a

GAO

United States General Accounting Office

Report to Congressional Requesters

May 2004 RURAL HOUSING 

SERVICE

Agency Has 

Overestimated Its 

Rental Assistance 

Budget Needs over the 

Life of the Program

GAO-04-752
www.gao.gov/cgi-bin/getrpt?GAO-04-752.

For more information, contact William B. 

Shear at (202) 512-4325 or shearw@gao.gov.

Highlights of GAO-04-752, a report to 

congressional requesters 

May 2004

RURAL HOUSING SERVICE 

Agency Has Overestimated Its Rental 

Assistance Budget Needs over the Life of 

the Program 

Based on their age, contracts (both 5 and 20 year) issued from 1978 through 

1997 should have expired by the end of 2002. As of June 2003, 

approximately 18 percent of these contracts were still active, accounting for 

$605 million in unexpended balances. Most of this amount ($510 million, or 

84 percent) involved the 32 percent of the contracts from 1978 through 1982 

that were still active. At current spending rates, it will take another 7 years 

for these contracts to expend their funds, 8 years after the last of the 20-year 

contracts were expected to expire. Contracts issued from 1983 through 1997 

should expend their remaining funds in 2004. According to USDA, any effort 

to recapture the remaining unexpended funds associated with rental 

assistance agreements entered into from 1978 through 1982 would result in a 

breach of those contracts and would subject USDA to liability. 

As of June 2003, 74 percent of the total number of contracts issued in 1998 

were still active, even though RHS expected these contracts to run out 

during 2003, suggesting that these contracts may have been overfunded. 

About 25 percent, or $114 million, of the funds remain from the 1998 

contracts, and about 35 percent, or $208 million, remain from the 1999 

contracts. Furthermore, only 11 percent of the funds from the contracts 

issued in 2002 were spent during the contracts’ first 1.5 years, suggesting 

that many of these contracts are expending their funds more slowly than 

RHS anticipated. Based on current spending rates, and allowing for 

inflation, the average contract issued during these years will likely run out of 

funds during its sixth year. 

GAO analysis of rental assistance payment data showed that the agency has 

overestimated its budget needs almost every year since 1990, the earliest 

year for which GAO gathered data. Just as GAO found that contracts issued 

from 1978 through 1997 have lasted beyond their intended terms, it appears 

that RHS has overestimated its budget needs over the life of the rental 

assistance program.

Actual Versus Estimated Rental Assistance Expenditures Per Unit Per Year, from 1990 

through 2003 

The Rural Housing Service’s (RHS) 

Section 521 Rental Assistance 

Program provides rental subsidies 

to about 250,000 rural tenants 

through 5-year contracts with 

project owners; 20-year contracts 

were also issued from 1978 through 

1982. In early 2003, RHS reported 

hundreds of millions of dollars in 

unexpended balances, primarily 

tied to 5- and 20-year contracts 

issued from 1978 through 1982. 

Since contracts remain active until 

all funds are expired, some of these 

contracts will likely last as long as 

38 years. GAO was asked to assess 

(1) the activity level of rental 

assistance contracts issued from 

1978 through 1997 that have 

unexpended balances and the 

possibility of deobligating these 

balances, and (2) the activity level 

of rental assistance contracts 

issued from 1998 through 2002 and 

the accuracy of RHS’s estimates of 

the rate at which these funds would 

be used. The Department of 

Agriculture commented on our 

responses to these questions. 
Page i GAO-04-752 Rural Housing Service

Contents

Letter 1

Agency Comments 4

Appendix

Appendix I: Briefing to the House Committee on Financial Services 6

Abbreviations

AMAS Automated Multi-Housing Accounting System

OMB Office of Management and Budget

RHS Rural Housing Service

USDA United States Department of Agriculture

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Page 1 GAO-04-752 Rural Housing Service

