National Housing Law Project Housing Law Bulletin

This article is the final of two installments analyzing specific aspects of the Moving-to-Work Demonstration.³ The previous article examined those features of MTW plans that relate most directly to the delivery of services that will aid residents moving to the world of work. The discussion covered activities from needs assessment through job placement and retention, supportive services such as child care and transportation assistance to be offered to employed residents, criteria for selecting MTW participants, collaborations the PHAs proposed with other institutions in their communities, and the funding participating PHAs plan to rely on to bring their plans to life.

This installment will examine how the PHAs plan to use rent policies both as a carrot to aid the transition to work for those who succeed and as a stick to punish or deter those who might fail. The policies that are helpful to tenants moving from welfare to work deal with a variety concerns. To make it easier for tenants to cope with new expenses and different budgets during a transition period, many PHAs will delay rent increases for newly employed tenants, either outright or on a phased-in basis, or allow the increases to be placed in an escrow account for the tenants. To achieve the same goal, some PHAs will deliberately set rents for new employees at a lower level than they would otherwise be. Beyond easing the transition, policies that base rent upon income may include deductions to exclude from the calculation work-related expenses and payroll withholding and thus make the rents more affordable. Finally, some PHAs are using ceiling or flat rents to cap rents at market levels and to keep rent increases from continually gobbling up income.

Other policies may have a negative effect upon tenants' efforts to secure employment, and many of the PHAs' MTW plans include such policies. Tenants will be hurt by proposals for flat rents that are significantly higher than the rents welfare recipients are currently paying. In those cases, tenants who need time for education and training before going to work and who are not able to retain their new jobs will be overwhelmed and eventually evicted because their new rent is unrelated to their income. Other tenants will be adversely affected by rents designed to impose penalties upon welfare recipients who do not cooperate with economic self-sufficiency programs. Finally, several of the MTW participants are proposing rent changes in order to generate more income or to reduce administrative burdens, but their unintended side effects will be to make rents less affordable to welfare recipients and to low-wage workers.

When Congress set up the Moving-to-Work demonstration it directed that all PHAs must adopt a "reasonable rent policy" designed to encourage employment, for example, by excluding all or some of a family's earned income from the rent calculation.⁴ Policies that delay rent increases from new earned income, establish escrow accounts, allow deductions for work-related expenses and create ceiling rents meet this requirement. There is a substantial question, however, whether that same conclusion should be reached regarding flat rents that are significantly higher than welfare recipients making efforts to become financially self-sufficient can afford. In those cases, PHAs may have over-stepped the wide discretion that Congress granted to them.

Rent Policies That Assist Tenants in Making
the Transition to Work

Rent increase delays. Many of the PHAs address the concern that increasing rents immediately when tenants secure a job will adversely affect their efforts to move from welfare to work. In 1981, the Brooke Amendment, which had set a maximum limit on public housing rents in 1969, was amended to mandate that tenants pay 30 percent of their income for rent — no more, and no less.⁵ The result of that 1981 amendment is that tenants' rents must be increased when their incomes increase. The prospect of facing a significant rent increase may dissuade some tenants from going to work. Even if it does not, it makes them feel unfairly treated when so much of their extra income secured from going to work just goes to the housing authority or to cover other expenses they did not have when they were on welfare. In addition, having to pay the increased rent immediately gives the tenant no time to adjust to the extra expenses and income that have become part of their budget.

The MTW PHAs have developed a variety of approaches to address these concerns. One variable is the duration of rent increase postponements. The most aggressive approach is to disregard increased earned income during the entire term of each MTW participant's three- to five-year contract. Two PHAs, Tampa and Portland, chose that option. The next longest disregard period is proposed by San Mateo (California), which would disregard 25 percent of all earned income increases for two years.⁶ Another PHA, Birmingham, chose to parallel the current law,⁷ which excludes increased earned income for 18 months. Two other PHAs, Cambridge and Lincoln, selected 12 months as the disregard period. Lincoln also would provide a 90-day delay of rent increases for tenants who choose not participate in the Family Self-Sufficiency program.

