National Housing Law Project Housing Law Bulletin

Tenant-Based Section 8 Renewal Rule

by Barbara Sard(1)

HUD published a final regulation governing renewal of expiring Section 8 tenant-based assistance contracts(2) on October 21, 1999. The new rule will apply to voucher and certificate (including project-based certificate) contracts that expire after December 31, 1999. The rule was fashioned through a negotiated rulemaking process, as required by Congress(3). It is important for advocates as well as public housing agencies (PHAs) to understand the new rule, as the renewal funding formula will significantly affect the impact of PHA decisions concerning the voucher payment standard(s) and local admissions preferences on the number of families a PHA can assist.

This article briefly reviews the significance of the renewal formula, how certificate and voucher funding was previously handled by HUD, and the methodology that will be used under the new rule.

The new renewal formula adopted by HUD means that HUD will fund the additional costs that may be incurred if PHAs increase their voucher payment standards, whether to achieve adequate utilization of contracted funds, to promote deconcentration of poverty and expand housing opportunities, to restrain families’ payment burdens, or to meet targeting requirements(4). The chart on the opposite page illustrates the effect of setting the voucher payment standard at different percentages of the applicable Fair Market Rent (FMR) on the rent burden that families will experience, and on the cost of units that families may be permitted to rent.

In general, a higher voucher payment standard will make more units available to families at a rent burden of 30 percent of income for rent and utilities(5), and will make more units available for which a family’s share of the rent will be within the permissible maximum limit of 40 percent of adjusted income(6). This is particularly true for housing in areas that are less poverty-concentrated and that have better access to jobs and quality services. Such an increase in the potential availability of affordable units may be necessary if a sufficient number of families are to succeed in leasing units with their vouchers–both overall and in low poverty neighborhoods--for a PHA to score well on the relevant indicators in the Section 8 Management Assessment Program (SEMAP)(7) and to prevent the future reduction in the size of its voucher program(8). It may also be necessary for a PHA to comply with the targeting requirements for the voucher program(9), as the lower a family’s income, the less ability it will have to rent a unit for which the rent and utility costs exceed the payment standard.

If PHAs choose to admit more poor families than required by the federal targeting floor in order to meet identified housing needs, and as a result incur additional housing assistance costs, the new renewal formula will also cover these increased costs. Subject to adequate Congressional appropriations, PHAs are assured of sufficient funds to serve at least the number of families that HUD considers its baseline--that is, the number of families actually served, or that HUD records indicate the PHA was contracted to serve, on October 1, 1997 (whichever is higher), plus any additional "units" subject to HUD/PHA contract since that date, in a manner that is consistent with these program goals.(10)

2. Background (11)

Some background is necessary to appreciate the need for a new renewal formula and why the funding methodology is confusing to many people involved with the Section 8 program. Until recent years, budget authority for Section 8 certificates and vouchers was appropriated by Congress in multi-year increments, generally of from five to 15 years. HUD’s contracts with PHAs for these subsidies indicated the number of families that HUD expected the PHA to serve with the reserved funding amount. HUD calculated the amount of funding based on the applicable FMR(s) and an assumed national inflation rate for the duration of the contract. Until recently, HUD reserved for PHA use the full FMR amount, without any deduction for families’ assumed contributions toward their rental costs. When the initial multi-year contracts expired, they were renewed by HUD (annually, beginning in the mid-1990's) based on the number of families HUD had initially assumed would be served by the increment in question, multiplied by the full FMR for the area.

As a result of this funding methodology, many PHAs accumulated huge reserves due to housing assistance payment costs below the FMR. In the certificate program this was the result of two factors: tenants contributing a portion of the costs, and rents for existing participants lagging behind FMR increases. In the voucher program(12), there was the additional factor that PHAs could set their payment standard as low as 80 percent of the FMR, and assist more families than the number initially specified by HUD with any remaining funds. Some PHAs decided to "grow their own programs" by using the program reserves accumulated in both the certificate and voucher programs to lease units to additional families beyond the number HUD had initially specified that the funding was intended to assist.

In 1996, in response to Congressional criticism that such "self-help" increases in program size were contrary to Congressional prerogatives to control incremental assistance, HUD instructed PHAs that they were no longer permitted to use program reserves to increase the number of families served(13). However, PHAs could, if they had sufficient budget authority without using reserves, approve leases for more families than HUD had anticipated they would serve within their budget authority(14). This policy revision left unchanged the ability of PHAs, within their voucher programs, to serve additional families within their current budget authority by using a lower payment standard. Because PHAs’ administrative fees are tied to the number of families participating in the program, PHAs continued to have a financial as well as moral/political incentive to serve the maximum number of families, though their discretion was largely limited to the voucher program by late 1996.