United States General Accounting Office

Washington, D.C. 20548

A

May 20, 2004 Letr

The Honorable Michael G. Oxley

Chairman

Committee on Financial Services

House of Representatives

The Honorable Sue W. Kelly

Chairwoman

Subcommittee on Oversight and Investigations

Committee on Financial Services

House of Representatives

The Honorable Robert W. Ney

Chairman

Subcommittee on Housing and Community Opportunity

Committee on Financial Services

House of Representatives

Each year, the Rural Housing Service (RHS) of the Department of 

Agriculture (USDA) provides rental subsidies through the Section 521 

Rental Assistance Program to about 250,000 rural tenants living in federally 

subsidized properties. RHS provides the subsidies through 5-year contracts 

with project owners; 20-year contracts were also issued for units in newly 

constructed properties from 1978 through 1982. With a fiscal year 2004 

appropriation of almost $600 million, the program is RHS’s largest line-item 

appropriation. In early 2003, RHS reported hundreds of millions of dollars 

in unexpended balances, primarily tied to 5- and 20-year contracts issued 

from 1978 through 1982. Since contracts remain active until all funds are 

expired, some of these contracts will likely last as long as 38 years.

To help with your oversight of the Section 521 Rental Assistance Program, 

you asked us to assess (1) the activity level of rental assistance contracts 

issued from 1978 through 1997 that have unexpended balances and the 

possibility of deobligating1

 these unexpended balances, and (2) the activity 

level of rental assistance contracts issued from 1998 through 2002 and the 

accuracy of RHS’s estimates of the rate at which these funds would be 

used.

1

An agency’s cancellation or downward adjustment of previously recorded obligations.
Page 2 GAO-04-752 Rural Housing Service

To assess the activity level of rental assistance contracts issued from 1978 

through 2002, we reviewed rental assistance data from USDA’s Automated 

Multi-Housing Accounting System (AMAS) from January 1990 through 

October 2003 to determine the extent of the unexpended balances. We also 

used these data to determine the rate at which those balances were 

currently being expended. We estimated when the funds will expire by 

applying Office of Management and Budget (OMB) inflation rates for future 

years to the current rates of expenditure. We acquired the OMB inflation 

rates for future years from the fiscal year 2004 and 2005 budgets of the 

President.2

 We assessed the accuracy of RHS’s estimates of the rate at 

which the funds would be used for contracts issued from 1998 through 

2002—and again for contracts issued from 1990 through 2003—by 

comparing RHS’s estimated rental assistance expenditures to actual 

program expenditures. We determined RHS’s estimated expenditures based 

on data provided by the agency. We determined actual program 

expenditures using payment data from AMAS. We conducted our work 

from June 2003 through February 2004 in Washington, D.C., and St. Louis in 

accordance with generally accepted government auditing standards.

Based on their age, contracts (both 5 and 20 year) issued from 1978 through 

1997 should have expired by the end of 2002. As of June 2003, 

approximately 18 percent of these contracts were still active, accounting 

for $605 million in unexpended balances. Most of this amount ($510 

million, or 84 percent) involved the 32 percent of the contracts from 1978 

through 1982 that were still active (see appendix, slides 4 and 5). Contracts 

issued from 1983 through 1997 accounted for the remaining $95 million. 

In 2002, approximately $179 million in rental assistance funds was paid to 

project owners from contracts issued from 1978 through 1997, $53 million 

from contracts issued from 1978 through 1982, and $126 million from 

contracts issued from 1983 through 1997 (see appendix, slides 6 and 7). At 

this rate, contracts from the 1983 to 1997 period will likely expend their 

remaining $95 million during 2004. The 1978 to 1982 contracts will not 

expend their $510 million in unexpended balances until 2011 on average—8 

years after the last of the 20-year contracts should have expired (see 

appendix, slide 8). 

2

Table S-11: Comparison of Economic Assumptions from the Budget for Fiscal Year 2005, 

lists inflation rates for 2005 through 2009. For any projections for 2010 and beyond, we used 

the rate for 2009.
Page 3 GAO-04-752 Rural Housing Service

The rental assistance contracts that implement the rental assistance 

program explicitly tie their expiration to the disbursement of rental 

assistance amounts listed in the contracts. In practice, this has resulted in 

many of the contracts extending beyond (in some instances, far beyond) 

the contemplated 5- or 20-year term. According to USDA, any effort to 

recapture the remaining unexpended funds associated with rental 

assistance agreements entered into from 1978 through 1982 would result in 

a breach of those contracts and would subject USDA to liability.3

 

As of June 2003, 74 percent of the total number of contracts issued in 1998 

were still active, even though RHS expected these contracts to run out 

during 2003, suggesting that these contracts may have been overfunded. 

