to $221 million in FY 1998, $224 
million in FY 1999, $226 million in FY 2000, $228 million in FY 
2001 and $170 million in FY 2002. The amounts provided are to 
remain available until expended, so as to facilitate 
reallocation of unused funds.
    The total grant amounts noted above (including ``old'' and 
``new'' money) will be allocated to state agencies using a 
formula, determined by the Secretary, that reflects each 
state's proportion of able-bodied adults without dependents 
subject to the work requirement time limits who are not 
excepted (e.g., because of age, disability, etc.) under section 
6(o)(3) of the Food Stamp Act. The Secretary will base state 
agencies' allocations on information from the FY 1996 survey 
conducted under the Integrated Quality Control System (and 
other factors deemed necessary by the Secretary due to the 
timing of the survey and its limitations), adjusted to reflect 
changes in the state's food stamp caseload in the prior year.
    To the extent state agencies do not use all of the 
unmatched federal grant money allocated for a fiscal year, the 
Secretary will reallocate the unexpended amounts to other 
states. Unexpended amounts from one fiscal year may be 
reallocated for use in the following fiscal year.
    States will be paid specific amounts based on the average 
monthly number of recipients placed in employment and training 
activities. Payment rates will be set by theSecretary to 
reflect the reasonable cost of efficiently and economically providing 
the appropriate services, as periodically adjusted by the Secretary.
    A higher payment rate will be paid in the case of able-
bodied adults without dependents subject to work requirement 
time limits who are placed in workfare or in employment and 
training programs supervised or operated by a state or 
political subdivision requiring participation for 20 hours or 
more per week--but not including job search or job search 
training (or Job Training Partnership Act or Trade Adjustment 
Assistance programs). A lower payment rate will be paid in the 
case of recipients placed in other, less rigorous, employment 
and training activities. The Committee encourages the 
Department to set the payment rates so as to allow for the 
creation of the maximum number of work/training opportunities.
    State agencies will be required to use 75 percent of their 
unmatched federal grant money to serve food stamp recipients 
subject to work requirement time limits who are placed in 
employment and training programs qualifying for the higher 
payment rate.
    In order to receive their unmatched federal grant money, 
state agencies must maintain their federally matched 
expenditures for employment and training program 
administrative/operating costs at no less than 75 percent of 
the FY 1996 level.
    Federal matching money for any employment and training 
activities will continue to be available for all support costs 
(e.g., transportation, child care). But in the case of 
administrative/operating costs, federal matching money will 
only be available for costs incurred to place individuals for 
whom unmatched federal grant money has not been used.
<GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT>

               congressional budget office cost estimate

Reconciliation Recommendations of the State Committee on Banking, 
        Housing, and Urban Affairs (Title II)

    Summary: This bill would permanently prohibit the Federal 
Housing Administration (FHA) from providing foreclosure 
avoidance relief to mortgagors who have defaulted in making 
payments on FHA-insured single-family mortgages. The bill would 
also authorize a so-called Mark-to-Market approach for the 
restructuring of certain FHA-insured multifamily mortgages and 
for renewing section 8 contracts; section 8 contracts would be 
renewed at market rents for FHA-insured projects that currently 
receive above-market rents, and mortgages would be written down 
to levels that could be supported by those lower rents. The 
bill would also make several other changes to the section 8 
program that would reduce costs. First it would establish 
minimum rents of up to $25 per month for all section 8 project-
based programs. Second, it would eliminate federal preference 
rules for admitting new recipients into units with project-
based assistance. Third, it would generally prohibit rent 
increases for projects assisted under the section 8 new 
construction and substantial or moderate rehabilitation 
programs, if their assisted rents exceeded the fair market rent 
(FMR) established by the Department of Housing and Urban 
Development (HUD) for that housing area. Finally, the bill 
would limit rent increases for units without tenant turnover.
    This title contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act of 1995 
(UMRA) and would impose no costs on state, local, or tribal 
governments.
    Estimated cost to the Federal Government: CBO estimates 
that the committee's proposals would reduce direct spending by 
about $2.1 billion over the 1997-2002 period. The estimated 
budgetary effects of these proposals by program over the 1997-
2002 period are shown in table 1. Table 2 shows the estimated 
changes in direct spending by provision through 2007.

  TABLE 1: ESTIMATED BUDGETARY IMPACT OF THE RECONCILIATION RECOMMENDATIONS OF THE SENATE COMMITTEE ON BANKING, 
                                           HOUSING, AND URBAN AFFAIRS                                           
                                    [By fiscal year, in millions of dollars]                                    
----------------------------------------------------------------------------------------------------------------
                                                        1997      1998      1999      2000      2001      2002  
----------------------------------------------------------------------------------------------------------------
                                                 DIRECT SPENDING                                                
                                                                                                                
                                    FHA Single-Family Mortgage Insurance Fund                                   
                                                                                                                
Spending under current law:                                                                                     
    Estimated budget authority......................      -772      -977    -1,226    -1,221    -1,109    -1,095
    Estimated budget outlays........................      -772      -977    -1,226    -1,221    -1,109    -1,095
Proposed changes:                                                                                               
    Estimated budget authority......................         0      -136      -161      -183      -183      -183
    Estimated outlays...............................         0      -136      -161      -183      -183      -183
Spending under Title II:                                                                                        
    Estimate budget authority.......................      -772    -1,113    -1,387    -1,404    -1,292    -1,278
    Estimate outlays................................      -772    -1,113    -1,387    -1,404    -1,292    -1,278
                                                                                                                
                                     FHA Multifamily Mortgage Insurance Fund                                    
                                                                                                                
Spending under current law:                                                                                     
    Estimated budget authority......................        41     1,357     1,688     1,555     1,419     1,300
    Estimated outlays...............................      -357     1,566     1,897     1,764     1,628     1,509
Proposed changes:                                                                                               
    Estimated budget authority......................      -533         0         0         0         0         0
    Estimated outlays...............................      -533         0         0         0         0         0
Spending under Title II:                                                                                        
    Estiamted budget authority......................      -492     1,357     1,688     1,555     1,419     1,300
    Estimated outlays...............................      -890     1,566     1,897     1,764     1,628     1,509
                                                                                                                
                                                 Capital Grants                                                 
                                                                                                                
Spending under current law:                                                                                     
    Estimated budget authority......................         0         0         0         0         0         0
    Estimated outlays...............................         0         0         0         0         0         0
Proposed changes:                                                                                               
    Estimated budget authority......................         0       218       528       340        76        47
    Estimated outlays...............................         0        16        56        84        91        96
Spending under Title II:                                                                                        
    Estimated budget authority......................         0       218       528       340        76        47
    Estimated outlays...............................         0        16        56        84        91        96
                                                                                                                
                                           Section 8 Rental Assistance                                          
                                                                                                                
Spending under current law:\1\                                                                                  
    Estimated budget authority......................     3,550    10,286    12,295    14,424    16,085    17,461
    Estimated outlays...............................    15,941    16,360    17,025    17,717    18,402    19,121
Propsed changes:                                                                                                
    Estimated budget authority......................         0        -2        -2        -2      -113         0
    Estimated outlays...............................         0        -6      -101      -234      -320      -366
Spending under Title II:                                                                                        
    Estimated budget authority......................     3,550    10,284    12,293    14,422    15,972    17,461
    Estimated outlays...............................    15,941    16,354    16,924    17,483    18,082    18,755
                                                                                                                
                                        Total Changes in Direct Spending                                        
                                                                                                                
Estimated budget authority..........................      -533        80       365       155      -220      -136
Estimated outlays...................................      -533      -126      -206      -333      -412      -453
                                                                                                                
                                               CHANGES IN REVENUES                                              
                                                                                                                
Civil money penalties...............................     (\2\)     (\2\)     (\2\)     (\2\)     (\2\)     (\2\)
----------------------------------------------------------------------------------------------------------------
\1\ CBO's baseline with annual adjustments for anticipated inflation.                                           
\2\ Less than $500,000.                                                                                         

    The budgetary effects of this legislation fall within 
budget functions 600 (income security) and 370 (commerce and 
housing credit).

