National Housing Law Project Section 8 Housing

HUD published a final regulation governing renewal of expiring Section 8 tenant-based assistance contracts on October 21, 1999.⁽²⁾ The new rule applies to voucher and certificate contracts that expire after December 31, 1999. The rule was fashioned through a negotiated rulemaking process, as required by Congress.⁽³⁾ It is important to understand the new rule, as the renewal funding formula will significantly affect the impact of PHA decisions concerning the voucher payment standard(s) and local admissions preferences on the number of families a PHA can assist. In addition, the new rule permits HUD to reduce permanently the amount of funding allocated to PHAs that do not use a sufficient amount of their Section 8 funds. In this new world of "use it or lose it," PHAs must understand the new renewal rule.

This article briefly reviews the significance of the renewal formula, how certificate and voucher funding was previously handled by HUD, and the methodology that will be used under the new rule. 

1. Significance of Renewal Formula

The new renewal formula adopted by HUD means that HUD will fund the additional costs that may be incurred if PHAs increase their voucher payment standards, whether to achieve adequate utilization of contracted funds, to promote deconcentration of poverty and expand housing opportunities, to restrain families' payment burdens, or to meet targeting requirements.⁽⁴⁾ The attached chart illustrates the effect of setting the voucher payment standard at different percentages of the applicable Fair Market Rent (FMR) on the rent burden that families will experience, and on the cost of units that families may be permitted to rent. 

In general, a higher voucher payment standard will make more units available to families at a rent burden of 30 percent of income for rent and utilities,⁽⁵⁾ and will make more units available for which a family's share of the rent will be within the permissible maximum limit of 40 percent of adjusted income.⁽⁶⁾ This is particularly true for housing in areas that are less poverty-concentrated and that have better access to jobs and quality services. An increase in the potential availability of affordable units may be necessary if a sufficient number of families are to succeed in leasing units with their vouchers — both overall and in low poverty neighborhoods --- for a PHA to score well on the relevant indicators in the Section 8 Management Assessment Program (SEMAP)⁽⁷⁾ and to prevent the future reduction in the size of its voucher program.⁽⁸⁾ Increasing the payment standard may also be necessary to make more units potentially available to voucher holders with incomes below 30 percent of area median, as the lower a family's income, the less ability it will have to rent a unit for which the rent and utility costs exceed the payment standard. At least 75 percent of the families newly leasing under the voucher program must be in this extremely low income group in order for a PHA to comply with the new targeting requirements for the voucher program.⁽⁹⁾

If PHAs choose to admit more poor families than required by the federal targeting floor in order to meet identified housing needs, and as a result incur additional housing assistance costs, the new renewal formula will also cover these increased costs. Subject to adequate Congressional appropriations, PHAs are assured of sufficient funds to serve at least the number of families that HUD considers its "baseline" in a manner that is consistent with these program goals. (A PHA’s baseline is the number of families the PHA was authorized to serve on December 31, 1999, adjusted for any changes since that date.⁽¹⁰⁾

On the other hand, if PHAs are able to serve more than their "baseline" number of families within their budget authority because their costs have decreased (due to higher family incomes, lower rents, or other cause), the new renewal rule may result in a reduction in renewal funding. This will occur because the new formula uses a PHA’s actual costs to calculate the amount of funding needed to support the baseline number of assisted households, rather than the costs of serving a larger number of families. If a PHA that has "maximized leasing" in this manner is caught in a budget squeeze as a result of reduced renewal funding due to decreased costs, it will be allowed to use its reserve funds to support the additional families during at least a one-year attrition period. But the PHA will have to restore its reserves out of its regular budgeted funds. It is possible that HUD will allow PHAs to retain some of the financial benefit of reduced costs as an incentive to restrain costs in the operation of the voucher program.^(10a)

2. Background⁽¹¹⁾

Some background may be necessary to appreciate the need for a new renewal formula and why the funding methodology is confusing to many people involved with the Section 8 program. Until recent years, budget authority for Section 8 certificates and vouchers was appropriated by Congress in multi-year increments, generally of from five to 15 years. HUD's contracts with PHAs for these subsidies indicated the number of families that HUD expected the PHA to serve with the reserved funding amount. HUD calculated the amount of funding based on the applicable FMR(s) and an assumed national inflation rate for the duration of the contract. Until recently, HUD reserved for PHA use the full FMR amount, without any deduction for families' contributions toward their rental costs. When the initial multi-year contracts expired, they were renewed by HUD (annually, beginning in the mid-1990's) based on the number of families of each bedroom size that HUD had initially assumed would be served by the increment in question, multiplied by the full FMR for the area. 

