would rise to $250 billion, and I felt as though we had to try every way in our power to stop that. We were able to stop it. We stopped it in 1982 at $244 billion and since that time it's been dropping and we were able to stop it because we terminated section 8 new construction which I considered wasteful and not economical.

We also made better use of both new and existing programs. We deobligated a number of nonviable projects. We made improvements in management.

Through these and other things we were able to stop that rising debt and as you see, it has dropped dramatically since then. Today it's at about $235 billion and by 1986 it will go under $200 billion. At the same time-and I emphasize this-at the same time we have increased the number of families who receive assisted housing. When I got here there were about 3.2 million families receiving assisted housing. It's now at about 3.8 million, and it will continue to go up in the future so that by 1986 it will exceed 4 million. Thus, we have been increasing assisted housing while we have been decreasing the assisted housing debt, the very thing that the President asked me to do, to reduce the size and cost of Government but at the same time care for the most needy. So we have been increasing our aid to the most needy while reducing our debt and taking it off the backs of future taxpayers.

Now in 1981, the total assisted housing debt was being forecast at $250 billion by 1982, as I said before; $250 billion is a lot of money, a quarter of a trillion dollars. The debt had increased 30 percent between 1977 and 1980. Clearly, we had to redirect the Nation's housing policy to save us from an assisted housing debt of catastrophic proportions, while continuing to help the most needy. As a first step, we switched emphasis from new construction programs to those which utilize existing housing stock. As part of that effort, we developed the rental rehabilitation initiative and the Voucher Program which provides housing assistance to eligible families at about one-third the cost of new construction.

With these actions and others, we've begun to reduce the assisted housing debt, as the chart indicates. At the same time, we are assisting more families than ever. In fiscal 1981, HUD was assisting 3.2 million families with housing; in 1986 that number will have risen to 4.2 million, an increase of approximately 1 million families since I arrived at HUD.

I'm proud of that increase. And, I'm proud of the reduction we've achieved-and continue to achieve-in the assisted housing debt. I intend to maintain and improve upon our progress on both these fronts. But present conditions demand that we do even more. Today, as President Reagan said in his second inaugural address: "We have come to a turning point, a moment for hard decisions." In making those decisions, we benefit by the groundwork laid over the last 4 years.

By 1981, the Section 8 New Construction Program had produced a great number of housing units. But, it was exorbitantly expensive and it took years before actually housing anyone.

I recommended that we terminate the program and the Congress agreed.

Our proposals of the early 1980's sought new means to address the low-income housing needs of this country both thoughtfully and

sensibly. With vouchers, we have an assisted housing program that utilizes existing housing stock instead of focusing on new construction. We'll subsidize a family instead of a builder. We'll offer freedom of choice and a shopper's incentive for a family, instead of forcing it to live in a Federal project. And we'll shelter that family today, not three to four years from now-the average time it took to house a family under section 8 new construction.

The American people have a commitment to provide decent, safe, and affordable housing for those who are needy. With these changes and new programs, we renew taxpayer confidence so we can carry that commitment into the future.

Mr. Chairman, we can help attack Federal deficits through a temporary pause in funding new assisted housing units. We propose a 2-year moratorium on incremental units, knowing that we have a substantial amount in our pipeline which will add 207,000 new families to those we now assist. We also know that, when full funding resumes in fiscal 1988, our programs will be adding new families-who will be housed more quickly-because of the vouch

er.

Those programs will include:

A Permanent Voucher Program, for which authorization in fiscal 1986 is sought;

Section 202 housing for the elderly and handicapped;

Rental rehabilitation, a Pay-As-You-Go Program which allows local government decisionmaking for design and location of its projects.

And finally, Indian housing.

We propose terminating the Rental Housing Development Grant Program, or HoDAG. This program was created by the Congress and accepted by the administration with the understanding that it would be a one-time, 2-year program.

We have found that the HoDAG Program is an expensive way to subsidize lower income housing. We estimate, overall, 60 percent of the HODAG funds are subsidizing market rate units and 40 percent are subsidizing lower income units. The net effect is a cost of $76,000 to provide a lower income HoDAG unit. In addition, threequarters of the HoDAG projects include tax-exempt financing, increasing the Federal cost even more.

We also have found that the program is not well targeted to need. Over 40 percent of the projects funded thus far are located in cities with a rental vacancy rate above the national median of 6.34 percent, accounting for 43 percent of the HODAG funds. Rental vacancy rates in these cities went as high as 12 percent.

We've made some tough decisions for fiscal 1986 in our public housing programs. But here again, our proposals rest on a foundation of long-term planning of management reforms and use of a substantial funding pipeline.

We propose $1 billion in operating subsidies for fiscal 1986, which represents 100 percent of the performance base funding formula.

Under the Modernization Program, approximately $3 billion of the $7.4 billion of funds approved through 1984 for capital improvements remains available for present and future use by public housing authorities. In addition, we have on hand $847 million of funds

approved for fiscal year 1985-funds which can and will be committed to these PHA's.

We propose a limited moratorium on modernization funds for fiscal 1986. I say "limited" because we still will provide $175 million for emergency needs.

However, we will use this moratorium on comprehensive modernization to allow PHA's to utilize backed-up pipeline funds and develop long-range planning for future funding.

