Rural Housing Service: Overview of Program Issues
Published: 2005-03-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The rural America of 2005 is far different from the rural America of the 1930s, when the federal government first began to provide housing assistance to rural residents. Advances in transportation, computer technology, and telecommunications, along with the spread of suburbia, have linked many rural areas to urban areas. These changes, along with new fiscal and budget realities, raise questions about how Rural Housing Service (RHS) programs could most effectively and efficiently serve rural America.
section_title: What GAO Found
paragraphs: This testimony is based on a report on how RHS determines which areas are eligible for rural housing programs, three reports on RHS's rental assistance budgeting and distribution processes, and a report we are releasing today on internal control issues with RHS's loans and grants databases. GAO found that while RHS has significantly improved the housing stock in rural America and has made progress in addressing problems, several issues prevent the agency from making the best use of resources. Specifically: (1) Statutory requirements for program eligibility, including those related to metropolitan statistical areas (MSA), "grandfathering" communities, and demonstrating a "serious lack of mortgage credit," are of marginal utility. For example, using density measures rather than MSAs might allow RHS to better differentiate urban and rural areas, and phasing out the "grandfathering" of communities could better ensure that RHS makes more consistent eligibility determinations; (2) RHS has consistently overestimated its rental assistance budget needs by using higher inflation rates than recommended by the Office of Management and Budget and incorrectly applying those rates. Also RHS lacked sufficient internal controls to adequately monitor the use of rental assistance funds, particularly for fund transfers and income verifications. RHS has been taking actions that should correct many of the rental assistance shortcomings GAO identified; and (3) GAO found incorrect, incomplete, and inconsistent entries in RHS's loans and grants databases. Until RHS can demonstrate that its system edit functions or other design features can ensure the accuracy of data in its databases, second-party review is necessary to meet internal control standards.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the management of Rural Housing  Service (RHS) programs and our examinations of agency efforts. RHS  makes a significant investment in affordable housing for low-income rural  Americans through a variety of direct and guaranteed loan and grant  programs. RHS manages a single-family and multifamily direct loan  portfolio of about $28 billion, oversees a program that guarantees about $3  billion in single-family mortgages annually, and administers over $500  million in rental assistance payments each year. However, the rural  America of 2005 is different from the rural America of the 1930s, when the  federal government first began to provide housing assistance to rural  residents. Advances in transportation, computer technology, and  telecommunications, along with the spread of suburbia, have linked many  rural to urban areas and blurred distinctions between them. Yet the need  for decent, safe, and affordable low-income housing remains strong in  rural areas. The changing face of rural America, advances in technology  affecting program administration, and new fiscal and budget realities raise  questions about how RHS programs could most effectively and efficiently  serve rural Americans.
Thus, my principle objective today is to present an overview of issues you  may want to consider as you deliberate on how to best improve housing  services for rural Americans.
This statement is primarily based on reports we did for this Subcommittee  as well as for the Ranking Minority Member of the Subcommittee on  Agriculture, Rural Development, and Related Agencies, Senate Committee  on Appropriations: a December 2004 report on how RHS determines which areas are eligible  for rural housing programs; three previous reports on RHS’s rental assistance budgeting and  distribution processes; and   a report we are releasing today addressed to the RHS Administrator that  describes errors in, and internal control issues for, RHS’s loans and grants  databases.
Finally, I will provide a few comments addressing the recently completed  Comprehensive Property Assessment, which RHS initiated in response to  our May 2002 study on long-term needs in the Section 515 multifamily  housing program.
In summary, while RHS has significantly improved the housing stock in  rural America and RHS management has made progress in addressing  problems we have identified in the past, several issues still prevent the  agency from making the best use of its resources.
