Project-Based Rental Assistance: HUD Should Streamline Its Processes to Ensure Timely Housing Assistance Payments
Published: 2005-11-15T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Housing and Urban Development (HUD) provides subsidies, known as housing assistance payments, under contracts with privately owned, multifamily projects so that they are affordable to low-income households. Project owners have expressed concern that HUD has chronically made late housing assistance payments in recent years, potentially compromising owners'ability to pay operating expenses, make mortgage payments, or set aside funds for repairs. GAO was asked to discuss the timeliness of HUD's monthly housing assistance payments, the factors that affect payment timeliness, and the effects of delayed payments on project owners.
section_title: What GAO Found
paragraphs: From fiscal years 1995 through 2004, HUD disbursed three-fourths of its monthly housing assistance payments on time, but thousands of payments were late each year, affecting many property owners. Over the 10-year period, 8 percent of payments were delayed by 2 weeks or more. Payments were somewhat more likely to be timely in more recent years. The process for renewing HUD's subsidy contracts with owners can affect the timeliness of housing assistance payments, according to many owners, HUD officials, and contract administrators that HUD hires to work with owners. HUD's renewal process is largely a manual, hard-copy paper process that requires multiple staff to complete. Problems with this cumbersome, paper-intensive process may delay contract renewals and cause late payments. Also, a lack of systematic internal processes for HUD staff to better estimate the amounts that HUD needs to obligate to contracts each year and monitor contract funding levels on an ongoing basis can contribute to delays in housing assistance payments. Although HUD allows owners to borrow from reserve accounts to lessen the effect of delayed housing assistance payments, 3 of 16 project owners told GAO that they had to make late payments on their mortgages or other bills--such as utilities, telephone service, or pest control--as a result of HUD's payment delays. Owners who are heavily reliant on HUD's subsidy to operate their properties are likely to be more severely affected by payment delays than other, more financially stable, owners. Owners reported receiving no warning from HUD when payments would be delayed, and several told GAO that such notification would allow them to mitigate a delay. Nonetheless, project owners, industry group officials, and HUD officials generally agreed that late housing assistance payments would be unlikely to cause an owner to leave HUD's housing assistance programs, because such a decision is generally driven primarily by local market factors.

section_title: Letter
paragraphs: The Department of Housing and Urban Development (HUD) provides  rental assistance subsidies to privately owned, multifamily projects so that  they are affordable to low-income households. In fiscal year 2004, HUD  assisted approximately 1.6 million households through project-based rental  assistance contracts, committing about $4.4 billion to fund these contracts  with property owners. Owners rely on these subsidies from HUD, often to a  great extent, to pay for daily operating expenses, such as staff salaries and  maintenance, as well as to make their monthly mortgage payments and set  aside funds for contingencies and major repairs. Although HUD’s subsidy  payments to owners are not subject to a statutory or regulatory standard  for timeliness, HUD’s goal, with some exceptions, is to provide the  payments by the 1st business day of the month.
Project owners, and various associations representing them, have  expressed concern that HUD has been late in paying some owners their  monthly subsidy and that late payments to owners have become a chronic  problem in recent years. According to some owners, late payments can lead  them to defer maintenance, miss payments on monthly utility bills, or risk  default on their mortgages. Furthermore, late payments might influence  owners to “opt out” of HUD’s rental assistance programs when their  contracts with HUD expire, potentially resulting in a reduction of  affordable housing units for low-income households.
You asked us to review the effects that late housing assistance payments  may have on project owners and the availability of affordable housing. Our  report discusses (1) the extent to which HUD makes monthly housing  assistance payments in a timely manner, (2) the factors that affect the  timeliness of the payments, and (3) the effect(s) that payment delays have  on project owners and their willingness to continue providing affordable  housing.
To determine the extent to which HUD’s housing assistance payments are  timely—that is, disbursed by the 1st business day of the month for most  contracts—we analyzed 10 years (fiscal years 1995 through 2004) of HUD’s  monthly payment data. We analyzed trends in these data to determine  whether payment timeliness changed over time and whether there were  differences in payment timeliness by the type of contract administrator  (i.e., whether HUD staff or contractors processed monthly vouchers). To  determine the factors that affect the timeliness of housing assistance  payments, we analyzed the portion of HUD’s monthly payment data  (generally, payments made in fiscal years 2002 through 2004) that captured  the reasons particular payments were delayed. We supplemented our  analyses by interviewing HUD officials from headquarters and eight field  offices (which were selected to represent a range of experiences by state— those with high and low percentages of late payments), contract  administrators, project owners, and industry group officials. To assess the  effects of payment delays on project owners and their willingness to  continue providing affordable housing, we compared available HUD data  on projects that opted out of HUD’s programs with monthly payment  timeliness data to determine whether these projects experienced more  payment delays than projects that are currently receiving assistance from  HUD. At the HUD field offices where we did site visits, we interviewed  project owners and contract administrators to determine (1) the reasons  owners opted out of HUD’s programs, (2) the extent to which delayed  housing assistance payments may have factored into this decision, and (3)  what other effects (e.g., financial difficulties) payment delays had on  project owners. We also discussed these issues with HUD and officials  from eight industry associations representing property owners. We  conducted our work between October 2004 and September 2005 in  Baltimore, Maryland; Boston, Massachusetts; Chicago, Illinois; Des Moines,  Iowa; Kansas City, Kansas; Kansas City, Missouri; Los Angeles, California;  Manchester, New Hampshire; Seattle, Washington; and Washington, D.C., in  accordance with generally accepted government auditing standards.  Appendix I provides additional details on our scope and methodology.
subsections: section_title: Background
paragraphs: HUD operates a variety of project-based rental assistance programs  through which it pays subsidies, or housing assistance payments, to private  owners of multifamily housing that help make this housing affordable for  lower income households. In some cases, HUD subsidized the construction  of the housing (or substantial rehabilitation of existing properties) through  means such as discounted mortgages insured by HUD’s Federal Housing  Administration; in others, such as the Section 202 Supportive Housing for  the Elderly Program, HUD provided grants to construct the housing. HUD  entered into long-term contracts, often 20 to 40 years, committing it and the  property owners to providing long-term affordable housing. Under these  contracts, tenants generally pay 30 percent of their adjusted income toward  their rents, with the HUD subsidy equal to the difference between what the  tenants pay and the contract rents that HUD and the owners negotiate in  advance.
