Rental Housing Programs: Excluding Servicemembers' Housing Allowances from Income Determinations Would Increase Eligibility, but Other Factors May Limit Program Use
Released: 2006-07-31T00:00:00

Letter

Background

BAH, one of several components of military compensation, is intended to provide servicemembers with an allowance to enable them to obtain suitable housing when military-owned housing is not provided. Accordingly, BAH payments reflect the cost of housing where servicemembers are stationed, and the payments change annually in response to increases or decreases in local housing costs. Still, the most recent base realignment and closure (BRAC) process, among other restationing actions, will cause movement of large numbers of military personnel to communities that initially may lack enough private housing that is affordable to most servicemembers. Several HUD, USDA, and IRS rental housing programs that are intended to make housing affordable to low-income households count BAH as income when assessing the eligibility of active-duty servicemembers.

Military Compensation Incorporates Basic Pay, Allowances, and Bonuses

BAH is one of several elements of regular military compensation. Regardless of whether they live in military-owned housing or receive BAH, servicemembers receive basic pay and a Basic Allowance for Subsistence (BAS). BAH and BAS are not subject to federal income tax. With the addition of average BAH payments to the other two pay elements, regular military compensation in 2006 starts at $26,401 for the lowest-ranking enlisted servicemembers and culminates at $183,196 for the highest-ranking officers, excluding consideration of any tax advantage because the allowances are not subject to federal income tax (see fig. 1).

In addition to the primary elements of military compensation shown in figure 1, servicemembers with duty stations in more than 55 continental U.S. locations, where nonhousing expenses exceed the national average by at least 8 percent, receive a cost-of-living allowance. Servicemembers also may receive other types of pay, allowances, or bonuses, depending on their professional backgrounds, skills, or duties. For example, servicemembers may receive special pay for hardship duty or exposure to hostile fire, allowances when they are separated from their families because of a change in station or a temporary duty assignment, and bonuses for enlistment and reenlistment.

According to DOD officials, in March 2006, about 950,000 personnel lived in private housing (including privatized military family housing) and received BAH—including roughly 70 percent of active-duty servicemembers in the United States, as well as some activated reservists and servicemembers stationed overseas whose dependents lived in the United States. DOD generally requires enlisted servicemembers in the lowest ranks who do not have dependents to live on base in furnished living quarters, commonly referred to as barracks. These enlisted servicemembers do not receive BAH.

Each year, DOD sets BAH rates (i.e., the allowances servicemembers receive monthly) that are based on the median local monthly cost of housing, including current market rents, utilities, and renter’s insurance. The amounts that servicemembers receive also are based on their pay grades and whether they have dependents. To calculate BAH rates for different pay grades, DOD uses six standard categories of housing—ranging from an one-bedroom apartment to a four-bedroom, single-family detached house—that are intended to match the housing normally occupied by civilians with comparable incomes. DOD applies separate categories to servicemembers with and without dependents, but the number of dependents does not affect the BAH amount.

BAH rates have increased since 2000 as DOD implemented an initiative to reduce servicemembers’ out-of-pocket housing costs. Prior to 2005, the BAH rate for each area and pay grade was the local median monthly housing cost minus a percentage of the national median monthly housing cost. That deduction represented the amount that servicemembers would have to pay out of pocket if their actual housing costs exactly matched the median local housing cost for their pay grade. In 2000, the deduction was 19 percent of the national median housing cost. DOD gradually reduced the deduction so that, by 2005, BAH rates equaled the median housing cost for each area and pay grade. Furthermore, while the housing allowance is calculated on the basis of the rental market, servicemembers may choose to apply their allowance toward purchasing a home, and they are free to spend more or less than their allowance on housing.

We reported in April 2006 that the increases in BAH rates had made it possible for more servicemembers to afford private housing in the local market, thus reducing the need for privatized housing at installations. This has recently contributed to lower-than-expected occupancy rates at some privatized housing projects. If some privatized projects persistently experience lower-than-expected occupancy rates, they could encounter financial difficulties or, at worst, failures. To avoid such concerns in future privatization projects, we recommended that DOD determine how increased BAH rates would affect installations’ housing requirements and provide guidance on how the services should incorporate this information into their assessments of the need for privatized family housing.

