National Housing Law Project Housing Law Bulletin

The current changes in the welfare programs will mean that many more welfare recipients will be moving into the workforce and more of them than previously will be participating in employment training programs. A substantial number of those welfare recipients are living in public and assisted housing. The way that their rents are calculated when they are participating in the training programs and when they move to employment can have significant impacts upon their financial circumstances and their lives.¹

Over the years, Congress and HUD have required the exclusion of certain types of earned income and other payments from the rent calculations.² In 1987, HUD required PHAs to exclude amounts received by tenants participating in HUD-funded training programs or reimbursements received by tenants participating in other publicly assisted programs.³ In 1995, HUD expanded that provision to exclude compensation received from such participation.⁴ Congress, in 1990, required the exclusion for 18 months of any earnings of a public housing tenant who secures a job after participating in a public employment training and supportive services program.⁵ HUD issued implementing regulations on that exclusion in 1994.⁶ Congress and HUD have also given PHAs the option of disregarding other elements of public housing tenants' earned income in other situations.⁷ In addition, since 1987, Congress has allowed PHAs to use ceiling rents to cap the rents paid by higher income public housing tenants.⁸ In 1996, Congress made it easier for PHAs to use those ceiling rents.⁹

As part of our research on the intersection of the changes in welfare and housing, we have sought to find out whether PHAs know about and have implemented the mandatory income exclusions and whether they are exercising their options to exclude other earned income and establish ceiling rents. One part of the effort was to survey PHAs about what they have been doing. The results of that survey are discussed below.

The Survey

The purpose of the survey was to find out what PHAs were doing with these rent rules which Congress and HUD have created. The first area of inquiry related to the exclusions for reimbursements and earnings received by public housing and Section 8 tenants while they are in job training. Those rules were issued by HUD in 1987, and we asked whether the PHA had implemented them; if so, when; and if not, whether the PHA was aware of the rules.

The second area was the rule excluding income earned by a public housing tenant during the first 18 months of a job secured after participating in an employment training and supportive services program. We had anecdotal information that that rule, which had been enacted by Congress in 1990 and published in regulations by HUD in 1994, was not being implemented by many PHAs. Thus we asked the PHAs whether they had implemented the rule, when they had done so and, if not, were they aware of the rule.

Third, we asked about the optional disregards of earned income which Congress has authorized for fiscal years 1996, 1997 and 1998, and which HUD has created by regulation on a permanent basis. The anecdotal information indicated that not many PHAs were taking that option, allegedly because they had to take the risk that they would lose money on it. We wanted to see whether that was true. Thus we asked the PHAs whether they had implemented the optional disregards and, if so, to send us information about what they had decided to disregard.

Finally, we wanted to see what PHAs were doing with ceiling rents. Ceiling rents are, in effect, flat rents that serve as the maximum rent a PHA may charge for a unit. As a tenant's income rises, eventu
ally 30 percent of adjusted income reaches or exceeds the ceiling rent and the PHA charges the tenant the ceiling rent, instead of the higher, 30-percent-of-adjusted income figure. Congress has authorized ceiling rents since 1987, but PHAs had complained that the formulas for setting them were unworkable. As a result, Congress changed the formulas in 1996 and repealed a HUD approval requirement. To find out what was happening with ceiling rents, we asked the PHAs whether they were using ceiling rents and to send us information describing what they had done.