Basis of estimate

            Elimination of FHA's single-family assignment program
    Under current law, FHA's assignment program has been 
suspended through fiscal year 1997. Section 2002 would 
permanently eliminate the assignment program, enabling FHA to 
foreclose more quickly on properties that would otherwise enter 
the assignment program. CBO estimates that more rapid 
foreclosure would reduce FHA's costs by decreasing the amount 
of taxes and other expenses that FHA would pay while holding 
these properties. Early foreclosures also would expedite the 
receipt of sales revenues that FHA would collect on the 
affected properties. CBO estimates that 16 percent of all 
claims from new loan guarantees will eventually enter the 
assignment program if it continues in place. Based on 
information provided by FHA, we estimate that eliminating the 
program would increase FHA's recoveries on such defaults by an 
average of 30 to 40 percent.
    CBO estimates that the decrease in FHA's costs from 
defaults would reduce direct spending by $846 million over the 
next five years. These estimated savings represent the net 
decrease in subsidy costs of new loan guarantees expected to be 
made by FHA over the 1998-2002 period. Under current law, FHA 
guarantees of new single-family mortgages result in offsetting 
receipts on the budget because the credit subsidies are 
estimated to be negative. (That is, guarantee fees for new 
mortgages more than offset the costs of expected defaults.) 
Eliminating the assignment program would make such subsidies 
more negative and the estimated change in those subsidy 
receipts would be recorded in the years in which new loans are 
guaranteed. For example, estimated savings for 1998 represent 
the present value (subsidy) savings of avoided costs in all 
future years associated with the new guarantees made in 1998.
            Mark-to-market provisions for FHA-insured multifamily 
                    housing mortgages
    The Federal Housing Administration (FHA) currently insures 
the mortgages of about 850,000 rental units in projects that 
also receive project-based rent subsidies under section 8 of 
the United States Housing Act of 1937. About 58 percent of 
these units have rents that exceed those for comparable 
unassisted units. The original section 8 contracts attached to 
these projects were written for periods typically ranging from 
15 to 40 years, and most will expire over the next five to ten 
years. HUD does not have the authority to renew these contracts 
at more than 120 percent of the fair market rent. The vast 
majority of these projects could not survive if their rental 
income was reduced to market levels and would therefore default 
on their mortgages, generating large losses to the FHA 
insurance fund and possibly displacing many of the tenants in 
these projects. Indeed, CBO's baseline for this fund includes 
estimated net losses for these projects of $7.6 billion over 
the 1998-2010 period, under the assumption that the rental 
income of these projects would be reduced to market levels at 
contract expiration.
    Subtitle B of the bill--often referred to as the Mark-to-
Market provisions--would generally direct the renewal of 
section 8 contracts for above-market units at market rents. In 
cases where the market rents would be so low that a project 
could not meet its operating and other expenses, even if the 
mortgage were extinguished, the bill would authorize exception 
rents that would be set at the level necessary to cover project 
expenses, including a return to the owner.
    The bill would authorize a variety of tools to prevent 
defaults on the FHA-insured mortgages once rents were reduced. 
In particular, the bill would authorize a bifurcation of the 
current mortgage into a first mortgage that could be supported 
by the lower rent and a so-called soft second mortgage that 
would be repaid over a 50-year period, starting after the first 
mortgage was paid off. During the period that the first 
mortgage was being paid, the second mortgage would accrue 
interest at the applicable federal interest rate. One purpose 
of this provision is to prevent a tax liability that owners 
would incur if that part of the current mortgage was simply 
forgiven. In that way, the provision also intends to encourage 
those owners whose section 8 contracts expire after the program 
would sunset, at the end of fiscal year 2001, to have their 
mortgages restructured early rather than choosing to default on 
their mortgages later. The bill would also authorize the 
insurance fund to pay for the credit subsidies that would be 
associated with any FHA-insured first mortgages or with the 
second mortgages, which would typically be held by HUD in the 
form of direct loans. For projects that could not support any 
mortgage, the fund would pay off the entire mortgage.
    The bill also would authorize the insurance fund to pay for 
part of the cost of repairs to the projects, not to exceed 
$5,000 per unit. In addition, Section 2201 would authorize a 
capital grant program that would reduce the restructuring cost 
to the insurance fund. Annual grant payments could be used by 
owners, for example, to help them pay for repairs through loans 
obtained from private lenders rather than through grants paid 
for by the fund. Funding for this capital grant program would 
not be derived from the insurance fund.
    CBO estimates that the Mark-to-Market provisions of the 
bill would save a total of $240 million over the 1997-2002 
period, as shown in Table 2. Restructuring mortgages would 
reduce the annual cash flows from the FHA-insurance fund over 
the next 15 to 20 years relative to CBO's baseline, which 
assumes mortgage defaults for the projects whose mortgages 
would be restructured under the bill. Under credit reform, that 
reduction in annual cash flows is scored on a net present value 
basis in the year the legislation would be enacted. Assuming 
that the bill is enacted before October 1, 1997, CBO estimates 
that those savings would amount to $533 million, recorded in 
fiscal year 1997. Rent reductions are estimated to save $50 
million for existing Section 8 contracts. The capital grant 
program wouldincrease direct spending by an estimated $343 
million. The budgetary impact of the proposal would represent the net 
result of a number of factors, some of which make the cost of 
restructuring more expensive and others that make it less expensive 
than the cost of defaults.
    FHA Insurance Fund. One factor that would make the cost of 
restructuring more expensive to the FHA-insurance fund is the 
timing of the restructuring. To the extent that owners would 
have their mortgages restructured before the time that they 
would be expected to default, the FHA insurance fund must make 
payments at an earlier date. That shift in timing increases the 
cost of restructuring on a net present value basis. CBO 
estimates that this impact would not to be very large, however, 
because the bill's provisions may entice relatively few owners 
whose contracts expire after 2001 to have their mortgages 
restructured because most might face large tax liabilities at 
the time of restructuring. Based on conversations with staff of 
the Joint Committee on Taxation, CBO assumes that, when there 
is a realistic possibility that the mortgage would be repaid, 
the Internal Revenue Service (IRS) would consider the soft 
second mortgages as valid indebtedness because they would 
accrue interest at the federal rate. On the other hand, if the 
economic circumstances of a project were such that the project 
was highly unlikely to ever pay off that debt, the IRS has the 
authority to recharacterize the mortgage as a forgiveness of 
indebtedness, in which case it would become taxable at the 
owner's personal income tax rate. That tax could be 
substantially higher than the tax owners would have to pay if 
they defaulted on their current mortgage years later, because 
(1) the unpaid mortgage balance would be lower at such a later 
date and (2) that unpaid balance would be taxed after default 
and foreclosure at the capital gains tax rate, which could be 
much lower than the owner's marginal personal income tax rate.
    Available data suggest that mortgages covering only about 
22 percent of all units that could receive the soft second 
mortgages (representing about 8 percent of all debt outstanding 
in the form of these mortgages) would likely be repaid. For the 
purposes of this estimate, CBO assumes that all owners in that 
category whose section 8 contacts expire after the program 
sunsets would have their mortgages restructured but that only 
10 percent of the remaining 78 percent would. In addition, CBO 
assumes that none of the owners whose mortgage would be written 
off completely would come in prior to the expiration of their 
contracts.
    A second factor that would increase the cost of 
restructuring is the credit subsidies associated with any new 