As a result of this funding methodology, many PHAs accumulated huge reserves due to actual housing assistance payments below the FMR. In the certificate program this was primarily the result of two factors: tenants contributing a portion of the costs, and rents for existing participants lagging behind FMR increases. In the voucher program,⁽¹²⁾ there was the additional factor that PHAs could set their payment standard as low as 80 percent of the FMR, and assist more families than the number initially specified by HUD with any remaining funds. Some PHAs decided to "grow their own programs" by using the program reserves accumulated in both the certificate and voucher programs to lease units to additional families beyond the number HUD had initially specified that the funding was intended to assist. 

In 1996, in response to Congressional criticism that such "self-help" increases in program size were contrary to Congressional prerogatives to control incremental assistance, HUD instructed PHAs that they were no longer permitted to use program reserves to increase the number of families served.⁽¹³⁾ However, PHAs could, if they had sufficient budget authority without using reserves, approve leases for more families than HUD had anticipated they would serve within their budget authority.⁽¹⁴⁾ This policy revision left unchanged the ability of PHAs, within their voucher programs, to serve additional families within their current budget authority by using a lower payment standard. Because PHAs' administrative fees are tied to the number of families participating in the program, PHAs continued to have a financial as well as moral/political incentive to serve the maximum number of families, though by late 1996 their discretion was largely limited to the voucher program.

Congress sought to prevent this "problem" of PHAs adding families to the program by requiring HUD, in 1997, to recapture approximately $7.2 billion in Section 8 program reserves. Trying to prevent large reserves from again accumulating from unspent Section 8 funds, in 1998 HUD began to renew expiring Section 8 contracts at 92 to 94 percent of FMR. While this was an attempt by HUD to bring PHAs' budgets closer to what appeared to be their actual costs for Section 8 assistance, there were many difficulties in the application of this national percentage reduction to the funding of individual PHAs.

This was the situation Congress faced in the fall of 1998. To remedy it, Congress included a section in the Quality Housing and Work Responsibility Act of 1998 (QHWRA) that specified the standard HUD must meet in renewing tenant-based contracts, and directed HUD to implement the new standard through negotiated rulemaking.⁽¹⁵⁾ The statutory standard contains two requirements that are vital to keep in mind in reviewing the new rule: (1) the renewal formula must allocate sufficient funds, "at a minimum . . . to ensure continued assistance for the actual number of families assisted as of October 1, 1997" plus incremental assistance and additional families authorized subsequent to that date (known as the PHA's "baseline"); and (2) inflation adjustments must be based on local or regional (not national) factors.⁽¹⁶⁾

For FY 1999, prior to the negotiated rulemaking, Congress directed HUD to implement the statutory provision by notice. In that notice, HUD made an extremely important addition to the statutory language concerning the "baseline" number of units that the renewal formula must fund. HUD decided that it would fund the higher of the number of families actually assisted on October 1, 1997, or the number of units "reserved" for the PHA on HUD's records. (HUD determined the number of "reserved" units based on its initial contracts for each certificate or voucher increment with each PHA plus authorized additions. The "reserved" number was not adjusted to reflect the number of families the PHA could actually assist with its budget authority in light of costs, the bedroom sizes needed by the families assisted, or the then-required three-month delay in reissuance of turnover subsidies. ⁽¹⁷⁾ For most PHAs, the "reserved" number of units provided a higher "baseline" than the statutory language regarding the actual number of families assisted. 

