Elderly Housing: Project Funding and Other Factors Delay Assistance to Needy Households
Published: 2003-06-17T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2001, an estimated 2 million elderly households with very low incomes (50 percent or less of area median income) did not receive housing assistance. The Department of Housing and Urban Development (HUD) considered most of these households to be "rent burdened" because they spent more than 30 percent of their incomes on rent. The Section 202 Supportive Housing for the Elderly Program provides capital advances (grants) to nonprofit organizations to develop affordable rental housing exclusively for these households. Based on a report issued in May 2003, this testimony discusses the role of the Section 202 program in addressing the need for affordable elderly housing and factors affecting the timeliness of approving and constructing new projects.
section_title: What GAO Found
paragraphs: As the only federal housing program that targets all of its rental units to very low-income elderly households, HUD's Section 202 program provides a valuable housing resource for these households. Although they represent a small share of all elderly households, very low income elderly renters have acute housing affordability problems because of their limited incomes and need for supportive services. The Section 202 program offers about 260,000 rental units nationwide and ensures that residents receive rental assistance and access to services that promote independent living. However, even with the program's exclusive focus, Section 202 has only reached an estimated 8 percent of very low-income elderly households. More than 70 percent of Section 202 projects in GAO's analysis did not meet HUD's time guideline for gaining approval to start construction. These delays held up the delivery of housing assistance to needy elderly households by nearly a year compared with projects that met HUD's guideline. Several factors contributed to these delays, particularly capital advances that were not sufficient to cover development costs. Project sponsors reported that because of insufficient capital advances, they often had to spend time seeking additional funds from HUD and other sources. Although HUD's policy is to provide sufficient funding to cover the cost of constructing a modestly designed project, HUD has acknowledged that its capital advances for the Section 202 program sometimes fall short. Other factors affecting the timeliness of the approval process include inadequate training and guidance for field staff responsible for the approval process, inexperienced project sponsors, and local zoning and permit requirements.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss the Department of  Housing and Urban Development’s (HUD’s) Section 202 Supportive  Housing for the Elderly Program. The Section 202 program provides funds  to nonprofit organizations to develop affordable rental housing exclusively  for very low income elderly households that do not receive other forms of  housing assistance. In 2001, there were an estimated 2 million such  households in the nation, most of which HUD considered “rent burdened”  because their rents exceeded 30 percent of their household incomes.
Section 202 provides two types of financial support. First, HUD provides a  project sponsor with a capital advance—essentially a grant—to cover land  and construction costs. HUD’s policy is to have the capital advance cover  the total development costs of the project, which must be of modest  design and must comply with HUD’s minimum property standards. HUD  uses a competitive process to select projects for funding and has  guidelines calling for project sponsors and the agency’s field offices to  accomplish project processing activities—such as completing and  approving design plans—within 18 months so that construction may  commence. (HUD’s field offices may grant extensions of up to 6 months  without headquarters’ approval.) Second, after the project is completed,  HUD provides the sponsor with monthly rental assistance payments to  defray some of the operating expenses. For fiscal year 2002, Congress  appropriated about $783 million for the Section 202 program to fund the  construction of over 6,000 new units, multiyear rental assistance contracts,  and other authorized activities.
My statement today is based on the report on the Section 202 program that  you requested and are releasing today. Specifically, my statement  discusses: (1) the role of the Section 202 program in meeting the housing  needs of elderly renter households with very low incomes, (2) the extent  to which Section 202 projects meet HUD’s time guideline for approving  projects to start construction, and (3) the factors that keep Section 202  projects from meeting the time guideline. In preparing the report, we  analyzed data from HUD and other sources on the housing needs of very  low income elderly households. In addition, we reviewed HUD program  and budget data, surveyed all 45 HUD field offices that process Section 202  projects, and surveyed and interviewed project sponsors and consultants  experienced in working with the Section 202 program. Our analysis  focused on Section 202 projects funded between fiscal years 1998 and  2000.
