Rural Housing Service: Standardization of Budget Estimation Processes Needed for Rental Assistance Program
Published: 2004-03-25T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Rural Housing Service's (RHS) Section 521 Rental Assistance Program provides rental subsidies to about 250,000 rural tenants. With an annual budget of over $700 million, the program is RHS's largest line-item appropriation, accounting for approximately 70 percent of the agency's budget. In early 2003, RHS reported hundreds of millions of dollars in unexpended balances, primarily tied to 5- and 20-year contracts issued from 1978 through 1982. Concern has arisen that these unexpended balances may be the result of the agency's budget practices, especially its procedures for estimating funding needs. GAO was asked to assess the accuracy of RHS's budget estimates for the rental assistance program, the activity level of rental assistance contracts issued from 1978 through 1997, and the activity level of rental assistance contracts issued from 1998 through 2002 and the accuracy of RHS's estimates of the rate at which these funds would be used.
section_title: What GAO Found
paragraphs: RHS is overestimating its budget needs for 5-year rental assistance contracts in three ways. First, the agency uses inflation factors that are higher than those OMB recommends for use in the budget process. Second, RHS does not apply its inflation rate separately to each year of a 5-year contract, but instead compounds the rate to reflect the price level in the fifth year and applies that rate to each contract year. Using these first two methods, RHS overestimated its 2003 budget needs by $51 million (6.5 percent). Third, RHS bases its estimates of future expenditure rates on recent maximum expenditures, rather than on the average rates at which rental assistance funds are expended. RHS has begun the process of automating its budget processes and certain aspects of its new model promise improvements over the current estimating methods. However, the agency continues to use its own inflation rates and incorrectly calculates those rates in such a way that would cause the agency to actually underestimate its budget needs. At current spending rates, it will take another 7 years for all the active contracts that were issued from 1978 through 1982 to expend their funds, 8 years after the last of the 20-year contracts were expected to expire. Contracts issued from 1983 through 1997 should expend their remaining funds in 2004. GAO calculated that RHS overestimated its funding needs for contracts issued from 1998 through 2002 by an average of about 8 percent each year. GAO analysis of rental assistance payment data showed that the agency has overestimated its budget needs almost every year since 1990, the earliest year for which GAO gathered data. Where GAO had sufficient data from the agency, the analysis also shows that if RHS had used and correctly applied OMB inflation rates to its base perunit rates, its estimates would have been closer to actual expenditures. Standardizing the agency's budget estimation processes would help the agency more accurately estimate its rental assistance needs and curtail future unexpended balances or budget shortfalls.

section_title: Letter
paragraphs: Each year, the Rural Housing Service (RHS) of the Department of  Agriculture (USDA) provides rental subsidies through the Section 521  Rental Assistance Program to about 250,000 rural tenants living in federally  subsidized properties.  With an annual budget of over $700 million, the  program is RHS’s largest line-item appropriation, accounting for  approximately 70 percent of the agency’s budget.  In early 2003, RHS  reported hundreds of millions of dollars in unexpended balances, primarily  tied to 5- and 20-year contracts issued from 1978 through 1982.  Concern  has arisen that these unexpended balances may be the result of the  agency’s budget practices, especially its procedures for estimating funding  needs.
To help with your oversight of the Section 521 Rental Assistance Program,  you asked us to assess (1) the accuracy of RHS’s budget estimates for the  rental assistance program, (2) the activity level of rental assistance  contracts issued from 1978 through 1997 that have unexpended balances  and the possibility of deobligating these unexpended balances, and (3) the  activity level of rental assistance contracts issued from 1998 through 2002  and the accuracy of RHS’s estimates of the rate at which these funds would  be used.
To respond to these objectives, we collected written information from RHS,  interviewed their representatives, and received oral verification from  Office of Management and Budget (OMB) staff on RHS’s budget estimation  processes.  We reviewed federal guidance on program budget preparation  and on internal controls that apply to the process.  Also, we collected and  analyzed raw data from RHS’s accounting database to determine rental  assistance program activity.  Details about our scope and methodology  appear at the end of this letter.
We conducted our work from January 2003 through February 2004 in  Washington, D.C. and St. Louis, Missouri, in accordance with generally  accepted government auditing standards.
subsections: section_title: Background
paragraphs: The Section 521 Rental Assistance Program, started in 1978, is  administered by RHS’s Multifamily Housing Division of Portfolio  Management.  The program provides rental assistance for tenants living in  units created through RHS’s Multifamily Direct Rural Rental Housing Loans  and Multifamily Housing Farm Labor Loans programs.   Under the  program, eligible tenants pay no more than 30 percent of their income toward the rent, and RHS pays the balance to the project owner.   As of  January 2003, approximately 53 percent of tenants in the program’s 464,604  housing units were receiving rental assistance.  According to program  officials, the program has a waiting list of approximately 80,000 eligible  tenants.