3. The Final Renewal Rule

The final rule is a refinement of the actual cost methodology that HUD developed during 1998 and 1999, including an important change in how PHAs can use their program reserves. Basically, the formula is: 

Each of these concepts requires explanation. 

a. The Renewal Formula

The "Baseline"

The determination of a PHA's Section 8 renewal budget for the subsequent calendar year starts with a PHA's "baseline" number of units, which will now be the number of Section 8 subsidies reserved by HUD for the PHA program as of December 31, 1999.⁽¹⁸⁾ In the years following 2000, the baseline will be adjusted by any permanent changes made to the units reserved by HUD for the PHA.⁽¹⁹⁾ This adjustment could be upward or downward, based on permanent changes in HUD’s allocation to the PHA. The preamble explains that this baseline includes the higher of the number of units leased or reserved on October 1, 1997 plus adjustments HUD has made to correct its records and to add new units.⁽²⁰⁾ HUD issued a notice in April 2000 that includes a more detailed explanation of how the "baseline" is determined and what procedures PHAs should follow if they believe HUD has made an error in determining their baseline.⁽²¹⁾ In March or April, 2000, each PHA should have received individual notice from HUD of HUD’s determination of the PHA’s baseline in accordance with this procedure.

PHA Actual Cost Per Unit [ACPU]

The number of units in the adjusted baseline that expire in the upcoming calendar year is then multiplied by the PHA's adjusted annual per unit cost. Each PHA's annual per unit cost is determined by dividing the PHAs' total Section 8 housing assistance paid by the total number of "unit months" for which housing assistance was paid, and then multiplying by 12 to annualize the monthly actual average cost. (This formula assures PHAs operating a Family Self-Sufficiency program of sufficient renewal funds to cover FSS escrow deposits, because PHA contributions to FSS escrow accounts are included in its actual housing assistance payments costs.) The PHA's cost data are derived from the PHA's most recent HUD-approved year-end statement. This could mean that renewal funding for subsidies for which the funding expires in calendar year 2000 is based on either the PHA's FY 1998 or FY 1999 year end statement, depending on the PHA's fiscal year and the speed of HUD's approval process.

Inflation Adjustment

Because of the one- to two-year time lag between the cost data used to determine actual costs and the subsequent period in which the funding will be used, HUD adjusts the actual annual per unit cost by the Section 8 annual adjustment factor(s) (AAF) that applies to the PHA's jurisdiction for the time period(s) between the last approved year end statement and the end date of the funding under the renewal contract.⁽²²⁾ HUD has committed to trying to develop a better measure of actual inflation in costs at the local level that are relevant to the amount of Section 8 assistance payments in place of the Section 8 annual adjustment factors (AAFs).⁽²³⁾

Recognizing that the AAFs do not always accurately project future costs that are changing rapidly, HUD agreed to include in the rule flexibility to modify the adjusted annual per unit cost figure used to determine the subsequent year's budget on request of a PHA.⁽²⁴⁾ PHAs that increase their payment standard in light of increasing rental costs of available units, but make the increase too late to be adequately reflected in the actual cost data contained in the most recent approved year end statement, may wish to request upward modification of their budget authority under this provision.

The text box below illustrates how the principles discussed above will apply for renewal funding in 2001
 
 

Example for 2001 Initial Baseline =                         110 "units" Adjustments since 12/31/99 = +10 incrementals                                                +10 conversions Adjusted Baseline =                  130 units Minus units expiring        after 12/31/01                     - 20 Total Renewal Units                   110 Determining Actual Cost Per Unit [ACPU]: Total FY 1999 HAP:                  $120,000    [divided by]                           _________ FY 1999 unit months leased:             300 Monthly per unit cost =                   $ 400                                                         x 12 Actual annual per unit cost:           $ 4,800               x FY 2000 AAF (1.5%) x .015                                                    $ 4,872  x FY 2001 AAF (2.2%)              x .022                                                    $4,979 110 renewal units x $4,979 [ACPU] = $547,690   need to add examples w. arithmetic shown:  a. FY 2001 costs increase: ACPU increases from $4,979 to $5,250 due to an increase in the payment standard. Total FY 2002 budget is $577,500: show calculation. b. FY 2001 costs decrease: If 2001 ACPU declines from $4,979 to $4,800, PHA can use $19,690 "saved" in 2001 to assist 4 additional families (48 unit months). In 2002 (or 2003), ACPU = $4,800 (assuming no inflation). Renewal budget for 110 units = $528,000. Can only support 110 units (or fewer if costs increase in 2002).

