National Housing Law Project Housing Law Bulletin

Section 8 Renewals Pose Extraordinary
FY 1998 Budget Challenge

The Budget Authority Problem

Most immediately, expiring Section 8 contracts present primarily a budget authority problem. Many of these Section 8 project-based units or tenant-based subsidies are approaching the end of existing contracts expending previously appropriated funds. These contracts begin to expire in dramatically increasing numbers in FY 1998 (commencing October 1, 1997). Maintaining funding for these existing units and subsidies requires new budget authority. Even under the expedient gimmick of providing budget authority commitments for only a one-year term, the sheer number of expiring units produces a staggering budget authority renewal figure, even though actual annual outlays would likely increase little over current expenditures.³

Unlike other procurement programs using long-term budget authority, Section 8 is unique in that, while the appropriation covers the lion's share of the capital and operating expenses, it fails to purchase the capital asset for the public benefit within the subsidy term. This subsidy structure not only requires budget authority renewals to fund ongoing operating subsidies to serve those tenants whose rents cannot cover operating costs, but also permits any principal amortization paid by the subsidy to accrue to the benefit of the private owner. As currently structured, Section 8 requires virtually perpetual renewals just to maintain the current number of assisted units and families. Sound public investment strategies, if linked to ownership transfers or long-term use restrictions, could reduce eventual renewal costs to those required for operating expenses by retiring the capital cost and building in funds for recapitalization. The current course means an unending cycle of budgetary brinkmanship attendant to the passage of each year's new budget authority — or worse, a decision to abandon assisted affordable housing altogether.

For FY 1998, according to HUD's request, the Section 8 renewal and amendment⁴ line alone amounts to $13.5 billion,⁵ compared with the FY 1997 level of $4.45 billion.⁶ This amounts to about $9 billion of HUD's $13 billion total requested budget authority increase over FY 1997 levels. The increase results primarily from the fact that the number of units expiring during FY 1998 jumps from the FY 1997 level of about 800,000 to about 1.8 million. This figure of course includes not just those units originally calendared for expiration under existing 5-, 15- or 20-year contracts, but also all of those contracts that have expired more recently (e.g., over the past two years) and that had been renewed for just one year at a time. Additional budget burdens reflect higher per-unit costs: an increasing number of the expiring project-based contracts support the newer assisted stock, such as Section 8 New Construction and Substantial Rehabilitation properties, and a higher proportion of these (about 60 percent of those with HUD insurance) are relatively expensive, carrying current contract rents that exceed true market rent levels.

OMB's FY 1998 passback provides about $3 billion less for renewals than HUD's request.⁷ Fortunately, OMB justifies this reduction not by proposing to reduce the number of units assisted, but rather by pointing to an alleged Section 8 renewal carryover of $1.6 billion identified in HUD's FY 1997 Operating Plan. This carryover is rumored to be mostly in the form of Section 8 tenant-based subsidy contract reserves residing with public housing authorities (PHAs). The balance of OMB's reduction is less tangible, coming from market-based restructurings and conversions to vouchers of the project-based assistance system.

Possible Solutions to the Budget Authority Problem

There are several possible solutions to the FY 1998 Section 8 budget authority crisis. First, without changing any of the budget rules, the budget authority caps provided by the budget process to the appropriations committees and the accompanying spending levels could be adjusted to fully compensate for the huge jump in FY 1998 renewal needs.⁸ This would require some reductions elsewhere within the HUD budget (very unlikely) or elsewhere within federal domestic discretionary spending (also unlikely). Second, Congress could change the rules governing HUD's budget, separating it into two parts, one consisting of Section 8 renewals and the other including all of HUD's other programs. In this way, the unique budget problems of Section 8 would not be confused with the other HUD programs, and those other needs would be analyzed apart from Section 8 levels. To do this, Congress could establish new budget categories and caps exclusive of Section 8 renewals, while devising separate caps and methodologies for the renewals (e.g., an earmarked reserve fund). Similarly, Congress could simply create an exception within the existing budget rules and caps for Section 8 renewals.