RHS provides the subsidies through 5-year contracts with project owners;  20-year contracts were also issued to units in newly constructed properties  from 1978 through 1982.  The contracts specify that owners will receive  payments on behalf of tenants in a designated number of units at the  project.  Contracts may be renewed as many times as funds are made  available, and additional units may be covered if funds are available.   According to program officials, about 96 percent of the Rental Assistance  Program’s budget is used to renew expiring rental assistance contracts.   The remaining funds are used to provide rental assistance for units in  newly constructed properties and additional rental assistance at existing  properties.  Budget needs are estimated assuming a 5-year rental assistance  contract life, although a contract’s actual life is determined by how long its  funds last and could run far beyond its estimated life if the funds are  expended slowly enough.
Each month, project owners or their management companies must certify  the number of rental assistance units that are occupied.  If a unit is empty  and rental assistance is not being used, the project owner assigns a new  tenant from the waiting list.  If there are no tenants eligible for the rental  assistance, the rental assistance may be transferred to another property.
RHS’s national, state, and local offices manage the rental assistance  program.  The national Office of Multifamily Housing Portfolio  Management develops and implements the program regulations, estimates  program budgets, allocates funds, and tracks nationwide program  statistics.  State and local offices work directly with property owners,  property management companies, and tenants to monitor the program.   State and local responsibilities include conducting financial, management,  and physical reviews of the properties; executing rental assistance  contracts with property owners; approving rent increases; and processing  rental assistance payments.  State and local staff also collect and maintain  property and tenant data for their areas.  Support for the program is also  provided through two offices in St. Louis.  The Information Resources  Management Office’s Rural Housing Service Branch maintains the  automated databases used to manage program data.  The Office of the  Deputy Chief Financial Officer uses the program data to generate and  maintain the general ledger and financial statements for the program.
In 1982—the fourth year of the program—RHS reported in an internal  position paper that rental assistance funds were being substantially  underused.  The agency found that approximately $100 million of the rental  assistance funds obligated for 5-year contracts would be lost between 1983  and 1985, because the contracts would expire before all the obligated funds  were used.  The study found that rental assistance contracts set to expire  at the end of 5 years still had funds available for an average of 5 additional  years.  The agency noted that if contract terms were extended until the  funds ran out, the tenants could receive benefits twice as long without any  further appropriation of funds.  Alternately, the agency noted that  terminating contracts at the end of their terms and returning the  unexpended funds would save federal funds, assuming the contracts would  not be replaced.  The paper recommended the indefinite extension of rental  assistance contracts, and the recommendation was adopted as agency  policy in 1983.  Contract language was changed at that time, and previously  written contracts were amended.
section_title: RHS’s Current Methods Have Overestimated the Agency’s Budget Needs by as Much as 7 Percent, or $51 Million Per Year
paragraphs: Using its current methodology, RHS has overestimated its budget needs for  5-year rental assistance contracts in three ways.  First, the agency has used  inflation factors that are higher than those projected by OMB for use in the  budget process.  Second, RHS compounds the inflation rate to reflect the  price level in the fifth year and applies that rate to each contract year,  rather than using an appropriate rate for each year.  Third, the expenditure  rates RHS uses to estimate budget needs may also overstate the need for  rental assistance.  Furthermore, RHS budget processes do not adhere to  certain internal control standards.  While a new budget forecasting model  shows promise, it is, at present, flawed.
subsections: section_title: Current Processes for Estimating Budget and Allocation Needs
paragraphs: RHS’s processes for estimating its budget and allocation needs have  evolved over time.  An agency official who worked on the program’s initial  budgets from 1978 through 1982 told us that RHS intentionally overfunded  the contracts in an effort to subsidize the poorest possible tenant by basing  tenant contributions on minimum Social Security payments.  Agency  documents suggest that the agency was using inflation rates of 10 to 20  percent to estimate future spending rates for the life of the contracts.   After this time period, the agency made a series of changes to its processes,  including increasing tenant contributions from 25 percent to 30 percent,  and differentiating per-unit costs for rural rental housing and farm labor  housing properties.