In the mid- to late-1990s, Congress and HUD made several important  changes to the duration of housing assistance contract terms (and the  budgeting for them), the contract rents owners would receive relative to  local market conditions, and the manner in which HUD administers its  ongoing project-based housing assistance contracts. Specifically:  Because of budgetary constraints, HUD shortened the terms of  subsequent renewals, after the initial 20- to 40-year terms began expiring  in the mid-1990s. HUD reduced the contract terms to 1 or 5 years, with  the funding renewed annually subject to appropriations.
Second, in 1997, Congress passed the Multifamily Assisted Housing  Reform and Affordability Act (MAHRA), as amended, in an effort,  among other things, to ensure that the rents HUD subsidizes remain  comparable with market rents. Over the course of the initial longer  term agreements with owners, contract rents in some cases came to  substantially exceed local market rents. MAHRA required an assessment  of each project when it neared the end of its original contract term to  determine whether the contract rents were comparable to current  market rents and whether the project had sufficient cash flow to meet  its debt as well as daily and long-term operating expenses. If the  expiring contract rents were below market rates, HUD could increase  the contract rents to market rates upon renewal (i.e., “mark up to  market”). Conversely, HUD could decrease the contract rents upon  renewal if they were higher than market rents (i.e., “mark down to  market”).
Finally, in 1999, because of staffing constraints (primarily in HUD’s field  offices) and the workload involved in renewing the increasing numbers  of rental assistance contracts reaching the end of their initial terms,  HUD began an initiative to contract out the oversight and administration  of most of its project-based contracts. The entities that HUD hired— typically public housing authorities or state housing finance agencies— are responsible for conducting on-site management reviews of assisted  properties; adjusting contract rents; reviewing, processing, and paying  monthly vouchers submitted by owners; renewing contracts with  property owners; and responding to health and safety issues at the  properties. These performance-based contract administrators (PBCA)  now administer the majority of contracts—over 13,000 of approximately  23,000 contracts in fiscal year 2004.
According to HUD officials, the department has not yet transferred all of its  rental assistance contracts to the PBCAs. HUD plans to have traditional, or  nonperformance-based contractors, continue to administer the  approximately 5,000 contracts that they were administering until these  contracts expire; at which time, these contracts will be assigned to the  PBCAs. The traditional contract administrators are, often, local public  housing authorities handling a very limited number of contracts. HUD itself  also administers the contracts under certain programs, such as the Section  202 Supportive Housing for the Elderly Program and the Section 811  Supportive Housing for Persons with Disabilities Program. HUD  announced in April 2004 that it was conducting a competitive sourcing  effort to determine the most efficient and cost-effective means to  administer some of these contracts. At the conclusion of this effort, HUD  will seek new budget authority to pay for contract administration services.  Consequently, while the PBCAs handle most of HUD’s project-based  housing, three types of administrators are involved in day-to-day program  oversight and administration, including tasks involved in processing  monthly housing assistance payments.
To receive their monthly housing assistance payments, owners must submit  monthly vouchers to account for changes in occupancy and tenants’  incomes that affect the actual amount of subsidy due. However, the manner  in which the owners submit these vouchers and the process by which they  get paid varies depending on which of the three types of contract  administrators handles their contract (see fig. 1). For HUD-administered  contracts, the owner submits a monthly voucher to HUD for verification,  and HUD in turn pays the owner based on the amount in the voucher. For  PBCA-administered contracts, the owner submits a monthly voucher to the  PBCA, which verifies the voucher and forwards it to HUD for payment.  HUD then transfers the amount verified on the voucher to the PBCA, which  in turn pays the owner. In contrast, for traditionally administered contracts,  HUD and the contract administrator develop a yearly budget, and HUD  pays the contract administrator set monthly payments. The owner submits  monthly vouchers to the contract administrator for verification, and the  contract administrator pays the amount approved on the voucher. At the  end of the year, HUD and the contract administrator reconcile the  payments HUD made to the contract administrator with the amounts the  contract administrator paid to the owner, exchanging payment as  necessary to settle any difference.
HUD has an ongoing effort to improve its rental assistance programs’  business processes and make better use of information technology related  to those programs. In 2004, HUD launched a Business Process  Reengineering (BPR) initiative to, among other things, improve inefficient  and redundant processes, as identified by HUD’s contractor for this effort,  and to integrate HUD’s data systems. HUD expects its contractor to identify  its recommended changes by June 2006. According to HUD officials, HUD  does not currently have the funding in place to implement the BPR.
section_title: HUD Made Three- fourths of Its Housing Assistance Payments On Time in Fiscal Years 1995 Through 2004
paragraphs: Between fiscal years 1995 and 2004, HUD disbursed three-fourths of its  monthly housing assistance payments by the due date, but thousands of  payments each year were late, affecting many property owners. For this  10-year period, about 8 percent of all payments were delayed by 2 weeks or  more, a time frame we characterize as significant. On average, about one- third of housing assistance contracts experienced at least 1 payment per  year that was delayed by 2 weeks or more. Furthermore, the timeliness of  housing assistance payments has varied, with a decrease in 1998, but with a  gradual improvement since 2001. Timeliness also varied by type of contract  administrator, with payments for HUD-administered contracts more likely  to be late, based on our analysis of fiscal year 2004 payment data.  Timeliness varied considerably by state as well.
subsections: section_title: Over a 10-Year Period, 75 Percent of HUD’s Payments Were On Time, but 8 Percent Were Significantly Late
paragraphs: Overall, from fiscal years 1995 through 2004, HUD disbursed by the due  date 75 percent of the 3.2 million monthly housing assistance payments on  all types of contracts (see fig. 2). However, 8 percent of payments,  averaging 25,000 per year, were significantly late—that is, they were  delayed by 2 weeks or more and therefore could have negative effects on  owners who relied on HUD’s subsidy to pay their mortgages. During this  period, 6 percent of the total payments (averaging 18,000 per year) were 4  weeks or more late, including about 10,000 payments per year that were 8  weeks or more late.