Statutory requirements for program eligibility may not reflect changes in  rural areas or best determine which areas qualify for RHS housing  programs. Specifically, we found the statutory requirements relating to  metropolitan statistical areas (MSA), the ability to “grandfather” eligibility,  and demonstration of a serious lack of mortgage credit for low- and  moderate-income families to be of marginal utility. Changes to these  requirements, such as using density measures rather than the currently  used MSA criterion, might allow RHS to better differentiate urban and  rural areas. Also, phasing out the “grandfathering” of communities that  experience changes in eligibility because of inclusion in an MSA could  better ensure that RHS more consistently makes eligibility determinations  for rural housing programs. Finally, “lack of credit” does not appear to be  as great a challenge to rural Americans gaining access to affordable  housing as lack of income or the inability to repay loans. RHS already  targets its programs and services, based on income, to areas and  populations of greatest need. As a result, the “lack of credit” requirement  does not appear necessary to appropriately determine program eligibility.
Weaknesses in RHS’s budget estimation and oversight of rental assistance  funds increase the risk that the agency is not efficiently or appropriately  allocating resources. We found that RHS had consistently overestimated  its budget needs for rental assistance contracts in its Section 521 program  by using higher inflation rates than recommended and incorrectly applying  those rates. Using and correctly applying the inflation rates provided by  the Office of Management and Budget  (OMB) would help the agency more  accurately estimate its rental assistance needs. Additionally, RHS lacked  sufficient internal controls to adequately monitor the use of rental  assistance funds, particularly in its funds transfer processes, methodology  for supervisory reviews, and tenant income verification processes.  Establishing centralized guidance on transferring unused rental assistance,  improving sampling methods in the tenant file review process, and  improving processes for verifying tenant information could help ensure  that these funds are being effectively administered and used. Also, making  a statutory change to give RHS access to the Department of Health and  Human Services’ National Directory of New Hires, which provides recent  nationwide data on wages, could help the agency verify tenant income  information. RHS has recently moved on a number of fronts to correct the  many rental assistance program shortcomings identified in our reports.  While it is too early for us to fully review the impact of these changes, we  believe that changes in how rental assistance budgets are estimated and  the application or strengthening of internal controls, consistent with our  recommendations, would result in greater efficiency and resource savings  in this pivotal program.
Although RHS has worked to improve its management information  systems, we found incorrect, incomplete, and inconsistent entries in its  loans and grants databases, and the system “edit” functions do not appear  to flag or correct these errors. Further, RHS does not have a process to  review these databases for accuracy. Additional internal control measures  could ensure more accurate data entry and reporting, particularly at the  field office level, and such an effort could ensure that RHS’ investment in  system upgrades would provide more meaningful and useful information  to the agency itself, Congress, and the public.
RHS recently contracted for a study called the Comprehensive Property  Assessment. The study was done to develop a baseline for assessing the  portfolio’s physical and financial condition. Its principal findings—that  RHS’s multifamily housing portfolio is aging rapidly and property reserves  and cash flows do not appear sufficient for basic maintenance or long- term rehabilitation needs—are consistent with our work in the area. The  study concludes that leveraging market-based solutions with traditional  approaches would provide a more cost-effective alternative to using only  federal dollars. It also concludes that while the solutions proposed will  cost more than current budget levels, delaying actions to address the  physical, fiscal, and market issues documented in the study could result in  even greater budget needs in the future.
subsections: section_title: Background
paragraphs: The Housing Act of 1949 authorized new rural lending programs to  farmers, which were administered by RHS’s predecessor, the Farmers  Home Administration, within the U.S. Department of Agriculture (USDA).  RHS now facilitates homeownership, develops rental housing, and  promotes community development through loan and grant programs in  rural communities. Over the decades, Congress changed the requirements  for rural housing eligibility—for example, by changing population limits— and rural housing programs have evolved to serve low- and moderate- income people of all occupations. The current definition of rural considers  factors such as whether an area is contained in an MSA, is “rural in  character,” and “has a serious lack of mortgage credit for lower- and  moderate-income families.”
