VA Testimony of Keith Pedigo before Congress on February 24, 1998

United States Department of Veterans Affairs

STATEMENT OF
KEITH PEDIGO
DIRECTOR
LOAN GUARANTY SERVICE
VETERANS BENEFITS ADMINISTRATION
DEPARTMENT OF VETERANS AFFAIRS
BEFORE THE
SUBCOMMITTEE ON BENEFITS
COMMITTEE ON VETERANS' AFFAIRS
HOUSE OF REPRESENTATIVES

February 24, 1998

Mr. Chairman and Members of the Subcommittee:

It is a pleasure to appear before you this morning and present the views of the Department of Veterans Affairs on H.R. 3039, the "Veterans Transitional Housing Opportunities Act of 1997."

Homelessness among veterans is a tragic situation that concerns us all and is unacceptable in a nation of our rich resources. Solving this difficult problem, Mr. Chairman, requires collaboration among a variety of governmental and nongovernmental entities. Approximately 1/3 of homeless adults in this country are veterans. This means that on any given night approximately 200,000 veterans are sleeping on the streets or in emergency shelters. It is estimated that nearly twice that number of veterans become homeless during the course of a year.

VA is deeply concerned about the plight of homeless veterans, and is committed to taking all reasonable steps to assist these individuals. While we recognize the need to address the transitional housing needs of homeless veterans, we have two overriding concerns regarding the provisions of H.R. 3039. First, we believe additional analysis needs to be performed to determine whether a loan guaranty program is the best alternative for meeting the transitional housing needs of homeless veterans. Significant uncertainties exist in regard to how such a loan program would be structured and implemented, as well as the ability of the program to generate sufficient revenues from homeless veterans participating in the program to fund the full range of support services participants need. Secondly, we are concerned about the use of insurance trust fund assets generated from premiums paid by veterans, to finance transitional housing loans.

As we testified before this Subcommittee in Buffalo, New York, on December 18, 1997, VA has over 100 specialized programs for assisting eligible homeless veterans. In response to the needs of homeless veterans, especially those with mental illnesses and substance abuse disorders, VA developed clinical programs and services to meet their needs. VA is one of only a few Federal agencies that provide direct services to the homeless population.

For each of the past four years, the "CHALENG" assessment mandated by 38 U.S.C. § 1774 has identified transitional housing for homeless veterans as one of their greatest unmet needs.

We therefore regret, Mr. Chairman, that we cannot support H.R. 3039. H.R. 3039 would authorize VA to guarantee loans for the construction or rehabilitation of multifamily transitional housing projects for homeless veterans. Loans would be limited to 90 percent of the "total cost of the project." The bill does not specify the maximum loan amount, or the amount or percentage of the guaranty. Further, the bill does not state whether the "total cost" of the project is limited to the cost of the structure and land, or may also include other costs such as furnishings and supplies and organizational working capital. Under the bill, however, VA would be limited to making 15 such loans (not more than 5 of which may be made during the first 3 years after the bill’s enactment) with an aggregate principal balance of $100 million. The bill further requires VA to enter into contracts with nonprofit organizations to obtain advice in carrying out this program, including advice on the terms and conditions for the loans.

The projects financed by H.R. 3039 must provide, in addition to transitional housing, supportive services and counseling (including job counseling), must require that the veteran seek employment, and must maintain strict guidelines regarding sobriety. The project may charge a reasonable fee for occupancy, and provide space for retail services and job training. To the extent that room is available after meeting the needs of homeless veterans, the project may provide housing for veterans who are not homeless, or homeless individuals who are not veterans.

In addition, H.R. 3039 would authorize the Secretary of the Treasury to invest moneys in the National Service Life Insurance (NSLI) Fund in certain mortgage-backed securities. The difference between the earnings on moneys invested in those securities and the amount that the NSLI Fund would have earned had the moneys been invested in the same manner as is now authorized by law would be available to offset the subsidy cost of loans guaranteed under H.R. 3039.

Mr. Chairman, the knowledge and skills that would be required to operate the proposed transitional housing loan guaranty program are very different from those necessary to run the existing VA program of guaranteeing loans obtained by individual veterans for single-family homes. VA does not now have the necessary knowledge or expertise to operate the proposed loan guaranty program.

Therefore, Mr. Chairman, we are not in a position at this time to express an opinion on how the proposed loan program should be structured and whether these loans would be commercially sound. Until such time as we are able to make a more informed assessment, we cannot support pledging taxpayers’ funds to guarantee these loans, let alone placing the funds of our NSLI policyholders at risk, however worthy the objective.

In VA’s 10 years of experience in serving homeless veterans we have learned that very few veterans are homeless because of economic difficulties alone. The majority of homeless veterans suffer from mental illnesses and/or substance abuse disorders, and have significant medical problems as well. In addition to housing, homeless veterans need a wide range of support services that include case management, substance abuse treatment, mental health treatment, assistance with job development opportunities, etc. It seems unlikely that the rents collected from homeless veterans who would be living in these transitional housing projects would provide enough funding to pay for the "wrap-around" support services that are critical components of a successful transitional housing program.

