It provides an underlying assurance that interim financing will be available from FPHA if necessary. Based upon these assurances, the local public agencies have been able to sell their short-term notes to private investors at very low interest rates; and (2) To make loans during any emergency conditions that might arise where the private-capital market dries up temporarily. But beyond that we feel no need for any additional authorization of capital funds. Subsection 7 would insert a definition of development cost which is needed to improve financing operations. While the date of initial completion will continue to limit the extent to which carrying charges can be included in development cost, this date should not exclude adjustments in capital cost to reflect either capital items which cease to be a part of a project or which add to the cost of a project through additions or capital improvements. Such a change will accord with normal business practices. BANKING AMENDMENT: SECTION 704 (b) Subsection (b) I would like to comment on briefly. The intent of that subsection is to amend the Banking Act to enable national banks and, to the extent permitted by State laws, State banks that are members of the Federal Reserve System, to invest in local housing authority bonds beyond the present legal limitations. They would be able to purchase in larger amounts, and to underwrite, local public agency bonds which are secured by a pledge of annual contributions and by an agreement under the proposed new section 22 of the United States Housing Act. Without this amendment, investment in such bonds by these banks would be subject to the same restrictions as are applicable to local housing authority bonds which are now issued without the additional security features provided by the proposed financing amendments. In short, they could not be underwritten by such banks and could be purchased by the banks for their own account only to the extent of 10 percent of unimpaired capital and surplus. I should like to observe that whether or not this is a good thing from the point of view of Federal fiscal policy is not for me to comment on; it is a matter upon which the executive branch should appropriately speak through the Treasury Department. We do not express any opinion on their behalf as we have not discussed this matter with them recently. From the point of view of the housing program, of course, it would be helpful because, to the extent that we open the market and make banks and others eligible to buy a bond which is secured substantially by Federal credit, to that extent we can get more competition in our money market and get lower interest rates and greater participation.` Now is there any question about that, sir? The CHAIRMAN. I don't think anybody is against that. I don't know. REHABILITATION OF EXISTING BUILDINGS: SECTION 705 Mr. KLUTZNICK. Section 705 concerns itself with the rehabilitation of existing housing. A well-rounded housing program should preserve the value of existing housing and should include preventive as well as remedial measures. Accordingly, this section provides assistance. for remodeling existing structures, and thus preventing the spread of blight to an entire neighborhood. There has been a lot of talk about how much could be done in taking over and rehabilitating existing housing and making it available for families of low income, rather than building new houses. As far as I am concerned, I believe firmly that to the extent that that is feasible it ought to be done. Of course, it ought never to be done where we perpetuate bad housing for a short period of time. It ought to be done, as this provision recognizes, only where the effect would be to arrest blight or to prevent the spread of blight in a neighborhood. Under the present act we are permitted to do that sort of a job, but the formula is not workable. The formula of the act does not provide an amount of subsidy which, when added to the anticipated income of the rehabilitated property, would be sufficient to take care of operations and replacements and to amortize the debt during the anticipated life of the rehabilitated property. This section 705 proposes a new formula under which an increased annual subsidy would be made available for rehabilitation projects. It would enable the Authority to assist local agencies in undertaking rehabilitation projects by (1) providing for shorter loan and annual contribution periods of 30 years-as compared with 45 years in the case of new construction--because of the shorter useful life of rehabilitated buildings; and (2) providing for maximum annual contributions, exceeding the maximum rate for new construction by 1 percent of the development cost. Chart 23 presents a typical example of rehabilitation under the proposed provisions compared with rehabilitation if attempted under the present act, and compared with typical new construction. (See chart 23 which follows Mr. Klutznick's statement.) Mr. KLUTZNICK. A new dwelling, at an estimated cost of $5,000 under the United States Housing Act, could presently achieve a rent and utility charge of $16 with the maximum subsidy. If you attempted to take an old house and you had to pay $2,500 for it and spent $1,500 to rehabilitate it, having a total capital cost of $4,000, under the present act the lowest attainable rental with the