HUD does not have an overall timeliness standard by which it makes  payments to owners or its contract administrators, based in statute,  regulation, or HUD guidance. However, HUD contractually requires the  PBCAs (which administer the majority of contracts) to pay owners no later  than the 1st business day of the month. HUD officials said that they also use  this standard informally to determine the timeliness of payments on  HUD-administered and traditionally administered contracts. Therefore, we  considered payments to be timely if they were disbursed by the 1st business  day of the month. Based on our discussions with project owners who  reported that they relied on HUD’s assistance to pay their mortgages before  they incurred late fees (generally, after the 15th day of the month), we  determined that a payment delay of 2 weeks or more was significant.
section_title: The Timeliness of Payments Has Varied over a 10-Year Period
paragraphs: The timeliness of housing assistance payments over the 10-year period  (fiscal years 1995 through 2004) has shown some variation (see fig. 3). The  percentage of payments that were significantly late increased in 1998,  which HUD and PBCA officials indicated likely had to do with HUD’s initial  implementation of MAHRA and new contract renewal procedures and  processing requirements for project owners. Timeliness has gradually  improved since 2001, shortly after HUD first began using the PBCAs to  administer contracts.
The percentage of contracts experiencing significantly late payments over  the course of the year showed a similar variation over the 10-year period,  rising to 43 percent in fiscal year 1998 and decreasing to 30 percent in fiscal  year 2004 (see fig. 4). As with the percentage of late payments, the  percentage of contracts with late payments increased in fiscal year 1998  when HUD implemented requirements pursuant to MAHRA. Over the 10-year period, about one-third of approximately 26,000 contracts  experienced at least 1 payment per year that was delayed by 2 weeks or  more.
Although HUD data showed a gradual decline in the percentage of late  payments and the number of contracts affected by late payments, in the  most recent 3-year period (fiscal years 2002 through 2004), the percentage  of payments that were 2 weeks or more and 4 weeks or more late was  nearly as high (7 percent and 5 percent) as over the 10-year period  (see fig. 2).
section_title: The Timeliness of Payments Varied Based on the Type of Contract Administration
paragraphs: Payments on HUD-administered contracts were more likely to be delayed  than those on contracts administered by the PBCAs and traditional  contract administrators, based on HUD’s fiscal year 2004 payment data  (see fig. 5).
Payments on PBCA- and HUD-administered contracts have more elaborate  monthly processing requirements than do the payments on traditionally  administered contracts that HUD processes. Payments on PBCA- and  HUD-administered contracts require that the monthly vouchers be  reviewed and processed by a PBCA or HUD field office before a payment is  approved. As previously noted, for traditionally administered contracts,  HUD creates an annual budget, amortizes the budget over 12 payments for  the year, disburses the set monthly payments, and makes any necessary  adjustments through a year-end settlement based on voucher information  submitted to the traditional contract administrators.
The percentage of chronically late payments also varied by contract  administrator. In fiscal year 2004, 9 percent of HUD-administered  contracts experienced chronic late payments, while 3 percent of  PBCA-administered contracts and 1 percent of the traditionally  administered contracts had chronic late payments.
section_title: Payment Timeliness Also Varied by State
paragraphs: We analyzed HUD’s payment data by state and found that timeliness varied  considerably for both PBCA- and HUD-administered contracts, although  the reasons for this variation are not clear. The percentage of payments on  PBCA-administered contracts that were 2 weeks or more late in fiscal year  2004 ranged from 1 percent in North Dakota to 13 percent in the District of  Columbia (see fig. 6). With some exceptions, a single PBCA administers all  of the PBCA-administered contracts for a single state. However, late  payments may be attributable to a number of factors, and the HUD  payment data do not provide an explanation for the variations among the  states.
For HUD-administered contracts, 19 states had 15 percent or more of their  payments that were 2 weeks or more late in 2004. The percentage of  payments 2 weeks or more late ranged from 2 percent in North Dakota to  35 percent in Wyoming. Again, the HUD payment data do not provide an  explanation for the state variation in payment delays.
The percentage of contracts that experienced chronic late payments also  varied by state. In fiscal years 2002 through 2004, 17 percent of the  contracts in Delaware and 13 percent in Connecticut and the District of  Columbia had 6 or more payments per year that were 2 weeks or more late  (see fig. 7). In contrast, less than 3 percent of contracts in most states had  chronic late payments.
section_title: Contract Renewals, HUD Funding and Monitoring Issues, and Problems with Some Owners’ Vouchers Contributed to Payment Delays
paragraphs: The contract renewal process, HUD’s internal processes for funding and  monitoring contracts, and owners’ erroneous or untimely voucher  submissions affected payment timeliness. For instance, owners were more  likely to receive late monthly payments when their contracts with HUD had  not been renewed by their expiration dates. Moreover, HUD’s process of  estimating how much funding it needs to obligate to contracts; HUD’s  inconsistent approach to monitoring contracts to determine when  additional funding should be obligated; and lack of staff access to, and  training on, HUD payment databases also may have affected the timeliness  of housing assistance payments. Additionally, HUD’s interpretation of  legislative restrictions on its ability to use recaptured funds may have  exacerbated payment delays. Finally, owners’ erroneous or untimely  submissions of monthly vouchers could have caused some of the untimely  payments from HUD.
subsections: section_title: Payment Delays Were More Likely When a Contract Renewal Was Pending
paragraphs: Late monthly voucher payments were more likely to occur when a contract  had not been renewed by its expiration date, according to many of the HUD  officials, contract administrators, and property owners with whom we  spoke. HUD’s accounting systems require that an active contract be in  place with funding obligated to it before it can release payments for that  contract. Therefore, an owner cannot receive a monthly voucher payment  on a contract that HUD has not renewed.
