HUD Rental Assistance: Progress and Challenges in Measuring and Reducing Improper Rent Subsidies
Published: 2005-09-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In fiscal year 2003, the Department of Housing and Urban Development (HUD) paid about $28 billion to help some 5 million low-income tenants afford decent rental housing. HUD has three major programs: the Housing Choice Voucher (voucher) and public housing programs, administered by public housing agencies, and project-based Section 8, administered by private property owners. As they are every year, some payments were too high or too low, for several reasons. To assess the magnitude and reasons for these errors, HUD established the Rental Housing Integrity Improvement Project (RHIIP). This testimony, based on a report issued in February 2005, discusses the sources and magnitude of improper rent subsidy payments HUD has identified and the steps HUD is taking to address them.
section_title: What GAO Found
paragraphs: HUD has identified three sources of errors contributing to improper rent subsidy payments: (1) incorrect subsidy determinations by program administrators, (2) unreported tenant income, and (3) incorrect billing. HUD has attempted to estimate the amounts of improper subsidies attributable to each source but has developed reliable estimates for only the first--and likely the largest--source. HUD paid an estimated $1.4 billion in gross improper subsidies (consisting of $896 million in overpayments and $519 million in underpayments) in fiscal year 2003 as a result of program administrator errors--a 39 percent decline from HUD's fiscal year 2000 baseline estimate. GAO estimates that the amount of net overpayments could have subsidized another 56,000 households with vouchers in 2003. HUD has initiated several efforts under RHIIP to address improper subsidies in its public housing, voucher, and project-based Section 8 programs. Specifically, HUD has (1) stepped up monitoring of program administrators, (2) improved verification of tenants' incomes, and (3) provided guidance and training on program requirements to HUD staff and program administrators. These actions have strengthened HUD's oversight of the programs, despite some implementation problems and remaining challenges. For example, for the voucher and public housing programs, HUD field office staff completed about 1,100 Rental Integrity Monitoring reviews--that is, on-site assessments of public housing agencies' compliance with policies for determining rent subsidies--between 2002 and 2004. However, problems with a database containing information on these reviews prevented HUD from analyzing the results. According to HUD, the complexity of existing policies contributes to the difficulties program administrators have in determining rent subsidies correctly. For example, program administrators must assess tenants' eligibility for 44 different income exclusions and deductions. However, simplification of these policies, which will likely require statutory changes by Congress, could affect many tenants' rental payments, with some tenants paying more and others paying less. HUD has considered various approaches to simplifying policies for determining rent subsidies, but it has not conducted a formal study to inform policymakers on this issue.

section_title: Letter
paragraphs: I appreciate the opportunity to be here today to discuss our work on  improper subsidy payments in the Department of Housing and Urban  Development’s (HUD) rental assistance programs: Housing Choice  Voucher (voucher), public housing, and project-based Section 8. Payments  made under these programs, which help keep rents affordable for about 5  million low-income tenants, account for the majority of HUD’s  expenditures. For example, in fiscal year 2003, these payments accounted  for about $28 billion, or almost 75 percent of the department’s total  expenditures. HUD’s payments cover the difference between a unit’s  monthly rental cost—or, for public housing, the operating cost—and the  tenant’s payment, which is generally equal to 30 percent of the tenant’s  adjusted monthly income. I will refer to these payments as rent subsidies.  Public housing agencies (PHA) administer the voucher and public housing  programs, and private property owners administer the project-based  Section 8 programs. These program administrators are responsible for  ensuring that tenants meet HUD’s eligibility criteria and for accurately  calculating rent subsidies.
Each year HUD makes improper payments—that is, payments that are too  high or too low—under these programs primarily because it cannot ensure  that rent subsidies are determined correctly. Because of their vulnerability  to waste, fraud, and abuse, GAO has designated HUD’s rental assistance  programs as high risk since early 2001. In addition, the President’s  Management Agenda for Fiscal Year 2002 identified HUD’s rental  assistance programs as one of nine program areas that have severe  management challenges and that are in need of immediate reform. In  response to these assessments, HUD established the Rental Housing  Integrity Improvement Project (RHIIP) in 2001 to increase accountability  and reduce improper subsidy payments.