We sent the survey to 833 PHAs on HUD's mailing list of PHAs. They were composed of 429 PHAs in medium to large size cities and an additional 404 PHAs in smaller localities that were randomly selected. We received responses from 121 PHAs which, together, have 137,292 public housing units and administer 226,538 certificates and vouchers. Those totals represent approximately 10 percent of the federal public housing units in the country and 16 percent of the certificates and vouchers.¹⁰

Ninety-three of the respondents have public housing units and they were fairly evenly distributed between large, medium and small-sized PHAs. Twenty-seven were large PHAs (more than 1,250 public housing units), 33 were medium-sized (between 250 and 1,250 units), and 33 had fewer than 250 units apiece. Altogether the large PHAs had 113,052 units, the medium-sized had 20,778, and the small-sized had 3,462 units. One hundred and four of the PHAs administered certificates and vouchers and they also were fairly evenly distributed among large, medium and small PHAs. Forty administered more than 1,250 certificates and vouchers each, 46 administered between 250 and 1,250, and 18 had fewer that 250. The large PHAs administered a total of 191,869 certificates and vouchers, the medium-sized had 31,909, and the small PHAs administered 2,760 altogether. Seventy-seven of the PHAs administered both public housing and certificates and vouchers.

Job Training Exclusions

On the rule excluding payments from training programs, 67 PHAs said they had implemented it, one said it was in the process of doing so, and 52 PHA said they had not implemented it. One PHA said it was not applicable to them, because it had only elderly and disabled housing.

The PHAs that had not implemented the rule, which was adopted in 1987, constitute 43 percent of the responding PHAs. They manage 38,330 public housing units, 28 percent of the total public housing units managed by the respondents. Seven of the 40 non-implementing PHAs with public housing are large, 16 are medium-sized, and 17 are small. Forty-one of the 52 non-implementing PHAs administer certificates and vouchers. Their certificates and vouchers total 53,782, or 24 percent of the total administered by the respondents. Twelve administer more than 1,250 certificates and vouchers, 19 between 250 and 1,250, and 10 have fewer than 250 each.

These 52 PHAs are responsible for roughly one quarter of the public housing and certificate and voucher assistance provided by the responding PHAs. Their failure to follow HUD's rules is disturbing, especially since those rules have been on the books for more than 10 years. If the performance of the responding PHAs is representative of all the PHAs, that would mean that roughly one quarter of the households in public housing and the certificate and voucher programs is not receiving the benefit of these rules issued by HUD.

Some of the PHAs, 16 of the 50 that have not implemented the rule, indicated that they were not aware of it. That makes it clear that communicating through the Federal Register, where HUD publishes its regulations, is not enough. The rules on job training exclusions have been published in the Federal Register three times: as final rules in September of 1987, as part of the interim combined rent and income rules in April of 1995, and as part of the final combined rules in October of 1996.¹¹ They have been in the bound volumes of the Code of Federal Regulations since 1988. For PHAs that do not subscribe to the Federal Register, HUD sent out copies of both the 1995 interim and the 1996 final combined rules with a cover notice in April 1995 and December 1996.¹² Furthermore, in October of 1992, HUD had sent all PHAs a Notice explaining the exclusion of income received under training programs and had send another Notice in June of 1995, extending the effective date of the 1992 Notice.¹³

Finally, in January of 1998, HUD issued another Notice on the treatment of income received from training programs.¹⁴ This Notice is much more detailed than the previous ones. It discusses situations in which the rule applies and poses and answers a series of questions about how to apply the rule. In addition, unlike the regulations in the Federal Register, it focuses just on rent calculations involving earned income and payments received during training programs. The combination of that narrower focus and the greater detail the Notice provides may be more effective in ensuring that PHAs know about the rule and follow it.

Nonetheless, it may be that ensuring that all PHAs are informed is not enough to guarantee compliance. Twenty-four of the 50 PHAs that have not implemented the rule stated that they are aware of it. One might infer that they have decided not to follow HUD rules even though they are mandatory and they know about them. However, it is more likely that they are only saying that they are aware of the rule because the 1998 HUD Notice brought it to their attention and that they will be implementing it soon. At least, 18 of those 24 PHAs did ask for the packet of materials on the rules that we offered as part of the survey.