Another approach could combine some of these revised accounting practices with the technique of mortgage restructuring, the most obvious way to reduce Section 8 budget authority requirements without reducing the number of assisted units. Restructuring involves writing off some or all of the underlying loan principal, thus reducing debt service and per-unit Section 8 subsidy requirements. This essentially would shift the costs to claims on the mortgage insurance fund (at an estimated cost of $6 to $12 billion), which uses mandatory appropriations rather than discretionary budget authority. Congress has ratified this approach for use under the recently enacted FY 1997 "Portfolio Restructuring" demonstration program for HUD-insured buildings with costlier Section 8 contracts (above 120 percent of Fair Market Rent) expiring during FY 1997.⁹ This technique also figures prominently in most discussions concerning the Section 8 budget crisis, including the Senate's aborted 1996 authorizing bill (S. 2042) and HUD's 1995 and 1996 "Mark to Market" and "Portfolio Reengineering" proposals.

Restructuring alone, however, cannot resolve the budget authority problems of Section 8. It cuts costs only for a portion of the renewal line (the project-based), only for a portion of the project-based inventory (the above-market units), and even then only for a limited portion of their costs (the subsidy amount in excess of market). The larger budget problem posed by growing Section 8 renewals is a function of growing numbers of expiring units requiring new budget authority. The simple expedient of shifting renewals to one-year terms is no longer much help, since in FY 1998 renewals take their largest one-year jump and must then be sustained annually thereafter. Because eventually every Section 8 unit (both project- and tenant-based) will have to be renewed annually, the annual budget authority requirements for contract renewals will only keep climbing until every unit under obligation in an unexpired contract reaches expiration and gets renewed, sometime in the new millennium.

Funding the budget authority for renewals at anything less than actual need — once the savings wrought by the creative accounting of restructuring is considered — will force a net reduction in the number of assisted units and families or in the maximum federal subsidy per unit. Without adequate budget authority for all renewals, Congress and HUD will not have the authority to continue providing the outlay expenditures to subsidize these units.

This daunting budget authority challenge faces us immediately. It will figure prominently in negotiations between HUD and OMB as the Administration's final budget request to Congress is determined between now and the end of the year, and subsequently as the congressional budget and appropriations process unfolds in early spring and throughout the coming year.

Balanced Budget Pressures and the Outlay Problem

As tremendous as the budget authority threat may be to Section 8 housing, it is only half the Hydra. As balanced budget mania reaches across partisan lines in the 105th Congress and becomes an articulated priority shared by the Administration, the financial dilemmas of federal low-income housing programs present challenges that are far more complicated than accounting entries.

The annual wrangling over appropriations and the scale of the budget authority difficulties for FY 1998 obscure the major problem confronting Section 8 and other housing programs serving people with very low incomes: the outlay problem. HUD's annual outlays are substantially higher than its budget authority levels of recent years, primarily due to the fact that HUD is still spending down previous multi-year obligations under programs like Section 8.¹⁰ While obtaining the increased budget authority for renewing contracts does not significantly change outlay spending from year to year, the problem is that maintaining outlays at current levels is not what budget cutters want. They want to reduce them, even though the outlay needs are in fact growing as assisted families' incomes fail to keep pace with the rising costs of providing housing.¹¹ Balancing the budget will require large cuts in the outlays for domestic discretionary programs — how much the government actually spends each year — and the scale of these cuts will grow larger if spending for middle-class entitlements such as Social Security and Medicare prove politically intractable.

Reducing outlay expenditures will hit all housing programs especially hard, particularly those like public housing and Section 8 that subsidize income-based rents on an ongoing basis. Even the estimated across-the-board cuts of a minimum 20 percent in outlays for domestic programs that would be needed to balance the budget would dramatically affect HUD's ability to serve current program beneficiaries. Moving low-income housing programs or funding onto the short list of favored domestic programs of either of the key players — the Administration or a Republican Congress — might temper the reductions. But if neither party to these negotiations can be convinced to make housing programs a priority, outlay spending will be cut.

To reduce annual outlays, Congress will have to authorize decreases either in the number of assisted units or in the federal share of the costs of assisted units. While some combination of these approaches would be most likely, the technique promising the least political fire is reducing the number of families assisted, so long as that can be accomplished through an attrition strategy that minimizes displacement of existing residents. Shrinking budget authority commitments to one-year terms obviously makes it easier to reduce outlays, since more of the spending becomes subject to annual decision-making.

Techniques to reduce the number of assisted units will probably include allowing the best and worst project-based units to exit the system whenever possible, forcing and consolidating vacancies and reducing the number of units covered by subsidy contracts on vacancy or expiration where market conditions permit. For tenant-based Section 8, outlay spending can be easily reduced by not reissuing certificates and vouchers when they turn over.¹² Pressure will also continue across the Section 8 program to shift to shallower subsidies, to select higher income tenants, and to generally get more income out of tenants to reduce governmental contributions.