My statement today is based on our February 2005 report to the  Subcommittee on Housing and Community Opportunity, House  Committee on Financial Services, which requested that we examine HUD’s  efforts to measure and reduce improper rent subsidy payments.  Specifically, my statement discusses (1) the sources and magnitude of  improper payments that HUD has identified; (2) the actions HUD is taking  under RHIIP to reduce improper payments in the voucher, public housing,  and project-based Section 8 programs; and (3) the status and potential  impact of HUD’s efforts to reduce the risk of improper payments by  simplifying the process for determining rent subsidies. In preparing the  report, we obtained and analyzed data on improper payments that HUD  collected for fiscal years 2000 and 2003. We also interviewed officials from  HUD’s headquarters and field offices, PHAs, and contract administrators;  examined laws, regulations, policies, and guidance related to subsidy  determinations; and reviewed relevant HUD reports and studies.
HUD has identified three sources of errors that contribute to improper  rent subsidy payments: (1) incorrect subsidy determinations by program  administrators, (2) unreported tenant income, and (3) incorrect billing.  HUD has attempted to estimate the amounts of improper subsidies  attributable to each source but has developed reliable estimates for only  the first—and likely the largest—source. HUD paid an estimated $1.4  billion in gross improper subsidies (consisting of $896 million in  overpayments and $519 million in underpayments) in fiscal year 2003 as a  result of program administrator errors—a 39 percent decline from HUD’s  fiscal year 2000 baseline estimate. We estimate that the amount of net  overpayments could have provided another 56,000 low-income households  with vouchers in fiscal year 2003.
HUD has initiated several efforts under RHIIP to address improper  subsidies in its public housing, voucher, and project-based Section 8  programs. Specifically, HUD has (1) stepped up its monitoring of program  administrators, (2) improved verification of tenants’ incomes, and (3)  provided additional guidance and training on program requirements to  HUD staff and program administrators. These actions have strengthened  HUD’s oversight of the programs, despite some implementation problems  and remaining challenges. For example, for the voucher and public  housing programs, HUD field office staff completed about 1,100 Rental  Integrity Monitoring (RIM) reviews—that is, on-site assessments of PHAs’  compliance with policies for determining rent subsidies—between 2002  and 2004. However, problems with a database containing information on  RIM reviews prevented HUD from analyzing the results of the reviews.
According to HUD, the complexity of existing policies contributes to the  difficulties program administrators have in determining rent subsidies  correctly. For example, program administrators must assess tenants’  eligibility for 44 different income exclusions and deductions. However,  simplification of these policies, which will likely require statutory changes  by Congress, could affect the rental payments of many tenants. HUD has  considered various approaches to simplifying policies for determining rent  subsidies but has not conducted a formal study to inform policymakers on  this issue.
On the basis of our findings, we recommended that HUD:    make regular monitoring of PHAs’ compliance with its policies for  determining rent subsidies a permanent part of its oversight activities,   collect complete and consistent information from these monitoring efforts  and use it to help focus corrective actions where needed, and   study the potential impact of alternative strategies for simplifying program  policies on tenant rental payments and program costs.
HUD has taken steps to address the first two recommendations but, as  noted, has not done a formal study of simplification and its likely effects.
subsections: section_title: Background
paragraphs: HUD’s voucher, public housing, and project-based assistance programs  share the common mission of making housing affordable to low-income  households. The subsidies these programs provide are not an entitlement,  and the number of low-income households eligible for assistance exceeds  the number of subsidized units or vouchers that are available. These  programs are administered differently and vary in the number of  households they assist and the amount of funding they receive.
The voucher program, which approximately 2,500 PHAs administer on  HUD’s behalf, is HUD’s largest rental assistance program. The program,   authorized under Section 8 of the United States Housing Act of 1937, as  amended, provides housing vouchers that eligible individuals and families  can use to rent houses or apartments in the private housing market from  property owners participating in the program. In fiscal year 2003, the  program assisted about 2 million households (42 percent of all HUD- assisted households) and had outlays of about $13 billion. In general, only  households with very low incomes—less than or equal to 50 percent of  area median income—are eligible for vouchers.
