Rental Housing Assistance: Policy Decisions and Market Factors Explain Changes in the Costs of the Section 8 Programs
Published: 2006-04-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Annual appropriations for the Department of Housing and Urban Development's (HUD) Section 8 programs--a key federal tool for subsidizing rents of low-income households--have increased sharply in recent years, raising concerns about their cost. Section 8 pays the difference between a unit's rent and the household's payment (generally 30 percent of adjusted income). Section 8 includes a voucher program administered by public housing agencies (PHA) that allows eligible households to use vouchers to rent units in the private market and a project-based program administered by property owners who receive subsidies to rent specific units to eligible households. In both programs, contracts between HUD and the administrators specify the duration and amount of the subsidy. GAO assessed Section 8 trends from fiscal years 1998 through 2004 and examined (1) annual budget authority and outlays for each program; (2) factors that have affected outlays; and (3) the estimated impact of factors, such as market rents, on the average rental subsidy per voucher household.
section_title: What GAO Found
paragraphs: From 1998 through 2004, annual budget authority for Section 8 grew from $9.4 billion to $19.3 billion (105 percent, or 82 percent after adjusting for inflation), while outlays grew from $14.8 billion to $22.2 billion (50 percent, or 33 percent after inflation adjustment). The steep rise in budget authority was partly due to the additional funding needed to cover the cost of renewing long-term contracts. GAO estimates that voucher outlays grew by 93 percent from 1998 through 2004 (71 percent after inflation adjustment), accounting for almost all of the growth in total Section 8 outlays. Estimated project-based outlays grew by 6 percent (and actually declined after inflation adjustment) over this period. GAO estimates that about 43 percent of the growth in voucher outlays from 1998 through 2004 stemmed from policy decisions that increased the number (from 1.6 million to 2.1 million) and use of vouchers, while over half of this growth was due to an increase in the average rental subsidy per household. For the project-based program, a modest increase in the average rental subsidy per household drove the growth in outlays but was partly offset by a reduction of 62,000 in the number of units. On the basis of statistical analysis of cost data, GAO estimates that growth in the average annual rental subsidy per voucher household from 1999 through 2004 is primarily explained by changes in market rents (about one-half of the growth), PHAs' decisions to increase the maximum subsidized rents (about one-quarter), and lagging growth in assisted household incomes (about 16 percent.) Household and neighborhood characteristics, while important cost determinants, did not vary enough to cause a substantial change in the average rental subsidy per household.

section_title: Letter
paragraphs: Annual appropriations for the Department of Housing and Urban  Development’s (HUD) Section 8 rental housing programs have grown  significantly in recent years, climbing to nearly $21 billion in 2006.  Authorized by the Housing and Community Development Act of 1974 (P.L.  93-383), as amended, Section 8 currently comprises the Housing Choice  Voucher (voucher) and project-based programs. While these programs are  the federal government’s primary tool for making rental housing units  affordable to low-income households, they are not entitlements—that is,  not all eligible households receive assistance. HUD and Congress have  recently supported changes to the voucher program designed to limit  further growth in appropriations without reducing the number of  households that receive assistance. However, analysis of factors driving the  growth in the budgetary costs of Section 8—which could assist in such  efforts—has been limited, in part because HUD has not separately reported  budget authority or outlays for each program.
The voucher and project-based programs share the common mission of  making housing affordable to low-income households by paying subsidies  that make up the difference between a unit’s rent and the household’s  payment, which is generally 30 percent of monthly income after  adjustments. Despite their shared goals, the two programs operate  differently. The voucher program, administered by state and local public  housing agencies (PHA), provides vouchers that eligible households can  use to rent houses or apartments in the private market. The subsidies in the  voucher program are tied to the household, rather than to any particular  dwelling unit (i.e., they are tenant-based). In contrast to vouchers, the  project-based program is administered by property owners who have  agreed to rent specific dwelling units to eligible households. The subsidies  in the project-based program are tied to the rental unit rather than to any  specific tenant. Under both programs, the program administrators enter  into contracts with HUD that specify the number of vouchers or units  authorized to receive rental subsidies and the duration of the subsidy  payments. For the voucher program, PHAs have flexibility to determine the  maximum amount of rental subsidy they can pay for assisted households  within limits set by HUD. For example, HUD establishes “fair market rents”  for each geographic area, based on actual market rents for standard-quality  rental units, but PHAs may choose a “payment standard” that is up to 10  percent lower or higher.
Each year, Congress appropriates budget authority to cover the cost of  Section 8 contracts. HUD uses its budget authority to incur obligations  (e.g., enter into contracts) that result in expenditures, or outlays, of federal  funds. Unlike budget authority, outlays occur when payments are made and  thus reflect the programs’ actual annual cost of providing rental assistance.  Originally, Section 8 contracts were written with 5- to 40-year terms, and  Congress appropriated all of the budget authority needed to cover the  projected costs of these contracts up front. Under this approach, further  appropriations were generally not needed; HUD could make outlays to  provide the subsidy in each year, using the budget authority already  appropriated, until the contract expired. However, for expiring contracts  that are renewed, appropriations of new budget authority are needed to  cover the renewed contract term. Today, contracts are renewed and funded  in 1-year increments for vouchers and either 1- or 5-year increments for the  project-based program.
In response to your request, this report provides information on trends in  the size and the cost of the Section 8 programs from 1998 through 2004 (the  last year for which data were available at the time of our analysis).  Specifically, the report discusses (1) the annual numbers of vouchers in the  voucher program and units in the project-based program, (2) the annual  new budget authority and outlays for each program, and (3) the factors that have affected outlays. In addition, for the voucher program—the larger of  the Section 8 programs and the focus of recent efforts to limit costs—the  report discusses factors, such as changes in market rents, that have  affected the annual average rental subsidy cost per household.
To determine the annual number of vouchers and project-based units and  the annual amounts of new budget authority and outlays for each program,  we obtained and analyzed data from HUD’s budget office, annual budget  requests and other budget documents, and audited financial statements.  HUD’s budget office was not able to report data on budget authority and  outlays for the voucher and project-based programs separately. We  estimated outlays using data from HUD’s accounting systems, which  showed the rental assistance payments paid to PHAs and property owners  under each program from 1998 through 2004. Our report generally presents  budget authority and outlay amounts in nominal dollars; amounts adjusted  for inflation are shown in appendix IV. To identify the factors that have  affected outlays, we analyzed data on rents and household incomes from  HUD’s administrative databases and reviewed reports by HUD,  Congressional Budget Office (CBO), and Congressional Research Service  (CRS). To assess the impact of different factors on the average rental  subsidy cost per household for the voucher program, we developed a  statistical model using data from HUD and the Census Bureau. Our model  allowed us to estimate the effect of each of several variables—market  rents, household incomes, household and neighborhood characteristics,  and a measure of the relationship between program policies and market  rents—on the average rental subsidy per voucher household while  controlling for the effects of other variables. Because data on certain  variables used in our statistical model were not available for 1998, our  analysis of average rental subsidy costs in the voucher program covers the  period from 1999 through 2004. We assessed the reliability of the data from  HUD’s accounting systems and administrative databases by reviewing  related documentation and interviewing agency officials who work with  the systems. In addition, we performed internal checks to determine the  extent to which the data fields were populated and the reasonableness of  the values contained in the fields. We concluded that the data were  sufficiently reliable for the purposes of this report. To address all of the  objectives, we interviewed officials from HUD’s Offices of the Chief  Financial Officer, Public and Indian Housing, Housing, and Policy  Development and Research. We also met with CBO and CRS officials and  representatives of various industry and research groups. We conducted our  work in Washington, D.C., and Chicago, Illinois, from April 2005 through  March 2006 in accordance with generally accepted government auditing  standards. Appendix I provides additional details on our scope and  methodology.
subsections: section_title: Background
paragraphs: Prior to the 1970s, the federal government made housing affordable to low-  and moderate-income households by subsidizing the production of  privately and government-owned properties with below-market interest  rate mortgages, direct loans, and other development subsidies. Under these  production programs, the rent subsidies were project based, and tenants  received assistance only while living in the subsidized units. In the early  1970s, concerns were raised about the effectiveness of these programs:  Many moderate-income tenants benefited from federal assistance, while  lower-income families did not; federal costs for producing the housing  exceeded the private sector costs to produce the same services; and  allegations of waste surfaced. Interest in a more cost-effective approach  led Congress to explore options for using existing housing to shelter  low-income tenants. Section 8 of the Housing and Community  Development Act of 1974, as amended, authorized programs that reflected  both approaches—a tenant-based rental certificate program (now called  the voucher program) for use in existing housing and a project-based  program. The project-based program comprises multiple subprograms,  including Section 8 New Construction/Substantial Rehabilitation, Loan  Management Set-Aside, and Property Disposition. Appendix III contains  detailed descriptions of these subprograms.