maximum subsidy would be $23.05. Under the rehabilitation provision of S. 1592, if you went through exactly the same procedure, you would be able to attain a rent of $19.35. Although the cost of acquiring and rehabilitating old buildings may be somewhat less than the cost of new dwellings, the useful life would be shorter than new construction and the amortization period correspondingly less. This means higher costs for debt service per dollar of capital cost. Moreover, the cost of operation will be somewhat higher on rehabilitated old structures than on new buildings. Yet the amount of annual contributions that could be paid on a rehabilitation project, based on the rates in the present act, would be smaller because of the smaller capital cost. As a result, the chart shows that under the present act the monthly rent for a rehabilitated unit would have to be approximately $7 more than for a new unit. It is therefore proposed in this bill that the annual contribution rate for rehabilitated projects be increased above the rate for new construction by 1 percent of development cost. The effect of this, in the typical example, would be to reduce monthly rents by almost $4 below the rents achievable on rehabilitation under the present act. This would bring rents within the reach of families of low income, although rents would still be higher than the new-house rent, for the simple reason that the life of this building is less and it has to be amortized over a shorter period of time. Although the contribution percentage rate on rehabilitation projects would be increased, it would not necessarily mean more dollars of subsidy per dwelling unit, because of the somewhat lower capital cost which may be possible on rehabilitation projects. To the extent that increases in annual contributions may be involved, they appear well justified because the rehabilitation would not only provide decent housing for low-income families, but would also arrest or prevent the blight of an entire neighborhood. Rehabilitation projects would be required to meet certain standards which are eminently sound, namely, that the buildings be structurally sound; that the project will serve the purpose of saving neighborhoods by arresting or preventing the spread of blight; and that, when completed the project will provide decent, safe, and sanitary low-rent housing. I am not too confident that the rehabilitation program will produce a large volume of housing. This is particularly true if it is administered faithfully in keeping with the basic concept that remodeling, repair, or reconstruction should be performed only where, by so doing, the spread of blight can be prevented or arrested in a given neighborhood. It would be tragic if such a tool were used to perpetuate the useful life of buildings which are structurally inadequate and located in neighborhoods which have gone downgrade so far that attempted reclamation would be contrary to the public interest. But I do believe that we must prove to ourselves definitely and conclusively that you can or you cannot make this program work, because if it is workable, we ought to build that many fewer new houses. This formula gives us that opportunity. It is experimental. It may be successful. In my opinion it is worth a try. Senator BUCK. Who holds title to the property? Individual owners? Mr. KLUTZNICK. Under this bill, this proposed provision, the property would be acquired by the local public agency, but if it can achieve the same rent by leasing, the bill would permit leasing. Frankly, I doubt whether it can. Senator BUCK. That would be for a period of years? Senator BUCK. Yes. Mr. KLUTZNICK. Are there any questions with respect to that? The CHAIRMAN. I don't think so. SPECIAL PROJECTS IN TERRITORIES: SECTION 706 Mr. KLUTZNICK. Section 706 would make the increase in subsidy provided for rehabilitation projects available for what we call land and utility projects. The only place where we have them presently is in Puerto Rico. The subsidy is provided in order to enable the Puerto Rico housing authorities to acquire a piece of land and merely put sanitary facilities in. The tenant or the person who is to live there moves his own house onto the land. Of course, the living standard in Puerto Rico is considerably below the continental standard. This has been accomplished heretofore at a capital cost of about $650 per family; because the capital cost is low and because of the low rentals, the formula with respect to annual contributions, if based on the regular ratio to capital cost, has not produced enough subsidy to make it generally workable. However, the higher contributions rate provided for by this amendment will still leave the cost of annual contributions, in terms of dollars per family rehoused, very small in comparison with new construction. While I would not recommend such a program generally, I have been in Puerto Rico and I doubt whether we shall be able to reclaim, in a completely adequate way, the conditions in which 75 to 80 percent of the population of that island live; and this program on land and utilities, which provides the sanitary facilities and at least a decent place for the house to rest, is certainly a desirable interim program for this generation in Puerto Rico. Based on discussions with some of their leaders, we would endorse this particular provision. But