The current method for estimating budget needs was developed by two  agency officials, between 1995 and 1997, and is based on a formula that  consists of multiplying estimates for the number of expiring rental  assistance units by a national average per-unit cost and by an inflation  factor.  The need for rental assistance for units in newly constructed  properties and additional rental assistance at existing properties is also  calculated.  Since 1996, one official has largely managed the process with  oversight from the Rural Development Budget Office, OMB staff, and RHS  supervisors.
OMB Circular A-11, Preparation, Submission, and Execution of the  Budget, provides guidance to agency officials, stating that preparation of  agency budgets must be consistent with the economic assumptions  provided by OMB.  These assumptions are listed each year in the  President’s Budget, though they are made available to agencies prior to that  time for their budget preparations.  However, neither OMB staff nor the  Rural Development Budget Office official we spoke with required RHS to  use these rates or objected to the agency determining its own inflation  rates.  Although OMB policy does permit agencies to consider other factors  in developing their budget estimates, it does not allow agencies to  automatically apply these factors to their budget requests.  Also, although  OMB staff and a Rural Development budget official review and approve  RHS’s budget requests each year, neither has ever required nor sought a  justification for the rates chosen.
RHS considers its annual rental assistance needs through two different  processes prior to funding the contracts.  First, the agency prepares the  submission for the President’s Budget about 2 years prior to the budget  year, based on previous renewal needs, average per-unit costs, and a  compounded inflation rate.  Agency officials explained that in recent years  they used 2.7 percent when preparing estimates to submit with the  President’s Budget.  By the time Congress appropriates a budget based on  this information, the data used by the agency are about 2 years old.   Therefore, after receiving the fiscal year budget, and before allocating the  rental assistance funds, RHS rechecks the estimated number of expiring  units and average per-unit costs, based on more current data.
For this second process, the agency prepares a report using the Automated  Multi-Housing Accounting System database (AMAS) on the contracts  expected to expire in the coming year.  This report is sent to the local  offices for verification and then returned to the national office.  The agency  establishes average per-unit values, based on the contracts expiring in the  coming year, by inflating the maximum per-unit cost from the prior 3  months by a compounded inflation rate.  According to agency officials,  RHS adjusts the inflation rate to more closely approximate the level of  funding received.  If the original budget estimate and the allocation  estimate differ, RHS distributes any rental assistance funds remaining after  the expiring contracts are renewed among states to create new rental  assistance units.  These allocation figures then become the basis for future  submissions for the President’s Budget.
section_title: RHS’s Current Methods Have Overestimated Its Budget Needs
paragraphs: Because it has not followed OMB procedures, RHS has overestimated its  future budget needs.  For example, although OMB’s fiscal year 2003  published rates varied between 2.2 and 2.4 percent for 2003 through 2007,  RHS used a rate of inflation of 2.7 percent when preparing its budget for 5- year contracts that would be renewed in 2003.  Applied to the average per- unit, per-year base rate of $3,264, the 2.7 percent rate created a difference  of $203 per unit over the 5-year contract period.  Since RHS planned to  issue 5-year contracts for 44,652 units that year, it overestimated its budget  needs by more than $9 million.  RHS did not keep documentation of the  inflation rates it used prior to 2000 but, as table 1 shows, the agency’s  inflation rates have been higher than OMB’s rates for every year for which it  has documentation.
However, it is not so much the inflation rates RHS uses as how it uses them  that has caused the agency to significantly overestimate its budget needs.   As we have seen, OMB’s economic assumptions provide inflation rates for  each year, and agencies are expected to use these individual rates for each  year they are projecting, compounding the rates separately for each  subsequent year based on the previous year’s rate.  But RHS uses one  inflation rate for all 5 years of the contract, compounds that rate to the fifth  year, and then applies the compounded rate to each year of the contract.   This practice results in the agency using a rate that is more than five times  the rate it started with for the first year.
For example, rather than applying its 2003 inflation rate of 2.7 percent to  each year, RHS compounded this rate to the fifth year and applied the  resulting value (14.2 percent) back to each year of the contract (fig. 2).   Spending was thus assumed to be 14.2 percent higher for each of the  subsequent 5 years, although its stated inflation projection was that prices  would be only 2.7 percent higher in the next year, about 5.4 percent higher  in the following year, and so on.  Thus RHS multiplied the annual per-unit  base rate of $3,264 by over 14 percent, rather than the 2.7 percent it started  with, or the 2.2 to 2.4 percent projected by OMB.  Compared with OMB’s  rates and procedures for calculating future spending, RHS’s method  created a difference of $1,147 per unit.  Again, as RHS estimated it would  fund contracts for 44,652 units in 2003, it actually overestimated its budget  needs by over $51 million (6.5 percent).