The voucher program provides vouchers to eligible households to rent  houses or apartments in the private market from landlords who are willing  to accept the vouchers. Voucher holders are responsible for finding  suitable housing that complies with HUD’s housing quality standards. The  voucher program pays the difference between the lesser of the unit’s gross  rent or a local “payment standard,” and the household’s payment, which is  generally 30 percent of monthly income, after certain adjustments. To be  eligible to apply for assistance, households must have very low  incomes—less than or equal to 50 percent of area median income (AMI) as  determined by HUD. Under the provisions of the Quality Housing and Work  Responsibility Act of 1998 (P.L. 105-276), at least 75 percent of new  participants in the voucher program must be households with extremely  low incomes—at or below 30 percent of AMI. Households already  participating in the voucher program remain eligible for assistance as long  as their incomes do not rise above 80 percent of AMI. The voucher program  is administered by over 2,500 state and local PHAs that are responsible for  inspecting dwelling units, ensuring that rents are reasonable, determining  households’ eligibility, calculating households’ payments, and making  payments to landlords. HUD provides funding to PHAs for administrative  expenses as well as rental subsidies.
The project-based program subsidizes rents at properties whose owners  have entered into contracts with HUD to make rents affordable to  low-income households. Often these properties were financed with  mortgages insured or subsidized by HUD or with bonds issued by state and  local housing finance agencies. Property owners and managers are  responsible for administering the program at about 22,000 properties  nationwide. The project-based program operates much like the voucher  program, paying the difference between a HUD-approved unit rent and the  household’s payment, which is generally equal to 30 percent of adjusted  monthly income. In general, only households with low incomes (i.e., at or  below 80 percent of AMI) are eligible for assistance, and since 1998 at least  40 percent of new residents must have extremely low incomes. Private  property owners and managers have requirements similar to those for  PHAs for administering the project-based program—they must ensure that  households meet program eligibility requirements and must calculate  households’ payments. HUD pays rent subsidies directly to the property  owners but does not pay them a separate administrative fee, as the owners’  administrative costs are reflected in the HUD-approved rents. However,  because of limited staff resources and the large number of project-based  Section 8 contracts, HUD pays contract administrators (state and local  PHAs) administrative fees to oversee most of the contracts, a task that  requires processing monthly payment vouchers, reviewing property  owners’ tenant information files, and addressing health and safety issues.
Each year, Congress appropriates budget authority to cover the costs of  new Section 8 contracts, renewals of expiring contracts, amendments to  existing project-based contracts, and administrative fees. For the period  covered by our review (1998 through 2004), Congress appropriated funds  for the Section 8 programs in HUD’s Housing Certificate Fund account.  Over time, Congress has changed the way it funds the Section 8 programs.  From 1974 to 1983, Congress made large up-front appropriations to cover  the projected costs of multiyear Section 8 contracts. Initially, voucher  contracts were written for 5 years and were renewable, at HUD’s  discretion, for up to 15 years, while the terms for project-based contracts  ranged from 15 to 40 years. When these initial contracts began to expire in  1989, HUD required new budget authority to renew them. Owing to budget  constraints, Congress funded Section 8 contracts with amounts that led to  shorter contract terms. HUD initially renewed expiring contracts generally  for 5-year terms but starting in the mid-1990s switched to 1-year terms for  the voucher program and either 1- or 5-year terms for the project-based  program.
The Section 8 programs are not entitlements, and as a result, the amount of  budget authority HUD requests and Congress provides through the annual  appropriations process limits the number of households that Section 8 can  assist. Historically, appropriations for the Section 8 programs (as well as  for other federal housing programs) have not been sufficient to assist all  households that HUD has identified as having housing needs—that is,  households with very low incomes that pay more than 30 percent of their  income for housing, live in substandard housing, or both. According to  HUD data for calendar year 2003, Section 8 and other federal housing  programs assisted an estimated 4.3 million households, or 27 percent of all  renter households with very low incomes (see fig. 1). HUD estimated that  over 9 million very low income households (about 59 percent) did not  receive assistance and had housing needs. Of these 9 million households  with housing needs, over 5 million had what HUD terms “worst case”  needs—that is, they paid over half of their income in rent, lived in severely  substandard housing, or both.
section_title: Increases in the Number of Vouchers Drove Growth in the Size of Section 8 from 1998 through 2004
paragraphs: The combined number of authorized vouchers and project-based units  grew from about 2.93 million to 3.36 million from 1998 through 2004—an  overall increase of about 15 percent and an average annual increase of  about 2 percent (see fig. 2). Most of this increase occurred from 1998 to  2001, when about 327,000 vouchers were added. However, as figure 2  shows, this overall trend masked a difference in the trends for the  individual programs: The number of vouchers grew by 31 percent during  this period, while the number of project-based units declined by 5 percent.
It is important to note that at any given time the actual number of  households assisted with Section 8 programs is likely to be less than the  number of authorized vouchers and project-based units, because some  authorized vouchers and units may not be in use. For example, vouchers  may go unused because households may not be able to find units that meet  the program’s affordability requirements and quality standards. (As  discussed subsequently in this report, the extent to which authorized  vouchers are actually used to rent units—and thus incur subsidy costs—is  called the voucher utilization rate.) Project-based units may not be in use  during the period when landlords are seeking new occupants for units that  have been vacated.
subsections: section_title: The Number of Vouchers Increased by 31 Percent
paragraphs: From 1998 through 2004, the number of authorized vouchers grew from  about 1.60 million to almost 2.09 million, an increase of 490,944 vouchers  (see fig. 2). This increase represents an average annual growth rate of  almost 5 percent. The new vouchers were composed of both “incremental  vouchers” and tenant protection vouchers. Incremental vouchers are those  that resulted from Congress’ decision to expand the program to serve more  households. Notices published in the Federal Register and HUD data  indicate that the agency awarded 276,981 incremental vouchers and  205,853 tenant protection vouchers from 1998 through 2004 (see table 1).
Incremental vouchers consist of three major types: fair share,  welfare-to-work, and special purpose. Fair share vouchers are those that  HUD allocates to PHAs on a competitive basis using a formula that  accounts for poverty rates, renter populations, vacancies, overcrowding,  and other measures, in each county and independent city throughout the  country. Welfare-to-work vouchers are designated for households for which  a lack of stable, affordable housing is a barrier to employment and that are  making the transition to economic self-sufficiency. Finally, special  purpose vouchers include those designated for a variety of special needs  populations, such as persons with disabilities. Fair share vouchers  accounted for about 56 percent of the total, while welfare-to-work and  special purpose vouchers represented 18 percent and 26 percent,  respectively.
From 1998 through 2002, Congress provided new funding each year for a  large number of incremental vouchers to help address the unmet housing  needs of very low-income households, and fair share vouchers were the  key type of incremental vouchers used to increase the number of assisted  households. Starting in 2003, Congress provided no new funding for fair  share vouchers, but did provide new funding for a smaller number of  special purpose vouchers. By 2004, however, no new funding was provided  for any type of incremental voucher.
Unlike incremental vouchers, tenant protection vouchers do not add to the  total number of authorized units under Section 8 (and other HUD programs  for which they are used) because they replace one form of HUD assistance  with another. Tenant protection vouchers are offered to eligible households  that had received housing assistance under various HUD programs  (including the project-based program, certain HUD mortgage insurance  programs, and public housing) before the assistance was terminated. As  part of its annual budget request, HUD estimates the number of tenant  protection vouchers it will need and the amount of funding required for  these vouchers. As table 1 shows, the number of tenant protection  vouchers awarded from 1998 through 2004 remained relatively stable, from  a low of 22,839 in 2002 to a high of 36,000 in 2001.
section_title: The Number of Project-Based Units Declined by 5 Percent
paragraphs: The number of authorized project-based units fell from 1.33 million to 1.27  million, a decline of approximately 62,000 units (see fig. 2). This  represented an average annual decrease of less than 1 percent. The number  of project-based Section 8 units declined primarily because either property  owners or HUD decided not to renew Section 8 contracts. Owners may  choose not to renew their contracts and to opt out of the program for a  variety of reasons, including plans to convert the properties to market-rate  rental units. HUD may decide not to renew some contracts if property  owners have not complied with program requirements, such as maintaining  the property in decent, safe, and sanitary condition.
