prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 1.



Report 2: The RAD program was authorized by Congress and signed into law by the President in November 2011 under the Consolidated and Further Continuing Appropriations Act, 2012 with amendments in 2014, 2015, 2016, and 2017  The RAD program consists of two components  The first component of the RAD program—and the focus of our review— provides PHAs the opportunity to convert units subsidized under HUD’s public housing program and owned by the PHAs to properties with long- term (typically, 15–20 years) project-based voucher (PBV) or project- based rental assistance (PBRA) contracts  These are two forms of Section 8 rental assistance that tie the assistance to the unit to provide subsidized housing to low-income residents  In a RAD conversion, PHA- owned public housing properties can be owned by the PHA, transferred to new public or nonprofit owners, or transferred to private, for-profit owners when necessary to access LIHTC financing, if the PHA preserves its interest in the property in a HUD-approved manner  The second component of RAD converts privately owned properties with expiring subsidies under old rental assistance programs to PBV or PBRA in order to preserve affordability and encourage property rehabilitation  The goals of the RAD program include preserving the affordability of federally assisted rental properties and improving their physical and financial condition  Specifically, postconversion owners (PHAs, nonprofits, or for-profit entities) can leverage the subsidy payments under the newly converted contracts to raise capital through private debt and equity investments, or conventional private debt, to make improvements  The RAD program provides added flexibility for PHAs to access private and public funding sources to supplement public housing funding  These financing sources may include debt financing through public or private lenders; mortgage financing insured by FHA; PHA operating reserves; replacement housing factor funds; seller or take-back financing; deferred developer fees; equity investment generated by the availability of 4 percent and 9 percent LIHTC; or other private or philanthropic sources  PHAs also may pursue various options for their conversions, which often depend on property needs and available financing, including property rehabilitation or new construction  Additionally, PHAs may undertake conversion involving no property rehabilitation or new construction to meet certain financial goals or for future rehabilitation or new construction, as long as the PHA can demonstrate to HUD that the property does not need immediate rehabilitation and can be physically and financially maintained for the term of the Section 8 Housing Assistance Payment contract (HAP contract)  The RAD authorizing legislation and RAD Notice also specify requirements for ownership and control of converted properties  That is, converted properties must have public or nonprofit ownership or control, with limited exceptions  The RAD authorizing legislation, RAD Notice, HAP contracts, and RAD Use Agreement also establish procedures to help ensure that public housing remains a public asset should challenges arise, such as default, bankruptcy, or foreclosure  Oversight of RAD conversion and properties is primarily divided among three HUD offices  The Office of Recapitalization is responsible for administering the conversion process but generally does not oversee converted properties  Before conversion, the Office of Public and Indian Housing oversees the properties  After conversion, oversight remains with Public and Indian Housing for properties that convert to PBV contracts and transfers to the Office of Multifamily Housing Programs for PBRA  The RAD program has been implemented and expanded in phases  Since its authorization, the RAD unit cap gradually increased from 60,000 units in 2011 to 225,000 units in May 2017  The RAD program is currently fully subscribed with all 225,000 units allocated  As of September 30, 2017, 689 conversions were closed that involved a total of 74,709 units (see fig  1 for a breakdown by fiscal year)  Additionally, 706 conversions involving 79,078 units were in the process of structuring conversion plans  The remaining conversions under the cap were allocated to specific properties and in the process of having commitments issued or reserved under multi-phase or portfolio awards, according to HUD officials  RAD conversions begin with the submission of an application by PHAs after which they are notified of selection  The PHA is then required to submit a financing plan within 180 days or a later deadline based on the nature of the financing proposed  A RAD conversion is considered closed when the HAP contract is signed and financial documents are executed  The properties are considered converted to Section 8 assisted housing on the effective date of the HAP, which is generally the first day of the following month  Once the RAD conversion is closed, the PHA or ownership entity can move forward with its submitted proposals or RAD-related rehabilitation or new construction and is responsible for complying with RAD requirements and associated contracts  In some cases, rehabilitation can take place in advance of conversion closing if public housing funds are being used  Most RAD conversions involved some type of construction  Our analysis of HUD data showed that as of September 30, 2017 417 of 689 closed conversions (61 percent) involved planned rehabilitation to the property, 86 (12 percent) new construction, and 186 (27 percent) no construction; and 361 of 706 active RAD conversions (51 percent) involved planned rehabilitation, 89 (13 percent) new construction, and 256 (36 percent) no construction  HUD officials stated that they approve conversions that involve no immediate planned rehabilitation or new construction as long as the property has no immediate needs to be addressed  Such conversions allow PHAs to better position themselves to access additional capital to address future rehabilitation or construction plans  Our review of 31 conversion files also showed that the scope of proposed physical changes varied among RAD conversions  For properties that included scope of work narratives, physical changes included renovations to mitigate hazardous materials, aesthetic renovations, code and accessibility compliance, and construction of new buildings, among other changes  Financing for RAD conversions involved multiple public and private sources, but many conversions used LIHTC  Our analysis of HUD data showed that as of September 30, 2017, 173 of 689 closed RAD conversions (25 percent) utilized 4 percent LIHTC, 99 (14 percent) utilized 9-percent LIHTC, and 416 (60 percent) did not use LIHTC  By dollar amount, major financing sources were 4 percent LIHTC at $2 4 billion; new first mortgages at $1 8 billion; and 9 percent LIHTC at $1 1 billion  Construction costs constituted the highest-dollar use of financing for RAD conversions, but not all conversions incurred construction costs, as discussed earlier  On average, construction costs per closed conversion were $6 4 million (ranging from no construction costs to $236 million) and nearly $60,000 per-unit converted to RAD  Construction costs represented the highest-dollar use of financing for closed RAD conversions at $4 4 billion followed by building and land acquisition costs, and developer fees  For more information on financing sources and uses, see appendix II  PHA officials and developers we interviewed cited various factors that influence financing sources needed for RAD conversions  For example, property needs assessments help establish the level of rehabilitation or new construction that would address the capital needs of the property  In turn, needs assessments can derive from physical assessment results and incorporate federal, state, or local compliance requirements  For instance, rehabilitation or construction would need to address the accessibility requirements of the Americans with Disabilities Act and local building codes, among other requirements  PHA officials and developers we interviewed also said they had to consider competition or access to financing for RAD conversions  For example, PHAs noted that tax credit applications and other financing had to be competitive  Some PHAs we interviewed also noted that while the 9 percent LIHTC provides more equity to finance low-income units (finances 70 percent of the costs of the units), there is more competition for the 9 percent LIHTC, while the 4 percent LIHTC can be automatically awarded for certain deals involving tax exempt bonds and federally subsidized projects  Thus, while some PHAs and developers might prefer to obtain 9 percent LIHTC, they often apply for 4 percent LIHTC to increase the chances of obtaining some tax credit equity  For example, one particular PHA that had used both 4 percent and 9 percent LIHTCs noted that in one transaction it had to compete against 74 applicants for 25 available awards of 9 percent credits  The RAD authorizing statute requires HUD to assess and publish findings regarding the amount of private capital leveraged as a result RAD conversions  A leverage ratio relates the dollars other sources provide to the dollars a program provides to an institution or a project  HUD uses various quantitative, qualitative, and processing and efficiency metrics to measure conversion outcomes  To meet the RAD statutory requirement, HUD published an overall RAD leverage ratio that has fluctuated between 19:1 and 9:1 since 2014  HUD’s most recent leverage ratio in fiscal year 2017 was 19:1, nearly double what the agency reported the prior year  We asked HUD officials why the leverage ratio nearly doubled between 2016 and 2017 and received conflicting information during the course of our audit  Initially, officials noted that the ratio was intended to replicate the methodology used by PD&R in its September 2016 report  Subsequently, the officials clarified that they did not follow PD&R’s methodology for categorizing financial source data  Specifically, officials did not review or make manual adjustments to the financial data PHAs entered in open source fields to ensure sources actually represented public, private, or other funding categories when calculating the leverage ratio  Finally, they noted that they disagreed with the methodology used in the PD&R September 2016 report and stated that there are various ways to calculate leverage  For the purposes of announcing the most recent leverage ratio in 2017, HUD officials decided that a leverage ratio comparing federally appropriated public housing resources would reflect the amount of financing leveraged had RAD not existed  We found, and officials from HUD acknowledged, three limitations to the RAD leverage calculation  First, HUD generally had data on funding sources and amounts a RAD conversion proposed to use (at the time of its application to HUD and at the time of closing of construction financing) rather than data after construction is completed on funding sources and amounts  HUD officials stated that they were reviewing final closing packages to confirm that the data reflect the latest reported information on sources and uses of funds for each conversion at closing  However, sources and uses of funds and amounts at the time the RAD conversion is closed may differ from amounts upon completion of construction  In October 2017, HUD implemented procedures to verify completion of planned construction activities and costs, which we discuss later in this report  Second, HUD’s leverage ratio, published in 2017, did not manually adjust funding source data to accurately account for all sources in calculating the leverage ratio for RAD  Specifically, HUD did not isolate funding sources that were federally appropriated, contributed by the PHA, or contributed by state or local municipalities to calculate leverage  For example, among approximately $2 billion from other financial sources, HUD included Moving to Work (MTW) funding (which may include public housing capital funds, public housing operating funds, and voucher funds) and tax credit equity as leveraged sources  However, these are not necessarily private sources, which we explain later in this report  As a result, HUD’s current calculation does not reflect the amount of private- sector leveraging  HUD calculated and published a RAD leverage ratio in May of 2017 using the following formula: Total leverage ratio = (total dollars from all sources – public housing dollars) To calculate the RAD leverage ratio, HUD uses some but not all financial source data it collects (see app  II for a list of data fields collected by HUD)  For example, HUD mistakenly excluded data that capture private funds, reducing the amount of total sources in the numerator  HUD calculates “public housing dollars” by adding data that capture replacement factor funds, public housing operating reserve funds, and prior-year public housing capital funds  HUD considers tax credit equity, new first mortgages, and “other funding” data to be non-public housing dollars (see app  II for a list of fields in HUD’s calculation)  PHAs enter a description and amount for other funding sources in “other funding” data fields (see app  II)  For example, a PHA may enter a federal financial source in one of the open-entry “other funding” data fields, requiring a manual adjustment to properly account for the financial source  According to HUD, additional fields were included in mid-2016 to better differentiate certain sources such as from the HOME Investment Partnerships Program (HOME) and seller take-back financing  Prior to this point, these financial sources were placed into “other” fields, and the standard resource desk report had not been updated until mid-2017 to include all of these fields  Third, HUD does not categorize and report its leveraging by private and public sources  According to HUD officials, informative leverage methodologies could calculate the ratio based on the leveraging of public housing program funds, the leveraging of all federally appropriated funds, or the leveraging of PHA funds (i e , sources in the transaction that have come from the PHA itself even if not federally appropriated through the public housing program), among other methodologies  The RAD authorizing statute requires HUD to assess and publish findings on the amount of private-sector leveraging  In addition, Standards for Internal Control in the Federal Government require agencies to communicate quality information with external parties, such as other government entities, to make informed decisions and evaluate the entity’s performance in achieving key objectives  HUD also does not use final (postcompletion) funding data in another metric of RAD leveraging  Specifically, in June 2017 HUD publicly reported that RAD “has leveraged more than $4 billion in capital investment in order to make critical repairs and improvements ” HUD calculates this figure by summing the construction costs—a subcomponent of total costs—with data from the time a conversion closes and not upon completion of construction  HUD officials we spoke with clarified that this metric solely reports construction investments and does not reflect any conclusion regarding private leverage of public funds  But, HUD publically characterized this measure in different ways, including as the amount of “public-private investment in distressed public housing,” the amount of “construction achieved under RAD,” and the amount of “new private and public funds leveraged by RAD ” HUD’s 2016 interim report calculated and published multiple leverage ratios, but chose to highlight a RAD leverage ratio that is consistent with ratios used for other HUD programs  However, the ratio does not specifically follow the prescribed ratio language in the authorizing statute because the report states that the ratio represents the amount of private and public external sources invested for every dollar invested by PHAs but the statutory language only discusses private-sector leveraging  Officials further noted that the statute does not require a particular methodology and HUD relies on PD&R—and its independent contractor— to determine the appropriate methodology for purposes of compliance with the statute  Lastly, the statute does not preclude the use of other leverage metrics for other purposes, such as using the ratio to measure the amount of nonpublic housing funds leveraged in RAD transactions that would not be available to the property absent RAD  As a result, HUD’s leverage metrics announced in May 2017 do not accurately reflect the amount of private-sector leveraging achieved through RAD, do include public funding as private sources, and inconsistently measured sources that were federally appropriated or contributed by PHAs, potentially under- or over-reporting the program’s performance  Additionally, in October 2017, HUD began implementing procedures to collect data after construction is completed and is not yet able to calculate a leverage metric using final (postcompletion) financial sources rather than the financial sources collected at closing  The lack of a consistent metric for private leveraging could also lead to inconsistent reporting of the leverage ratio, as has occurred in prior years  We recalculated RAD leverage ratios in a number of different ways, including to correct errors we identified during our review  For example, HUD’s 2016 interim report noted that data on closed transactions do not provide detailed description of “other sources,” requiring a crosswalk between applications and closed transactions to develop estimates for the allocation of “other sources” across financial source categories  Abbreviated descriptions are provided in the form of notes that are not always clear and consistent; therefore public housing sources may include federally appropriated sources, as well state, city, or county sources  Through our estimates, we found that the overall leverage ratio could range from 7 44:1 for a ratio recalculating HUD’s leverage ratio to 1 23:1 for a ratio estimating private-sector leveraging  Recalculation with HUD methodology and financial source recategorization  As discussed previously, HUD’s methodology does not account for all financial data collected by HUD and includes “other” funding sources erroneously considered as leveraged funds  Thus, we manually adjusted RAD funding source data and found that nearly $1 2 billion were erroneously considered leveraged funds because they are not private funds  For example, HUD included MTW funds; public housing operating reserves; public housing capital funds; replacement housing factor funds; other federal funds; other state, local, or county funds; and take-back financing funds as leveraged financial sources  For more information, see appendix