The expenditure rates RHS uses to estimate budget needs may also  overstate the need for rental assistance.  RHS officials claim that the  expenditure rates they use—equal to the maximum amount of monthly  rental assistance used over the previous 3 months—account for vacant  units at the properties.  However, using this method treats vacant units as if  they were occupied and ignores the impact that a property’s vacancy rate  has on rental assistance usage.  For example, a property with 10 units  (receiving $200 of rental assistance for each unit) may have no vacant units  during the first month, one vacant unit during the second month, and 2  vacant units during the third month.  During an average month, one of the  property’s units will be vacant, and the property will require $1,800 in rental  assistance ($200 from each of the nine occupied units).  However, using the  maximum of 3 months, it would appear the property has no vacant units  and that rental assistance needs are $2,000 a month.  The estimation rate  would be 10 percent higher than it should be, because the impact of the  vacant units on rental assistance usage was ignored.  We believe using a 3-  or 12-month average could produce a more accurate picture of usage.  We  discussed this practice with RHS officials, and they replied that they used  the maximum monthly rate because they did not believe averages were  accurate for their purposes.
section_title: RHS Is Not Adhering to Internal Control Standards
paragraphs: Finally, RHS is not adhering to internal control standards regarding  segregation of duties.  A single employee within the agency is largely  responsible for both the budget estimation and allocation processes for the  rental assistance program.  Furthermore, this employee’s work is not  afforded a deliberative review by the Rural Development Budget Office,  OMB staff, or RHS supervisors.  While the office has assigned staff to  support this employee, the employee told us that due to staff turnover,  there was no one available to help with the budget estimation and  allocation processes.
Internal control is a major part of managing an organization.  Our  Standards for Internal Control in the Federal Government provide the  overall framework for establishing and maintaining internal control and for  identifying and addressing major performance and management challenges  and areas at greatest risk of fraud, waste, abuse, and mismanagement.
Internal control activities are the policies, procedures, techniques, and  mechanisms that enforce management’s directives and help ensure that  actions are taken to address risks.  Control activities are an integral part of  an entity’s planning, implementing, reviewing, and accountability for  stewardship of government resources.  One very basic but essential  example of a control activity is the segregation of duties.  According to the  standards, key duties and responsibilities need to be divided or segregated  among different people to reduce the risk of error or fraud.  This should  include separating the responsibilities for authorizing transactions,  processing and recording them, reviewing the transactions, and handling  any related assets.  No one individual should control all key aspects of a  transaction or event. Based on our analysis of RHS’s budget estimation and  allocation processes, and our Standards for Internal Control, it is our view  that the autonomy of this employee is not consistent with internal control  standards.
section_title: Automated Process Is an Improvement, but Problems Remain
paragraphs: In March 2003, RHS began the process of automating its budget estimation  and allocation processes by developing a forecasting model that it will use  to estimate future budget needs, starting in 2006.  A team consisting of staff  from the national office, state offices, and the Information Resources  Management Office’s Rural Housing Service Branch created the model.   RHS also used contractors and consulted with numerous internal experts.   The model was designed to automatically calculate rental assistance by  projecting renewal needs on a property-by-property basis and calculating  future rental assistance usage estimates using a combination of factors,  including prior actual usage, inflation, the potential for rate increases, and  rental assistance volatility.  These last two factors were dropped from the  model when the agency determined that their impact on future spending  was negligible.  The forecasting model is currently in the testing phase.
RHS demonstrated its new forecasting model to us in late 2003.  Certain  aspects of the model promise improvements over the current estimating  methods.  For example, the model (1) allows RHS to use property-level  data rather than the national averages that are currently used to establish  per-unit rates and (2) determines each property’s per-unit rate based on the  average usage over the prior 12 months, rather than the maximum usage of  the previous 3 months that is currently used.  These improvements should  allow for more accurate replacement estimates based on actual rental  assistance usage at each property.  Furthermore, the model properly  applies the inflation rate to each of the 5 years for which the agency is  forecasting.  Program officials also told us that three to four staff members  will be trained to use the model and develop the budget and allocation  estimates for the agency, which should mitigate the segregation of duties  concern.
However, the inflation calculation in the model is flawed.  RHS continues  using its own inflation rates rather than those provided by OMB, and the  agency is incorrectly calculating the rates it plans to use.  RHS officials  explained that they are using historical rates of change to determine future  spending rates rather than OMB’s rates, which are based on future  projections of inflation.  This means that RHS is looking to past activity to  determine what will happen in the future, whereas OMB asks agencies to  use projections of future change.