If a property owner or HUD decides not to renew a project-based Section 8  contract, the property is no longer required to comply with program rules,  including affordability requirements. To protect Section 8 households from  rent increases that may result when owners opt out of their contracts, HUD  provides a special type of tenant protection voucher known as an enhanced  voucher. Enhanced vouchers are designed to ensure that tenants can afford  to remain in the properties that are no longer receiving project-based  Section 8 assistance—even if the rents for these units exceed those for the  regular voucher program (such vouchers are considered enhanced because  they allow these higher subsidies). If HUD terminates a project-based  Section 8 contract, the agency usually provides affected families with  regular vouchers to allow them to find other housing. The substitution of  tenant protection vouchers for subsidies previously paid for project-based  units has helped minimize the net loss of Section 8 units.
section_title: Section 8 New Budget Authority Increased at a Faster Rate than Outlays from 1998 through 2004
paragraphs: Although both budget authority and outlays for the Section 8 programs  increased significantly from 1998 through 2004, the rates of growth  differed. Appropriations of new budget authority grew more than twofold  during this period (105 percent), partly because HUD needed more budget  authority to cover the cost of renewing long-term contracts that began to  expire in 1989. In comparison, from 1998 through 2004 total Section 8  outlays rose at a slower rate (50 percent). However, this increase masks  substantial differences in the rates of growth for the individual Section 8  programs. Although HUD did not separately track outlays for the voucher  and project-based programs during this period, we estimate that outlays  increased by 93 percent for the voucher program and by 6 percent for the  project-based program.
subsections: section_title: Renewal of an Increasing Number of Expiring Contracts Contributed to Much of the Growth in Budget Authority
paragraphs: Appropriations of new budget authority for Section 8 grew from $9.4 billion  in 1998 to $19.3 billion in 2004, an overall increase of about 105 percent and  an average annual rate of 13 percent (see fig. 3). During 2001, new budget  authority grew by 22 percent, the largest single-year increase during this  period. For the other years, the annual increase in new budget authority  ranged from 10 to 17 percent. Over the same period, new budget authority  for Section 8 accounted for an increasing share of HUD’s total annual  appropriations, growing from 41 percent in 1998 to 54 percent in 2004.  Part of the growth reflects the effects of inflation. After adjusting for  inflation, new budget authority rose from $10.6 billion in 1998 to $19.3  billion in 2004 (82 percent). Appendix IV contains detailed information on  budgetary costs in nominal and inflation-adjusted dollars.
HUD did not separately track budget authority for the voucher and  project-based programs for the period covered by our analysis. HUD  budget officials told us they had no need to do so because Congress funded  both programs under a single budget account, the Housing Certificate  Fund. However, to provide better transparency and strengthen oversight of  the programs, Congress directed HUD to create two new budget  accounts—Tenant-Based Rental Assistance and Project-Based Rental  Assistance—for all new Section 8 appropriations. Beginning with its 2006  budget, HUD has provided separate information for each program.
The substantial growth in new budget authority stemmed primarily from  decisions to renew expiring long-term Section 8 contracts. From 1974 to  1983, Congress made large up-front appropriations to cover the projected  costs of multiyear Section 8 contracts that were written in those years.  Because Congress and HUD funded these long-term contracts up front,  they generally did not require new budget authority during the years  specified in the contracts. During the early to mid-1990s, large numbers of  these long-term contracts reached the end of their terms. Decisions to  renew the contracts created the need for new budget authority. As figure 4  shows, the trend in the numbers of expiring contracts continued from 1998  through 2004. Specifically, the number of project-based units with expiring  contracts that were renewed grew significantly—by 373,310 units from  1998 through 2004. (As noted previously, because some project-based  contracts were not renewed, the total number of authorized project-based  units declined during this period—even as the number needing new budget  authority grew.) Additional new budget authority was required each year to  cover the renewal of 818,095 vouchers from 1998 through 2004.
A factor also contributing to the need for new budget authority was a  declining amount of “carryover” budget authority. Carryover consists of  unobligated budget authority (not yet committed to specific contracts),  including funds that have been “recovered” (de-obligated from expired  contracts that did not need all of the budget authority that had been  obligated for them). Congress may rescind any portion of such unused  budget authority and in fact enacted rescissions in the Section 8 program  during each of the years we examined. Total budget authority available to  renew Section 8 contracts in any year thus consists of both the carryover,  net of rescissions, as well as new budget authority, and represents all of the  funds available to HUD for future obligations and outlays.
Typically, HUD has had large amounts of carryover funds in the Section 8  programs, and these carryover funds have helped offset the need for new  budget authority. However, as shown in figure 5, the carryover amounts  generally declined during the period we examined. For example, about $7.5  billion in carryover funds in 1998 lessened the need for new appropriations  of budget authority in that year, whereas the decline in carryover funds in  later years increased the need for new appropriations. Partly because of  declining carryover amounts during this period, total available budget  authority grew at a slower rate than new budget authority. More  specifically, total available budget authority grew from $14.0 billion to $20.9  billion over this period (fig. 5), an average annual rate of about 7 percent.  Congress rescinded between $1.6 billion and $2.9 billion each year during  the period.
section_title: Total Section 8 Outlays Grew by 50 Percent
paragraphs: As figure 3 shows, annual outlays for Section 8 programs grew from $14.8  billion in 1998 to $22.2 billion in 2004, an overall increase of about 50  percent and an average annual increase of 7 percent. About 78 percent of  this growth occurred from 2002 to 2004, with 2003 representing the largest  annual increase ($2.5 billion). Despite this growth, total Section 8 outlays  accounted for a relatively stable share of HUD’s total outlays over this  period, ranging from 45 percent in 1998 to 52 percent in 2004.
Outlays for Section 8 generally exceeded new budget authority for the  program each year from 1998 through 2004 (see fig. 3). This pattern  resulted primarily from the way the program was originally funded. As  noted previously, initial Section 8 contracts generally had long terms and  received large up-front appropriations of budget authority to cover their  projected costs. As a result, HUD has for many years—including the 1998  through 2004 period—made outlays for contracts that have not required  new budget authority. During this period, the gap between outlays and new  budget authority narrowed as the number of expiring vouchers and  project-based units that required new budget authority grew and were  renewed on an annual basis. If all Section 8 contracts had reached the end  of their multiyear terms and were renewed annually, new budget authority  requirements would more closely approximate the expected annual  outlays.
section_title: Estimated Outlays for Vouchers Rose by 93 Percent, while Those for the Project-Based Program Remained Relatively Stable
paragraphs: Since HUD did not separately track outlays for the voucher and  project-based programs (for the same reasons it did not do so for budget  authority), we developed our own estimates of outlays for both programs  based on data from the accounting systems HUD uses to record Section 8  rental subsidy payments. On the basis of these data, we estimated that  from 1998 though 2004:  Outlays for the voucher program rose from $7.5 billion to $14.5 billion  (fig. 6)—an overall increase of 93 percent and an average annual rate of  increase of 12 percent. The largest annual increases—approximately 20  percent—occurred both in 2002 and 2003. About 56 percent of the total  increase in outlays also occurred in these 2 years. As discussed in more  detail in a subsequent section of this report, the growth in voucher  program outlays resulted in large part from increases in the average  rental subsidy per household and decisions by Congress to expand the  number of vouchers.
In contrast, outlays for the project-based program remained relatively  stable, rising from $7.3 billion to $7.7 billion, or about 6 percent from  1998 through 2004—an average annual rate of about 1 percent.
Because of its much faster rate of growth, the voucher program accounted  for nearly all of the growth in total Section 8 outlays from 1998 through  2004. Specifically, the program accounted for about $7.0 billion (94  percent) of the $7.4 billion increase in total Section 8 outlays during this  period. In contrast, the project-based program accounted for only $419  million (6 percent) of the overall increase in total Section 8 outlays. In 1998,  the voucher and project-based programs each represented about half of the  total outlays for the Section 8 programs. In a relatively short time span,  voucher outlays surpassed those for the project-based program by a  significant margin, and by 2004 the voucher program was responsible for  about 65 percent of total Section 8 outlays.