As noted earlier, over half the PHAs (67 out of 121) indicated that they have implemented the training rule and one says it is in the process of doing so. They manage 98,837 public housing units, 72 percent of the public housing covered by the respondents. They also administer 172,756 certificates and vouchers, 76 percent of the certificates and vouchers covered. That PHAs responsible for 75 percent of the public housing and certificates and vouchers administered by the respondents are implementing this rule is encouraging. But even that news is not all good. Twenty-nine of those 68 PHAs have implemented the regulation only this year or last, even though it was first issued in 1987. Those PHAs administer 116,426 public housing units and certificates and vouchers, 32 percent of the total. Thus the level of prompt compliance with these HUD regulations is much lower than the current 75-percent compliance figure.

The 18-Month Disregard

The picture of compliance with the 18-month earned income disregard provision is much bleaker. Enacted by Congress in 1990, that rule requires PHAs to exclude from the income of public housing tenants the first 18 months of incremental earnings from a job they secure as a result of participating in an employment training program.¹⁵ HUD initially delayed issuing regulations, but they were finally published in August 1994, with an effective date of September 23, 1994.¹⁶ Yet the survey results indicate that more than half of the respondents (54 of 93) with public housing had not implemented the regulation.¹⁷ Those PHAs manage 70,972 units, 52 percent of the public housing managed by the respondents. They are fairly evenly spread among large, medium and small PHAs. Eleven are large, 22 are medium-sized and 21 are small. Twenty-seven of the 54 PHAs said they were aware of the rule.

Thirty-seven responding PHAs have implemented the rule and one is in the process of doing so. They are managing 66,195 units, 48 percent of the total units managed by survey respondents. Yet even with these PHAs, implementation of the rule is mostly a relatively recent phenomenon. Twenty-one of these 38 PHAs are either implementing the rule now or have done so in the last year. They manage 37,489 units, 27 percent of the total. That means that the 18-month rule was implemented prior to 1997 for only 21 percent of the units managed by the responding PHAs. Only two of the responding PHAs state that they implemented the rule when it became effective.

The fact that this rule was not issued in regulatory form until 1994 explains, at least in part, why it has been implemented less thoroughly than the training rule. But, still, compliance for less than half of
the public housing inventory three and one-half years after the regulations became effective is far from satisfactory. Clearly, changes in rent policies that affect welfare recipients moving to work have to be implemented by HUD regulations immediately. Publication of regulations and their delivery to the PHAs through the HUD Notice system is not enough. Implementing instructions must be issued by HUD in detailed Notices to the PHAs, as PIH 98-2¹⁸ eventually did. Beyond that, local and central office HUD officials need to present new rules to PHA directors at their regional and national meetings. More importantly, training programs for PHA caseworkers have to include the new rules and simplified devices for their application to tenants' real situations.

Optional Earned Income Disregards

With the optional disregards the question of non-compliance with HUD and congressional rules does not arise, because these disregards are discretionary with the PHAs. In effect, what HUD and Congress have said to the PHAs is that if they think there is a better way to count the income of working tenants, the PHAs are free to do it their own way. Congress said PHAs may create additional adjustments to the earned income of public housing tenants, during fiscal years 1996, 1997 and 1998.¹⁹ In its permanent regulations defining tenants' income, HUD says that PHAs, without any further HUD approval, may exclude from public housing tenants' income all or any portion of their earned income. Examples HUD gives include:

• excluding new or increased earned income, permanently, for a limited time or with phase-ins;
• excluding income of secondary wage earners;
• excluding items withheld from paychecks or associated with other costs of working; and
• excluding earned income used to pay for medical expenses previously covered by Medicaid.²⁰

More than one fifth of the responding PHAs that have public housing (20 out of 93) have accepted Congress's offer. They manage 44,889 units of public housing, 33 percent of the total public housing units managed by those responding PHAs. They have chosen to provide their tenants who are employed some deductions or exclusions in addition to the ones mandated by the statute or regulations. If those figures are representative of PHAs generally, the number of PHAs acting affirmatively is greater than had been expected.²¹

Ten of the PHAs adopting optional disregards provided additional information on the policies they chose. Four excluded a percentage of earned income, ranging from 7.65 percent to 15 percent, so that the rent would be based upon a figure closer to take-home pay. Another PHA allowed just the deduction of amounts withheld for FICA and state and local taxes. One allowed families to deduct medical expenses in excess of 3 percent of income, and one allowed working families to deduct all health insurance premiums. Three allowed the exclusion of child-support payments made by working families, although one of the three limited the exclusion to people working at least 20 hours per week and to 50 percent of the amount paid.