RHS’s Section 521 Rental Assistance Program is the agency’s largest   line-item appropriation, with an annual budget of more than $500 million.  The program provides rental subsidies for approximately 250,000 tenants  who pay no more than 30 percent of their income for rent (RHS pays the  balance to the property owner). The units in which the tenants live are  created through RHS’s Section 515 Multifamily Direct Rural Rental  Housing Loans and Section 514 Multifamily Housing Farm Labor Loans  programs. The Section 515 and 514 programs provide developers loans  subsidized with interest rates as low as 1 percent to help build affordable  rental housing for rural residents and farm workers.
section_title: Some Eligibility Requirements for RHS Programs Can Result in Similar Areas Receiving Dissimilar Treatment
paragraphs: RHS staff determine which areas are eligible for RHS housing programs by  interpreting statutory requirements and agency guidance; however, their  determinations involve judgment and may be open to question.  Additionally, some eligibility requirements often result in areas with  similar characteristics receiving different designations. For example, the  requirement that an eligible area cannot be part of an MSA often results in  ineligibility for what appears to be a rural area. Also, the “lack of credit” in  rural areas remains an eligibility requirement, even though USDA has  reported that a lack of income and ability to pay the mortgage appear to be  the greater problems than a lack of credit for rural Americans.
subsections: section_title: While Statute and Guidance Help RHS Staff, Determinations of Eligibility Require Judgment and Can Be Problematic
paragraphs: Section 520 of the Housing Act of 1949, as amended, defines rural for most  RHS housing programs. Using the statute and instructions promulgated by  the national office, state and local (together, field) offices determine the  boundaries to delineate eligible areas from ineligible areas—a task field  office officials acknowledged is time-consuming, based on judgment, and  can be problematic. The statutory definition generally identifies eligible  rural areas as those with populations up to 20,000 and defines “rural” and  “rural areas” as any open country or any place, town, village, or city that is  not part of or associated with an urban area.
Specifically, there are several population levels at which communities may  be determined eligible, but as a community’s population increases, the  statute imposes additional requirements that include being “rural in  character” (a concept that is not defined in the statute), having a serious  lack of mortgage credit, or not being located within an MSA. Certain  communities with populations above 10,000 but not exceeding 25,000 may  be “grandfathered in,” based on prior eligibility if they still met the “rural  in character” and “lack of credit” criteria. USDA’s instructions give its field  offices flexibility in implementing the statute. Field office officials said  that drawing the eligibility boundaries required an element of judgment  because “rural in character” is open to interpretation—even with the  overall national guidance on the statute and review of census populations,  MSA standards, maps, aerial photographs, and visits to communities.
Even when local supervisors fully understand the local conditions and  rural character of an area, finding a way to equitably decide on a boundary  is sometimes problematic. For instance, field staff in Maryland told us that  in response to December 2002 national guidance, they stopped using  natural features such as rivers or mountains as eligibility boundaries for  communities. Maryland now uses only roads. Figure 1 shows a new  boundary, a road that divides the eligible area on the left from the  ineligible area on the right. RHS local office officials told us that the “road  only” criteria forced them to find the nearest public road to a populated  section of Hagerstown, which happens to go through farmland. The result  is that apparently similar rural areas received different designations.
Figure 2 shows an area in Brookside, Ohio, where the city line divides the  eligible from the ineligible area. The Maryland example illustrates that  using the only physical boundary available resulted in one piece of  farmland receiving a rural designation and the other not. The Brookside  example shows that using a political boundary also did not necessarily  result in a readily discernible urban-rural difference.
section_title: Eligibility Interpretations of Associations with Urban Areas May Be Questionable
paragraphs: Our analysis of RHS eligible areas nationwide, compared with census data,  found approximately 1,300 examples where communities with populations  at or below 10,000 were within or contiguous with urban areas that had  populations of 50,000 or more. The statute states that eligible communities  cannot be a part of or associated with an urban area. Some field staff  determinations of eligibility in these cases might be questionable as some  of these communities, despite their low populations, might not be  considered rural, and thus, eligible.
