New Gambit to Pass Tax Cut Extensions Without Paying for Them Represents Unsound Policy, Rev. 7/15/04

HUD Policy Is Forcing Many Housing Agencies to Impose Cuts Even Though Congress Provided
Sufficient Funding to Support All Vouchers
by Barbara Sard and Will Fischer

[1] Some agencies also may have another type of reserve, referred to as an administrative fee reserve. If an agency does not need all of the administrative funds it receives from HUD to administer the voucher program in a given year, it is permitted to retain the remaining amount (or a portion of the remainder) in a reserve fund. Administrative fee reserves could be used to cover the voucher funding shortfalls, but it is uncertain how much funding is currently available in these reserves or how many local agencies possess them.

Furthermore, most agencies will need to draw on their administrative fee reserves in 2004 to meet the current expenses of administering their voucher programs because of a sharp, retroactive reduction in the administrative fees that HUD is paying agencies in 2004. In late May, HUD notified agencies of the amount of administrative fees they would earn per voucher in 2004. On average, fees were estimated to be reduced about 13 percent compared to last year. After a firestorm of protest, HUD agreed the following week to recalculate administrative fees in a manner that would be more consistent with the directive in the 2004 appropriations act. On June 3, HUD staff told PHA representatives that under a new calculation method, fees would be reduced 6.2 percent on average. On June 11, HUD notified agencies of the revised fee levels. It appears that the reduction in fees for individual local agencies paid in 2004 may vary substantially from the 6.2 percent average reduction that HUD has cited.

[2] NAHRO’s state-by-state estimates are available on the internet at http://www.nahro.org/documents/2004/0528HUDImpFY2004S8HAPRenForm.pdf.

[3] Some agencies may be able to achieve a portion of the required savings through changes in the administration of their voucher programs that do not harm low-income families. Each housing agency is required to compare the rent for every apartment leased by a voucher holder to market rents for similar units in similar locations and must refuse to make payments on vouchers where the rent is out of line with the local market. If agencies have been lax in their enforcement of this “rent reasonableness” requirement, they could reduce their costs to some degree by reexamining rents and lowering those that are too high in comparison to market rents. Lowering rents to the “reasonable” level does not shift costs to tenants.

The available evidence suggests, however, that agencies generally enforce rent reasonableness quite effectively. In 2001, a study conducted for HUD took the first systematic look at implementation of these requirements by local housing agencies. The study found that the requirements generally were being followed and that the average rent for units occupied by families with housing vouchers was $95 less per month than the estimated rents for comparable unassisted units. The study also found that housing voucher units located “in relatively high cost submarkets almost universally have rents less than comparable units. Overall, such units rent for $244 less than comparable rents. Only 3 percent of such units have rents that exceed market rent by 5 percent or more. By contrast, rents in relatively low cost submarkets are, on average…$14 less than comparable rent.” These findings suggest that on the whole, housing agencies will have little opportunity to achieve savings by improving enforcement of the rent reasonableness requirement.

Some agencies have indicated that they will go beyond enforcing rent reasonableness and will refuse to allow vouchers to cover any rent increases, even though they are supposed to approve rents that keep pace with rental prices of comparable units in the local market. This step will likely prompt some owners to end their participation in the voucher program. In Willimantic, Connecticut, for example, an owner denied a rent increase by the housing authority is threatening to evict 40 voucher holders with disabilities. In Bakersfield, California, a significant number of minority voucher holders have been able to use their vouchers to move to middle-income neighborhoods that are not predominantly minority. Owners of the large rental complexes providing these improved housing opportunities have indicated that they will not continue to participate in the voucher program if the housing agency does not approve market rents. In such cases, a family may have as little as two months to find another unit in which it can use its voucher. If the family does not succeed, it will lose its voucher assistance.

[4] The survey, begun in late May 2004 and currently ongoing, was distributed to hundreds of advocates and housing authority officials around the country. We have received a total of 117 responses to date. Of the agencies for which we received information, 81 reported higher current average voucher costs than the figure HUD was using for the agency. (We do not consider this high rate to reflect the incidence of funding shortfalls nationwide. It is likely that agencies experiencing funding shortfalls would be more likely to complete the survey.) Of the 92 agencies that reported taking one or more step to cut voucher assistance in light of HUD’s new funding policy, 68 currently have higher average voucher costs than HUD is funding. The 24 agencies taking actions to reduce program costs that are currently receiving sufficient funding may be concerned that without policy changes their costs by the end of the year would exceed the level HUD will pay for. Agencies that report a shortfall but no specific policy changes to reduce costs may be intending to cover the shortfall with reserve funds or may not yet have determined what actions to take.