II  We obtained documentation from HUD to replicate their methodology and recategorized financial sources that corrected errors in the data, and found that the RAD leverage ratio was less than half of HUD’s most recently publicly reported leverage ratio (19:1), approximately 7 44:1 (see app  II)  Recalculation to exclude LIHTC and other federal sources  We previously reported that LIHTCs are considered a federal source because tax credit equity represents foregone federal tax revenue and, therefore, are a direct cost to the government  Accordingly, we recalculated the RAD leverage ratio by excluding all federal funding sources and obtained a ratio of approximately 1 43:1 (see app  II)  Recalculation of private-sector leveraging  Lastly, the RAD authorizing statute requires HUD to assess and publish findings on the amount of private-sector leveraging, but HUD’s current calculation does not present the amount of private-sector leveraging and does not include all available data (for example, the “Other Private” funds collected by HUD)  We estimated the amount of private-sector leveraging by grouping public housing sources, other public sources, and private sources, resulting in a leverage ratio of approximately 1 23:1 (see app  II)  In October 2017, HUD implemented procedures to certify completion after developers finish RAD-approved rehabilitation or construction  Previously, HUD had a limited ability to monitor and evaluate final (postcompletion) physical and financial changes in RAD projects with existing data  According to HUD officials, HUD did not implement completion certification procedures before October 2017 because it had been addressing what it considered to be the highest risks first (such as clarifying requirements for RAD participants, resident safeguards, and other procedural and administrative requirements)  HUD’s October 2017 completion certification procedures include instructions for owners to report final construction costs and documentation on completion of repairs or construction within 45 days of the completion date recorded in the RAD Conversion Commitment  More specifically, HUD requires owners to list a final construction cost amount—a subcomponent of total costs—in the RAD resource desk, describe variances from the approved construction cost amount in a comment box, and describe how increases in costs were addressed  Additionally, a third-party must certify that the repairs in the scope of work were completed by providing an attestation to HUD  However, HUD’s procedures do not require documentation from the owners to support the final total cost figures, which include not only construction costs but also building and land acquisition costs, and developer fees, among others as noted earlier in this report  These procedures also do not require a certification from owners on all financing sources and costs recorded in the RAD Conversion Commitment  Standards for Internal Control in the Federal Government require that management implement control activities through documented policies and procedures to provide reasonable assurance that the objectives of the agency will be achieved, and also communicate quality information with external parties to make informed decisions and evaluate the entity’s performance in achieving key objectives  While HUD now has certification completion procedures in place, this process provides the agency limited financial information from owners  As a result, HUD is unable to report metrics that reflect final (postcompletion) RAD financial outcomes after construction is completed  Furthermore, HUD is limited in its ability to effectively oversee conversion budget and cost variances, and expenditures that require HUD approval  Lastly, the RAD authorizing statute requires that the Secretary of HUD demonstrate the feasibility of the RAD conversion model to recapitalize and operate public housing properties under various situations and by leveraging other sources of funding to recapitalize properties  Without metrics that reflect the final (postcompletion) financial outcomes of RAD after construction is completed, HUD and congressional decisionmakers are unable to make informed decisions concerning the RAD program  HUD has not systematically tracked or analyzed household data on residents in RAD-converted units that are available from its public housing or Section 8 databases or from PHAs or other postconversion owners—the main sources of resident data for the RAD program  In addition, HUD has not yet developed monitoring procedures for all the resident safeguards in the RAD program  Finally, residents told us of some concerns about information they received on RAD conversions, communications opportunities, and the relocation process  HUD officials told us that the agency does not systematically track or analyze household-level data on residents in RAD-converted units across existing program databases (HUD maintains household data for the public housing and Section 8 rental assistance programs in two databases)  In particular, HUD does not track changes in household characteristics before and after conversion, such as changes in rent, as well as relocations or displacement of individual households  However, according to HUD officials, their databases are not designed to track the impact of RAD conversion on residents and they are unable to electronically link household information submitted before RAD conversion to information submitted after conversion  Once a property is converted, the property and corresponding household information are removed from the public housing database  Owners of converted properties are to use software to manually enter household information into the databases for the Section 8 program when submitting tenant certifications and information for assistance payments  This procedure is the standard for administration of all project-based Section 8 properties  HUD officials stated that they have explored the possibility of transferring household data from one system to another at the time of a property’s conversion  While HUD has not systematically analyzed household information from its public housing and Section 8 databases, we were able to perform a limited analysis  We requested and received data from HUD on the households affected by RAD  Using the data provided that were current as of June 2017, we were able to identify about 26,000 households that lived in units that were converted to a PBV subsidy, but we were unable to identify the total number of households converted to a PBRA subsidy  Based on our analysis of 26,000 PBV households, we found about 2,700 (about 11 percent of) households were headed by an about 6,800 (about 26 percent of) households were headed by an individual with a disability; about 2,700 households (about 10 percent of) households were headed by an elderly person who also had a disability; over half (about 14,000 or 54 percent) of the households were headed by an individual identified as black; close to 11,000 households (about 41 percent) were identified as white; and about 1,000 households (about 4 percent) were identified as Asian  Close to 3,100 households (about 12 percent) were headed by an individual identified as Hispanic; about half (about 49 percent) of the PBV households were single- person households; the median annual income of PBV households both before and after RAD conversion was about $10,000; and about 5,300 (about 20 percent) of households were paying a flat rent rather than income-based rent before RAD conversion  However, the data on PBV households were not comprehensive  For example, while about 10,000 residents (about 57 percent) experienced a rent increase following RAD conversion under PBV, we could not determine if the rent increase was the result of an increase in resident income  We also could not determine changes in location among the PBV households following RAD conversion  Rather than relying on the public housing and Section 8 databases for tracking household information during conversion, HUD officials indicated that the agency will rely on locally maintained resident logs, which contain household information collected by property owners, as the starting point when HUD determines a compliance review is warranted  The logs will be the primary way the agency collects household information for compliance reviews under the RAD program, according to HUD officials  In November 2016, HUD issued a notice, which requires the PHA or other postconversion owner to maintain a log about every household at a converting project, including information on race and ethnicity, household size, and disability  The notice also requires owners to track residence status throughout the relocation process, including whether the resident has returned, moved elsewhere, was permanently relocated or evicted; relocation dates; and details on any temporary housing and moving assistance provided  Owners are required to make the information available to HUD upon request for audits and other purposes  According to HUD officials, the agency expects the information in the resident logs to be more robust than what they would collect through the public housing and Section 8 databases, which do not track residents while they are relocated  HUD officials stated that the agency plans to review selected resident logs as part of an ongoing limited compliance review of about 90 RAD conversion projects  HUD officials told us they are developing procedures for performing compliance reviews—such as developing a mechanism to review a sample of logs on a periodic basis—but they have not yet done so because they have been focusing on developing procedures for activities that present a high risk to the program as described in the following section  HUD has not established a time frame for developing these procedures  However, HUD officials indicated that they plan to select resident logs for review based on risk of noncompliance and do not plan to analyze program-wide information currently collected in the public housing and Section 8 databases for program monitoring  HUD officials also noted that that PD&R is planning to track a sample of residents through its evaluation of the program, which we previously mentioned  While HUD has decided to rely on resident logs because of the difficulty of tracking household information across its program databases, using resident logs to assess the effects of the RAD program on residents has limitations  While the resident logs would contain detailed household information, they were not required prior to November 2016 and may not contain information on households converted before that date (RAD conversions started in 2013)  HUD’s public housing and Section 8 databases contain information on such households  Second, as previously mentioned, HUD plans to review resident logs only when there is a risk of noncompliance, but they collect household information in their databases on a rolling basis  Standards for Internal Control in the Federal Government require agencies to use quality information to achieve their objectives, and obtain and evaluate relevant and reliable data in a timely manner for use in effective monitoring  Without a comprehensive review of household information—one based on information in HUD data systems as well as resident logs—HUD cannot reasonably assess the effects of ongoing and completed RAD conversions on residents and compliance with resident safeguards, as discussed in the next section  HUD has not yet developed monitoring procedures for certain resident safeguards under the RAD program  RAD requirements include those intended to ensure that residents whose units are converted through RAD are informed about the conversion process; can continue to live in a converted property following RAD conversion; are afforded certain protections carried over from the public housing are afforded a phase-in of any rent increases under Section 8 program requirements  Currently, based on HUD notice requirements, PHAs must document compliance with three safeguards (PHA plan amendments, resident notification, and procedural rights) in their RAD application and other conversion paperwork  For example, PHAs must submit comprehensive written responses to resident comments received in connection with the required resident meetings with their RAD application  For one safeguard, PHAs are not required to report to HUD but must retain documentation of compliance to be made available to HUD as part of the monitoring for the program  For others, the HUD notice does not specify reporting and monitoring requirements  Based on our review of files for selected conversions, which we previously discussed, we found PHAs generally submitted documentation of their efforts to inform residents about RAD conversion, such as providing evidence to HUD of meetings with residents and written responses to resident questions as required  However, the specific documents for these requirements were not available from HUD in all cases  HUD’s review of amendments to PHA plans was documented in all but one of the conversions we reviewed  Documentation requirements for resident relocations have changed since RAD was introduced, which made the documentation more difficult to assess  HUD developed and started implementing procedures in October 2017 that require owners to certify and provide data supporting compliance with the resident right-to-return requirements  For example, owners must certify the number of residents who exercised their right to return to a converted property compared with the number of residents who did not return  HUD is also developing standard operating procedures to review each conversion for compliance with RAD relocation provisions  Specifically, the procedures would describe the review steps required at different stages of the conversion process, a process for identifying risks, and how to address instances of noncompliance with RAD requirements  Additionally, HUD noted that they have 2 compliance reviews under way including 1 involving a set of HUD requirements that affect relocations of more than 1 year and the limited compliance review of 90 projects that we previously described  HUD officials noted that they are developing additional guidance in other areas  First, HUD officials indicated that as part of an overall update of RAD standard operating procedures, they are developing additional protocols on resident notification and how residents’ comments are addressed through conversion planning  Second, the agency had not been consistently collecting required documentation on “house rules,” which describe the conditions and procedures for evicting residents and terminating assistance at RAD PBRA properties, so it has developed and implemented additional legal review procedures as part of the implementation of RAD resident eviction and grievance procedural rights requirements  According to HUD officials, they have been focusing primarily on right-to-return and relocation requirements because they represent areas of highest risk  HUD has not developed separate monitoring procedures for other resident safeguards—the phase-in of tenant rent increases, resident representation through tenant organizations, and choice mobility requirements  However, HUD officials told us that they plan to assess how administrative data can be used to monitor choice mobility as part of the planning for a separate PD&R evaluation of this safeguard  HUD officials also indicated that there are procedures for residents to report complaints to HUD if resident representation and organization requirements are not met  Standards for Internal Control in the Federal Government require agencies to implement control activities through documented policies and procedures to provide reasonable assurance that agency objectives will be achieved  These standards also require agencies to design procedures to achieve goals and objectives, and identify, analyze, and respond to risks related to achieving the defined objectives  Table 1 includes a description and information on implementation of resident safeguards that most directly affect residents’ experience with the conversion process and ability to live at the property following conversion  Appendix III describes these and other RAD resident safeguards  HUD officials indicated that the safeguards for the phase-in of tenant rent increases, resident representation, procedural rights, and choice mobility presented a lower risk than the right-to-return requirements, so they were a lower priority, and in some cases were addressed through general monitoring of the Section 8 program  For choice mobility options, HUD indicated that its data systems are not designed to track whether residents are able to exercise these options, such as tracking whether residents left a property to exercise choice mobility or for other reasons  All but two of the resident safeguards do not take effect until after a property has been converted and is part of the Section 8 program  For example, residents are only eligible to use vouchers through choice mobility after they have lived in the converted property for 1 or 2 years depending on the assistance contract involved (PBV or PBRA)  Moreover, certain RAD safeguards are not typically available for Section 8 residents  For example, RAD establishes resident representation provisions and procedural rights that are more in line with public housing rather than Section 8 requirements  While HUD has indicated that the Section 8 program has experience administering different types of assistance contracts, RAD nonetheless creates separate requirements for certain provisions from the public housing and Section 8 programs  As previously mentioned, RAD conversions have been completed at an increasing pace in the last 5 years  However, because HUD has not yet developed separate monitoring procedures for certain requirements—the phase-in of tenant rent increases, resident representation through tenant organizations, and choice mobility requirements, many of which take effect after a conversion—and without using all available household data, the agency will not be able to reasonably ensure that these safeguards were implemented  Residents who participated in our focus groups expressed some concerns about information they received on RAD conversions, communications opportunities, and the relocation process  Residents indicated that they were notified about RAD conversion in a variety of ways  Residents in 5 of 14 focus groups found the information presented to them on RAD to be helpful  Residents in 7 of 14 focus groups indicated that the information they received was not helpful  Across these focus groups, a range of concerns was expressed, including that the information provided was not always clear or reflective of the final changes resulting from RAD conversion, and that