For Section 8 projects, the debt restructuring technique, which promises a modest reduction in the huge budget authority requirements, has a relatively more significant impact on long-term outlays. Outlays are cut by reducing subsidy levels to those supportable by market rents or even lower, depending on the extent of Congress' willingness to use debt reduction strategies involving mandatory claims on the mortgage insurance fund. Even so, at debt levels supportable by the market, Section 8 outlays would not be reduced sufficiently to meet the outlay targets imposed by any balanced budget goal that fails to simultaneously protect housing spending.

This explains why HUD's 1995 Reinvention Blueprint proposed to break the link between the operating subsidy and the housing by shifting the subsidies to vouchers after restructuring. "Vouchering out" was supported not because it would cost less, but because it would have transferred the risk of Congress' subsequent outlay reductions from HUD's real estate portfolio directly to present and future voucher recipients, while relieving the agency of its administrative burdens. One-year vouchers present an easy target to reduce federal spending, either by cutting the federal contribution per unit or reducing the number of assisted units.

The problem of HUD's outlays will remain with us regardless of how the budget authority problem gets resolved. The degree of its significance will depend upon the fate of the balanced budget amendment and any new budget agreements reflecting that goal. But as evidenced over the last two fiscal years, even without a formal balanced budget target enshrined in law, the annual budget resolutions and appropriations bills fashioned on Capitol Hill may seek to advance that objective and reduce HUD outlays, especially if the Administration fails to take a principled stand to maintain them.

Conclusion

The budget authority and outlay problems presented by the Section 8 programs must be addressed by Congress and the Administration over the next few years, with the budget authority problem requiring the most immediate attention during 1997's planning for FY 1998. How these issues are approached in the coming year will provide important lessons for resolving the longer term tension between a balanced budget objective and providing sufficient outlays to maintain the stock and numbers of subsidized units and families. Our advocacy challenge is to ensure that the budget and policy makers understand and address the impacts of their decisions on low-income families and communities.

1. See HUD Provides Fiscal Year 1998 Budget Estimates to OMB, 26 HOUS. L. BULL. 156 (Nov. 1996).
2. OMB, Department of Housing and Urban Development FY 1998 Passback (undated, about Nov. 27, 1996). This 47-page document, hereafter also referred to as the passback, is on file at National Housing Law Project's Oakland office. See also OMB Delivers One-Two Punch to Low-Income Housing and OMB's Proposed Rural Housing Budget elsewhere in this article.
3. The budget authority seems huge because it is $7,000 per unit per year. Actual outlays are slightly less. The problem is that the budget authority caps and levels are lower than outlays, but renewal of budget authority is a big jump from the prior year's level.
4. Amendment funds are needed to cover shortfalls in some contracts where cost increases over the contract exceeded estimates reflected in the original appropriations.
5. See HUD Provides Fiscal Year 1998 Budget Estimates to OMB, 26 HOUS. L. BULL. 156 (Nov. 1996).
6. In FY 1997, renewals accounted for $3.6 billion and amendments $850 million. Pub. L. No. 104-204 (Sept. 26, 1996).
7. See OMB Delivers One-Two Punch to Low-Income Housing, earlier in this issue.
8. See HUD, "Department of Housing and Urban Development Position Paper: Renewal of Section 8 Contracts" (May 1996) at 5-6.
9. See Another One-Year Reprieve for Most Expiring Section 8 Housing, 26 HOUS. L. BULL. 133 (Oct. 1996).
10. For example, HUD's FY 1997 budget authority for low-income housing assistance (all public housing and Section 8) totaled $11.23 billion, but its outlays for the same programs were projected at $25.68 billion. OMB Passback, supra note 2, at 4. The gap between these figures will narrow in FY 1998 should Congress approve adequate budget authority for renewals.
11. Outlays have grown rapidly in recent years. See Stephen Kohashi, Senate HUD, VA and Independent Agencies Subcommittee, "Housing Budgetary Analysis" (Nov. 29, 1994, discussion draft). This need will only accelerate under any welfare revisions or practices that have the effect of reducing public benefits without corresponding increases in earned income. See New Welfare Law's Effect on Welfare Recipients and on Housing Programs and Their Participants, 26 HOUS. L. BULL. 117 (Sept. 1996).
12. This was done in FY 1996 and again in FY 1997 to a limited extent, when PHAs were instructed to hold onto and not reissue certificates and vouchers upon turnover for a three-month period, in effect reducing the budget outlays during that moratorium period.