National Housing Law Project Housing Law Bulletin

The various proposals have some common policy objectives, and thus it may be possible to settle on a version that would protect the tenants and achieve other reasonable objectives. The first objective upon which people have focused extensively for the past four years has been to eliminate the disincentives to work that flow from increasing a tenant's rent when he or she goes to work. The major cause of that disincentive is the provision added in 1981 that sets the rent at no less than 30 percent of the tenant's adjusted income.⁶ That is called the floor component of the 30-percent rule. Using the 30-percent figure as a floor means that, if a household's income rises, the rent must be increased. Eliminating the floor eliminates that cause of the disincentive.

A second objective is to ensure that rents are not set so high in public housing that they drive higher income tenants out and keep higher income applicants from moving in. Again, the 1981 amendment that made the 30-percent figure a floor is alleged to have forced higher income families to move out of public housing. Eliminating the floor aspect of the 30-percent rule partially cures this problem. Nonetheless, allowing PHAs unlimited discretion to set flat rents at any levels they like could have the same impact of driving higher income tenants out of public housing if the PHAs were to select rents well above the units' actual market value. Some limit is thus needed in the legislation to guard against that possibility.

A third and most important objective is to ensure that rents in public housing can be afforded by everyone, even those with the lowest incomes. Using the 30-percent-of-adjusted-income figure as a cap on the amount any particular family may be charged as rent is the device used in the past to meet that objective.⁷ With any system that allows the PHA to set a flat rent for a unit, there must be an income-based cap to take care of cases where the flat rent is more than tenants and applicants with low incomes can afford.

Finally, because there is not an unlimited amount of federal subsidy money available, PHAs should not have unlimited discretion to set rents so low that federal subsidies would skyrocket. If the rents collected from higher income tenants were well below what they could afford and what the units were worth, and federal operating subsidies made up the difference, some of those subsidies would represent an unjustifiable expenditure of scarce housing resources. Prior to 1981, that problem was addressed by a requirement that the average rent-to-income ratio of a PHA's tenants be at least 20 percent.⁸ The 1981 amendment eliminated the problem by setting the rent at a minimum of 30 percent of adjusted income for all tenants. But that floor-setting provision caused its own problems, as outlined above. HUD's current proposal would require flat rents to cover at least 75 percent of the units' operating costs, leaving only 25 percent to be subsidized by HUD.⁹

The following examples explain why a system that allows PHAs to charge flat rents, up to 30 percent of a family's adjusted income, would meet all of these objectives. It would not create a disincentive to work. It would protect tenants with the lowest incomes from being priced out of public housing, without administrative complexity or risk of people falling through the cracks. With a floor on flat rents at 75 percent of operating costs, the risk of breaking the federal subsidy bank could be lessened. With a cap on flat rents at the market value of the units, the risk of driving higher income tenants out of public housing could also be avoided.

Under such a system, the PHA would choose the flat rent for each unit. It would be based on the market value of the unit and not be so high as to constitute a disincentive to continued occupancy, as H.R.2 would prescribe.¹⁰ The rent could be required to be at least 75 percent of the operating costs for the unit, as HUD proposes. The tenant would pay that rent or 30 percent of adjusted income, whichever is lower. The floor aspect of the current 30-percent rule would be repealed, thus eliminating the PHA's obligation to raise a tenant's rent each time the household's income increases.

In the first example below, the PHA has chosen to set the flat rent at $100 per month. If a family of three were living in that unit and receiving $383 per month from the TANF program, 30 percent of its adjusted income would be $91 per month and that would be the family's rent. If the head of the household got a minimum wage job, for 20 hours a week, the family would receive $442 per month in earnings and $108 from TANF. Thirty percent of that family's new adjusted income would be $141, but the family would pay the $100 flat rent, which is the lower figure. The rent increase of $9 is not at all likely to be a disincentive to work. If the family moved to full-time minimum wage work or even to work at $2.30/hour more than the minimum wage, there would be no rent increase and no disincentive to work.

$100 Flat Rent/Ceiling Rent¹¹

TANF Income Only	1/2 Time Min. Wage Work + TANF	Full-time Min. Wage Work	Full-time Work at Min. Wage + $2.30/Hr.
Income	$38312	$55013	$88414	$128315
30% of Adjusted Income16	91	141	241	360
Rent17	91	100	100	100
Income Minus Rent	292	450	784	1183

If the PHA were to set the flat rent at 75 percent of the approximate average operating cost for public housing units nationwide, i.e., at $250, the situation would be somewhat different, as the next example explains. The family living in that unit with a $383 TANF grant would pay only $91 for rent, because of the 30-percent-of-income cap. If that family went to work half-time at the minimum wage, its rent would rise to $141 because it would not be protected by the higher flat rent. If the family went to full-time minimum wage work, its rent would be set at $241 because of the 30-percent cap. If the family received any raises thereafter, its rent would be capped at the flat rent of $250 per month.