Our analysis of HUD data from fiscal years 2002 through 2004 shows that 60  percent of the payments that were 2 weeks or more late was associated  with pending contract renewals, among late payments on PBCA- and  HUD-administered contracts for which HUD recorded the reason for the  delay (see fig. 8).
A contract renewal may be “pending” when one or more parties involved in  the process—HUD, the PBCA, or the owner—have not completed the  necessary steps to finalize the renewal. Based on our interviews with HUD  officials, contract administrators, and owners, pending contract renewals  may result from owners’ failing to submit their renewal packages on time.  Often the delay occurs when owners must submit a study of market rents,  completed by a certified appraiser, in order to determine the market rent  levels. However, late payments associated with contract renewals may also  occur because HUD has not completed its required processing. For  example, according to a HUD official, at one field office we visited,  contract renewals were delayed because HUD field staff were behind in  updating necessary information, such as the new rent schedules associated  with the renewals and the contract execution dates in HUD payment  systems.
HUD’s contract renewal process itself also may take longer than expected,  contributing to late housing assistance payments, because the process is  largely manual and paper driven and requires multiple staff in the PBCAs  and HUD to complete (see fig. 9). Upon receipt of renewal packages from  owners, the PBCAs then prepare and forward signed contracts (in hard  copy) to HUD field offices, which execute the contracts; in turn, the field  offices send hard copies of contracts to a HUD accounting center, which  activates contract funding. In order to allow sufficient time to complete the  necessary processing, HUD’s policy currently requires owners to submit a  renewal package to their PBCAs 120 days before a contract expires, and  gives the PBCAs 30 days to forward the renewal package to HUD for  completion (leaving HUD 90 days for processing). However, some of the  owners with whom we spoke told us that their contract renewals had not  been completed by the contract expiration dates, even though they had  submitted their renewal packages on time.
While initial contract renewals (upon expiration of the owner’s initial long- term contract) often exceeded the 120-day processing time, subsequent  renewals were less time-consuming and resulted in fewer delays, according  to HUD officials, the PBCAs, and owners. Initial renewals could be  challenging for owners because they often involved HUD’s reassessment of  whether the contract rents were in line with market rents. Additionally, the  initial renewal represents the first time that owners have to provide HUD  with the extensive documentation required for contract renewals in order  to continue receiving housing assistance payments. Our analysis of the  most recent 3 years of HUD data (fiscal years 2002 through 2004) shows  that while 25 percent of initial contract renewals exceeded the 120-day  processing time frame set by HUD, 17 percent of subsequent renewals  exceeded that time frame, as shown in figure 10. Increased timeliness on  subsequent renewals might be explained partly by owners’ gaining  competency—that is, the PBCAs and owners described a “learning curve”  when owners renewed their contracts for the first time.
The processing times for contract renewals that HUD’s data show do not  include some interactions between the PBCAs and owners. More  specifically, HUD’s data systems capture the dates on which it receives  completed renewal packages from the PBCAs, but do not capture the dates  for earlier steps in the process. For instance, the data systems do not  capture the dates when owners initially submit renewal packages to the  PBCAs and, thus, the amount of time it may take the PBCAs and owners to  go “back and forth” to assemble completed packages.
According to our analysis, the processing time for the contract renewals  also was likely to exceed HUD’s 120-day standard when owners chose or  were subject to one of two options at their initial renewals. First, for  properties with contract rents lower than comparable market rents,  owners had the option to request contract renewals under the “mark-up-to- market” option, which required (1) owners to obtain an appraiser’s  determination of comparable market rents and (2) HUD to reassess the  contract rents in order to raise them to applicable market level rents. For  fiscal years 2002 through 2004, 60 percent of the 471 contract renewals  using the mark-up-to-market option took more than the expected 120 days.  Second, for expiring contracts with rents higher than comparable market  rents, contract administrators referred the owners to HUD’s Office of  Multifamily Housing Assistance Restructuring (OMHAR), a process that  can lead to rents in renewed contracts that are lower than those in the  expiring contracts (the “mark-to-market” option). For fiscal years 2002  through 2004, 56 percent of the 1,276 contract renewals referred to OMHAR  to reduce rents—and, in many cases, to restructure the property owners’  debt—took more than the expected 120 days to process.
Recognizing that contract renewal is lengthy and cumbersome, HUD’s goal  is to automate the renewal process and reduce the 120-day time frame  through a BPR effort for its rental assistance programs. HUD launched this  initiative in 2004 to, among other things, develop plans to improve what it  characterizes as “inefficient or redundant processes” and to integrate data  systems. For example, according to a senior HUD official, the department’s  goal is to automate the entire contract renewal process by 2007, eliminating  the need for HUD and owners to physically sign the contracts. According to  HUD officials, this effort would eventually include a more streamlined and  automated contract renewal process. However, this effort is in its early  stages, and is currently not focused on streamlining the contract renewal  process or addressing the problem of late housing assistance payments.  HUD does not have concrete plans regarding how it will accomplish these  goals, nor does it have funding in place to implement any of the  recommendations the reengineering effort might develop.
section_title: HUD’s Difficulties in Assessing Rate of Funding Use and Monitoring Funding Levels May Have Affected Timeliness of Housing Assistance Payments
paragraphs: The methods HUD uses to estimate the amount of funds needed for the  term of each of its project-based assistance contracts and the way it  monitors the funding levels on those contracts may also affect the  timeliness of housing assistance payments. When HUD renews a contract,  and when it obligates additional funding for each year of contracts with  5-year terms, it obligates an estimate of the actual subsidy payments to  which the owner will be entitled over the course of a year. However, those  estimates are often too low, according to HUD headquarters and field office  officials and contract administrators. For example, an underestimate of  rent increases or utility costs or a change in household demographics or  incomes at a property will affect the rate at which a contract exhausts its  funds, potentially causing the contract to need additional funds obligated  to it before the end of the year. If HUD underestimates the subsidy  payments, the department needs to allocate more funds to the contract and  adjust its obligation upwards to make all of the monthly payments.