Outlays for the project-based program increased at a rate slower than  inflation from 1998 through 2004. Specifically, after adjusting for inflation,  outlays dropped from $8.3 billion to $7.8 billion, a decrease of 6 percent.  The growth in voucher outlays, however, significantly outpaced the rate of  inflation, increasing from $8.5 billion to $14.6 billion (71 percent) in  inflation-adjusted dollars. Additional information on outlays in nominal  and inflation-adjusted dollars appears in appendix IV.
section_title: Policy Decisions and Market Factors Drove Increases in Section 8 Outlays, but HUD and Congress Have Acted to Limit Further Growth
paragraphs: A number of policy decisions and market factors contributed to the growth  in total Section 8 outlays from 1998 through 2004, including decisions to  expand the number of households receiving vouchers, increases in the  average rental subsidy per household, and other program costs. Figure 7  shows the general relationship between these policy decisions and market  factors and Section 8 outlays. Although these factors also affected budget  authority, our analysis focuses on outlays because, unlike budget authority,  outlays occur when payments are made and thus reflect the actual annual  cost of providing rental assistance. Congress and HUD have taken steps to  limit further growth in Section 8 program costs—for example, by changing  the program’s funding formula for vouchers.
subsections: section_title: Policies to Expand the Number of Assisted Households Resulted in an Increase in Voucher Outlays, while the Declining Number of Units Limited Growth in Project-Based Outlays
paragraphs: Decisions to increase the number of households receiving vouchers were a  significant driver of growth in voucher outlays from 1998 through 2004. As  noted previously, between 1998 and 2004 Congress authorized funding for a  total of 490,944 incremental and tenant protection vouchers. This trend,  coupled with a rise in the percentage of authorized vouchers in use (the  utilization rate) that started in 2001, increased the number of assisted  households and, in turn, the amount of outlays for vouchers. We estimate  that about $3.0 billion (43 percent) of the increase in voucher outlays from  1998 through 2004 was attributable to the additional assisted households  resulting from the authorization of new vouchers and higher utilization  rates (table 2).
Certain policy changes were designed to increase average voucher  utilization rates. For example, starting in 2002, PHAs that applied for fair  share vouchers had to maintain utilization rates of at least 97 percent to be  eligible to receive them. Also, according to HUD, Congress’ decision in  2003 to limit the funding basis for voucher contracts to only vouchers that  were actually in use effectively encouraged PHAs to increase their  utilization rates in order to receive more funding.
Using the average annual household subsidy in 2004 for the project-based  program ($5,948), we estimate that the decline of about 62,000 units  reduced project-based outlays by roughly $367 million (see table 2).  However, this decrease was more than offset by the other factors, leading  to an overall increase of $419 million.
Although the decline in the number of project-based units caused outlays  for the project-based program to be less than they would have been  otherwise, its effect on total Section 8 outlays was offset to a large degree  by the issuance of tenant protection vouchers to households displaced  from their project-based units. As noted previously, under the  project-based program (or other HUD programs), tenants in units receiving  assistance that is terminated (e.g., because the unit owner decides not to  renew an expiring contract) may face higher rental payments. To protect  these tenants from potentially unaffordable rent increases and continue  providing assistance, Congress made tenant protection vouchers available.  In effect, outlays from the project-based program were shifted to the  voucher program, although not on a one-for-one basis because the per  household subsidy costs were different for project-based units and  vouchers.
section_title: Increases in the Average Rental Subsidy per Household Contributed to Higher Outlays for Both Programs
paragraphs: Increases in the average rental subsidy per household also contributed to  the growth in outlays for the voucher and project-based programs,  although the average subsidy increased more for vouchers than for  project-based programs. As figure 8 shows, the average subsidy for  vouchers grew from $4,420 to $6,262 from 1998 through 2004, an overall  increase of 42 percent. The annual rate of increase in the average per  household subsidy for vouchers was 6 percent during the period, ranging  from a low of 1 percent in 1999 to a high of 11 percent in both 2002 and  2003. The high rate of growth in 2002 and 2003 coincided with the largest  yearly increases in voucher outlays (see fig. 6). For 2004, the annual rate of  increase slowed to over 2 percent after several years of substantial growth.  The growth in the number of enhanced vouchers, which, as previously  noted, allows for higher subsidies, may have contributed to the overall  increase. As described in table 2, an estimated $3.6 billion (51 percent) of  the increase in voucher outlays was due to growth in the average rental  subsidy per household.
In comparison, the average rental subsidy per household for the  project-based program grew more modestly during the period—from  $5,305 to $5,948, an overall increase of 12 percent and an average annual  increase of 2 percent. The annual rate of increase in average per  household subsidy did not exceed 1 percent from 1998 through 2001 and  remained at less than 4 percent from 2002 through 2004. As described in  table 2, we estimate that this raised outlays for the project-based program  by about $616 million. The decline in the number of project-based units  partially offset this increase in program outlays, however.
As figure 8 shows, during the period we examined, the per household  subsidy in the voucher program was initially less than the project-based per  household subsidy but then became greater. However, this trend does not  mean that the project-based program has become more cost-effective. Any  comparison of the cost-effectiveness of these programs should account for  all subsidies received during the properties’ life cycles, adjusted for any  differences in unit and household characteristics, such as the number of  bedrooms and family size. For example, the average project-based  subsidy per household during the period we examined did not account for  the effects of past subsidies or for potential future subsidies that may be  needed to maintain properties in the program. Similarly, it is important to  note that the nationwide trends we present do not reflect the considerable  variation that exists across local rental housing markets. That is, even  during the period we examined, in some markets the per household  subsidy for vouchers may have remained below that for the project-based  program.
For both the voucher and project-based programs, many policy decisions  and market factors influenced the average per household rental subsidy,  such as HUD’s fair market rent (FMR) determinations, housing market  conditions, household incomes, and policies for limiting the cost of rental  assistance. More detailed information on the trend in the average rental  subsidy per household and the specific impact of these factors on per  household rental subsidies for vouchers are discussed in a subsequent  section of this report.
section_title: Administrative and Special Program Costs Contributed Modestly to the Increase in Outlays for Both Programs
paragraphs: Other costs for program administration and special programs contributed  to the change in outlays for the voucher and project-based program,  although to a lesser extent than the other factors (see table 2). More  specifically, according to data from HUD’s accounting systems,  administrative costs for vouchers increased by about $368 million from  1998 through 2004. Although complete data on administrative costs for the  project-based program were not available, a major administrative expense  was HUD’s Performance-Based Contract Administrator initiative, which  started in 2000. This initiative, intended to augment HUD’s oversight of  project-based Section 8 contracts, added $170 million in outlays from 1998  through 2004.
According to HUD, outlays for special programs increased but were  relatively small during the period covered by our analysis. There have been  multiple special programs, including the Family Self-Sufficiency program,  which paid for service coordinators to help participating families achieve  economic independence. The Family Self-Sufficiency program accounted  for about $50 million in outlays in 2004. Since detailed data on the outlays  for special programs were not readily available for this period, we were  unable to comprehensively estimate their impact on outlays.
section_title: HUD and Congress Have Taken Steps to Limit Growth in the Cost of Both Programs
paragraphs: HUD has implemented measures to limit increases in the cost of the  Section 8 programs. For example, as noted previously, in 2003 Congress  authorized changes to HUD’s policies for funding vouchers to slow the  growth in new budget authority and, in turn, outlays. Before 2003, Congress  appropriated budget authority using a unit-based approach that covered all  vouchers authorized in each contract, whether or not all of the vouchers  had been utilized. Concerned that appropriations were exceeding actual  program needs, Congress changed the formula for funding voucher  contracts to a dollar-based approach, basing it on actual expenditures from  the previous year plus an inflation factor. In addition, Congress authorized  a contingency fund to cover increases in rental costs in excess of the  inflation factor.
