United States General Accounting Office

GAO Report to Congressional Committees

February 1998 SECTION 8

TENANT-BASED

HOUSING ASSISTANCE

Opportunities to Improve

HUD’s Financial

Management

GAO/RCED-98-47

GAO United States

General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-277227 

February 20, 1998

Congressional Committees

This report responds to a mandate in the 1997 Emergency Supplemental Appropriations Act

that we evaluate the accuracy of the Department of Housing and Urban Development’s (HUD)

estimate of unexpended budget authority in the Section 8 tenant-based program. Our report

also responds to your request that we assess HUD’s budget formulation process for this program.

The report contains recommendations to the Secretary of Housing and Urban Development that

are designed to improve the reporting of unexpended budget authority and the formulation of

budget requests for the Section 8 tenant-based program.

We are sending copies to the appropriate congressional committees; the Secretary of Housing

and Urban Development; and the Director, Office of Management and Budget. Copies are

available to other interested parties upon request.

If you or your staff have any questions, please call me at (202) 512-7631. Major contributors to

this report are listed in appendix III.

Judy A. England-Joseph

Director, Housing and Community

 Development Issues
B-277227 

List of Committees

The Honorable Christopher S. Bond

Chairman

The Honorable Barbara A. Mikulski

Ranking Minority Member

Subcommittee on VA, HUD, and

 Independent Agencies

Committee on Appropriations

United States Senate

The Honorable Jerry Lewis

Chairman

The Honorable Louis Stokes

Ranking Minority Member

Subcommittee on VA, HUD, and

 Independent Agencies

Committee on Appropriations

House of Representatives

Page 2 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
B-277227 

Page 3 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Executive Summary

Purpose In fiscal year 1998, the Congress appropriated $25 billion in discretionary

budget authority for the Department of Housing and Urban Development’s

(HUD) programs, which represented a 30-percent increase over the fiscal

year 1997 level of $19.3 billion. HUD will use more than a third of this

funding to assist low-income households to obtain decent housing under

section 8 of the Housing Act of 1937. Section 8 of the act establishes two

primary types of assistance for families to rent privately owned housing

units: tenant-based assistance provided through contracts with housing

agencies and project-based assistance provided through contracts with

private landlords.1

 In 1997, HUD reported that enough budget authority had

accumulated unneeded and unspent over the 24-year life of the

tenant-based program to equal the amount expended to fully fund the

program for fiscal year 1996. Before 1997, however, HUD’s information

systems could not identify and report the accumulation of such excess

budget authority. Furthermore, HUD has not specifically identified the

budget authority for the tenant-based program in its budget submission or

in its consolidated financial statements, and therefore it was not subject to

annual audit.

Expressing concern about HUD’s lack of timeliness and precision in

identifying the magnitude of unspent budget authority in the tenant-based

portion of the Section 8 program, the Chairman of the Subcommittee on

VA, HUD, and Independent Agencies, House Committee on Appropriations,

asked GAO to review HUD’s financial management of the tenant-based

program. In response to that request and to a mandate in the 1997

Emergency Supplemental Appropriations Act (P.L. 105-18) that directs GAO

to review HUD’s budgeting and accounting systems for Section 8 rental

assistance,2 GAO’s objectives for this report were to

• evaluate the accuracy of HUD’s estimate of its unexpended funds in the

Section 8 tenant-based program and the reasonableness of this amount

and

• assess HUD’s budget formulation process as it was carried out for the

Department’s fiscal year 1998 submission for the tenant-based Section 8

program.

1

For the tenant-based program, HUD contracts with state and local public housing agencies to manage

the program’s certificates and vouchers, which assist 1.4 million households. These agencies make

payments to private-sector landlords to subsidize the rent of certificate and voucher holders.

2

This report is the first of three that GAO plans to issue in response to this mandate. The second report

will address budgeting and accounting issues for the Section 8 project-based program, and the third

report will address the Section 8 Moderate Rehabilitation Program.

Page 4 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Executive Summary

Background HUD’s rental housing programs help about 4.7 million low-income

households to obtain safe, decent, and affordable places to live. About

two-thirds of these households rent units in the privately owned housing

market under the Section 8 program. HUD’s estimate for new budget

authority to renew expiring Section 8 tenant-based and project-based3

contracts grew from $3.6 billion in fiscal year 1997 to $8.1 billion in fiscal

year 1998. Moreover, HUD estimates that because a significant number of

the tenant-based contracts will expire over the next 5 years, the renewal

needs for the tenant-based portion alone will increase from $2.5 billion in

fiscal year 1997 to more than $10.5 billion in budget authority by fiscal

year 2002. Nearly one-third of all assisted households, or 1.4 million,

participate in the tenant-based program.

To offset the budget authority requirements for renewing the tenant-based

portion of the Section 8 program, HUD began in 1995 to draw on unspent

budget authority from previous years to extend contracts beyond their

expiration dates. Because Section 8 budget authority is available to HUD’s

programs until expended, unspent Section 8 funding that accumulates

over the years as reserves remains credited to the housing agencies.

However, for years, HUD’s information systems did not allow the

Department to accurately identify such unexpended budget authority. In

addition, since the early 1990s, the Office of Management and Budget and

HUD’s Office of the Inspector General have reported that the Department

has been unable to submit accurate estimates of its contract renewal

needs because its financial management systems have not contained

adequate data on Section 8 contracts. This situation occurred because of

serious deficiencies in the controls and procedures for maintaining

contract and accounting data. In an effort to more accurately estimate

contract renewal needs, HUD began an aggressive effort in February 1996

to quantify for all participating housing agencies the accumulated reserves

available to extend contracts.

Results in Brief In 1997, HUD estimated that $20.7 billion in unexpended budget authority

existed in the Section 8 tenant-based program and that $9.9 billion of that

amount was excess to known program needs. This is funding that housing

agencies received under contracts with HUD but did not expend because

the funding was not needed as planned to make housing assistance

payments to landlords on behalf of low-income families. Because HUD

3

For the project-based program, HUD contracts directly with and provides rental subsidies to the

owners of private rental housing and state housing finance agencies. For both the tenant-based and

project-based programs, assisted households generally pay 30 percent of their income for rent,

although this percentage can vary depending on a family’s income and the type of program.

Page 5 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Executive Summary

based its estimate largely on the data in its tenant-based program’s

information system—which HUD’s Office of Inspector General and an

independent audit firm have tested and determined to be reliable—GAO

believes that the estimate is reasonably accurate. After the Congress

rescinded a total of $4.2 billion in June and October 1997 and HUD set aside

$2.2 billion for unanticipated costs and to account for future transactions,

the balance of $9.9 billion in excess unexpended budget authority was

reduced to about $3.5 billion in October 1997 and placed in a

congressionally established Reserve Preservation Account.

The budget formulation process that HUD used to prepare its fiscal year

1998 budget request for renewing Section 8 tenant-based contracts did not

produce an accurate estimate of needs. Key HUD offices did not adequately

oversee critical steps in the process, and the process did not require

reasonable justification for substantial portions of the estimate—including

several hundred million dollars proposed for contingency costs. In

addition, although at the time of its fiscal year 1998 budget submission HUD

had an estimate of the impact of welfare reform on the cost of the Section

8 program, more recent information caused the Department to conclude

that including this estimate in the budget request was unnecessary. As a

result, the Department eventually lowered by $1 billion (over 10 percent)

its fiscal year 1998 budget estimate for renewing Section 8 contracts. To

improve its process, HUD has further enhanced its tenant-based program’s

information system,4

 consolidated its budget development with strategic

planning and financial management, and changed its budget process; HUD

also plans additional changes in these areas but does not have a timetable

for accomplishing them.

Principal Findings

Tenant-Based Program

Accumulated Billions in

Excess Unexpended

Budget Authority

At the direction of the Congress and with an improved information system,

HUD identified in 1997 $20.7 billion in unexpended budget authority in the

Section 8 tenant-based program. HUD classified $9.9 billion of that amount

as excess because it would not be needed to meet the current

requirements of the tenant-based program. An independent review by

Price Waterhouse LLP showed that these amounts were accurate.

However, because the housing agencies that administer the program had

not demonstrated in prior years a need for significant amounts of reserve

4

HUD’s central accounting and program system for the tenant-based program, called HUDCAPS,

provides financial accounting, management control, and financial reporting capabilities.

Page 6 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Executive Summary

funding, a reserve of $9.9 billion to address unexpected program costs was

excessive. Therefore, after deducting $2.2 billion for contingencies and

other adjustments, HUD took back $7.7 billion from the amounts formerly

provided to housing agencies under contract to administer the Section 8

program. Of this amount, the Congress rescinded $4.2 billion and HUD

placed the remaining $3.5 billion in a congressionally established account

for excess Section 8 reserves.