Several PHAs came up with different ways to deal with income from new jobs. One fairly standard method was to eliminate interim reporting of increased income between annual recertifications, even
though PHAs have always been authorized to do that without the appropriations act language. One PHA expanded the 18-month income disregard provision to cover all public housing tenants who get a new job, even if they have not participated in a federal or state employment training program. Another PHA disregards 50 percent of the income from a new job in the first year, 40 percent in the second year and 30 percent in the third, if the new job is for at least 20 hours per week and the tenant previously had been employed for less than 20 hours a week, or unemployed for six months or 48 of the 52 weeks preceding the new job.

Two PHAs also dealt with secondary wage earners. One excludes all the earned income of people aged 18-21, as long as they are not the household head or spouse and their income is not the household's sole income. The other excludes 50 percent of the second wage earner's income, as long as both wage earners are employed full time. That same PHA excludes for 23 months the welfare cash grants of all tenants who work at least 20 hours a week.

Ceiling Rents

Where rent is based upon a percentage of income only, rents continue to increase as tenants' incomes increase. For about six years, from 1982 through 1988, federal law required PHAs to charge tenants 30 percent of their income for rent, no less and no more.²² Sometimes 30 percent of income became more than an apartment was worth, leading some tenants to move out of public housing. In the 1987 housing legislation, Congress restored PHAs' authority to set a ceiling rent and to stop charging tenants 30 percent of adjusted income for rent where that figure was higher than the ceiling.²³ The purpose of ceiling rents is to encourage employed applicants with higher incomes to move into public housing, to encourage existing tenants to stay in public housing when their incomes rise, and to protect existing tenants against unduly high rents while they are in transition to a secure, well paid employment situation.

In 1987, Congress set three limits on ceiling rents.²⁴ First, the ceiling rent had to be approved by HUD. Second, it had to be designed to cover the debt service and operating costs on the unit, so that, in effect, the higher income tenants would not be directly drawing any subsidies for their units. Third, tenants could be protected by ceiling rents for only three years, a limit that was raised to five years in 1989²⁵ and repealed in 1992.²⁶ Because of dissatisfaction with the ceiling rent system it had created, Congress, in the appropriations acts since 1996, has changed the formula for calculating the minimum level of ceiling rents and eliminated the HUD approval requirement.²⁷ Until HUD issues regulations implementing the appropriations acts, the ceiling rents must cover the PHAs' operating costs per unit, but need not cover the debt service. Ceiling rents may be set at the Section 8 Existing Housing Fair Market Rents (FMRs), the 95th percentile of rents being paid for comparable units in the development, or in accordance with the 1987 statutory formula.²⁸

Nearly 40 percent of the survey respondents that manage public housing (36 out of 93) have already implemented ceiling rents and one is in the process of doing so. Those 37 PHAs manage 40 percent of the public housing units managed by the responding PHAs. That these percentages are higher than the percentages of PHAs implementing optional earned income disregards is not surprising. The option of establishing ceiling rents has been available since the 1987 housing legislation became effective. In addition, PHAs do not take the risk that the rent lost from creating ceiling rents will not be offset by increased rent collections from tenants who are encouraged to go to work. If ceiling rents decrease rent collections, operating subsidies are increased to offset the loss.