[5] The maximum amount of rent that a voucher can cover is known as the voucher “payment standard.” Federal funds pay the difference between the payment standard (or the unit rent, if lower) and 30 percent of a family’s income. If the cost of rent and utilities exceeds the payment standard, the family pays the extra amount. The poorest families are likely to have particular difficulty using vouchers if the payment standard is very low, because they will have less income available to cover costs beyond the payment standard. Moreover, when families first receive voucher assistance or move to new units, they are prohibited from spending more than 40 percent of their income for rent and utility expenses. This rule is more restrictive for a family with very little income than for a family with more income, since 40 percent of the poorer family’s income is a smaller amount. After the first year that a family lives in a unit with voucher assistance, there is no limit on the amount it may pay for rent.

[6] Under current law, a reduced voucher payment standard would apply immediately to new voucher holders and to families that move with their vouchers from one housing unit to another. For other families, a reduced payment standard can not take effect for at least a year. (See 24 C.F.R. § 982.505(c)(3).) The purpose of this policy is to protect low-income families against sudden increases in their rental obligations and to give them an opportunity to search for a less expensive unit.

[7] Some housing agencies have indicated that to avoid having to terminate current voucher holders, they will undertake cost-cutting measures that appear to be prohibited by voucher program rules (and that HUD has stated are illegal in its communications with housing agencies). For example, several agencies have said that they will reduce the rents that owners are permitted to charge on an across-the-board basis, without having any evidence that current rents are unreasonably high. Others have indicated they are planning to terminate only the vouchers of families that have moved to other jurisdictions.

[8] Even some of these 13 agencies may no longer be overleased, because their fiscal years end on June 30 and their survey only indicated that they were overleased on average during the year ending June 30, 2004. It would be expected that by the end of June many such agencies would have reduced the number of their vouchers that are in use below their authorized level, so any further cuts made by these agencies would result from HUD’s policy of funding vouchers based on May-July per-unit costs.

[9] See Financial Management Center Bulletin #03-04, amending Bulletin #02-04 issued two days earlier. Had HUD not put this floor in place and instead simply funded agencies based on the number of vouchers in use according to the most recent available data (which could be as little as two months old), agencies would have faced strong incentives against reducing the number of families served. Under such a policy, a reduction in the number of families served would have pushed the agency into a downward spiral, in which a cut made in response to the reduction in funding would have resulted in a further reduction in funding, which in turn would have forced further cuts. Prior to HUD issuance of Bulletin #03-04 it appeared that HUD would implement a “floorless” policy of this type. HUD’s April 22 notice states that HUD “will use the latest data provided by each PHA in [quarterly data submissions] to calculate unit months leased for the PHA fiscal year, which affects the PHA’s renewal funding every quarter.”

Even with the existence of a floor under the number of vouchers funded, agencies have some incentive to lease a greater number of units. Agencies that increase utilization may receive more administrative fees, since those fees are allocated based on the number of vouchers leased. (On June 14, HUD staff informed PHAs during a national information session on the new funding policies that there was no guarantee that they would receive additional fees if they leased more vouchers than they had leased in April 2004; receipt of additional fees above the April level would depend on a later HUD determination of whether sufficient funds were available.) In addition, if an agency raises the number of vouchers in use above the May-July 2003 level, it will receive additional funding for the added units; in other words, the May-July utilization level does not act as a ceiling on the number of vouchers funded.

[10] The HUD guidance also lists as criteria three specific factors that could cause rents in an area to rise more rapidly than the AAF: property tax increases, rent stabilization laws and other local rent requirements, and increases in property insurance rates.

[11] The table shows the variation in the growth of the cost of a voucher used by a non-elderly, non-disabled family that has two children and initial income of $12,000 and lives in a housing unit with a monthly rent of $600.

[12] For example, one agency in New York City reports that its average monthly cost for these special vouchers is $1,653, about three times the average monthly cost of the agency’s other vouchers. During the first year after it is issued, an “enhanced voucher” is supported with funds from a separate appropriation that is not considered part of an agency’s voucher renewal funding and is not governed by the April 22 notice. Agencies that are currently issuing new enhanced vouchers thus will not experience shortfalls immediately as a result of the high cost of these vouchers. Instead, it will be agencies that issued enhanced vouchers after the May – July 2003 period that is used to determine an agency’s average costs per voucher that will face shortfalls as the separate funding for these vouchers expires later this year and the vouchers become part of the agency’s overall voucher renewals.

Such "opt-out" vouchers may increase an agency's average costs even if the rents paid are not unusually high. For example, effective August 1, 2003, the Iowa City Housing Authority received new vouchers for tenants in a development that had opted out of the project-based section 8 program. Because of the timing of the award, none of these vouchers is included in the agency's reported costs for May - July 2003. The average voucher payment for these families is 38.5 percent higher than the "frozen" cost figure that HUD is using to fund Iowa City, primarily because most of these households are families with children that needed larger, and therefore more expensive, units than the smaller households the agency typically had previously served.