Until HUD’s actions in 1997 to identify and take back the excess

unexpended budget authority in its Section 8 contracts, the Department

had been unaware of the magnitude of the growing balances in these

accounts. Furthermore, only after recent improvements to its information

system does HUD now have the capacity to obtain accurate data on these

balances. HUD does not currently distinguish, in either its budget

justification materials or its consolidated financial statements, excess

balances of budget authority from amounts that are needed to meet

requirements. However, regular reporting of these balances would provide

the Congress with a more accurate picture of the tenant-based program’s

cost. Such reporting also would better ensure that HUD’s future budget

requests recognize the availability of this funding to offset needs for new

budget authority or for other purposes.

Flaws in HUD’s Budget

Process for the

Tenant-Based Program Led

to Significant

Overestimates of Contract

Renewal Needs; HUD

Plans Improvements

Despite improvements to the Section 8 tenant-based program’s

information system, in its fiscal year 1998 budget submission to the

Congress, HUD overstated its $9.2 billion estimate of tenant-based contract

renewals by over $1 billion because of (1) fundamental flaws in its budget

development process and (2) states’ experience with welfare reform

showing that welfare recipients’ incomes were not falling as anticipated.

The flaws in the budget process included the following:

• A lack of oversight by appropriate offices allowed HUD to double-count the

administrative fee that is paid to housing agencies for operating the

Section 8 program, thus adding approximately $700 million to the estimate

of new budget authority needed to renew tenant-based contracts.

• Insufficient use of supporting historical data caused HUD to request

unneeded additions to its estimate of the annual cost per unit of assisted

housing, which added $444 million to HUD’s total request for contract

renewal. HUD also provided insufficient support for a requested

$162 million for contingencies, an amount that it could not justify with

information from prior years.

Page 7 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Executive Summary

Recognizing these budgeting inaccuracies and that the $179 million that it

had budgeted to address the impact of welfare reform on tenants’ incomes

would not be necessary, HUD submitted a revised budget estimate for

renewing Section 8 contracts to the Congress prior to the enactment of

HUD’s fiscal year 1998 appropriations bill. HUD reduced its estimate by

$1 billion—from $9.2 billion to $8.2 billion—by, among other actions,

reducing the average unit cost, eliminating its request for funds to address

unspecified contingency costs, and increasing its use of unused funding

from prior years.

To address the problems that GAO and HUD identified in its budget process,

HUD plans to make additional improvements to its information system and

reorganize the offices responsible for preparing and reviewing the

Department’s budget estimates. Recognizing a need to improve its budget

process with better oversight and documentation, HUD recently moved the

Office of Budget under the control of the Office of the Chief Financial

Officer and plans to base future budgets on documented historical

program costs and data. HUD officials plan to adopt other changes—such

as no longer using excess budget authority to extend expiring

contracts—to make their requests for new budget authority more

accurately reflect the needs of the Section 8 program. Because many of

these changes have not been fully implemented, GAO cannot determine

whether they will positively affect the budget process for fiscal year 1999

and beyond.

Recommendations To improve HUD’s financial management of its tenant-based program and

the soundness of the budget estimates for fiscal year 2000 and beyond, GAO

recommends that the Secretary of Housing and Urban Development

• direct the Office of the Chief Financial Officer to modify the agency’s

consolidated financial statements so that they (1) identify the portions of

the unexpended appropriations for the Section 8 program that are

attributable to the tenant-based and project-based programs and

(2) disclose the accumulated amounts of budget authority in each program

that are excess to current needs and therefore available for other uses and

• annually assess the balance of excess unexpended budget authority

credited to housing agencies and take back amounts that accumulate

above what is prudently needed to address contingency costs.

Page 8 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Executive Summary

Agency Comments GAO provided a draft of this report to HUD for its review and comment. In

commenting on the report, HUD’s Chief Financial Officer said that HUD

agreed with the report’s major findings, conclusions, and

recommendations. HUD’s Office of Public and Indian Housing said that the

report presents a balanced assessment. To provide a more factual

representation and to ensure clarity, HUD provided additional comments.

For example, HUD’s principal concern was that GAO had characterized HUD’s

initial estimate of the impact on welfare reform as unjustified. HUD believes

that while more recent conditions and information show the estimate to be

obsolete and unnecessary, the estimate included as part of the fiscal year

1998 budget estimate was based on the best information available at the

time. GAO agrees and has made appropriate changes in its report to reflect

HUD’s concerns.

Page 9 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Contents

Executive Summary 4

Chapter 1 

Introduction

12

1.4 Million Households Benefit From HUD’s Tenant-Based Rental

Assistance

12

Nearly a Fivefold Increase in Section 8 Tenant-Based Assistance

Is Expected Within 5 Years

13

Accumulation of Unexpended Budget Authority in the Section 8

Tenant-Based Program

16

Long-Standing Problems With HUD’s Budget Estimating Process 17

Objectives, Scope, and Methodology 19

Chapter 2 

HUD Identified

Billions in Excess

Unexpended Budget

Authority

22

About $10 Billion of Excess Budget Authority Accumulated in the

Section 8 Tenant-Based Program

22

Opportunities Exist for Better Reporting of Excess Budget

Authority

26

Conclusions 27

Recommendations 28

Agency Comments 28

Chapter 3 

HUD Plans Changes

to Improve Its Budget

Formulation Process

29

Ineffective Budget Process Caused Errors and Resulted in

Revised Budget Request

29

HUD’s Funding Request for Future Years’ Contract Amendments

Is Not Well Supported

33

HUD Plans to Improve Its Process for Estimating Contract

Renewals

34

Conclusions 36

Agency Comments 37

Appendixes Appendix I: HUD’s Development of Its Fiscal Year 1998 Average

Unit Cost Estimate for Tenant-Based Contract Renewals

38

Appendix II: HUD’s September 1997 Changes to the Section 8

Contract Renewal Estimate Originally Submitted in the February

1997 Budget Request

39

Appendix III: Major Contributors to This Report 40

Tables

Page 10 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Contents

Table 2.1: Unexpended Budget Authority in the Tenant-Based

Program That Is Excess to Current Program Needs as of

October 1, 1997

24

Table 2.2: Budget Authority Remaining in the Section 8 Reserve

Preservation Account

25

Table 3.1: HUD’s Changes to Its Fiscal Year 1998 Tenant-Based

Contract Renewal Budget Estimate

32

Figures Figure 1.1: Estimated Budget Authority and Expiring Units for

Section 8 Tenant-Based Contract Renewals, Fiscal Years

1997-2002

15

Figure 2.1: Actions Taken by the Congress and HUD to Identify

and Control Section 8 Tenant-Based Funding

23

Abbreviations

CFO Chief Financial Officer

FY fiscal year

GAO General Accounting Office

HUD Department of Housing and Urban Development

OIG Office of Inspector General

OMB Office of Management and Budget

Page 11 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 1 

Introduction

In fiscal year 1998, the Congress appropriated $25 billion in discretionary

budget authority for the Department of Housing and Urban Development’s

(HUD) programs, which represented a 30-percent increase over the fiscal

year 1997 level of $19.3 billion. HUD provides rental housing

assistance-about $21 billion in fiscal year 1996—that enables about

4.7 million low-income households to obtain safe, decent, and affordable

housing. HUD assists about two-thirds of these households through its

Section 8 housing assistance program.1 HUD’s estimate of new budget

authority to renew expiring Section 8 tenant-based and project-based

contracts2

 increases from $3.6 billion in fiscal year 1997 to $18.1 billion in

fiscal year 2002. For the tenant-based portion of the Section 8 program,

HUD provides housing subsidies through nearly 4,300 contracts with local

housing agencies and state housing finance agencies. Housing agencies

receive a fee from HUD for administering the tenant-based program and

working with households to determine eligibility, verify income, and

ensure that units meet quality standards. Because a significant number of

the Section 8 tenant-based contracts will expire over the next 5 years, the

estimated cost to renew contracts in the tenant-based program alone will

rise from about $2.5 billion in fiscal year 1997 to $10.5 billion in fiscal year

2002. To identify unexpended funding that could offset this growing

renewal cost, HUD recently undertook aggressive efforts to reconcile its

records in the tenant-based program.

1.4 Million

Households Benefit

From HUD’s

Tenant-Based Rental

Assistance

Tenant-based assistance is an important part of the federal government’s

commitment to providing safe, decent, and affordable housing to

low-income people. In fiscal year 1996, HUD spent about $7 billion to

provide tenant-based rental assistance. HUD’s tenant-based assisted

housing programs—the Section 8 certificate and voucher

programs—provide direct rental assistance to about 1.4 million

households. These programs are designed to allow low-income households

to live in decent and affordable private rental housing of their choice, as

long as the units meet HUD’s rent and quality standards. Generally, under

the certificate program, an assisted household pays 30 percent of its

1

The Section 8 housing assistance program, named for the revised section 8 of the U.S. Housing Act of

1937, was originally established by the Housing and Community Development Act of 1974 (P.L.

93-383). It includes project-based assistance for specific properties and tenant-based assistance for

specific households.