We also want to use the moratorium period for transition to a more effective modernization program. I soon will submit a proposal for a comprehensive grant system which would become effective in fiscal 1987. The objectives of the proposal will be to deregulate the public housing program in favor of a greater degree of local choice and to provide a greater degree of predictability of funding for capital improvements through use of formula funding. I look forward to working with the authorization committees in both Houses toward development of such a system.

In addition, our 1986 budget and legislative package proposes public housing financing reform to reduce budget outlays in future years. The Tax Reform Act of 1984 has prevented us from rolling over in the private market approximately $14 billion in guaranteed, tax-exempt short-term notes. These notes had been issued to finance public housing development and modernization. We are buying up the entire inventory of these notes, increasing outlays and budget authority sharply in 1985.

We propose to turn this problem into an opportunity. We plan to finish buying up the inventory of short-term loans and seek legislation to cancel both the Treasury debt and the debt of the public housing authorities. With these cancellations, by 1990 we would recapture and rescind approximately $36 billion in long-term commitments to pay debt service. This would enable us to reform the outdated and expensive financing mechanism for public housing construction and modernization. These programs would then be financed on an up-front capital cost basis, saving billions of dollars in future years.

With steps like these, we hope to avoid mortgaging our children's future.

The people who live in public housing deserve a better future, as well. The quality of life in public housing is important to us, and we're being innovative on behalf of those who live there. We're also committed to improving and preserving our existing housing inventory, which can contribute to a better quality of life for residents of public housing.

Now I'll discuss our community development proposals. Community development block grants must play a part in our deficit reduction effort for 1986. We propose a CDBG reduction of 10 percent, to a funding level of $3.125 billion. This is solely a belt-tightening measure for fiscal 1986. Beginning in fiscal 1987, we will increase funding by 6 percent per year through 1990.

We also propose changing the split of CDBG funds between the entitlement and nonentitlement categories from a 70- and 30-percent division to a 60- and 40-percent split. This allocation change will allow more of the community development activities currently carried out by the Farmers Home Administration to be undertaken

by small communities through the State CDBG Program. This is consistent with the administration's proposal to end Farmers Home support of public facility construction projects.

To underscore our commitment to deficit reduction, we propose terminating one major development program-Urban Development Action Grants, or UDAG. As you know, I've been one of the program's strongest supporters. I fought for its continuation.

UDAG has been a good program. Over the last 4 years, UDAG made possible redevelopment projects which could not have been achieved without it. However, we've come to the point where we must reduce our budget to bring down current and outyear deficits. In order to do this, the administration has taken the position it will eliminate Federal financing and grant programs for local economic development programs such as EDA, the Appalachian Regional Commission and UDAG. By terminating these programs, savings to the Treasury will be nearly $2 billion in just 3 years.

It's worth noting that over 80 percent of the communities which have won UDAG awards will receive some form of debt service repayment in 1986. Looked at another way, this year-fiscal 1985debt service repayment to communities will amount to approximately $170 million-roughly 25 percent of current annual UDAG appropriations. This repayment increases yearly, in 1988 reaching about 50 percent of current annual UDAG appropriations. These repayments allow communities to carry on new economic development activities.

The Urban Homesteading Program continues to serve as an effective, low-cost method for improving existing housing stock and promoting neighborhood revitalization. We propose a $12 million appropriation for this program in 1986 to support the conveyance and homesteading of 827 units.

Our budget proposes expanded authority and outlays in one key area-fair housing. We are determined to assure fair housing for all Americans. Our one new undertaking next year will be a Fair Housing Initiatives Program to be funded at $10 million in fiscal 1986. This will be part of an expanded national effort to focus on the problem of discrimination in housing by utilizing both public and private resources and energies at the grassroots level.

In addition, our existing Fair Housing Assistance Program will be continued at a funding level of $5 million. This brings the total budget authority for fair housing programs to $15 million, up from $6.7 million in 1985. Outlays will also rise: From $7.8 million to $11 million.

The President and I have long recognized that we need to strengthen the enforcement provisions of our fair housing law. The issue of fair housing transcends partisan concerns. Stronger fair housing enforcement will be a major legislative effort for us this year.

Another priority is enactment of Federal enterprise zone legislation. Enterprise zones are targeted to areas of the country that are severely distressed. Surrounded by extreme poverty and unemployment, these areas are not benefiting from the economic recoverynor are they likely to in the foreseeable future.

Enterprise zones can help alleviate the severe problems in these areas. With Federal tax and regulatory relief added to State and

local incentives, private sector capital will be attracted to our distressed communities. Enterprise zones can help us to replace poverty and despair with jobs and hope.

That, Mr. Chairman, is where we are headed. I'm convinced that sacrifice is required if we are to meet the major economic challenges before us.

We can bring the Federal budget under control. And, doing so will help us ensure that the fruits of our prosperity are shared as widely as possible, especially with those with the greatest needs.

Thank you for inviting me to present our budget and legislative proposals to this committee. Now I will be glad to respond to any questions you and the members of the subcommittee may have. Chairman GONZALEZ. Thank you, Mr. Secretary.

[Secretary Pierce's prepared statement, on behalf of the Department of Housing and Urban Development, and a letter from Secretary Pierce to Speaker of the House Thomas P. O'Neill, Jr., dated March 11, 1985, with the text of H.R. 1870 and a section-by-section explanation and justification of the legislation, follow:]