FHA-insured first mortgages. CBO assumes that the great 
majority--85 percent--of the first mortgages would need credit 
enhancement in the form of FHA insurance because of the 
relatively high risk associated with these mortgages. Those 
credit subsidies are estimated to add about $131 million to the 
cost of restructuring.
    A factor that would make the cost of restructuring less 
expensive than the cost of defaults is avoidance of the 
frictional costs associated with the default and foreclosure 
process. CBO assumes that restructuring would reduce losses to 
the fund by 4 percent of the unpaid mortgage balance compared 
with the cost of a default. Another factor is the use of the 
soft second mortgages instead of the outright payment of claims 
under a default on the current mortgage. Although most of these 
mortgages are expected not to be repaid, CBO estimates that HUD 
would be able to recover about 8 percent of their total unpaid 
balance upon default.
    Capital Grants Program. The availability of funds from the 
capital grant program would reduce the cost of restructuring to 
the FHA fund, but increase the cost of the proposal to the 
government over the long run. CBO estimates that those funds 
alone would reduce the restructuring cost to the fund by $531 
million on a net present value basis. However, the annual 
payments of these grants would generate direct spending of $343 
million over the 1998-2002 period, and would continue for as 
long as 15 years thereafter.
    Reduction in Rents for Units Subject to Mortgage 
Restructuring. For projects participating in the mark-to-Market 
provisions, rents received by project owners would be reduced 
at the time that the mortgage was restructured from their 
current high levels to the going market rent for comparable 
unassisted units. The bill also would authorize the state and 
local government entities that would carry the mortgage 
restructuring process to take over the administration of the 
section 8 contracts from HUD. Thus, the savings in federal 
subsidies from the rent reductions would be offset to some 
extent by the cost of fees that HUD would have to pay the 
administering agencies.
    The Mark-to-Market provisions would result in savings from 
existing section 8 appropriations because of the rent 
reductions in properties that have their mortgages restructured 
prior to the expiration of their section 8 contracts. CBO 
estimates that outlays for existing contracts would be reduced 
by $50 million over the five-year period. In 1998, average net 
savings relative to CBO's baseline would range from $825 to 
over $1,800 per unit per year, depending on the type of section 
8 program under which a unit is assisted. That estimate 
includes the added cost of administrative fees, which are 
assumed to be set at the same level as those received by public 
housing agencies under the section 8 certificate and voucher 
programs--7 percent of the two-bedroom FMR. Because few owners 
are expected to restructure their mortgage prior to contract 
expiration, CBO estimates that savings would be incurred for at 
most 29,000 units, or 20 percent of all units with contracts 
expiring after 2001.
            Other decreases in the Federal cost of section 8 housing
    Under the section 8 rental assistance program, the federal 
government generally pays the difference between a maximum rent 
that owners receive and 30 percent of a tenant's income.The 
bill would modify several other aspects of the section 8 program that 
would affect spending from previous appropriations. CBO estimates that 
those provisions would save the government $977 million on subsidies 
for existing contracts over the 1998-2002 period (see Table 2). They 
would also reduce the amounts of budget authority that would need to be 
appropriated for renewals of expiring contracts in future years.
    Minimum Rents. Section 2202 would allow HUD to set minimum 
rents of up to $25 per month for all project-based section 8 
programs. Based on data provided by HUD, CBO estimates that 
this provision would affect less than 4 percent of assisted 
families and would increase their rent contributions on average 
by about $12 per month. As a result, outlays for existing 
contracts are estimated to decline by about $18 million over 
the five-year period.
    Repeal of Preferences. Section 2203 would repeal federal 
preference rules for admitting new recipients of section 8 
project-based assistance. Current rules give priority to 
applicants on waiting lists who have the most severe housing 
problems and who typically have much lower incomes than other 
eligible families. If this provision were enacted, CBO expects 
that private owners of assisted projects would offer a portion 
of their newly vacant units to working families with somewhat 
higher incomes to serve as role models. Because such tenants 
would pay a larger share of the rent, federal spending for 
existing contracts would decline by an estimated $47 million 
over the five-year period.
    Freeze Rents for High Cost Units. Starting in fiscal year 
1999, section 2003 would bar rent increases in projects 
assisted under the section 8 new construction and substantial 
rehabilitation or moderate rehabilitation programs, if their 
assisted rents exceed the higher of the local market rents for 
similar unassisted units or the fair market rent, which is set 
by HUD at the 40th percentile of local rents. CBO estimates 
that this provision would reduce spending for existing 
contracts by $773 million over the five-year period. We 
estimate that provision would initially affect about three-
quarters of all units assisted under these programs. That 
proportion would decrease by about 4 percent per year, as some 
of the assisted rents would begin to fall below the market 
rents or the FMR. In addition, the number of units affected 
would decline sharply each year as contracts expire. In all, 
CBO estimates the average number of affected units to decline 
from about 787,000 in 1999 to 418,000 in 2002.
    Reduce Rent Increases for Stayers. Starting in fiscal year 
1999, Section 2004 would reduce by 1 percentage point rent 
increases for units occupied by the same families at the time 
of the last annual rent adjustment. (Such families are oftened 
referred to as stayers.) This provision would reduce outlays 
for existing contracts by and estimated $151 million over the 
five-year period. CBO estimates that, in a given year, this 
provision would affect between 80 and 85 percent of assisted 
units that receive an annual rent adjustment. (The provision 
would generate no savings from units that would be affected by 
section 2003.) Because of expiring contracts, the number of 
affected units is estimated to decline from about 430,000 in 
1999 to about 230,000 in 2002.
    Interaction Effects. Implementing the Mark-to-Market 
provisions would reduce the savings from the two provisions 
that would limit rent increases. CBO estimates that this 
interaction effect would reduce overall savings to the section 
8 program by about $12 million over the five-year period. For 
example, when a unit's rent is reduced to market level under 
the Mark-to-Market provisions, that unit would no longer be 
affected by the rent freeze.
            Civil money penalties
    Sections 2313, 2320, and 2321 would provide for civil 
penalties for varous violations of the section 8 and FHA 
programs. Payments of these civil penalties would be recorded 
as miscellaneous receipts to the Treasury. CBO expects that any 
increase in penalty collections would be insignificant.
    Intergovernmental and private-sector impact: This bill 
contains no intergovernmental or private-sector mandates as 
defined in the Unfunded Mandates Reform Act of 1995, and would 
not impose any costs on state, local, or tribal governments. If 
they choose, a state housing finance agency or a local housing 
agency would be allowed to act as the designee for HUD in 
implementing mortgage restructuring for FHA-insured multifamily 
housing.
    Previous CBO estimates: On June 13, 1997, CBO provided an 
estimate for the reconciliation recommendations of the House 
Committee on Banking and Financial Services (Title II), as 
approved on June 11, 1997. The House and Senate reconciliation 
recommendations contain identical FHA single-family assignment 
reform and section 8 rental adjustment provisions. The Senate 
reconciliation recommendations also include provisions for 
restructuring FHA-insured multifamily mortgages and two more 
provisions that would affect the federal cost of the section 8 
program. As a result of these additional provisions, the 
budgetary effects of this bill differ from those in the House 
version.
    Estimate prepared by: FHA Single-Family Mortgage 
Insurance--Susanne S. Mehlman; All Other Provisions--Carla 
Pedone.
    Estimate approved by: Paul V. Van de Water, Assistant 
Director for Budget Analysis.