2

For the project-based program, HUD contracts directly with and provides rental subsidies to the

owners of private rental housing and state finance agencies. In the Moderate Rehabilitation Program,

HUD contracted with landlords to rehabilitate their multifamily properties and also provided

project-based Section 8 assistance to make them affordable for low-income households. For each

program, assisted households generally pay 30 percent of their income for rent, although this

percentage can vary depending on a family’s income and the type of program.

Page 12 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 1 

Introduction

adjusted income for rent. In contrast, households with vouchers may elect

to pay more or less than 30 percent of their income for rent, depending on

the rent charged for the unit in which they elect to live. In turn, the

voucher program assists the household by making a subsidy payment to

the landlord equal to the difference between 30 percent of the household’s

adjusted income and a payment standard for the housing unit based on the

fair market rent for a unit of a similar size in the area.

To operate the certificate and voucher programs, HUD enters into contracts

with local and state housing agencies, including public housing agencies.

These housing agencies certify applicants for eligibility, inspect units

found by the tenant for compliance with housing standards, and verify that

the lease terms meet HUD’s requirements. In addition, the housing agencies

pay the rent subsidies to owners of private rental housing for the assisted

households. HUD also pays the housing agency a statutorily determined

administrative fee for managing the program.

Section 8 Tenant-Based

Contracts

When the Section 8 program began in 1974, HUD entered into long-term

contracts with housing agencies to provide tenant-based assistance.

Initially, contract terms for tenant-based assistance were for 15 years. As

the federal budget deficit grew larger, HUD reduced contract terms to

reduce the amount of budget authority it needed to set aside to fully fund

the contracts over their whole terms.3 HUD subsequently shortened the

contract terms to 5 years and, later, to 3 years. Finally, beginning in fiscal

year 1995, Section 8 tenant-based contracts were written for 1-year terms,

thus minimizing the amount of budget authority HUD needs to fund

contract renewals. HUD’s actions have resulted in contract lengths ranging

from as long as 15 years to as short as 1 year.

Nearly a Fivefold

Increase in Section 8

Tenant-Based

Assistance Is

Expected Within 5

Years

HUD estimates that the cost of Section 8 contract renewals for the

tenant-based program alone will increase from $2.5 billion in fiscal year

1997 to $10.5 billion in fiscal year 2002—nearly a fivefold increase in the

amount of budget authority needed to fund Section 8 tenant-based

contract renewals. The increase in budget authority is attributable to the

large growth in the number of expiring Section 8 tenant-based contracts.

This growth reflects the renewal of the initial expiration of long-term

contracts, as well as the re-renewal of shorter term contracts begun in the

1990s. To offset the budget authority requirements for Section 8 contract

3

Budget authority is the authority provided by federal law to incur financial obligations that will result

in outlays. Appropriations are the most common means of providing budget authority. Outlays are the

measure of federal spending and are payments to liquidate obligations.

Page 13 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 1 

Introduction

renewals, the Congress encouraged HUD in 1995 to begin using available

unexpended budget authority that had accumulated over the years in the

housing agencies’ program reserve accounts to extend the funding of

expiring Section 8 contracts.

The Congress provides budget authority for HUD’s Section 8 tenant-based

assistance to (1) renew expiring contracts to maintain existing subsidies

(called contract renewals), (2) create new contracts to increase the

number of assisted households (called incremental assistance), and

(3) provide additional funds for existing contracts when the remaining

contract funds are insufficient to pay subsidies over the remaining life of

the contract (called contract amendments). Renewal assistance represents

the vast majority of Section 8 tenant-based assistance.

HUD and the Congress have worked together during recent years to renew

every expiring contract. However, renewing these contracts will require a

sharp increase in budget authority over the next few years because the

number of expiring contracts is increasing dramatically. The sharp growth

in expirations has two causes. First, the number of contracts expiring for

the first time will increase sharply in the coming years. These consist of

15-year contracts issued in the late 1970s and early 1980s and short-term (5

years or less) tenant-based contracts issued since the early 1990s. Second,

HUD must renew an increasing number of contracts that it has renewed at

least once previously, a circumstance that has begun to occur more

frequently as contract terms have grown shorter. Renewing expiring

contracts will require a sharp increase in budget authority over the next

several years, as shown by figure 1.1.

Page 14 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 1 

Introduction

Figure 1.1: Estimated Budget Authority

and Expiring Units for Section 8

Tenant-Based Contract Renewals,

Fiscal Years 1997-2002

1997 1998 1999 2000 2001 2002

$2

$4

$6

$8

$10

$12

$14

0

0.4

0.8

1.2

1.6

Fiscal Year

$ in Billions Expiring units (in millions)

Budget authority

Units

Note: HUD applied $1.6 billion of excess budget authority to its fiscal year 1998 Section 8

tenant-based contract renewal request, thereby reducing it to $6.7 billion.

Source: Congressional Justifications for 1998 Estimates, HUD.

In 1995, the Congress encouraged HUD to use available unexpended funds

in the Section 8 program to offset the budget authority requirements for

contract renewals. Budget authority appropriated for Section 8

tenant-based contract renewals is “no-year” money and does not expire if

it is not expended. These unexpended funds have been obligated to the

housing agencies but will not be needed to meet planned requirements; the

funds are, in effect, credited to housing agencies’ program reserve

accounts. In fiscal year 1995, HUD began to draw on unused budget

authority from previous years to extend the terms of expiring contracts.

To identify unexpended balances to help offset the cost of Section 8

contract renewals, HUD began in February 1996 an extensive examination,

called “reconciliation,” of the Section 8 tenant-based program’s reserve

accounts at all housing agencies. The results of this examination were not

completed until 1997. In addition, in November 1996 HUD identified

approximately $1.6 billion that had not been obligated to the tenant-based

program—and therefore was also unexpended. HUD called this amount

“carryover” and used it to offset the Department’s fiscal year 1998 contract

renewal needs. Identifying this carryover occurred too late in the budget

process to have an impact on HUD’s fiscal year 1997 budget request.

Page 15 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 1 

Introduction

Therefore, HUD reflected it in the Department’s fiscal year 1998 budget

request by reducing the estimate of Section 8 tenant-based contract

renewals by $1.6 billion.

At the request of the Chairman of the Subcommittee on VA, HUD, and

Independent Agencies, House Committee on Appropriations, we reviewed

HUD’s fiscal year 1998 budget request for Section 8 contract renewal

funding. In February 1997, we briefed the Subcommittee and provided

testimony for the Subcommittee’s hearing on March 18, 1997. 4

 We

informed the Congress that HUD had a significant amount of unexpended

funds in the Section 8 tenant-based program and that once HUD completed

its examination of the housing agencies’ accounts, the likely total amount

of available unexpended funds would far exceed the $1.6 billion that HUD

disclosed in its fiscal year 1998 budget request. In chapter 2, we discuss

HUD’s actions to further identify the unexpended budget authority in the

tenant-based program.

Accumulation of

Unexpended Budget

Authority in the

Section 8

Tenant-Based

Program

The accumulation of unexpended funds in housing agencies’ reserve

accounts resulted from HUD’s method of estimating budgets since the

beginning of the program. According to HUD officials, at the outset of the

Section 8 tenant-based program, HUD intentionally established program

reserves during the early years of a multiyear housing assistance contract

to help fund the program in the later years. This practice was, in part,

required by law.5

To build up reserves, HUD based its estimate of the amount of budget

authority needed to fund the program on two conservative assumptions.

First, HUD assumed that tenants would make a contribution of zero toward

their rent. Therefore, as tenants had income and contributed to their rent

the amount of budget authority the housing agency drew down from the

program was less than budgeted, and program reserves began to grow.

Second, HUD assumed that all certificates were in constant use, even

though the leasing of housing units would necessarily take some time to

accomplish while prospective tenants shopped for housing and the

housing agencies determined the tenants’ eligibility and ensured that the

selected units met quality standards. Thus, reserves accumulated during

4

HUD’s FY 1998 Budget Request: Some Requests for Funding May Be Unnecessary

(GAO/T-RCED-97-108, Mar. 18, 1997).

5

To address the effect of inflation in the early years of the program, a provision in section 8 of the

Housing Act of 1937 required HUD to provide each housing agency with 115 percent of the estimated

amount of housing assistance that would be required to assist a family receiving a 5-year housing

voucher. HUD adopted this provision for certificates as well.

Page 16 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 1 

Introduction

the time housing units were not leased because housing agencies did not

make housing subsidy payments for unleased units. As a result, the larger

housing agencies, especially those receiving new certificates every year,

developed significant reserves.

While HUD began to consider tenants’ income in its contract renewal

budget requests for fiscal year 1991, it continued to assume that all units

were fully leased. For instance, currently, a statutory requirement exists

that once a household discontinues its need for and use of a certificate or

voucher and returns it to the housing agency, the housing agency must

wait 3 months before reissuing that certificate or voucher to another

eligible household. However, HUD does not factor the effect of this

requirement into its budget estimates for Section 8 tenant-based

assistance. Therefore, during this 3-month period, reserves accumulate in

the housing agencies’ reserve accounts because the agencies do not make

housing assistance payments to landlords for housing units not under

lease.