Furthermore, RHS is incorrectly calculating its historical rates of change in  a way that could cause the agency to underestimate its budget needs.  RHS  calculates the average per-unit expenditures for each year over 3 years,  then calculates the change from the first year to the third and divides that  number by 3.  The agency should divide by 2, since it is estimating an  annual rate of change from 2 years of changes.  By dividing by a larger  number than appropriate, RHS’s method will cause it to underestimate the  rate of change and thus to underestimate its budget needs.  For example, if  prices increased 3 percent from 2000 to 2001, and 2 percent—of the year  2000 level—from 2001 to 2002, then the average annual increase is 3 plus 2,  divided by 2, which equals 2.5.  If RHS divides by 3, it will come up with an  inflation rate of 1.67— lower than the average inflation rate of the recent  past.
section_title: Unexpended Funds Primarily from Contracts Issued from 1978 through 1982 Will Not Be Exhausted until 2011
paragraphs: Contracts issued from 1978 through 1982 account for the majority of  unexpended balances and are expending their funds at a relatively slow  rate.  Based on current average expenditures, these contracts likely will not  expend their funds completely until 2011.  USDA has concluded that these  funds cannot be deobligated.  Contracts issued from 1983 through 1997 also  have unexpended balances; based on our analysis, these funds likely will be  expended in 2004.
Based on their age, contracts issued from 1978 through 1997 (both 5 and 20  year), should have expired by the end of 2002.  As of June 2003,  approximately 18 percent of these contracts were still active, accounting  for $605 million in unexpended balances.  Most of this amount ($510  million or 84 percent) involved the 32 percent of the contracts from 1978  through 1982 that were still active (see fig. 3).  Contracts issued from 1983  through 1997 accounted for the remaining $95 million.
Based on average current spending rates calculated from AMAS data and  projected forward using OMB inflation rates, RHS will not exhaust all the  unexpended balances from these contracts until at least 2011.  In 2002,  approximately $179 million in rental assistance funds was paid to project  owners from contracts issued from 1978 through 1997, $53 million of it  from contracts issued from 1978 through 1982, and $126 million from  contracts issued from 1983 through 1997.  At this rate, contracts from the  1983 to 1997 period will likely expend their remaining $95 million during  2004.  The 1978 to 1982 contracts, which were funded based on inflation  projections of 10 to 20 percent, will not expend their $510 million in  unexpended balances until 2011 on average—8 years after the last of the  20-year contracts should have expired.
subsections: section_title: USDA Stated that Deobligating Unexpended Balances Would Result in Breach of Contract
paragraphs: The USDA regulations state that rental assistance contracts are effective  for, depending on the contract, 5 or 20 years from the effective date of the  agreement.  These same regulations, however, make it clear that the  expiration date of a contract is at complete disbursement of the funds  obligated to the contract.  This date, as the USDA regulations state, may be  "before or after" the 5- or 20-year term.
The rental assistance contracts that implement this policy explicitly tie  their expiration to the disbursement of rental assistance amounts listed in  the contracts.  In practice, this has resulted in many of the contracts  extending beyond (in some instances, far beyond) the contemplated 5- or  20-year term.  According to USDA, any effort to recapture the remaining  unexpended funds associated with rental assistance agreements entered  into from 1978 through 1982 would result in a breach of those contracts and  would subject USDA to liability.
section_title: The Activity of Contracts Issued in 1998 through 2002 Is Consistent with Earlier Years
paragraphs: Ninety percent of the contracts issued from 1998 through 2002 are still  active and appear to be expending their funds at a slower rate than RHS  anticipated.  Based on current expenditure rates, these contracts likely will  run an average of over 6 years each.  These findings are consistent with our  analysis of RHS data, which shows that RHS has overestimated its  spending needs most years since 1990.
subsections: section_title: The Majority of Contracts Issued from 1998 through 2002 Are Still Active and Expending Their Funds at a Slower Rate than RHS Anticipated
paragraphs: According to RHS data, and illustrated in figure 5, a relatively small  percentage of contracts have expired.  As of June 2003, 74 percent of the  contracts issued in 1998 were still active, although the average contract  should have expired by this date.   The fact that so many were still active  suggests that the majority of the 1998 contracts may have been overfunded.   Furthermore, about 25 percent of the funds remained from the contracts  issued in 1998, and about 35 percent of the funds remained from the  contracts issued in 1999; only 11 percent of the funds allocated in 2002  were spent during the contracts’ first 1½ years.  This suggests that the  contracts are also expending their funds more slowly than the 5 years on  which RHS bases its budget needs.