More Than 100 Installations Will Gain Personnel through the 2005 BRAC Process

The National Defense Authorization Act for Fiscal Year 2002 authorized a new BRAC process in 2005. This was the fifth such process in the last two decades, but the first since 1995. As in previous processes, Congress enacted the legislation to close unneeded bases and realign others. On November 9, 2005, Congress accepted in their entirety the most recent BRAC recommendations for base closings and realignments. DOD has 6 years, or from 2005 until September 15, 2011, to implement these recommendations.

The 2005 BRAC process affects a substantial number of communities surrounding installations that are expected to experience considerable growth in military personnel. While scores of installations will gain or lose military personnel, more than 20 installations each are expected to gain between 2,000 and 21,000 military, civilian, and mission-support contractor personnel. For the most part, installations with the largest gains are located in predominantly urban counties. However, some installations are in rural areas that may have less housing available, raising the possibility that incoming personnel initially could face a shortage of nearby housing that is affordable to them. The installations that will gain the most personnel through BRAC are Department of the Army installations, with their gains attributable to actions such as the consolidation of various activities and the return of personnel from overseas locations under DOD’s integrated global presence and basing strategy. In addition to shifts related to BRAC, the Army is realigning personnel as it changes its force structure.

Many Federal Rental Housing Programs Include BAH in Income Determinations

Various HUD, USDA, and IRS rental housing programs are intended to make housing affordable for lower-income renters. None of the federal agencies that administer these programs maintain data on the number of participating servicemembers. The programs either support the production of new or rehabilitated rental housing for eligible families or subsidize tenants’ rents to make existing units affordable (see table 1). Specifically: Among the production programs, LIHTC and Section 515 Rural Rental Housing Loans require property owners to restrict the rents that eligible tenants pay. The rent on each tax-credit unit generally cannot exceed 30 percent of the applicable income limit, adjusted for the number of bedrooms. Tenants pay 30 percent of their adjusted incomes toward the rent on Section 515 units. The tax-exempt multifamily housing bonds program requires units to be set aside for eligible families, but the rents on these units generally do not have to be restricted.

Rental assistance programs make payments to property owners to make up the difference between an eligible tenant’s rent contribution (generally, 30 percent of adjusted monthly income) and a unit’s total rent. The Housing Choice Voucher program offers tenant-based rental assistance that tenants can use to rent privately owned apartments or single-family homes, and that they can transfer to new residences if they move. In contrast, the project-based Section 8 and Section 521 Rural Rental Assistance programs offer project-based rental assistance, which is attached to specific properties and is available to tenants only when they are living in units at these properties.

Public housing also subsidizes tenants’ rents. However, rather than making rental assistance payments to owners that are keyed to tenants’ rent payments, HUD provides public housing agencies with annual operating subsidies that are based partly on the property’s projected overall rental income.

All of these federal programs use a common definition of income as set out in a HUD regulation. Under this definition, incomes of servicemember households include all regular pay, special pay, and allowances (including BAH) of the servicemember, except special pay to servicemembers who are exposed to hostile fire. Each program determines households’ eligibility to apply by comparing their incomes with an income limit, expressed as a percentage of the area median. The income limits are adjusted for family size, with higher limits for larger families. In addition, the HUD and USDA programs use tenant income (with certain adjustments) to determine how much of a unit’s rent the tenant will pay.

The programs generally target various categories of households, defined according to the relationship between a household’s income and the local area median income (AMI): extremely low (household income is no more than 30 percent of AMI), very low (no more than 50 percent of AMI), low (no more than 80 percent of AMI), and moderate (no more than $5,500 above 80 percent of AMI). In addition to these categories, the LIHTC and tax-exempt multifamily housing bond programs can target households with incomes that are no more than 60 percent of AMI. For purposes of this report, we focused on the 50 percent and 60 percent of AMI limits because they generally apply to new applicants for the two largest federal rental housing programs, Housing Choice Voucher and LIHTC.

The federal rental housing programs are not entitlements and, as a result, do not assist all households that HUD has identified as having housing needs—that is, households with very low incomes that pay more than 30 percent of their income for housing, live in substandard housing, or both. According to HUD data for 2003, federal rental housing programs assisted an estimated 4.3 million households, or 27 percent of all renter households with very low incomes. Over 9 million renter households with very low incomes (about 59 percent) did not receive federal assistance and had housing needs. Of these 9 million households, over 5 million had what HUD terms “worst case” needs—that is, they paid over half of their income in rent, lived in severely substandard housing, or both.