Long-Standing

Problems With HUD’s

Budget Estimating

Process

The build-up of reserves in HUD’s Section 8 tenant-based program is

indicative of long-standing problems with HUD’s budget estimating process.

According to HUD’s Office of Inspector General (OIG), HUD, for years, has

been unable to estimate accurately the budget authority it needs for

Section 8 contract renewals and amendments. Historically, HUD’s

accounting and information systems did not contain reliable, complete, or

accurate data on Section 8 contracts. This situation occurred because of

poor systems design and serious deficiencies in the controls, policies, and

procedures associated with the input and maintenance of Section 8

contract and accounting data. As a result of these problems, HUD had to

continually revise its Section 8 estimates and often request additional

funding. While HUD has taken action to correct these problems, budget

estimating problems still remain.

In response to congressional concerns about HUD’s budget estimating

problems, HUD and the Office of Management and Budget (OMB) formed a

joint team to evaluate HUD’s fiscal year 1992 contract renewal and cost

amendment estimates and to find ways to improve the process in the

future. The team determined that HUD was unable to accurately estimate

Section 8 contract renewal and amendment needs because HUD’s data

systems were inadequate for the timely retrieval of accurate information.6

6

Final Report on Management of Section 8 Housing Assistance Programs, Department of Housing and

Urban Development and Office of Management and Budget Joint SWAT Team (Nov. 1991).

Page 17 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 1 

Introduction

Furthermore, the team reported that estimating the number of expiring

Section 8 contracts—and the budget authority required to renew

them—had been a recurring problem for HUD since 1989. For example, HUD

had to re-estimate its contract renewal needs for fiscal years 1990 and 1991

because of inadequate financial management systems and inaccurate

forecasting. Specifically, HUD’s financial management systems did not

provide summary information to determine the number of expiring Section

8 contracts. In addition, HUD’s cost estimates for contract renewal were

based on assumptions about average costs that proved to be inaccurate.

In 1992, HUD’s OIG reported that the Department continued to experience

problems in submitting reliable Section 8 budget requests to the Congress.7

Specifically, the OIG concluded that serious deficiencies existed in (1) the

controls and procedures in HUD’s Section 8 accounting and budgeting

systems and (2) the input and maintenance of contract and accounting

data in the Department’s information systems. As a result, HUD could not

assure the Congress that its Section 8 budget requests for fiscal years 1992

and 1993 were reasonably accurate. Because HUD’s management relied on

the Department’s inadequate Section 8 financial management systems to

develop the budget requests and because the estimate of the cost to fund

expiring contracts turned out to be inaccurate, HUD had to increase its

Section 8 contract renewal estimates for fiscal years 1992 and 1993. In

addition, the OIG reported that HUD’s original estimates for Section 8

amendments for fiscal years 1992 and 1993 may have been materially

overstated. However, the OIG believed that the accuracy of the

Department’s tenant-based contract renewal estimate for fiscal year 1993

appeared improved over the fiscal year 1992 estimate.

To determine HUD’s progress in improving its Section 8 budgeting systems

and processes, HUD’s OIG conducted a follow-up audit in 1995.8

 The OIG

found that HUD’s program offices had developed and implemented interim

budgeting procedures that had improved the Department’s ability to

formulate Section 8 contract renewal budget estimates. Nevertheless, the

OIG found that HUD continued to experience problems developing accurate

and reliable Section 8 contract renewal and amendment estimates. For

example, the OIG found that because of a breakdown in the budgeting

process, the Department’s budget office did not use more reliable

7

Review of HUD’s Fiscal Year 1992 and 1993 Budget Estimating Processes for Section 8 Contract

Renewals and Amendments (Audit Report No. 92-TS-103-0008), HUD Office of the Inspector General

(Apr. 1992).

8

Audit of Section 8 Accounting and Budgeting (Audit Report No. 97-FO-103-0001), HUD Office of

Inspector General (Mar. 1995).

Page 18 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 1 

Introduction

estimates developed by the program offices for the Department’s initial

fiscal year 1996 budget submission to OMB. The OIG also concluded that

HUD’s fiscal year 1994 amendment estimate was materially overstated and

believed that the estimates for fiscal years 1995 and 1996 also appeared to

be overstated. In response, the Assistant Secretary for Public and Indian

Housing pointed out that the tenant-based program had included a

“cushion” in its amendment estimates to cover shortfalls in budget

authority that could not be estimated by the Department’s systems.

To help correct the deficiencies with its accounting and budgeting for

Section 8 contracts, HUD implemented a new Section 8 tenant-based

information system in fiscal year 1995.9

 Besides containing primary

information for estimating contract renewal needs, the system contains

the actual cost incurred by each housing agency for providing rental

assistance. The system also provided the amount of unspent budget

authority credited to each housing agency at the end of the agency’s fiscal

year.

Objectives, Scope,

and Methodology

The Chairman of the Subcommittee on VA, HUD, and Independent

Agencies, House Committee on Appropriations, has expressed concern

about HUD’s financial management of the Section 8 tenant-based

program—specifically, HUD’s lack of timeliness and precision in identifying

the magnitude of unspent budget authority in the Section 8 tenant-based

program. As a result, the Chairman asked us to review HUD’s financial

management of the Section 8 tenant-based program. In addition, the 1997

Emergency Supplemental Appropriations Act (P.L. 105-18) directed us to

determine whether HUD’s systems for budgeting and accounting for Section

8 rental assistance ensure that unexpended funds do not reach

unreasonable levels and that obligations are spent in a timely manner. Our

objectives for this report, therefore, were to

• evaluate the accuracy of HUD’s estimate of its unexpended funds in the

Section 8 tenant-based program and the reasonableness of this amount

and

• assess HUD’s budget formulation process for the Section 8 tenant-based

program.

To evaluate the accuracy of HUD’s estimate of its unexpended funds in the

Section 8 tenant-based program and the reasonableness of this amount, we

9

This is HUD’s tenant-based central accounting and program system, called HUDCAPS, that provides

financial accounting, management control, and financial reporting capabilities.

Page 19 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 1 

Introduction

reviewed documentation and discussed HUD’s examination of unexpended

balances in housing agencies’ reserve accounts with HUD officials. We

reviewed and discussed the results of Price Waterhouse LLP’s independent

evaluation of available unexpended funds in the tenant-based program

with officials from Price Waterhouse LLP and with HUD officials in the

Offices of Public and Indian Housing, the Chief Financial Officer, and

Inspector General. We contacted national associations representing

housing agencies and discussed the need for retaining unexpended funds

in housing agencies’ program reserve accounts. These organizations were

the Council of Large Public Housing Authorities, the National Association

for Housing and Redevelopment Officials, and the Public Housing

Authority Directors Association.

To assess HUD’s budget formulation process for the Section 8 tenant-based

program, we reviewed HUD’s process for developing the contract renewal

estimates and evaluated supporting documentation for HUD’s fiscal year

1998 budget request. We also reviewed federal laws and regulations, OMB

policies, and HUD’s guidance. We analyzed the impact that HUD’s budgeting

processes had on its fiscal year 1998 budget submission to the Congress.

In addition, we discussed programmatic, budgeting, and financial

management issues with HUD officials from the Offices of Public and

Indian Housing, Budget, the Chief Financial Officer, Policy Development

and Research, and Inspector General.

While we did not systematically verify the accuracy of HUD’s data or

conduct a reliability assessment of HUD’s databases as part of this

assignment, we relied upon the work of HUD’s OIG and our review of the

OIG’s audit of the consolidated financial statement, which shows that the

information in HUD’s tenant-based information system is generally reliable.

As part of its audit of HUD’s fiscal year 1996 financial statements, HUD’s OIG

analyzed a statistical sample of HUD’s contracts. For those contracts that

were Section 8 tenant-based contracts, the OIG traced the information in

the original contract files first to HUD’s Department-wide accounting

system and then to HUD’s Section 8 tenant-based information system. The

OIG concluded that, for the sample reviewed, the amounts reserved and

obligated in the Section 8 tenant-based information system were correct.10

As part of our audit of the federal government’s consolidated financial

statement, we selected a subset of this sample and performed similar tests

at two field offices. On the basis of these tests, we concurred with the OIG’s

findings.

10Audit of the U.S. Department of Housing and Urban Development’s Fiscal Year 1996 Financial

Statements (Audit Report No. 97-FO-177-0003), HUD Office of Inspector General (Apr. 10, 1997).

Page 20 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 1 

Introduction

We provided a draft of this report to HUD for review and comment and we

address HUD’s comments at the end of each applicable chapter.

We performed our work from May 1997 through December 1997 in

accordance with generally accepted government auditing standards.

