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President's 2007 Budget Renews Same Number of Housing Vouchers Funded in 2006

April 25, 2006

Executive Summary

The President's budget requests $15.9 billion in fiscal year 2007 for tenant-based rental assistance under the Housing Choice Voucher Program, the nation's largest low-income housing program. The request would renew approximately 2,070,000 vouchers in 2007, about equal to the total number of vouchers funded in 2006. Yet most local communities would face cuts due to the inefficient method that would be used to allocate funds among the more than 2,400 state and local housing agencies that administer the program.

The budget proposes to distribute voucher renewal funding using a formula similar to the "dollar-based" formula implemented in 2006. Under this formula, the share of funding that each housing agency receives is based on the amount it was eligible to receive the previous year, adjusted by an inflation factor set by HUD. The HUD inflation factor would be derived from housing cost data that is two years out-of-date, and no adjustments would be made for the number of vouchers that an agency uses or changes in the actual per-voucher costs in the area that the agency serves.

This distribution formula, in combination with the renewal funding level requested, would fail to provide the funding stability that state and local housing agencies badly need. We estimate that the budget request would underfund 70 percent of agencies in 2007, forcing them to cut the number of families they serve or reduce the average rent subsidy they provide to each family, which would raise rent burdens on needy families or have other harmful consequences. At the same time, about one quarter of agencies would receive sufficient funding to lease up more vouchers in 2007 than they could in 2006.

The budget would result in state and local agencies being able to use widely disparate shares of their authorized vouchers. For individual agencies, the percentage of authorized vouchers that would be funded would vary from less than 60 percent in some agencies to more than 140 percent of authorized vouchers in others. Because they would receive an inadequate share of funding, one-quarter of all agencies would be able to use less than 90 percent of their authorized vouchers, while a slightly larger percentage of agencies would be funded for at least the full number of vouchers they currently are authorized to administer.

Since early 2004, the combined effect of the use of inefficient formulas to distribute voucher renewal funding, poor implementation of voucher funding policy by HUD, and voucher funding shortfalls has been to generate fiscal instability among state and local housing agencies and cause a significant reduction in the number of families assisted under the program. According to recent HUD data, between April 2004 and September 2005, the number of families assisted by vouchers fell by about 60,000, even as roughly 40,000 families being shifted from other forms of housing assistance were issued new "tenant-protection" vouchers during this period.[1] This means that the number of families assisted fell by about 100,000 over this 17-month period, once adjustment is made for families that were shifted from other housing assistance to a voucher. This represents a substantial loss at a time when many communities have long and growing waiting lists for voucher assistance.

HUD and other supporters of the "dollar-based" formula now being used to allocate voucher funding have argued that it will engender fiscal predictability and stability in the voucher program. The evidence indicates, however, that the opposite has been the case -- the funding levels received by state and local housing agencies under the dollar-based formula have been more unpredictable and less stable.

Since the current dollar-based formula was first introduced in 2005, the Administration has not requested, nor has Congress provided, full funding for the formula. As a result, the funding level for each state and local housing agency has been prorated (i.e., reduced below the amount for which the agency is eligible under the formula) each year. In 2005 and 2006, funding due under the formula was cut by 4.1 and 5.4 percent, respectively. According to our estimates, these reductions are likely to be followed by a pro-rata reduction of 6.7 percent in 2007, under the funding level the President's budget requests. In other words, a pattern may be developing under which policymakers are providing a steadily decreasing share each year of the funding called for under HUD's own formula. The funding that housing agencies received stood at 95.9 percent of what the formula called for in 2005, and 94.6 percent of what the formula called for in 2006. Under the President's budget, funding would equal an estimated 93.3 percent of what the formula calls for in 2007.

Deepening cuts in formula funding create substantial fiscal uncertainty and shortfalls for state and local housing agencies, making it difficult for them to manage their programs well. The dollar-based formula consequently has aggravated, rather than mitigated, the fiscal instability of housing agencies.

Rather than acknowledging that flawed funding formulas have contributed to the fiscal instability experienced by local voucher programs, the budget faults the existing rules of the voucher program for failing to give agencies sufficient flexibility to adjust to funding shifts. The Administration restates its intention to convert the program to a block grant and to eliminate current statutory protections that require most vouchers be used to serve poor families at rents they can afford. Filed last year, the Administration's block-grant proposal (the "State and Local Housing Flexibility Act") has so far not been favorably received by Congress.[2] Because the Congressional calendar is tight this year, major changes in the housing voucher program are unlikely to be enacted in 2006.

The budget would set aside $100 million of the requested voucher renewal funds to be allocated by HUD for "unforeseen exigencies" and for payments to agencies to offset costs related to program provisions that allow families to use vouchers to move to new communities. Recent changes in the funding formula have compelled housing agencies to increasingly restrict the ability of voucher holders to move to communities with better jobs and schools, a trend that undermines one of the essential benefits of housing vouchers. The set-aside funds could play an important role in protecting voucher holders' right to use their vouchers to move to new areas. The $100 million in funds also could be important in enabling Gulf Coast agencies to meet rapidly rising housing costs and in assisting communities that have taken in Gulf Coast evacuees, since the special disaster funds they are using to help evacuees will expire in 2007.

The budget request for tenant protection vouchers to replace federal housing assistance that has been eliminated - $149 million - is nearly $30 million below last year's appropriation for this purpose and would support about 5,000 fewer vouchers. In a major policy shift, the budget would limit the award of tenant protection vouchers to the replacement of subsidized units that were under lease at the time they were demolished or disposed of. In the past, tenant protection vouchers were generally provided to replace all subsidized units. This is because the vouchers are intended not just to help specific residents whose units had been eliminated, but also to compensate the community for the loss of affordable housing resources. As a result of the proposed change, communities where some units in a subsidized building are vacant at the time the subsidies are ended would permanently have fewer subsidies available to help low-income people afford housing.

On the whole, affordable housing and community development programs fare poorly in the 2007 budget request. The Administration proposes to cut total HUD funding in 2007 by 3.9 percent in real terms (i.e., below the 2006 levels, adjusted for inflation). Substantial cutbacks are sought for public housing, the Community Development Block Grant (CDBG), and new affordable housing for the elderly and people with disabilities. In many cases, the proposed cutbacks follow on funding cuts already implemented in prior years. At a time when many communities are struggling to meet severe affordable housing needs, the budget request would sharply reduce housing assistance to support these efforts. In addition, proposed cuts to popular programs such as CDBG are likely to place pressure on Congress to reduce funding elsewhere in the HUD budget, including funding for Section 8 vouchers, in order to restore funding to those programs.

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End Notes:

[1] Tenant-protection vouchers are issued to families whose existing housing assistance is ending because the public housing project in which they are living is being torn down or a federally subsidized, privately-owned building in which they reside is being converted to other uses.

[2] The Administration's proposal was first introduced as S. 711 by Senator Wayne Allard (R-CO) on April 13, 2005. Representative Gary Miller (R-CA) introduced a similar bill as H.R. 1999 in the House on April 28, 2005. The House Financial Services Committee held two hearings on the House bill shortly after it was introduced; no hearings have been held in the Senate. For an analysis of the Administration's proposal, see Will Fischer and Barbara Sard, Administration Housing Proposal Lays Groundwork For Planned Funding Reductions, May 9, 2005,