                                                TABLE 2. ESTIMATED CHANGES IN DIRECT SPENDING OF TITLE II                                               
                                                                [In millions of dollars]                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                   1998-2002   1998-2007
                                 1997     1998     1999     2000     2001     2002     2003     2004     2005     2006     2007      total       total  
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           FHA SINGLE-FAMILY ASSIGNMENT REFORM                                                          
                                                                                                                                                        
Estimated budget authority...        0     -136     -161     -183     -183     -183     -183     -183     -183     -183     -183        -846      -1,761
Estimated outlays............        0     -136     -161     -183     -183     -183     -183     -183     -183     -183     -183        -846      -1,761
                                                                                                                                                        
                                                        FHA MULTIFAMILY MARK-TO-MARKET PROVISIONS                                                       
                                                                                                                                                        
FHA Insurance Fund:                                                                                                                                     
    Estimated budget                                                                                                                                    
     authority...............     -533        0        0        0        0        0        0        0        0        0        0        -533        -533
    Estimated outlays........     -533        0        0        0        0        0        0        0        0        0        0        -533        -533
Capital grants:                                                                                                                                         
    Estimated budget                                                                                                                                    
     authority...............        0      218      528      340       76       47       42       40       35       30       25       1,209       1,381
    Estimated outlays........        0       16       56       84       91       96      101      106      111      116      121         343         898
Reduce rents to market rents                                                                                                                            
 prior to contract                                                                                                                                      
 expiration:                                                                                                                                            
    Estimated budget                                                                                                                                    
     authority...............        0       -2       -2       -2     -113        0        0        0        0        0        0        -119        -119
    Estimated outlays........        0      \1\       -1       -1      -13      -35      -33      -14       -7       -5       -4         -50        -113
Subtotal mark-to-market                                                                                                                                 
 provisions:                                                                                                                                            
    Estimated budget                                                                                                                                    
     authority...............     -533      216      526      338      -37       47       42       40       35       30       25         557         729
    Estimated outlays........     -533       16       55       83       78       61       68       92      104      111      117        -240         252
                                                                                                                                                        
                                                               OTHER SECTION 8 PROVISIONS                                                               
                                                                                                                                                        
Minimum rent up to $25 per                                                                                                                              
 month for families with                                                                                                                                
 project-based section 8:                                                                                                                               
    Estimated budget                                                                                                                                    
     authority...............        0        0        0        0        0        0        0        0        0        0        0           0           0
    Estimated outlays........        0       -3       -5       -4       -3       -3       -2       -2       -2       -1       -1         -18         -26
Eliminate preference rules                                                                                                                              
 for project-based section 8:                                                                                                                           
    Estimated budget                                                                                                                                    
     authority...............        0        0        0        0        0        0        0        0        0        0        0           0           0
    Estimated outlays........        0       -3       -7      -10      -13      -14      -15      -16      -17      -18      -20         -47        -133
Freeze rents for high cost                                                                                                                              
 units:                                                                                                                                                 
    Estimated budget                                                                                                                                    
     authority...............        0        0        0        0        0        0        0        0        0        0        0           0           0
    Estimated outlays........        0        0      -71     -182     -248     -272     -268     -245     -239     -237     -235        -773      -1,997
Reduce rent increases for                                                                                                                               
 stayers by 1 percentage                                                                                                                                
 point: \2\                                                                                                                                             
    Estimated budget                                                                                                                                    
     authority...............        0        0        0        0        0        0        0        0        0        0        0           0           0
    Estimated outlays........        0        0      -17      -37      -46      -51      -53      -55      -62      -69      -76        -151        -466
Interaction of mark-to-market                                                                                                                           
 with freeze and stayers                                                                                                                                
 provisions:                                                                                                                                            
    Estimate budget authority        0        0        0        0        0        0        0        0        0        0        0           0           0
    Estimated outlays........        0    (\1\)    (\1\)    (\1\)        3        9       10        3        2        0        0          12          27
Subtotal other section 8                                                                                                                                
 provisions:                                                                                                                                            
    Estimated budget                                                                                                                                    
     authority...............        0        0        0        0        0        0        0        0        0        0        0           0           0
    Estimated outlays........        0       -6     -100     -233     -307     -331     -328     -315     -318     -325     -332        -977      -2,595
                                                                                                                                                        
                                                        TOTAL PROPOSED CHANGES IN DIRECT SPENDING                                                       
                                                                                                                                                        
Estimated budget authority...     -533       80      365      155     -220     -136     -141     -143     -148     -153     -158        -289      -1,032
Estimated outlays............     -533     -126     -206     -333     -412     -453     -443     -406     -397     -397     -398      -2,063      -4,104
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Less than $500,000.                                                                                                                                 
\2\ Estimate includes effects of interaction with freeze provision.                                                                                     