Throughout the year, HUD headquarters uses a “burn-rate calculation” to  monitor the rate at which a contract exhausts or “burns” the obligated  funds and to identify those contracts that may have too little (or too much)  funding. According to some HUD field office and PBCA officials, they also  proactively monitor contract fund levels. Based on the rate at which a  contract exhausts its funds, HUD obligates more funds if needed.
However, based on our analysis of available HUD data and our discussions  with HUD field office officials, owners, and contract administrators,  payments on some contracts were still delayed because they needed to  have additional funds allocated and obligated before a payment could be  made. As shown in figure 8, our analysis of HUD’s payment data shows  that, where the reasons for delayed payments on PBCA- and  HUD-administered contracts were available, 11 percent of delays of 2  weeks or more were due to contracts needing additional funds obligated.  That is, those payments were delayed because, at the time the owners’  vouchers were processed, HUD had not allocated and obligated enough  funding to the contracts to cover the payments.
One potential factor contributing to payment delays related to obligating  contract funding is likely that staff at some HUD field offices—unlike their  counterparts in other field offices and staff at some of the PBCAs—did not  have access to data systems or were not trained to use them to monitor  funding levels. At some of the field offices we visited, officials reported that  they did not have access to the HUD data systems that would allow them to  adequately monitor contract funding levels. For example, one field office  official told us that he needed access to one of HUD’s accounting data  systems to more accurately monitor contract funding. According to this  official, he requested “read-only” access to this system, which requires a  security clearance, but never received information on the status of his  application from HUD headquarters. HUD field offices reported, and  headquarters confirmed, that some field officials have not received training  to carry out some functions critical to monitoring the burn rate. One field  office official reported that none of the staff in her office had received  training in a payment processing database, which is critical for monitoring  the status of monthly payments. A HUD headquarters official reported that  changes in the agency’s workforce demographics posed challenges because  not all of the field offices have staff with an optimal mix of skill and  experience.
According to a senior HUD official, HUD’s BPR is intended to provide a  systematic, agencywide solution to the contract funding issues that field  office officials have been trying to address on an ad hoc basis to prevent  payment delays. If this effort successfully addresses contract funding  monitoring agencywide through automation, as this official suggested,  HUD may not have to rely solely on the intervention of its field officials.
section_title: HUD’s Interpretation of Legislative Restrictions on Its Ability to Use Recaptured Funds May Have Exacerbated Payment Delays
paragraphs: Prior to fiscal year 2003, HUD used funds that it had recaptured from some  contracts to augment other contracts that required additional funds.  Based on HUD’s interpretation of its appropriations acts for fiscal years  2003 and 2004, the agency determined that recaptured funds were not  available in those years to fund contract amendments. According to HUD  officials, this made it difficult to budget for amendments in those years and  could have affected the timeliness with which HUD funded some contracts  and made related housing assistance payments. HUD’s fiscal year 2005  appropriation specifically authorized the use of recaptured funds for  contract amendments.
According to HUD headquarters officials, operating under a continuing  resolution rather than an appropriation should not affect the timeliness of  housing assistance payments. According to HUD budget officials, under a  continuing resolution, HUD has funding available to meet its contractual  obligations to pay project owners and, if need be, to renew rental  assistance contracts.
section_title: Owners’ Untimely, Inaccurate, or Incomplete Submissions May Have Affected the Timeliness of Housing Assistance Payments
paragraphs: The PBCAs with which we met estimated that 10 to 20 percent of owners  submit late vouchers each month. For example, one PBCA reported that  about 20 percent of the payments it processed in 2004 were delayed due to  late owner submissions. However, the PBCAs also reported that they  generally could process vouchers in less than the allowable time—20  days—agreed to in their contracts with HUD and resolve any errors with  owners to prevent a payment delay. According to PBCA officials, there are  often several “back-and-forth” interactions with owners to resolve errors or  inaccuracies. Typical owner submission errors include failing to account  correctly for changes in the number of tenants or tenant income levels, or  failing to provide required documentation. As we previously noted, because  HUD’s data systems do not capture the back-and-forth interactions PBCA  officials described to us, we could not directly measure the extent to which  owners’ original voucher submissions may have been late, inaccurate, or  incomplete.
HUD officials and the PBCAs reported that owners had a learning curve  when contracts were transferred to the PBCAs because the PBCAs  reviewed monthly voucher submissions with greater scrutiny than HUD  had in the past. The timeliness of payments may also be affected by a  PBCA’s own internal policies for addressing owner errors. For example, in  order to prevent payment delays, some of the PBCA officials with whom  we spoke told us that they often process vouchers in advance of receiving  complete information on the owners’ vouchers. In contrast, at one of the  PBCAs we visited, officials told us that they will not process an owner’s  voucher for payment unless it fully meets all of HUD’s requirements.
section_title: HUD’s Payment Delays Have Caused Difficulties for Project Owners, but Are Unlikely to Be a Significant Factor in Owners Opting Out of HUD Contracts
paragraphs: HUD’s payment delays have had negative financial effects on project  owners, but they are unlikely to result in owners opting out of HUD’s  programs. Owners with whom we spoke reported that they have incurred  late fees on their mortgages and other bills and have had difficulty  operating their properties as a result of payment delays. The severity of the  effects depended on the financial condition of the property owner and the  extent to which the owner relied on HUD’s subsidy to make the mortgage  payment and operate the property. HUD did not notify owners when  payments would be late, and owners said that this lack of notice  exacerbated the effect of late payments. However, delayed payments alone  were unlikely to result in opt outs, although they could have been a  contributing factor, according to owners as well as officials from industry  groups and HUD. Finally, our analysis of HUD payment data indicated that  there was little difference in payment delays between properties that have  opted out of, and those that still participate in, HUD’s programs.
subsections: section_title: Some Owners Report Difficulties in Paying Mortgages and Other Bills and Operating Their Properties as a Result of Payment Delays
paragraphs: Some owners report that they have not been able to pay their mortgages or  other bills on time as a result of HUD’s payment delays. Three of the 16  owners with whom we spoke reported having to pay their mortgages or  other bills late as a result of HUD’s payment delays. One owner reported  that he was in danger of defaulting on one of his properties as a direct  result of late housing assistance payments. Another owner reported having  paid $4,000 in late fees to a utility company because she was unable to pay  the bill on time. Another owner was unable to provide full payments to  vendors, including utilities, telephone service, plumbers, landscapers, and  pest control services during a 3-month delay in receiving housing  assistance payments. According to this owner, her telephone service was  interrupted during the delay and her relationship with some of her vendors  suffered. For example, the pest control and plumbing vendors would  continue to provide services only if they received cash in advance. This  owner also expressed concern about how the late and partial payments to  vendors would affect her credit rating. Industry groups with whom we  spoke also raised concerns about their members’ inability to pay mortgages  and other bills when HUD’s housing assistance payments were delayed.