In HUD’s 2004 budget, Congress authorized the creation of a Quality  Assurance Division within HUD to provide more oversight of the  administration and cost of the voucher program. A key part of this effort  involves monitoring and verifying program costs reported by PHAs. The  division also audits PHAs’ program records to ensure that voucher costs  were reported accurately and monitors local rental market trends to  determine whether HUD’s FMRs were set too high or too low. In addition,  quality assurance staff review PHAs’ compliance with HUD’s requirement  that rents for voucher units be reasonable—that is, comparable to rents for  similar unassisted units in the market.
Congress and HUD have taken further steps since the period of our analysis  to limit cost growth. For example, Congress made further changes to the  voucher’s dollar-based formula in 2005 that eliminated all contingency  funding, so that PHAs were expected to absorb all additional cost increases  during the year. To help PHAs keep their costs within their funding levels,  HUD issued guidance in 2005 concerning options PHAs could exercise to  limit costs. These options included the following.
Reduce payments standards: Because PHAs may set their own payment  standards—that is, the maximum rent that can be used to calculate  rental subsidies—anywhere between 90 and 110 percent of the FMR for  their area, reducing payment standards allow PHAs to limit growth in  rental subsidy payments.
Ensure reasonable rents: Statute and HUD regulations require PHAs to  compare rents for voucher units to those for comparable unassisted  units and reduce rents for voucher units if warranted. To ensure that  rents are reasonable, PHAs can conduct more frequent reviews of rents  charged by landlords. Any rent reductions would reduce the rental  subsidy payments that PHAs make.
Deny moves within and outside PHA jurisdiction: The voucher  program allows households to move anywhere within and outside of a  PHA’s jurisdiction. However, if a PHA has insufficient funding, it can  deny a voucher household’s move to an area that would result in higher  subsidy costs—for example, an area with a higher payment standard.
Not reissue vouchers or terminate assistance: Vouchers can become  available to new households when assisted households leave the  program (turnover). To limit costs, PHAs can choose not to reissue  turnover vouchers or pull back outstanding vouchers for other  unassisted households searching for housing. PHAs can also terminate  assistance if they determine that the funding provided by HUD is  insufficient, although according to HUD, the department is not aware of  any instance in which a PHA has terminated voucher assistance.
Set higher minimum rents: HUD policy allows PHAs to set a minimum  rent for households that can range from as low as $0 to as high as $50.  Some PHAs currently allow certain households with very little income  to pay rents that are below the minimum rent ceiling (i.e., less than $50).  To reduce their costs, these PHAs can raise the minimum rent to $50.
Furthermore, HUD supports proposed legislation—the State and Local  Housing Flexibility Act of 2005—that would replace the existing voucher  program with the “flexible voucher program.” This proposed program  would, among other things, allow individual PHAs to set (within broad  federal guidelines) eligibility requirements, the maximum period that a  household could receive assistance, and households’ contributions toward  rents. According to HUD, this proposed program, which would initially  continue to fund vouchers using the dollar-based approach, would create  incentives and provide flexibilities for PHAs to manage their funds in a  cost-effective manner.
For the project-based program, Congress has taken steps to control the  cost of rental subsidies, and as our analysis shows, these steps have limited  growth in the program’s average rental subsidy per household and thus in  outlays. In 1997, Congress passed the Multifamily Assisted Housing Reform  and Affordability Act, which established the Mark-to-Market program.  When properties entered the project-based program in the late 1970s  through the mid-1980s, HUD often subsidized rents that were above local  market levels to compensate for high construction costs and  program-related administrative expenses. Thereafter, these rents were  adjusted annually using an operating cost factor determined by HUD. In the  early 1990s, HUD concluded that the continued growth in subsidy levels  would be unsupportable within HUD’s budget limitations. The  Mark-to-Market program, which began in 1998, authorized HUD to reduce  rents to market levels on project-based properties with HUD-insured mortgages. According to HUD, the program has reduced project-based  rental subsidy costs at over 2,700 properties by an estimated $216 million  per year since 2000.
section_title: Policy Changes and Trends in Market Rents and Household Incomes Increased the Average Subsidy per Voucher Household
paragraphs: We developed a statistical model to assess the impact that certain  variables—specifically, market rents, payment standards, household  incomes, and household and neighborhood characteristics—had on the  change in the average rental subsidy per household for the voucher  program. Changes in market rents explained a significant part of the  increase in the average rental subsidy per household. Specifically, we  estimate that from 1999 through 2004, over one-half of the increase in the  average per household subsidy was explained by higher market rents, all  other things being equal. Higher payment standards and the relatively  slow growth in household incomes also contributed to the increase.  Although we found that household and neighborhood variables were  important determinants of per household rental subsidies, their average  values did not vary enough from 1999 through 2004 to cause a significant  change in the average per household rental subsidy over this period.
subsections: section_title: Growth in Market Rents
paragraphs: Because voucher households rent units in the private market, trends in  market rents have a major effect on per household rental subsidies. To  assess the impact of market rents on per household rental subsidies, we used HUD’s FMRs as indicators of local market rents. Our model  estimated the average per household subsidy that HUD paid in each year  (baseline estimate). We then used the model to estimate the average per  household subsidy HUD would have paid in each year, had the average  market rents remained at the 1999 level, adjusted for overall price level  changes. Comparing this figure with the baseline estimate indicates the  influence of changes in rents. We estimate that from 1999 through 2004 the  average annual rental subsidy per household would have grown from  $5,225 to $5,800 (an increase of 11 percent), if the average market rents had  remained at 1999 levels, compared with the 24 percent growth, from $5,225  to $6,478, in the baseline estimate (fig. 9). Expressed differently, the effect  of market rents accounted for over half of the increase in the average per  household subsidy, all other things being equal.
section_title: PHAs’ Exercise of Flexibility in Setting Payment Standards
paragraphs: In 1998, the Quality Housing and Work Responsibility Act (P.L. 105-276)  authorized PHAs to set local payment standards anywhere between 90 to  110 percent of the FMR without the need for prior HUD approval. This  flexibility was intended to make it easier for voucher households to find  housing successfully, reduce concentrations of poverty by helping voucher  households find housing in neighborhoods with higher incomes, and allow  PHAs to respond to local market conditions. The result of this policy was  that the average payment standard, as a percentage of the FMR, increased  from about 96 percent in 1999 to 103 percent in 2004. The average voucher  rent as a percentage of the FMR also increased, rising from about 94  percent in 1999 to 97 percent in 2004 (see app. VI for detailed discussion of  the trends in voucher rents).
To assess the impact of higher payment standards on the change in per  household rental subsidies, we compared our baseline estimate with the  average per household subsidy that our model predicted HUD would have  paid in each year had the average payment standard, as a percentage of the  FMR, remained at its 1999 value. As shown in figure 10, we estimate that  over this period the average per household subsidy would have grown from  $5,225 to $6,169 (an 18 percent increase) if the average payment standard  as a percentage of the FMR had remained at the 1999 level, compared with  the 24 percent growth, from $5,225 to $6,478, in the baseline estimate.  Further, we estimate that the impact of higher payment standards  accounted for about one-quarter of the increase in the average per  household subsidy from 1999 through 2004, all other things being equal.
section_title: Slower Growth in the Average Income for Voucher Households
paragraphs: Slow growth in household incomes, which did not keep pace with the  increases in market rents, also contributed to higher per household rental  subsidies. Specifically, from 1999 through 2004, the average income of  voucher households grew from $8,779 to $10,086, an overall increase of 15  percent and an average annual rate of about 3 percent. However, market  rents, as measured by FMRs, increased by about 23 percent over this  period, or an average annual rate of over 4 percent. To determine the  impact of household income on the change in per household rental  subsidies, we compared the baseline estimate with the estimated amount  that our model predicted HUD would have paid had the average household  income grown at the same rate as the average market rent. As shown in  figure 11, we estimate that over this period the average per household  subsidy would have grown from $5,225 to $6,279 (an increase of 20  percent) if the average income had grown as fast as the average market  rent, compared with the 24 percent growth, from $5,225 to $6,478, in the  baseline estimate. Further, we estimate that the effect of relatively slow  growth in the average household income accounted for about 16 percent of  the increase in the average per household subsidy, all other things being  equal.
section_title: Household and Neighborhood Characteristics of Voucher Holders Did Not Have a Significant Effect on the Growth in the Average Rental Subsidy per Household
paragraphs: We analyzed certain household characteristics, such as family size, family  types (for example, whether the household was headed by an elderly  person or a person with a disability), and others, and found that, while they  were major determinants of per household rental subsidies, they did not  vary enough over this period to effect significant change in the average per  household rental subsidy. Stated differently, these factors exhibited about  the same influence on per household voucher subsidies throughout the  period, and thus do not help explain the overall trend of increased rental  subsidy.