Page 21 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 2 

HUD Identified Billions in Excess

Unexpended Budget Authority

Over the more than 20 years that HUD has provided housing assistance

through the Section 8 tenant-based program, approximately $9.9 billion of

budget authority excess to program needs has accumulated in housing

agencies’ reserve accounts. This is funding that housing agencies received

under contracts with HUD but did not expend because the funding was not

needed as planned to make housing assistance payments to landlords on

behalf of low-income families. After HUD reported this large unexpended

balance, the Congress rescinded $4.2 billion, and after other adjustments

of about $2.2 billion, the current balance is about $3.5 billion, which

remains in a congressionally established Section 8 Reserve Preservation

Account. To identify this programwide unexpended balance, HUD

conducted in 1996 and 1997 a financial data reconciliation of all of its

tenant-based housing assistance contracts. Until completing the

reconciliation process and making recent improvements to its information

system, the Department could not accurately report its excess balances in

the tenant-based program. However, with improved systems and better

data, HUD has the opportunity to report in more detail its unexpended

Section 8 funding and the potential availability of this funding to offset

needs for new budget authority or for other uses.

About $10 Billion of

Excess Budget

Authority

Accumulated in the

Section 8

Tenant-Based

Program

In March 1997, HUD completed an extensive accounting reconciliation and

data verification process that it had begun in February 1996. With the

results of the reconciliation, HUD updated its Section 8 tenant-based

information system and subsequently determined that the unexpended

budget authority in the tenant-based program was $20.7 billion and that

$9.9 billion of that amount was not needed to meet current program needs.

Because this $9.9 billion of excess budget authority was not needed to

fund current obligations, it therefore was available to meet future Section

8 or other needs. HUD recaptured $7.7 billion of this excess balance and

retained the difference of $2.2 billion to cover contingencies and to

account for future transactions. The $9.9 billion that had accumulated as

excess exceeded the $7.4 billion that housing agencies expended on

payments to landlords during fiscal year 1996. Figure 2.1 provides a

chronology of the actions taken by the Congress and HUD to identify and

control Section 8 tenant-based funding.

Page 22 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 2 

HUD Identified Billions in Excess

Unexpended Budget Authority

Figure 2.1: Actions Taken by the Congress and HUD to Identify and Control Section 8 Tenant-Based Funding

1997

HUD's FY 1998 

budget was 

submitted to the 

Congress

Congress passed

HUD's FY 1998

budget & rescinded

$0.55 billion from 

the program, 

leaving $3.5 billion 

in the Section 8

Reserve 

Preservation

Account

2/6/97

4/17/97

10/27/97

HUD submitted

FY 1997 operating 

plan to the Congress 

showing $1.6 billion 

in carry-over funds

applied to Section 8

contract renewals

11/25/96

HUD began

reconciliation of

Section 8 

tenant-based

accounts

2/96

HUD reported to

the Congress an

excess budget authority 

estimate of $5.8 billion for 

the tenant-based

Section 8 program

Congress rescinded

$3.65 billion of Section 8

program funding and

established the Section 8

Reserve Preservation

Account

Independent accounting 

firm verified $9.9 billion 

as excess budget 

authority in HUD's 

Section 8 tenant-based

program 

HUD reported to

the Congress a revised

excess budget authority

estimate of $7.3 billion *

HUD submitted 

revised FY 1998

budget estimate

to the Appropriations

Committees

6/12/97

7/1/97

7/29/97

9/11/97

1996

*The difference between the independently verified number of 9.9 billion and the $7.3 billion

reported to the Congress is an amount set aside to meet various contingencies.

$9.9 Billion of Excess

Budget Authority Had

Accumulated in the

Tenant-Based Program

In May 1997, HUD estimated that the amount of unexpended budget

authority that exceeded the amount needed to meet contract requirements

in the tenant-based program was $9.9 billion. This was HUD’s second

attempt to estimate this figure; the Department revised its initial estimate

Page 23 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 2 

HUD Identified Billions in Excess

Unexpended Budget Authority

after an independent accounting firm determined that critical data used

could not be verified because they were maintained manually at HUD’s field

offices. HUD’s revised estimate of $9.9 billion has been verified by an

independent accounting firm. In contrast to the first estimate, HUD

calculated its revised estimate by using data exclusively from its Section 8

tenant-based information system to compare total unexpended budget

authority with the housing assistance requirements for that budget

authority. By subtracting projected program requirements of $10.2 billion

and other adjustments of $0.6 billion from the total unexpended budget

authority of $20.7 billion, HUD concluded that the amount of unexpended

budget authority that was not needed to meet existing housing assistance

needs at the beginning of fiscal year 1998 would be $9.9 billion, as shown

in table 2.1.

Table 2.1: Unexpended Budget

Authority in the Tenant-Based

Program That Is Excess to Current

Program Needs as of October 1, 1997

Dollars in billions

Total unexpended budget authority under contract as of April 22, 1997 $20.7

Less:requirements to fund all active housing units under contract on

April 22, 1997, through the expiration of those contracts (10.2)

Total excess budget authority under contract as of April 22, 1997 $10.5

Less:adjustments needed to project the balance through the end of

fiscal year 1997 (September 30, 1997) (0.6)

Projected excess budget authority as of October 1, 1997 $9.9

Source: HUD’s Office of Public and Indian Housing.

Price Waterhouse LLP assisted HUD in evaluating its revised estimate and

determined the estimate to be accurate. During its work, Price Waterhouse

LLP performed tests on a statistical sample of 158 housing agencies to

confirm the accuracy of HUD’s $9.9 billion estimate of excess unexpended

budget authority. For this sample, the accounting firm compared

information in HUD’s tenant-based information system with information in

the housing agencies’ most recent year-end settlement statements.1

 By

extrapolating the results from the test sample to the information system as

a whole, Price Waterhouse LLP found that the totals differed from HUD’s by

5 percent or less and on that basis concluded that HUD’s estimate of

$9.9 billion was accurate.

1

HUD field office officials review and approve housing agencies’ year-end settlement statements. The

statement documents the cost incurred by the housing agency to run the program for the fiscal year

and the corresponding number of unit-months under leases supported by those funds.

Page 24 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 2 

HUD Identified Billions in Excess

Unexpended Budget Authority

HUD Ultimately

Recaptured $7.7 Billion of

the $9.9 Billion

In the June 1997 Emergency Supplemental Appropriations Act, the

Congress directed HUD to recapture unexpended budget authority that was

not needed to meet the current obligations of the Section 8 tenant-based

program. In the act, the Congress also established the Section 8 Reserve

Preservation Account as an accounting repository for recaptured excess

budget authority. In response to this direction, HUD recaptured $7.7 billion

of the excess budget authority and placed it in the Preservation Account.

Of the $2.2 billion not recaptured, about $1.2 billion was left in the

participating housing agencies’ accounts as a reserve for contingencies

equal to about 2 months of assisted housing payments to landlords. The

remaining $1 billion was not recaptured because it represented amounts

that had not yet been credited to housing agencies’ reserve accounts at the

time of the recapture.2

 As shown in table 2.2, after two congressional

rescissions totaling $4.2 billion, GAO has calculated on the basis of data

obtained at the end of fiscal year 1997 that about $3.5 billion remains in

the Reserve Preservation Account. (However, more recent financial

information maintained by HUD shows that this balance may be closer to

$3.7 billion.)

Table 2.2: Budget Authority Remaining

in the Section 8 Reserve Preservation

Account

Dollars in billions

Projected excess contracted budget authority as of October 1, 1997 $9.9

Less: 2-month reserve for contingencies (1.2)

Less: amount not yet accumulated at the time of the recapture (1.0)

Excess contracted budget authority recaptured and placed in the Section

8 Reserve Preservation Account $7.7

Less:budget authority rescinded ($3.65 billion in June 1997 and $0.55

billion in Oct. 1997) (4.2)

Budget authority remaining in the Section 8 Reserve Preservation Account $3.5

Source: GAO calculation based on data from HUD’s Office of Public and Indian Housing.

While a reserve for contingencies is prudent, it is not clear that a reserve

of $1.2 billion is reasonable and necessary. A report from HUD’s

tenant-based information system shows that, in fiscal year 1996, housing

2

Some of the $9.9 billion in excess unexpended budget authority had not yet been placed in housing

agencies’ reserve accounts at the time of the recapture because some housing agencies’ accounts had

not been closed via the year-end settlement process. During this process, HUD determines the

difference between the amount of budget authority that the housing agency is entitled to under

contract and the amount of budget authority that the housing agency actually used during the year.

Once this difference is determined, HUD places the amount in the housing agency’s reserve account.

Page 25 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 2 

HUD Identified Billions in Excess

Unexpended Budget Authority

agencies used $353 million3 in excess budget authority to cover

contingencies, far less than the amount that HUD has reserved for this

purpose. Moreover, during fiscal year 1996, an additional $1.4 billion4

 in

excess budget authority accrued. HUD plans to adjust its reserve level after

it examines in more detail housing agencies’ actual use of available

unexpended budget authority in fiscal years 1996 and 1997. However,

given housing agencies’ experience in fiscal year 1996, much less than

$1 billion likely will be needed to meet unanticipated costs during a 1-year

period.