Twenty-five of the 37 PHAs with ceiling rents provided additional information about their policies. Six of those PHAs had adopted ceiling rents under the 1987 legislation with HUD's permission, but 19 did not act until Congress loosened up the formula and eliminated the HUD approval requirement in 1996. Twelve of those 19 chose to set the rents at the Section 8 FMRs, three opted for the 95th percentile formula, and four did not indicate which method they used. Two of the PHAs using FMRs deviated from the usual method of equating the ceiling rents for each size unit with the FMR for a unit with the same number of bedrooms. One subtracted the maximum Section 8 allowance for tenant-paid utilities and services from the FMR for each size unit. That resulted in a $181 per unit reduction in the ceiling rents. The second chose the FMR for a one-bedroom unit and applied it to all the other units in its inventory, not only the 209 one-bedroom units, but also the 134 units with two or more bedrooms. The PHA acted on the advice of a consultant who indicated that this methodology was being used by other PHAs and that it was justified because public housing rents are not usually based upon unit size so they should not be in the case of ceiling rents.

In both of these cases, deviation from the normal practice enabled the PHAs to set the ceiling rents at lower levels, producing a greater benefit for the affected tenants. The three PHAs that chose the 95th percentile method also did so because it produced rents that were lower than the FMR. Rents set at the FMR would have been too high for them to achieve their purposes. One other PHA, Newark, set rents at the FMR but also set lower ceiling rents to be implemented later, after HUD approval under the 1987 legislation. The tenant organization had argued successfully for the lower ceilings, because the metropolitan-wide FMRs were significantly higher than the market rents in Newark. Some of the PHAs that had adopted ceiling rents under the 1987 legislation imposed three- or five-year limits on individual tenant's use of the ceilings, as previously required by the legislation. Two of the PHAs using the 1996 Appropriations Act authority also imposed time limits, one for two years and one of five years. Those time limits were not required. One of those PHAs also made the ceiling rents optional for Family Self-Sufficiency (FSS) program participants. It would seem that most FSS participants would choose the lower ceiling rents. Nonetheless, some tenants might respond to the incentive of paying a higher rent based on 30 percent of their income and having the excess placed in their FSS escrow account for use when they complete the program.

Conclusion

Congress and HUD have created some tools that will help public housing and Section 8 tenants make the transition from welfare to work. Nonetheless, congressional enactments and even HUD regulations do not by themselves make new rules effective. When Congress enacts a law, HUD must issue implementing regulations promptly or nothing will happen. When HUD issues the regulations, it also must make special efforts to inform the PHAs of the new rules and to explain in detail how those rules work. In addition, HUD has to ensure that training is made available, by HUD or third parties, to the individuals who will have to apply the new rules to tenants' situations. Otherwise, policies that Congress and HUD have decided are necessary will have no effect. They will be on the books, but will not be followed by the people who count, those who actually perform the rent calculations.

When PHAs are informed in detail about the new rules, they seem to be following them. What is more encouraging, many PHAs have made the choice to adopt optional policies that protect employed tenants from unfair rents. Ceiling rents are the most popular, probably because they cost the PHA nothing and may save the PHAs some administrative time by eliminating recertifications and rent increases when tenant incomes increase. They also benefit the highest income tenants whom many PHAs wish to keep as long as possible. However, significant numbers of
PHAs are also adopting earned income exclusions and adjustments that benefit not only the high income tenants, but also those working part time and at low-paying jobs. There is room for improvement, but much progress is
being made.