For example, field staff told us that Belpre, Ohio, is eligible for RHS  programs because it meets both the population and “rural in character”  requirements. However, Belpre is contiguous with Parkersburg, West  Virginia, which has a population of more than 33,000 (see fig. 3). In  addition, the 2000 census considers Belpre, along with Parkersburg and  Vienna, West Virginia, as part of an urbanized area because its total  population exceeds 50,000. Although it is across the Ohio River from  Parkersburg, bridges have connected Belpre and Parkersburg for decades  and, according to a Belpre city employee, many people from Belpre work  in Parkersburg. Furthermore, most of Belpre has a population density of  1,000 people or more per square mile, which the Census Bureau considers  “densely settled” and a measure of urbanization. For these reasons, it is  unclear whether Belpre meets the eligibility requirements.
section_title: Changing Some Eligibility Requirements Could Better Delineate Boundaries for Urban-Rural Areas and Address Inconsistent Treatment of Similar Communities
paragraphs: Changes to the way eligibility is defined might allow RHS to better  designate “rural” areas and treat communities with similar characteristics  more consistently. For instance, eliminating the MSA requirement and  “grandfathering” might help RHS better serve its clients. To illustrate, we  found rural communities with populations exceeding 10,000 that were  directly impacted by the MSA and “grandfather” restrictions. Because  MSAs are county-based and may contain both urban and rural areas, the  MSA restriction and the grandfathering of certain communities resulted in  some communities being eligible while others with similar demographic  profiles were ineligible.
We looked at two communities within the Bakersfield, California, MSA,  which is basically rural outside the environs of Bakersfield (see fig. 4).  Lamont was grandfathered because it lost eligibility when its population  went above 10,000 at the 1980 census. Taft’s population was already over  10,000 prior to the 1980 census, so Taft was not eligible for grandfathering.  The right side of the figure shows what would happen if MSAs and  grandfathered eligibility were removed from the equation and a density- based system such as the Census Bureau’s urbanized areas/urban clusters  were used to indicate changes in population. Taft would be in its own  urban cluster outside of the Bakersfield urbanized area, which happens to  include Lamont. Based on our visit, we believe this scenario, where the  more rural community would be the one eligible, is more in line with the  overall purpose of the legislation than the current situation.
In another example, by eliminating the MSA criterion, RHS could review  the eligibility of Washington Court House and Circleville, Ohio, based on  population and rural character criteria. Additionally, using density-based  mapping could help RHS draw boundaries around these communities,  which although Census-designated as “urban clusters,” still meet rural  housing program population requirements (see fig. 5).
section_title: “Lack of Credit” Requirement Does Not Appear Central to Determining Eligibility
paragraphs: The statute imposes a requirement to demonstrate a serious lack of  mortgage credit for lower- and moderate-income families in communities  with populations of 10,001 to 25,000. RHS has a policy stating that a  serious lack of mortgage credit at rates and terms comparable with those  offered by the agency exists in all rural areas. However, a study by USDA’s  Economic Research Service concluded that credit problems in rural areas  are primarily limited to sparsely populated or remote rural areas; such  communities generally do not fall into the population range specified  above. Many of the RHS officials and industry experts with whom we  spoke also saw the primary “credit” problem as lack of income rather than  lack of credit.
Additionally, eligibility requirements for RHS programs are based on  income levels. The agency uses funding set asides, funding allocations,  application reviews, and state-level strategic plans to determine areas and  populations of greatest need. As a result, RHS program activity already is  focused on income issues, and given RHS’s blanket policy, the “lack of  credit” requirement is not central to determining participant eligibility.
section_title: Opportunities to Improve RHS Rental Assistance Budgeting and Allocation Processes Exist
paragraphs: We reported that weaknesses in RHS’s budget estimation and oversight of  rental assistance funds had resulted in largely overestimated budget levels  and increased the risk that the agency was not efficiently or appropriately  budgeting and allocating resources. Additionally, RHS lacked sufficient  internal control to adequately monitor the disbursement of rental  assistance funds.
subsections: section_title: RHS Overestimated Budgets for Section 521 Program
paragraphs: In March 2004, we reported that since 1990, RHS had consistently  overestimated its budget needs for the rental assistance program. Concern  had arisen about this issue because in early 2003 RHS reported hundreds  of millions of dollars in unexpended balances tied to its rental assistance  contracts. Specifically, in estimating needs for its rental assistance  contracts, RHS used higher inflation factors than recommended, did not  apply the inflation rates correctly to each year of the contract, and based  estimates of future spending on recent high usage rather than average  rates.