the PHA and management were not always forthcoming with information about the RAD changes  Residents in some focus groups also indicated that they were not involved in the RAD conversion  Residents in 5 of 14 groups indicated that they were not given the opportunity to provide input into the RAD changes, while residents in 6 of 14 groups indicated that their concerns were not addressed and their suggestions were not incorporated  Residents also described problems with relocations  Some of the concerns expressed by resident focus groups on relocation related to the location of the temporary units (3 of 14 focus groups), the timing of relocation or amount of notice given (7 of 14 focus groups), and moving issues (such as items damaged during moves)  Residents were asked to describe ways in which RAD conversion improved or harmed their living conditions  Residents in several focus groups indicated that RAD improved their living conditions, including both the condition (7 of 14 focus groups) and appearance of their units or the property in which they lived (6 of 14 focus groups)  Some of the changes residents liked included the installation of new appliances, mold and pest removal, and safety and energy efficiency improvements  However, residents in several of the focus groups identified problems with their living conditions following RAD conversion  The problems residents identified included security concerns (10 of 14 focus groups); renovations that were of poor quality (6 of 14 focus groups); and other problems with the units (10 of 14 focus groups), such as pest problems; decreased amenities (8 of 14 focus groups), such as the removal of common areas or in-unit washing machines; and issues with property management (11 of 14 focus groups)  For example, in several instances, residents stated that new managers or owners in place following RAD conversion were not responsive to their needs or concerns  During our site visits, residents described other experiences with RAD conversion  Residents in all of the groups identified being notified about RAD  Residents in 9 of 14 focus groups indicated that their rent was the same following RAD conversion  Residents in a few focus groups indicated that their rent had increased because of changes in their income or conversion from a flat rent  However, residents in a few focus groups experienced challenges in how their income was certified for the purpose of calculating rents, such as problems with requests for information (2 of 14 focus groups) and other issues with the process (4 of 14 focus groups)  For example, residents reported having to provide the same paperwork multiple times  No instances in which residents were permanently involuntarily displaced were reported  One resident organization expressed concerns about fewer eviction protections and resident representation after RAD conversion  We spoke with 18 PHAs, some of which cited benefits as well as several challenges of RAD participation and some noted HUD responsiveness to their circumstances and concerns  According to many of the PHAs we spoke with, benefits of participating in the RAD program included reducing administrative requirements in Section 8 programs and opening avenues for additional sources of funding  In particular, many of the PHAs noted that RAD allowed them to access tax credit equity and other funding to complete the bulk of their repairs and renovations at once  Over half of the PHAs we spoke with also found HUD to be flexible and responsive to individual PHA circumstances  The majority of PHAs we spoke with indicated that remaining in the public housing program was not tenable because funding for the public housing program was not enough to meet their long-term capital needs  PHAs we contacted also noted several challenges of participating in RAD: financing constraints, timing challenges, and evolving requirements  Financing constraints  Some PHAs noted that program rent requirements can limit PHA participation in RAD  Each year, HUD calculates a contract rent—the total rent for a unit, including operating subsidy and resident contribution  PHAs must use the contract rent to calculate Section 8 subsidies for properties converting under RAD  According to HUD and several PHAs, contract rents for RAD-converted Section 8 units are lower than rents in traditional Section 8 assisted units, and are almost always lower than market-rate rents  Several PHAs and HUD officials have described the difficulty of converting units from the public housing program with this rent limitation  For example, when the cost of needed rehabilitation or construction is high, low allowable contract rents might not be sufficient to access appropriate capital for the conversion  In certain localities, PHAs have found solutions to augment rents and have used RAD flexibilities to allow them to convert and plan for operating expenses  For example, the PHA in Tacoma, Washington, used the Moving to Work program flexibilities to increase contract rents and housing officials in San Francisco used an allowable procedure to transfer RAD assistance from converted buildings to properties throughout its portfolio (each is a blend of traditional project-based vouchers with higher contract rents and RAD assistance)  In Montgomery County, Maryland, the PHA similarly included RAD assistance in some mixed-finance properties that contain other high-rent subsidies and market-rate rents
Report 2:  Examples of schedule D positions include those involving science, technology, engineering, or mathematics (STEM) occupations and positions in the Presidential Management Fellows Program  Schedule D positions generally require an applicant to satisfy basic qualification standards established by OPM for the relevant occupation and grade level  Like employees in the competitive service, excepted service employees are generally paid in accordance with the General Schedule  In addition, excepted service employees maintain the same notice and appeal rights for adverse personnel actions  Some employees in the excepted service, however, must satisfy different durational requirements before these rights become available  So-called "preference eligibles" in an executive agency, the Postal Service, or the Postal Rate Commission must complete one year of current continuous service to avail themselves of the relevant notice and appeal rights  The term "preference eligible" refers to specified military veterans and some of their family members, such as an unmarried widow, and the wife or husband of a service-connected disabled veteran  Employees in the excepted service who are not preference eligibles and (1) are not serving a probationary or trial period under an initial appointment pending conversion to the competitive service, or (2) have completed two years of current or continuous service in the same or similar position, have the same notice and appeal rights as qualifying employees in the competitive service  The SES is a cadre of high-level government administrators who manage major programs and projects within most federal agencies  While they are considered federal employees within the civil service system, the SES is governed by a regulatory structure separate from the competitive and excepted services  As defined in statute, SES positions are generally managerial or supervisory positions that are classified above the GS-15 grade (or certain equivalent positions) and need not be appointed by the President and confirmed by the Senate  In these leadership roles, SES members may serve as intermediaries between top-level political appointees of an agency who seek to carry out the objectives of a particular President and career civil servants with institutional experience relating to relevant issues  According to a 2018 report, there are currently more than 7,000 permanent SES positions  There are two types of SES positions: (1) career reserved and (2) general  Career reserved positions must be filled with career appointees to shield certain SES roles from political influence  Generally, agency heads are to determine whether a particular SES position warrants a career reserved designation, to "ensure impartiality, or the public's confidence in the impartiality, of the Government " OPM regulations reflect the types of SES roles in which this designation is appropriate, including those involving adjudication and appeals, auditing, and law enforcement duties  General positions may be filled by career appointees, as well as other noncareer and limited term (i e , political) appointees  There are four types of SES appointments: career, noncareer, limited term, and limited emergency appointees  The SES mainly consists of "career appointees" chosen through a merit-based competitive hiring process  As part of this process, each agency must maintain a recruitment program for career appointees, as well as at least one executive board that reviews qualifications and makes recommendations regarding SES candidates  An OPM-convened Qualification Review Board (QRB) must certify the executive and managerial qualifications of a selected candidate before a career appointment may be made to an SES position  Unlike career appointees, noncareer appointees are not subject to the competitive selection process, but agency heads must determine that these appointees meet the qualifications of the SES position  While noncareer appointees are not QRB-certified, OPM must approve these appointees  Limited term and limited emergency appointees make up a small subset of the SES, and their terms are non-renewable  These appointments are used when a position is needed for a specified period (such as to manage a special project), or a position is established to meet a "bona fide, unanticipated, urgent need " Limited term and limited emergency appointments are also subject to OPM approval  To restrict the politicization of the SES, Title 5 of the U S  Code (Title 5) limits the number of noncareer and limited term appointees who may serve in SES positions  The SES pay structure is also distinct from the rest of the civil service  Title 5 specifies that the pay rate of each senior executive is based on the executive's individual performance or contribution to agency performance (or both), as measured under a "rigorous" performance appraisal system  Each federal agency must maintain at least one of these appraisal systems, subject to OPM standards, review, and approval  Performance appraisals of SES members may consider factors such as improvements in efficiency, productivity, and quality of work or service, cost efficiency, and performance timeliness  In response to earlier concerns that SES appraisal systems were flawed because most executives received the highest rating, Title 5 tasks OPM, in collaboration with the Office of Management and Budget, with the establishment and maintenance of a government-wide performance appraisal system certification process, in an effort to ensure that an agency's appraisal systems for SES employees make "meaningful distinctions based on relative performance " Title 5 also sets out different pay rates for the SES, with a minimum rate of basic pay equal to 120 percent of the rate for GS-15, step 1, and a maximum rate of basic pay equal to the rate for Level III of the Executive Schedule  But SES members' annual aggregate pay (that includes additional compensation such as bonuses, awards, and other payments in addition to basic pay) is capped at the rate for Level I of the Executive Schedule  If a senior executive's total compensation exceeds the aggregate limitation, the executive receives the overage in the following calendar year  To encourage federal agencies to establish and maintain an OPM-certified performance appraisal system, Title 5 allows for a higher range of SES pay for agencies that have these certified systems  Title 5 also articulates conditions and procedures for removing, suspending, or taking other adverse actions against a member of the SES  Career SES appointees who have successfully completed a one-year probationary period may be removed or subject to adverse action only for specified reasons  For example, an SES career appointee may be removed from the civil service or suspended for more than 14 days only for misconduct, neglect of duty, malfeasance, or failure to accept a directed reassignment or to accompany a position in a transfer of function  SES members must receive advance written notice about the action and opportunity to provide an answer or receive hearing, subject to exception  The senior executive may also appeal the employment action to the MSPB  A career appointee receiving a single unsatisfactory performance rating may be reassigned or transferred within the SES or removed from the SES  A career SES member who receives two unsatisfactory ratings in any period of five consecutive years, or twice in any period of three consecutive years receives less than fully successful ratings, must be removed from the SES  Affected SES career appointees must receive advance written notice of these actions  While these appointees may not appeal these actions to the MSPB, they may request an informal hearing before the Board  SES career appointees are also generally entitled to be placed in a civil service position at GS-15 or above (or an equivalent position)  In comparison, noncareer, limited term, and limited emergency appointees are generally not subject to the same removal protections and may be removed from the SES at any time  The procedures for removal of noncareer and limited term appointees are largely not addressed in federal statute, and the terms and procedures for their removal are mainly at the discretion of the agency head  In response to concerns about performance and accountability of SES members employed by the Department of Veterans Affairs (VA), Congress recently created special removal requirements that apply to these positions  In 2017, Congress passed the Department of Veterans Affairs Accountability and Whistleblower Protection Act, which amended an existing provision concerning removal procedures for these covered senior executives  Under the 2017 Act, the VA Secretary has discretion to suspend, demote, remove, or take other actions against SES career appointees or other high-level executives if the Secretary determines that the individual's misconduct or performance warrants such action  To address SES job performance issues more expeditiously, SES employees at the VA Department are entitled to abbreviated notice and appeals rights, as compared to the removal procedures in place in other federal agencies 

ground_truth: News reports in the late 1990s and early 2000s drew attention to a phenomenon sometimes called corporate "inversions" or "expatriations": instances where U.S. firms reorganize their structure so that the "parent" element of the group is a foreign corporation rather than a corporation chartered in the United States. The main objective of these transactions was tax savings, and they involved little to no shift in actual economic activity. Bermuda and the Cayman Islands (countries with no corporate income tax) were the locations of many of the newly created parent corporations. These types of inversions largely ended with the enactment of the American Jobs Creation Act of 2004 (JOBS Act; P.L. 108-357), which denied the tax benefits of an inversion if the original U.S. stockholders owned 80% or more of the new firm. The act effectively ended shifts to tax havens where no real business activity took place. However, two avenues for inverting remained. The act allowed a firm to invert if it has substantial business operations in the country where the new parent was to be located; the regulations at one point set a 10% level of these business operations. Several inversions using the business activity test resulted in Treasury regulations in 2012 that increased the activity requirement to 25%, effectively closing off this method. Firms could also invert by merging with a foreign company if the original U.S. stockholders owned less than 80% of the new firm. If the original U.S. shareholders owned less than 60%, the firm was not considered as inverting. Two features made a country an attractive destination: a low corporate tax rate and a territorial tax system that did not tax foreign source income. The U.K. joined countries such as Ireland, Switzerland, and Canada as targets for inverting when it adopted a territorial tax in 2009. At the same time, the U.K. also lowered its rate (from 25% to 20% by 2015). Inverted firms could reduce worldwide taxes by stripping taxable earnings out of the new U.S. subsidiary, largely through allocating debt to that subsidiary. Soon after, several high-profile companies indicated an interest in merging with a non-U.S. headquartered company, including Pfizer, Chiquita, AbbVie, and Burger King. This "second wave" of inversions again raised concerns about an erosion of the U.S. tax base. Chiquita and AbbVie canceled their plans in the wake of 2014 Treasury regulations, but Burger King and other firms completed merger plans. Pfizer subsequently terminated its planned merger with Allergan after Treasury regulations issued in 2016. Evidence suggests that these Treasury regulations have been an important factor in subsequently decreasing these merger-related inversions. Two policy options had been discussed in response: a general reform of the U.S. corporate tax and specific provisions to deal with tax-motivated international mergers. In December 2017, P.L. 115-97 (popularly known as the Tax Cuts and Jobs Act) lowered the corporate tax rate as part of broader tax reform which some argued would slow the rate of inversions. Other tax reform proposals suggested that if the United States moved to a territorial tax, the incentive to invert would be eliminated. There were concerns that a territorial tax could worsen the profit-shifting that already exists among multinational firms. P.L. 115-97, while moving in some ways to a territorial tax, also instituted a number of measures aimed at combatting profit shifting, including a global minimum tax on intangible income that limited the tax benefits of a territorial tax. The second option is to directly target inversions. The 2017 act included several provisions that discouraged inversions. In addition, further anti-inversion provisions have been introduced, most recently H.R. 5108 and S. 2459 in the 115th Congress, to treat all firms in which former U.S. shareholders have more than 50% ownership (or in which management and control is in the United States) as U.S. firms. These bills also provided that debt could also be allocated to the U.S. member of a worldwide operation in proportion to the U.S. ownership of assets.

prompt_front: You are given two reports by the government agency.



Question: Write a one-page summary of the report 2.