even in Puerto Rico, this type of program is regarded by the local public agencies as suitable only for the families of extremely low income, and only as a transition to an ultimately higher standard of housing. Any questions about that, sir? The CHAIRMAN. I was down there, too, a couple of years ago, and it was a pretty bad spot. There is a lot to be done there, isn't there? Mr. KLUTZNICK. Yes, sir. And I doubt if we can achieve much more than this for a good part of the population, to start with. The CHAIRMAN. Yes. Mr. KLUTZNICK. Now, section 707. The CHAIRMAN. I was there at my own expense, not the Govern ment expense. Mr. KLUTZNICK. Senator, when I travel at the Government expense I go partially at my own, too. [Laughter.] The $6 rate hardly takes care of the expenses in Puerto Rico, particularly. The CHAIRMAN. I know it. ANNUAL CONTRIBUTION AUTHORIZATION FOR ADDITIONAL PROGRAM: SECTION 707 Mr. KLUTZNICK. The annual contributions authorization for the additional program, which is section 707, is the meat of a good part of this discussion. We have talked about annual contributions, and with the committee's indulgence I would like to explain briefly how they really work, so that perhaps we can discuss the additional amounts with a great deal more certainty. Chart 24 shows the income and expense per dwelling unit per month. under the USHA low-rent program for local authority fiscal years ending in 1944. You will note at the top of the chart that there was an operating expense of $16.50, broken down into items shown in the box. Payments in lieu of taxes, made to communities in that year, were $1.48. Debt service (interest and amortization) was $12.69. The total expense of a dwelling unit per month was $30.67. During that same year the total income was only $23.48, from rents from the families residing in those houses. Rents were set at levels appropriate to the incomes of the families housed. The difference between the actual expense and actual income of the various projects was covered by Federal annual contributions. In order to achieve the balance during that year, we paid an annual contribution of $7.19 per unit, 80525-46-pt. 1-15 or just under $2 per month per person rehoused. This was 60.8 percent of the maximum that we were permitted to pay, which was $11.83. (See chart 24 which follows Mr. Klutznick's statement.) Mr. KLUTZNICK. Now are there any questions about that chart? (No response.) Mr. KLUIZNICK. Chart 25 shows the make-up and distribution of "economic rent," that is, the amount which would have to be charged tenants if no contributions were received either from Federal or local governments. The left-hand pie is the economic rent cost per dwelling unit. The economic rent of each dwelling unit is illustrated in the central circle as being $36.61. The green pie illustrates how that cost is made up: 45 percent of it is operating expense; $6.99 or 19 percent of it is full local taxes; 1 percent is utilities not included in the rent, 35 percent is debt service. (See chart 25 which follows Mr. Klutznick's statement.) Mr. KLUTZNICK. The right-hand circle shows how the economic rent is met: Sixty-four percent of the income needed to meet the economic rent is tenants' payments. Fifteen percent is the local contribution. Local contributions are required by statute and must equal at least 20 percent of the Federal contributions. In practice, these local contributions are met through the exemption of low-rent housing from local taxes. The amount of the contribution is the full local tax less the payments in lieu of taxes. Twenty percent is the FPHA contribution, which is the Federal cost-the whole Federal cost-in this program. Chart 26 illustrates what the war period has done to Federal annual contributions due to rising family incomes and rent incomes. In 1941 the Federal Government paid 88.2 percent of the maximum annual contributions that it was permitted to pay. In 1942 it had to pay only 79.6 percent, in 1943 only 69.1 percent, and in 1944 only 60.8 percent of the maximum. I am not particularly proud of that. It merely reflects the fact that the local authorities have higher-income families in their housing today whose rents are higher as a result, and who can't move out because of war stringency. But this does prove that we do not spend Federal money to take care of the family that can take care of itself. This is the beauty of the annual-contribution system. In proportion as we are successful in reaching lower-income families, the annual contributions will again increase in order to achieve the rents they can afford. (See chart 26 which follow's Mr. Klutznick's statement.) The CHAIRMAN. Their rents-their income is higher? Mr. KLUTZNICK. As their income gets higher, their rent increases to the point where they pay the OPA maximum. The CHAIRMAN. Yes. Mr. KLUTZNICK. Chart 27 merely shows that we are fresh out of money. (See chart 27 which follows Mr. Klutznick's statement.) Mr. KLUTZNICK. Under the Wagner-Steagall Act we had authority to enter into maximum annual contribution contracts of $28,000,000 a year. We have committed ourselves for locally owned projects just short of $25,000,000. There must be kept available for presently federally owned projects that are to revert to local ownership-such as the Ohio projects and 671 projects-$2,618,000. Actually, if we |