In addition, we analyzed the characteristics of the neighborhoods—also  important determinants of per household subsidies—where voucher holders live. Specifically, given the significant increases in voucher rents  and payment standards, we explored the extent to which the increase in  the average per household subsidy was the result of voucher households  moving to neighborhoods with less poverty and other favorable  characteristics. However, just as with the household characteristics, the  average values of these variables did not vary enough from 1999 through  2004 to cause a substantial change in the average per household rental  subsidy over this period. Because we did not have comprehensive data on  the quality of rental units in the voucher program, we could not explore  whether the trends in higher voucher rents and payment standards were  also accompanied by changes in the quality of units occupied by voucher  holders.
section_title: Observations
paragraphs: The cost of providing rental assistance has been a long-standing issue for  policymakers and has led Congress, on different occasions, to reform  various housing programs. Recent proposals for reform have focused on  the voucher program, which experienced a significant growth in outlays  and constituted nearly all of the increase in total Section 8 outlays from  1998 through 2004. We found that the growth both in the number of assisted  households—driven largely by policy decisions to expand this  nonentitlement program—and in the average rental subsidy per household  explain much of the increase in voucher outlays over this period. In turn,  the average per household subsidy rose in large part because of changes in  the rental market, use of higher payment standards by PHAs, and  household incomes that grew more slowly than rents.
To the extent that policymakers wish to stem the rising cost of the voucher  program, our analysis suggests that future increases could be mitigated by  reducing the number of assisted households, lowering payment standards,  requiring households to pay a larger share of their incomes toward rent,  subsidizing households with higher incomes, or a combination thereof.  However, these actions require making difficult trade-offs between limiting  program costs and achieving long-standing policy objectives, such as  serving more needy households, having assisted households pay a  relatively small share of their incomes in rents, making it easier for voucher  holders to find housing (especially in tight rental markets), reducing the  concentration of poverty, and giving PHAs the flexibility to respond to local  rental market conditions.
Congress and HUD have already responded to the increasing cost of  vouchers by changing the way the program is funded. Specifically, HUD no  longer provides funding to PHAs based on the number of authorized  vouchers, but rather based on the prior year’s level of voucher  expenditures, adjusted by an inflation factor. While this approach allows  HUD to limit the annual rate of increase in the program’s cost, it does not  directly address the policy decisions and market factors that we identified  as contributing to the increase in program costs. Instead, it will be up to  PHAs to exercise their flexibilities and make decisions regarding how to  use the voucher funding that they receive from HUD. For example, some  PHAs may choose to reduce their local payment standard, a course that, as  our analysis suggests, would likely limit growth in voucher costs. The  decisions that PHAs make will eventually influence trends in outlays, per  household subsidies, and unit rents, and these trends will become more  apparent in the years following the period covered by our analysis.
section_title: Agency Comments
paragraphs: We provided HUD with a draft of this report for review and comment. In a  letter from the Acting Deputy Chief Financial Officer (see app. VII), HUD  suggested technical clarifications, which we incorporated where  appropriate, and made the following comments:  HUD noted that the draft report’s discussion of efforts to limit growth in  program costs did not cite the department’s recent legislative  proposal—the State and Local Housing Flexibility Act—to reform the  voucher program. The proposal’s primary mechanism for limiting cost  growth is the continued implementation of a dollar-based approach for  funding the voucher program. Our draft report discussed the  dollar-based approach and its intended impact on program costs.  However, in response to HUD’s comment, we added language to the  final report describing the legislation’s key provisions and objectives.
HUD indicated that the draft report was incorrect in stating that to be  eligible for assistance under the voucher program, households must  have very low incomes—less than or equal to 50 percent of AMI. HUD  said that households must have low incomes—less than or equal to 80  percent of AMI—to be eligible. The income limit that HUD referred to  generally applies to households already participating in the voucher  program. The income limit cited in our draft report referred to the  eligibility criteria for new applicants. We revised the final report to make  this distinction clearer.
HUD said that our draft report’s discussion of the growth in  appropriations from 1998 through 2004 that was due to expiring Section  8 contracts may have inadvertently cited 1989 (rather than 1998) as the  year in which contracts began to expire. Based on our analysis of prior  studies on this issue, 1989 is generally regarded as the year in which  Section 8 contracts started to expire. Contracts that expired, and were  renewed with shorter terms in 1989 and afterwards, required new  appropriations for renewals in subsequent years, including the years  covered by our analysis. Accordingly, we made no changes to the final  report.
Finally, HUD stated that the draft report did not mention a critical  reason that the lower cost per unit in project-based programs did not  imply greater cost effectiveness—specifically, that vouchers are used  for units that, on average, have more bedrooms and serve larger  households than project-based units. In response to HUD’s comments,  we revised the final report to reflect the fact that determining the  cost-effectiveness of HUD’s housing programs must account for not only  all subsidies received over time but also unit and household  characteristics.
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section_title: Objectives, Scope, and Methodology
paragraphs: This report provides information on trends in the size and cost of the  Department of Housing and Urban Development’s (HUD) Section 8  program from 1998 through 2004. Specifically, our report objectives were to  determine (1) the annual numbers of vouchers in the voucher program and  units in the project-based programs, (2) the annual new budget authority  and outlays for each program, (3) the factors that have affected outlays,  and (4) the impact of factors on the average rental subsidy cost per  household for the voucher program.
To determine the annual numbers of vouchers in the voucher program and  units in the project-based program, we obtained and reviewed data on the  numbers of authorized vouchers and project-based units from 1998 through  2004 from HUD’s budget office. We compared the annual numbers of  vouchers and project-based units that HUD provided with information  reported in the agency’s annual budget requests to ensure that they were  consistent. We obtained data on the number of units authorized under the  Section 8 Moderate Rehabilitation program from HUD’s program offices.  We compiled and analyzed HUD notices of funding announcements and  awards published in the Federal Register to determine the different types  of new vouchers that were added to the program.
To determine the annual amount of new budget authority and outlays for  each program, we obtained and analyzed data from HUD’s budget office,  annual budget requests and other budget documents, and audited financial  statements. We also reviewed relevant prior reports from HUD, HUD’s  Office of Inspector General (OIG), the Congressional Budget Office (CBO),  and the Congressional Research Service (CRS). Because HUD’s budget  office was not able to report data on outlays for the voucher and project- based programs separately, we obtained data on rental assistance  payments from HUD’s accounting systems and estimated the amount of  rental assistance payments paid to public housing agencies (PHA) and  property owners under each program from fiscal years 1998 through 2004.  Specifically, from the HUD Central Accounting and Program System  (HUDCAPS), we obtained information on rental assistance payments and  other expenses for the voucher and the Section 8 Mod Rehab program, as  well as for a limited number of contracts for the project-based program.  From HUD’s Program Accounting System (PAS), we obtained similar  information for the remaining project-based Section 8 contracts. In total,  the data we used comprised approximately 3 million payment records. Our  analysis included payment records associated with the voucher and  project-based programs only and did not include payment records for other  HUD rental assistance programs, such as the Section 202 Supportive  Housing for the Elderly and Section 811 Supportive Housing for Persons  with Disabilities programs. We included payment records for certain  administrative expenses, such as fees paid to PHAs for the voucher  program and to Performance-Based Contract Administrators for the  project-based program.
We compared our estimate of outlays for the voucher, project-based, and  Mod Rehab programs and other related expenses (total outlays) with  published totals in HUD’s annual budget requests. Our estimates using  HUDCAPS and PAS were, on average, 0.7 percent less than the totals in  HUD’s annual budget requests. For 1998 and 1999, our estimate of total  outlays varied from the published totals by -1.2 percent and -4.2 percent,  respectively. For 2000 through 2004, our estimates of total outlays were  within 0.4 percent. One reason for the variation between our estimates and  the published totals is that our analysis did not include certain nonrental  assistance activities paid for with Section 8 funds.