About 25 percent, or $114 million, of the funds remain from the 1998 

contracts, and about 35 percent, or $208 million, remain from the 1999 

contracts. Furthermore, only 11 percent of the funds from the contracts 

issued in 2002 were spent during the contracts’ first 1.5 years, suggesting 

that many of these contracts are expending their funds more slowly than 

RHS anticipated (see appendix, slide 10). Based on current spending rates, 

and allowing for inflation, the average contract issued during these years 

will likely run out of funds during its sixth year. 

In fact, our analysis of rental assistance payment data showed that the 

agency has been overestimating its budget needs since at least 1990, the 

earliest year for which we gathered data. Slide 12 (see appendix) provides 

an example of the difference between RHS’s actual and estimated 

expenditures from 1990 to 2003.4

 RHS estimates are above actual 

expenditures in each of the years. Just as we found that contracts issued 

3

We will issue a separate legal opinion on this issue.

4

The actual expenditures are averaged from the entire portfolio of 5-year contracts issued 

from 1989 through 2002, while the estimated expenditures are averaged from only those 

units for which new (including renewal) contracts originated in the corresponding year. 

Furthermore, the RHS-estimated expenditure for a given year shows the effect of the 5-year 

estimate in the first year only. Due to RHS’s method for calculating its estimated 

expenditures over a 5-year period, the difference is largest in the first year and declines over 

time as inflation raises the actual expenditure (or more accurate estimation) closer to the 

estimated expenditure. The declining differentials of the second to fifth years are not 

reflected in slide 12. Nonetheless, while the estimated expenditures for any given year 

represent about 20 percent of the portfolio, they represent almost the entire portfolio over 

any 5-year period in the figure. RHS estimates are above actual expenditures in each of the 

years. For more discussion, see U.S. General Accounting Office, Rural Housing Service: 

Standardization of Budget Estimation Processes Needed for Rental Assistance Program, 

GAO 04-424 (Washington, D.C.: Mar. 25, 2004).
Page 4 GAO-04-752 Rural Housing Service

from 1978 through 1997 have lasted beyond their intended terms, it would 

appear that RHS has overestimated its budget needs over the life of the 

rental assistance program.

Agency Comments We provided USDA with a draft of our report Rural Housing Service: 

Standardization of Budget Estimation Processes Needed for Rental 

Assistance Program, which included these two objectives, for review and 

comment.5

 The Acting Undersecretary for Rural Development for USDA 

raised concerns about our analysis of RHS’s rental assistance expenditure 

data. Specifically, USDA believed our finding that contracts issued from 

1998 through 2002 are expected to exhaust their funds in their sixth year 

validates the method of budget estimating that RHS has used in recent 

years. While we agree that RHS’s contracts are not lasting as long as they 

did in the past, a 6-year average contract life is still 20 percent greater than 

the intended contract life. USDA claimed we assert that the contracts 

issued from 1998 through 2003 are expending funds at a level consistent 

with contracts funded from 1978 through 1997. We do not make this 

assertion; we state that the activity of contracts issued from 1998 through 

2002 is consistent with earlier years and, in particular, that RHS has 

overestimated its spending needs in most years since 1990.

As agreed with your office, unless you publicly announce the contents of 

this report, we plan no further distribution until 30 days from the report 

date. At that time, we will send copies of this report to interested Members 

of Congress and congressional committees. We also will send copies to the 

Secretary of the Department of Agriculture and make copies available to 

others upon request. In addition, the report will be available at no charge 

on the GAO Web site at http://www.gao.gov.

5

GAO-04-424 addressed three objectives, two of which are discussed here, in GAO-04-752. 

See GAO-04-424 for USDA’s complete comments on all three objectives.
Page 5 GAO-04-752 Rural Housing Service

If you or your staff have any questions about this report, please contact me 

at (202) 512-4325, Andy Finkel at (202) 512-6765, or Katherine Trimble at 

(202) 512-5033. William Bates, Emily Chalmers, Jamila Jones, Austin Kelly, 

Marc Molino, and Julie Trinder made key contributions to this report.