Under the public housing program authorized by the United States  Housing Act of 1937, as amended, HUD has subsidized the development,  operation, and modernization of government-owned properties, which are  currently managed by some 3,300 PHAs. In fiscal year 2003, HUD’s public  housing program assisted 1.2 million households (one-quarter of all  households receiving housing assistance) and had outlays of about $7  billion. To be eligible for public housing, a household must be low  income—that is, have an income that is less than or equal to 80 percent of  area median income.
Under a variety of project-based Section 8 programs authorized by the  Housing and Community Development Act of 1974, as amended, HUD  subsidizes rents at certain multifamily housing developments, which had  often received construction subsidies from other HUD programs, with  rental assistance payments disbursed under multiyear contracts. Property  owners and managers for about 22,000 subsidized properties currently  participate in these programs. In fiscal year 2003, HUD’s project-based  programs assisted 1.6 million households (one-third of all HUD-assisted  households) and had outlays of roughly $8 billion. In general, only  households with low incomes are eligible for HUD project-based Section 8  assistance.
HUD’s oversight of the program administrators varies, depending on the  program. For vouchers and public housing, HUD field offices provide  oversight of PHAs that administer the programs. Field office staff conduct  on-site reviews and analysis of PHAs’ operations. For HUD’s Section 8  project-based programs, contract administrators—which include both  private contractors and HUD field offices—are responsible for overseeing  and ensuring that Section 8 properties are in compliance with HUD’s  policies.
HUD created RHIIP in the spring of 2001 to assess the magnitude of and  reasons for improper payments in its rental housing assistance programs.  RHIIP was set up as a direct result of HUD’s analysis of data it collected  on improper subsidy payments in fiscal year 2000. The analysis, which  HUD issued in a June 2001 report, focused on subsidy errors made by  program administrators but did not attempt to determine if the tenants had  supplied accurate and complete income information. In 2002, HUD  completed a separate evaluation to determine the magnitude of rental  assistance errors caused by unreported tenant income. The study matched  tenants’ reported incomes with income data from the Internal Revenue  Service and the Social Security Administration.
RHIIP’s goal is to reduce the incidence and dollar amount of improper rent  subsidies by 50 percent in fiscal year 2005 compared with fiscal year 2000,  with interim goals of a 15 percent reduction by fiscal year 2003 and a 30  percent reduction by fiscal year 2004. To meet this goal, HUD has initiated  several program-specific and overarching efforts.
section_title: HUD Has Identified the Sources of Payment Errors but Lacks Complete and Reliable Estimates for Each One
paragraphs: HUD has identified three basic sources of errors that have resulted in  improper rent subsidy payments  and has conducted separate studies for  each of these sources to assess the magnitude of the problem and the  progress that has been made in meeting RHIIP’s goal of reducing improper  subsidies. However, these studies have not provided reliable estimates of  the amount of improper subsidies from each source.
subsections: section_title: Errors during the Subsidy Determination Process Can Result in Improper Subsidy Payments
paragraphs: As part of RHIIP, HUD identified three basic sources of errors that  resulted in improper rent subsidy payments: (1) program administrator  errors, (2) unreported tenant income, and (3) billing errors. Program  administrator errors are the broadest category of errors because, as figure  1 shows, they can affect nearly all of the critical dimensions of the process  for determining rent subsidies. In performing their work, program  administrators may incorrectly determine rent subsidies by, for example,  making calculation and transcription errors or by misapplying income  exclusions and deductions required by HUD policies.
Errors that result from unreported tenant income occur when tenants do  not report an income source, either their own or another household  member’s, to program administrators. These errors generally occur early  in the process when the tenant first submits income information to  program administrators (see fig. 1). Although some tenants may not  disclose all income sources in order to qualify for assistance and to  increase the rent subsidies they receive, tenants may also fail to report  income sources unintentionally if program administrators provide unclear  instructions about the sources of income they must disclose.
