The federal government has held up $5 million of the District's $23.5 million in housing block grant funds for the current fiscal year because of a continuing dispute over how the city's housing department did its bookkeeping in past years.

In addition, the U.S. Department of Housing and Urban Development is withholding $3.6 million to repay the interest on the city's outstanding urban renewal loans, which total $38 million. This procedure is routine, however, with the government withholding some of the block grant funds each year to repay interest on urban renewal funds borrowed from the federal government.

The $8.6 million total withheld "hurts us," said James Clay, deputy director of the city's housing department. Since the city has only $14.9 million to spend instead of $23.5 million, the department has cut back on a wide range of housing programs including two of its most popular ones.

HUD officials said they are withholding $5 million from this year's allocation because a similar amount spent in previous grants was subsequently disallowed as unjustified.

For instance, said city housing department controller Robert Pohlman, the city has acknowledged it incorrectly charged $1 million in administrative expenses to the community development account, but HUD officials are not satisfied with the city's documentation showing that the amount has been repaid to the account.

In another instance, Pohlman said, HUD contends the books do not completely support the city's claim that it deposited $1 million in rental payments earmarked for the community development account.

Until the city satisfies HUD about the $5 million, the housing department, for example, has cut by half the $4.5 million budgeted for a low-interest rehabilitation loan program to assist lower income families to fix up their homes. It has also reduced from $1.5 million to $1 million a home purchase assistance program that helps lower income tenants buy their apartments when they are threatened by sale to developers.

This is the second straight year that HUD has withheld a portion of the city's community development block grant funds. Last year, it paid the money out in quarterly amounts because of what it said was the city's poor accounting system and its inadequate plan for citizen participation.