National Housing Law Project Housing Law Bulletin

Over the past two years, Congress, HUD and affected constituencies have been wrestling with a moving target: the level of annual budget authority required to renew all expiring Section 8 contracts. During the debate over 1997's Balanced Budget Agreement and the Fiscal Year 1998 HUD appropriations bill, the budget request for Section 8 renewal costs during FY 1998 alone fell from its originally projected level of almost $11 billion to its final level of $8.1 billion. Over the past year, the projected budget request for FY 1999 renewals has jumped around between $13 billion (HUD's February 1997 estimate) and the current Administration request for $7.1 billion. Understanding the reasons for this constant shifting is important to advocates' success in obtaining what is needed. HUD, its supporters in Congress and affordable housing advocates must restore a higher level of credibility to these estimates in order to obtain the necessary resources from an increasingly skeptical Congress, many of whose members are already less than enthusiastic about addressing low-income housing needs.

Reason #1: HUD's data on renewal needs is steadily improving. Projecting renewal needs for such a large and diverse inventory of housing stock is a new and difficult task. Section 8 subsidies cover about 3 million units, with roughly half for tenant-based certificates and vouchers and the other half for project-based assistance. Until recently, most of these units were subsidized under long-term contracts (5, 15 and 20 years) previously funded by Congress with multi-year appropriations. Outlays were made to support those units and subsidies under those contracts without the need for new budget authorizations. Recently, as those longer term contracts have begun to expire in large numbers, projecting annual budget authority requirements for the renewals, even for just one-year terms, has become an essential and challenging task.

On the project-based side, since 1995, renewal policy has been up in the air. Would Congress commit to renew? If so, which units? At what rent and subsidy levels? For what term? Would owners want to renew? How many units would be replaced with tenant-based subsidies or none at all? Until Congress set a renewal policy framework, accurately estimating budget requirements for the project-based stock would be impossible.

Finally, in October of 1997, Congress enacted the Section 8 renewal and restructuring program in the "Multifamily Assisted Housing Reform and Affordability Act of 1997,"¹ which sets the general framework and subsidy rules for renewals. This law provides that "market rent" will provide the usual benchmark for a HUD renewal offer, absent exemptions or other exceptions (hence the name "Mark to Market"). However, since "market rent" is unique for every property, this framework alone does not solve the budget estimation problem, unless an arbitrary proxy such as the HUD-published FMR is chosen to represent HUD's renewal offer. Apparently, this was done in order to project budget requirements and "savings" from the Mark-to-Market program.

At the same time, HUD has improved its project-based inventory data. Better data has permitted more accurate projections of budget needs for different kinds of properties, depending on variables such as type of financing and current unit cost relative to market. HUD-insured units with above-market rents will be reduced to market levels in the restructuring or renewal process; units with Section 202, Rural Housing Service or state or local bond financing can generally receive current rent renewal offers, even if in excess of market levels; and below-market units will receive offers at current rents, or possibly at higher market rents if HUD so decides. HUD's improved data has helped sort out these variables and costs.

Finally, the Section 8 contract "amendment" needs of existing units under long-term project-based contracts that are running short of funds provide another important part of the Section 8 budget picture.

For the tenant-based inventory, over the past five years, HUD has worked with other governmental agencies like the General Accounting Office and the Office of Management and Budget to improve its data on unit counts, while simultaneously refining estimates of per-unit costs. A recent GAO report provides more detail on these issues, including per-unit cost.² On the per-unit cost issue, this report indicates that HUD has used faulty estimation methods that resulted in overestimating tenant-based contract renewal funding needs. Specifically, the GAO Report found that HUD failed to utilize actual expenditure data to estimate per-unit cost needs, and also built in unwarranted contingency costs.

For FY 1998's renewal request, HUD used a tenant-based per-unit cost average of $6,386 that was apparently faulty because it double-counted the PHA administrative fee (averaging $561 per unit). It also added a contingency cost of two weeks' disbursements (averaging $204), when PHAs already have minimum reserves of two months' disbursements. It included an additional $138 for projected increased outlays from reduced tenant incomes under welfare reform which have not yet materialized. HUD's initial request for an additional general contingency of $162 million for FY 1998 was subsequently abandoned. In total, these revisions to the tenant-based renewal request between January and September of 1997 resulted in average per-unit cost reductions of 14 percent, from $6,386 to $5,499, for a cumulative reduction in required budget authority of $1.285 billion. Note that these reductions also have a similar effect on future years' projections, since contracts that cost less to renew this year bring similar savings at each annual expiration and renewal opportunity.

The tenant-based inventory also has amendment needs, mostly to cover shortfalls on remaining 15-year contracts, but these needs should disappear as the entire system is shifted to one-year funding on renewal over the next few years.