Report 1: The U S  corporate income tax is based on worldwide economic activity  If all of a corporation's economic activity is in the United States, then tax administration and compliance is relatively straightforward  Many corporations, however, operate in several jurisdictions, which creates complications for tax administration and compliance  Further, corporations may actively choose where and how to organize to reduce their U S  and worldwide tax liabilities  Some of these strategies have been referred to as expatriation, inversions, and mergers  This report begins with a brief discussion of relevant portions of the U S  corporate income tax system before examining how inversions were commonly structured  The report then looks at how Congress and the Department of the Treasury have reduced the benefits of inversions  The report concludes with an examination of remaining methods for inverting and policy options available to prevent or limit these inversions  Achieving tax savings using an inversion became more difficult with the enactment of the American Jobs Creation Act of 2004 (JOBS Act; P L  108-357 )  The JOBS Act denied or restricted the tax benefits of an inversion if the owners of the new company were not substantially different from the owners of the original company  The act also allowed a firm to invert only if it had substantial business operations in the country where the new headquarters was to be located  Although the 2004 legislation largely prevented the types of inversions that drew attention prior to its adoption, several companies have successfully inverted in the past few years by using the substantive business operations mechanism or merging  Treasury regulations have subsequently limited the former mechanism  In spring 2014, several high-profile companies indicated an interest in merging or plans to merge with a non-U S  firm, including Pfizer, Chiquita, and Omnicom (an advertising firm)  News reports indicated that a group of Walgreens investors was also urging such a move  Although the Pfizer and Omnicon mergers and Walgreens headquarters shifts ultimately did not take place, other firms announced mergers in the late spring and early summer  A number of firms in the medical device or pharmaceuticals fields announced mergers or proposed mergers with a shift of headquarters: Medtronics, Salix, AbbVie, Mylan, and Hospira  In August 2014, concern about inversions increased with the announcement that Burger King was in talks to merge with Tim Hortons, a Canadian firm, with the merged firm's headquarters in Canada  An agreement was announced on August 26  Although Burger King is a smaller firm than AbbVie, for example, it is a household name and this proposed inversion garnered much attention  In September 2014, the Treasury Department released a notice of regulatory changes that would restrict some aspects of inversions or their benefits and indicated that other actions may follow  AbbVie, Chiquita, and some other firms canceled their plans in the wake of these Treasury regulations, although new merger proposals were also announced  In November 2015, the Treasury announced additional regulatory restrictions  Although new inversions slowed significantly, others continued but in many cases have been structured to avoid the regulations by reducing ownership below 60%  Most notable of these is the proposed merger of Pfizer with Allergan in November 2015  Pfizer terminated the merger after the release of the April 4, 2016, regulations  This "second wave" of inversions again raised concerns about an erosion of the U S  tax base  While the substantial business avenue appears to have been largely eliminated by Treasury regulations that increased the required share of activity, the option of merging with a smaller foreign company remains  U S  firms may also merge with larger firms, although in this case the tax benefits are less likely to be key factors in the decision to merge  Data released by the Bureau of Economic Analysis indicated that acquisitions by foreigners, which rose substantially in 2015, fell by 15% in 2016, and by 32% in 2017  Some of the largest declines were in countries associated with inversions, such as Ireland, where acquisitions fell from $176 billion in 2015, to $35 billion in 2016, and to $7 billion in 2017  In December 2017, a tax revision ( P L  115-97 ), often called the Tax Cuts and Jobs Act (TCJA), and subsequently referred to as the "Act," made major changes to the corporate tax and the international tax rules, along with some specific revisions aimed at discouraging inversions  Although data for 2018 are not yet available, one planned inversion, by Assurant, Inc , was revised to retain the headquarters in the United States  Ohio-based Dana, Inc  announced plans to merge and move the headquarters to the U K , although the merger would leave the U S  shareholders with less than 60% ownership, and therefore not make them subject to anti-inversion penalties  The United States uses a system that taxes both the worldwide income of U S  corporations and the income of foreign firms earned within U S  borders  All income earned within U S  borders is taxed the same—in the year earned and at statutory tax rates of 21% (reduced from 35% by the Act)  Under pre-Act law, U S  corporate income earned outside the United States was also subject to U S  taxation, though not necessarily in the year earned  This treatment occurred because U S  corporations could defer U S  tax on active income earned abroad in foreign subsidiaries until it was paid, or repatriated, to the U S  parent company as a dividend  To mitigate double taxation, tax due on repatriated income was reduced by the amount of foreign taxes already paid  The Act substituted a new system (Global Intangible Low-Taxed Income, or GILTI) that taxed foreign source income of U S  subsidiaries currently but with an exemption for a deemed return of 10% on tangible assets and a deduction from the remaining income (for 50% of income through 2025 and 37 5% afterward)  It allows a credit for 80% of foreign taxes  The new system also allows U S  firms a deduction for foreign derived intangible income, or FDII, which was designed to reduce tax rates on foreign earnings from the use of intangible assets held in the United States  The deduction is 37 5% of this estimated income through 2025 and 21 875% afterward  Income from certain foreign sources earned by subsidiaries—which generally includes passive types of income, such as interest, dividends, annuities, rents, and royalties, and is referred to as Subpart F income—is generally taxed in the year it is earned and was retained by the Act  Subpart F applies only to shareholders who may be able to influence location decisions at the corporate level  These subsidiaries are referred to as controlled foreign corporations (CFCs)  The Act also adopted the Base Erosion and Anti-Abuse tax (BEAT), an alternative minimum tax with the tax based increased by certain payments to related foreign parties  Its primary focus was to address profit shifting between foreign parents and U S  subsidiaries, but it applies in general  Notably, it excludes payments for costs of goods sold and for costs of services under some pricing rules  One way of shifting profits was to locate debt in high-tax countries  Preexisting thin capitalization rules limited interest to 50% of earnings before the deduction of interest, taxes, and amortization, deprec iation, and depletion (EBITA), although firms with a debt-to-asset rate of 1 5 or less were exempt  The new law adopted much stricter thin capitalization rules to prevent firms from deducting large amounts of interest  The new law lowers the cap to 30% of profits, eliminates the exemption based on the debt-to-asset ratio and, after 2021, measures the cap as a share of profits after amortization, depreciation, and depletion deductions  The Act also adopted some tax provisions targeted at discouraging inversions, which are discussed subsequently  A corporate inversion is a process by which an existing U S  corporation changes its country of residence  After the inversion, the original U S  corporation becomes a subsidiary of a foreign parent corporation  Corporate inversions occur through three different paths: the substantial activity test, merger with a larger foreign firm, and merger with a smaller foreign firm  Regardless of the form of the inversion, the typical result is that the new foreign parent company faces a lower home country tax rate and no tax on the company's foreign-source income  The U S  firm can use inversions to reduce taxes using various techniques  Foreign operations in the future can be formed as subsidiaries of the new foreign parent in a country with a territorial tax, so that future foreign income can be exempt from tax  Accumulated and future foreign income from the U S  company's foreign subsidiaries (which would be taxed by the United States if paid to the parent as a dividend) may be effectively repatriated tax free by lending or otherwise investing in the related foreign firm, such as a low-interest loan to the foreign parent holding company  These borrowed funds could then be used, for example, to pay dividends to shareholders or make loans to the U S  firm  In addition, the combined firm can engage in "earnings stripping": reducing income in the U S  firm by borrowing from the U S  company and increasing interest deductions  For example, a foreign parent may lend to its U S  subsidiary  This intercompany debt does not alter the overall company's debt, but does result in an interest expense in the United States (which reduces U S  taxes paid) and an increased portion of company income being "booked" outside the United States  Royalty payments, management fees, and transfer pricing arrangements are other avenues for earnings stripping, but are thought to be of lesser importance than intercompany debt  In this form of inversion, a U S  corporation with substantial business activity in a foreign company creates a foreign subsidiary  The U S  corporation and foreign subsidiary exchange stock—resulting in each entity owning some of the other's stock  After the stock exchange, the new entity is a foreign corporation with a U S  subsidiary, as the exchange is generally in proportion to the respective company valuations  As this form of inversion does not require any change in the effective control of the corporation, it is referred to as a "naked inversion " In this form of inversion, a U S  corporation would like to bolster its foreign operations and, perhaps, lower its U S  tax  To do so, the U S  corporation merges with a larger foreign corporation, with the U S  shareholders owning a minority share of the new merged company  This results in the effective control of the new company being outside U S  borders  While this form of inversion may be driven by business considerations, tax considerations may also be part of the decision  An example of this can be seen in the following statement by the board of directors of a U S  corporation recommending approval of a merger with a U K  corporation  The board of directors pursued the merger in part because Ensco was headquartered in a jurisdiction that has a favorable tax regime and an extensive network of tax treaties, which can allow the combined company to achieve a global effective tax rate comparable to Pride's competitors  In this case, a U S  firm, Pride, merged with a U K  firm, Ensco, and the headquarters remained in the U K  In this form of inversion, a U S  corporation would like to bolster its foreign operations and lower its U S  tax  To do so, the U S  corporation merges with a smaller foreign corporation, with the U S  shareholders owning a majority share of the new merged company  This merger results in the effective control of the new company staying with the shareholders of the U S  corporations  While this form of inversion may be driven by business considerations, tax considerations may also be part of the decision  An example is the Eaton Cooper merger  The following is an excerpt of a U S  corporation's (Eaton's) press release announcing the acquisition of an Irish company (Cooper), with the company headquartering in Ireland (with a 12 5% tax rate and a territorial system)  At the close of the transaction     Eaton and Cooper will be combined under a new company incorporated in Ireland, where Cooper is incorporated today  The newly created company, which is expected to be called Eaton Global Corporation Plc or a variant thereof ("New Eaton"), will be led by Alexander M  Cutler, Eaton's current chairman and chief executive officer  At the close of the merger, it was expected that the shareholders of the U S  company would control 73% of the combined company, with the shareholders of the Irish company controlling the remaining 27%  The press release notes expected tax benefits from the merger at $165 million in 2016, out of $535 million of total cost savings  In this case, a U S  corporation used a merger to achieve an inversion while its shareholders retained a significant majority of shares  In the late 1990s and early 2000s, news reports drew the attention of policymakers and the public to a phenomenon sometimes called corporate "inversions" or "expatriations": instances where firms that consist of multiple corporations reorganize their structure so that the "parent" element of the group is a foreign corporation rather than a corporation chartered in the United States  Among the more high-profile inversions were Ingersoll-Rand, Tyco, the PXRE Group, Foster Wheeler, Nabors Industries, and Coopers Industries  These corporate inversions apparently involved few, if any, shifts in actual economic activity from the United States abroad, at least in the near term  In particular, inverted firms typically continued to maintain headquarters in the United States and did not systematically shift capital or employment abroad post inversion  Further, Bermuda and the Cayman Islands were the location of many of the newly created parent corporations—jurisdictions that have no corporate income tax but that also do have highly developed legal, institutional, and communications infrastructures  A 2002 study by the U S  Treasury Department concluded that while inversions were not new—the statutory framework making them possible has long been in existence—there had been a "marked increase" in their frequency, size, and visibility  Taken together, these facts suggested that tax savings were one goal of the inversion, if not the primary goal  Beyond taxes, firms engaged in the inversions cited a number of reasons for undertaking them, including creating greater "operational flexibility," improved cash management, and an enhanced ability to access international capital markets  The 2002 Treasury report identified three main concerns about corporate inversions: erosion of the U S  tax base, a cost advantage for foreign-controlled firms, and a reduction in perceived fairness of the tax system  These concerns, along with a growing awareness of inversion transactions, may have resulted in congressional concern and debate about how to address the issues surrounding inversions, culminating with the enactment of an anti-inversion provision (Section 7874) in the American Jobs Creation Act of 2004 (AJCA; P L  108-357 )  The AJCA adopted two alternative tax regimes applicable to inversions occurring after March 4, 2003  The AJCA treats the inverted foreign parent company as a domestic corporation if it is owned by at least 80% of the former parent's stockholders  In these cases, the AJCA would deny the firm any tax benefits of the inversion (i e , it would continue to be taxed on the combined group's worldwide income)  The second regime applies when there is at least 60% continuity of ownership but less than 80%  In this case, the new foreign parent is not taxed like a domestic corporation, but any U S  toll taxes (taxes on gains) that apply to transfers of assets to the new entity are not permitted to be offset by foreign tax credits or net operating losses  The AJCA also exempted corporations with substantial economic activity in the foreign country from the anti-inversion provisions, but it did not define substantial business activity in the statute  Although the 2004 act largely eliminated the generic naked inversions, two alternatives remained that allowed a firm to shift headquarters and retain control of the business: the naked inversion via the business activity exemption, and merger with a smaller company  Using the business activity route would require significant economic operations in the target country  An inversion by merger would require a large firm that would be at least 25% of the size of the U S  firm  The post-2004 approaches to inversions no longer involved countries such as Bermuda and the Cayman Islands, but larger countries with substantial economic activity such as the U K , Canada, and Ireland  The U K , in particular, has become a much more attractive headquarters  Because of freedom of movement rules in the European Union, the U K  cannot have anti-inversion laws, which may have played a role in both moving to a territorial tax and lowering the corporate tax rate  A 2012 report in the Wall Street Journal highlighted some recent moves abroad  This report claimed 10 companies had inverted since 2009, with 6 within the past year or so  This was a small number of companies, but it is useful to look at the methods involved  The Wall Street Journal article identified by name 5 of the 10 companies that had moved abroad recently: Aon, ENSCO, Rowan, Eaton, and DE Master Blenders 1763  (The article also referred to Transocean and Weatherford International, but these were firms that had inverted before the 2004 legislation: Transocean first to the Cayman Islands, and then Switzerland, and Weatherford first to Bermuda, and then Switzerland ) The remaining firm mentioned in the Wall Street Journal article is Eaton  Eaton's move abroad was a merger; it merged with Coopers, a firm effectively operating its headquarters in the United States, but one that had inverted prior to the 2004 law change  An article by Bret Wells identified Aon, ENSCO, and Rowan as having inverted via the substantial business activity exemption (where the only apparent objective is tax savings)  All three moved to the United Kingdom, where a recent move to a territorial tax, as well as decisions in the European Court of Justice that limited their anti-abuse rules, had made their tax system more attractive  The U K  was also in the process of lowering its own corporate rate  Two of the firms are oil drilling firms; drilling in the North Sea might have affected their ability to use this exemption  Aon is an insurance firm  Wells mentions another firm, Tim Hortons, which also used a naked inversion using the substantial business activity exemption in 2009 to relocate to Canada  In doing so, the firm was returning to its origins, as it was founded in Canada  It became an American company when Wendy's acquired it in 1995, but it was subsequently spun off in 2006  DE Master Blenders 1763, like Tim Hortons, was returning to its origins as well (a Netherlands firm), as it was spun off from Sara Lee, which had acquired it in 1978  In response to increased use of the substantial business activity exemption, Treasury Regulations (T D  9592, June 12, 2012) increased the safe harbor for the substantial business activities test from 10% to 25%, effectively closing off this avenue in the future  This action could be done by regulation because the statute did not specify how the substantial business activity test was to be implemented  A number of mergers have either been effectuated or were proposed: Chiquita, Actavis, and Perrigo (the latter two are pharmaceutical firms) moving to Ireland; Valeant Pharmaceuticals and Endo Health Services moving to Canada; and Liberty Global (a cable company) to the U K  Subsequently, the new Irish firm Actavis (itself the result of two prior mergers) merged with Forest Labs  Omnicom (an advertising firm) planned