An alternative selected by three PHAs, Lawrence, Portland (Oregon) and Seattle, is to eliminate any obligation to report income increases between annual recertifications, thus postponing any rent increase until the next regular recertification. That delay, however, may not be very significant for those people getting a job near the end of their 12-month certification period. Portland created an exception to that policy by requiring interim reporting of income increases arising when a new person moves into the household.

Phased-in increases. A refinement of the policies of postponing rent increases is to phase in the increases once the postponement period ends. Cambridge proposes to phase in the increase in small increments over the six months following its 12-month disregard. Similarly, Seattle plans to disregard new earned income until the next annual recertification, and then to phase in the increase at 1/12 of the total per month.

Escrow policies. An alternative mechanism for addressing the adverse impact of immediate rent increases is to implement the rent increase, but to deposit the extra rent in an escrow account for the tenant. Using escrow accounts in that fashion originated with the Family Self-Sufficiency program and its predecessor programs Project Self-Sufficiency and Operation Bootstrap. The escrows at least reassure participating families that the increased rent is not gone forever. In addition, if families are allowed to withdraw funds when needed, an escrow account can help them deal with emergency expenses connected with their employment, such as emergency child care and car repairs.

Many of the MTW grantees will use this escrow concept as a component of their plans. Several grantees are either sticking with or considering the traditional FSS model. They include the Housing Authority of the Cherokee Nation (Oklahoma), Minneapolis, Seattle and Vancouver. In addition, the Utah consortium⁸ will allow each participating PHA to select either the escrow strategy or a postponement of the rent increase.

Other PHAs have come up with variations on the traditional FSS model. The Lincoln Housing Authority, after disregarding new earned income for 12 months, will escrow up to $200 of any rent increase for the second year. It then will pay the family the escrowed amount at the end of the year as long as the family has cooperated with the self-sufficiency program. San Mateo will delay for two years 25 percent of the rent increase that new earned income would produce and place the other 75 percent in an escrow account. San Antonio will escrow rent increases for 18 months. Portland and Tampa, which propose to delay any increases that new earned income would produce for the entire MTW demonstration program, will offer participants the alternative of paying the increase and having it kept for them in an escrow account.

Three other PHAs, the Massachusetts Department of Housing and Community Development, Louisville and San Diego, will require MTW participants to save money, but the savings will not be related to income and rent increases. Louisville proposes to reduce the rent-to-income ratio to 20 or 25 percent and to mandate that participants place 5 percent of their incomes in a savings account for subsequent use for a downpayment, unsubsidized rents or emergencies. Similarly, the Massachusetts DHCD would place $50 a month of the housing assistance stipend in an escrow account that the family could access at the end of the three-year program. San Diego would do approximately the same thing. While the benefits of accruing savings are obvious, forced escrow accounts, unlike the voluntary system proposed by Portland and Tampa, deprive residents the dignity of choosing a course of action with respect to savings that suits their particular situation.

Lowering rents for newly employed tenants. Another approach to relieving the financial strains that immediate rent increases place on people going to work is to lower the rents for newly employed tenants. Three PHAs propose such a scheme. Los Angeles County would set the rent-to-income ratio at 20 percent for MTW participants' first year of employment. Louisville is considering a 20-percent-of-income formula for all MTW participants, with the added requirement that they put 5 percent of their income into a savings account. Greene Metropolitan Housing Authority (Ohio) proposes a different approach, setting flat rents at $50 per month in the first year, $75 in the second, and $100 in the third for MTW participants who have become employed at least 30 hours a week. Those low rents, even though they exclude tenant-paid utilities, should make the transition to employment easier.

Work-related expenses. One of the difficulties with the present rent formulas is that earned income and unearned income are treated as if they were the same, even though payroll withholding and work-related expenses may leave the working tenant with less money to pay the rent. One of the ways to make rents more equitable for tenants with earned income is to allow those tenants additional deductions for payroll withholding and other work-related expenses. The only such deduction allowed under current law is for child care expenses.