Opportunities Exist

for Better Reporting

of Excess Budget

Authority

April 1997 was the first time that HUD identified and reported to the

Congress the excess unexpended budget authority associated with the

Section 8 tenant-based program. Until HUD’s recent improvements to its

information system, such reporting could not be done accurately.

However, better data and improved systems now offer HUD the opportunity

to use its (1) budget justification materials and (2) financial statements as

a means to report the status of unexpended funds and their availability to

offset needs for new budget authority or for other uses.

HUD is not required to and does not currently report in its annual budget

justifications the aggregate amount of excess unexpended budget

authority credited to housing agencies’ reserve accounts. By doing so,

however, the Department could ensure that the Congress is informed

about the funding on hand before appropriating new budget authority.

Moreover, according to OMB’s guidance on budget formulation, agencies

should consider available funding on hand before requesting new funding.

A second means for HUD to improve its reporting of excess unexpended

budget authority in the Section 8 tenant-based program is through its

financial statements. HUD’s consolidated financial statements comply with

the federal accounting requirement to disclose unexpended budget

authority by major budget account—the entire Section 8 program, for

example. However, the statements do not currently show the amount of

unexpended budget authority for programs that are at the level of the

tenant-based and project-based Section 8 programs or whether

unexpended budget authority is needed to meet program requirements or

is available for other purposes. The federal accounting standards

established by the Financial Accounting Standards Advisory Board require

3

The $353 million includes excess budget authority used for the Section 8 Moderate Rehabilitation

Program.

4

The $1.4 billion includes excess budget authority accrued in the Section 8 Moderate Rehabilitation

Program.

Page 26 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 2 

HUD Identified Billions in Excess

Unexpended Budget Authority

that agencies disclose the status of budgetary resources, including the

amount obligated. The standards do not, however, require agencies to

disclose such information below the major budget account level. Each

agency should disclose information that is most useful to the users of their

financial statements.

In a note to its fiscal year 1996 consolidated financial statements, HUD

disclosed unexpended appropriations by major program type. The note

explained that unexpended appropriations include obligated, committed,

and reserved as well as excess funds. It further said that HUD had

unexpended appropriations of $43 billion in the Section 8 program

(tenant-based and project-based) at the end of fiscal year 1996. While the

note fulfills the advisory board’s requirement to report on the status of

budgetary resources, the note does not identify the portion of the

$43 billion attributed to the two Section 8 assisted housing programs or

the amount in excess of the programs’ needs. By reporting excess budget

authority in the two programs in its consolidated financial statements, HUD

would instill greater confidence in the accuracy of these balances because

they also would be reviewed as part of the annual consolidated financial

statement audit required by the Chief Financial Officers Act of 1990.

Moreover, clearly identifying the existence and amount of excess

unexpended budget authority is important if the Congress is to have

confidence in HUD’s capacity to effectively manage the funding provided

for the Section 8 tenant-based program.

Conclusions We believe that to adequately address economic contingencies—such as

rising rental rates or falling tenant incomes—HUD should maintain a

reasonable level of excess budget authority; however, excess budget

authority that exceeds a full year of housing assistance payments is

excessive. To ensure that excess unexpended budget authority does not

reach unreasonable levels, HUD would need to annually review each

tenant-based housing assistance contract it has with housing agencies with

the intent of recapturing amounts above the level prudently needed to

cover the unexpected but potential costs of administering the contract.

Furthermore, now that HUD has corrected the data in its tenant-based

information system, the Department has several means—including its

financial statements and budget submissions—to keep the Congress better

informed in the future of the amount of excess unexpended budget

authority in the Section 8 tenant-based program.

Page 27 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 2 

HUD Identified Billions in Excess

Unexpended Budget Authority

Recommendations To improve HUD’s fiscal responsibility to the Section 8 program and to

ensure that the Congress is adequately informed about the amount of

excess unexpended budget authority at HUD in the future, we recommend

that the Secretary of HUD

• direct the Office of the Chief Financial Officer to modify the agency’s

consolidated financial statements so that they (1) identify the portions of

the unexpended appropriations for the Section 8 program that accrued

during the year and are attributable to the tenant-based and project-based

programs, respectively and (2) disclose the amounts of budget authority in

each program that are excess to current needs and therefore available for

other uses;

• include in HUD’s annual budget justification documents the amount of

unexpended budget authority in the Section 8 assisted housing program

that is in excess of current obligations and recapture amounts that

accumulate above what is prudently needed to address contingent costs.

Agency Comments In commenting on a draft of this report, HUD’s Chief Financial Officer said

that HUD agreed with the report’s major findings, conclusions, and

recommendations. In addition, HUD’s Office of Public and Indian Housing

said that the report presents a balanced assessment. The CFO and officials

of the housing office provided several comments to improve the report’s

clarity, and we incorporated them as appropriate.

Page 28 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 3 

HUD Plans Changes to Improve Its Budget

Formulation Process

Accurate budget estimates are essential to federal agencies meeting their

fiscal responsibilities because such estimates facilitate sound policy

decisions and effective funding trade-offs. In support of agencies being

fiscally responsible, OMB requires them to submit reasonably accurate

budget estimates. However, HUD has long-standing problems in submitting

accurate estimates—since 1989, its estimates of Section 8 contract

renewals have been either too low or too high. This inability to accurately

forecast budget needs persisted into fiscal year 1998. We found that HUD

had problems with its budget submission; but we also found that HUD had

corrective actions planned or in process to improve its budgeting process.

Specifically, we found the following:

• The budgeting process HUD used in fiscal year 1998 produced excessive

estimates of key cost factors that, once discovered, led to HUD’s reducing

its request for tenant-based contract renewal funding by about $1 billion.

• In its budget projection for fiscal years 1999 through 2002, HUD

overestimated its need for funding to amend existing housing assistance

contracts because accurate data were not available from its accounting

system at the time.

• HUD has acknowledged many of its problems with its budgeting process

and has begun implementing corrective actions that include changing its

organizational structure to improve oversight among the staff responsible

for formulating budget estimates. However, many of the changes HUD is

making or has planned were not implemented in time to affect HUD’s initial

formulation of its fiscal year 1999 estimate, and HUD has not prepared a

timetable for implementing these changes.

Ineffective Budget

Process Caused

Errors and Resulted in

Revised Budget

Request

HUD’s fiscal year 1998 budget request contained errors and insupportable

estimates that led to HUD’s overstating funding needs for its tenant-based

contract renewals by over $1 billion. This error was caused by an

ineffective internal budget process that lacked adequate oversight and did

not make effective use of actual expenditure data for the program. For

example, insufficient review of the estimating methodology led to

double-counting a large component of the average cost per assisted

housing unit. Because this cost is a key variable in determining HUD’s

contract renewal needs, the double-counting caused HUD to greatly

overstate its estimate for renewing expiring contracts. In addition, HUD’s

estimate contained contingency costs that could not be justified on the

basis of program experience.

Page 29 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 3 

HUD Plans Changes to Improve Its Budget

Formulation Process

Budget Process Erred in

Developing Unit Cost

In its fiscal year 1998 budget submission of February 1997, HUD used a

value of $6,386 as the average unit cost for renewing tenant-based housing

assistance contracts.1

 Although this value is based on the program’s actual

expenditure data for fiscal year 1996, it also includes several

supplementary amounts for

• administrative fees paid to housing agencies,

• contingent or unexpected costs, and

• increased program expenditures caused by residents losing their welfare

assistance in 1997 and 1998.

However, we and HUD determined that adding these three amounts to the

average unit cost either could not be justified or was not necessary. For

the first amount—the administrative fee—HUD officials had already

included this fee in the baseline unit cost; adding it again resulted in

double-counting it.2

 Specifically, the program’s fiscal year 1996

expenditure data that HUD obtained from the accounting system

represented the total cost to HUD of providing rental assistance and,

therefore, necessarily included the administrative fee. However, to

develop the final fiscal year 1998 average unit cost, HUD added the fee

again, resulting in raising the contract renewal estimate by approximately

$700 million. We found, and program officials agree, that better

coordination and oversight among the officials in the program office, the

office of the comptroller, and the departmental budget office could have

prevented this error. For example, the program office’s comptroller

reviewed the actual disbursement data obtained from the accounting

system but did not review the final average unit cost calculation until after

HUD submitted its budget to the Congress. Moreover, departmental budget

officials accepted the program office’s estimate without an independent

review of the added costs and underlying basis for the estimate.3

The second supplementary amount was for covering unknown costs or

contingencies. For this supplement, HUD added approximately $204 to the

unit cost, or 2 weeks of disbursements.4

 However, at the time that HUD

1

Appendix I shows HUD’s calculation of the $6,386 average unit cost used to estimate the amount of

budget authority that would be needed to renew housing assistance contracts in fiscal year 1998.