A document provided by the agency indicates that, since 1992, contracts  have been spending on average 3 percent in their first year, 14 to 18 percent  in the second through sixth years, 8 percent in the seventh year, and  tapering off around the twelfth year.  According to the agency, this tapering  indicates that overfunding of contracts is moderate.  However, it should be  noted that the document projects, for example, that about 1.7 percent of  the funds allocated in 2000 will remain by the tenth year—a balance of  $10.8 million from the $640 million originally allocated.
Using RHS rental assistance payment data, we calculated that RHS  overestimated its funding needs for these contracts by an average of about  8 percent each year.  Between 1998 and 2002, almost $1.2 billion in rental  assistance payments were made from contracts originating in those years,  at an average rate of $2,808 per-unit per-year.  However, RHS budgeted  these units at an average annual rate of $3,019—a difference of $211 per- unit per-year (7.5 percent), or $1,055 per-unit per 5-year contract.
section_title: RHS Has Overestimated Its Spending Needs in Most Years Since 1990
paragraphs: Our analysis of rental assistance payment data showed that the agency has  been overestimating its budget needs since at least 1990, the earliest year  for which we gathered data.  Importantly, where we had sufficient data  from the agency, our analysis also shows 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.
Figure 6 below provides an example of the difference between RHS’s actual  and estimated expenditures.  The actual expenditures are averaged from  the entire portfolio of 5-year contracts issued from 1989 through 2002,  while the estimated expenditures are averaged from only those units for  which renewal, new construction, or servicing contracts originated in the  corresponding year.  Furthermore, the RHS estimated expenditure for a  given year shows the effect of the 5-year estimate in the first year only.  Due  to RHS’s method for calculating its estimated expenditures over a 5-year  period, the difference is largest in the first year and declines over time as  inflation raises the actual expenditure (or more accurate estimation) closer  to the estimated expenditure (see fig.  2).  The declining differentials of the  second to fifth years are not reflected in figure 6 below.  Nonetheless, while  the estimated expenditures for any given year represent about 20 percent  of the portfolio, they represent almost the entire portfolio over any 5-year  period in the figure.  RHS estimates are above actual expenditures in each  of the years.  In addition, the corresponding estimated expenditures using  OMB inflation rates also helps to illustrate the degree to which the RHS  method has lead to overestimation.  Sufficient information was not  available from the agency to extend our OMB-based estimate of RHS  expenditure prior to 2000.  Our scope and methodology section contains a  discussion of the data limitations we faced in our assessment of activity  levels.
Between 1998 and 2002, RHS planned to fund 5-year contracts for an  average of 42,000 units each year; the difference between the actual rate of  expenditure and what RHS budgeted may mean that the agency had a  surplus of approximately $43 million per year during this period, or more  than $220 million total over the last 5 years.
Based on current spending rates, and allowing for inflation, the average  contract issued during these years will likely run out of funds during its  sixth year.  That is, the average contract issued in 2000 or 2001 will  completely expend its funds during 2006 or 2007, respectively, and the  average contract issued in 2002 will completely expend its funds during  2008.
section_title: Conclusions
paragraphs: RHS provides subsidized rental housing to almost half a million people  each year.  The rental assistance program, with an annual budget of over  $700 million, provides further subsidies to about half this number.  RHS  budget estimating processes have caused the agency to overstate its  spending needs over the life of the rental assistance program, resulting in  hundreds of millions of dollars in unexpended balances.  Consistently  overstating funding needs for one program also undermines the  congressional budget process by not allowing those funds to be available  for other programs.  RHS is updating and automating its budget estimation  process, and its new forecasting model shows some improvements over  past and current processes.  However, there are some flaws with the model.   The agency plans to use its own inflation rates, which are based on historic  rates of change, rather than the inflation rates provided by OMB, which  predict future rates of change.  Furthermore, RHS is incorrectly calculating  the rates it plans to use, which may cause the agency to underestimate its  future contract needs.  A simple modification to the agency’s planned  budget estimation process would help the agency more accurately estimate  its rental assistance needs and curtail future unexpended balances—or  budget shortfalls as the case may be.
section_title: Recommendation for Executive Action
paragraphs: To more accurately estimate rental assistance budget needs, we  recommend that the Secretary of Agriculture require program officials to  use and correctly apply the inflation rates provided by OMB in its annual  budget and allocation estimation processes.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided USDA and OMB with a draft of this report for their review and  comment.  The Acting Undersecretary for Rural Development for USDA  raised several concerns about our analysis of RHS’s budgeting practices  and rental assistance expenditure data.  In particular, the Acting  Undersecretary argued that OMB’s Circular A-11 encourages the use of a  per-property microscale rate of change, rather than a blanket national rate.  OMB’s Circular A-11 states that all budget materials must be consistent  with the economic assumptions provided by OMB.  While OMB policy  permits consideration of certain factors in developing out-year estimates,  this does not mean that an agency should automatically use its own  economic assumptions without providing documentation and justification.   As we note in our report, neither OMB staff nor the Rural Development  Budget Office required a justification for the agency’s inflation rates.