The rent increase experienced by the family when it goes to half-time work, and later to full-time work, might be thought of as a work disincentive, but the family that goes to half-time work would still have almost $100 more left over after paying the rent than before going to work. The family that goes to full-time work would have an additional $350 left over after paying the rent. In addition, if there is a disincentive, it results from the PHA's choice to set the flat rent at $250, instead of $100, not from the 30-percent cap. Without the 30-percent cap in this case, the family with only a welfare grant could not afford the unit. It would be paying 65 percent of its gross income for rent. Without the cap, even the family working half-time would pay 45 percent of its gross income for rent.

$250 Flat Rent/Ceiling Rent¹⁸

TANF Income Only	1/2 Time Min. Wage Work + TANF	Full-time Min. Wage Work	Full-time Work at Min. Wage + $2.30/Hr.
Income	$383	$550	$884	$1283
30% of Adjusted Income	91	141	241	360
Rent	91	141	241	250
Income Minus Rent	292	409	643	1033

Even in this case of a $250 flat rent, there need not be any rent increase that would cause a work disincentive. Protection from immediate rent increases may be secured from provisions, like the one in H.R.2, that postpone rent increases from new earned income for 18 months and thereafter phase them in over three years.¹⁹ Mandatory deductions for excessive medical costs, work-related expenses, and withholding for Social Security and similar costs would make sure that the adjusted income to which the 30-percent cap applies includes only money that is available to pay rent.²⁰ With those changes, tenants who go to work will be financially better off than those who do not. When working tenants' incomes increase to the level at which the higher flat rents kick in, those flat rents will safeguard against further rent increases.

One might think that the same result could be achieved without the 30-percent cap if the PHA were allowed to set flat rents of $250 per month and all tenants were required to pay that amount. In that case, tenants moving from welfare to work would not experience a rent increase, because the welfare tenant's rent would be $250 per month from the start. The problem with that analysis, however, is that a welfare recipient with a grant of $383 per month would not be living in public housing with $250 rents. That rent would be 65 percent of the household's income. No PHA would let them in, and if they were admitted they would not be able to make rent payments at that level for long.

If the PHA sets the flat rent at $350, approximately the average operating cost per unit of public housing nationwide, the same principles would apply. The person moving from welfare to half-time work would experience a $50 rent increase but would have the extra $100 left over after paying rent. If the family moved to full-time employment, it still would not be not protected by the flat rent, but would have about $350 extra after paying rent. Only when the family's hourly wage exceeded the minimum by more than $2 would the flat rent kick in and cap the tenant's rent at $350.

$350 Flat Rent/Ceiling Rent²¹

TANF Income Only	1/2 Time Min. Wage Work + TANF	Full-time Min. Wage Work	Full-time Work at Min. Wage + $2.30/Hr.
Income	$383	$550	$884	$1283
30% of Adjusted Income	91	141	241	360
Rent	91	141	241	350
Income Minus Rent	292	409	643	933

If the PHA sets the flat rent at $500, it would have little impact at all on the question whether a tenant faces a disincentive to work, as the next example illustrates. The welfare family experiences the $50 rent increase when moving to half-time work, but has the extra $100 after paying rent. When it moves to full-time work, there is another rent increase, this time $100, but the family has an extra $250 after paying the rent. The flat rent of $500 does not kick in at this stage or even if the family gets a raise to $10 per hour.

On the other hand, with a $500 flat rent, the 30-percent cap is essential to ensure poor people a chance to live in public housing. If there were no 30-percent cap, a family with a $383 welfare grant would have to pay more for rent than its entire income. A family working half-time at minimum wage would be paying over 90 percent of its income for rent. Without the 30-percent cap, even the family with full-time minimum wage work and no welfare would be paying over 55 percent of its gross income for rent.

$500 Flat Rent/Ceiling Rent²²

TANF Income Only	1/2 Time Min. Wage Work + TANF	Full-time Min. Wage Work	Full-time Work at Min. Wage + $2.30/Hr.
Income	$383	$550	$884	$1283
30% of Adjusted Income	91	141	241	360
Rent	91	141	241	360
Income Minus Rent	292	409	643	923

None of these calculations factors in details such as the earned income tax credit, the deductions for child care or the discretionary deductions and disregards for earned income. The principles, however, are the same. Eliminating the 30-percent floor eliminates the disincentive. Keeping the 30-percent cap ensures poor people affordable rents. Allowing flat rents enables working tenants to stay in public housing if they want to.