Finally, billing errors occur at the very end of the process (see fig. 1). The  procedures program administrators use to bill HUD for subsidy payments  vary for each of the three rental assistance programs, and, as a result, the  specific types of mistakes that lead to billing errors can also vary.  However, in general, billing errors arise when discrepancies exist between  the amount of rent subsidy the program administrator determines and the  amount billed to and paid by HUD. Billing errors can also include  accounting discrepancies between amounts paid by HUD and a property’s  bank statements and accounting records.
section_title: HUD Has Reliable Estimates of Improper Payments Due Only to Program Administrator Errors
paragraphs: To determine the amounts of improper rent subsidies resulting from  program administrator errors, HUD collected data on more than 2,400  randomly selected households participating in the voucher, public  housing, and project-based Section 8 programs for fiscal years 2000 and  2003. Our analysis of the documentation and data collected indicated that  these studies provided a reasonably accurate estimate of subsidy  determination errors made by program administrators. Data from the  fiscal year 2003 study show that the department paid an estimated $1.4  billion in gross improper rent subsidies (representing $896 million in  overpayments and $519 million in underpayments) as a result of program  administrator errors in fiscal year 2003—a 39 percent decrease from fiscal  year 2000. The voucher program accounted for about one-half of the total  reduction, while public housing and project-based Section 8 each  accounted for roughly one-quarter. Because the overpayments exceeded  the underpayments, HUD was not able to use an estimated $377 million of  its funding to assist needy low-income households. On the basis of the  average national subsidy cost of a voucher in 2003—about $6,720,  including administrative costs—we estimated that HUD could have  provided an additional 56,000 households nationwide with vouchers in  fiscal year 2003, nearly the same number of households that currently  receive vouchers in the Los Angeles, California, area.
Each of the rental assistance programs experienced substantial reductions  in gross program administrator error between fiscal years 2000 and 2003— 50 percent for public housing, 35 percent for vouchers, and 32 percent for  project-based Section 8 (see fig. 2). These reductions exceeded HUD’s  interim RHIIP goal of reducing improper rent subsidies by 15 percent by  fiscal year 2003 for this source of error. Many of the initiatives under  RHIIP were too recent to have had any direct impact on the reductions.  However, HUD officials stated that its communications with program  administrators about the importance of addressing improper rent  subsidies and program administrators’ anticipation of increased  monitoring by HUD had probably led to voluntary improvements in  internal control activities and likely contributed to these reductions.
Future estimates of improper subsidies may show whether further  reductions can be made and sustained as the RHIIP initiative matures.
For the other two sources of errors—unreported tenant income and billing  errors—HUD did not produce complete or reliable estimates for all three  programs for fiscal years 2000 and 2003. HUD estimated that the  department paid $191 million in fiscal year 2003 in gross improper rent  subsidies due to unreported tenant income. However, the small number of  files that formed the basis for the estimate and the large variances in the  amounts of income tenants did not report resulted in a margin of error so  large that the estimate is not meaningful. As a result, the actual amount of  improper rent subsidies for this source of error could be as low as zero or  many times higher than HUD’s estimate. Despite problems with the  estimate, HUD reported that gross improper rent subsidies due to  unreported income decreased by 80 percent from fiscal years 2000 to 2003.  However, we believe that any comparison between the two estimates is  not valid because of the limitations of the fiscal year 2003 estimate and  significant differences in the methodology used for each year.
HUD also did not produce a complete and reliable estimate of the amount  of billing error in fiscal year 2000 for any of the three programs. For fiscal  year 2003, HUD has begun to implement a methodology for estimating  billing error for vouchers and public housing. For project-based Section 8,  HUD estimated approximately $100 million in billing errors for fiscal year  2003, although the small sample size and the concentration of errors in a  small number of properties resulted in a large margin of error.
section_title: HUD Has Taken Steps to Reduce Improper Subsidies in All Three Programs, but Challenges Remain
paragraphs: HUD has undertaken three separate efforts under RHIIP to address  improper rent subsidies for its public housing, voucher, and project-based  Section 8 programs. Specifically, HUD is (1) stepped up its monitoring of  program administrators, (2) improving verification of tenants’ incomes,  and (3) providing HUD staff and program administrators with guidance  and training to help them understand program requirements. Despite some  implementation problems and remaining challenges, these actions have  strengthened HUD’s oversight of the programs.