As the only federal housing program that targets all of its rental units to  very low income elderly households, Section 202 is an important source of  affordable housing for these households. Section 202 insulates tenants in  housing units subsidized by the program from increases in housing costs  by limiting their rents to 30 percent of household income. As of 2001, the  program provided housing for an estimated one-fifth of the 1.3 million  elderly renter households with very low incomes that received some form  of government housing assistance. However, nationwide about 1.7 million  elderly renter households with very low incomes did not receive  government housing assistance and had a housing affordability problem— that is, they paid over 30 percent of their incomes for rent. Even with the  program’s exclusive focus, Section 202 has only reached an estimated 8  percent of very low income elderly renter households.
More than 70 percent of Section 202 projects funded between 1998 and  2000 were delayed—that is, they took longer than the 18 months set out in  HUD’s guidelines to proceed from the date of the funding award to the  date of HUD’s approval to start construction (the project processing  period). However, a majority of projects were approved for construction  within 24 months, or 18 months plus the 6-month discretionary extension.  Projects located in metropolitan areas were more likely than projects in  nonmetropolitan areas to exceed the 18-month guideline. Further, projects  that exceeded the 18-month guideline ultimately took an average of 11  months longer to finish than projects that met the time guideline, and  these delayed projects contributed to the program’s unexpended fund  balances. At the end of fiscal year 2002, 14 percent of the Section 202  program’s $5.2 billion in unexpended appropriations was associated with  projects that had not yet been approved for start of construction after 18  months.
Several factors impeded the timely processing of projects, according to  project sponsors, consultants, and HUD field office staff. First, despite  HUD’s intent, capital advances have not always covered the cost of  developing projects, and the resulting shortfalls often prolonged  processing times, in part because sponsors needed to seek additional  funding. Second, field office staff’s inconsistent implementation of  procedures intended to streamline processing, as well as limited training  and out-of-date guidance on processing policies and procedures, impeded  timely processing. Third, HUD’s project monitoring system has limitations  that may have hindered HUD’s ability to oversee project timeliness.  Finally, other factors—including inexperienced sponsors and local permit  and zoning requirements—prolonged processing time for some projects.
Based on our findings, we recommended that HUD evaluate the  effectiveness of the current methods for calculating capital advances and  make any changes necessary to ensure that capital advances adequately  cover development costs. We made three additional recommendations— concerning HUD’s training of field office staff, handbook guidance, and  data systems—directed at more timely processing of projects. In  commenting on the report, HUD agreed with the recommendations.
subsections: section_title: Background
paragraphs: HUD defines elderly households as those in which the householder—the  person whose name is on the lease, mortgage, or deed—or the  householder’s spouse is at least 62 years old. Elderly households occupied  about one-quarter (26 million) of the approximately 106 million housing  units in the United States in 2001, according to the American Housing  Survey. A large majority of these elderly households were homeowners. A  small share of elderly households, about 19 percent or 5 million, rented  their homes (compared to about 36 percent of nonelderly households),  and about 3.3 million of these elderly households were renters with very  low incomes—that is, 50 percent or less of area median income.
The Housing Act of 1959 (P.L. 86-372) established the Section 202 program,  which began as a direct loan program that provided below-market interest  rate loans to private nonprofit developers, among others, to build rental  housing for the elderly and people with disabilities. In 1990, the Cranston- Gonzalez National Affordable Housing Act (P.L. 101-625) modified Section  202 by converting it from a direct loan program to a capital advance  program.
In its current form, Section 202 provides capital advances—effectively  grants—to private nonprofit organizations (usually referred to as sponsors  or owners) to pay for the costs of developing elderly rental housing. As  long as rents on the units remain within the program’s guidelines for at  least 40 years, the sponsor does not have to pay back the capital advance.  HUD calculates capital advances in accordance with development cost  limits that it determines annually, and HUD’s policy is that these limits  should cover the reasonable and necessary costs of developing a project of  modest design that complies with HUD’s project design and cost standards  as well as meets applicable state and local housing and building codes.
To be eligible to receive Section 202 housing assistance, households must  have very low income and one member who is at least 62 years old.  Section 202 tenants generally pay 30 percent of their income for rent.  Because their rental payments are not sufficient to cover the property’s  operating costs, the project sponsor receives rental assistance payments  from HUD to cover the difference between the property’s operating  expenses (as approved by HUD) and total tenant rental receipts. In  addition, the project sponsor can make appropriate supportive services,  such as housekeeping and transportation, available to these elderly  households.