                       Explanation of Provisions

     Subtitle A--Mortgage Assignment and Annual Adjustment Factors

Sec. 2002. Extension of foreclosure avoidance and borrower assistance 
        provisions for FHA single family housing mortgage insurance 
        program.
    This section extends the foreclosure avoidance and borrower 
assistance provisions enacted in 1995. The original Federal 
Housing Administration (FHA) single family mortgage assignment 
program was created in 1959, but was not operational until 1976 
after a court consent decree required the Department of Housing 
and Urban Development (HUD) to implement the program. 
Subsequent modifications to the temporary mortgage assistance 
program and the assignment program required HUD to accept 
defaulted FHA borrowers into the program. As a condition for 
assignment, a borrower's default was be based on circumstances 
beyond his or her control, such as sickness or loss of 
employment and a reasonable expectation that the borrower will 
resume normal and regular mortgage payments and correct any 
loan deficiencies within a reasonable time. The program allows 
up to 36 months in forbearance in anticipation that a mortgagor 
will be able to resume his or her mortgage payments. Since the 
majority of assigned loans are insured under the FHA Mutual 
Mortgage Insurance Fund (MMIF), the cost of the assignment 
program was borne by the Fund.
    The Committee noted in 1995 that if the well-intentioned 
objectives of the current assignment program are not achieved, 
it could cause some $1.6 billion in future losses to the FHA 
MMIF. A General Accounting Office (GAO) study indicated that 
there were currently 71,500 loans in the program and that it 
``operates at a high cost to FHA's Fund and has not been very 
successful helping borrowers avoid foreclosures in the long 
run.'' Approximately 30% of assigned borrowers eventually 
become current and graduate out of the FHA assignment program, 
thereby indicating a current failure rate at approximately 70%. 
Thus, FHA borrowers were paying higher premiums to meet the 
capital ratio standards of the MMIF as well as to cover the 
exorbitant costs of the assignment program. The Committee, 
therefore, chose to replace the existing program.
    The replacement assignment program continued in the 
Committee's proposal provides HUD with authority to pay partial 
mortgage insurance claims limited to the amount equivalent to 
or less than twelve monthly mortgage payments. As a condition 
for accepting a partial claim payment, the lender agrees, on a 
short term basis, to modify the terms of the loan to a level 
where the borrower has the ability to pay and retain the loan 
in its portfolio. In some circumstances, however, where the 
default and modification may be for a longer period of time, 
the replaced program allows HUD to pay the mortgage insurance 
claim and accept the borrower into a new assignment program. It 
is expected that HUD will use private sector sources for 
servicing and foreclosure activities.
Sec. 2003. Adjustment of maximum monthly rents for certain dwelling 
        units in new construction and substantial or moderate 
        rehabilitation projects assisted under section 8 rental 
        assistance program.
    Under the Section 8 new construction, substantial 
rehabilitation, and moderate rehabilitation programs, the 
Department of Housing and Urban Development (HUD) pays the 
owner of a rental housing property the difference between 30 
percent of the tenant's income and a contract rent that was 
established when the project was built. Under the program, 
owners are provided an increase in the contract rent each year 
to cover the effects of inflation on the costs of operating the 
property. The rent increase is known as the annual adjustment 
factor (AAF).
    This proposal would limit the application of AAFs to only 
that portion of the contract rent attributable to the operating 
costs of the project. This restraint in the annual growth in 
the rents paid to owners will only apply to high-cost projects 
with current contract rents in excess of 100 percent of the 
fair market rent for the area. Since the portion of the rent 
goes to pay debt generally will remain fixed each year, it 
should not increase with inflation. This proposal will still 
permit increases sufficient to cover the costs of operating and 
maintaining a development in decent, safe, and sanitary 
condition.
Sec. 2004. Adjustment of maximum monthly rents for nonturnover dwelling 
        units assisted under section 8 rental assistance program.
    For section 8 units for which there has been no resident 
turnover since the preceding annual rental adjustment, this 
section would reduce the AAF by one percent.

                 Subtitle B--Multifamily Housing Reform

Part 1--FHA-Insured Multifamily Housing Mortgage and Housing Assistance 
                             Restructuring

    The Committee recognizes that the cost of renewing expiring 
section 8 rental assistance contracts will begin to grow 
substantially. The Committee believes that the expiration of 
Section 8 contracts should be seized as an opportunity to 
reduce the present costs of the assisted housing programs while 
maintaining the long-term availability and affordability of 
this important federal housing resource. The Federal Government 
has invested billions of dollars in creating and maintaining 
this housing as an importantpublic resource. Since 1994, the 
Committee has recognized that reforming the assisted and insured 
multifamily housing programs of the Federal Government would be an 
enormous challenge due to the program complexities, budgetary costs, 
and social policy implications. The Committee also recognized that the 
inevitable expiration of thousands of housing assistance payment 
contracts could not be ignored and that delays would risk a loss of the 
affordable housing supply as well as tenant displacement.
    In response to this problem, the Committee is incorporating 
S. 513, the Multifamily Assisted Housing Reform and 
Affordability Act of 1997, which represents a major effort to 
address the escalating budgetary costs and operational 
inefficiencies affecting the nation's assisted and insured 
housing programs. This bill continues the Committee's serious 
effort to reform Federal housing programs while ensuring that 
residents continue to be provided decent, safe, and affordable 
housing.
    The Committee bill reduces the ongoing costs of operating 
the Department of Housing and Urban Development's (HUD) insured 
multifamily rental housing portfolio that receive project-based 
rental assistance from HUD's Section 8 programs through a 
restructuring process called ``mark-to-market.'' In addition, 
it expands the enforcement authorities of the Federal 
Government to ensure that the public interest is safeguarded 
and that the assisted housing programs serve their intended 
purposes.
     In 1996, the Committee introduced S. 2042 to authorize HUD 
to reduce oversubsidized contract rents to market rent levels 
by simultaneously restructuring the underlying FHA-insured 
debt. This legislation was reintroduced in the 105th Congress 
as S. 513. In crafting this legislation, the Committee has made 
a great effort to obtain and incorporate the views of those 
involved in rental assisted housing programs, including the 
Administration, private sector apartment owners and managers of 
assisted housing properties, residents, community groups, and 
state and local governments. The Subcommittee on Housing 
Opportunity and Community Development has held three hearings 
on reforming the federal assisted housing programs.
    Project-based section 8 assistance for these properties is 
provided under housing assistance payment contracts that are 
generally 20 years in duration. In many cases, contract rents 
on these properties far exceed market-area rents. Between 1996 
and 2004, Section 8 project-based assistance contracts on over 
800,000 units will expire. Most of these contracts assist 
properties whose mortgages are insured by the Federal Housing 
Administration (FHA). The combination of insurance and rental 
assistance makes this matter extremely complicated and 
difficult since changes to either program can impact the other. 
The failure to continue Section 8 assistance will impede the 
borrower's ability to meet its debt service payment. The 
failure to meet debt service payments will then result in 
substantial costs to the FHA insurance funds since FHA 
insurance guarantees lenders the repayment of project debts if 
borrowers default. However, if the government attempts to 
reduce its insurance liabilities by increasing Section 8 
subsidies, the cost and commitment of future Section 8 
assistance is increased. In other words, this situation has 
created a dilemma where the Federal Government will end up 
paying for this housing either through the continuation of 
direct rental subsidies or through claim payments from the 
mortgage insurance funds.
    Continuing Section 8 assistance at current subsidy levels, 
however, will be extremely difficult in an era of shrinking 
federal resources as indicated in recent appropriation actions. 
Further, the recent budget resolution adopted by the Congress 
places rent limitations on contract renewals that would not be 
adequate for a significant portion of the FHA-insured inventory 
to meet its operating costs and debt service payments. 
Estimates indicate that if project-based housing assistance 
contracts were renewed under existing rent levels, the 
budgetary cost would grow from $1.2 billion in fiscal year 1997 
to almost $8 billion by fiscal year 2006. The Committee also 
recognizes that the Section 8 program has allowed project 
owners to receive more Federal dollars in rental assistance 
than is necessary to maintain properties as decent and 
affordable rental housing. The Department has estimated that 
almost two-thirds of assisted properties have rent levels that 
are higher than comparable market rents. Therefore, renewing 
expiring contracts at current levels is not only unacceptable 
from a housing policy standpoint, but in an era of diminishing 
Federal resources, it is not practical.
    The Committee also recognizes that the assisted housing 
inventory of almost 8,500 properties is a valuable Federal 
investment. This housing currently provides decent, safe, and 
affordable housing to almost 1.6 million families. Although 
federally assisted housing provides much needed affordable 
housing for lower income families and persons, a significant 
portion of this stock is physically and financially distressed.
    Compounding these problems is HUD's inability to administer 
and oversee its portfolio of multifamily housing properties. 
Despite the Administration's recent efforts to correct its 
management deficiencies, the current HUD management structure 
fails to guarantee the viability of the housing stock and does 
not provide adequate assurance to the American taxpayer that 
funds are being spent appropriately. The General Accounting 
Office and the HUD Office of Inspector General (IG) have found 
that even though HUD has various enforcement tools to ensure 
that properties are properly maintained, poor management 
information systems and ineffective oversight of properties 
have impeded HUD's ability to identify problems and pursue 
enforcement actions in a timely fashion.HUD is further hampered 
by the lack of adequate staffing and inadequately trained staff.
    In response to these problems, the Committee developed a 
comprehensive reform proposal that reduces the growing costs of 
providing Section 8 rental assistance while protecting existing 
residents and maintaining the affordability and availability of 
the housing stock. The bill would focus on the most significant 
problems affecting this portfolio, that is, oversubsidized 
housing properties and housing of poor quality. Oversubsidized 
housing properties would have their rental subsidies reduced to 
the level of market comparables or to the minimum level 
necessary to support proper operations and maintenance. To 
achieve these lower rent levels without forcing loan defaults, 
the bill would provide a variety of tools that would reduce the 
project's debt service such as refinancing and restructuring 
the mortgage. In response to the long recognized problems with 
HUD's capacity, the Committee has also designed a new 
administrative and oversight structure to ensure the long-term 
viability of this important housing resource. The Committee has 
proposed to alter significantly the administration and 
management of this portfolio by shifting these responsibilities 
from HUD to capable public entities such as State and local 
housing finance agencies that have demonstrated expertise in 
affordable housing and management. The Committee bill would 
also terminate the government's relationship with owners who 
have failed to comply with federal requirements such as housing 
quality standards and prevent the continued subsidization of 
properties that are not economically viable.