a move to the U K  (after proposed merger with a French firm, creating a Netherlands holding company, resident in the U K  for tax purposes), but has abandoned its merger  Chiquita canceled its plans after Treasury regulations were issued in September 2014  Most of these firms are not household names or industry giants  Thus, perhaps none created as much interest as the attempt by pharmacy giant Pfizer to acquire AstraZeneca with a U K  headquarters, or the urging of some stockholders of Walgreens to invert to Switzerland  Pfizer represented a significant potential loss of future tax revenue, as much as $1 4 billion per year  According to a study by Martin Sullivan, in 2005, when a temporary tax exclusion of 85% of dividends (the repatriation holiday) was in force, Pfizer repatriated $37 billion, the single largest amount of repatriations of any firm  In 2009, Pfizer repatriated $34 billion (and paid U S  taxes on that amount) to finance the acquisition of Wyeth, but earnings abroad grew from $42 billion in 2009 (after the repatriation) to $73 billion by 2012  These earnings have not been repatriated and taxed in the United States  An inversion by Pfizer would, however, result in current shareholders paying capital gains taxes on any stock appreciation when they are converted into shares of the new company  Shares held in IRAs and 401(k)s would not typically owe this tax, but shares owned directly by individuals and in mutual funds would owe tax even if they did not sell their stock  Policymakers and the public remained interested in the issue of inversions through 2014  Although the initial Pfizer merger did not occur, the spate of mergers or proposed mergers in the medical device and pharmaceuticals industries continued in 2014  One example included one of the largest proposed mergers yet, AbbVie's acquisition of Shire, an Irish firm  The announcement of a proposed merger between Burger King and Tim Hortons also generated interest in the issue  As is the case with Chiquita, AbbVie canceled its plans after the issuance of Treasury regulations in September 2014, but Burger King planned to complete its merger and did so on December 12, 2014  Treasury continues to regulate inversions where regulations are possible  For example, in 2014 it took action to close a loophole stemming from the coordination of two sets of regulations—the "Anti-Killer B Regulations" and the "Helen of Troy Anti-Inversion Regulations"—that allowed Liberty Global shareholders to avoid some capital gains taxes  In response to the new wave of inversions, the Treasury Department released a notice of regulatory actions that would restrict inversions and their benefits  Treasury news releases, however, indicated that legislative action is the only way to fully rein in these transactions  Following this notice, several firms announced they were canceling plans to merge, and one firm, Medtronic, announced a change in financing plans (no longer using earnings abroad to pay acquisition costs)  Other firms, however, have announced inversion plans  There is no way to know how many unannounced mergers were, or will be, prevented by these regulations  The regulatory actions address two basic aspects of inversions  One set of changes limits the ability to access the accumulated deferred earnings of foreign subsidiaries of U S  firms  The second regulatory action restricts certain techniques used in inversion transactions that allowed firms to qualify with less than 80% ownership  This regulation is effective for inversions that closed on or after September 22, 2014  The regulations do not prevent inversions via merger and do not address earnings stripping by shifting debt to the U S  firm, although Treasury has indicated future action in this area  In an inversion, the foreign subsidiaries of the original U S  firm remain subsidiaries so that any dividends paid to the U S  parent would be taxed  Regulations also treat other direct investments in U S  property, such as loans to the U S  parent, as dividends  Once a firm has inverted and the U S  firm is now a subsidiary of a foreign parent, there are methods of accessing the earnings of overseas subsidiaries by transactions between the new foreign parent and the U S  firm's foreign subsidiaries  The regulation is intended to address three such methods  First, the regulation prevents the access to funds by, for example, a loan from the U S  company's foreign subsidiary to the new foreign parent (called "hopscotching")  Before the regulation, funds of this type could have been used to pay dividends to the individual shareholders or for other purposes  Under the regulation, acquiring any obligation (such as a loan) or stock of a foreign related person is treated as U S  property subject to tax  Second, the regulation addresses "decontrolling," where the foreign acquiring corporation issues a note or transfer of property for stock in the U S  firm's foreign subsidiaries  If a majority of stock is obtained, the U S  firm's subsidiary is no longer a controlled foreign corporation (CFC) and not subject to Subpart F, which taxes currently certain passive or easily shifted income  However, even a less than majority share can allow partial access to deferred earnings without a U S  tax  This regulation prevents this by treating acquisition of foreign subsidiary stock as acquisition of stock in the U S  parent  Third, the regulation addresses transactions where the foreign acquiring corporation sells stock of the former U S  parent corporation to that U S  parent corporation's CFC in exchange for property or cash  If such a transaction is structured properly, some interpretations of the old regulations would have permitted the income to avoid taxation  The new regulations would prevent that and would apply regardless of the firm's inversion status  A firm can realize the tax benefits of an inversion only if the shareholders of the original U S  firm retain, after the merger, less than 80% of the ownership in the new company  The regulation contains several provisions that limit certain techniques for achieving this goal  The avoidance techniques include inflating the foreign firm, shrinking the U S  firm, and inverting only part of the U S  firm  First, it prevents firms from reaching the less than 80% goal by inflating the size of the foreign merger partner (which must have more than 20% ownership subsequent to the merger) by use of passive assets (e g , an interest bearing bank deposit)  This notice disregards passive assets of the foreign firm if more than 50% of its value is in passive assets  (Banks and financial service companies are excluded ) Second, it prevents firms from shrinking the size of the U S  firm by paying extraordinary dividends before the merger  The notice disregards this reduction in value  Third, it prevents an inversion of part of a U S  company (a "spinversion") by spinning it off to a newly formed foreign corporation, by treating the new "foreign" company as a domestic corporation  After the 2014 Treasury regulations were issued, some firms revised their plans, and the pace of inversions slowed  Some mergers were structured to avoid the anti-inversion rules and Treasury regulations, by an ownership share of less than 60%  Among what appear to be inversions is the merger of telecom firm Arris and Pace (a U K  firm), CF Industries (fertilizer) and OCI NB (a Netherlands firm), Terex with Konecranes (a Finnish firm), and a consolidation of European Coca-Cola bottling firms (one such firm, Coca-Cola Enterprises, was a U S  headquartered firm)  Waste Connections Inc  merged with Progressive Waste Solutions Ltd (a Canadian Firm), with 70% ownership and a headquarters in Canada  Monsanto's proposal to merge with Syngenta (a Swiss firm) was called off  Some mergers that did not qualify as inversions under the tax law also occurred  The most significant in size was the proposed Pfizer merger  On November 23, 2015, Pfizer announced a proposed merger with Allergan, an Irish company, and the move of its headquarters to Ireland  This merger, which would result in the largest pharmaceutical company in the world, is not covered under the anti-inversion rules because Pfizer will own 56% of the value of the new firm  Allergan itself is the product of a merger involving both stock and cash acquisition by Actavis in 2015, with former Allergen shareholders owning a minority of the new company  Thus, this merger as well was not an inversion under the tax law  Actavis, in turn, was a former U S  firm that inverted by merger with Warner Chillcott, an Irish firm, in 2013 (where the former shareholders of the U S  firm acquired 77% of the stock)  Pfizer terminated its merger with Allergen after the April 4, 2016, regulations (discussed below)  Other notable mergers not subject to anti-inversion rules were the acquisition of Salix, a pharmaceutical company, by Valeant (a Canadian company); the acquisition of Auxilium by Endo (after Auxilium backed out of an inversion with Canadian firm QLT); the merger of Cyberonics with Italy's Sorin (to be headquartered in the U K ); and the merger of Broadcom (a chipmaker) with Avago (a Singapore firm)  Information and analytics provider HIS announced a merger with Markit Ltd, a U K  firm, to be headquartered in the U K , but the ownership share of HIS would be less than 60% of the firm  Johnson Controls also merged with Tyco, one of the earlier inverted firms  The 2015 Treasury regulations appear to have more limited consequences for inversions than the 2014 regulations did  Three regulatory changes were made by the notice  First, in the case where the foreign parent is a tax resident of a third country, stock issued by that parent to the existing foreign firm will be disregarded for purposes of the ownership requirement  That change will prevent a U S  firm from merging with a partner and then choosing a tax friendly third country to headquarter in  The second provision would clarify the so called "anti-stuffing" rules, where the foreign firm's size is inflated by adding assets to that firm  The notice clarifies that this rule applies to any assets, not just passive assets  Third, the current business activity exception requires 25% of business activity to be in the foreign country where the new parent is created or organized, but does not require it to be a foreign parent  This rule requires the business activity to be in the foreign parent  It prevents inversion based on the business activity test when the foreign parent has a tax residence in another country without substantial business activities  On April 4, 2016, the Treasury Department issued temporary and proposed regulations formalizing rules contained in Notices 2014-52 and 2015-79 limiting corporate tax inversions, as well as adding new rules addressing inversions and earnings-stripping transactions  In response to these new regulations, the proposed merger between Pfizer and Allergen PLC has been terminated  The April 4, 2016, Treasury regulations put in place several anti-inversion rules that target groups that have engaged in a series of inversion or acquisition transactions as well as a rule that restricts postinversion asset dilution  The temporary regulations target inversion transactions involving a new foreign parent that previously acquired one or more U S  entities in inversions or acquisitions in which the new foreign parent issued stock  These prior acquisitions would generally increase the value of the foreign entity, enabling it to subsequently engage in an inversion transaction with a larger U S  company while remaining below the 60% or 80% ownership thresholds  The temporary regulations disregard stock of the new foreign parent to the extent the value of such stock is attributable to its prior U S  entity acquisitions during the prior three years  According to analysis by Americans for Tax Fairness, the implementation of this rule would have increased Pfizer's share of the merged company to roughly 70% from 56% prior to the rule  Similar to the multiple domestic entity acquisition rule, the multiple-step acquisition rule targets certain inversions that are structured as back-to-back foreign acquisitions  Specifically, it targets transactions that are part of a plan in which a foreign corporation acquires substantially all of the assets of a U S  entity and, subsequent to this first acquisition, a second foreign corporation acquires substantially all of the assets of the first foreign corporation  The temporary regulations, under certain circumstances, treat each acquisition as an acquisition of a U S  entity that may be subject to anti-inversion rules  Unlike the multiple domestic entity acquisition rule, which has a three-year look-back period, the multiple-step acquisition rule can be applied to all acquisitions that are part of the same plan regardless of time  A third rule modified existing regulations to restrict the ability of inverted companies to avoid paying tax on unrealized gains (under Section 965) through a transfer to a controlled foreign corporation (CFC) (under Section 351)  This would address situations where a CFC of an inverted U S  company engages in a postinversion exchange that could dilute a U S  shareholder's indirect interest in the exchanged asset, allowing the U S  shareholder to avoid U S  tax on any realized gain in the asset that is not recognized at the time of the transfer  The rule requires a CFC of an inverted U S  group to recognize all realized gain with respect to any such postinversion Section 351 exchange  The earnings-stripping regulations aim to restrict the ability of foreign-parent groups to shift earnings out of the United States through dividends or other economically similar transactions (under Section 385)  In these cases certain related-party debt will be characterized as equity for tax purposes  The result of equity classification is that interest deductions will be disallowed, and withholding obligations of 30% (or lower rate based on an applicable income tax treaty) could ensue  The regulations do not normally apply for related-party debt that is incurred to fund actual business investment, such as building or equipping a factory  The regulations also require documentation of debt instruments issued and held by certain members of an expanded group to establish that such instruments are properly characterized as debt  The regulations also allow the IRS on audit to treat an instrument issued to a related party as in part debt and in part equity  The final regulations issued on October 21, 2016, scaled back the original regulations in response to the comment period  The final regulations removed the general bifurcation rule that would have allowed a debt instrument to be classified as part debt and part equity and an exemption for debt for foreign issuers  The rules also provided exemptions for cash pools (a pool of cash to be accessed for short-term needs), short-term loans, regulated financial entities, and pass-throughs (firms not taxed as corporations)  The Treasury delayed documentation rules for a year on July 28, 2017  Treasury announced on July 7, 2017, that these debt-equity regulations were to be among eight rules targeted for review  The Treasury issued final regulations for the temporary regulations introduced in April 2016 on July 12, 2018, as TD 9834 with minor changes  Two days after the regulations were issued, Pfizer withdrew from its merger with Allergen, an Irish-based company that was an inverted firm  It appears that this merger was affected by the multiple-entity rule, which has come to be called "serial inversion " Mergers between Shire (Ireland based) and Basalta, and between HIS and Markit Group Inc  (U K  based) went forward  The CF Industries merger with OCI NV (based in the Netherlands) was also called off; Johnson Controls and Tyco went forward  A merger between Konecranes (a Finnish firm) and Terex was scaled down to an acquisition of a share of Terex with the U S  firm owning 25%, thus avoiding the effect of regulations  In May 2016 Cardtronics, Inc , an ATM operator, announced a plan to move to the U K  using the substantial business activities test  Also in May, an oil and gas industry service and technology firm announced a merger with Technip SA (France) to form a U K  company, with each firm holding about half the stock and thus avoiding any of the recent regulations and establishing a new headquarters in another country  In 2017, Praxaire (a U S  industrial gas company) announced a merger with Linde AG (a German gas and technology company), also with each owning half of the new company  As noted in the introduction, statistical data suggest a decline in inversions from 2015 to 2016, and again from 2016 to 2017, and these data are consistent with the limited news reports of major inversions  Pfizer's CEO has recently indicated that deals are on hold generally while tax reform is being considered  The 2017 legislation not only made fundamental changes to the overall treatment of corporate income at home and abroad, but also adopted several provisions specifically aimed at inverted corporations (those with 60% to 80% ownership)  Under the new law, existing untaxed earnings held abroad are taxed under a deemed repatriation rule, but at a lower rate (8% for earnings reinvested in noncash assets and 15 5% for earnings held as cash or cash equivalents)  A special recapture rule applies on deemed repatriations of newly inverted firms  This recapture rule applies if a firm first becomes an expatriated entity at any time during the 10-year period beginning on December 22, 2017  In this case, the tax will be increased from 8% and 15 5% to 35% tax for the entire deemed repatriation, with no foreign tax credit allowed for the increase in tax rate  The additional tax is due on the full amount of the deemed repatriation in the first tax year in which the taxpayer becomes an expatriated entity  BEAT excludes payments which reduce gross receipts with the result that payment for the cost of goods sold is not included under BEAT  An exception applies for firms that invert after November 9, 2017, where payments to a foreign parent or any foreign firm in the affiliated for cost of goods sold is included in BEAT  The constructive ownership rules for purposes of determining 10% U S  shareholders, whether a corporation is a CFC and whether parties satisfy certain relatedness tests, were expanded in the 2017 tax revision  Specifically, the new law treats stock owned by a foreign person as attributable to a U S  entity owned by the foreign person (so-called "downward attribution")  As a result, stock owned by a foreign person may generally be attributed to (1) a U S  corporation, 10% of the value of the stock of which is owned, directly or indirectly, by the foreign person; (2) a U S  partnership in which the foreign person is a partner; and (3) certain U S  trusts if the foreign person is a beneficiary or, in certain circumstances, a grantor or a substantial owner  The downward attribution rule was originally conceived to deal with inversions  In an inversion, without downward attribution, a subsidiary of the original U S  parent could lose CFC status if it sold enough stock to the new foreign parent so the U S  parent no longer had majority ownership  With downward attribution, the ownership of stock by the new foreign parent in the CFC is attributed to the U S  parent, so that the subsidiary continues its CFC status, making it subject to any tax rules that apply to CFCs (such as Subpart F and repatriation taxes under the old law, and Subpart F and GILTI under the new law)  Dividends (like capital gains) are allowed lower tax rates than the rates applied to ordinary income  The rates are 0%, 15%, and 20% depending on the rate bracket that ordinary income falls into  Certain dividends received from foreign firms (those that do not have tax treaties and PFICs ) are not eligible for these lower rates  Dividends paid by firms that inverted after the date of enactment of P L  115-97 are added to the list of those not eligible for the lower