¹  Research on these and related issues is being conducted by the National Housing Law Project with funding provided by the Annie E. Casey Foundation and the John D. and Catherine T. MacArthur Foundation, receipt of which is greatly appreciated. The opinions expressed in this article are those of the National Housing Law Project and not those of the funding providers.
²  See Earned Income Disregards for Public Housing Tenants, 28 HOUS. L. BULL. 1 (Jan. 1998).
³  Former 24 C.F.R. §§ 813.106(c)(8) and 913.106(c)(8), 52 Fed. Reg. 34,113-14 (Sept. 9, 1987), subsequently recodified at 24 C.F.R. § 5.609(c)(8) (1997).
⁴  Former 24 C.F.R. §§ 813.106(c)(8)(v) and 913.106(c)(8)(v), 60 Fed. Reg. 17,393-94 (Apr. 5, 1995), subsequently recodified at 24 C.F.R. § 5.609(c)(8)(v) (1997).
⁵  42 U.S.C. § 1437(a) (1998), as amended by Pub. L. No. 101-625, § 515(b), 104 Stat. 4199 (Nov. 28, 1990).
⁶  Former 24 C.F.R. § 913.106(c)(11) (1995), 59 Fed. Reg. 43,635 (Aug. 24, 1994), subsequently recodified at 24 C.F.R. § 5.609(c)(13) (1997).
⁷  Pub. L. No. 104-99, § 402, 110 Stat. 26, 40 (Jan. 26, 1996), extended by Pub. L. No. 105-65, § 201(d), 111 Stat. 1343, 1364 (Oct. 27, 1997); 24 C.F.R. § 5.609(d) (1997).
⁸  42 U.S.C.A. § 1437a(a)(2) (West 1994).
⁹  42 U.S.C.A. § 1437a(a)(2) (West Supp. 1998).
¹⁰  See HUD, A Picture of Subsidized Households in 1997: United States: Totals & Agencies with Over 500 Units (Dec. 1997), at 7.
¹¹  52 Fed. Reg. 34,108 (Sept. 7, 1987); 60 Fed. Reg. 17,388 (Apr. 5, 1995); 61 Fed. Reg. 54,491 (Oct. 18, 1996).
¹²  HUD Notice PIH 95-23, "Addition of Nine Exclusions to the Definition of Annual Income" (Apr. 14, 1995); HUD Notice PIH 96-93, "Combined Income and Rent Final Rule" (Dec. 18, 1996).
¹³  HUD Notice PIH 95-43, "Extension of Notice PIH 92-48, Exclusion of Income Received under Training Programs."
¹⁴  HUD Notice PIH 98-2, "Treatment of Income Received from Training Programs" (Jan. 12, 1998).
¹⁵  Pub. L. No. 101-625, § 515(b), 104 Stat. 4199 (Nov. 28, 1990).
¹⁶  59 Fed. Reg. 43,635 (Aug. 24, 1994).
¹⁷  One PHA had public housing only for people with disabilities or who are elderly, and it is not included among the 54 PHAs that have not implemented the rule.
¹⁸  Supra note 14.
¹⁹  Pub. L. No. 104-99, § 402, 110 Stat. 26, 40 (Jan. 26, 1996), extended by Pub. L. No. 105-65, § 201(d), 111 Stat. 1343, 1364 (Oct. 27, 1997).
²⁰  24 C.F.R. § 5.609(d) (1997).
²¹  In a 1997 survey done by the Public Housing Authority Directors Association (PHADA), only 11.8 percent of the responding PHAs indicated that they had implemented additional adjustments to earned income. Survey of the Use of Flexibility Regarding Preferences, Funding and Rent Reform, PHADA ADVOCATE (July 7, 1997), at 6-8.
²²  There were two minor exceptions which raised the rents above 30 percent of adjusted income, but they are not relevant to ceiling rents. Pub. L. No. 97-35, § 322, 95 Stat. 400 (Aug. 13, 1981).
²³  42 U.S.C.A. § 1437a(a)(2) (West 1994).
²⁴  Pub. L. No. 100-242, § 102(a), 101 Stat. 1821 (Feb. 5, 1988).
²⁵  Pub. L. No. 101-235, § 302, 103 Stat. 2043 (Dec. 15, 1989).
²⁶  Pub. L. No. 102-550, § 102, 106 Stat. 3683 (Oct. 28, 1992).
²⁷  42 U.S.C.A. § 1437a(a)(2) (West Supp. 1998).
²⁸  HUD's proposed regulations were published in the Federal Register on November 25, 1997. 62 Fed. Reg. 62,927.