Excluding BAH When Determining Income Would Extend Eligibility to More Servicemembers, Assuming No Additional Household Income

Assuming that the primary components of military pay were the only sources of servicemembers’ household incomes, excluding BAH payments from income when determining servicemembers’ eligibility for federal rental housing programs would have substantially increased the percentage that would have been eligible to apply for the programs as of December 2005. Specifically, most junior enlisted members would have been eligible for the programs, as would have much smaller percentages of senior servicemembers. In addition, although few in number, servicemembers with the largest families (nine or more persons) would have been somewhat more likely to be eligible for the programs than those with smaller families. However, to the extent that servicemembers’ households had income from nonmilitary sources, fewer of them would have been eligible for the federal programs. We lacked data on servicemember household incomes from nonmilitary sources, but at least 80 percent of the potentially eligible servicemembers were married, and income earned by spouses would likely have disqualified many of these households.

Most Junior Enlisted Members and Some Senior Members Would Have Been Eligible if Military Pay Were Their Sole Source of Income

Assuming that the primary components of servicemembers’ military pay were their only sources of household income in 2005, we found that by excluding BAH from income determinations, 19.9 percent of servicemembers of all grades would have been eligible for federal rental housing programs that used an income limit of 50 percent of AMI, compared with less than 1 percent of servicemembers with BAH included. Similarly, at the 60 percent of AMI limit, 39.3 percent of the servicemembers would have been eligible if BAH were excluded when determining income, compared with 4.8 percent if BAH were included (see fig. 2). At both income limits, most junior enlisted members (for our purposes, E-1 through E-4) would have been eligible for the programs if BAH were excluded. Specifically, at the 50 percent of AMI limit, substantial majorities of E-1s (92.4 percent), E-2s (78.7 percent), and E-3s (65.2 percent) would have been eligible. At the 60 percent of AMI limit, virtually all E-1s (99 percent) and E-2s (97.6 percent) and substantial majorities of E-3s (90.2 percent) and E-4s (64.6 percent) would have been eligible.

In addition, using the same assumption that household income included only the primary components of military pay, some senior enlisted members and officers would have been eligible for the programs if income determinations excluded BAH. Specifically, at the 50 percent of AMI limit, 19.2 percent of E-5s and 9.4 percent of E-6s would have been eligible, as would have very small percentages of servicemembers in pay grades E-7 through E-9 (see fig. 2). The percentage of eligible officers also would have been very small, as follows: 1 percent using the 50 percent of AMI limit, and 2 percent using the 60 percent of AMI limit.

Excluding BAH, More Servicemembers with Families of All Sizes Would Have Been Eligible, Especially Larger Families

Again assuming that the primary components of military pay were the only sources of household income, by excluding BAH from income determinations, considerable percentages of servicemembers with families of all sizes would have been eligible for the programs, using either the 50 percent or 60 percent of AMI limit. However, because the programs’ income limits increase with family size, servicemembers with larger families (although relatively few in number) generally would have been more likely to be eligible than those with smaller families (which were much greater in number). For example, with BAH in income determinations, 6.6 percent (59) of the largest families (those with nine or more persons) would have been eligible for programs using the 50 percent of AMI limit, compared with 0.5 percent (866) of the smallest (two-person) families (see fig. 3). With BAH excluded, 40.6 percent (361) of the largest families would have been eligible, compared with 23.7 percent (45,262) of the smallest families. The same general pattern held true for programs using the 60 percent of AMI limit. For example, 63.8 percent (568) of the largest families and 44.5 percent (84,999) of the smallest families would have been eligible if BAH were excluded from income determinations.

Additional Household Income Would Reduce the Number of Eligible Servicemembers

To the extent that servicemembers had additional sources of household income, their actual eligibility for the federal rental housing programs would have been less than the percentages shown in our analysis. Additional sources of household income could include income on assets (such as savings accounts or mutual funds), employment of other household members, or types of military pay that we did not include in our analysis. For example, figure 4 shows that—at both program income limits and with BAH included in or excluded from income determinations—at least 80 percent of the potentially eligible servicemembers were married and, thus, could have had additional income earned by a spouse. In addition, at least 9 percent of the potentially eligible servicemembers received other types of military pay.