rates  In 2004, an excise tax of 15% was imposed on stock compensation received by insiders in an expatriated corporation; the new law increases it to 20%, effective on the date of enactment for corporations that first become expatriated after that date  As noted earlier, there are no aggregate data available yet for 2018, but there are also indications that most tax-motivated inversions had already been discouraged by the 2016 regulations  Considering announcements of individual companies, one planned inversion, by Assurant, Inc  was revised to retain the headquarters in the United States  Ohio-based Dana, Inc  announced plans to merge and move the headquarters to the U K , although the merger would leave the U S  shareholders with less than 60% ownership, and therefore not make them subject to anti-inversion penalties  A recent announcement indicated that the Dana merger was called off  Some firms may be considering reversing their headquarters decisions  The AJCA was successful at limiting a form of inversions, at least initially  In particular, the AJCA stopped the practice of basic "naked inversions," in which little activity or presence in the new jurisdiction is required and the new parent is domiciled in a tax haven  Further, through regulation, Treasury has limited the use of the substantial business activity test safe harbor to invert  Recent activity (as noted above), however, suggests that mergers continued to be used as a vehicle for corporate inversions after these changes  These more recent mergers have increasingly resulted in a U K  parent company (e g , FMC-Technip, HIS-Markit), due to policy decisions by the U K  government  Specifically, the U K  lowered its corporate tax rate and adopted a territorial tax system  In addition, anti-abuse provisions for foreign source income were weakened by the European Union courts  The U K  has also proposed taxing certain intangible income at a 10% rate  (This is referred to as a patent box ) To restrict the occurrence of tax-motivated inversions, both a general reform of the U S  corporate tax and specific provisions to deal with tax-motivated international mergers were discussed  Some important changes were made in 2017; other options remain  Interest in reforming the corporate income tax was long-standing, including calling for explicit accommodation of international concerns  As noted earlier, two aspects of the U S  corporate tax system are particularly relevant to corporate location decisions: the corporate tax rate and the taxation of foreign-source earnings  Taken together, these factors, under prior law, could yield a substantial reduction in taxes paid  In the case of the proposed merger of Forest Laboratories Inc  (a U S  company) and Actavis (an Irish company) in 2014, the tax reduction was estimated to be roughly $100 million per year  Prior to the 2017 changes, the U S  corporate statutory tax rate was higher than both the average statutory rates of the other Organisation for Economic Co-operation and Development (OECD) countries and that of the 15 largest economies in the world  Many asserted that the U S  statutory tax rate needed to be lowered to reduce the incentive for inversion transactions  With the rate lowered from 35% to 21%, the combined central and subnational corporate tax rates are similar to most rates in the OECD  While lowering the corporate tax rate would reduce the incentive to invert, there are reasons to suggest that it would be impractical to reduce the rate to the level needed to stop inversions  Namely, to stop inversions through a reduction in the corporate tax rate would require a U S  corporate tax rate set equal to the lowest tax rate of a destination company, or zero  A lower corporate tax rate alone reduced the incentive for corporate inversions, primarily by reducing the tax rate applied to repatriated earnings  For a company like Pfizer, with large foreign earnings, a rate reduction could yield significantly lower taxes paid  However, as discussed below, the benefit of a lowered rate is negligible relative to the benefit to corporate taxpayers afforded by territorial tax systems, when income earned in low- or no-tax foreign jurisdictions is never subject to U S  tax  Two factors present challenges for lowering the corporate tax rate further  First, if revenue neutrality is a goal, there may not be enough base-broadening provisions with revenue offsets to provide deep cuts in the corporate tax; and, if such offsets were found, they might have their own consequences for investment  Reducing the corporate tax without corresponding base broadening would likely reduce corporate tax revenue, adding to chronic budget deficits  Prior to the 2017 revision, the United States was one of the few countries that had a worldwide tax system and levied a tax on the foreign-source income of domestic corporations  Changing corporate tax residence to a country with a territorial tax system (where foreign earnings would not be taxed at all) was thought to drive inversion decisions  This issue led to proposals for the United States to adopt a territorial tax system to stop inversion transactions  One concern about adopting a territorial tax system is the strain it would likely place on the current transfer pricing system  From this perspective, the worldwide tax system provided a backstop on the amount of profit shifting or base erosion possible, because shifted profits will eventually be repatriated  Under a territorial tax system, this is not the case  Research has found evidence of significant profit shifting, especially related to mobile intellectual property, suggesting a lot of income from foreign sources is really U S  income in disguise  Numerous other issues surround the adoption of a U S  territorial tax  For example, while some supported a territorial tax to eliminate the incentive to keep earnings abroad, others opposed it because it likely discourages domestic investment and activity in the United States  The revisions in 2017 maintained a worldwide system, but with some changes  Income from U S  subsidiaries is taxed on a current basis but at a lower rate and with an exemption for a deemed return on tangible assets  It also provided a subsidy for locating intangible assets with earnings from abroad in the United States  Many of the inverting firms had significant intangible assets, and it is not clear whether this new regime (a lower tax rate but on a current basis) is more or less generous to firms considering inverting  Moving closer to a pure territorial tax, as in the case of a rate reduction, would likely reduce corporate tax revenue and add to current budget pressures unless it is offset by other tax increases, although this effect would be less costly at the lower 21% tax rate  In 2027, GILTI is projected to raise $21 billion  GILTI could be retained and the rate lowered or the temporarily lower rate could be made permanent  There has been some agreement that adopting a territorial tax without some significant anti-abuse provisions could be problematic, as it would likely increase profit shifting abroad by U S  firms  Evidence suggests that administrative remedies were successful at dramatically slowing inversions; the targeted legislative changes in the 2017 Act may have had some impact as well  There are further changes that could be made to discourage inversions  This section discusses the history of these proposals, both legislative and administrative  One approach would be to extend the rate recapture enacted in the 2017 Act for a period longer than 10 years, or to make it apply indefinitely to future inversions  A second alternative is to directly restrict the ability of U S  firms to invert by merger  The President's FY2015, FY2016, and FY2017 budget proposals contained a provision that would have further restricted the use of inversions  The proposal would modify the 80% test enacted in the AJCA to a 50% test and eliminate the 60% test  In effect, this proposal would reduce the percentage of shareholders that are owners of the "old U S  company" and the "new foreign merged company " The proposal would also require that the new foreign corporation be managed and controlled from outside the United States and prohibit transactions where the new foreign company has substantial business activities in the United States  In November 2015, then-Senate Finance Committee Chairman Hatch indicated the possibility of adding an anti-inversion provision to legislation to extend expired provisions  Many of these bills were introduced in the 115 th Congress  H R  1931 (Doggett), the Corporate EXIT Fairness Act, and H R  3434 (Levin) and S  1636 (Durbin, along with a number of cosponsors), the Stop Corporate Inversions Act, would have treated all mergers as U S  firms when the U S  firm's shareholders hold more than 50% or when management and control primarily takes place in the United States  H R  1932 (Doggett) and S  851 (Whitehouse), as with bills introduced in the 114 th Congress, would have included anti-inversion provisions as part of a broader proposal to address tax havens and deferral  H R  3603 (Levin) would have addressed earnings stripping of inverted corporations  H R  3424 (DeLauro) would disallow federal contracts for inverted firms  H R  1451 (Schakowsky) and S  586 (Sanders) would make major changes in the tax treatment of foreign source income and include anti-inversion rules  Following the change in the international system adopted at the end of 2017, Representative Doggett and Senator Whitehouse introduced the "No Tax Break for Outsourcing Act" ( H R  5108 , S  2459 ) which, in addition to other changes, would have treated foreign corporations that are managed and controlled in the United States as domestic corporations and treated inverted firms as U S  firms when the shareholders of the former U S  company own more than 50% of the shares  These bills would have also limited interest deductions in the United States to the proportionate share of the firm's assets  The last proposal (to allocate worldwide interest) was in both the House and Senate versions of the legislation ( H R  1 ; 115 th Congress) in somewhat different form but was not retained in the final legislation  While this proposal was not specifically targeted at inverted firms it would have increased the restrictions that limit earnings stripping  Former President Obama had encouraged Congress to act directly to limit inversions, but had also indicated on August 6, 2014, that administrative changes to limit inversions were under examination  Prior to that announcement, Steve Shay, a Harvard professor and former practitioner and Treasury official, outlined two regulatory actions that he believed could be taken  The first would limit earnings stripping by reclassifying debt as equity due to excessive related party debt in an inversion  (The second provision is no longer relevant under the new international tax regime ) A number of other administrative proposals that have been suggested (such as provisions relating to taxing accumulated deferred earnings) are no longer relevant and others have been adopted in the regulatory changes discussed above  Expanding the scope of Section 7874 (which treats inverted firms as U S  firms) by combining multiple transactions into single ones, or vice versa  The scope of Section 7874 could also be expanded by treating certain stock as disqualified (because it is expected to be held temporarily or because it is accompanied by restrictions on voting rights); this provision was adopted in Treasury regulations; Potentially recognizing accumulated deferred earnings as currently taxable under authority such as Subpart F, Section 367, or other rules (this provision is no longer relevant with the end of deferral, but it may have influenced the decision to tax deferred earnings of newly inverted firms at the full 35% rate for the next 10 years); Issuing regulations that would generally tighten restrictions on interest deductions under the thin capitalization rules of Section 163(j)  These changes would probably apply to corporations in general, and not just to inverted corporations (this change was made in the 2017 tax revision); Stricter regulations under Section 367 to immediately include foreign earnings in the case of actions that attempt to move foreign operations out from under the U S  parent  This would make future earnings of these operations nontaxable; Strengthening and modernizing the effectively connected income rules that determined whether trade or business activity is taking place in the United States by foreign firms; and Closely monitoring the creation of non-U S  subsidiaries owned by the foreign parent after inversion, and ensuring that assets (including intangibles such as inventions, knowhow, etc ) transferred from the U S  firm are transferred at arms-length prices  There is disagreement among experts about whether the types of regulatory changes discussed in this section are feasible or desirable  A number of legislative proposals were advanced in 2014, when the wave of inversions through merger began  Representative Levin, the ranking member of the House Ways and Means Committee, introduced the Stop Corporate Inversions Act of 2014 ( H R  4679 ), which would have reflected the Administration's proposed changes, retroactive to May 8, 2014  The inversion would have not been recognized if the U S  stockholders had 50% of the shares or if 25% of the business activity is in the United States  A companion bill, which would have sunset in two years to provide time for tax reform, was introduced in the Senate by Senator Levin in 2014 ( S  2360 )  The Joint Committee on Taxation estimated the permanent proposal to gain $19 5 billion in revenue over FY2015-FY2024  The two-year proposal would have raise $0 8 billion over the same period  In the 114 th Congress, these legislative proposals were introduced as H R  415 (Levin) and S  198 (Durbin)  Senator Casey proposed an anti-inversion amendment to an education bill ( S  1177 )  In the 114 th Congress, H R  297 (Doggett) and S  174 (Whitehouse) included anti-inversion provisions as part of a broader proposal to address tax haven abuses and restrict the benefits of deferral  S  922 (Sanders) and H R  1790 (Schakowsky) also included anti-inversion provisions, as well as earnings-stripping provisions (discussed below) and broader provisions, including the repeal of deferral  In 2014 a number of legislative proposals were introduced that would limit the tax benefits associated with inversions for certain corporations  For example, H R  1554 (Doggett), H R  3666 (DeLauro), H R  3793 (Maffei), S  268 (Levin), S  1533 (Levin), and S  1844 (Shaheen) would each treat corporations managed and controlled from the United States as domestic corporations regardless of their legal tax home or status as an inverted company  This provision was also included in S  922 (Sanders) and H R  1790 (Schakowsky)  Other proposals in 2014, H R  694 (Schakowsky) and S  250 (Sanders), would have eliminated deferral (taxing foreign source income currently), in addition to limiting the benefits of inversions when management and control continues to reside in the United States  Legislative proposals were also under discussion in 2014 by Representative Levin (announced July 31, 2014) and by Senator Schumer (announced August 14, 2014) to address earnings stripping, where foreign parent companies borrow from the U S  subsidiary to increase interest deductions and reduce taxable income in the United States  Both of these proposals would have tightened the rules allowing interest deductions by reducing the current limit on interest deductions relative to adjusted income from 50% to 25% and repealing an alternative safe-harbor debt-to-equity test  Both proposals would have also eliminated or limited interest carryforwards  The Schumer proposal was intended to apparently apply to inverted firms while the Levin proposal would have applied generally  The Levin proposal would have also limited other transactions between related parties within the firm that allow untaxed investment of funds in the United States  The restrictions on interest in the Levin bill were the same as those initially proposed in the House in 2004  Senator Schumer introduced his proposal, S  2786 , the Corporate Inverters Earnings Stripping Reform Act of 2014  Its limits on interest deductions would have applied to inverted firms where U S  shareholders own more than 50% of the firm  The restriction also would have applied to firms that inverted using the substantial business activities test  The bill had nine Democratic cosponsors; five of them were on the Senate Finance Committee  In the 114 th Congress, S  922 (Sanders) and H R  1790 (Schakowsky) included general earnings-stripping provisions for firms with a foreign parent  Earnings stripping provisions were also addressed in the report of the Senate Finance Committee's working group on Tax Reform  H R  5278 (DeLauro) and S  2704 (Levin), introduced May 30, 2014, would have disallowed awarding federal contracts to inverted firms  These proposals were introduced in the 114 th Congress as H R  1809 (DeLauro) and S  975 (Durbin)  In 2014, Senators Brown and Durbin proposed S  2895 , and Representative Doggett introduced H R  5549 , the Pay What You Owe Before You Go Act, that would have taxed the accumulated deferred earnings of inverting firms  Then Senate Finance Committee Chairman Ron Wyden had proposed having draft legislation in place in September 2014, and also referred to Schumer's earnings-stripping proposal  Senator Wyden had previously announced that any changes would be retroactive to May 8, 2014 


