Funding Adjustments Under a Housing Voucher Block Grant
would
BE UNLIKELY To keep pace with program Needs
by Will Fischer and
Barbara Sard
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The Administration’s fiscal year 2004 budget states that the Administration will submit legislation to convert the housing voucher program to a block grant to the states, with the block grant taking effect in fiscal year 2005. This change poses a number of risks to the voucher program and the low-income families it serves. One of the most important of these is the possibility that funding for the block grant would not keep pace with the needs of the program over time. If annual adjustments to block-grant funding did not fully accommodate changes in voucher costs, states would be required to impose cuts or contribute their own resources to maintain voucher assistance at its current level.
The Administration’s budget does not provide details regarding the key issue here — how voucher block-grant funding would be adjusted from year to year. For two reasons, however, there is a strong possibility that funding would erode over time.
-
First, two primary indices that could be used to adjust
block-grant funding — the Consumer Price Index and HUD’s Section 8 contract
rent annual adjustment factors — have risen far more slowly in recent years
than the fair market rents that determine how much rent a voucher can cover.
(Fair market rents are a rough, but not exact, proxy for voucher costs.) If
the voucher program had been converted to a block grant five years ago,
states would have been forced to reduce the level of voucher assistance they
provide by an average of 13 percent if funding had been adjusted
annually using the Consumer Price Index, and by an average of 8 percent
if funding had been adjusted based on the contract rent annual
adjustment factors.
- Second, the block grant would be a discretionary program with funding set in the annual appropriations process. As a result, there would be no assurance that even the potentially inadequate funding increases called for under whatever inflation adjustment index is written into the block-grant legislation would actually be appropriated. Faced with tight budget allocations, the Appropriations Committees could freeze block-grant funding in some years or increase it by less than the amount called for under the adjustment factor contained in the legislation that established the block grant. Such actions in appropriations bills are common; the Appropriations Committees virtually never receive sufficient overall funding to fund most discretionary programs at the full levels authorized for those programs. Moreover, the fact that states, rather than federal policymakers, would have to make the painful decisions on where to cut their voucher programs if funding was insufficient would make it more likely that the voucher block grant would be among the programs funded below their full authorized levels. In the past, a number of other federal block grants have experienced multi-year funding freezes or received funding increases insufficient to keep pace with inflation.
It may be noted that even funding for the politically popular HOME housing block grant has failed to keep pace with inflation since HOME was established. The amount appropriated for core HOME grants to states and localities for fiscal year 2003 is five percent below the amount provided when the HOME program was created, after adjusting for inflation using the Consumer Price Index. The erosion is larger if the adjustment for inflation is based on a housing-related index. Moreover, in each year the level of funding appropriated for HOME has been below the full authorized funding level for the program.
Inadequate Adjustment of Block Grant
Funding Would Force States to Impose Cuts or
The Administration’s budget does not indicate how funding for the proposed housing voucher block grant would be adjusted from year to year. A HUD official stated in a briefing to Congressional staff on February 3 that the authorized level of block-grant funding would be adjusted based on inflation, but provided no further details. The Administration has not provided a timetable for the release of additional information regarding funding adjustments or other aspects of the block grant.
Currently, a housing agency receives funding based on the actual cost of the vouchers it administers.[1] Those costs depend on a number of local factors, including the local “payment standard” (which sets a limit on the amount of rent a voucher can cover), the actual rent and utility costs of apartments occupied by local voucher holders, and the incomes of voucher holders. Payment standards are derived from “fair market rents” for each local area, which are determined by HUD (in most cases, fair market rents are HUD’s estimate of the amount needed to cover the rental charges for the least-expensive 40 percent of housing units in the local market), but can be raised or lowered to some degree based on decisions by local housing agencies. Rents and incomes can vary widely depending on local employment and housing-market conditions. Unless the block grant somehow continued the current cost-based funding method — and it is extremely difficult to conceive how that could be done under a block grant — the amount of funding that states would receive under the block grant would not take all of these factors into account. Funding consequently would grow at a different rate than voucher costs.
If funding growth were slower than the growth in voucher costs, as would be likely, states would not receive sufficient federal funding to maintain the current level of assistance. States could respond to this situation in three ways:
- They could reduce the number of vouchers, either through attrition or by terminating assistance to some families. The Administration’s proposal, however, indicates that under the block grant, states would not be allowed to reduce the number of families served.
- States could reduce the amount of rental assistance they provide per low-income family. This could be accomplished by shifting vouchers from poorer families to those at somewhat higher income levels. (A voucher currently covers the difference between the rent for a modestly priced apartment and 30 percent of the tenant’s income, so lower-income families receive larger average subsidies and thus are more expensive to serve.) Alternatively, states could shift rental burdens to voucher recipients by requiring them to pay more than 30 percent of income for rent or reducing the total amount of rent that a voucher could cover (and thereby making units in some areas with more job opportunities or lower crime rates less accessible to voucher families).
- States could contribute funds from state revenues to enable them to maintain the same level of assistance.
How Would Voucher Funding Be Adjusted From Year to Year?
To assess the funding implications of the voucher block-grant proposal, we examined two alternative methods for adjusting the authorized level of block-grant funding from one year to the next: the national Consumer Price Index (CPI) and the annual adjustment factors that HUD uses to adjust rent levels in the project-based Section 8 program. We compared changes in these indices over the past five years to changes in fair market rents during the same period; the changes in fair market rents provide an approximation of changes in voucher costs. (It should be noted that actual voucher costs may vary from fair market rents, since actual costs are influenced by tenant incomes, local policy decisions, and other factors not reflected in fair market rents.)