b. New Policy on Use of Reserves

This actual cost methodology means that if a PHA's average per-unit cost has increased, the increased cost will, within one to two years, be fully reflected in the Section 8 renewal funding it receives from HUD. But during the year when per unit costs first increase and possibly the following year (depending on the timing of the PHA's fiscal year and HUD approval of the year end statement), the actual cost formula may not yet reflect a cost increase. To avoid a reduction in the number of families served below the "baseline" during this adjustment period, PHAs will be permitted to draw more liberally on the two-month reserve that HUD provides to each PHA. 

The details of this new reserve policy are contained in the Federal Register notice published on April 19, 2000. Non-troubled PHAs that need to use reserves to be able to serve the "baseline" number of families at current costs may access 50 percent of their reserves --- one month’s funding --- merely by submitting a revised budget to HUD, without a need for prior HUD approval. If the PHA needs more than one month’s additional funding to support the baseline number of families, it must request HUD approval for this additional withdrawal. The renewal rule and the implementing notice obligate HUD to restore depleted reserves used to support the baseline number of families, so long as there are sufficient program appropriations.⁽²⁵⁾ From the data reviewed during the negotiated rulemaking process, in virtually all cases this liberalized authority to draw on reserve funds will be sufficient to prevent a reduction in the number of families served.

Add examples, based on same facts as in the text box above, that show how the PHA experiencing increased costs in 2001 could draw on reserves to stay at baseline; and how the PHA experiencing decreased costs in 2001 could draw on reserves in 2002 to avoid termination of assistance while program size decreases through attrition.

c. Limited Authority for HUD to Alter the Actual Cost Methodology

Other than an actual national shortfall in appropriations,⁽²⁶⁾ there are three possible situations in which HUD may in the future depart from the rule's actual cost methodology for renewal funding. HUD may invoke its right to modify the actual cost budgeting only after a subsequent notice published in the Federal Register based on consultation with relevant stakeholders, and under circumstances and procedures that are consistent with the program goals listed in the regulation.⁽²⁷⁾

If HUD does not use its authority to adjust the cost formula for PHAs with declining costs--and it appears unlikely HUD will do so⁽³⁴⁾--it will be the responsibility of PHAs that permit additional families above the baseline number to lease units with Section 8 assistance to cut back to the number of families that it can serve within its budget authority. During the attrition period, PHAs may be permitted to draw on reserve funds to prevent the loss of assistance to any family currently participating in the program, but HUD makes no commitment to restore the depleted reserves.⁽³⁵⁾ If HUD does not restore the PHAs’ reserves, PHAs that have "maximized" their leasing will need to attrit below the number of baseline units in order to restore their own reserves. 

PHAs that set a lower payment standard (or otherwise reduce program costs) with the goal of increasing the number of families served within budget authority thus run a substantial risk that in the following year, or an even longer period, they will not be able to serve any new families in their Section 8 program while they reduce the number of families served down to the baseline number that can be supported with the reduced budget authority that will result from the rule's formula.

Conclusion

Taken as a whole, the new Section 8 renewal rule means that PHAs, advocates and residents need to discard the old notion that Section 8 funds are fixed, and that if costs increase (because of an increase in the payment standard, admitting poorer families, or any other reason) then the number of families served must necessarily be reduced. PHAs are assured, so long as Congress fully funds renewal needs as indicated by the regulatory formula, of having sufficient funds to support at least the "baseline" number of families at the costs that the PHA actually incurs, so long as those costs reflect reasonable management decisions about how to implement Section 8 program goals. PHAs can serve families better, without having to reduce the number of families they serve.