2

The value that HUD used for the fee was $561 per unit.

3

In 1995, HUD’s Inspector General reported that the departmental budget office was responsible for

determining the reasonableness of all estimates provided by the program offices for the agency’s

budget request.

4

The added cost for contingencies increased the contract renewal estimate by approximately

$265 million.

Page 30 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 3 

HUD Plans Changes to Improve Its Budget

Formulation Process

developed this estimate, almost all housing agencies participating in the

tenant-based program already had individual reserve accounts equal to at

least 2 months of disbursements. These reserves could be used to cover

contingencies such as rent increases and decreases in tenants’ income.

Section 8 program officials stated that they added the 2-week reserve as

another safeguard against the risk that families might lose rental

assistance because of unexpected increases in program costs. The officials

said, however, that they could not determine whether housing agencies

actually needed additional funding or were using available reserves for

unanticipated costs. They said that because the tenant-based information

system could give them only 1 year’s worth of complete and reliable

information on the use of reserves, a sufficient basis did not exist for

making informed decisions about the need for contingency funding.

The third supplementary amount that HUD used to develop its fiscal year

1998 unit cost was for mitigating the anticipated impact of welfare reform

on Section 8 costs. For 1998, HUD valued the welfare supplement at $138

per unit ($46 in 1997 and $92 in 1998).5

 However, after submitting its

budget estimate to the Congress in February 1997, HUD determined that

this amount was unnecessary. HUD found that its assumption that housing

agencies would begin to feel a significant impact from welfare reform

starting in 1997 was not borne out by what was happening across the

country. Instead, the states’ early experiences with the impact of welfare

reform showed little or no increased cost to the program as a result of the

falling incomes of assisted housing residents. As a result, adding a cost

factor to address the impact of welfare reform was not necessary.

In addition to the inflated unit cost estimate, HUD’s fiscal year 1998

contract renewal estimate contained a line item requesting a contingency

allowance of $162 million. Although program officials said that the funding

was needed to cover unanticipated costs in the program, they could not

provide supporting information to justify their request. Subsequently, HUD

adjusted its fiscal year 1998 budget request and removed this request for

funding. HUD’s Deputy Assistant Secretary confirmed that because HUD

would use historical data as the basis for future budget estimates, HUD

would make no future requests for contingency funding for the

tenant-based program.

5

The welfare factor increased the contract renewal estimate by approximately $179 million.

Page 31 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 3 

HUD Plans Changes to Improve Its Budget

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Because of Budget

Estimating Errors, HUD

Lowered Its Fiscal Year

1998 Contract Renewal

Request

As a result of misestimating the unit cost and using cost estimates in its

February budget submission that HUD later determined to be unnecessary,

in September 1997 HUD proposed—and the Congress accepted—changes in

its contract renewal estimate that lowered the average unit cost by

approximately 14 percent, from $6,386 to $5,499.6

 As shown in table 3.1,

for the 1,265,625 Section 8 housing certificates, vouchers, and moderate

rehabilitation units being renewed, this change represented a decrease of

$1.123 billion in the budget authority requested by HUD for its tenant-based

program.

Table 3.1: HUD’s Changes to Its Fiscal

Year 1998 Tenant-Based Contract

Renewal Budget Estimate Original estimate

submitted in

February 1997

New estimate

proposed in

September 1997

Change to fiscal

year 1998 budget

request (in

billions)

Average unit cost $6,386 $5,499 –$1.123

Allowance for

Contingencies $162,000,000 $0 –$0.162

Total -$1.285

HUD’s revised unit cost estimate produced the most substantial reduction

to the original contract renewal estimate. According to HUD’s Deputy

Assistant Secretary responsible for the tenant-based program, HUD

developed the revised unit cost using only the program’s historical

expenditure data from the tenant-based information system.7

 She also

stated that in the future HUD would not supplement the average unit cost

with additional amounts even if they made sense from a policy standpoint

unless the supplementary amounts could be supported with historical or

other data. Two of these supplements were an amount to reflect the

impact of welfare reform and an amount to cover contingent costs. An

official from HUD’s Office of Policy Development and Research stated that

the amount to reflect welfare reform’s impact was removed from the

average unit cost because states’ early experiences with welfare reform

did not show an increased cost to the program.

6

Appendix II shows the complete list of changes that HUD made to the fiscal year 1998 contract

renewal request and that HUD added some costs to the revision as well.

7

The actual disbursements were inflated by 4.4 percent over the 2-year period in accordance with the

OMB-established factor of 2.2 percent per year.

Page 32 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
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HUD Plans Changes to Improve Its Budget

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HUD’s Funding

Request for Future

Years’ Contract

Amendments Is Not

Well Supported

As part of its fiscal year 1998 budget request, HUD predicted an annual need

of $150 million for fiscal years 1998 through 2002 to amend its contracts

with public housing agencies that administer its Section 8 tenant-based

and moderate rehabilitation assisted housing programs.8

 Generally,

amending contracts refers to the process of changing specific housing

assistance contracts to add more funding. These contracts might need

additional funding because the budget authority initially obligated to

them—as long ago as 15 years—may not have been sufficient to provide

adequate rental assistance over the life of the contract. In addition to the

fiscal year 1998 budget request for amendment funding, HUD’s budget

submission also predicted that the need for amendments to the

tenant-based contracts through the year 2002 would be approximately

$600 million.

Although HUD has supporting documentation for its need for amendment

funding for fiscal year 1998, the Department’s prediction of needing future

amendment funding is not consistent with the significant changes HUD has

made to its contracting practices. In fiscal year 1995, HUD began reducing

the terms for renewed expiring contracts from 3 to 5 years to 1 year.

Therefore, under this policy HUD will renew the contracts receiving

amendment funding in fiscal year 1998 for 1 year after their expiration.

This change to shorter contract terms has made estimating contract

renewal needs more certain because changes in housing costs or tenants’

incomes could be predicted more easily over the shorter period. In

addition, a HUD official told us that the tenant-based information system

more accurately estimates funding needs 1 year at a time and, therefore,

greatly lowers the risk of underfunding contracts and could ultimately

eliminate the need for amendment funding. They also said most of the

tenant-based contracts should have 1-year terms by fiscal year 2003.

Therefore, because of the greater certainty about the future costs of a

program operating under contracts with mostly 1-year terms, HUD does not

appear to need additional funding for tenant-based amendments beyond

fiscal year 1998.

8

Although the budget line item for amendments was $850 million, HUD officials said that informally

they earmarked $150 million for the Office of Public and Indian Housing to fund the needs of the

tenant-based and moderate rehabilitation programs. The remaining $700 million was planned for the

project-based program.

Page 33 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 3 

HUD Plans Changes to Improve Its Budget

Formulation Process

HUD Plans to Improve

Its Process for

Estimating Contract

Renewals

HUD officials have made or plan to make several important changes to

HUD’s information system and organization to address the problems that

they and we have identified in HUD’s budgeting process. In response to the

fiscal year 1995 Financial Statement Audit prepared by HUD’s OIG,

9 HUD

recently enhanced its tenant-based information system and plans changes

to related procedures to improve the accuracy of its budget estimates.

Also recognizing the need for improving coordination and oversight among

the HUD officials involved in preparing and reviewing the budget

submission, HUD moved the Office of Budget under the control of the

Office of the Chief Financial Officer. HUD officials believe that these

improvements will correct past problems and enhance their efforts to

more accurately estimate their Section 8 budget needs.

Enhancements to

Accounting System and

Procedural Changes Could

Improve Budget Estimate

HUD is enhancing the Section 8 tenant-based information system by

automating and integrating the “reservation pricing” used to estimate the

amount of budget authority each housing agency is likely to need annually

to operate its tenant-based program. In the past, HUD field offices deducted

tenants’ expected contributions to rent (generally about 30 percent of a

tenant’s family income) from the local fair market rent to develop an

estimate of the cost to HUD of assisting low-income families to live in

decent housing during the coming year. However, after obtaining the

estimated costs, HUD did not compare these estimates with the actual cost

of that assistance for the most recently completed year. As a result, HUD

overfunded many tenant-based contracts, and the excess funding

contributed to the accumulation of program reserves. By creating a

“reservation pricing” subsystem within the information system, HUD now

will use the actual historical cost data to evaluate the fair market rents and

tenants’ contributions. HUD officials believe that this process will eliminate

overfunding and improve the accuracy of the budget estimating for

contract renewals.

HUD also plans the following additional modifications to the tenant-based

Section 8 information system and the budgeting procedures used to

estimate contract renewal needs, although our work did not focus on

evaluating the potential benefits of these actions:

• HUD plans to modify its information system to calculate the actual average

cost per unit before completing the annual settlement process at each

housing agency. This change will verify the reasonableness of the average

9

HUD’s Fiscal Year 1995 Financial Statements (Audit Report No. 96-FO-177-0003), Aug. 1996, HUD’s

Office of the Inspector General.