Congress sought to prevent this "problem" of PHAs adding families to the program by requiring HUD, in 1997, to recapture approximately $7.2 billion in Section 8 program reserves. Trying to prevent large reserves from again accumulating from unspent Section 8 funds, in 1998 HUD began to renew expiring Section 8 contracts at 92 to 94 percent of FMR. While this was an attempt by HUD to bring PHAs’ budgets closer to what appeared to be their actual costs for Section 8 assistance, there were many difficulties in the application of this national percentage reduction to the funding of individual PHAs.

This was the situation Congress faced in the fall of 1998. To remedy it, Congress included a section in the Quality Housing and Work Responsibility Act of 1998 (QHWRA) that specifies the standard HUD must meet in renewing tenant-based contracts, and directed HUD to implement the new standard through negotiated rulemaking(15). The statutory standard contains two requirements that are vital to keep in mind in reviewing the new rule: (1) the renewal formula must allocate sufficient funds, "at a minimum . . . to ensure continued assistance for the actual number of families assisted as of October 1, 1997" plus incremental assistance and additional families authorized subsequent to that date (known as the PHA’s "baseline"); and (2) inflation adjustments must be based on local or regional (not national) factors.(16)

For FY 1999, prior to the negotiated rulemaking, Congress directed HUD to implement the statutory provision by notice. In that notice, HUD made an extremely important addition to the statutory language concerning the "baseline" number of units that the renewal formula must fund. HUD decided that it would fund the higher of the number of families actually assisted on October 1, 1997, or the number of units "reserved" for the PHA on HUD’s records (i.e., the number of families HUD believed the PHA could assist, whether or not its actual budget authority would support that number in light of costs, and without regard to the then-mandated 3-month delay in reissuance of turnover Section 8 subsidies)(17). For most PHAs, the latter "reserved" number of units provided a higher "baseline" than the statutory language regarding the actual number of families assisted.

The final rule is a refinement of the actual cost methodology that HUD developed during 1998 and 1999, including an important change in how PHAs can use their program reserves. Basically, the formula is:

[PHA’s expiring baseline number of units (adjusted for post-12/31/99 changes)]

x [PHA’s actual cost per unit] x [inflation adjustment].

Each of these concepts requires explanation.

The determination of a PHA’s Section 8 renewal budget for the subsequent calendar year starts with a PHA’s "baseline" number of units, which will now be the number of Section 8 subsidies reserved by HUD for the PHA program as of December 31, 1999(18). In the years following 2000, the baseline will be adjusted by any permanent changes made to the units reserved by HUD for the PHA(19). The preamble explains that this baseline includes the higher of the number of units leased or reserved on October 1, 1997 plus adjustments HUD has made to correct its records and to add new units(20). HUD will issue a notice in February 2000 that will include a more detailed explanation of how the "baseline" is determined and what procedures PHAs should follow if they believe HUD has made an error in determining their baseline.(21)

The number of units in the adjusted baseline that expire in the upcoming calendar year is then multiplied by the PHA’s adjusted annual per unit cost. Each PHA’s annual per unit cost is determined by dividing the PHAs’ total housing assistance amounts paid by the total number of "unit months" for which housing assistance was paid, and then multiplying by 12 to annualize the monthly actual average cost. The PHA’s cost data are derived from the PHA’s most recent HUD-approved year-end statement. This could mean that renewal funding for subsidies for which the funding expires in calendar year 2000 is based on either the PHA’s FY 1998 or FY 1999 year end statement, depending on the PHA’s fiscal year and the speed of HUD’s approval process.

Because of the one- to two-year time lag between the cost data used to determine actual costs and the subsequent period in which the funding will be used, HUD adjusts the actual annual per unit cost by the Section 8 annual adjustment factor(s) (AAF) that applies to the PHA’s jurisdiction for the time period(s) between the last approved year end statement and the end date of the funding under the renewal contract(22). HUD has committed to trying to develop a better measure of actual inflation in costs relevant to the amount of Section 8 assistance payments at the local level rather than the Section 8 annual adjustment factors.(23)

Recognizing that the AAFs do not always accurately project future costs that are changing rapidly, HUD agreed to include in the rule flexibility to modify the adjusted annual per unit cost figure used to determine the subsequent year’s budget on request of a PHA(24). PHAs that increase their payment standard in light of increasing rental costs of available units, but make the increase too late to be adequately reflected in the actual cost data contained in the most recent approved year end statement, may wish to request upward modification of their budget authority under this provision.