A system that would force a tenant to chose between flat rents or the 30-percent-of-income test each year, as H.R.2 provides,²³ would not achieve these policy objectives as well. The example of the $250 flat rent illustrates the problem. In that situation, a tenant on welfare would have to choose the 30-percent-of-income level, because the $250 flat rent would consume 65 percent of her income, which she could not afford. If she chose the 30-percent figure and then got a half-time job, she would experience the same rent increase she would have faced if the "choice" system had not been used. Ironically, if she got a full-time job at minimum wage plus $2.30/hour, she would face a rent increase to $360, $110 more than the flat rent her neighbors making even more money would be paying. The choice system in H.R.2 does not cap the tenant's rent at the flat rent.

Under the choice system, a tenant working full-time at minimum wage might be reluctant to choose the 30-percent figure ($241) even though that would be less than the $250 flat rent. If she thought she would be receiving a raise soon, she might opt for the $250 flat rent to avoid a rent increase above $250 if the raise were to come through. If she opted for the flat rent but did not get raise, and in fact lost her job, she would be in more trouble. Under the H.R.2 "choice" system, her rent would not automatically switch to the 30-percent-of-income test. Nor would she have the right to choose the 30-percent level in that situation. In H.R.2, the PHA has the sole discretion to decide whether to allow a tenant to switch from flat rents to the 30-percent level.²⁴

As a result, with the choice system, neither the work disincentive problem nor the affordability problem is solved. Welfare tenants moving to work would still face rent increases, despite the "choice." Even minimum wage workers might not get the protections of flat rents if their incomes were to increase, because they might be forced to "choose" the 30-percent test to safeguard against the risk of losing a job. On the affordability side, anyone who did opt for flat rents would be left at the mercy of the PHA which could deny them a chance to switch to the 30-percent test. If they were denied that switch, they would then not be able to afford their homes and would be evicted.

What these examples teach is that it is possible to devise a rent scheme that eliminates the disincentives to work and the pressures on higher income tenants to move out, while simultaneously preserving the Brooke Amendment's cap as a protection against unaffordability. All that is needed now is a consensus and some careful drafting.

¹H.R.2, The Housing Opportunity and Responsibility Act of 1997 (introduced Jan. 7, 1997) (hereafter HORA). For a description of some of the bill's more important provisions, see House Introduces Low-Income Housing Program Changes, 27 HOUS. L. BULL. 1 (Jan. 1997), and Project's Testimony on H.R.2 elsewhere in this March issue.

²HORA, § 225.

³Statement of [HUD] Secretary Andrew Cuomo Before the House Banking and Financial Services Subcommittee on Housing and Community Opportunity (Mar. 6, 1997), at 5-6.

⁴H.R. 1014 (introduced Mar. 11, 1997).

⁵See, e.g., Council of Large Public Housing Authorities (CLPHA), CLPHA's Goals in the 105th Congress (Dec. 18, 1996), critiqued in CLPHA's Goals for the 105th Congress, 27 HOUS. L. BULL. 5 (Jan. 1997).

⁶Pub. L. No. 97-35, § 322(a), 95 Stat. 400 (Aug. 13, 1981).

⁷42 U.S.C.A. § 1437a(a)(1) (West 1994).

⁸Former 24 C.F.R. § 860.407, 40 Fed. Reg. 44,324 (Sept. 25, 1975).

⁹Statement of Secretary Andrew Cuomo, supra note 3, at 5.

¹⁰HORA, § 225(b)(1).

¹¹Set by the PHA at the lowest level a PHA is likely to choose.

¹²In July 1996, the median AFDC grant for a family of three (single parent and two children) was $383.

¹³Income calculated by reducing the welfare grant to $108, by subtracting earnings of $5.10/hour x 20 hours a week ($442 per month), minus $30 and one third of remaining earned income, from the welfare grant.

¹⁴Calculated at $5.10/hour x 40 hours per week and 173 hours per month.

¹⁵Calculated at $7.40/hour x 40 hours per week and 173 hours per month.

¹⁶Calculated by subtracting $80 for two dependents from gross income and multiplying the result by .30.

¹⁷Calculated by choosing the lower of the flat rent or 30 percent of adjusted income.

¹⁸Set by the PHA at approximately 75 percent of the average operating cost for public housing nationwide.

¹⁹HORA, § 225(g).

²⁰Compare HORA, § 104(c) (voluntary deductions).

²¹Set by the PHA at approximately the average operating cost of public housing nationwide.

²²Set by the PHA at the hypothetical market value of the unit, less 10 percent.

²³HORA, § 225(a).

²⁴HORA, § 225(d)(2).