If owners are unable to pay their vendors or their staff, services to the  property and the condition of the property could suffer. At one affordable  housing project for seniors that we visited, the utility services had been  interrupted because of the owner’s inability to make the payments. At the  same property, the owner told us that she could not purchase cleaning  supplies and had to borrow supplies from another property. One of the 16  owners with whom we spoke told us that they were getting ready to  furlough staff during the time that they were not receiving payments from  HUD. According to one HUD field office official, owners have complained  about not being able to pay for needed repairs or garbage removal while  they were waiting to receive a housing assistance payment. According to  one industry group official, payment delays could result in the gradual  decline of the condition of the properties in instances where owners were  unable to pay for needed repairs.
section_title: Effects of Delayed Payments on Owners Varied Based on Several Factors, Particularly the Owners’ Financial Condition and Degree of Reliance on HUD’s Subsidy
paragraphs: According to owners as well as industry group and HUD officials, owners  who are heavily reliant on HUD’s subsidy to operate their properties are  more severely affected by payment delays than other owners. Particularly,  owners who own only one or a few properties and whose operations are  completely or heavily reliant on HUD’s subsidies have the most difficulty  weathering a delay. Two of the 16 owners with whom we spoke reported  that they could not pay their bills and operate the properties during a  payment delay. These owners were nonprofits, each operating a single  property occupied by low-income seniors. In both cases, the amount of rent  they were receiving from the residents was insufficient to pay the mortgage  and other bills. Neither of these owners had additional sources of revenue.
In contrast, owners with several properties and other sources of revenue  were less severely affected by HUD’s payment delays. Three of the owners  with whom we spoke reported that they were able to borrow funds from  their other properties or find other funding sources to cover the mortgage  payments and other bills. All 3 of these owners had a mix of affordable and  market rate properties. According to HUD and PBCA officials, owners who  receive a mix of subsidized and market rate rents from their properties  would not be as severely affected by a payment delay as owners with all  subsidized units. For example, representatives of 2 of the owners stated  that they did not have to take any measures to address delays in housing  assistance. One owner is an investment firm for a pension fund that  maintains a large portfolio of mostly market rate properties. According to a  representative of the firm, delayed housing assistance payments had not  caused financial difficulties, but the delay had presented accounting  difficulties for the firm. The other owner is a nonprofit with several  properties. According to a representative of the owner, the rents paid by  the residents of all of the properties were a larger part of the nonprofit’s  revenue than the HUD subsidy, so the nonprofit was not negatively affected  by an occasional delay in housing assistance payments.
HUD allows owners to borrow from their reserve accounts to help mitigate  the effects of delayed housing assistance payments, but some owners  either do not have reserves or their reserves are not sufficient to cover the  period of the delay. HUD requires HUD-insured properties and properties  with HUD-held mortgages to set aside funds in a reserve account, which is  designed primarily to help fund capital improvements on the properties.  HUD also allows owners to withdraw funds from this account in the event  of HUD’s payment delays, so that owners are able to make their mortgage  payments. However, properties that are not insured by HUD and do not  have a HUD-held mortgage may not have a reserve account, and, according  to HUD and industry group officials, owners with small or newer properties  may not have sufficient reserves to cover delays. Even if the reserves were  sufficient, industry group officials have pointed out that owners might have  to defer capital improvements during payment delays, and also lose  interest that they would otherwise accrue in the reserve account. Some  projects also have a residual receipts account from which owners may  borrow. HUD requires nonprofits and limited dividend multifamily projects  that are HUD-insured or have a HUD-held mortgage to maintain a residual  receipts account for monies beyond the owner’s maximum allowable  distribution or profit.
section_title: Lack of Notice about Payment Dates and Lengths of Delays Has Exacerbated Problems for Owners
paragraphs: HUD has no system for notifying owners when a payment delay will occur  or when it will be resolved, which industry associations representing many  owners as well as the owners with whom we met indicated impedes their  ability to adequately plan to cover expenses until receiving the late  payment. Most of the owners with whom we spoke reported that they  received no warning from HUD that their payments would be delayed.  Several of the owners told us that notification of the delay and the length of  the delay would give them the ability to decide how to mitigate the effects  of a late payment. For example, owners could then immediately request  access to reserve accounts if the delay were long enough to prevent them  from paying their mortgages or other bills on time. Industry group officials  with whom we met agreed that a notification of a delayed payment would  benefit their members.
section_title: Delayed Housing Assistance Payments Were Unlikely to Cause Owners to Opt Out of HUD’s Programs or Discontinue Involvement in Providing Affordable Housing
paragraphs: Project owners, industry group officials, contract administrators, and HUD  officials we interviewed generally agreed that market factors primarily  drove an owner’s decision to opt out of HUD programs. Owners generally  opt out when they can receive higher market rents or when it is financially  advantageous to convert their properties to condominiums. In previous  work, we reported that financial and market considerations were factors  likely to affect owners’ decisions to opt out of HUD’s programs. For  profit-motivated owners, this decision can be influenced by the condition  of the property and the income levels of the surrounding neighborhood.  Owners were more likely to opt out if they could upgrade their properties  at a reasonable cost to convert them to condominiums or rental units for  higher income tenants.
Most of the owners with whom we spoke, including some profit-motivated  owners, reported that they would not opt out of HUD programs because of  their commitment to providing affordable housing. Industry group officials  also stated that most of their members are “mission driven,” or committed  to providing affordable housing.