First, the agency used inflation factors that were higher than those  recommended by OMB for use in the budget process. Second, RHS did not  apply its inflation rate separately to each year of a 5-year contract, but  instead compounded the rate to reflect the price level in the fifth year and  applied that rate to each contract year. The result was an inflation rate that  was more than five times the rate for the first year. For example, using  these two methods, RHS overestimated its 2003 budget needs by $51  million or 6.5 percent. Third, RHS based its estimates of future  expenditure rates on recent maximum expenditures, rather than on the  average rates at which rental assistance funds were being expended.
Additionally, our analysis of rental assistance payment data showed that  the agency had overestimated its budget needs almost every year since  1990, the earliest year for which we gathered data. Where we were able to  obtain sufficient data from RHS, our analysis showed that if RHS had used  and correctly applied OMB inflation rates to its base per-unit rates, its  estimates would have been closer to actual expenditures (see fig. 6).
section_title: RHS Rental Assistance Program Was Not Adhering to Internal Control Standards
paragraphs: We also reported that RHS was not adhering to internal control standards  regarding segregation of duties, rental assistance transfers, and tenant  income verification reviews.
A single employee within the agency was largely responsible for both the  budget estimation and allocation processes for the rental assistance  program. According to GAO internal control standards, key duties and  responsibilities need to be divided or segregated among different people to  reduce the risk of error or fraud.
Moreover, RHS did not have a comprehensive policy for transferring rental  assistance. As a result, insufficient guidance on the transfer process  limited RHS’s ability to move unused rental assistance to properties that  had tenants with the greatest need.
Finally, because RHS conducts reviews infrequently and covers a small  percentage of tenant files, the agency cannot reasonably ensure that  tenants’ income and assets, and ultimately rental assistance payments, are  adequately verified. RHS’s national, state, and local offices share  responsibility for monitoring the rental assistance program, with the local  offices performing the primary supervisory review every 3 years. These  triennial supervisiory reviews are RHS’s primary tool for detecting  misreporting of tenant income, which may result in unauthorized rental  assistance payments. But the shortcomings in the review process increase  the risk that RHS will provide rental assistance to tenants that may not be  eligible. Alternate methods of verifying tenant information, such as  internal database checks and wage matching, also have limited  effectiveness but could help improve internal control if properly designed  or implemented.
section_title: Internal Control Issues Contribute to Errors in Loan and Grants Databases
paragraphs: Today we are releasing a report addressed to the RHS Administrator on  internal control issues in the Information Resource Management (IRM)  databases. We issued the report as a follow-up to our work addressing the  definition of rural used for rural housing programs. During the earlier  review, we identified several issues that raised concerns about the  accuracy of the information in the IRM databases. For example, while we  originally intended to geocode (match) 5 years of the national RHS  housing loan and grant portfolio to specific communities, the time needed  to ensure the reliability of the data required us to limit much of our  analysis to five states.
In reviewing 29,000 records for five states we found incorrect, incomplete,  and inconsistent entries. For example, over 8 percent of the community  names or zip codes were incorrect. Additionally, inconsistent spellings of  community names distorted the number of unique communities in the  database. More than 400 entries lacked sufficient information (street  addresses, community names, and zip codes) needed to identify the  community to which the loan or grant had been made. As a result, some  communities served by RHS were double counted, others could not be  counted, and the ability to analyze the characteristics of communities  served was compromised.
Since these data form the basis of information used to inform Congress  (and the public) about the effectiveness of RHS programs, data accuracy is  central to RHS program management and the ability of Congress and other  oversight bodies to evaluate the agency and its programs. While the agency  has worked to improve its management information systems (for example,  since 2002, the agency has spent $10.3 million to improve its management  information systems including developing single and multifamily program  data warehouses which were designed to improve its reporting  capabilities), the system still relies upon information collected and entered  from field offices.