From year to year, Section 202 has carried significant balances of  unexpended appropriated dollars for capital advances and rental  assistance payments. In fiscal year 2002, the unexpended balance for  Section 202 was approximately $5.2 billion. About 41 percent of this  balance was in capital advance funds and 59 percent was in rental  assistance funds. Some of these unexpended funds have not yet been  awarded to projects, and others are for projects that have not begun  construction. Once construction begins, funds are expended over several  years during the construction phase and during the term of the rental  assistance contracts.
Other federal programs can provide housing assistance to needy elderly  households, albeit not exclusively. For example, low income housing tax  credits and tax-exempt multifamily housing bonds provide federal tax  incentives for private investment and are often used in conjunction with  other federal and state subsidies in the production of new and  rehabilitated rental housing. The Housing Choice Voucher Program  supplements tenants’ rental payments in privately owned, moderately  priced apartments chosen by the tenants. Currently, about 260,000 of the  approximately 1.5 million voucher households are elderly. Other programs  are discussed in an appendix to the report.
section_title: Section 202 Is an Important Source of Housing for Elderly Households with Very Low Incomes
paragraphs: Section 202 is the only federal housing program that targets all of its rental  units to very low income elderly households. Because these households  often have difficulty affording market rents, program funding is directed to  localities based in part on their proportions of elderly renter households  that have a housing affordability problem. Section 202 insulates tenants in  housing units subsidized by the program from increases in housing costs  by limiting rents to a fixed percentage of household income. The program  is a significant source of new and affordable housing for very low income  elderly households. Even with the program’s exclusive focus on the very  low income elderly, Section 202 has reached only a small share of eligible  households.
subsections: section_title: Section 202 Targets Very Low Income Elderly Households and Makes Supportive Services Available
paragraphs: Congress specifically intended the Section 202 program to serve very low  income elderly households and to expand the supply of affordable housing  that can accommodate the special needs of this group. HUD takes into  account the need for the kind of housing Section 202 provides when  allocating program funds to the field offices. The criteria for allocating  funds to the field offices include, among other things, the total number of  very low income elderly renters in the area and the number in this group  that pay more than 30 percent of their incomes for rent. According to the  American Housing Survey, in 2001 about 1.7 of the 3.3 million elderly  renters with very low incomes paid over 30 percent of their incomes for  rent.
The rent that tenants in Section 202 housing pay equals a percentage of  their household incomes—generally 30 percent. This percentage remains  constant, so the amount of rent tenants pay increases only when  household income rises, protecting them from rent increases that might be  imposed by the private housing market when market conditions change. In  contrast, very low income elderly renter households that do not receive  this type of assistance are vulnerable to high rent burdens and increases in  market rents. Most of these households have few or no financial  resources, such as cash savings and other investments, and rely primarily  on fixed incomes that may not increase at the same rate as market rents.
Section 202 serves another important function, potentially allowing elderly  households to live independently longer by offering tenants a range of  services that support independent living—for example, meal services,  housekeeping, personal assistance, and transportation. HUD ensures that  sponsors have the managerial capacity to assess tenants’ needs,  coordinate the provision of supportive services, and seek new sources of  assistance. HUD pays a small portion of the costs of providing these  services through its rental assistance payments.
section_title: Section 202 Provides an Estimated One-Fifth of All Government-Subsidized Housing for Very Low Income Elderly Renters
paragraphs: According to the American Housing Survey, in 2001 about 1.3 million, or 40  percent, of elderly renter households with very low incomes received  some form of rental assistance from a government housing program,  including Section 202. According to our analysis of HUD program data,  about 260,000 Section 202 units with rental assistance generally served  very low income elderly households in 2001. Taken together, these two  sources of data suggest that Section 202 served around one-fifth of the 1.3  million assisted elderly households identified in the American Housing  Survey.