It should be noted that while the majority of homeless veterans who are seen in VA programs are able to work, approximately 13 percent are 55 years old or older and 18 percent are on disability or are retired. The bill would require that veterans living in a transitional housing project "seek to obtain and keep employment." This requirement might eliminate these transitional housing projects as housing options for the most needy homeless veterans.

Additionally, there appears to be a technical issue with the way the bill was drafted that would result in no increased earnings from the mix of fund investments. Section 1920(b) of title 38, United States Code, currently authorizes the NSLI Fund to invest "in interest-bearing obligations of the United States or in obligations guaranteed as to principal and interest by the United States . . . ." We believe this language already authorizes investment of moneys in the NSLI Fund in mortgage-backed securities guaranteed by the full faith and credit of the United States, such as Ginnie Mae-backed securities and the so-called "Vinnie Mac" securities guaranteed by VA. Preliminary VA analysis reveals, however, that investing in Ginnie Mae securities during the past several years may have actually generated a lower rate of return to the NSLI Fund due to the early payoff of loans and the loss on early redemption of such securities (which we discuss below).

Since current law authorizes the NSLI Fund investments in some mortgage-backed securities, investing in similar securities would not necessarily produce any income for the transitional housing program under the provisions of H.R. 3039. Although certain private mortgage-backed securities might produce a greater yield than Government-guaranteed mortgage-backed securities, investing in those securities would subject the NSLI Fund to an added risk. The bill does not guarantee to the NSLI Fund that it will always obtain a return from private mortgage-backed securities that is at least equal to the yield it would enjoy from investing in conventional Treasury bonds. Without such a guarantee, we are concerned that any loss to the NSLI Fund resulting from such an investment could be viewed as an unconstitutional taking from the policyholders.

The NSLI Fund consists of the premiums paid by the policyholders and the earnings from investing those premiums. We believe the principal and earnings of the fund are for the benefit the policyholders. Moreover, although providing transitional housing to homeless veterans is clearly a worthwhile Government endeavor, any investment decision regarding the NSLI Fund must be made with the needs of the life insurance policyholders foremost in mind. Under current arrangement with the Treasury, VA is able to redeem Treasury bonds early without penalty. The Fund frequently takes advantage of this arrangement. Early redemption is not possible with mortgage-backed securities. The loss of the early redemption feature would reduce the liquidity of fund investments and limit the availability of fund assets to meet future obligations. We would, therefore, be opposed to committing NSLI Fund assets to offset the subsidy cost of loans for transitional housing.

Under this funding mechanism, preliminary analysis indicates that we would have to invest almost $200 million to generate the subsidy required to fund this program in the first year alone, jeopardizing our commitment to a balanced budget. Investing insurance trust fund assets outside of the Government requires the outlay of funds. These costs would be subject to the pay-as-you-go requirements of the Omnibus Budget Reconciliation Act of 1990 (OBRA).

With regard to General Operating Expenses (GOE), VA estimates that even a limited program as envisioned by H.R. 3039 would require a minimum of 4 full time equivalent employment (FTE) to administer the loan program, at an annual cost of approximately $200,000. Additional FTE plus travel expenses may also be required if VA provides on-site services to residents of the projects. VA may also incur costs for the annual independent audit of the projects. Finally, VA would also be required to incur GOE expenses at the start-up of the program for contracts with nonprofit organizations for the required consulting services.

Mr. Chairman, transitional housing programs for homeless veterans are currently being supported through VA’s Homeless Providers Grant and Per Diem Program. This program was originally authorized by Public Law 102-590 and was extended through FY 1999 by Public Law 105-114. Under this program, VA is authorized to provide grants to state, county, city or non-profit organizations to purchase, renovate or build supported housing programs for homeless veterans. To date we have offered 4 rounds of grants and have awarded $21 million to non-VA organizations to develop programs for homeless veterans. VA funds up to 65 percent of the cost of these projects. When these projects are complete, 1,700 new community based beds will be available to homeless veterans. Approximately 22 projects are now complete and over 600 new beds are operational. These 22 programs are receiving per diem payments of $16 per day to help defray the operating expenses associated with providing supported housing programs for homeless veterans.

In summary, VA has a strong tradition of providing services to homeless veterans to help them overcome their physical, psychological, and social needs so that they can resume a productive role in society. VA administers a number of programs to assist the estimated 200,000 veterans who are without housing. More needs to be done. However, VA cannot support taking the premiums paid by other veterans for their life insurance benefits and placing their funds at risk in order to finance this or any other program, however well intentioned. We look forward to working collaboratively with this Committee, and with other Federal agencies, state and local governments, and non-profit groups in efforts to assist homeless veterans and to explore options to address transitional housing needs for these veterans.

This concludes my statement, Mr. Chairman. I will be pleased to respond to any questions you or the members of this Committee may have.