Mr. SLUSSER. I know nothing of that, sir. Mr. WOLCOTT. They have to agree to pay taxes, and so on, don't they? What do they have to agree to? Mr. SLUSSER. In the way of taxes? Mr. WOLCOTT. Yes. What is their contribution? Mr. SLUSSER. They pay 10 percent of the shelter rent as payments in lieu of taxes. Mr. WOLCOTT. What is shelter rent? Mr. SLUSSER. That is the rent receipts from the project, excluding the cost of utilities. Ten percent of that is returned to the local community as payments in lieu of taxes on the property. Mr. WOLCOTT. Then they just enter into an agreement to pay 10 percent of the shelter rent? Mr. SLUSSER. Yes. Mr. WOLCOTT. How do you arrive at that figure? Mr. SLUSSER. It is a figure established by Congress, sir. Mr. WOLCOTT. How do you know what the shelter rent will be? Mr. WOLCOTT. How do you know how many units they will get? Mr. WOLCOTT. You don't know until you have made a survey, do you? Mr. SLUSSER. No, sir; we don't know how many units we will approve until we have made a survey. Mr. WOLCOTT. Then you don't know what the shelter rent will be. Do you set that arbitrarily? Mr. SLUSSER. The cooperation agreement agrees to 10 percent of shelter rent to be returned as payments in lieu of taxes to the local community. That is cooperation between the local community and the housing authority, regardless of the number of units they would build and what the income from the property would be. It would be 10 percent of shelter rent returned to the community as payment in lieu of taxes. Mr. WOLCOTT. At which stage of the proceeding do you enter into an agreement with the local housing authorities for these annual contributions? Mr. SLUSSER. For the annual contribution? Mr. WOLCOTT. At what stage of the proceeding? Mr. SLUSSER. After preliminary planning is completed, and the cost of the project is known. Mr. WOLCOTT. After the project is constructed? Mr. SLUSSER. Final development cost is determined, and that establishes the subsidy payment. Mr. WOLCOTT. Does the Federal Government put up the money for the development costs? Mr. SLUSSER. Yes, sir. Mr. WOLCOTT. All of it? Mr. SLUSSER. By loan. Mr. WOLCOTT. How is this loan repaid? Mr. SLUSSER. By selling bonds on the open market. Mr. WOLCOTT. Who buys the bonds? Mr. SLUSSER. They are sold in the private market. Mr. WOLCOTT. Is any evaluation of the amount of the loan taken into consideration in determining the annual contributions and that part which the local housing authorities have put in? It seems in the 1937 act the local housing authorities had to put up 10 percent of the development costs. Mr. SLUSSER. I am not familiar with that, Congressman. Mr. WOLCOTT. In the 1937 act, when we extended it in 1939, we were told here that the local housing authorities would issue bonds for this 10 percent. Then the Public Housing Authority would increase the amount of the annual contributions by enough to retire these bonds which presumably were sold on the open market by the local housing authority. The local housing authority didn't have one red cent after they got through. We were charged with intellectual dishonesty because we did that. From 1939 until 1949, because of those practices, we didn't hear anything about public housing. That was the reason for it. What changes exist between the procedures in the 1937 and 1939 act with respect to the local public housing participations with the present? Mr. SLUSSER. I am sorry. I am not familiar with that legislative history. Perhaps someone else here can give you that answer. Mr. WOLCOTT. It has come to my attention it will be covered later. Some of these small communities have been told all they were signing for was to get money for preliminary investigations as to the housing situation in their area, and they discovered that after they signed the contract they had signed a 40-year contract waiving taxes and giving a full go ahead for putting up a public-housing project. Is that possible? Mr. SLUSSER. Apparently it was. Mr. COLE. I wonder if there is not some error in that. It seems to me it would be pretty difficult Mr. WOLCOTT. I hope there is. Mr. COLE. It seems to me it would be pretty difficult for that to occur. We would be glad to look into it, because I know Mr. Slusser would not permit such a thing to occur if he knew anything about it. He is not that kind of an operator. You are talking about present projects, are you not, Mr. Wolcott? You are not talking about 1937 or 1939 but presently? Mr. WOLCOTT. Yes. Mr. MULTER. I don't think Mr. Slusser means he knows of any instances where that happened. Mr. SLUSSER. I thought he was referring Mr. MULTER. That is why he said it was possible. Mr. SLUSSER. I thought he was referring to 1937 and 1939. Mr. WOLCOTT. No. When you sign these contracts they thought it was for preliminary investigation, but they found themselves saddled with a 40-year contract, where they have to pay taxes and they are given a full go-ahead for the project. Mr. SLUSSER. As