According to some owners with whom we spoke, owners have accepted  payment delays as the price of doing business with HUD. However,  industry group and HUD officials stated that delayed payments could be a  contributing factor in some opt outs. According to HUD officials, owners  with primarily market rents in their buildings were more likely to opt out  because the owners felt that the rents from subsidized units were not worth  the burden of HUD’s documentation and reporting requirements. Only 1 (a  real estate investment firm for a pension fund) of the 16 owners we  interviewed stated that the firm would opt out of HUD programs if the  payment delays were longer. According to representatives of this firm, their  company has a fiduciary responsibility to the pension fund. If they began  losing money on their affordable housing projects, they would have to sell  them.
Our analysis of HUD’s monthly payment data for fiscal years 1995 through  2004 revealed little difference in the percentage of late payments for those  contracts that opted out and those still participating in HUD’s programs  (9.6 percent and 9.2 percent, respectively). In addition, we found that over  the 10-year period, 1,764 housing assistance contracts out of the 13,051 that  were eligible to do so opted out of HUD’s programs. These opt outs  represented 1,460 affordable housing projects (a project may have more  than 1 contract, hence the number of contracts exceeds the number of  projects). The number of contracts opting out over this period peaked in  fiscal year 1998, with 392 contracts opting out, and gradually declined to 54  in fiscal year 2004 (see fig. 11).
The number of opt outs likely declined after the passage of MAHRA and  HUD’s subsequent efforts to preserve affordable housing by allowing  owners to increase the contract rents with HUD to market rates, thereby  making it more financially viable for owners to continue participating in  HUD’s programs.
section_title: Conclusions
paragraphs: HUD plays an important role in ensuring the continued availability of  affordable housing by providing subsidies to owners of multifamily rental  properties and encouraging owners to remain in its programs. Over the  10-year period we examined, HUD made most payments on time—that is,  by the 1st business day of the month. However, a significant percentage of  HUD’s payments were late. The delays, particularly those of 2 weeks or  more, can cause financial hardships for property owners. For example, the  subsidies not only help pay mortgages, but also the daily operating  expenses of many owners. In retrospect, new requirements under MAHRA  and the transition to a new system of contract administration likely  increased delays, particularly in the late 1990s. The initial difficulties in  implementing MAHRA requirements have abated, and HUD largely has  completed the transition to performance-based contract administration.  However, while the timeliness of housing assistance payments has  improved in recent years, the number of significantly late payments  remains a concern.
Although HUD has made changes to improve contract administration, it  has not comprehensively addressed the factors that most affect the  timeliness of payments—that is, its contract renewal and contract funding  and monitoring processes. HUD has recognized that its contract renewal  process is cumbersome and inefficient and wants to cut contract  processing time as one goal of a broader BPR effort. However, that effort  has just gotten under way and currently is not closely focused on the  housing assistance payment process. As a result, if HUD were to rely solely  on the reengineering effort, it would miss opportunities to effect more  immediate improvements to the processing of contract renewals. In  addition, HUD effectively could prevent many delayed payments by better  estimating the amounts it needs to obligate to contracts each year, more  systematically monitoring contract funding levels on an ongoing basis, and  promptly allocating and obligating additional funding to contracts when  necessary. Currently, while contract funding needs can increase for  unforeseen reasons, HUD often underestimates how much funding a  contract will need when it obligates funds at the beginning of a year.  Furthermore, HUD’s existing monitoring has not prevented payment delays  associated with contracts needing additional funding obligated in order for  HUD to pay the owner.
As previously noted, HUD has opportunities to improve its contract  processes and avoid the often damaging disruptions late payments could  cause. While project owners and industry groups have indicated that late  housing payments alone would not lead them to opt out of HUD programs,  late housing assistance payments have serious consequences for owners  and potentially for the residents they serve. But, HUD also has  opportunities to mitigate the effects of payments that it cannot make on  time. More specifically, if HUD were to notify project owners of delays and  their likely duration, owners could make contingency plans or otherwise  address the delayed payments.
section_title: Recommendations for Executive Action
paragraphs: To improve the timeliness of housing assistance payments and mitigate the  effects on owners when payments are delayed, we recommend that the  Secretary of Housing and Urban Development take the following three  actions:  streamline and automate the contract renewal process to prevent  processing errors and delays and eliminate paper/hard-copy  requirements to the extent practicable;  develop systematic means to better estimate the amounts that should be  allocated and obligated to project-based housing assistance payment  contracts each year, monitor the ongoing funding needs of each  contract, and ensure that additional funds are promptly obligated to  contracts when necessary to prevent payment delays; and  notify owners if their monthly housing assistance payments will be late  and include in such notifications the date by which HUD expects to  make the monthly payment to the owner.
section_title: Agency Comments
paragraphs: We provided a draft of this report to HUD for its review and comment. In a  letter from the Assistant Secretary for Housing, Federal Housing  Commissioner (see app. II), HUD stated that it concurred with our  conclusions and agreed that the implementation of our recommendations  would improve payment timeliness. Specifically, HUD agreed to review its  process for renewing and amending rental assistance contracts to identify  areas that can be streamlined and automated. HUD also agreed that  developing a more systematic means to estimate contract funding needs  would further improve payment timeliness. HUD stated that it has obtained  a contractor to determine how to improve its system of estimating contract  funding needs. Additionally, HUD agreed that notification to owners when  payments will be late is desirable and that it will examine the feasibility of  providing such notification.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after the  date of this letter. At that time, we will send copies of this report to the  Chairman and Ranking Minority Member, Senate Committee on Banking,  Housing, and Urban Affairs, and the Chairman and Ranking Minority  Member of its Subcommittee on Housing and Transportation. We will also  send copies to the Secretary of Housing and Urban Development and the  Director of the Office of Management and Budget. We will make copies  available to others upon request. The report will also be available at no  charge on GAO’s Web site at http://www.gao.gov.