To increase monitoring of program administrators, HUD has taken the  following actions:    For the voucher and public housing programs, HUD field office staff  completed about 1,100 RIM reviews—that is, on-site assessments of PHAs’  compliance with policies for determining rent subsidies—between 2002  and 2004. According to HUD officials, these reviews were the first  comprehensive reviews of PHAs’ tenant information files in more than 20  years. While important, the reviews were hampered by implementation  problems. For example, officials from most of the HUD field offices we  met with said that they did not have enough staff to conduct all of their  reviews within the required time frames and still fulfill their other  oversight responsibilities. As a result of resource constraints, some field  offices had to use staff with little or no experience in monitoring PHAs for  RIM reviews; issued their RIM review reports late; or postponed other  monitoring activities such as inspections of troubled properties.  Additionally, problems with a database containing information on RIM  reviews prevented HUD from analyzing the results of the reviews to assess  improvements in PHAs’ calculations of tenant subsidies and provide  technical assistance to PHAs.
For the project-based Section 8 programs, HUD plans to rely on  performance-based contract administrators (PBCA) to monitor property  owners’ compliance with HUD’s policies for determining rent subsidies.  For the past several years, HUD has been transferring responsibility for  overseeing property owners to PBCAs from other types of contract  administrators, including HUD field offices. As of October 2004, HUD’s  project-based Section 8 programs consisted of about 21,900 properties,  and HUD had transferred contracts for about 11,800 of these properties to  PBCAs. HUD requires PBCAs to perform extensive annual reviews of  properties’ operations, including reviewing owners’ rent subsidy  calculations. To ensure that PBCAs meet HUD’s performance standards,  HUD has developed a comprehensive oversight program. However,  because HUD has often not provided adequate oversight of contractors—a  factor that in 2003 led us to designate acquisitions management as one of  HUD’s major management challenges—implementing these oversight  measures could pose challenges to HUD.
In our February 2005 report, we recommended that HUD make regular  monitoring of PHAs’ compliance with HUD’s policies for determining rent  subsidies a permanent part of its oversight activities. We also  recommended that HUD collect complete and consistent information from  these monitoring efforts. In August 2005, HUD officials told us that they  planned to conduct 275 RIM reviews each year starting in 2006, and that  they were developing software to better track the results of RIM reviews.
To improve verification of tenants’ incomes, HUD has done the following:    For the voucher and public housing programs, HUD has implemented an  Internet-based income verification system that allows PHAs to compare  income information they receive from tenants with income information  employers report to government agencies. According to HUD officials, the  system is intended not only to help PHAs detect unreported income, but  also to provide them with a more convenient and accurate way to verify  tenant-reported information. HUD obtained the data currently in the  system through agreements with state wage and income collection  agencies. HUD is replacing these data with data from a single source—the  National Directory of New Hires—and intends to make it available to all  PHAs by the end of this month. Congress passed legislation in 2004 that  grants HUD the authority to request and obtain data from this directory—a   database containing quarterly federal and state wage data, quarterly  unemployment data, and monthly new hire data reported by employers to  state agencies and compiled by the Department of Health and Human  Services.
For project-based Section 8 programs, HUD plans to implement a similar  Internet-based system for property owners after it addresses data security  concerns. When Congress granted HUD access to the National Directory  of New Hires database, it required that HUD demonstrate to the  Department of Health and Human Services that all necessary steps had  been taken to prevent the inappropriate disclosure of information from the  database before property owners were given access. To alleviate concerns  about releasing sensitive information to private property owners, HUD is  initially making the data available only to PHAs to confirm that the system  is secure. If the Department of Health and Human Services is satisfied with  HUD’s security precautions, HUD plans to make the information available  to property owners by the end of fiscal year 2006. Once the system is  implemented, property owners will be able to access earned income data  from a secure Web site.
To improve HUD staff and program administrators’ understanding of the  complex requirements for determining rent subsidies, HUD has taken the  following steps:    For vouchers and public housing, HUD has provided training and guidance  to PHAs on various topics, such as how to calculate subsidies, improve  quality control procedures, and comply with income verification  requirements. The training addresses program basics, including how to  interview prospective tenants and verify tenant income information. HUD  also has provided guidance to PHAs on developing policies and  procedures that would prevent future subsidy calculation errors and  provided technical assistance to PHAs that were deemed high risk on the  basis of their performance in RIM reviews.  Finally, HUD has updated or  developed guidance for PHAs on how to correctly calculate rent subsidies.