I stated previously, we have a reaffirmation of the local community, by the governmental body, authorizing the Housing Authority to go ahead. In several instances I know where the local governing body turned down public housing and we did not go ahead. I know of no instance where we went ahead without the full authority of the local governing body and the Housing Authority. Mr. WOLCOTT. Any change of procedure with respect to the handling and signing of these annual subsidy contracts within the last year? Mr. SLUSSER. Have we changed the procedure of them? Mr. WOLCOTT. Yes. Mr. SLUSSER. Yes, we have made some changes in the annual contribution contract. Mr. WOLCOTT. What is the change in the procedure you made? Mr. SLUSSER. I cannot recall all of the conditions; it was somewhat of a tightening-up process in the contract to overcome some of the difficulties that historically had taken place. Mr. WOLCOTT. Under these 40-year contracts Mr. SLUSSER. May I go back to the other question? There was no change in the procedure, but there was change in the annual contribution contract. I thought that was your question. We did make some changes in the annual contribution provisions. Mr. WOLCOTT. How do you arrive at the community contribution; what are the contributions for? Mr. SLUSSER. The contribution is determined by the cost of the project, the rent we collect and the net residual receipts as a payment by the local authority. The subsidy makes up the difference. Mr. WOLCOTT. In relation to the ultimate cost of the project, what is the average, if there is an average, increment to the cost occasioned by the annual contributions? I know I do not make myself very clear, but this whole thing is pretty muddy in my opinion. You make annual contributions over a period of 40 years. Let us take an example. The construction cost of a project, we will say, is $500,000. After the 40-year period has elapsed, what does that amount to; in addition to the $500,000, what would it be? Mr. SLUSSER. Based on about 4 percent on the capital charge, whatever that would amount to. Mr. WOLCOTT. What is the 4 percent based on? Mr. SLUSSER. The annual debt service on the capital cost over the period of time. Mr. WOLCOTT. It would be 4 percent of what? Mr. SLUSSER. Four percent of the total development cost. Mr. WOLCOTT. What would 4 percent on $500,000 be? Mr. SLUSSER. It would be 4 percent debt service over a period of 40 years, on the total development cost. Mr. WOLCOTT. That would be $20,000 a year for 40 years? Mr. SLUSSER. Yes; I think that would be right. Mr. WOLCOTT. $800,000 for 40 years, on an initial expenditure of $500,000; is that about right? Mr. SLUSSER. Yes, that would be about right. Mr. WOLCOTT. Then it would be profitable for the Federal Government to build the properties outright in the first instance, would it not? Mr. SLUSSER. No, I do not think so. The residual receipts reduce the amount considerably. Mr. WOLCOTT. What are the residual receipts? Mr. SLUSSER. This coming year, we estimate $135 million as total rental income and net residual receipts at $23 million. Mr. WOLCOTT. What do they consist of? Mr. SLUSSER. Net rentals from properties. Mr. SLUSSER. Yes, we get the net rents as a credit against annual contributions. Mr. WOLCOTT. And you are going to get the residual receipts, are you not, just the same, over this 40-year period? Mr. SLUSSER. Of course it costs something to operate and maintain the property over that time. Mr. WOLCOTT. Do you subsidize the maintenance of the properties, and so forth? Mr. SLUSSER. No, sir. Mr. WOLCOTT. Is that contained in the annual contribution? Mr. SLUSSER. Not in the view I take of it. We do not subsidize the operation of the plant. They get that from the rental income of the property. We do subsidize the debt service of the property. Mr. WOLCOTT. For tax purposes, you write off about $1 million more than the $800,000 for 40 years than the initial cost. You take into consideration all of your depreciation at the expiration of 40 years, and have a good deal of your residual cost, or whatever you might call it, for maintenance of the project. Mr. SLUSSER. Mr. Chairman, we would like to furnish for the record the information on the request of Mr. Wolcott on the cost of projects, We would like to prepare a statement for the record on that. Mr. BROWN. All right. (The information is as follows:) FINANCING THE CAPITAL COST OF LOW-RENT HOUSING Local authorities finance the capital cost of their low-rent projects by short-term borrowing during construction and by the sale of long-term bonds upon completion. The United States Housing Act authorizes the Public Housing Administration to make such loans to the local authorities, but limits the amount of the loans to 90 percent of the total project cost. The remaining 10 percent must be obtained by the local authorities from other sources. As a matter of fact, however, the loans by PHA to local authorities are only a very small