Report 2:  Timing challenges  Some PHAs said they faced major challenges in coordinating RAD timelines with HUD, lenders, or other parties or with the requirements of the LIHTC process  HUD officials acknowledged that PHAs with more complex transactions, including those involved in the LIHTC process, struggle to implement their conversion plans within RAD time frames  HUD officials noted that because there is a statutory cap on the number of units that can be converted under RAD, they have established time frames to stay under the cap and ensure that PHAs that are planning to convert are ready to participate in the program  Additionally, according to HUD, it has made technical assistance available to all PHAs that receive a Commitment to enter into a Housing Assistance Payment contract during the RAD process to help ensure their readiness for RAD closing and to meet remaining conversion deadlines  On the other hand, some PHAs expressed concern to us about delays in the conversion process that put them at risk for missing state LIHTC deadlines  HUD officials described putting conversions on a fast-track on a case-by-case basis to meet LIHTC deadlines  For example, in one case a PHA relocated residents before closing and without HUD approval  HUD required the PHA to fund an escrow account until it was able to determine any payments that might need to be made to residents and any other necessary corrective action  This was done so that HUD could look into the issue while mitigating additional harm to the residents and continuing to move the PHA toward closing and aligned with tax credit application deadlines  The timing of conversion can also create gaps in the payment of Section 8 funds to PHAs  Section 8 funding should begin in January of the year following conversion  PHAs rely on annual public housing subsidies for the conversion year—public housing program funds are paid to PHAs annually and are not recaptured by HUD following RAD conversion  However, according to some PHAs we interviewed, Section 8 funding did not begin on time  For example, in Baltimore, Maryland, subsidy flow after conversion had not begun as of June of the following year  HUD officials told us inadequate guidance from HUD and confusion from PHAs regarding the necessary steps to request payment in a timely manner have been the major cause of the problems  HUD has tried to remedy delays and updated its notice to provide clearer guidance on the timing of subsidy flow around the time of conversion to Section 8  Moreover, HUD officials indicated that there has been confusion among PHAs on how to request funds, so HUD is currently revising and updating the guidance on steps PHAs must take to request payment under the PBRA program  HUD officials also indicated that it has begun monitoring whether new participants are taking the steps needed well before their first request for funding  Some PHAs we contacted also mentioned difficulty in coordinating with HUD on fulfilling internal RAD requirements and reviews  According to some, the different offices involved in RAD conversions within HUD were not well aligned and had different interpretations of the rules  For example, some RAD conversions require a civil rights review by HUD’s Office of Fair Housing and Equal Opportunity Office, including those transactions that require new construction or resident relocations  Some PHAs indicated that such reviews occurred too late in the conversion process even after other HUD offices had approved the conversion  HUD officials acknowledge that different HUD offices have different objectives in the RAD process  HUD officials indicated that the agency is trying to coordinate more effectively among these offices and streamline the conversion process as much as possible  Evolving requirements  While the majority of PHAs with which we spoke said that HUD provided clear, sufficient, and timely information, some PHAs noted that it also was challenging to adapt to evolving requirements  Some PHAs noted that as HUD identified problems in the early years of the program, it would change the guidance in response  For example, HUD officials explained that it had clarified fair housing review requirements in response to PHA concerns that the fair housing review occurred too late in the process and could affect successful conversion of projects  The most recent RAD notice (effective January 2017) is the third version since 2013 and revisions have involved substantial changes  For example, this notice provided PHAs with greater flexibilities on the funding sources they can use to raise initial contract rents and the ways they can demonstrate ownership and control of a converted property  In addition, HUD introduced a notice in November 2016 to strengthen resident protections  Some PHAs told us they found the pace or timing of the evolving requirements difficult to manage and also noted confusion about conversion instructions and guidance due to changing requirements  For example, one PHA indicated that the agency had problems reporting information into a new RAD data field in HUD’s Voucher Management System because there was no guidance at the time on how to complete this field  However, HUD has since included additional instructions in the user’s manual that became effective in April 2017  The Committee has included language to establish procedures that will ensure that public housing remains a public asset in the that event that the project experiences problems, such as default or foreclosure  In each RAD conversion, HUD and the property owner execute a use agreement, which specifies affordability and use restrictions for the property  The use agreement generally exists concurrently with the HAP contract, which is executed to govern the provision of either the PBRA or PBV subsidy for the unit  The use agreement must be recorded in a superior position to new or existing financing or other encumbrances on the converted property  Under a Section 8 HAP contract, residents pay 30 percent of adjusted household income  In the absence of the HAP contract, the use agreement is set up to control the amount paid: If the HAP contract is removed due to breach, noncompliance, or insufficiency of appropriations, under the use agreement new households in all units previously covered under the HAP contract must have incomes at or below 80 percent of the area median income for households of the size occupying an appropriately sized unit for their family size at the time of admission, and rents may not exceed 30 percent of 80 percent of area median income for the remainder of the term of the use agreement  For new residents at or below 80 percent of the area median income, under the use agreement the resident rent contribution without a HAP contract generally would be higher than that paid under a HAP contract, which is based on household income instead of the universally determined area median income  Although the use agreement maintains some level of affordability, the owner receives no subsidy under PBRA or PBV without a HAP contract and resident rent contribution is not tied to individual household income but rather based on a universal area income calculation (see fig  3)  According to HUD officials, other program requirements support the goal of long-term preservation: HAP contracts are executed for 20 years for PBRA or 15–20 years for PBV properties and compliance with all affordability requirements in the HAP and statute and regulation governing the PBRA and PBV programs must be maintained while the contract is in force  According to the authorizing statute, PHAs (for PBV contracts) and HUD (for PBRA contracts) shall offer and project owners shall accept a renewal contract at the expiration of the initial HAP contract and at each subsequent renewal  Each renewal contract will be subject to a RAD use agreement, governing the use of the property consistent with HUD requirements  According to the RAD notice, the project owner also is to establish and maintain a replacement reserve to aid in funding extraordinary maintenance and repair and replacement of capital items  The reserve account must be built up to and maintained at a level determined by HUD to be sufficient to meet projected requirements  According to HUD officials, during the conversion, HUD staff review each capital needs assessment to try to determine whether a property’s capital needs can be addressed over the forthcoming 20-year period  We reviewed 31 completed conversion files, the set of documentation required by HUD to enable a PHA to convert units from public housing to a Section 8 subsidy, and associated RAD contracts  In each file, key contractual protections appeared consistent with program requirements  Specifically, in all cases executed use agreements (which included requirements to limit residency eligibility to households making less than 80 percent of area median income) were included and not altered from the HUD template  In most files we reviewed, we found foreclosure riders were included and that they stated that use agreements would survive foreclosure, meaning that any new owners would take ownership subject to the agreements  Executed HAP contracts, requiring that residents’ contributions be set at 30 percent of adjusted household income, also were present in all files we reviewed  According to HUD officials, PHAs, and two housing groups we spoke with, provisions in the RAD use agreement to keep units affordable appear to be strong, with use and affordability protections designed to survive foreclosure, but the strength of provisions cannot yet be fully determined because the provisions have not yet been tested in foreclosure proceedings or in courts  According to HUD officials, as of October 2017 no RAD properties had entered foreclosure  The RAD authorizing statute requires that ownership be transferred to a capable public entity or, if not one, a capable entity as determined by HUD, or if necessary to fulfill LIHTC requirements for the property, to a HUD-approved for-profit entity (provided the PHA retained sufficient interest in the property)  HUD also subjects any subsequent transfer of the property to HUD review and requires the successor ownership to meet these same requirements  As stated in the use agreement, a lien holder must give HUD notice prior to declaring a default and provide HUD concurrent notice with any written filing of foreclosure (providing that the foreclosure sale must not be sooner than 60 days after the notice), but the use agreement does not prohibit a lien holder from foreclosing on the lien or accepting a deed in lieu of foreclosure  The RAD use agreement, which is recorded superior to other liens and places use and affordability restrictions on the property, survives foreclosure  With or without a HAP contract in place, the lender or new owner must maintain the units for low- income households according to the terms of the use agreement  Therefore, according to HUD officials, the lender or new owner has an incentive to identify an appropriate owner and secure HUD approval to avoid a default under the HAP contract, which provides a Section 8 subsidy to the owner  That is, if no HAP contract were in place, the owner would collect only the tenant rent contribution (30 percent of 80 percent of area median income), rather than the tenant rent contribution plus the subsidy  HUD has discretion to enforce or waive certain use and affordability protections  According to the authorizing statute, in the case of foreclosure, bankruptcy, or termination and transfer of assistance for material violation or substantial default, the priority for ownership or control must be provided to a capable public entity, or, if no such entity can be found, to a capable entity as determined by the Secretary of HUD  Additionally, the statute allows the transfer of property to for-profit entities to facilitate the use of LIHTC financing, with requirements to maintain the PHA’s interest, which was discussed above  As of September 30, 2017, about 40 percent of RAD conversions involved LIHTC financing  According to the RAD notice, in the event of a default of a property’s use agreement or HAP contract, HUD may terminate the HAP contract and transfer assistance to another location to retain affordable units  HUD will determine the appropriate location and owner entity for the transferred assistance consistent with statutory goals and requirements for RAD  The RAD use agreement will remain in effect even in the case of abatement or termination of the HAP contract for the term the contract would have run, unless HUD agreed differently in writing  In this case, the RAD notice limits HUD discretion to terminate the use agreement to only cases involving a transfer of assistance to another property  HUD has not yet developed procedures to monitor RAD projects for risks to long-term affordability of units, including default or foreclosure  HUD officials described an ongoing effort to develop oversight procedures it would need to reasonably ensure compliance with RAD agreements and avoid risks to long-term affordability once conversions closed and units moved to Section 8 but, as previously discussed, the agency has not yet completed this effort or fully implemented a monitoring system  HUD officials told us they also planned to develop protocols to more closely monitor properties at risk of foreclosure, including developing indicators, procedures, roles, and responsibilities within HUD, but they have not finalized the design of procedures or fully implemented them  To develop protocols, HUD created an asset management working group in September 2016  The officials also stressed that no one can take possession of or foreclose on a property without HUD involvement and approval  For example, HUD officials said they expect few foreclosures among RAD-converted properties because lenders tend to communicate with the agency early so that it can become involved to prevent foreclosure  HUD officials pointed to a robust structure to oversee program properties in the PBRA program, but stated PBV property oversight continues to be developed by the Office of Public and Indian Housing  According to Standards for Internal Control in the Federal Government, agencies should design procedures to achieve goals and objectives, such as the preservation of unit affordability, and respond to risks, in this case the risk of default or foreclosure or noncompliance with program requirements  Additionally, management should identify, analyze, and respond to risks related to achieving its goals and objectives  According to HUD officials, the agency had not yet fully developed and implemented oversight procedures for postconversion monitoring because since 2012, the agency has focused on RAD start-up and review and oversight procedures for the conversion process  HUD officials also said that many projects would receive ongoing monitoring from other parties, which also could serve as a safeguard for unit affordability and help ensure the appropriate financial and physical condition of the property after RAD conversion  For example, just under half of all RAD properties use LIHTC financing as part of financing packages, which can also include local and state bonds  According to HUD officials, oversight by tax credit allocating agencies, investors, and lenders, while not alone sufficient, helps secure affordable units in a property for the long-term  However, tax credit allocating agencies, investors, and lenders are not signatories to the HAP contract or use agreement and have no formal role in reasonably ensuring that properties meet requirements exclusive to RAD  Although other entities may exercise some oversight of properties, by not developing and implementing procedures for ongoing oversight, HUD in its role as program administrator will not be able to reasonably ensure that properties adhere to requirements or meet basic program goals  Furthermore, without such monitoring HUD would be limited in its ability to identify and assist with properties at risk of foreclosure  RAD was created to demonstrate the feasibility of converting public housing units to other rental assistance programs to help preserve affordable rental units and address the significant backlog of capital needs in the public housing program  However, demonstrating the feasibility of RAD conversion is contingent on collecting and assessing quality information about the conversion projects  HUD has an opportunity to improve the demonstration’s metrics  For instance, implementing robust postclosing oversight and collecting information on financial outcomes upon completion of construction would not only improve HUD’s oversight capabilities but also allow it to report quality information  Moreover, limitations in HUD’s methodology for calculating leverage ratios for RAD may obscure the effect of funding sources used to help fund RAD conversions, potentially under- or over-reporting the program’s capital leveraging  By collecting comprehensive information on final (postcompletion) financing sources and costs and developing quality metrics, HUD would be better positioned to more accurately report the results of the demonstration program  Additionally, a focus on the conversion process itself (and less on its results), and limitations in HUD’s data have contributed to limited monitoring by HUD in other areas  Specifically, by not developing and implementing monitoring procedures to assess the effect of RAD on residents HUD cannot ensure compliance with resident safeguards  Further, HUD collects and maintains household data for the public housing and Section 8 programs, yet it does not systematically use this information to ensure that resident safeguards are in place  Finally, HUD could benefit from additional procedures to assess RAD properties for risks to long-term preservation to be able to respond to property default or foreclosure  We are making the following five recommendations to HUD: HUD’s Assistant Secretary for Housing should include provisions in its postclosing monitoring procedures to collect comprehensive high quality data on financial outcomes upon completion of construction, which could include requiring third-party certification of and collecting supporting documentation for all financing sources and costs  (Recommendation 1) HUD’s Assistant Secretary for Housing should improve the accuracy of RAD leverage metrics—such as better selecting inputs to the leverage ratio calculation and clearly identifying what the leverage ratio measures—and calculate a private-sector leverage ratio  (Recommendation 2) HUD’s Assistant Secretary for Housing should prioritize the development and implementation of monitoring procedures to ensure that resident safeguards are implemented  (Recommendation 3) HUD’s Assistant Secretary for Housing should determine how it can use available program-wide data from public housing and Section 8 databases, in addition to resident logs, for analysis of the use and enforcement of RAD resident protections  (Recommendation 4) HUD’s Assistant Secretary for Housing should prioritize the development and implementation of procedures to assess risks to the preservation of unit affordability  (Recommendation 5) We provided a draft of this report to HUD for comment  HUD provided written comments on the draft report, which are summarized below and reproduced in appendix IV  HUD also provided technical comments, which we incorporated as appropriate  In its comment letter, HUD stated that it agreed with our findings that HUD can improve metrics used to assess program impact and build on existing oversight structures  HUD described actions it intends to take to implement our recommendations to the extent possible and consistent with resource limitations  More specifically, HUD agreed with our first recommendation to ensure it collects comprehensive quality data on financial outcomes in its postclosing monitoring procedures (which could include supporting documentation for all financing sources and costs)  HUD agreed it should routinely collect an updated list of funding sources and uses and related documentation when projects had cost overruns or other significant changes  HUD intends to review and revise, as appropriate, required postcompletion certifications  HUD added that in most cases, funding sources and uses do not materially change between closing and construction completion  HUD stated that securing the postclosing information in such cases might be of minimal benefit relative to the additional reporting burden  However, it is not clear how HUD would determine if projects had significant changes in costs or uses because HUD lacks postcompletion information that would show the magnitude of changes  In relation to reporting burden, HUD already has implemented procedures to collect limited financial information following the completion of construction in October 2017  We believe any additional reporting would not be disproportionate to the benefits of improving HUD's oversight capabilities through project completion and enhancing its reporting to more accurately reflect the results of the demonstration program  For our second recommendation to improve the accuracy of RAD leverage metrics and calculate a private-sector leverage ratio, HUD agreed that RAD leverage metrics can be improved  HUD will ensure that the private-sector leverage ratio required by statute is clearly identified and included in its RAD evaluation  HUD also intends to identify a small number of relevant leverage ratios with distinct methodologies and will routinely publish these ratios with clear identification and explanations  In relation to our finding of misidentified funding sources, HUD plans to re- examine its chart of accounts and review prior transaction records to address errors and properly classify transaction sources  In response to our third recommendation to prioritize the development and implementation of monitoring procedures for resident safeguards, HUD agreed that it is important to better document and expedite development and implementation of monitoring procedures  HUD also agreed that additional monitoring was needed to ensure the right of residents to request and move with a tenant-based voucher after a period of residency (choice-mobility)  HUD noted that its Office of Policy Development and Research is seeking funding for additional research on RAD with a focus on the use and effect of choice-mobility options, which would inform