To illustrate how additional sources of household income could affect eligibility for the federal rental housing programs, we calculated the amounts of additional income it would take to disqualify married servicemember households that would have been eligible on the basis of their military incomes alone. We found that, among the married servicemembers who were potentially eligible with BAH included in income determinations, income from even part-time, minimum-wage work by their spouses likely would have disqualified many from the federal programs. The same was true even if BAH were excluded from income determinations. For example, with BAH included, spousal income of $2,004 would have been enough to disqualify half of the married servicemembers that were potentially eligible for programs using the 50 percent of AMI limit (see table 2). With BAH excluded, spousal income of $4,044 would have been enough to disqualify half of the married servicemembers that were potentially eligible. At the 60 percent of AMI limit, $3,108 in spousal income would have disqualified half of the potentially eligible married servicemembers with BAH included in income determinations, compared with $6,180 if BAH were excluded. As shown in table 2, these amounts represent part-time work of 24 hours per week or less at the federal minimum wage.

Eligibility Aside, Lack of Demand and Other Factors Could Limit Servicemembers’ Use of Federal Rental Housing Programs

Agency officials and representatives from the four communities we examined described factors that may limit the role of federal rental housing programs in increasing the supply of housing or helping servicemembers afford existing housing, regardless of how BAH affects their eligibility. DOD officials said that servicemembers would be unlikely to need federal rental housing programs because BAH rates cover median local housing costs and would adjust annually to reflect any increases in market rents that resulted from increased demand for housing near growing installations. Yet, some community officials said that the LIHTC program could be used to build more affordable housing if more servicemembers were eligible. However, states would have to award tax credits to projects in these communities, and housing market factors—such as the financial feasibility of building market-rate units with rents that low-ranking servicemembers could afford—could affect developers’ interest in using the LIHTC program. Furthermore, although HUD and USDA programs could help some eligible servicemembers rent existing units, the programs are not entitlements; the limited availability of this rental assistance may preclude servicemembers from using the programs. Also, if more servicemembers applied for these programs, eligible lower-income civilians might face longer times on waiting lists.

Servicemembers May Not Need Programs because BAH Rates Cover Median Costs and Are Adjusted for Changing Rents

According to DOD officials, servicemembers would be unlikely to need federal rental housing programs to obtain affordable housing near growing installations because BAH rates cover local housing costs and would adjust for any increases in market rents that resulted from personnel gains. As of 2005, BAH rates fully cover the median local cost of housing at each installation. Officials noted that DOD’s recent initiative to reduce servicemembers’ out-of-pocket housing costs had resulted in substantial increases in BAH rates nationwide, including at the four selected installations we reviewed (Forts Benning, Bliss, Drum, and Riley). In addition, the officials said that, if increased demand for housing near a growing installation caused upward pressure on housing costs, DOD would adjust BAH rates upward as part of the annual rate-setting process, allowing servicemembers to obtain market-rate housing without additional federal assistance. However, if vacant units were not available in the communities immediately surrounding a growing installation, DOD officials acknowledged that some servicemembers might have to seek housing in outlying communities until the private market responded with new construction closer to the installation.

Furthermore, the National Defense Authorization Act for Fiscal Year 2006 authorized the Secretary of Defense to prescribe temporary increases in BAH rates in disaster areas or areas that contain one or more installations that are experiencing a sudden increase in the number of servicemembers assigned to the installation. Specifically, a temporary increase in BAH rates would be based on the amount by which area housing costs increased because of the disaster or influx of service members and would apply until new rates for the next calendar year took effect. According to DOD officials, no installations had requested an increase in BAH rates because of installation growth, and the Secretary had not used this authority as of June 2006. If an installation requests a temporary increase in BAH rates because of installation growth, the officials said that DOD would review local market conditions to determine whether an increase was warranted.

Ability of the LIHTC Program to Produce Needed Housing Could Be Affected Not Only by Servicemembers’ Eligibility, but Also by the State Allocation Process and Market Conditions

To varying degrees, officials in the four communities (near Forts Benning, Bliss, Drum, and Riley) that we examined described a need to build more private housing for incoming servicemembers. Some officials indicated that, under certain conditions, the LIHTC program could help address their anticipated housing needs.

According to officials at the selected installations, expected gains in military personnel ranged from about 4,500 at Fort Benning to about 19,500 at Fort Bliss (see table 3). The rural installations—Fort Drum and Fort Riley—expected more substantial growth relative to their existing supply of housing than did the urban installations. The communities generally did not yet have precise data on the expected number of servicemembers that would be most likely to seek private housing (servicemembers with families and those in higher pay grades who do not have dependents) or required to live in barracks (servicemembers in junior pay grades who do not have dependents). However, community officials in the Fort Riley area estimated that at least 9,000 more housing units would be needed, considering both the estimated number of incoming military personnel and the expected growth in the civilian employment at the installation. Similarly, community officials near Fort Drum estimated the need for approximately 2,000 additional units. Community officials in the Fort Benning and Fort Bliss areas had not developed such estimates, but they also anticipated that some new construction would be necessary to accommodate installation growth as well as other population increases.