This actual cost methodology means that if a PHA’s average per-unit cost has increased, the increased cost will, within one to two years, be fully reflected in the Section 8 renewal funding it receives from HUD. But during the year when per unit costs first increase and possibly the following year (depending on the timing of the PHA’s fiscal year and HUD approval of the year end statement), the actual cost formula may not yet reflect a cost increase. To avoid a reduction in the number of families served below the "baseline" during this adjustment period, PHAs will be permitted to draw more liberally on the two-month project reserve that HUD provides to each PHA. The details of this new reserve policy are to be issued by HUD shortly in a Federal Register notice, and the draft notice is currently available on the web. PHAs that need to use reserves to be able to serve the "baseline" number of families at current costs are given greater flexibility to do so than was previously the case, and are assured that HUD will restore depleted reserves so long as there are sufficient program appropriations(25). From the data reviewed during the negotiated rulemaking process, in virtually all cases this liberalized authority to draw on reserve funds will be sufficient to prevent a reduction in the number of families served.

Other than an actual national shortfall in appropriations(26), there are three possible situations in which HUD may in the future depart from the rule’s actual cost methodology for renewal funding. HUD may invoke its right to modify the actual cost budgeting only after a subsequent notice published in the Federal Register based on consultation with relevant stakeholders, and under circumstances and procedures that are consistent with the program goals listed in the regulation.(27)

• The first situation is when HUD determines that an individual PHA, based on its spending pattern, is likely to exhaust its budget authority and its reserves during its fiscal year. HUD reserves the authority to require such a PHA to bring its costs down and the number of families served in line with program resources. Yet the PHA is still assured of adequate funds to serve the baseline number of families, as adjusted since Dec. 31, 1999, in a manner that enables the families served to have a reasonable rent burden and expanded housing opportunities, and that enables the PHA to admit new families to the program consistent with the needs identified in the applicable consolidated plans and with targeting requirements.(28)

• The second situation is when HUD determines that it is necessary to alter the costs used to determine the budgets of specific individual PHAs or all PHAs, "because of threats to the future availability of funding"(29). This provision is directed not at mismanagement by individual PHAs, but at avoiding an increasing cost trajectory that HUD determines will result in future overall program costs that Congress will not fund(30). Reaching consensus on this provision was the most difficult task the Negotiated Rulemaking Committee faced(31). It presents some potential uncertainty concerning future funding even for PHAs that keep program costs from increasing beyond the level that would be covered by the rule’s formula and program reserves.

It is important to underscore that HUD could not lawfully reduce the actual cost formula in a manner that would be inconsistent with the listed program goals. Therefore, PHAs that increase their payment standards because they determine that such an increase is necessary to deconcentrate poverty, expand housing opportunities, prevent unreasonable rent burdens, or comply with income targeting, and are administering their programs efficiently and complying with rent reasonableness requirements, should not be at any risk of decreased funding under this provision of the rule. Moreover, should future funding be reduced in an unanticipated manner, a PHA remains free at that point to reduce its payment standard within the basic range(32) if it prefers to take that step rather than serve fewer families.

• The third situation is where a PHA’s actual average per subsidy cost has decreased compared with the prior year (because the PHA has lowered its payment standard, family incomes have increased, rents have fallen, or some other reason) and as a result the PHA would be due to receive reduced funding under the actual cost formula. Many PHAs would have responded to such a cost reduction by expanding the number of families served, or have induced the reduction for this purpose. In order to reward program efficiency and economy, and to enable a PHA to have sufficient funds to continue to serve additional families above its adjusted baseline, HUD may adjust the formula to prevent such PHAs from losing funding.(33)

If HUD does not use its authority to adjust the cost formula for PHAs with declining costs--and it will "in all likelihood" not do so(34)--it will be the responsibility of PHAs that permit additional families above the baseline number to lease units with Section 8 assistance to cut back to the number of families that it can serve within its budget authority. During the attrition period, PHAs may be permitted to draw on reserve funds to prevent the loss of assistance to any family currently participating in the program, but HUD makes no commitment to restore the depleted reserves(35). PHAs that set a lower payment standard (or otherwise reduce program costs) with the goal of increasing the number of families served within budget authority thus run a substantial risk that in the following year, or an even longer period, they will not be able to serve any new families in their Section 8 program while they reduce the number of families served down to the baseline number that can be supported with the reduced budget authority that will result from the rule’s formula.

Taken as a whole, the new Section 8 renewal rule means that PHAs, advocates and residents need to discard the old notion that Section 8 funds are a zero-sum "game," and that if costs are increased to serve some families (because of an increase in the payment standard, admitting poorer families, or any other reason) then the number of families served must necessarily be reduced. PHAs are assured, so long as Congress fully funds renewal needs as indicated by the regulatory formula, of having sufficient funds to support at least the "baseline" number of families at the costs that the PHA actually incurs, so long as those costs reflect reasonable management decisions about how to implement Section 8 program goals. PHAs can serve families better, without having to reduce the number of families they serve.

Notes-