In order to assess the reliability of the data from HUDCAPS and PAS, we  reviewed related documentation and interviewed agency officials who  work with these databases. In addition, we performed internal checks to  determine the extent to which the data fields were populated and the  reasonableness of the values contained in the fields. We concluded that the  data were sufficiently reliable for the purposes of this report.
To identify the factors that have affected outlays, we analyzed our reports  and reports by HUD, CBO, CRS, transcripts of congressional committee  hearings, and congressional committee reports. We also obtained and  analyzed data on rental subsidies per household, a key factor affecting  outlays, from two HUD databases—the Public and Indian Housing  Information Center (PIC) for the voucher program and the Tenant Rental  Assistance Certification System (TRACS) for the project-based program.  Using these data, we analyzed trends in unit rents, household incomes, and  household rental payments. In order to assess the reliability of the data  from PIC and TRACS, we reviewed related documentation and interviewed  agency officials who work with these databases. In addition, we performed  internal checks to determine the extent to which the data fields were  populated and the reasonableness of the values contained in the fields. We  concluded that the data were sufficiently reliable for the purposes of this  report.
To assess the impact of different factors on the average rental subsidy cost  per household for the voucher program, we developed a statistical model  using data from HUD and the Census Bureau. Specifically, we obtained  household-level data from PIC on the rental subsidies per household, unit  rents, household incomes, various demographic characteristics, and  geographic information about where households were located. We also  incorporated information from the 2000 Decennial Census and HUD on  neighborhood characteristics at the census tract level. Our model allowed  us to estimate the effect of each variable—market rents, household  incomes, household and neighborhood characteristics, and a measure of  the relationship between the payment standard and HUD’s fair market  rent—on the average rental subsidy per voucher household, while  controlling for other variables. The PIC data for 1998 did not have complete  information for certain fields (such as the fair market rent associated with  an individual household), and consequently, we did not include data for  1998 in our model. Appendix V contains further information on the results  of our statistical analysis.
To address all of the objectives, we interviewed officials from HUD’s  Offices of the Chief Financial Officer, Public and Indian Housing, Housing,  and Policy Development and Research. We also met with CBO and CRS  officials and representatives of various industry and research groups: the  Center for Budget and Policy Priorities, the Council of Large Public  Housing Authorities, the National Leased Housing Association, and the  National Low Income Housing Coalition. We conducted our work in  Washington, D.C., and Chicago, Illinois, from April 2005 through March  2006 in accordance with generally accepted government auditing  standards.
section_title: Information on the Section 8 Moderate Rehabilitation Program
paragraphs: This appendix provides information on the Section 8 Moderate  Rehabilitation (Mod Rehab) program. The Mod Rehab program was  created in 1978 to add to the existing stock of assisted housing. It did this  by providing funding to upgrade a portion of the estimated 2.7 million then- unassisted rental housing units with deficiencies that required a moderate  level of repair, and rental subsidies for low-income households to live in  them. Congress funded no new contracts for the Mod Rehab program after  1989 and repealed the program in 1991.
Under annual contracts with public housing agencies (PHA) that  administer the Mod Rehab program, HUD provides the funding for rental  subsidies as well as an administrative fee to the agencies. The  administering agencies, in turn, enter into contracts with property owners.  Under these contracts, property owners rehabilitate their housing units to  meet HUD’s standards for housing quality by completing repairs costing at  least $1,000 and make the rehabilitated units available to eligible  households. In exchange, PHAs screen applicants for eligibility and pay the  difference between the approved contract rent and the household’s portion  of the rent. The Mod Rehab has features that are common to both the  project-based and voucher programs. For example, similar to the voucher  program, the Mod Rehab program is administered by PHAs and was  intended to utilize the existing stock of privately owned rental housing.  However, Mod Rehab is fundamentally a project-based program because  the rental subsidy is tied to a specific unit, not the household.
During the 11 years that Congress funded new contracts under the Mod  Rehab program, the term for the Section 8 contracts was 15 years. When  the oldest of these contracts began to expire in 1995 and 1996, HUD  instructed PHAs to replace them with vouchers. Since fiscal year 1997,  however, HUD has renewed expiring contracts on an annual basis if the  owners opt to do so and the properties consist of more than four rental  units.
As shown in table 3, the Mod Rehab program has undergone significant  reductions in the number of units—from 71,659 in 1998 to 34,141 in 2004, a  decline of about 52 percent. As with project-based Section 8, owners of  Mod Rehab properties can choose to leave the program upon contract  expiration, and in these cases, eligible households can receive enhanced  vouchers.
Data on budget authority for the Mod Rehab program were not available  separately. From 1998 through 2004, HUD received budget authority for the  Mod Rehab program as part of the overall appropriations for Section 8 in  the Housing Certificate Fund account. Starting in its 2006 budget request,  HUD included renewal funding for the Mod Rehab program in its Project- Based Rental Assistance budgetary account. Similarly, data on Mod Rehab  outlays were not available. However, as we did for the voucher and project- based programs, we estimated Mod Rehab outlays using data from HUD’s  accounting systems. As table 4 shows, from 1998 through 2004, estimated  Mod Rehab outlays decreased by over 50 percent, from $472 million to $246  million. The decrease in outlays was due to significant reductions in the  number of units assisted under the program.
section_title: Description of the Section 8 Rental Housing Assistance Programs
paragraphs: Federal rental housing assistance, which began with the enactment of the  U.S. Housing Act of 1937, includes subsidies to construct new affordable  housing and to make rents affordable in existing rental housing. From 1937  through 1974, the emphasis was almost exclusively on new construction.  Questions about the cost-effectiveness of new construction led Congress to  explore options for using existing housing to shelter low-income families.  In 1974, it added Section 8 to the U.S. Housing Act of 1937 and created the  Existing Housing Certificate program, the first major program to rely on  existing privately owned rental housing and to provide tenant-based, rather  than project-based, assistance. Another type of Section 8 assistance, the  voucher program, started as a demonstration program in 1983, was made  permanent in 1988, and operated simultaneously with the certificate  program until 1998.  At that time, the two programs were consolidated into  the Housing Choice Voucher program, which combined features of both  earlier programs. This program is now the largest federal housing  assistance program. Table 5 summarizes the Section 8 rental housing  assistance programs, including their authorization date and current status.
section_title: Data on Budgetary Costs for the Voucher and Project-Based Programs
paragraphs: This appendix provides detailed data on total available budget authority  and outlays for the Section 8 programs.  Since we are evaluating budget  trends over a 7-year period, we present the budgetary data in both nominal  (current) and inflation-adjusted dollars. We use the gross domestic product  (GDP) index to adjust for inflation and 2004 as the reference year.
section_title: Description of the Econometric Analysis of Rental Subsidy Costs per Household for the Voucher Program
paragraphs: This appendix provides an overview of the econometric analysis we used to  investigate trends in Section 8 rental subsidies per household (housing  assistance payments, or HAP) between 1999 and 2004 for the voucher  program. These subsidies, which make up the difference between  households’ payments (usually 30 percent of adjusted income) and the  actual unit rent, are limited by the payment standards set by local public  housing agencies. PHAs set these payment standards based in part on fair  market rents (FMR) that the Department of Housing and Urban  Development (HUD) establishes for individual housing markets, generally  at the 40th percentile (in some cases 50th percentile) of the distribution of  rents. Raising the payment standard relative to the FMR can provide  assisted households with a wider choice of housing, but renting more  expensive units raises both the cost of the subsidies and thus of the Section  8 programs.
Because of the potential influence on program costs, we wanted to  investigate the role of HUD and PHA policies in setting payment standards.  Since 1998, PHAs have had more leeway than they did previously to  increase (or decrease) payment standards relative to the FMR. According  to HUD, this authority has been exercised too generously and is a major  cause of the recent increase in HAPs.
subsections: section_title: Model and Data
paragraphs: We developed a pooled cross-section time-series model explaining monthly  HAPs as depending on a variety of housing market, program, and  household characteristics. The results and descriptive statistics are based  on a 10 percent sample of voucher (and certificate) household records  obtained from HUD’s Public and Indian Housing Information Center files.  These files provide snapshots of the program as of the end of each calendar  year from 1998 through 2004 and provide information on HAPs, gross rents,  FMRs, and payment standards as well as household income and other  characteristics. The information in a file on a particular assisted household  is current as of a point in time—for instance, the date of a program action,  usually the date of an annual recertification for program eligibility. HUD’s  Office of Policy Development and Research worked with the underlying  administrative files to (1) correct various coding errors and  inconsistencies, (2) identify the census tract of each household based on  tenants’ addresses, and (3) add information of analytical interest that was not necessarily required for program administration. The date of  admission to the program and the date of the program action were used to  measure how long the household had been in the program, and other fields  were used to indicate any change in the household’s rental unit and  whether the household left the program. We used information on the  household’s census tract to identify neighborhood characteristics. We also  used the census tract information to develop an indicator of neighborhood  quality by determining whether the voucher household’s census tract was a  HUD-designated qualifying census tract (QCT).