fraction of the authorized amount. On December 31, 1955, local authorities had loans outstanding from private investors amounting to $2,774 million, while their borrowings from PHA amounted to only $90 million. only 3 percent of the outstanding financing was by loans from PHA, ADVANTAGES OF ANNUAL CONTRIBUTIONS INSTEAD OF CAPITAL GRANTS Thus, It was estimated in the hearings that if a project costing $500,000 is financed by bonds which mature over a 40-year period, the total disbursements for repayment of principal and interest over the 40-year period would amount to $800,000. It is, of course, natural that the total expenditure for financing a project over a period of years exceeds the initial capital cost. This is equally true in the case of a privately owned dwelling financed by a mortgage or any other property amortized over a period of time. It does not follow from this, however, that it would be cheaper for the Federal Government to finance the cost of public housing through capital grants. The appropriations for such capital grants would have to be financed by Treasury borrowings, and such borrowings would bear interest until repaid. Moreover, the contributions actually paid year by year are substantially less than the annual debt service required for interest and amortization. This is because the contributions are reduced each year by the residual receipts of the project; that is, by its rental earnings less the cost of management, repairs, utilities, payments in lieu of taxes, etc. These residual receipts over the period 1941 through 1955 aggregated 53.8 percent of the maximum contributions. In other words, the rents of the projects have not only paid all operating costs, but also 46.2 percent of the interest and amortization of the capital costs. If a capital-grant system were used, these residual receipts which accrue over 40 years would not, of course, be available in advance, and appropriations would have to be made covering the full cost of the projects and involving substantial increases in the national debt. By contrast, under the annual-contributions system the necessary subsidies are appropriated year by year so that the cost of providing housing for low-income families is spread over the period during which the projects are in use. Mr. WOLCOTT. Now has the President changed his mind about public housing since 1954? I have not read anywhere that the President has changed his mind at all. Mr. COLE. No, he has not, Mr. Wolcott. Mr. WOLCOTT. Then what is the matter with the criteria that we wrote into the 1954 act? Mr. COLE. I do not think that was what the administration recommended. Mr. WOLCOTT. Are you distinguishing between the President and the administration? Mr. COLE. No. Mr. WOLCOTT. Well I have to; because I am not going to take this thing much longer. I have been taking it for the last 2 or 3 years. I was at a conference at the White House and there was not a day but what they told me what they wanted and what they wanted they got. I got back to the office and wrote it into the law and it became the 1954 act. And we heard nothing about it for 11 months, and I found out you only contracted for about 100 units in 11 months, out of that 35,000 units and then within 30 days of the last of the yearin 11 months you only contracted for 100 units, and in the twelfth month you contracted for 19,000 units. I have never been able to understand that, not at all, and have not yet had an explanation of it. I have not seen anywhere where the President has changed his mind with respect to the necessity for public housing. We were told at that time his purpose was to make provision for the replacement of people who are to be displaced by urban rehabilitation and slum. clearance. Mr. COLE. That is still the basic purpose of the administration's program; it is still the program. Mr. WOLCOTT. I do not understand it that way. As I have told you, I have been trying to find out for 3 years who the "they" are in the Government, who are claiming different from what the President told us himself. Mr. COLE. I am the Administrator of the Agency, and I must take and do take responsibility for this; and if I am contrary to the President's request, then I am responsible for it. But I do not think I am. Mr. WOLCOTT. I will say in my own defense that I am going to take the attitude that the 1954 act expressed the wishes of the President until the President tells me differently himself, or it comes directly from the President that he has changed his mind. And I do not want to hear any more about the "they" in the White House who have changed their mind, until the President tells me he has changed his mind. Mr. MULTER. Are we going to change "protocol" in this committee on quoting the President? I have always understood that the "administration" means the "President." Mr. RAINS. I do not want to get into that, but it is a fact, Mr. Cole, that in the President's state of the Union message he set forth in plain |