A few MTW participants propose to adopt additional deductions to correct this inequity. Cambridge will extend the child care deductions, which now are limited to the care of younger children, to cover 13- and 14-year-olds. In addition to providing a financial benefit, the availability of this deduction should have the ancillary effect of allaying the acknowledged fear of parents concerned about leaving older children unsupervised. Cambridge, in addition, will disregard 15 percent of earnings of all tenants to account for payroll withholding and other expenses of going to work. To make it easier for people to pursue additional education, it will allow a deduction of tuition payments. To adjust for long-distance commutes, Cherokee will allow an increased mileage deduction.

Another concern for people leaving welfare and going to work is the increased medical expenses they will incur after their eligibility for Medicaid ends. The rent rules formerly allowed all families to deduct excessive medical expenses, which was of greatest benefit to employed tenants. Two PHAs propose differing medical expense deductions. Lawrence will have deductions for out-of-pocket medical expenses up to $2,000 per year. Similarly, Lincoln would allow deduction of medical and dental premiums in excess of 3 percent of gross income for all families. Basing this deduction on medical premiums instead of medical expenses is more convenient administratively, but it will be of little help for low-wage workers whose employers provide no medical coverage and who cannot afford health insurance.

Ceiling rents. Public housing tenants who have gone to work may also be adversely affected by the requirement that their rent be based upon 30 percent of their income if they do so well that 30 percent of their income exceeds the market value of their units. When that happens, tenants are forced either to pay too much for their apartments or to move out and take the risk that their good fortune in the employment world might not continue. If they do move out and then lose their jobs, their chances of moving back into public housing will be slim. To prevent tenants from being placed in this dilemma, PHAs have had authority to establish ceiling rents since 1988. Ceiling rents allow tenants' rents to increase as their incomes increase until a ceiling, usually near the market value of the unit, is reached. Many PHAs have established ceiling rents, especially since the Fiscal Year 1996 Appropriations Act made setting them easier.⁹ Some PHAs, however, have not established ceiling rent levels.

A few of the MTW PHAs that will retain the rule that rents be based upon income will use some form of ceiling rent. Cambridge will retain the ceiling rent it currently has in place. The Utah consortium will allow each PHA to decide whether to adopt ceiling rents. High Point HA (North Carolina) is also considering a ceiling rent.

Seattle and Lawrence are proposing two variations on the normal ceiling rent provisions. Seattle will cap the rent increases at a level equal to the operating costs of the unit, but only for two years, which is somewhat like the original ceiling rents that Congress limited to three years. Thereafter, Seattle will allow the rents to rise to 75 percent of the market rent for another two years and then to the full market value of the unit. Lawrence proposes to convert all of its housing, both public and Section 8, to a tenant-based assistance program under which a tenant's contributions will be set at 30 percent of income, but not less than a minimum rent nor more than a maximum amount. Those maximums, which will be set at approximately 85 percent of the local Fair Market Rent, will operate like a ceiling rent, stopping the increase of rent at the ceiling.

Rent Policies That Will Make the Transition to Work More Difficult and Sanction Tenants Who Do Not Make the Transition

Many MTW PHAs are taking a very different approach to setting rents. These PHAs appear quite dissatisfied with the policy of basing rent upon income. Instead, they are proposing flat rents that are significantly higher than the minimum rents now in effect and also higher than the rents that most welfare recipients pay under the 30-percent-of-adjusted-income formula. For some, at least part of the reason for switching to the higher, flat rents is to impose a sanction upon tenants who do not go to work, or, phrased more positively, to encourage tenants to seek jobs. The effect of these rent policies, however, will not be to make the transition to work easier than it otherwise would be. Instead, the focus seems solely to be upon making it more difficult to stay on welfare.

Flat rents. Five of the MTW PHAs will set flat rents for their housing that will remain the same throughout the tenant's participation. Those PHAs and their flat rents for two-bedroom units are:

Utah Consortium
Multifamily buildings: $ 50/month
Single-family: $100/month

Lawrence (Kansas): $180/month

Tulare (California): $225/month

Stevens Point (Wisconsin): $225/month

San Diego: $372/month

The Massachusetts DHCD will have a similar approach for its voucher program under which it will provide a fixed stipend, no matter what the tenant's income is or what rent the landlord is charging. The housing part of that stipend would be $250/month in Worcester, where the FMR for a two-bedroom unit is $610, and $400 in Boston, where the two-bedroom FMR is $874. Participating tenants would have to pay the difference between those stipends and their landlord's rents, which could work out to the equivalent of flat rents of $360 and $474.