Please contact me at (202) 512-8678 or woodd@gao.gov if you or your staff  have any questions about this report. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix III.
section_title: Scope and Methodology
paragraphs: To determine the extent to which the Department of Housing and Urban  Development’s (HUD) housing assistance payments are timely, we obtained  from HUD and analyzed 10 years of monthly payment data (fiscal years  1995 through 2004). We identified the timeliness of each payment within  HUD’s data systems by comparing the date that the U.S. Treasury disbursed  the payment with the date that the payment was due—the 1st business day  of the month. We did not look at the dollar amount of these payments. For  contracts administered by performance-based and traditional (or  nonperformance-based) administrators, the Treasury payment is disbursed  to the administrator, which in turn makes payments to the project owners.  In contrast, for HUD-administered contracts, the Treasury disburses  payments directly to the owners.
We analyzed trends in timeliness over the 10-year period as well as the most  recent 3-year period (fiscal years 2002 through 2004) for a more current  picture of payment timeliness. We also calculated the percentage of  payments that had various degrees of lateness (such as 1 to 6 days or 4  weeks or more). For fiscal year 2004, we compared timeliness for payments  processed by the different types of contract administrators involved in this  process (i.e., HUD field offices, performance-based contract administrators  (PBCA), and traditional contract administrators, for which the HUD  Financial Management Center processes payments). We limited our  analysis to fiscal year 2004 because the data we obtained from HUD do not  allow us to identify for prior fiscal years which type of contract  administrator was responsible for each contract, and, over the course of  these years, HUD was in the process of transferring contract  administration responsibilities to the PBCAs. To better understand the  payment process, we interviewed officials from both HUD’s Office of  Multifamily Housing and HUD’s Financial Management Center and  reviewed relevant documentation on the payment process.
We used various HUD databases to analyze the timeliness of housing  assistance payments. Specifically, we used data from HUD’s Program  Accounting System (PAS) for payments on contracts administered by HUD  and the PBCAs and data from the HUD Central Accounting and Program  System for contracts administered by nonperformance-based contract  administrators (traditionally administered contracts). We also used these  data to determine the percentage of significantly late payments (i.e., 2  weeks or more late), including the distribution by type of contract  administrator. We also used the PAS data to analyze differences in payment  timeliness by state for PBCA- and HUD-administered contracts.
In order to assess the reliability of the data previously described, we  reviewed related documentation and interviewed agency officials who  work with these databases. In addition, we performed internal checks to  determine the extent to which the data fields were populated and the  reasonableness of the values contained in the fields. During our internal  checks, we excluded from our analysis 7 percent of the payments recorded  in PAS due to unreasonable values for the payment date. We concluded that  the data we used were sufficiently reliable for the purposes of this report.
To determine the factors that affect the timeliness of HUD’s housing  assistance payments, we interviewed HUD headquarters officials  responsible for managing and budgeting for the project-based assistance  contracts and payments as well as officials from industry groups  representing a variety of property owners and management agents. We also  conducted site visits to eight locations that we selected by including those  with high and low percentages of late payments. For these site visits, we  interviewed the relevant field office officials involved in processing  housing assistance payments, renewing housing assistance contracts, and  conducting oversight of the PBCAs. We interviewed officials of the PBCAs  for each of the states we visited. In each of the eight locations, we also  interviewed 2 project owners with some experience with payment delays.  We randomly selected 15 of the 16 owners we interviewed; HUD field office  officials identified 1 of the project owners during the phase of our work  when we were gathering initial background information. For all of our  interviews for these site visits, we used a semistructured interview guide to  ensure consistency. We also reviewed relevant documentation provided by  HUD field officials, the PBCAs, and project owners.
We used available HUD data to characterize the reasons for some payment  delays for fiscal years 2002 through 2004. We matched PAS payment data  on PBCA- and HUD-administered contracts with data on reasons for  payment delays from HUD’s Tenant Rental Assistance Certification System  (TRACS). We could only determine the reason for delays for 55 percent of  the late payments. For almost all of the remaining 45 percent of the  payments, HUD’s data systems did not accept the voucher—for these  payments there was no error code associated with the delay. Although the  data on reasons for delays are thus not representative of all late payments  in these years, the testimonial evidence we obtained though our  discussions with property owners, contract administrators, and HUD  officials corroborated the results of our data analysis. HUD did not collect  data on the reasons for delayed payments on traditionally administered  contracts.
We also analyzed data to examine the timeliness of contract renewals with  the various types of rent adjustments that owners may seek. To determine  the extent to which HUD renewed or adjusted its contracts with property  owners within the 120-day time frame that the agency has established, we  used data from HUD’s Real Estate Management System covering fiscal  years 2002 through 2004. In order to assess the reliability of the data we  used to determine reasons for late payments and delays in contract  renewals, we reviewed related documentation. In addition, we performed  internal checks to determine the extent to which the data fields were  populated and the reasonableness of the values contained in the fields. We  concluded that the data we used were sufficiently reliable for the purposes  of this report.
To assess the effects of housing assistance payment delays on project  owners and their willingness to continue providing affordable housing, we  compared available HUD payment data on projects that have opted out of  HUD’s programs with those currently receiving assistance to determine if  these projects had experienced more payment delays. We tested for  statistically significant differences in the timeliness of payments among  properties that had and had not opted out. We held meetings with a variety  of industry groups to obtain their views on how late payments may affect  project owners and their willingness to continue providing affordable  housing. We also spoke with HUD field office officials, the PBCAs, and  project owners on our eight site visits, as previously mentioned, regarding  the effects of late payments on project owners.
We conducted our work between October 2004 and September 2005 in  Baltimore, Maryland; Boston, Massachusetts; Chicago, Illinois; Des Moines,  Iowa; Kansas City, Kansas; Kansas City, Missouri; Los Angeles, California;  Manchester, New Hampshire; Seattle, Washington; and Washington, D.C., in  accordance with generally accepted government auditing standards.
section_title: Comments from the Department of Housing and Urban Development
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to those named above, Bill MacBlane, Assistant Director; Jackie  Garza; Patty Hsieh; Jane Kim; Don Porteous; Julianne Stephens Dieterich;  Alison Martin; Marc Molino; Linda Rego; Barbara Roesmann; and Stu  Seman made key contributions to this report.