Prior to the 1970s, the federal government made housing affordable to low- and moderate-income households by subsidizing the production of privately and government-owned properties with below-market interest rate mortgages, direct loans, and other development subsidies. Under these production programs, the rent subsidies were project based, and tenants received assistance only while living in the subsidized units. In the early 1970s, concerns were raised about the effectiveness of these programs: Many moderate-income tenants benefited from federal assistance, while lower-income families did not; federal costs for producing the housing exceeded the private sector costs to produce the same services; and allegations of waste surfaced. Interest in a more cost-effective approach led Congress to explore options for using existing housing to shelter low-income tenants. Section 8 of the Housing and Community Development Act of 1974, as amended, authorized programs that reflected both approaches—a tenant-based rental certificate program (now called the voucher program) for use in existing housing and a project-based program. The project-based program comprises multiple subprograms, including Section 8 New Construction/Substantial Rehabilitation, Loan Management Set-Aside, and Property Disposition. Appendix III contains detailed descriptions of these subprograms. The voucher program provides vouchers to eligible households to rent houses or apartments in the private market from landlords who are willing to accept the vouchers. Voucher holders are responsible for finding suitable housing that complies with HUD’s housing quality standards. The voucher program pays the difference between the lesser of the unit’s gross rent or a local “payment standard,” and the household’s payment, which is generally 30 percent of monthly income, after certain adjustments. To be eligible to apply for assistance, households must have very low incomes—less than or equal to 50 percent of area median income (AMI) as determined by HUD. Under the provisions of the Quality Housing and Work Responsibility Act of 1998 (P.L. 105-276), at least 75 percent of new participants in the voucher program must be households with extremely low incomes—at or below 30 percent of AMI. Households already participating in the voucher program remain eligible for assistance as long as their incomes do not rise above 80 percent of AMI. The voucher program is administered by over 2,500 state and local PHAs that are responsible for inspecting dwelling units, ensuring that rents are reasonable, determining households’ eligibility, calculating households’ payments, and making payments to landlords. HUD provides funding to PHAs for administrative expenses as well as rental subsidies. The project-based program subsidizes rents at properties whose owners have entered into contracts with HUD to make rents affordable to low-income households. Often these properties were financed with mortgages insured or subsidized by HUD or with bonds issued by state and local housing finance agencies. Property owners and managers are responsible for administering the program at about 22,000 properties nationwide. The project-based program operates much like the voucher program, paying the difference between a HUD-approved unit rent and the household’s payment, which is generally equal to 30 percent of adjusted monthly income. In general, only households with low incomes (i.e., at or below 80 percent of AMI) are eligible for assistance, and since 1998 at least 40 percent of new residents must have extremely low incomes. Private property owners and managers have requirements similar to those for PHAs for administering the project-based program—they must ensure that households meet program eligibility requirements and must calculate households’ payments. HUD pays rent subsidies directly to the property owners but does not pay them a separate administrative fee, as the owners’ administrative costs are reflected in the HUD-approved rents. However, because of limited staff resources and the large number of project-based Section 8 contracts, HUD pays contract administrators (state and local PHAs) administrative fees to oversee most of the contracts, a task that requires processing monthly payment vouchers, reviewing property owners’ tenant information files, and addressing health and safety issues. Each year, Congress appropriates budget authority to cover the costs of new Section 8 contracts, renewals of expiring contracts, amendments to existing project-based contracts, and administrative fees. For the period covered by our review (1998 through 2004), Congress appropriated funds for the Section 8 programs in HUD’s Housing Certificate Fund account. Over time, Congress has changed the way it funds the Section 8 programs. From 1974 to 1983, Congress made large up-front appropriations to cover the projected costs of multiyear Section 8 contracts. Initially, voucher contracts were written for 5 years and were renewable, at HUD’s discretion, for up to 15 years, while the terms for project-based contracts ranged from 15 to 40 years. When these initial contracts began to expire in 1989, HUD required new budget authority to renew them. Owing to budget constraints, Congress funded Section 8 contracts with amounts that led to shorter contract terms. HUD initially renewed expiring contracts generally for 5-year terms but starting in the mid-1990s switched to 1-year terms for the voucher program and either 1- or 5-year terms for the project-based program. The Section 8 programs are not entitlements, and as a result, the amount of budget authority HUD requests and Congress provides through the annual appropriations process limits the number of households that Section 8 can assist. Historically, appropriations for the Section 8 programs (as well as for other federal housing programs) have not been sufficient to 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 calendar year 2003, Section 8 and other federal housing programs assisted an estimated 4.3 million households, or 27 percent of all renter households with very low incomes (see fig. 1). HUD estimated that over 9 million very low income households (about 59 percent) did not receive assistance and had housing needs. Of these 9 million households with housing needs, 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. The combined number of authorized vouchers and project-based units grew from about 2.93 million to 3.36 million from 1998 through 2004—an overall increase of about 15 percent and an average annual increase of about 2 percent (see fig. 2). Most of this increase occurred from 1998 to 2001, when about 327,000 vouchers were added. However, as figure 2 shows, this overall trend masked a difference in the trends for the individual programs: The number of vouchers grew by 31 percent during this period, while the number of project-based units declined by 5 percent. It is important to note that at any given time the actual number of households assisted with Section 8 programs is likely to be less than the number of authorized vouchers and project-based units, because some authorized vouchers and units may not be in use. For example, vouchers may go unused because households may not be able to find units that meet the program’s affordability requirements and quality standards. (As discussed subsequently in this report, the extent to which authorized vouchers are actually used to rent units—and thus incur subsidy costs—is called the voucher utilization rate.) Project-based units may not be in use during the period when landlords are seeking new occupants for units that have been vacated. From 1998 through 2004, the number of authorized vouchers grew from about 1.60 million to almost 2.09 million, an increase of 490,944 vouchers (see fig. 2). This increase represents an average annual growth rate of almost 5 percent. The new vouchers were composed of both “incremental vouchers” and tenant protection vouchers. Incremental vouchers are those that resulted from Congress’ decision to expand the program to serve more households. Notices published in the Federal Register and HUD data indicate that the agency awarded 276,981 incremental vouchers and 205,853 tenant protection vouchers from 1998 through 2004 (see table 1). Incremental vouchers consist of three major types: fair share, welfare-to-work, and special purpose. Fair share vouchers are those that HUD allocates to PHAs on a competitive basis using a formula that accounts for poverty rates, renter populations, vacancies, overcrowding, and other measures, in each county and independent city throughout the country. Welfare-to-work vouchers are designated for households for which a lack of stable, affordable housing is a barrier to employment and that are making the transition to economic self-sufficiency. Finally, special purpose vouchers include those designated for a variety of special needs populations, such as persons with disabilities. Fair share vouchers accounted for about 56 percent of the total, while welfare-to-work and special purpose vouchers represented 18 percent and 26 percent, respectively. From 1998 through 2002, Congress provided new funding each year for a large number of incremental vouchers to help address the unmet housing needs of very low-income households, and fair share vouchers were the key type of incremental vouchers used to increase the number of assisted households. Starting in 2003, Congress provided no new funding for fair share vouchers, but did provide new funding for a smaller number of special purpose vouchers. By 2004, however, no new funding was provided for any type of incremental voucher. Unlike incremental vouchers, tenant protection vouchers do not add to the total number of authorized units under Section 8 (and other HUD programs for which they are used) because they replace one form of HUD assistance with another.