Officials in some of these communities indicated that, under certain conditions, the LIHTC program could help address their anticipated housing needs. In particular, officials in the rural communities surrounding Fort Drum and Fort Riley said that the LIHTC program could help them build more affordable housing in response to installation growth, but only if more servicemembers would qualify to live in tax-credit units (see sidebar). Assuming that the primary components of military pay were the only sources of household income, modest percentages of servicemembers at Fort Drum and Fort Riley in December 2005 might have qualified for tax-credit units using the 60 percent of AMI limit even under the program’s existing income definition, but much larger percentages (about 37 percent and 26 percent, respectively) would have been eligible if BAH were excluded from income determinations (see fig. 5). In contrast, almost none of the servicemembers at Fort Benning and Fort Bliss would have been eligible under the existing income definition, and modest percentages (about 14 percent and 10 percent, respectively) would have been eligible if BAH were excluded from income determinations. The variation in servicemembers’ eligibility across installations reflected differences in the percentages of servicemembers in the lowest pay grades.

Although these data, which pertain to personnel already located at these installations as of December 2005, do not indicate how many incoming personnel might be eligible to live in tax-credit units, they suggest that substantial percentages of those at the rural installations might become eligible if BAH were excluded from income determinations. In light of that possibility, community officials near Fort Drum and Fort Riley stated that excluding BAH could create opportunities to use the LIHTC program. Specifically: Community officials near Fort Drum indicated that some developers were interested in building new rental housing but faced obstacles in financing projects because of an estimated gap between current market rents, which incoming junior enlisted personnel likely could afford, and the higher rents that developers would need to charge to make new apartments financially feasible without government subsidies. The officials had been working with developers to seek financing assistance through state programs, including New York’s low-income housing tax credit program, which serves households with incomes up to 90 percent of AMI. However, because the state programs are relatively small, the officials said that increasing servicemembers’ eligibility for the larger federal LIHTC program would provide more financing options for developers.

Community officials near Fort Riley noted that servicemembers make up a substantial portion of the current and expected future rental market in the area, particularly in the community of Junction City just outside of the installation. They said that while some developers of tax-credit projects have expressed interest in building more units in the area, they would only do so if the pool of potential tenants included more incoming servicemembers, because the demand for additional tax-credit units among civilian families is limited.

However, even if BAH were excluded from income when determining eligibility and if developers proposed building tax-credit units, LIHTC-funded development might be limited near growing installations because the state agencies that award available tax credits have a variety of priorities. By law, each state must prepare an annual plan that identifies its criteria for distributing its allocation of credits among proposed developments. A state would have to weigh how a proposed property would address the housing needs near growing installations against the state’s priorities and selection criteria. States must give preference to projects serving the lowest-income tenants and projects that would serve qualified tenants for the longest periods of time. The states’ selection criteria also must include other considerations, such as tenant populations with special housing needs. For example, the priority housing needs in Kansas’s plan for allocating tax credits in 2006 include projects in communities with populations of fewer than 5,000; preservation of housing with Section 8 or Section 521 project-based rental assistance; projects for special-needs populations, such as the homeless or people with disabilities; and projects whose units would offer below-market-rate rents. Projects addressing these priorities would receive extra points in the scoring process used to evaluate proposals.

Furthermore, officials in the four communities described market factors that could influence whether developers would try to use the LIHTC program to build housing near growing installations. In general, developers would have limited incentive to compete for tax credits if conditions for building market-rate housing were favorable, such as in areas having a higher-income population. Generally, market-rate housing allows developers to charge whatever rents the market will bear, without other restrictions. In contrast, applicants for tax-credit financing must agree to limit the rents charged for tax-credit units for at least 30 years and must comply with other federal requirements for 15 years or risk losing the right for investors to claim the tax credits. Thus, developers might be less likely to propose new tax-credit units near a growing installation that expected to receive more senior servicemembers with relatively high incomes than near one that expected more junior members with relatively low incomes. For example: Aside from military students who would live on base, most of the incoming military personnel at Fort Benning are associated with the planned realignment of a training school with primarily senior-ranking personnel. Community officials said that because these personnel likely could afford to pay market rates for housing, they did not expect developers to focus on providing new housing through the LIHTC program.