Furthermore, according to the Acting Undersecretary, we did not  demonstrate that using inflation rate projections from the President’s  Budget would provide a more accurate budget estimate.  We believe that  figure 6 in this report illustrates that using the inflation projections from  the President’s Budget would have brought the agency’s budget estimates  closer to its actual expenditures, without running the risk of underfunding  the rental assistance contracts.
USDA also disagreed with our finding that RHS’s budget estimates were too  high.  As stated in this report, we believe RHS overestimates its budget  needs by using inflation factors that are higher than those projected by  OMB for use in the budget process, improperly compounding the inflation  rates, and using expenditure rates that may overstate the need for rental  assistance.  Our estimates reflect the extent to which RHS may have  overestimated its budgets when compared with estimates based on OMB  budget guidance documents and appropriate application of a compounding  formula. USDA’s complete written comments and our responses appear in  appendix I.
We received oral comments from OMB.  OMB representatives did not have  comments on the specific findings or conclusions of this report.  They did,  however, note that they are always open to suggestions that would help the  Administration provide more accurate budget projections along with the  related oversight.
section_title: Scope and Methodology
paragraphs: To assess the accuracy of RHS’s budget estimates for the rental assistance  program, we collected written and testimonial information from agency  officials on current budget estimation methods and the budget automation  plan that is being developed.  We reviewed OMB guidance on preparing  agency budgets and the inflation rates provided by OMB for agency use,  and interviewed OMB staff that oversee the rental assistance program.   Finally, we consulted our Standards for Internal Control in the Federal  Government to review control activities that apply to RHS’s budget  estimation processes.  In describing RHS’s current process for estimating  its budget needs, we faced the problem that the agency has no official  written documentation for that process.  Most information was provided  verbally, and the information the agency did provide outlined only its  elementary budget processes.
To assess the activity level of rental assistance contracts issued from 1978  through 1997 with unexpended balances, we reviewed rental assistance  data from the agency’s Automated Multi-Housing Accounting System  (AMAS) from January 1990 through October 2003 to determine the extent  of the unexpended balances.  We also used these data to determine the rate  at which those balances were currently being expended; by applying OMB  inflation rates for future years to the current rates of expenditure, we  estimated when the funds will expire.  We acquired OMB inflation rates for  future years from the fiscal year 2004 and 2005 President’s Budgets.
To assess the activity level of rental assistance contracts issued from 1998  through 2002 and the accuracy of RHS’s estimates of the rates at which  these funds would be used, we reviewed rental assistance data from AMAS  from January 1998 through October 2003 to determine the activity level of  the unexpended balances.  We also used these data to determine the rate at  which those balances were currently being expended; by applying OMB  inflation rates for future years to current rates of expenditure we estimated  when the funds will expire.  We assessed the accuracy of RHS’s estimates  of the rate at which the funds would be used by comparing RHS’s estimated  rental assistance expenditures to actual program expenditures.  We  determined RHS’s estimated expenditures based on data provided by the  agency.  We determined actual program expenditures using payment data  from AMAS.
We faced limitations in our assessment of actual program expenditures  using AMAS data.  We had compared actual expenditures averaged from  the entire portfolio of contracts issued from 1978 through 2002 with  estimated expenditures averaged from only those units for which renewal,  new construction, or servicing contracts originated in the corresponding  year.  In response to agency concerns, we eliminated contracts issued prior  to 1989 because they represented a mix of contracts that were expending  funds normally and contracts that exhibited unusual behavior resulting in  abnormally low expenditures.  The agency opined that the annual  expenditures from these abnormal contracts could not be compared with  their estimates.  Due to the structure of AMAS data, we were unable to  isolate the abnormal behaving contracts.  However, the resulting figure (fig.  6), based on their comments, looks very similar to the original figure.