HUD's monitoring efforts  Finally, while HUD said that we did not find the safeguards to be weak or inadequate, we did not perform an audit designed to assess the safeguards and therefore cannot opine on their adequacy  On the basis of our findings, we found that HUD’s implementation of these safeguards could be strengthened  Regarding our fourth recommendation that HUD determine how it can use available program-wide data and resident logs for analysis of RAD resident protections, HUD agreed to examine how it could use its existing data systems to further enhance its monitoring efforts  HUD added that the systems have limitations, so that the agency also uses other mechanisms to track and monitor implementation of resident protections  For our fifth recommendation to prioritize the development and implementation of procedures to assess risks to the preservation of unit affordability, HUD agreed that it is important to assess and mitigate risks to unit affordability  HUD stated that it employs robust underwriting standards prior to permitting conversion, and relies on existing procedures to conduct ongoing oversight of Project-Based Rental Assistance (PBRA) properties, which we discussed in the draft  However, as we noted, HUD has not yet developed procedures to more closely monitor RAD properties at risk of foreclosure, though it plans to establish indicators of foreclosure risk and oversight roles and responsibilities within HUD  HUD said that since the summer of 2017, it has been evaluating what additional oversight procedures might be needed for RAD Project-Based Voucher properties  HUD also described plans to augment its existing oversight procedures to preserve affordable units in the event of foreclosure by developing protocols in the following areas: transfer of property ownership to a capable entity, transfer of the rental assistance to another site, and protection of residents in the event a Housing Assistance Payment contract was terminated  As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date  At that time, we will send copies to the Secretary of Housing and Urban Development and other interested parties  In addition, the report will be available at no charge on the GAO website at http://www gao gov  If you or your staff have any questions about this report, please contact me at (202) 512-8678 or garciadiazd@gao gov  Contact points for our Offices of Congressional Relations and Public Affairs are listed on the last page of this report  GAO staff who made major contributions to this report are listed in appendix IV  This report examines aspects of the Department of Housing and Urban Development’s (HUD) Rental Assistance Demonstration (RAD) program  More specifically, this report addresses (1) HUD’s assessment of the physical and financial outcomes of RAD conversion to date; (2) how RAD conversions affected residents and what safeguards were in place to protect them, including while temporarily relocated and during conversion; (3) what challenges, if any, public housing agencies (PHA) faced in implementing RAD; and (4) the extent to which RAD provisions are designed to help preserve the long-term affordability of units  To address all four objectives, we analyzed agency documentation and interviewed officials from HUD  The documentation we reviewed included policies and procedures for RAD; manuals describing HUD data systems; draft policies and procedures for implementing postclosing oversight; and reports on RAD performance  We interviewed HUD headquarters officials from the Office of Recapitalization within the Office of Housing, which oversees the administration of RAD, and the Office of Policy Development and Research (PD&R)  We also interviewed PHA officials and developers involved in RAD transactions, as well as selected experts and other stakeholders to obtain their perspectives on RAD  Additionally, we conducted a literature search to identify publications related to RAD  We visited a nonprobability sample of eight PHAs in Maricopa County, Arizona; Alameda County, California; Montgomery County, Maryland; and in the cities of San Francisco, California; Baltimore, Maryland; New Bern, North Carolina; El Paso, Texas; and Tacoma, Washington, to observe housing units before, during, or after renovation when possible as well as common areas that had planned or undergone renovation  We selected sites to include varying PHA sizes, RAD subsidy types, planned rehabilitation and resident relocation, numbers and sizes of RAD transactions, closing dates, constructions costs, and geographic locations across the United States  At each site, we conducted semistructured interviews with PHA officials and, when available, developers (5 sites)  We also conducted one or two focus-group interviews with groups of 6– 15 residents who lived at the converted properties to obtain their perspectives and experiences  In each location, we asked the PHAs to invite residents to participate in the focus groups based on their availability  We also met with the Resident Advisory Board in each location that had one  For 7 of 8 site visits, we selected two RAD properties to conduct resident focus groups (in Alameda County, California we held one focus group)  We conducted a content analysis based on resident focus group interviews to describe resident experiences and the RAD program’s effects on residents  Utilizing the selection criteria noted above, we conducted semistructured telephonic interviews with an additional nonprobability sample of 10 PHAs in Fresno, California; Fort Collins, Colorado; Dekalb County, Georgia; Chicago, Illinois; Ypsilanti, Michigan; Cuyahoga County, Ohio; Philadelphia; Pennsylvania; Spartanburg, South Carolina; McKinney, Texas; and Yakima, Washington  Because we selected a non-probability sample of PHAs to visit and interview, the information we obtained cannot be generalized more broadly to all PHAs  However, it provides context on RAD particularly on implementation challenges and perspectives on physical and financial impacts, long-term affordability, and resident protections  We also selected the following 11 individuals and organizations as experts and stakeholders: 1  Council of Large Public Housing Authorities 2  National Association of Housing and Redevelopment Officials 3  Center on Budget and Policy Priorities 4  Public Housing Authorities Directors Association 5  National Housing Law Project 6  Community Legal Services of Philadelphia 7  Maryland Legal Aid 8  Disability Rights Maryland 9  Jaime Alison Lee, Associate Professor of Law and Director, Community Development Clinic, University of Baltimore School of Law 10  Yumiko Aratani, Assistant Professor, Columbia University Mailman 11  University of California, Berkeley, Terner Center for Housing We interviewed experts and stakeholders on resident impacts and implementation challenges associated with RAD  The entities may not represent all views on these topics, but their views provide insights on RAD  To select these individuals and groups, we met with three major PHA associations and two resident advocacy groups, and asked for referrals for organizations or individuals with expertise in RAD  We also selected a nonprobability, random sample of 31 RAD conversion files to review  Utilizing HUD RAD Resource Desk data, we randomly selected 31 RAD files for properties that had closed conversion as of June 30, 2017 and that planned to incur construction costs  We used the files to help us determine physical changes to RAD conversions and the impacts of RAD on residents through, for example, relocation  We excluded RAD conversions with no construction costs from the random sample because they would not have physical changes and no resident relocation would occur before or during our review  To address our first objective on the physical and financial outcomes of RAD conversion to date and how HUD measured these outcomes, we first obtained and analyzed HUD data on RAD conversions since RAD’s authorization (from fiscal years 2013 through 2017)  We assessed the reliability of these data by reviewing system documentation, interviewing knowledgeable officials about system controls, and conducting electronic testing  We determined that the data were sufficiently reliable for the purposes of describing rehabilitation and new construction in RAD projects and evaluating RAD leveraging metrics  We included in our analysis all RAD conversions that were active or closed  We used these data to determine the number of closed RAD conversions, associated financial sources and uses, subsidy types, and type of construction (rehabilitation, new construction, and no rehabilitation or new construction)  In addition, during our interviews with PHAs and developers, we obtained their perspectives on potential contributing factors to financial decisions and type of construction pursued through RAD conversion  As noted earlier, we also reviewed 31 randomly selected files of converted properties with construction costs to describe property physical changes in RAD conversions  Furthermore, we reviewed HUD documents, such as HUD and PD&R evaluations, publications, and policies and procedures to gain additional context for how HUD measures RAD outcomes  We also interviewed HUD officials, including PD&R and Office of Recapitalization officials, on RAD data and metrics, as well as other performance monitoring activities  We further analyzed data from the HUD RAD Resource Desk to determine how these data support HUD’s metrics and performance monitoring activities  As previously mentioned, we determined that these HUD data were sufficiently reliable for the purposes of this report  Specifically, we assessed and calculated RAD leverage ratio and construction activity  We assessed HUD’s performance monitoring activities and reporting against the RAD authorizing statute, Standards for Internal Control in the Federal Government  To recalculate estimates of the RAD leverage metric, we obtained documentation from the Office of Recapitalization to review the methodology used to calculate their most recent leverage ratio  We aligned the methodology they provided with RAD Resource Desk Transaction Log data that was downloaded on August 7, 2017  We replicated HUD’s methodology and matched the data utilized with the descriptors from the Transaction Log  To isolate financial sources and manually adjust the “other source” data, we compiled matched descriptors and funding amounts and categorized each observation based on the funding source description, as a federal source, state/county/city source, or PHA source, among others  For additional information and results, see appendix II  To determine how RAD affected residents in converted units, we analyzed HUD public housing and Section 8 household data before and after conversion (demographic characteristics of residents and changes in rent, income, and location)  Specifically, we examined data from 2013— when the first transactions closed—through June 30, 2017  HUD compiled and provided custom extracts of data on households in RAD- converted properties from the Inventory Management System/Public and Indian Housing Information Center (IMS/PIC) (public housing and Section 8 PBV) and Tenant Rental Assistance Certification System (Section 8 PBRA)  We assessed the reliability of the data extracts provided by HUD by (1) performing electronic testing of required data elements, (2) reviewing existing information about the data and the system that produced them, and (3) interviewing agency officials knowledgeable about the data  We determined the data on PBV households were sufficiently reliable for the purposes of our reporting objectives, but that the data on PBRA households was not sufficiently reliable for purposes of describing some characteristics of RAD households  For example, in trying to determine participation in the RAD program by year, we received several thousand PBRA entries that preceded the establishment of the RAD program  Moreover, as we previously mentioned, the postconversion household data for PBRA conversions is in a separate data system, so some variables, such as those related to race, ethnicity, rent, and income, differ from the other household data for that program  Because of these limitations, the data for PBRA households were not reliable for purposes of comparing RAD household characteristics before and after conversion as we had intended  To describe safeguards for residents and help ascertain how HUD implemented protections, we reviewed legal protections and requirements in HUD notices, reviewed selected conversion files, and interviewed HUD officials about monitoring and compliance processes  Finally, as previously described, we held focus groups with residents to better understand any effects on their living conditions and quality of life  To determine challenges PHAs faced in implementing RAD, we reviewed HUD guidance and related documents for PHAs in the program  We also interviewed eight PHAs during our site visits and spoke with another 10 PHAs by telephone about the benefits and challenges of participating in the RAD program  To examine provisions designed to help preserve long-term affordability of units, we reviewed the RAD authorizing statute and amendments and HUD notices and interviewed HUD staff to verify our understanding of agency affordability protections  For a sample of 31 randomly selected properties, we examined templates for contractual agreements for RAD closings and analyzed closing documents and contracts to determine if agreements matched program requirements  We interviewed HUD staff and staff of 18 PHAs to obtain viewpoints on the potential strengths or weaknesses of preservation in the case of default or foreclosure  We conducted this performance audit from February 2016 to February 2018 in accordance with generally accepted government auditing standards  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives  The Department of Housing and Urban Development’s (HUD) Office of Recapitalization collects financial sources and use data from Rental Assistance Demonstration (RAD) participants  Table 2 lists the financial source fields collected by HUD  Table 3 lists the financial cost fields collected by HUD  Table 4 provides additional financial source detail pertaining to HUD’s leverage ratio calculation  Table 5 and Table 6 show the total financial source amounts collected by HUD  Specifically, Table 5 shows total financial source amounts prior to recategorization, while Table 6 shows total financial source amounts after manual adjustments  Manual adjustments included isolating funding source observations in “other funding” fields 1-6 and incorporating them into existing fields, as appropriate  Table 7 replicates HUD’s methodology for calculating the RAD leverage metrics after manual adjustments in HUD data  See Table 4, above, to compare changes in each category  Table 8 recalculates the leverage ratio by deducting federal sources as leveraged sources  Table 9 recalculates the leverage ratio by deducting public sources as leveraged sources (compare to Table 8 above)  The Rental Assistance Demonstration (RAD) program has numerous requirements intended to ensure residents whose units are converted through RAD receive certain protections  The following is a description of these safeguards and their reporting and monitoring requirements  The Government Accountability Office, the audit, evaluation, and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people  GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, 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ground_truth: HUD administers the Public Housing program, which provides federally assisted rental units to low-income households through PHAs. In 2010, HUD estimated its aging public housing stock had $25.6 billion in unmet capital needs. To help address these needs, the RAD program was authorized in fiscal year 2012. RAD allows PHAs to move (convert) properties in the public housing program to Section 8 rental assistance programs, and retain property ownership or transfer it to other entities. The conversion enables PHAs to access additional funding, including investor equity, generally not available for public housing properties. GAO was asked to review public housing conversions under RAD and any impact on residents. This report addresses, among other objectives, HUD's (1) assessment of conversion outcomes; (2) oversight of resident safeguards; and (3) provisions to help preserve the long-term affordability of units. GAO analyzed data on RAD conversions through fiscal year 2017; reviewed a sample of randomly selected, nongeneralizable RAD property files; and interviewed HUD officials, PHAs, developers, academics, and affected residents. The Department of Housing and Urban Development (HUD) put procedures in place to evaluate and monitor the impact of conversion of public housing properties under the Rental Assistance Demonstration (RAD) program. RAD's authorizing legislation requires HUD to assess and publish findings about the amount of private-sector leveraging. HUD uses a variety of metrics to measure conversion outcomes. But, the metric HUD uses to measure private-sector leveraging—the share of private versus public funding for construction or rehabilitation of assisted housing—has limitations. For example, HUD's leveraging ratio counts some public resources as leveraged private-sector investment and does not use final (post-completion) data. As a result, HUD's ability to accurately assess private-sector leveraging is limited. HUD does not systematically use its data systems to track effects of RAD conversions on resident households (such as changes in rent and income, or relocation) or monitor use of all resident safeguards. Rather, since 2016, HUD has required public housing agencies (PHA) or other post-conversion owners to maintain resident logs and collect such information. But the resident logs do not contain historical program information. HUD has not developed a process for systematically reviewing information from its data systems and resident logs on an ongoing basis. HUD has been developing procedures to monitor compliance with some resident safeguards—such as the right to return to a converted property—and begun a limited review of compliance with these safeguards. However, HUD has not yet developed a process for monitoring other safeguards—such as access to other housing voucher options. Federal internal control standards require agencies to use quality information to achieve objectives, and obtain and evaluate relevant and reliable data in a timely manner for use in effective monitoring. Without a comprehensive review of household information and procedures for fully monitoring all resident safeguards, HUD cannot fully assess the effects of RAD on residents. RAD authorizing legislation and the program's use agreements (contracts with property owners) contain provisions intended to help ensure the long-term availability of affordable units, but the provisions have not been tested in situations such as foreclosure. For example, use agreements between HUD and property owners specify affordability and use restrictions that according to the contract would survive a default or foreclosure. HUD officials stated that HUD intends to develop procedures to identify and respond to risks to long-term affordability, including default or foreclosure in RAD properties. However, HUD has not yet done so. According to federal internal control standards, agencies should identify, analyze, and respond to risks related to achieving goals and objectives. Procedures that address oversight of affordability requirements would better position HUD to help ensure RAD conversions comply with program requirements, detect potential foreclosure and other risks, and take corrective actions. GAO makes five recommendations to HUD intended to improve leveraging metrics, monitoring of the use and enforcement of resident safeguards, and compliance with RAD requirements. HUD agreed with our recommendations to improve metrics and build on existing oversight.