One benefit of this approach is that tenants do not face a rent increase when they go to work, work more hours or get a raise. This is an alternative way of dealing with the concerns about disincentives that earned income disregards and delayed rent increases were designed to address. Eliminating the rent increases is a significant benefit for tenants who have managed to become employed and who have enough income to pay these higher level rents.

The problem with this flat-rent approach, however, is its impact upon tenants who are still on welfare or who lose their jobs. Some of these flat rents are substantially higher than the amounts that welfare recipients would pay under the 30-percent-of-income test and more than they can afford. For example, Lawrence indicates that its $180 flat rent would be double the $90 average rent being paid by its public housing tenants in two-bedroom units. The average rent increases experienced by all its public housing tenants would be about $100 and for Section 8 tenants would be about $150.

The PHAs that are adopting this approach justify it by indicating that flat rents impose pressure on welfare recipients to get a job. They explain that the flat rents are affordable by people who are employed, even at minimum wage, for slightly less than full-time work. However, not all welfare recipients will be able to secure a job immediately. They will need time for education and training. When they get jobs, they will not always be able to keep them. While they are in the training period or if they lose their job, they will need reasonable rents to be able to cope with their other living expenses, especially expenses that have increased because they are in training or in jobs, even on a temporary basis. Without affordable rents during those periods, many will eventually be evicted and their transition from welfare to work will be jeopardized. Instead of helping them make the transition, these flat rents will become one more barrier making the transition more difficult.

One PHA, Keene (New Hampshire), whose flat rent policy is described below, displays some recognition of the difficulty that flat rents will cause for welfare recipients before they secure a job and for workers who lose their jobs. It proposes a relatively elaborate system to make its flat rents work. If the PHA's initial flat rent is too high, it proposes to allow residents to work for rent by doing things such as grounds work or cleaning vacated apartments. Where residents are making satisfactory progress, the PHA could allow them to pay less than the initial or subsequent flat minimum rent, combined with workfare at $5 per hour. Residents would be required to work off the difference between the reduced rent and their scheduled rent.

Flat rents that phase out to market rents. A variation on this flat-rent approach is one that imposes flat rents and then gradually increases them until the rents become full market rents. A similar approach for tenant-based assistance is to fix the subsidy at a particular level and then reduce it as time passes until the subsidy eventually disappears. Greene MHA, Keene, San Mateo and Seattle fit into this phase-out category, though no two plans are identical.

At Greene, tenants will pay $50 a month plus utilities in Year 1, $75 plus utilities in Year 2 and $100 plus utilities in Year 3. Keene would have public housing tenants pay the higher of $125, including utilities, or 30 percent of adjusted income in years 1 and 2, 45 or 50 percent of the FMR in years 3 and 4, and 65 to 75 percent of the FMR in years 5 and 6. Its scheme for the tenant-based program would be essentially the same: $125 or 30 percent of adjusted income to begin, the landlord's rent minus a $300 or $425 Housing Assistance Payment (HAP)¹⁰ in years 3 and 4, the landlord's rent minus a $200 or $300 HAP in years 5 and 6, and no subsidy thereafter. San Mateo would have regular income-based rents for years 1, 2 and 3, but for years 4, 5 and 6 the subsidies would be reduced by 20 percent per year and be eliminated by Year 7.

Seattle has two schemes. At its Rainier View project, which is a Jobs Plus site, the rents will be 20 percent of the FMR in Stage 1, 40 percent of market in Stage 2, 70 percent of market in Stage 3, and at market in Stage 4. Stage 1 will last for two years, but the length of the other stages is not specified. If a tenant loses a job, she may return to Stage 1 for three months. At the rest of the PHA's developments, there will be a ceiling rent, set at operating costs, for two years, followed by another ceiling, set at 75 percent of market, for another two years, followed by the market rent. The important differences presented by these proposals are to start the flat rent at a lower level, so that they will be affordable by more tenants, and to phase out the housing assistance so that tenants will eventually leave the assisted housing program.