Page 34 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 3 

HUD Plans Changes to Improve Its Budget

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cost per unit before HUD settles all program costs at the end of the year

with the housing agency.

• In response to the data access problems noted by HUD’s OIG, HUD plans to

improve the security over access to the unit tables within the information

system and to compare monthly the number of contracted units in the

system to the previous month’s total to reconcile any differences.

• Finally, to maintain better control over the amount of program reserves,

HUD plans to no longer extend expiring tenant-based contracts with excess

budget authority within the program reserves.

HUD Plans Management

Reforms to Improve

Coordination and

Oversight

HUD has recognized the need for improving coordination and oversight

among program, budget, and financial management officials in order to

achieve more reliable budget estimates, including estimates of Section 8

contract renewals. HUD’s Management Reform Plan states that the Chief

Financial Officer has lacked the ability to link budgeting with strategic

planning and financial management because HUD’s budget operations have

been fragmented and disjointed, preventing clear accountability and the

necessary coordination. As a result, HUD has recently placed all

departmental budget operations under the Office of the CFO to ensure that

budgeting is integrated with financial management oversight.

HUD also is in the process of implementing two changes directly related to

the budget estimate. First, all program divisions are hiring a chief financial

officer to mirror the operations of the Department’s Office of the CFO.

Previously, the program division’s budget director and comptroller

reported to a deputy assistant secretary. Under the new structure, the

division’s budget director and comptroller will report to the program’s

chief financial officer who will coordinate the agency’s CFO and the

program office to ensure adequate oversight. However, at the time of our

review, a chief financial officer for the tenant-based program had not been

hired and the program’s comptroller had been detailed to the

Department’s Office of General Counsel. Second, the Office of the CFO is

developing a model to analyze all budget submissions, including the

contract renewal estimate. Previously, the departmental budget office

accepted the cost estimates with only limited review of the supporting

documentation that detailed how the estimates were developed.

Although the Office of the CFO also plans to develop budget estimating

policies and procedures that build in enough time for adequate

coordination, oversight, and communication, these plans have not been

completed. HUD’s CFO did state, however, that the planned improvements

Page 35 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Chapter 3 

HUD Plans Changes to Improve Its Budget

Formulation Process

should be operational in time for HUD’s fiscal year 2000 budget submission.

In addition, according to HUD’s Director of the Office of Budget, HUD

submitted its fiscal year 1999 contract renewal estimate to OMB in

September 1997 with limited analysis. He also said that because of time

constraints, his office was limited to reviewing the budget estimates for

their numerical accuracy and could not question the estimates’

reasonableness or their underlying basis. For example, he stated that the

Budget Office was unaware of the program office’s budgeting assumption

that all tenant-based certificates are in constant use. This assumption,

however, does not reflect the current practice of housing agencies that

administer the tenant-based program. As stipulated by current

appropriations law, after a certificate is turned in by the current holder,

the housing agency must wait 90 days before reissuing it to a new

household. But because the budget estimate assumes constant use, the

effect is to estimate more funding than will actually be needed although

HUD could recapture such excess funding when it analyzes the housing

agency’s reserve account at the end of the year.

HUD’s Office of the CFO also is leading the effort to improve HUD’s financial

management performance by linking HUD’s budget functions with

performance measures and program delivery. Specifically, to improve

financial management oversight, HUD will consolidate the 10 accounting

divisions in HUD’s field offices into one office responsible for all accounting

operations. In addition, the Office of the CFO will develop management

controls to ensure that employees are accountable for the Department’s

fiscal integrity. HUD also has implemented a risk management program,

directed by the Office of the CFO, to protect resources from fraud, waste,

and abuse and to maintain the agency’s financial integrity. As part of this

effort, the CFO has collected all financial management deficiencies

identified by HUD’s OIG, GAO, and others and is working to correct these

deficiencies within all HUD programs. While these actions appear to be

responsive to the problems identified, HUD has no specific time frames for

their completion.

Conclusions HUD’s fiscal year 1998 budget process had inadequate oversight of

procedures and insupportable estimates or assumptions underlying key

values. Although HUD recognizes these problems and has plans to correct

them, it is too soon to measure the effectiveness of the remedies because

many have not been implemented. More importantly, HUD has a lengthy

history of budget estimating problems and faces some uncertainty now

about personnel to oversee and make policy for the budgeting function.

Page 36 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
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HUD Plans Changes to Improve Its Budget

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Therefore, we are concerned with the agency’s ability to sustain such

recent corrective actions and implement those it has planned.

Furthermore, many of the actions that HUD has taken or plans to take were

not completed at the time HUD prepared its initial contract renewal budget

estimate for fiscal year 1999 and sent it to OMB in September 1997. We

believe that HUD’s Office of the CFO will need to exercise strong leadership

to complete these changes and to develop specific budget procedures to

guide the new organizational changes. Otherwise, HUD’s fiscal year 2000

budget estimate—which HUD will begin to prepare in May 1998—and

future estimates may also misestimate program funding needs.

Because HUD has recognized many weaknesses in its budget process for

estimating contract renewal needs and has undertaken significant actions

to improve its process, we are not making recommendations at this time.

However, we will continue to monitor HUD’s budget process and review its

fiscal year 1999 budget submission to determine whether cost estimates

are adequately supported.

Agency Comments In commenting on a draft of this report, HUD agreed with the report’s major

findings and conclusions. HUD also provided several comments to improve

the report’s factual representation and to ensure clarity. In particular, HUD

believed that we should recognize that its initial estimate of the impact of

welfare reform on fiscal year 1998 budget needs was based on the best

information available. We agreed and made changes to reflect this

concern.

Page 37 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Appendix I 

HUD’s Development of Its Fiscal Year 1998

Average Unit Cost Estimate for

Tenant-Based Contract Renewals

Certificates Vouchers Mod Rehab

FY 1996 average disbursement

Disbursements $5,554,798,000 $1,874,533,000 $594,843,000

Divided by number of units 1,078,480 348,948 109,871

Average disbursements

per unit $5,151 $5,372 $5,414

FY 1997 average per unit calculation

1996 average $5,151 $5,372 $5,414

2-week reserve 198 207 208

Admn. fee 561 561 561

Subtotal $5,910 $6,140 $6,183

Add 2.2% inflation 130 135 136

Add welfare reform 46 46 46

FY 1997 average unit

cost $6,086 $6,321 $6,365

FY 1998 average per unit calculation

1997 average $6,086 $6,321 $6,365

Add 2.2% inflation 134 139 140

Add welfare reform 92 92 92

FY 1998 average unit cost $6,312 $6,552 $6,597

Weighted average calculation for FY 1998 estimate

70% certificates $4,418

25% vouchers 1,638

5% moderate rehabilitation 330

Total $6,386

Source: HUD’s Office of the Chief Financial Officer.

Page 38 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Appendix II 

HUD’s September 1997 Changes to the

Section 8 Contract Renewal Estimate

Originally Submitted in the February 1997

Budget Request

Fiscal Year 1998 original contract

renewal estimate $9,232 million

Reduction in the average per unit cost

(from $6,386 to $5,499) –1,123 million

Cost to convert tenant-based assistance

from fiscal to calendar yearsa

+471 million

Cost due to increase in tenant-based unit

estimate (from 1,265,625 to 1,321,230)b

+306 million

Deducting additional carryover to offset

contract renewal costs (from $1,594

million to $1,800 million)c

–206 million 

Allowance for contingencies (from $162

million to $0)

–162 million

Other changes related to project-based

housing assistance

–338 million

Total change to estimate $1,052 million

Fiscal year 1998 revised contract

renewal estimate

$8,180 million

aHUD officials stated that the conversion from fiscal year financing to calendar year financing was

necessary to ensure that all housing assistance contracts were funded on time. For example, they

said that delays in receiving federal funding caused by government shutdowns or continuing

resolutions could jeopardize the housing agencies’ ability to provide the rental assistance

payments.

bHUD officials also stated that the increase in units was necessary to fund the conversion from

fiscal year financing to calendar year financing.

cIn the February 1997 justification for the fiscal year 1998 contract renewal estimate, HUD

reported approximately $1.6 billion in carryover that could be used to offset or decrease the

amount of funding needed for Section 8 contract renewals. The carryover is previously

appropriated budget authority that was not obligated to any housing agency for the provision of

rental assistance. Once HUD determined the funding was not needed to meet current program

needs, the funding was used to decrease the amount of budget authority needed for the next

year’s contract renewals.

Page 39 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
Appendix III 

Major Contributors to This Report

Resources,

Community, and

Economic

Development Division

Eric A. Marts, Assistant Director

Carol Anderson-Guthrie

Donna M. Lucas

Anne-Marie Olson

Terri Russell

A. Paige Smith

(385678) Page 40 GAO/RCED-98-47 Section 8 Tenant-Based Housing Assistance
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