In contrast, on the basis of preliminary estimates from Fort Riley officials, roughly 45 percent of the servicemembers that would eventually be stationed there might be married members in pay grades E-1 through E-6. As of early 2006, the communities near Fort Riley had substantial market-rate development under way or in the planning stages. However, community officials anticipated that enough additional low-cost housing would be needed for servicemembers in these lowest pay grades to justify building tax-credit units for them (assuming they were to become eligible).

In addition, developers might be more disposed to seek LIHTC financing in areas where the cost to build new housing was high relative to the incomes of junior enlisted members. For example: Whereas officials in the Fort Benning area expected that developers could build new market-rate housing within the price range that incoming servicemembers could afford, officials in the rural Fort Drum and Fort Riley areas stated that increasing construction, labor, and infrastructure costs could make new market-rate units too expensive for junior enlisted members or could make it difficult to secure financing for market-rate units. For example, the cost of bringing materials and, perhaps, workers into a rural area can contribute to relatively high development costs.

Near Fort Bliss, El Paso city officials said that the LIHTC program might be an attractive financing alternative for developers if they could not otherwise build housing that servicemembers with the lowest incomes could afford. However, the officials did not yet know whether developers might need subsidies. They planned to study the issue by considering the expected incomes of servicemembers who would be arriving at Fort Bliss, the supply and price of existing housing, and the development costs and rents that would be charged for new market-rate housing.

Waiting Time and Scarcity of Larger Units May Preclude Servicemembers from Renting Existing Units through HUD and USDA Programs

Even if more servicemembers were to become eligible for HUD and USDA rental housing assistance programs, waiting lists for units and the limited availability of large units might limit servicemembers’ participation in these programs, according to officials from HUD, USDA, and the four selected communities.

Rather than financing new rental housing near growing installations, HUD’s Housing Choice Voucher, public housing, and project-based Section 8 programs and USDA’s Section 515 and Section 521 programs primarily would help servicemembers rent existing units if they obtained the programs’ assistance, typically by making up the difference between their required contribution (generally 30 percent of adjusted monthly income) and a unit’s total rent. However, these programs are not entitlements, and many of the HUD, USDA, and community officials said that the limited number of units or limited supply of rental assistance may deter eligible servicemembers from applying for these programs, especially in areas with long lists of applicants already awaiting assistance. If they did join the programs’ waiting lists, servicemembers might find other private, military-owned, or privatized housing; relocate to a different installation; or become ineligible for the program because of a promotion before they rose to the top of a list. In all four of the communities we reviewed, the Housing Choice Voucher and public housing programs had waiting lists, with times ranging from a few months to 2 years, according to officials from HUD field offices and the housing authorities that maintain the lists. For example, in Columbus, Georgia, near Fort Benning, the waiting list for vouchers was long enough that it was closed as of March 2006 and was not expected to open to new applicants until 2008.

In addition, servicemembers with large families may face obstacles to using rental assistance programs because of the limited availability of units with three or more bedrooms, according to some HUD, USDA, housing authority, and installation officials. In the four communities, properties with project-based Section 8 assistance and public housing developments offered relatively few units with three or more bedrooms, thereby limiting the options for families of five or more persons. For instance, in the Fort Drum area, of 690 project-based Section 8 and public housing units intended for families, 172 had three bedrooms and 43 had four bedrooms; the remaining 475 had fewer than three bedrooms. Similarly, although voucher recipients can seek housing in the broader private rental market, some of the HUD field office officials noted that larger families could have a hard time finding a sufficiently sized apartment or house that would meet the program’s quality and cost standards.

If servicemembers did join the programs’ waiting lists, HUD headquarters and field office officials noted that housing authorities could adopt preferences that would reduce servicemembers’ wait for vouchers or public housing, but some officials said that such a step could be controversial. The housing authorities that administer vouchers and public housing developments may establish local preferences for selecting families from waiting lists, on the basis of local housing needs and priorities. However, HUD and housing authority officials said that such preferences—for example, for victims of domestic violence or a single homeless person—have sometimes met opposition from those who would face longer waits because they did not qualify for these preferences.