Penalties for non-cooperation. A few PHAs have an alternative mechanism for dealing with families that do not cooperate in the self-sufficiency efforts. In essence, they establish separate, higher rent schedules for the uncooperative tenants. Los Angeles County would do that by raising the rent-to-income ratio of the non-cooperating tenants to 40 percent in their third year of participation. Lincoln would deem all non-working families to have income equal to the earnings of minimum wage workers. If the family has children, it will be presumed to have income equal to 25 percent per week of minimum wage work. If there are no children in the family, the presumption will be 40 hours a week of minimum wage work. Tampa would impose upon tenants (excluding the elderly and people with disabilities) who choose not to participate in the MTW efforts a flat rent based upon the market value of the unit, phased in over time.

A related policy is proposed by two PHAs, Portage (Ohio) and Portland, to deal with tenants who lose welfare payments because they do not cooperate with the welfare department's self-sufficiency program. Under current law, tenants who lose welfare in those cases will have their rents reduced if they are in public or assisted housing. In their MTW plans, these two PHAs propose to withhold rent reductions from tenants who lose welfare in such cases. There are similar provisions in the housing bills now pending in Congress.

Other rent changes. Beyond these rent policies that are consciously related to tenants' transitions from welfare to work, several PHAs have introduced other changes regarding rent that will increase tenants' rents and inadvertently make residents' transition to work more difficult. Two PHAs, the Delaware State Housing Authority and Vancouver Housing Authority, will raise the percentage of income paid for rent to 35 percent. Portage will limit the deduction for minors to two children to discourage families from having more children, and Delaware will withhold the deduction for children conceived after the family moves into assisted housing. Three PHAs, Greene, Keene and San Diego, and the Utah consortium, would eliminate utility allowances, and Lincoln would eliminate utility reimbursements. Vancouver and Lawrence would eliminate all income exclusions, and Portland would stop excluding earned income of tenants in training programs and of minors who are not in school any more. Portland would also limit interim income recertifications for a loss of income to one per year. All of these proposals are made either to lessen administrative burdens or to generate more income, but they will have the effect of making rents less affordable and thereby make it harder for tenants to cope with the transition to work.

HUD is now in the process of negotiating with the MTW PHAs for final plans for their demonstration project. In that process, more rent policies that can ease the transition to work may be added to some of the PHAs' plans, and ones that will make the transition process more difficult should be eliminated.

¹  See The Moving-to-Work Demonstration: What Housing Programs Can Do to Help Welfare Recipients Make the Transition to Work, 28 HOUS. L. BULL. 49 (Apr. 1998).
²  See id. at 50 n.11 for list of the 30 participating PHAs.
³  Funding for the research and writing of both this and the April Bulletin article were provided by the Annie E. Casey Foundation and the John D. and Catherine T. MacArthur Foundation, receipt of which we greatly appreciate. The opinions expressed in these articles are those of the National Housing Law Project and not those of the foundations.
⁴  Pub. L. No. 104-134, § 204(c)(3)(B), 110 Stat. 1321, 1321-282 (Apr. 26, 1996).
⁵  See Section 3 of the United States Housing Act of 1937, 42 U.S.C.A. § 1437a(a)(1) (West Supp. 1996).
⁶  The other 75 percent of the new earned income would be included, but the increased rent it produces would be placed in an escrow account, as described below.
⁷  42 U.S.C. § 1437a(a) (1988), as amended by Pub. L. No. 101-625, § 515(b), 104 Stat. 4199 (Nov. 28, 1990); seealso Earned Income Disregards for Public Housing Tenants, 28 HOUS. L. BULL. 1 (Jan. 1998).
⁸  Consisting of Salt Lake County, Salt Lake City, West Valley City, Davis County, Utah County, Provo County, and Ogden City housing authorities.
⁹  Pub. L. No. 104-99, § 402(a), 110 Stat. 26, 40 (1996).
¹⁰  Two-bedroom units would receive the lower HAP and three bedrooms would receive the larger HAP.