Sec. 2101. Findings and purposes.

    The Committee believes that the assisted and insured rental 
housing programs are too costly, inefficiently administered, 
and too often exposed to mismanagement by private owners. The 
Committee believes that the operational flaws need to be 
corrected in order to protect the financial liability of the 
Federal Government and to ensure that the housing stock 
provides long-term affordable, decent, and safe housing.
    The findings and purposes contained in this section 
describe the problems affecting the current assisted and 
insured rental housing programs and the solutions that will 
make the programs more efficient and effective at the least 
cost to the American taxpayer.
    The Committee recognizes that there exists a need for 
decent, safe, and affordable housing throughout the Nation and 
that the inventory of assisted and insured rental housing is an 
important resource for meeting some of this need. HUD's ``Worst 
Case Housing Needs'' report found that the number of households 
with unmet worst case needs for housing assistance rose to an 
all-time high of 5.3 million households in 1993. The study also 
found that the private market stock of extremely low-rent units 
declined by 478,000 units between 1985 and 1993. The Committee 
recognizes that this housing represents a substantial and 
significant Federal investment in meeting the affordable 
housing needs of an estimated 2 million lower income families 
and persons. The Committee, however, observes that federally 
assisted housing properties are plagued by high subsidy costs 
and mismanagement.
    The Committee finds that the subsidy costs of most of the 
assisted and insured housing inventory are substantially 
greater than those of comparable, unassisted rental units in 
the same housing market. Many of the contracts for this subsidy 
will expire during the next several years. It is estimated that 
if the Federal Government renews these contracts at the same 
rent levels, then the cost of renewing all expiring project-
based rental assistance contracts will increase from $1.2 
billion in fiscal year 1997 to almost $8 billion by fiscal year 
2006. As a result, these costs will require an increasingly 
larger portion of the discretionary budget authority of the 
Department.
    The Committee recognizes, however, that many of these 
rental assistance contracts are attached to properties whose 
mortgages are insured by the Federal Housing Administration 
(FHA). Therefore, if these contracts are not renewed or reduced 
to market levels, FHA's mortgage insurance funds will be 
exposed to huge claims, potentially resulting in tenant 
disruption and forcing HUD to act as the landlord for these 
properties.
    A portion of the federally assisted housing inventory is 
also plagued by mismanagement and some properties are 
physically or financially distressed. These problems have been 
affected by the Department's lack of capacity to administer and 
manage its housing portfolio.
    The Committee finds that the public interest and the 
interests of the housing stock and its residents and 
communities will be served by a system that: reduces the cost 
of Section 8 rental assistance to these properties by reducing 
the debt service and operating costs while retaining the low-
income affordability and availability of this housing; 
addresses the physical and economic distress of this housing 
and the failure of some project managers and owners to comply 
with management and ownership rules and requirements; and 
transfers and shares many of the loan and contract 
administration functions and responsibilities of the Secretary 
to capable State, local, and other entities.
    Therefore, it is the intent of this legislation: (1) to 
preserve low-income rentalhousing affordability and 
availability while reducing the long-term costs of project-based rental 
assistance; (2) to reform the design and operation of Federal rental 
housing assistance programs to promote greater project operating and 
cost efficiencies; (3) to encourage owners of eligible multifamily 
housing projects to restructure their FHA- insured mortgages and 
project-based rental assistance contracts before the expiration of the 
housing assistance contract; (4) to streamline and improve project 
oversight and administration; (5) to resolve the problems affecting 
financially and physically troubled housing projects through 
cooperation with residents, owners, State and local governments, and 
other interested parties; and (6) to grant additional enforcement tools 
to use against those who violate agreements and program requirements, 
in order to ensure that the public interest is safeguarded and that the 
Federal multifamily housing programs serve their intended purposes.

Sec. 2102. Definitions.

    Under this section, the Committee bill defines what types 
of multifamily housing properties would be eligible for ``mark-
to-market.'' This would focus portfolio restructuring on only a 
segment of the assisted and insured housing inventory--
specifically, assisted properties with contract rents above 
market rent levels.
    The Committee has elected to address only the assisted 
portfolio with contract rents above market rents for the 
following reasons. One, the costs of Section 8 rental 
assistance attached to these properties are much greater than 
those in the below market assisted inventory and the budgetary 
costs to maintain this inventory is greater. Therefore, greater 
budgetary savings will be realized on the oversubsidized stock. 
Further, most of the Section 8 contract rents on the below 
market assisted stock are regulated on a budget-based process. 
In other words, the rents are already set at the minimum level 
necessary to meet operating and debt service expenses. On the 
other hand, the above market assisted stock, which is generally 
newer assisted properties, have contract rents that are higher 
than prevailing market rates due to the initial construction 
costs and automatic rent increases that have been provided 
during the term of the assistance contract regardless of 
operating needs.
    Two, restructuring the debt on the below market and older 
assisted portfolio would likely achieve only minimal Section 8 
subsidy savings since the unpaid principal balance (UPB) on the 
remaining mortgage is small. Older assisted properties have an 
average UPB of $14,000 per unit compared to an average UPB of 
$35,000 per unit for newer assisted properties. Therefore, 
allowing below market assisted properties for debt 
restructuring would not be cost beneficial especially when 
considering the time and transaction costs of such a process.