However, RHS does not have procedures for second-party review of the  data in IRM systems. Moreover, while the IRM databases have edit  functions in place that are intended to prevent the entry of nonconforming  data (such as the entry of a community name in a street address field), the  functions are not preventing incorrect or incomplete entries. Until RHS  can demonstrate that its edit functions or other data entry design features  can ensure the accuracy and completeness of the data in the IRM  databases, second-party review would be necessary.
section_title: Comprehensive Property Assessment Advocates Leveraged Solutions
paragraphs: Our 2002 report to this subcommittee on RHS’s Section 515 multifamily  program concluded that with little new construction and limited  prepayment at that time, maintaining the long-term quality of the aging  housing stock in the program portfolio had become the overriding issue  for the program. We found that RHS did not have a process to determine  and quantify the portfolio’s long-term rehabilitation needs. As a result,  RHS could not ensure that it was spending its limited funds as cost- effectively as possible, providing Congress with a reliable or well- supported estimate of what was needed to ensure the physical and fiscal  “health” of the multifamily portfolio, and prioritizing those needs relative  to the individual housing markets. We recommended that USDA undertake  a comprehensive assessment of long-term capital and rehabilitation needs  for the Section 515 portfolio. We also recommended that USDA use the  results of the assessment to set priorities for immediate rehabilitation  needs and develop an estimate for Congress on the amounts and types of  funding needed to deal with long-term needs.
In response to our recommendation, RHS commissioned a consulting firm  to assess the condition and rehabilitation needs of its multifamily  portfolio. RHS released the study in November 2004. The principal  findings—that the housing stock represented in the portfolio is aging  rapidly and that property reserves and cash flows are not sufficient for  basic maintenance or long-term rehabilitation needs—are in line with our  findings in 2002. The study concludes that continuing the status quo would  put undue stress on the rental assistance budget and proposes leveraged  solutions that combine market-based solutions with private-sector funding  as a more cost-effective alternative to using only federal dollars. In  addition, the study concludes that while its proposed solutions will cost  more than current budget levels, delaying actions to address the portfolio’s  physical, fiscal, and market issues will result in even greater budget needs  in the future.
section_title: Conclusions
paragraphs: RHS has made progress in improving program management over the past  few years. For example, when we began our work on the multifamily loan  program in June 2001, agency officials could not provide us with the  number of properties in the portfolio or a list of where properties were  located. Today, with the exception of some database errors we pointed out  that RHS officials have committed to correct, RHS knows where its  multifamily properties are located and has developed a revitalization  strategy to deal with the physical, fiscal, and market issues identified.  However, the agency still faces challenges in areas that include the basic  question of how best to determine what areas are rural, how to best  manage rental assistance (the largest budget item in RHS), and how to  ensure that data entered into management information systems are  accurate. Despite these challenges, opportunities exist to provide more  flexibility and improve existing processes that could better help RHS serve  its clients while responding to the challenges of current fiscal and budget  realities.
For example, while determining what areas are eligible for rural housing  programs will always require an element of judgment, several changes to  the current eligibility requirements could help RHS make more consistent  eligibility determinations. If MSAs were removed from the eligibility  criteria, RHS officials could make determinations for more communities  based on population data and “rural character.” And, using an alternative  measure such as the Census Bureau’s urbanized areas and urban cluster  classifications as a guide could help RHS better draw boundaries around  rural areas, because the density-based measures provide finer-scale  information. Additionally, eligible communities within MSAs would not  need to be “grandfathered” based on previous eligibility, a provision which  essentially gives these communities an advantage over similar though  ineligible towns located in MSAs. Finally, the “lack of credit” requirement  could be removed with no detriment to RHS housing programs.
We noted further opportunities for improvement in RHS’s largest  program—the rental assistance program, which has an annual budget of  over $500 million and provides rental subsidies to about 250,000 rural  tenants. Problems with its budget estimating processes caused the agency  to consistently overstate its spending needs, resulting in hundreds of  millions of dollars in unexpended balances. Consistently overstating  funding needs for one program also undermines the congressional budget  process by making funds unavailable for other programs. In addition,  RHS’s internal controls had not provided reasonable assurance that rental  assistance resources were being used effectively. We questioned whether  internal control weaknesses were preventing rental assistance funds from  going to properties with the neediest tenants. RHS has recently moved on  a number of fronts to correct the many rental assistance program  shortcomings identified in our reports. For example, RHS has told us that  it will follow OMB budget estimation guidance, that it is correcting the  program’s segregation of duty issues, has issued standardized guidelines  on rental assistance transfers, and is revamping its supervisory review  process. While it is too early for us to fully review the impact of these  changes, we believe that changes in how rental assistance budgets are  estimated and the application or strengthening of internal controls,  consistent with our recommendations, would result in greater efficiency  and resource savings in this pivotal program.