For the AMAS data we used, we requested and received the most current  data available from the system.  We assessed the reliability of the data by  (1) reviewing existing information about the systems and the data, (2)  interviewing agency officials knowledgeable about the data, and (3)  examining the data elements (fields) used in our work by comparing  known and/or anticipated values.  When inconsistencies were found, we  discussed our findings with agency officials to understand why  inconsistencies could exist.  We determined that the data were sufficiently  reliable for the purposes of this report.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date.  At that time, we will send copies of this report to interested  Members of Congress and congressional committees.  We also will send  copies to the Secretary of the Department of Agriculture and the Director  of the Office of Management and Budget and make copies available to  others upon request.  In addition, this report will be available at no charge  on the GAO Web site at http://www.gao.gov.
Please contact me at (202) 512-4325, or Andy Finkel at (202) 512-6765, if  you or your staff have any questions concerning this report.  Key  contributors to this report are listed in appendix III.
section_title: Comments from the U.S. Department of Agriculture
paragraphs: The following are GAO’s comments on the U.S. Department of Agriculture's  letter dated March 8, 2004.
subsections: section_title: GAO Comments
paragraphs: 1. Our $51 million figure is based on data provided by the U.S. Department  of Agriculture (USDA), analyzed in a manner consistent with the Office  of Management and Budget (OMB) budgetary guidance, correcting for  the areas where we believe USDA overestimates its budgetary  requirements.  As we state in the report, this number is an estimate of  the extent to which the Rural Housing Service (RHS) may have  overestimated its budget when compared with an estimate based on  OMB budget guidance documents and appropriate application of a  compounding formula.   2. Although we concur that a budget estimation process, by itself, will not  necessarily put government funds at risk, consistently overstating  funding needs undermines the congressional budget process.  In  addition, without performing a detailed internal controls review, we  cannot state that the current process for allocating budget funds has  not put government funds at risk or led to a loss of funds.  We do note  that RHS is not adhering to internal control standards regarding  segregation of duties for both its estimation and allocation processes,  and such an internal control lapse could introduce a risk of error or  fraud.   3. We agree that RHS's contracts are not lasting as long as they did in the  past, however, a 6-year average life contract is still 20 percent greater  than the intended contract life.  4. Circular A-11 states that “all budget materials, including those for out- year policy and baseline estimates, must be consistent with the  economic assumptions provided by OMB.  OMB policy permits  consideration of price changes for goods and services as a factor in  developing  estimates.  However, this does not mean that you  should automatically include an allowance for the full rate of  anticipated inflation in your request.” If the agency has evidence that a  property will perform above or below the Consumer Price Index, which  is the basis for OMB’s economic assumptions, we would agree that this  evidence should be used.  OMB guidance indicates that the agency  should document this evidence and justify that its proposed budget- estimation methodology would create a more accurate budget estimate. 5. We note in our report that the difference declines over time.  Figure 2  shows this decline and shows that RHS is still overestimating its budget  needs in the fifth year, albeit by less than in years 1 through 4.   6. As stated in the note in figure 6, RHS's estimated expenditures are  based on data provided by the agency.  Actual RHS expenditures are  based on data from RHS's Automated Multi-Housing Accounting  System (AMAS).  As noted in the report, RHS did not document the  inflation rate it used in its budget and allocation estimates prior to 2000.   This is the lack of data to which we refer.  It only affected our OMB- based estimate of RHS expenditures by preventing us from backing out  agency rates and replacing them with the inflation projections from the  President's Budget for years prior to fiscal year 2000.  We clarified the  text on this point. 7. Our concern centers on the fact that the agency is using the highest of  the most recent 3 months instead of an average of all 3 months, not on  the use of 3 months of data versus 12 months of data.   8. We concur that these rates are, in fact, an estimate, but as figure 6  illustrates, using these rates would have brought the agency's estimates  closer to its actual expenditures.  Furthermore, as shown in figure 6,  budget estimates based on the inflation projections from the  President's Budget would still have been higher than actual program  expenditures, which should alleviate USDA's concern that using this  method would underfund contracts. 9. Our report does not make this assertion.  We state that the activity of  contracts issued from 1998 through 2002 is consistent with earlier  years, and in particular, that RHS has overestimated its spending needs  in most years since 1990. 10. The $51 million overestimate does not stem from the inflation rate only.
It also stems from RHS compounding the rate to the fifth power and  then applying that rate back to each year of the contract.  We concur  that we will not know the outcome of the contracts issued in 2003 until  2008 or later.  This is our best estimate based on data provided by the  agency and following OMB budgetary guidance.
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to those named above, William Bates, Emily Chalmers, Jamila  Jones, Austin Kelly, Marc Molino, and Julie Trinder made key contributions  to this report.
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