Sec. 2103. Authority of participating administrative entities.

    The Committee believes portfolio restructuring is being 
undertaken to reform and improve the programs from a financial 
and operating perspective, but not to abandon the long-term 
commitment to resident protection and ongoing affordability. 
Balancing the fiscal goals of reducing costs with the public 
policy goals of maintaining affordable housing requires an 
intermediary accountable to the public interest. In light of 
the Department's capacity and management problems documented by 
the Inspector General and the General Accounting Office, the 
Committee believes that capable public entities should act as 
participating administrative entities (PAEs) on behalf of the 
Federal Government. The Committee believes that State housing 
finance agencies (HFAs), local HFAs, public housing agencies, 
and other State and local housing and community development 
entities have the capacity to implement the mortgage 
restructuring program outlined in this bill.
    The Committee expects many public entities to volunteer and 
establish working agreements with the Secretary to implement 
``mark-to-market.'' The Committee believes that State and local 
HFAs can carry out portfolio restructuring consistent with the 
public interest for three primary reasons: (1) State and local 
HFAs already have a track record of working with HUD through 
the multifamily loan risk-sharing programs created under the 
1992 Housing and Community Development Act, multifamily 
mortgage sales program, and the multifamily property 
disposition demonstration program; (2) many State and local 
public entities have experience with the Section 8 programs as 
contract administrators and bond financiers of Section 8 
assisted properties and various other multifamily affordable 
housing programs such as the Low Income Housing Tax Credit 
program and HOME; and (3) HFAs are publicly accountable and 
closely scrutinized by their respective governments.
    This section provides the Secretary with the authority to 
select capable public entities that are determined to meet 
specific criteria related to management capacity, financial 
performance and strength, and expertise in affordable housing. 
Further, public entities that qualified under the mortgage 
risk-sharing and fiscal year 1997 demonstration had to meet 
similar criteria, which the Secretary had to determine, to 
ensure that only capable entities could act on behalf of the 
Federal Government. For example, the 1997 demonstration 
provided the Secretary with the authority to determine and 
select capable public entities. In fact, HUD has selected 42 
state and local housing finance agencies. By allowing these 
qualified entities to automatically qualify, the Committee 
believes thatit will streamline HUD's efforts in implementing 
this legislation in a timely manner.
    These criteria would form the basis for determining if the 
public entity had the capacity, experience, and management 
capability to implement portfolio restructuring in a manner 
that balances the social and fiscal goals of the legislation. 
The first criterion requires that the entity is located in the 
State or local jurisdiction in which the eligible multifamily 
housing project or projects are located. The Committee believes 
that this criterion will ensure that the public entity has some 
knowledge of the local markets and local housing needs. The 
second, third, and fourth criteria, as discussed below, are 
those used by rating agencies to evaluate the financial, 
administrative, and management performance of public entities. 
The second selection criterion requires that the entity has 
demonstrated expertise in low-income affordable rental housing. 
The entity also has to have a history of stable, financially 
sound, and responsible administrative performance. In this 
context, historical financial performance, the experience and 
qualifications of the entity's personnel and financial 
management, and the quality and dependability of reporting and 
monitoring systems would be important factors. Lastly, the 
entity must demonstrate financial strength in terms of asset 
quality, capital adequacy, and liquidity. This would include 
revenue sources, cost controls, loan loss reserves, and various 
characteristics of its real estate assets such as underwriting 
and delinquency rates.
    The Committee encourages qualified PAEs to create 
partnerships or subcontract with various other entities such as 
public housing agencies, private financial institutions, 
mortgage servicers including current mortgagees of FHA-insured 
mortgages, nonprofit and for-profit housing organizations, 
Fannie Mae and Freddie Mac, the Federal Home Loan Banks, and 
other State or local mortgage insurance companies or bank 
lending consortia. Further, coordination or partnerships among 
different State and local housing entities would be encouraged 
under this bill.
    Under this bill, PAEs would be responsible for the entire 
universe of eligible multifamily housing properties in their 
jurisdiction. The Committee is very concerned about PAEs taking 
on the portfolio restructuring responsibilities for only those 
projects where little or no physical, financial, or management 
problems exist. The Committee, however, does not expect that a 
PAE would necessarily take on the entire portfolio in its 
jurisdiction if there are other qualified public entities in 
the jurisdiction that could share the portfolio 
responsibilities.
    In cases where a qualified public entity is not available 
or does not volunteer, the Secretary would be allowed to either 
perform the restructuring in-house or use alternative 
administrators. Alternative administrators could be 
partnerships created out of private and public entities. The 
Committee believes that a public entity should be involved in 
all restructuring deals in order to protect the Federal 
government's investment.
    The Committee bill authorizes PAEs to perform a variety of 
functions in order to reduce project rents, address troubled 
projects, and correct management and ownership problems. PAEs 
would be given portfolio restructuring program responsibilities 
through a working agreement with the Secretary called 
``Portfolio Restructuring Agreements.'' The main elements of 
these cooperative agreements would (1) establish the 
obligations and requirements between the Secretary and the PAE, 
(2) identify the eligible multifamily projects for which the 
PAE is responsible for, (3) require the PAE to review and 
certify comprehensive needs assessments, and (4) identify the 
responsibilities of both the Secretary and the PAE in 
implementing the portfolio restructuring program.
    Under these agreements, PAEs would be authorized to take a 
number of actions in order to fulfill the goals of ``mark-to-
market.'' These actions would include the use of a number of 
tools to restructure the project's debt, screening out bad 
projects and bad owners from the renewal and restructuring 
process, creating partnerships with other housing and financial 
entities, and ensuring the project's long-term compliance with 
housing quality and management performance requirements.

Sec. 2104. Mortgage restructuring and rental assistance sufficiency 
        plan.

    Central to the Portfolio Restructuring Agreement is the 
``mortgage restructuring and rental assistance sufficiency 
plan.'' This plan would be developed at the initiative of the 
owner, in cooperation with the qualified mortgagee currently 
servicing the loan, and with the PAE before contract 
expiration.
    Under these plans, owners who elect to continue Section 8 
rental assistance would be required to determine the most cost-
effective and efficient manner to reduce project-based 
assistance rents, determine the project repair and capital 
needs, and ensure that competent management is provided to the 
project. Each plan would also: require the owner to take such 
actions as necessary to rehabilitate, maintain adequate 
reserves, and maintain the project in decent and safe 
condition; require the owner to maintain affordability and use 
restrictions for the remaining term of the existing mortgage 
and, if applicable, the remaining term of the second mortgage; 
and meet subsidy layering requirements established by the 
Secretary. The PAE would establish appropriate affordability 
and use restrictions that are consistent with the post-
restructuring rent levels, but in a manner that does not impact 
the physical and financial viability of the project. In other 
words, the Committee does not expect PAEs to set affordability 
and use restrictionsthat would compromise financial stability 
so that debt service and operating expense payments could not be met.