Similarly, some HUD officials said that increasing servicemembers’ eligibility for the programs or giving them preference on waiting lists could create tensions with lower-income civilians who might have to face even longer waiting periods for rental assistance as a result. On the basis of the 2006 pay rates for the primary elements of military compensation, servicemembers in all pay grades would have substantially more income than most existing Housing Choice Voucher recipients, even without their BAH payments (see fig. 6). In light of that difference in incomes, some of the officials also cited potential concerns about balancing any advantages for servicemembers with the programs’ current emphasis on targeting assistance to households with extremely low incomes.

Conclusions

As some military installations gain servicemembers, nearby communities face opportunities for growth as well as potential challenges in providing an adequate supply of housing that incoming servicemembers can afford. Many of these incoming personnel may not have problems finding housing they can afford—for example, junior enlisted members without dependents generally live in barracks; DOD has the ability to raise BAH rates for other servicemembers to reflect any increases in housing costs near the growing installations; and many servicemembers may have additional resources, such as spousal income, that they can put toward housing costs. Where communities lack enough housing for incoming personnel or where rents are expensive for married junior personnel, federal rental housing programs might help provide affordable housing for servicemembers through the production of additional housing or through rental assistance for existing housing. By excluding BAH from servicemembers’ incomes when determining eligibility, many of the lowest-ranking servicemembers could qualify to apply for these programs.

However, the effects of such a change are uncertain and could involve trade-offs that warrant attention. For example, the LIHTC program (or, similarly, tax-exempt multifamily housing bonds) could help increase the supply of affordable rental housing for incoming servicemembers, if more of the members were eligible to live in tax-credit units. However, even if more servicemembers were eligible, the extent to which the LIHTC program would play a role in increasing the supply of affordable housing near growing installations would depend on local housing market conditions, the income distribution of incoming servicemembers, and the decisions of state agencies regarding whether to allocate tax credits to projects near growing installations or to projects that might address other state housing priorities. Furthermore, the rental assistance programs are not entitlements and already do not assist all eligible households. While some servicemembers might be deterred by the prospect of a lengthy wait from applying for HUD and USDA rental assistance for existing units, those who did apply would expand the pool of those waiting for a limited supply of available assistance. Thus, making more servicemembers eligible by excluding BAH from income determinations could cause these programs to serve more servicemembers at the expense of eligible civilians.

Matter for Congressional Consideration

If the primary intent of excluding BAH from income determinations for federal rental housing programs is to help increase the supply of rental housing that servicemembers with the lowest incomes could afford, Congress should consider first applying such a change only to programs intended to stimulate production of such housing, such as LIHTC and tax-exempt multifamily housing bonds.

Agency Comments and Our Evaluation

We provided a draft of this report to DOD, HUD, IRS, Treasury, and USDA for their review and comment. Treasury and USDA did not comment on the draft report. DOD, HUD, and IRS provided technical comments, which we incorporated where appropriate. DOD also provided comments in a letter from the Acting Deputy Under Secretary for Military Personnel Policy (see app. II).

DOD commented that BAH does an excellent job of achieving the objective of providing servicemembers with the same quality and quantity of housing that their civilian counterparts can afford. However, DOD also noted that servicemembers may have difficulty finding adequate housing if there are substantial changes in the supply of or demand for housing in a local area, at least until the private market has had time to adjust to the changing conditions. DOD also observed that servicemembers with large families, who seek larger housing than an average size family, may have difficulty finding adequate housing using their BAH payments alone and may apply for federal rental housing programs. However, DOD also stated that servicemembers should be eligible for federal housing subsidies under the same terms as their civilian counterparts. Furthermore, DOD commented that excluding BAH from income determinations might transfer existing scarce resources from low-income civilians to the military and generate ill-will among civilians toward the military. Finally, DOD stated that, while our draft report showed that excluding BAH from income determinations might not have the desired effect of increasing the supply of rental housing for servicemembers, there might be other ways in which the government could assist the private market in responding to housing shortgages. Our draft report discussed the particular difficulties of large families—even those receiving rental assistance—in finding suitable housing. The draft report also addressed the potential role of existing programs, particularly the LIHTC program, in stimulating production of affordable housing near growing installations. However, examining other possible federal strategies for increasing the supply of private housing was beyond the scope of this study.

We are sending copies of this report to other interested congressional committees; the Secretaries of the Departments of Agriculture, Defense, Housing and Urban Development, and the Treasury; and the Commissioner of Internal Revenue. We will make copies available to others upon request. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov.