Reason #2: HUD's data on existing funds available to meet these needs is also steadily improving. Projecting needs is but half of the equation. Accurately predicting the additional budget authority needed for renewals requires accurate estimates of funds, known as program reserves, already appropriated and on hand to meet these needs. Most of these reserves are within the accounts of PHAs administering the tenant-based subsidy programs, Section 8 certificates and vouchers. They exist because in the past Congress provided funds to PHAs based upon the number of units and the local published FMR, and PHAs in many cases actually expended less, for a variety of reasons. PHAs either used these unexpended funds for other program purposes (e.g., subsidizing more units) or placed them in reserve accounts. As these reserves have been identified and quantified over the past few years, their considerable magnitude has created difficulties in HUD's credibility concerning program renewal needs.

The tenant-based reserves exist because PHAs often spend less than the per-unit FMRs used to calculate federal contributions. For some time, the federal contribution was not adjusted to account for the fact that, on average, tenants paying 30 percent of adjusted income pay about $175 per month toward the actual unit rent, and this amount reduces accordingly the actual need for federal subsidy. That fact was apparently incorporated in HUD budget planning several years ago. In addition, however, in many cases the actual "reasonable rent" approved by the PHAs is less than the FMR. Also, many PHAs do not fully utilize all of their tenant-based subsidies all of the time, due to difficulties in sustaining full lease-up rates and to tenant and unit turnovers. Finally, to reduce outlays, over the past few years Congress has required PHAs to "hold back" for three months tenant-based subsidies that turn over before reallocating them to needy families on the waiting list. All of these factors have contributed to building reserves in the tenant-based programs.

Prodded by Congress, in early 1996 HUD commenced a "reconciliation" process to verify the extent of these tenant-based reserves. In April of 1997, HUD initially estimated a $5.8 billion excess in reserves, which was soon increased to $9.9 billion. HUD and Congress then agreed that about $2.2 billion of this amount was need for program contingencies, so that about $7.7 billion actually exceeded projected needs. Congress then rescinded $4.2 billion of this funding, $3.65 billion in June of 1997 to pay for non-housing programs in the FY 1997 supplemental appropriation, and another $550 million in October. Congress then created a "Section 8 Reserve Preservation Account" to hold the balance of $3.5 billion. This amount was intended to be used to cover part of the growing renewal needs for FY 1999. The Administration's FY 1999 budget request was therefore for new budget authority of $7.1 billion, which, when added to the reserve of $3.5 billion, was thought sufficient to meet FY 1999's projected Section 8 renewal need (both project — and tenant-based) of almost $11 billion.

The immediate challenge for FY 1999. At this point no one is disputing the Administration's forecasted need of about $11 billion in budget authority to renew all tenant-based and project-based Section 8 contracts scheduled to expire in FY 1999, beginning October 1, 1998. Although, to the extent that some of these renewals are project-based units that are supposed to undergo restructuring to reduce Section 8 rents and subsidies, it is not clear that the projected needs incorporate some delay in making the restructuring program operational that may require short-term renewals at higher current rent levels.

The challenge is to meet this $11 billion need. While the Administration's request of $7.1 billion was premised upon the use of existing reserves of about $3.5 billion, these reserves are no longer available. Congress just approved, and the President has just signed, despite an earlier veto threat, an emergency supplemental appropriation for FY 1998 to cover disaster relief and peacekeeping.³ This legislation rescinded about $2.5 billion from the Section 8 reserve account, which last year had ostensibly been informally earmarked to pay for part of the FY 1999 renewal cost. The effect of this action is to increase the amount of required renewal appropriations by the same amount, $2.3 billion, from the requested level of $7.1 billion to a new level of $9.4 billion. Although the Administration cited the Republican congressional leadership's commitment to restore this $2.3 billion during the appropriations process as one reason to relinquish its veto threat. It remains to be seen just how these funds will be restored without reducing funding for other vital HUD programs that have already suffered reductions over the past few years.

During the early summer and fall, as the appropriations process wends its way toward the new fiscal year, this issue should become a central focus of low-income housing advocacy. Section 8 outlays currently hover around $18 billion annually. Failure to secure the rescinded budget authority for renewals would cause a $2.3 billion reduction in Section 8 spending, or approximately 13 percent of the total Section 8 budget, which currently serves about 3 million recipients. This will force either widespread subsidy deprivations (390,000 recipients) or benefit reductions to millions of needy recipients. We must ensure that these funds are provided.

¹  Pub. L. No. 105-65, Title V, 111 Stat. 1344, 1384 (Oct. 27, 1997).
²  United States General Accounting Office, Section 8 Tenant-Based Housing Assistance: Opportunities to Improve HUD's Financial Management, No. GAO/RCED-98-47 (Feb. 1998).
³  H.R. 3579, enacted May 1, 1998. See Congress Enacts — and the President Signs — Bill Funding Disaster Relief from Section 8 Reserves, elsewhere in this issue.