For project-based Section 8 programs, HUD has improved its guidance and  training for property owners, contract administrators, and HUD field staff.  For example, in 2003, HUD revised its handbook for project-based Section  8 programs, which sets forth the requirements and procedures that  property owners must follow in administering these programs, including  determining rent subsides. Also in 2003, HUD issued a new monitoring  guide to help contract administrators improve their oversight of property  owners’ subsidy determinations. HUD accompanied these efforts with  training for property owners, contract administrators, and HUD field  offices on the updated handbook and new monitoring guide.
section_title: HUD Has Considered Simplifying Policies for Determining Rent Subsidies but Has Not Done a Formal Review of the Potential Effects
paragraphs: As one of its efforts under RHIIP and as mandated by The President’s  Management Agenda for Fiscal Year 2002, HUD has considered various  approaches—statutory, regulatory, and administrative—to streamlining  and simplifying its policies for determining rent subsidies. According to  HUD, the complexity of the existing policies contributes to errors in  determining subsidies. For example, program administrators currently  must determine tenants’ eligibility for 44 different income exclusions and  deductions in order to calculate rent payments and subsidies. The purpose  of some of these income exclusions and deductions is to provide  additional relief to certain tenants, such as elderly and disabled  households with large medical expenses, by reducing the amount they  contribute toward rent. Other income exclusions are designed to  counteract potential work disincentives—for example, tenants’ rental  payments are raised as their income increases.
The process for determining rent subsidies is further complicated by the  difficulty some program administrators may have in understanding and  implementing HUD’s program requirements. According to multiple field  office staff, program administrators, and industry groups we met with,  staff responsible for calculating rent subsidies are often poorly paid and  have large caseloads and limited education. These factors can contribute  to the misapplication of program policies and to subsequent errors in  subsidy calculations. In addition, these same groups commented that these  types of positions have a high turnover rate, and, as a result, it is difficult  for program administrators to retain knowledgeable and experienced staff.
HUD has considered several approaches to simplifying rent subsidy  policies, including:    an income-based approach that would establish tenants’ rents as a  percentage of their income, possibly with a limited number of exclusions  and deductions or none at all;   a tiered flat-rent system that would establish tenants’ rents for several  income bands and eliminate the need to readjust rents because of income  changes, provided the changes were within the band; and    a mixed approach that would give program administrators various rent  structures to choose from, including income-based and tiered flat rents.
Adopting any simplification approach represents a change from current  policies. Because most of HUD’s policies have a basis in statute, major  changes are likely to require congressional action. Under any  simplification approach, many tenants’ rental payments could be affected,  with some tenants paying higher rents and others paying lower rents. For  example, elderly and disabled households, as well as large families, that  currently benefit the most from HUD’s exclusions and deductions would  be hit hardest by the elimination of current income adjustments. In  addition, the transition to simplified policies could create confusion  among program administrators and tenants in the short term. Depending  on the magnitude of program changes, program administrators—the  approximately 22,000 property owners and 3,000 PHAs across the  country—would have to retrain staff, update written procedures and  administrative plans, and make potentially costly modifications to their  software applications. Program administrators would also have to  undertake outreach efforts to explain the changes to tenants.
HUD staff have conducted a preliminary analysis of the impact of some  simplification approaches on tenants’ rental payments and program costs.  However, the department has not conducted a formal study on the impact  of policy changes to inform policymakers on this issue. To ensure that  policymakers have sufficient information with which to consider potential  simplification approaches, our February 2005 report recommended that  HUD study the possible impact of alternative strategies for simplifying  program policies on subsidy errors, tenant rental payments, program  administrators’ workload, and program costs.
In its fiscal year 2006 budget submission, HUD proposed, among other  things, to simplify program requirements for the voucher program and  provide PHAs with greater administrative flexibility. The proposal  recommends a mixed approached and allows PHAs to choose from several  alternative rent structures, including income-based and tiered flat rents.
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. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this  statement. Individuals making key contributions to this testimony included  Daniel Garcia-Diaz, Rose Schuville, Cory Roman, Steve Westley, Emily  Chalmers, Carl Barden, Jerry Sandau, Marc Molino, and John McGrail.
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