Please call me at (202) 512-8678 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. See appendix III for key contributors to this report.

Objectives, Scope, and Methodology

Objectives

Our objectives were to determine (1) how excluding the Basic Allowance for Housing (BAH) from income determinations would have affected the eligibility of servicemembers receiving BAH as of December 2005 and (2) programmatic and market factors that could affect eligible servicemembers’ participation in the programs in selected communities gaining military personnel.

Scope and Methodology

The federal rental housing programs in our scope include the Department of Housing and Urban Development’s (HUD) public housing, Housing Choice Voucher, and project-based Section 8 programs; the Department of Agriculture’s (USDA) Section 515 Rural Rental Housing Loans and Section 521 Rural Rental Assistance programs; and the Low-Income Housing Tax Credit (LIHTC) and tax-exempt multifamily housing bond programs, which are jointly administered by the Internal Revenue Service (IRS) of the Department of the Treasury (Treasury) and the states.

To determine how excluding BAH would have affected the eligibility of active-duty servicemember households receiving BAH as of December 2005, we compared the incomes of servicemembers who received BAH in December 2005 with the federal rental housing programs’ income limits in effect at that time. We obtained personnel and pay data from the Department of Defense’s (DOD) Active Duty Personnel Master and Active Duty Pay files for December 2005. We analyzed data on 702,975 active-duty servicemembers who received BAH payments that month. We calculated servicemembers’ annual incomes on the basis of their December 2005 payments for basic pay; BAH; Basic Allowance for Subsistence; and, where applicable, a cost-of-living adjustment for servicemembers in certain high- cost areas. We assumed that these elements of military pay were servicemembers’ sole sources of household income because data on other income sources, such as spousal income, were unavailable. However, we analyzed how other sources of income might have reduced servicemembers’ eligibility by calculating the median additional annual income needed before married servicemembers’ families would have exceeded the income eligibility limit.

To assess the reliability of the data used in our analysis, we interviewed DOD officials who were familiar with the data, reviewed relevant documentation, and tested the data for missing and apparently erroneous values. DOD provided data on 708,548 active-duty members of the Departments of the Army, Navy and Air Force and the Marine Corps. On the basis of our tests of these data, we excluded 5,573 (about 0.8 percent) records because we could not match the servicemembers’ zip codes to the geographic areas for which income limits were defined, because data on family size were missing, or because anomalies in the monthly pay data prevented us from calculating an annual income amount. As a result, our servicemember population was 702,975 for this analysis. We concluded that these data were sufficiently reliable for our purposes. Nonetheless, our analysis was limited because it provided a snapshot of servicemembers’ potential eligibility to apply for the programs on the basis of their incomes in December 2005. We could not predict the effects of a future change in income determinations, because potential changes in servicemembers’ incomes or duty locations and annual adjustments to programs’ income limits would also affect eligibility.

To determine the programmatic and market factors that could affect eligible servicemembers’ participation in the programs in selected communities gaining military personnel, we interviewed and reviewed relevant documentation from military installation officials; rental housing program officials (including officials from HUD and USDA field offices, public housing authorities, and state housing finance agencies); and local government or community organization representatives in four communities near installations that will gain military personnel as a result of the 2005 base realignment and closure (BRAC) process or other military initiatives. We selected Fort Benning, Georgia; Fort Bliss, Texas; Fort Drum, New York; and Fort Riley, Kansas. We selected these installations on the basis of their expected net gains of military personnel and preliminary information indicating that the surrounding communities had initiated planning to address the housing needs of incoming servicemembers. We also sought a balance between urban and rural locations. Our selection of four Army installations reflects that this service generally expected the largest personnel gains. We visited the Fort Riley, Kansas, area and contacted the other areas by telephone. We cannot generalize the information from these four installations to all installations that will gain military personnel. In addition to our local contacts, we also discussed factors that affect the use of federal rental housing programs with headquarters officials at the Army, DOD, HUD, USDA, IRS, and Treasury.

We conducted our work in Washington, D.C.; Arlington, Virginia; and Junction City and Manhattan, Kansas, between November 2005 and July 2006, in accordance with generally accepted government auditing standards.

Office of the Under Secretary of Defense

GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Steve Westley, Assistant Director; Julianne Stephens Dieterich; Alison Martin; Bettye Massenburg; John McGrail; John Mingus; Marc Molino; David Pittman; and Barbara Roesmann made key contributions to this report.