Finally, in reviewing RHS property data for selected states, we identified  various errors that raise questions about the accuracy of agency’s data.  Although the agency is making efforts to improve its data systems, our  findings suggest additional measures could ensure more accurate data  entry and reporting, particularly at the field level. In addition to improving  the accuracy of the information, such an effort could ensure that RHS’s  investment in system upgrades would provide more meaningful and useful  information to the agency itself, Congress, and the public.
section_title: Matters for Congressional Consideration
paragraphs: To improve eligibility determinations in rural housing programs, we  suggested that Congress may wish to consider eliminating the MSA  criterion, recommending that RHS use density measures as a basis for its  eligibility decisions, phasing out the practice of “grandfathering”  communities, and eliminating the “lack of credit” requirement.
To help the agency verify tenant information, we also suggested that the  Congress consider giving RHS access to the Department of Health and  Human Services’ National Directory of New Hires (New Hires), which  includes centralized sources of state wage, unemployment insurance, and  new hires data for all 50 states, and it would provide nationwide data for  wage matching. Congress already granted HUD the authority to request  and obtain data from New Hires in January 2004, and as part of its  initiative to reduce improper rent subsidies for its rental assistance  program, HUD is making New Hires information available to public  housing authorities who are responsible for, among other things, verifying  tenant income and calculating rent subsidies correctly. HUD plans to make  the data from the new hires database available to property owners by  fiscal year 2006.
section_title: Recommendations for Executive Action
paragraphs: To more accurately estimate rental assistance budget needs, we  recommended that the Secretary of Agriculture require program officials  to use and correctly apply the inflation rates provided by OMB in its  annual budget estimation processes.
To ensure that rental assistance funds are effectively distributed to  properties that have tenants with the greatest need, we recommended that  the Secretary of Agriculture require program officials to establish  centralized guidance on transferring unused rental assistance, improve  sampling methods to ensure a sufficient number of tenant households are  selected for supervisory reviews, and improve tenant verification of  information, including more effective use of alternate methods of income  verification.
To improve data entry and accuracy, we recommend that RHS formally  advise field staff to establish a second-party review of data in the IRM  databases are accurate and complete, require correction of errors in  existing information, and ensure that system edit functions are properly  functioning.
section_title: Agency Comments
paragraphs: USDA generally agreed with our matters for congressional consideration,  stating that our report on eligibility articulates how the use of MSAs has  resulted in disparate treatment of some communities. USDA added that  applying a density-based measure might have merit but that further study  would be needed to properly define such a measure for nationwide  application. We concur with this position. In addition, USDA stated that  the “lack of credit” requirement could be removed with no detriment to  RHS housing programs. USDA initially disagreed with our finding that its  rental assistance budget estimates were too high, questioning whether we  demonstrated that using inflation rate projections from the President’s  Budget would provide a more accurate budget estimate. However, USDA  has now reported that it will adopt OMB estimates, and it appears that  RHS now agrees with our report findings. USDA also generally agreed with  most of our recommendations on monitoring and internal controls. RHS  has recently issued regulations and an asset management handbook on  transferring unused rental assistance and expanded guidance on income  verification. Also, it appears that RHS is acting on our recommendation to  improve sampling methods to ensure a sufficient number of tenant  households are selected for supervisory reviews; that is, the agency has  informed us that it is revamping that process. Finally, the RHS  Administrator has generally agreed to implement our recommendations on  the IRM databases.
Mr. Chairman, this concludes my statement. I would be pleased to respond  to any questions you or members of the Subcommittee may have.
section_title: Contacts and Acknowledgements
paragraphs: For more information regarding this testimony, please contact William B.  Shear at (202) 512-4325 or shearw@gao.gov or Andy Finkel at (202) 512- 6765 or finkela@gao.gov. Individuals making key contributions to this  testimony also included Martha Chow, Katherine Trimble, and Barbara  Roesmann.
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