We excluded observations with extreme or missing values for key  variables, and we excluded duplicate observations in the latest record and  the record from the previous year. We also excluded households that  appeared to have entered or left the program more than once.
We placed each household in one of four categories, based on demographic  and labor market characteristics: single female-headed households with  children (nonelderly, nondisabled), elderly (including elderly disabled),  nonelderly disabled, and all other. Because groups could face different  housing and labor market conditions and the variables in our model could  have different effects on the level of HAP in each group, we estimated the  same model separately for each of the four categories. For instance,  disabled households are typically smaller than other households but may  require housing with features not commonly available in the general rental  stock. Families with children may be larger than other families, and thus  require larger units, and may also experience changes in labor market  incomes.
The purpose of the model is to explain monthly HAPs using an estimating  equation that is based on a variety of household, housing, neighborhood,  and policy factors. HAPs range from close to zero to the thousands of  dollars, with variations in each cross section and over time. In the model,  HAPs are explained by the general level of market rents, tenant incomes, a  measure of neighborhood quality, time period, and a measure of PHA  payment standard policy. We also included in our model a series of  explanatory dummy variables for household size, duration in program,  termination and moves, and metropolitan areas. All dollar amounts (e.g.,  HAP, market rents, adjusted income) are expressed in 2004:Q4 terms using  the price index for Personal Consumption Expenditures from the Bureau of  Economic Analysis.
Because gross rents are important in defining the level of HAPs, we control  for the general level of market rents in order to examine the effects of other  variables. We use the FMR for this purpose because it provides  considerable variation within cross sections and across time. The level of  income is also important in determining the level of HAPs, and we used  adjusted income as reported in the file. This choice is potentially  problematic, as the level of HAPs may influence income by encouraging  program participants to seek work or not. However, this problem is  somewhat mitigated by the fact that adjusted income is a predetermined  rather than an actual amount. Specifically, the adjusted income reported in  the file is the PHA’s projection of a household’s income in the upcoming  year based on income information from the previous year, taking into  account expected changes in hours, wages, and labor force status. Finally,  the file did not include information concerning household characteristics,  such as occupation, education, and experience, that would help explain  variations in assistance payments at the individual household level.
The policy variable of interest relates to the way PHAs set payment  standards (relative to the FMR). We define a ratio variable to measure this  policy by calculating the average payment standard and average FMR by  year and bedroom size for each PHA and then calculate the ratio (1 = 100)  of the year-specific, PHA-specific payment standard to the FMR. Missing  payment standard information were set equal to the FMR for a value of  100. (To limit the effects of outliers, we excluded from the analysis those  households with payment standard ratios of less than 75 and more than  120.)  The baseline specification uses the year-specific, PHA-specific  payment standard to FMR ratio as a continuous variable (also truncated at  75 and 120).
Neighborhood quality is measured in two ways, both of them based on the  household’s census tract. Our base specifications use HUD-designated  QCTs, which are in less desirable neighborhoods than other tracts. Thus  rents and HAPs should be lower in those neighborhoods, given that the  market rent variable distinguishes higher-rent markets from lower-rent  markets.
Because the same households are in the data set for many years, up to as  many as six times, the error terms are not likely to be independent from  each other to the extent that unobserved characteristics may make the  error terms for each household correlated with each other. However, to the  extent that this presents a problem with the confidence intervals around a  coefficient estimate (rather than a point) estimate, we believe that this is  mitigated to a large extent by the large sample sizes used in the estimation.  Table 11 shows the mean values of the variables included in our statistical  model for the whole period from 1999 through 2004.
section_title: Results
paragraphs: The results of our regressions are reported in table 12. Unless reported  separately in parentheses, all P-values are less than 0.0001.
In general, the results are consistent with our general expectations. For  example,   HAPs increase with market rent levels and decrease with adjusted  incomes.
Households in less desirable neighborhoods, as measured by the QCT  variable, are about $20 to $30 per month less ($240 to $360 annually),  depending on the group.
Smaller households receive smaller HAPs, and those in the program  longer receive smaller HAPs.
Those that ultimately leave the program receive smaller HAPs, in some  cases because incomes may have increased to the point that the  households are no longer eligible.
Households that move to a new unit tend to receive higher HAPs.
HAPs increase as the payment standard increases relative to the FMR.
The time period dummy variables used in our model suggest that, at least  for households that are neither elderly nor disabled, HAPs were  approximately $40 to $50 per month ($480 to $600 annually) higher in 2004  than in 1999, even after controlling for changes in market rent levels and  payment standards.
To present the results in terms of trends, we focused on those variables for  which the average values changed significantly over the time period. Table  13 presents averages of selected variables—HAP, market rents, adjusted  income, and payment standard ratio—for the largest group (single female- headed households with children).
section_title: Trends in Rents and Household Payments for the Voucher and Project-Based Programs
paragraphs: The rental subsidy per household of both Section 8 programs is the  difference between a household’s payment and the lesser of either the  payment standard or the unit’s gross rent. Trends in rents and household  payments, therefore, drive changes in the rental subsidy per household. For  the voucher program, average rents grew by 35 percent from 1998 through  2004 (fig. 12). The average annual increase in voucher rents was 5 percent  during this period, ranging from a low of 3 percent in 2004 to 8 percent in  2002. Average project-based rents grew by 12 percent over this period, an  average annual rate of 2 percent. Rents in the voucher program grew  almost three times faster than those in the project-based program (35  percent versus 12 percent) over this period. A major reason for this  difference is that voucher rents are determined by the private market,  while project-based rents are adjusted annually using a HUD-determined  operating cost factor.
Annual increases in household payments did not keep pace with the  increases in voucher rents. Specifically, the average household payment by  voucher households rose by 24 percent over this period and grew at an  average annual rate of 4 percent (fig. 13). The disparity in the rates of  increase between rents and household payments accelerated the growth in  the average per household subsidy for vouchers. In contrast, the annual  rate of increase in the average project-based rent was similar to that of  household payments. As a result, growth in the average per household  subsidy kept pace with rents and household payments in the project-based  program.
subsections: section_title: Annual Increases in Voucher Rents and Fair Market Rents Were Similar
paragraphs: Although the average voucher rent grew dramatically from 1998 through  2004, our analysis found that this increase was consistent with the growth  in the average fair market rent. Fair market rents, which HUD sets for each  locality, reflect the cost of modest, standard-quality housing. We created a  fair market rent index, weighted by the proportion of voucher households  in each locality, and compared it to the average rent for vouchers, which  was similarly weighted, in order to assess the change in the average rent for  vouchers over time. From 1999 through 2004 (the only years for which  complete data on fair market rents and voucher holders were available),  the average rent in the voucher program grew by 27 percent, while the  average fair market rent grew by 23 percent (fig. 14). Starting in 2003, the  average voucher rent increased at a faster rate than the average fair market  rent—5 percent versus 4 percent, respectively, in 2003, and 3 percent  versus 1 percent, respectively, in 2004—thus narrowing the gap between  them.
A major reason for the trend in the growth in the average voucher rent was  PHAs’ authority to set their payment standard above the applicable fair  market rent. As previously noted, each PHA sets a local payment standard  up to 110 percent of the fair market rent for their area. The average  payment standard as a percentage of the fair market rent has steadily  increased, from about 96 percent in 1999 to 103 percent in 2004.  Accordingly, the average voucher rent as a percentage of the fair market  rent also increased, from about 94 percent in 1999 to 97 percent in 2004.
section_title: Comments from the Department of Housing and Urban Development
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Steve Westley, Assistant Director;  Stephen Brown; Emily Chalmers; Mark Egger; Daniel Garcia-Diaz; John T.  McGrail; Marc W. Molino; Rose Schuville; and William Sparling made key  contributions to this report.