While Section 202 is an important source of affordable elderly housing, the  program has reached a relatively small fraction of very low income elderly  renter households. Between 1985 and 2001, Section 202 reached no more  than about 8 percent of elderly households eligible for assistance under  the program. Also, during this period, many of the elderly renter  households with very low incomes—ranging from about 45 to 50  percent—had housing affordability problems. Other federal programs that  develop rental housing generally target different income levels, serve other  populations in addition to the elderly (including families with children and  people with disabilities) and do not require housing providers to offer  supportive services for the elderly.
section_title: Section 202 Projects Generally Did Not Meet Guidelines for Timeliness
paragraphs: Most of the Section 202 projects funded between fiscal years 1998 and  2000 did not meet HUD’s guideline for approving the start of construction  within 18 months. However, a slight majority of the projects were  processed and approved to start construction within 24 months.  Timeliness varied both across HUD’s field offices and by project location  (metropolitan versus nonmetropolitan areas). As well as taking longer to  complete than other projects and thus delaying benefits to very low  income elderly households, projects that were not approved for  construction after the 18-month time frame increased the Section 202  program’s year-end balances of unexpended appropriations.
subsections: section_title: HUD Took Longer Than 18 Months to Approve Most Projects for Construction
paragraphs: HUD’s guidelines state that within 18 months of the funding award date,  field offices and project sponsors must complete various task before  construction can commence (fig.1). Altogether, 73 percent of the Section  202 projects funded from fiscal years 1998 through 2000 did not meet this  18-month processing time guideline. These projects accounted for 79  percent of the nearly $1.9 billion in funding awarded to projects during this  period. Also during this period, 78 percent of projects located in  metropolitan areas exceeded the 18-month guideline as opposed to 61  percent of projects located in nonmetropolitan areas.
HUD field offices may grant an extension of up to 6 months after the 18- month guideline for projects needing more time to gain approval to start  construction, and many projects were approved within that 6-month time  frame. Of the projects funded from fiscal years 1998 through 2000, HUD  approved 55 percent for construction within 24 months of the funding  award—27 percent within 18 months and 28 percent within 19 to 24  months. The remaining 45 percent of projects took longer than 24 months  to be approved.
We looked at the performance of HUD’s 45 field offices that process  Section 202 projects and found that they had varying degrees of success in  meeting the 18-month guideline. We evaluated their performance by  estimating the percentage of projects approved for construction within 18  months for each field office. Among these offices, the median project  approval rate for construction within 18 months was 22 percent, but their  performance varied widely. Eight field offices had no projects that met the  18-month guideline, while at one office more than 90 percent of projects  met the guideline. Field offices’ performance varied by region, with those  located in the northeast and west being least likely to approve projects  within 18 months of the funding award.
section_title: Delayed Projects Affected the Program’s Production Times and Expenditures
paragraphs: Meeting processing time guidelines is important because most of the  delays in total production time—that is, the time between funding award  and construction completion—stem from the project processing phase.  When we compared the average total production times for completed  projects that did not meet HUD’s 18-month processing guideline and those  that did, the delayed projects took 11 months longer than other projects to  proceed from funding award to construction completion. Since the  average time taken for the construction phase was very similar for all  projects, most of the 11-month difference in total production time was  attributable to the extra 10 months that delayed projects took to complete  the processing phase.
Delayed processing of Section 202 projects also affected the Section 202  program’s overall balances of unexpended appropriations. At the end of  fiscal year 2002, for example, HUD had a total of $5.2 billion in  unexpended Section 202 funds. A relatively small part of these  unexpended funds—about 14 percent—was attributable to projects that  had not yet been approved to start construction and had exceeded HUD’s  18-month processing time guideline. Consequently, none of the funds  reserved for these projects had been expended. By contrast, the remaining  86 percent of unexpended funds were associated with projects for which  HUD was in the process of expending funds for construction or rental  assistance. For example, almost half of the unexpended balances—about  48 percent—resulted from projects that had already been completed but  were still drawing down their rental assistance funds as intended under  the multiyear project rental assistance contract between HUD and the  project sponsor.
section_title: Various Factors Can Delay the Approval of Projects for Construction
paragraphs: Our review of projects funded from fiscal years 1998 through 2000 shows  that several factors impeded Section 202 projects from meeting the 18- month processing time guideline, including insufficient capital advances,  limited training and guidance for HUD field office staff on processing  policies and procedures, and limitations in HUD’s project monitoring  system. Factors external to HUD, such as sponsors’ level of development  experience and requirements established by local governments, also  hindered processing.