[13]HUD has characterized the formula used prior to Secretary Jackson’s announcement as a “pro-rated” adjustment, but in fact it was simply inadequate. HUD’s Annual Adjustment Factor is intended to reflect the percentage increase in rental charges over a 12-month period. Properly “pro-rating” this factor for a period shorter than twelve months would mean adjusting it so it covers the correct number of months. For example, to adjust costs from the May-July 2003 base period that HUD is using to the January-March 2004 period, HUD would need to apply eight months worth of inflation adjustment (since January is eight months after May). Before Secretary Jackson’s announcement, however, HUD was applying only three months worth of inflation adjustment for the period from May-July 2003 to January-March 2004.

[14] The $152 million that would be used to replenish reserves consists of unspent funds appropriated by Congress for the voucher program’s “central fund,” which is available to help support voucher renewals. Under the HUD policy in place in fiscal year 2003, HUD already should have used these funds to replenish reserves. (PIH 2003-23, the HUD notice establishing the voucher funding method for fiscal year 2003, states that “If appropriations are available, HUD intends to annually restore ACC reserves to the one-month level.”) HUD has not explained why it did not follow this policy in 2003.

[15] HUD has claimed that it is unable to replenish reserves used to cover cost increases because the fiscal year 2004 appropriations act prohibits the use of the “central fund” to cover cost increases. This claim is dubious. The central fund represents a portion of the appropriation for the voucher program that Congress has set aside to serve as a reserve for agencies that increase the number of authorized vouchers in use during their fiscal year. Under previous HUD policy, the Department could use the main voucher renewal appropriation, which is separate from the central fund, to replenish reserves. Nothing in the fiscal year 2004 appropriations act requires HUD to change this policy. The prohibition in the 2004 act on using funds to cover cost increases applies only to the central fund. In other words, HUD can use the main voucher renewal fund to replenish reserves drawn down to defray increases in per-voucher costs but is choosing not to do so.

Moreover, HUD can use unspent funds from previous years to replenish reserves. Senator Christopher Bond, the chair of the Senate Appropriations Subcommittee with jurisdiction over HUD, noted that prior-year funds can be used in this manner in an April 29 letter to Secretary Jackson.

[16] Both of these figures exclude Section 8 Moderate Rehabilitation units and vouchers administered by certain agencies participating in the Moving-to-Work demonstration; these two categories of subsidies have traditionally been funded through separate mechanisms.

[17] Estimates by CBPP indicate that the excess funding would be higher — approximately $260 million. This is the approximate amount by which the funding provided under the policy that HUD announced on April 22 will fall below the fiscal year 2004 appropriations level for voucher renewals, including the central fund, assuming that the number of vouchers leased continues at the level achieved in January 2004. This estimate is probably conservative, since it does not assume any reductions in the number of vouchers in use beyond those directly resulting from funding shortfalls created by HUD’s policy. It is likely that some agencies will reduce the size of their voucher programs even more than they are required to, out of concern that they will receive inadequate funding in the future. In addition, the estimate of $260 million assumes that HUD will permit agencies to use all of their federal fiscal year 2004 funds at any point in calendar year 2004, regardless of whether an agency’s fiscal year ends in June or September rather than December.

Outlays in Figure 1 are in constant 2003 dollars, adjusted using the CPI. Outlay levels for fiscal years 2004 through 2006 are CBO projections from the March 2004 baseline. In 2007 through 2009, the chart shows the amount of outlays required to support all authorized Section 8 units that will require funding under CBO assumptions regarding the number of authorized units, per-units costs, and the voucher utilization rate. Because of technical, statutory constraints on the methods CBO uses to project total Section 8 outlays, CBO’s actual outlay projections in those years are below the level required to support all of the authorized units that will require funding. As a result, CBO’s actual projections are somewhat below the adjusted levels shown in the figure.

[18] See Barbara Sard and Will Fischer, “Nearly All Recent Section 8 Growth Results from Rising Housing Costs and Congressional Decisions to Serve More Needy Families,” Center on Budget and Policy Priorities, February 2, 2004, available on the internet at http://www.centeronbudget.org/2-2-04hous.htm.

Action to Reduce Voucher Costs in Response to Policy	Percent of Housing Agencies Implementing or Considering Action
Action to Reduce Voucher Costs in Response to Policy	Of All Housing Agencies Implementing or Considering Any Action	Of Non-Overleased Housing Agencies Implementing or Considering Any Action
Terminating Vouchers	12	10
Taking Back Vouchers from Searchers	15	16
Freezing Voucher Issuance	50	51
Refusing to Allow Portability	43	42
Lowering Payment Standards	64	66
Establishing or Increasing Minimum Rents	49	51
Recalculating Rent Reasonableness	20	16
Other Rent Reductions to Owners	20	22
Canceling or Reducing Project-Based Vouchers	5	3

Rent Increase	Income Change	Cost Increase
2.9%	-2.0%	7.2%
2.9%	-1.0%	6.3%
2.9%	0.0%	5.4%
2.9%	1.0%	4.4%
2.9%	2.0%	3.5%
2.9%	3.0%	2.6%
2.9%	4.0%	1.7%