In fiscal year 2003, the Department of Housing and Urban Development (HUD) expended about $28 billion in rental assistance—about 75 percent of the department’s total expenditures—to help almost 5 million low- income tenants afford decent housing. HUD provides rental assistance through three major programs: Housing Choice Vouchers (vouchers), public housing, and several project-based Section 8 programs. These programs reduce tenants’ rental payments by providing subsidies to owners of private properties, the public housing agencies (PHA) responsible for government-owned developments, or both. Because these subsidies involve complicated calculations and program rules, the process of determining them is prone to errors. In response to growing concerns about improper rental assistance payments, in fiscal year 2001 HUD established the Rental Housing Integrity Improvement Project (RHIIP), which is designed to address the causes of these errors and ensure that only eligible people receive subsidies. This report discusses (1) the sources and magnitude of improper payments that HUD has identified, (2) the actions HUD is taking under RHIIP to reduce improper payments in the voucher and public housing programs and the status of these initiatives, (3) the actions HUD is taking under RHIIP to reduce improper payments in its project-based programs and the status of these initiatives, and (4) the status and potential impact of HUD’s efforts to reduce the risk of improper payments by simplifying the subsidy determination process. HUD’s voucher, public housing, and project-based assistance programs share the common mission of making housing affordable to low-income households. The subsidies these programs provide are not an entitlement. Typically, the number of low-income households eligible for assistance exceeds the number of subsidized units and vouchers that is available. Specifically, HUD estimated that in 1999 about a quarter of all households eligible for housing assistance received it. HUD’s programs are administered differently and vary in the number of households they assist and the amount of funding they receive. The voucher program, which local PHAs administer on HUD’s behalf, is HUD’s largest rental assistance program. The program, authorized under Section 8 of the United States Housing Act of 1937, as amended, provides housing vouchers that eligible individuals and families can use to rent houses or apartments in the private housing market from property owners participating in the program. Voucher holders are responsible for finding suitable housing, which must meet HUD’s housing quality standards. In fiscal year 2003, the program assisted about 2 million households (42 percent of all households receiving HUD housing assistance) and had outlays of $13.4 billion (47 percent of HUD’s total rental assistance outlays). In general, only households with very low incomes—those with incomes that are less than or equal to 50 percent of area median income (AMI)—are eligible for vouchers. In addition, the legislation requires that at least 75 percent of new participants in the voucher program have extremely low incomes—that is, their incomes must be at or below 30 percent of AMI. Voucher holders generally pay 30 percent of their adjusted monthly income toward rent, and the PHA receives HUD subsidies to pay the remainder of the rent to the property owners. The subsidies in the voucher program are tenant based—that is, they are tied to the household rather than to the rental unit. The approximately 2,500 PHAs that administer the voucher program are responsible for ensuring that tenants meet program eligibility requirements and that tenant subsidies are calculated properly. PHAs are also required to develop written policies and procedures to administer the program according to HUD regulations. Under the public housing program authorized by United States Housing Act of 1937, as amended, HUD subsidized the development, operation, and modernization of government-owned properties, which are currently managed by some 3,300 PHAs. In fiscal year 2003, HUD’s public housing program assisted 1.2 million households (25 percent of households receiving housing assistance) and had outlays of $7.1 billion (25 percent of HUD’s total rental assistance outlays). To be eligible for public housing, a household must be low income—that is, have an income that is less than or equal to 80 percent of AMI—and the legislation stipulates that at least 40 percent of new residents have extremely low incomes—less than or equal to 30 percent of AMI. As in the voucher program, public housing tenants generally pay 30 percent of their adjusted monthly income on rent. HUD pays subsidies to the PHAs for the remainder to cover the difference between the PHAs’ operating costs and rental receipts. In contrast to the voucher program, the subsidies in the public housing program are project based—that is, they are tied to the unit, and tenants receive assistance only when they live in units eligible for subsidies. PHAs are responsible for ensuring that tenants are eligible for public housing, that tenant subsidies are calculated properly, and that the PHAs’ policies and procedures conform to HUD’s regulations. Under a variety of project-based Section 8 programs