William B. Shear

Director, Financial Markets

 and Community Investment
Page 6 GAO-04-752 Rural Housing Service

Appendix I

Briefing to the House Committee on Financial Apendxies

Services ApendxiI

1

House Financial Services

March 11, 2004 Briefing

RHS Has Overestimated 

Its Rental Assistance Budget Needs

Over the Life of the Program
Appendix I

Briefing to the House Committee on 

Financial Services

Page 7 GAO-04-752 Rural Housing Service

2

Objectives

1) What is activity level of rental assistance 

contracts issued in 1978-97 that have 

unexpended balances, and what is the

possibility of deobligating these balances?

2) What is the activity level of rental assistance 

contracts issued in 1998-2002, and how 

accurate were RHS’s estimates of the rate at 

which these funds would be used?
Appendix I

Briefing to the House Committee on 

Financial Services

Page 8 GAO-04-752 Rural Housing Service

3

Active vs. Expired Contracts 

(1978 – 1997)

Source: GAO analysis of RHS data.
Appendix I

Briefing to the House Committee on 

Financial Services

Page 9 GAO-04-752 Rural Housing Service

4

Expended vs. Unexpended Amounts 

(1978 – 1997)

Source: GAO analysis of RHS data.
Appendix I

Briefing to the House Committee on 

Financial Services

Page 10 GAO-04-752 Rural Housing Service

5

Active vs. Expired Contracts

(1978 – 1982)

Expended vs. Unexpended

Amounts (1978 – 1982)

Source: GAO analysis of RHS data.
Appendix I

Briefing to the House Committee on 

Financial Services

Page 11 GAO-04-752 Rural Housing Service

6

RA Payment Amounts per Year since 1990 

(for contracts issued in 1978-1982)

20

30

40

50

60

1990 1992 1994 1996 1998 2000 2002

Year

Total RA Pay

m

Total RA Payments

(in millions)

Source: GAO analysis of RHS data.
Appendix I

Briefing to the House Committee on 

Financial Services

Page 12 GAO-04-752 Rural Housing Service

7

RA Payment Amounts per Year since 1990 

(for contracts issued in 1983-1997)

0

100

200

300

400

500

1990 1992 1994 1996 1998 2000 2002

Year

Total RA Payment Total RA Payments (in millions)

Source: GAO analysis of RHS data.
Appendix I

Briefing to the House Committee on 

Financial Services

Page 13 GAO-04-752 Rural Housing Service

8

Schedule for Unexpended Obligations,

Based on Current Spending Rates 

(for contracts issued in 1978-1997)

0

50

100

150

200

250

300

350

400

450

500

19901992199419961998200020022004200620082010

1978-1982

1983-1997

(in millions)

Source: GAO analysis of RHS data.
Appendix I

Briefing to the House Committee on 

Financial Services

Page 14 GAO-04-752 Rural Housing Service

9

USDA Contracts Do Not Allow

Unexpended Balances to be Deobligated

• USDA stated that the unexpended balances cannot be 

deobligated, since every rental assistance contract RHS has 

executed contains a provision stating that the agreement

expires only when the assistance runs out.

• We will issue a separate legal opinion on this issue.
Appendix I

Briefing to the House Committee on 

Financial Services

Page 15 GAO-04-752 Rural Housing Service

10

Active vs. Expired Contracts

(1998 – 2002)

Expended vs. Unexpended

Amounts (1998 – 2002)

Source: GAO analysis of RHS data.
Appendix I

Briefing to the House Committee on 

Financial Services

Page 16 GAO-04-752 Rural Housing Service

11

Message

• Why are contracts lasting longer than 5 years?

• RHS is overestimating its funding needs.
Appendix I

Briefing to the House Committee on 

Financial Services

Page 17 GAO-04-752 Rural Housing Service

12

RHS Expenditure per RA Unit per Year

(Actual vs. Estimated)

Source: GAO analysis of RHS data.

(250160)
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