Resident and community participation

    One of the most important elements of the Committee bill is 
the opportunity and ability of residents, local governments, 
and community groups to participate in the mortgage 
restructuring process. The Committee believes that those who 
are most affected by renewal and restructuring decisions--the 
residents, local governments, and communities--must be given 
the opportunity to provide meaningful input. Resident and 
community participation, however, should not be used to unduly 
delay the renewal and restructuring process.
    Residents, local governments, and community entities would 
be provided an opportunity to participate meaningfully in the 
discussion of major issues such as physical inspections, a 
project's eligibility for restructuring or renewal, and the 
Portfolio Restructuring Agreement. Under the renewal and 
restructuring procedures, these affected parties would be 
given: the rights to timely and adequate notice of proposed 
decisions, timely access to all relevant information, an 
adequate period of time to analyze and comment on all relevant 
information, and if requested by any of the parties, a meeting 
with the PAE and other affected parties.
    The Committee bill also facilitates the participation of 
residents and community groups by authorizing an annual fund of 
$10 million for capacity building and technical assistance 
purposes. These funds are intended to be used by resident 
groups and nonprofit organizations to assist residents and 
community groups in understanding the renewal and restructuring 
process and to facilitate their participation in key decisions 
that affect their lives. Further, this fund could be used to 
assist residents and nonprofits in developing plans to acquire 
projects where owners have expressed an interest to sell.

Rent setting

    One of the most important elements of restructuring is 
establishing the appropriate rent levels at the time of 
restructuring. In addition, the Committee was concerned about 
the administrative burden in rent setting. The rent level 
affects financing and the project's future viability due to the 
uncertainty facing future congressional appropriations for 
contract renewals. The Committee considered a variety of rent 
setting approaches such as using (1) a formulaic approach that 
would set the rents based on some percentage of HUD's fair 
market rent (FMR) system, (2) market rents based on comparable 
properties in the same locality, and (3) rents based on 
operating costs (budget-based).
    The Committee bill reflects the belief that rents should be 
set at a reasonable level near or at market levels but through 
a process that will not require a significant amount of 
resources or time. The bill would set rents at comparable 
market rent levels where comparable rents are available and 
easily determined. The Committee believed that setting rents at 
comparable market rent levels was appropriate so that the 
Federal Government was not oversubsidizing properties and so 
that rent levels were not more than what the property could 
command on the market.
    In addition, the Committee was concerned that HUD's 
existing FMR system is problematic in some respects and in 
specific cases results in either an over-estimate or under-
estimate of prevailing market rents in metropolitan or regional 
areas. For example, in cities or states with rent regulated 
apartments, the controlled or stabilized rents have been 
included in the FMR calculations, despite their relative lack 
of relevance in determining the costs of operating or providing 
housing--resulting in an underestimate of prevailing market 
rents.
    The Committee, however, recognized that many assisted 
properties were built in areas where the private market would 
not build properties because of the neighborhood conditions and 
low-income clientele. Also, the Committee was concerned about 
the inherent subjectivity in determining market rents and the 
past problems with other programs such as the Low Income 
Housing Preservation and Resident Homeownership Act. In cases 
where no comparable properties exist, the Committee bill would 
establish rents at 90 percent of the FMR. The Committee used 90 
percent of FMR as a proxy for comparable market rents since the 
national median of comparable market rents is about 90 percent 
of FMR.
    The Committee also recognized that a small portion of the 
inventory could not meet its operating expenses at market rent 
levels even if the entire debt service was eliminated. In these 
cases, the Committee bill would allow for exception rents set 
at the minimal level necessary for proper operations and 
maintenance. Exception rents would be set using a budget-based 
method. Budget-based exception rents would be capped at 120 
percent of the FMR and only 20 percent of the inventory's units 
could receive these rents. The Committee established these 
limitations to minimize the administrative work for the PAEs or 
Secretary in determining these rents. A recent study by HUD 
indicated that about 20 percent of the inventory would need 
exception rents.
    The Committee, though, is sensitive to the reality that 
many of the propertieswhich may require budget-based exception 
rents may be concentrated in certain metropolitan or regional areas. To 
address this problem, the Secretary has the authority to waive the 20 
percent limitation in any jurisdiction which can demonstrate a special 
need. The Committee expects that the Secretary shall utilize this 
important discretionary tool to address the unique circumstances of 
various communities and regions throughout the nation. The Secretary 
should consider relevant local or regional conditions to determine 
whether good cause exists in granting such a waiver. Such factors 
should include, but should not be limited to: (1) whether the 
jurisdiction is classified as a ``high cost area'' under other federal 
statutes or programs; (2) prevailing costs of constructing or 
developing housing; (3) local regulatory barriers which may have 
contributed to increased development costs; (4) State or local rent 
control or rent stabilization laws; (5) the costs of providing 
necessary security or services; high energy costs; the relative age of 
housing in a jurisdiction; or (6) other factors which may have 
contributed to high development or operational costs of affordable 
housing in a given jurisdiction.
    The Committee believes that such waivers will be used on a 
limited basis. Nonetheless, the Committee firmly intends that 
the Secretary should grant due deference to the need to 
maintain affordable housing and preserve the federal investment 
in high cost areas. Therefore, the Committee instructs the 
Secretary to properly utilize this authority based on local 
factors. Such concerns should outweigh the federal desire for a 
``one-size-fits-all'' solution which may be unworkable in 
practice in certain jurisdictions.

Exempt multifamily housing projects

    In addition to the assisted and insured properties with 
rents below market rent levels, the Committee bill would exempt 
two other types of properties from debt restructuring. 
Properties with mortgages financed through obligations that 
prohibit a mortgage modification or rent reduction would be 
exempt from the Committee's restructuring program. Most of 
these properties receive Section 8 new construction or 
substantial rehabilitation assistance and are financed by State 
and local housing agencies. The Committee is sensitive to these 
contractual obligations and believes that the Federal 
Government should honor those agreements. The Committee, 
however, is concerned about the high subsidy costs and rent 
levels of these properties and therefore, allows the Secretary 
to reduce the rents using a budget-based method, without 
affecting the financing. The other class of exempt properties 
would be those where restructuring would not result in 
significant Section 8 savings to the Federal Government. In 
these cases, the Committee expects the PAEs to perform a cost-
benefit analysis of the estimated Section 8 savings compared to 
the transaction costs of conducting debt restructuring.
    The Committee bill would not automatically renew the 
contracts on exempt properties. All properties would be subject 
to restructuring and renewal prohibition criteria. The 
Secretary and its designees would have to screen all properties 
with expiring contracts before a renewal decision is made. This 
would encompass reviewing the ownership, management, and 
economic viability of the properties to ensure that the Federal 
Government is only assisting viable properties that have been 
managed and operated well.

Sec. 2105. Section 8 renewals an