subsections: section_title: Insufficient Capital Advances Caused Some Sponsors to Seek Other Funding
paragraphs: Although HUD policy intends for capital advances to fund the cost of  constructing a modestly designed project, capital advances have not  always been sufficient to cover these expenses. HUD field office staff,  project sponsors, and consultants reported that program limits on capital  advances often kept projects from meeting HUD’s time guideline for  approving projects for construction. Most field offices, and every sponsor  and consultant that we surveyed, reported that insufficient capital  advances negatively affected project processing time, and a substantial  majority of respondents indicated that this problem occurred frequently.  Many respondents also reported that securing secondary financing to  supplement the capital advance amount often added to processing time.  According to nearly all sponsors and consultants, the capital advance  amounts set by HUD were frequently inadequate to cover land, labor, and  construction costs as well as fees imposed by local governments. As a  result, sponsors had to seek secondary financing from other federal, state,  and local sources—including other HUD programs—or redesign projects  to cut costs, or both. According to a HUD official, the agency is currently  initiating steps to study the sufficiency of capital advances in covering  project development costs.
section_title: Varying Field Office Practices and Inadequate Staff Training and Guidance Affected Timely Processing
paragraphs: In 1996, to help ensure that field office staff and project sponsors could  complete project processing requirements within the 18-month time  guideline, HUD adopted changes that were intended to streamline  processing procedures. One of the key changes included requiring field  office staff to accept sponsor-provided certifications of architectural  plans, cost estimates, and land appraisals. Previously, field office staff  performed detailed technical reviews of these items.
According to our survey, differences in the procedures field offices used to  approve projects for construction and the lack of staff training and  experience affected project processing time. For example, most  consultants and sponsors in our survey responded that inconsistent  implementation of streamlined processing procedures by field offices  caused delays, as did insufficient training for and inexperience of field  office staff. Some consultants and sponsors whom we interviewed told us  that some field offices continued to conduct much more detailed and time- consuming technical reviews of project plans than HUD’s current policies  require.
HUD has provided limited guidance for field office staff on the current  processing policies and procedures. At the time of our review, most field  office staff had not received any formal training on Section 202 project  processing. According to HUD, in 2002, the agency required  representatives from each field office to attend the first formal training on  project processing for field office staff since at least 1992. Although HUD  headquarters expected those who attended to relay what they had learned  to other staff members in their own offices, our survey showed that by  November 2002 no on-site training had occurred at about a quarter of the  field offices. We also found that HUD’s field office staff was relying on out- of-date program handbooks that did not reflect the streamlined processing  procedures.
section_title: Administrative and Oversight Weaknesses at HUD Headquarters Contributed to Delays
paragraphs: HUD’s project monitoring system was not as effective as it could have  been and may have impeded HUD’s oversight of project processing. HUD  officials told us that headquarters periodically uses its Development  Application Processing (DAP) system to identify projects that have  exceeded the 18-month processing time guideline. In addition,  headquarters contacts field offices on a quarterly basis to discuss the  status of these delayed projects. Nevertheless, HUD officials have  acknowledged that there are data inaccuracies in the DAP system. The  lack of reliable, centralized data on the processing of Section 202 projects  has limited HUD headquarters’ ability to oversee projects’ status,  determine problematic processing stages, and identify field offices that  may need additional assistance. HUD officials indicated that enhancing the  DAP system is a priority, but that a lack of funding has hindered such  efforts.
Finally, other factors outside of HUD’s direct control kept some projects  from meeting the time guideline, according to field office representatives  and sponsors and consultants responding to our survey. Almost all survey  respondents agreed that project processing time was negatively affected  when sponsors were inexperienced in project development. Nearly 60  percent of field offices, and almost 40 percent of sponsors and  consultants, indicated that this problem occurred frequently. A majority of  survey respondents reported that local government permitting and zoning  requirements prolonged project processing, although we found differences  of opinion on whether these problems occurred frequently. Community  opposition and environmental issues were also reported to negatively  affect project processing time, but not frequently.
Mr. Chairman, this concludes my prepared statement. I would be happy to  answer any questions at this time.
section_title: Contacts and Acknowledgments
paragraphs: For further information on this testimony, please contact David G. Wood  at (202) 512-8678 or Paul Schmidt at (312) 220-7681. Individuals making  key contributions to this testimony included Emily Chalmers, Mark Egger,  Daniel Garcia-Diaz, William Sparling, and Julianne Stephens.
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