authorized by the Housing and Community Development Act of 1974, as amended, HUD has subsidized rents with multiyear rental assistance payments, which have often been combined with construction subsidies from other HUD programs. These programs included the New Construction, Substantial Rehabilitation, Loan Management Set-Aside, Property Disposition, and Moderate Rehabilitation programs. Before project-based Section 8 programs, HUD had provided rental assistance through Rent Supplement and Section 236 Rental Assistance Payment programs. For ease of presentation, this report refers to all of these rental assistance programs as project-based Section 8. Property owners and managers for about 22,000 subsidized properties currently participate in these programs. In fiscal year 2003, HUD’s project-based programs assisted 1.6 million households (33 percent of all households receiving assistance from HUD) and had outlays of $7.7 billion (27 percent of HUD’s total rental assistance outlays). As in HUD’s other rental assistance programs, households receiving project- based Section 8 assistance generally pay 30 percent of their adjusted income toward rent and HUD pays a subsidy—in this case to property owners and managers—for the remainder of the rent. In general, only households with low incomes are eligible for HUD project-based Section 8 assistance, and at least 40 percent of new residents must have extremely low incomes. Private property owners and managers have similar requirements to PHAs for administering the project-based Section 8 program—they must ensure that tenants meet program eligibility requirements and that tenant subsidies are calculated correctly. They also must develop administrative policies and procedures that are consistent with HUD’s regulations. HUD’s oversight of program administrators varies depending on the program (see fig. 1). For vouchers and public housing, HUD field offices provide oversight of the PHAs that administer the programs. Field office staff conduct on-site reviews and analysis of PHAs’ operations. Field offices are also responsible for confirming the accuracy of information PHAs submit to HUD’s performance rating systems for vouchers and public housing: the Section 8 Management Assessment Program (SEMAP) and Public Housing Assessment System (PHAS), respectively. Both SEMAP and PHAS provide HUD managers with performance measures in key program areas, such as program management and the physical condition of properties. For HUD’s Section 8 project-based programs, contract administrators are responsible for overseeing individual Section 8 properties and ensuring that properties are in compliance with HUD’s policies. The administrators conduct on-site reviews of property owners’ tenant information files, process monthly payment vouchers, respond to health and safety issues, and renew rental assistance contracts. Currently, there are three different types of contract administrators: performance-based contract administrators, “traditional” contract administrators, and HUD field office staff (see chap. 4). Subsidies under HUD’s rental assistance programs are generally based on tenant households’ adjusted annual income, or gross income less any exclusions and deductions. Laws and HUD regulations provide for 44 different types of income exclusions and deductions. Of these, HUD’s regulations cite 20 income sources, such as income from minors, student financial aid, and qualifying employment training programs, which are excluded when determining households’ eligibility to receive assistance and calculating tenants’ rent. Nineteen other income sources qualify as exclusions under various statutes. For example, Earned Income Tax Credit refund payments received on or after January 1, 1991, are excluded, as is income from participating in AmeriCorps. A complete list and descriptions of these exclusions appear in appendix II. In addition to these 39 income exclusions, program administrators must also apply five income deductions, which reduce the amount of income that can be considered in calculating tenants’ rent. Legislation specifies the following five deductions from annual income: a standard amount ($480) for each dependent; a standard amount ($400) for elderly or disabled family members; unreimbursed child care expenses that are necessary for a family member to remain employed; the sum of the following to the extent that it exceeds 3 percent of annual certain unreimbursed medical expenses for elderly or disabled family certain unreimbursed attendant care and auxiliary apparatus expenses necessary for a disabled family member to be employed; and other deductions from annual income as determined by program administrator. Once program administrators have collected information from tenants on income and applicable exclusions and deductions, HUD policy requires that program administrators independently verify this information (third- party verification). To obtain third-party verification, program administrators must directly contact employers, welfare offices, health care providers, and others to ensure that the information tenants have reported is accurate and complete. However, third-party verification on its own may not identify all income not reported (intentionally or otherwise) by tenants.