If the Administration proposes that the funding level authorized for the block grant be adjusted based on general inflation, the Administration likely will propose use of the CPI or a similar index. Alternatively, if the Administration intends to propose that the authorized funding level be adjusted based on inflation in rental housing costs, it could advocate a method similar to that now used to determine the annual adjustment factors for the project-based Section 8 program; these annual adjustment factors are based on rent and utility cost data from the Consumer Price Index for large metropolitan areas and on regional surveys that cover groups of several states for other areas. The annual adjustment factors do not take into account additional variables that are used to ensure that fair market rents are responsive to local housing markets. For example, fair market rents may be adjusted using survey data for a particular metropolitan area or county and may be increased to avoid concentration of voucher holders in a small, highly impoverished section of a metropolitan area.
Figure 1 displays national changes in fair market rents, the Section 8 annual adjustment factors, and the Consumer Price Index over the past five years (or the most closely comparable period for which data are available). Tables 1 and 2 show the changes in these three measures over the past five years on a state-by-state basis. (The methodology used to derive these data is described in the appendix on page 10.) These data demonstrate a sharp divergence between fair market rents and these two potential cost-adjustment indices.
· Nationally, the Consumer Price Index rose by 12 percent over the five-year period, while the annual adjustment factors increased by 18 percent. By comparison, fair market rents rose 25 percent.[2]
· There were only eight states in which the Consumer Price Index kept pace with fair market rents and nine states where the annual adjustment factors kept pace with fair market rents.
·
Had the voucher program been converted to a block grant to
states five years ago, states would have been forced to reduce the level of
voucher assistance they provide by 8 percent (equivalent to 163,000
vouchers) if funding had been adjusted using the Section 8 annual adjustment
factors and by 13 percent (equivalent to 259,000 vouchers) if funding had
been adjusted based on the Consumer Price Index.
|
State |
Fair Market Rent |
Project-Based Section 8 Annual Adjustment Factor |
Change in Number of Vouchers Funded that Would Have Occurred if 1998-2003 Funding Adjustments Had Been Based on Section 8 AAF |
|
|
Percent of State Allocation |
Number of Vouchers |
|||
|
Alabama |
11.6% |
10.1% |
-2.7% |
-756 |
|
Alaska |
9.1% |
9.7% |
0.8% |
33 |
|
Arizona |
25.8% |
15.2% |
-12.7% |
-2,573 |
|
Arkansas |
11.2% |
10.3% |
-1.8% |
-394 |
|
California |
44.1% |
26.6% |
-15.9% |
-47,647 |
|
Colorado |
33.5% |
25.9% |
-8.1% |
-2,254 |
|
Connecticut |
20.1% |
15.5% |
-5.3% |
-1,782 |
|
Delaware |
13.3% |
10.9% |
-3.2% |
-146 |
|
District of Columbia |
42.1% |
17.7% |
-22.0% |
-2,223 |
|
Florida |
18.0% |
11.3% |
-8.8% |
-7,827 |
|
Georgia |
27.8% |
17.6% |
-12.3% |
-5,822 |
|
Hawaii |
-11.0% |
2.2% |
20.9% |
2,489 |
|
Idaho |
8.9% |
8.9% |
0.0% |
0 |
|
Illinois |
21.3% |
20.5% |
-0.9% |
-721 |
|
Indiana |
12.9% |
12.1% |
-1.4% |
-512 |
|
Iowa |
12.7% |
9.7% |
-5.1% |
-1,095 |
|
Kansas |
18.2% |
13.8% |
-6.8% |
-716 |
|
Kentucky |
13.6% |
10.2% |
-5.7% |
-1,783 |
|
Louisiana |
18.2% |
11.0% |
-11.6% |
-4,208 |
|
Maine |
17.0% |
11.4% |
-7.8% |
-966 |
|
Maryland |
36.2% |
17.2% |
-19.1% |
-8,052 |
|
Massachusetts |
42.6% |
25.7% |
-15.3% |
-11,074 |
|
Michigan |
18.6% |
13.6% |
-6.8% |
-3,033 |
|
Minnesota |
33.4% |
20.4% |
-14.4% |
-4,267 |
|
Mississippi |
14.2% |
9.5% |
-8.7% |
-1,489 |
|
Missouri |
27.7% |
16.6% |
-15.5% |
-6,334 |
|
Montana |
11.9% |
12.7% |
1.3% |
79 |
|
Nebraska |
15.0% |
9.7% |
-8.7% |
-998 |
|
Nevada |
19.3% |
15.1% |
-5.1% |
-588 |
|
New Hampshire |
24.0% |
22.5% |
-1.7% |
-158 |
|
New Jersey |
19.3% |
18.8% |
-0.5% |
-322 |
|
New Mexico |
12.9% |
10.3% |
-4.1% |
-555 |
|
New York |
17.5% |
17.5% |
0.0% |
-20 |
|
North Carolina |
17.7% |
10.1% |
-11.0% |
-5,957 |
|
North Dakota |
12.5% |
13.3% |
1.5% |
113 |
|
Ohio |
22.2% |
14.1% |
-11.1% |
-9,415 |
|
Oklahoma |
20.3% |
10.3% |
-16.3% |
-3,784 |
|
Oregon |
18.1% |
13.9% |
-5.7% |
-1,788 |
|
Pennsylvania |
17.6% |
12.9% |
-6.4% |
-5,112 |
|
Rhode Island |
2.8% |
10.4% |
11.7% |
1,092 |
|
South Carolina |
13.0% |
10.1% |
-4.8% |
-1,137 |
|
South Dakota |
13.6% |
12.8% |
-1.3% |
-76 |
|
Tennessee |
14.3% |
10.1% |
-6.8% |
-2,047 |