1. Barbara Sard is the Director of Housing Policy for the Center on Budget and Policy Priorities. This article is based on an article originally written for the January 2000 Housing Law Bulletin (published by the National Housing Law Project). Ms. Sard served as a member of the Negotiated Rulemaking Committee on Tenant-Based Section 8 Renewal.

2. 64 Fed. Reg. 56,882 (amending 24 C.F.R. §§ 982.102) (hereinafter all citations to the final rules will be to the section of the Code of Federal Regulations as it will be codified). Most contracts between HUD and PHAs to fund Section 8 certificates and vouchers are now one-year contracts, and must be renewed annually for funding to remain available. 

3. Pub. L. No. 105-276, §§ 556(b), 112 Stat. 2461, 2613 (1998). 

4. 24 C.F.R. §§ 982.102(g)(4) (list of "legitimate program goals" that HUD must adhere to if it alters the cost-based formula for allocating renewal Section 8 budget authority to PHAs). 

5. Under the new voucher program, families must pay at least 30 percent of their adjusted income for rent and utilities, even if a unit's rent is below the payment standard. 24 C.F.R. §§ 982.505(b). Only families that rented less expensive units under the old voucher program prior to October 1, 1999 will continue to benefit from the so-called "shopping incentive" during the conversion period. 24 C.F.R. §§ 982.502(c). HUD may require PHAs to increase their payment standard up to 110 percent of FMR for a particular unit size if 40 percent or more of participants occupying units of that size pay more than 30 percent of income for rent and utilities. 24 C.F.R. §§ 982.503(e). 

6. 24 C.F.R. §§ 982.508. This limit applies to new program participants and movers who rent units for which the cost of rent and utilities exceeds the payment standard. 

7. PHAs that lease fewer than 95 percent of the units budgeted for the PHA by HUD lose 20 out of a possible 135 to 145 points on SEMAP. 24 C.F.R. §§ 985.3(n). PHAs in metropolitan areas that take the necessary steps to expand housing opportunities, including analyzing the effect of their payment standard[s] and the possible need for an increased or exception payment standard, and achieve an adequate or increased level of deconcentration of poverty, can earn an additional 10 points. 24 C.F.R. §§ 985.3(g)(expanding housing opportunities), (h)(deconcentration bonus), as amended by 64 Fed. Reg. 40,496, 40,498 (July 26, 1999). If a PHA earns zero points on the lease-up or expanding housing opportunities indicators, despite designation as a "standard" or "high performing" PHA due to its overall SEMAP score, the PHA must correct the deficiency within 45 days, and may be considered by HUD to be in breach of its contract with HUD, which HUD may then cancel. 24 C.F.R. §§§§ 985.106, 985.109. 

8. Short of canceling a PHA's voucher contract altogether, the new Section 8 renewal rule authorizes HUD to permanently reduce the funding level and number of "baseline" units for PHAs that fail to adequately lease units, and reallocate that funding to other PHAs. 24 C.F.R. §§ 982.102(i). The rule itself does not set a numerical standard for what level of leasing is "adequate" to avoid reallocation of funds. HUD issued procedural notice relevant to the implementation of the rule in the April 19, 2000 Federal Register, 65 Fed. Reg. 21088 (hereafter the "Renewal Notice"). The notice is available on the Internet at <http://frwebgate.access.gpo.gov/cgi-bin/multidb.cgi>. The reallocation provision will apply to PHAs that are using less than 90 percent of their budget authority, and do not achieve leasing of 95 percent of budgeted units by the time they submit their second budget after HUD’s notice of deficiency. According to HUD, this is likely to occur approximately 16 months after a PHA receives a warning from HUD. Renewal Notice, Part VI.

9. Not less than 75 percent of the households admitted each year by PHAs to their voucher programs must be extremely low income (i.e., with incomes at or below 30 percent of area median), subject to very limited exceptions. 24 C.F.R. §§ 982.201(b)(2). 

10. 24 C.F.R. §§ 982.102(g)(4)(iv), (viii). See discussion of §§ 982.102(g) below. 

10a. Renewal Notice, Part IV(C)(2)(a) and (c), (D); 24 C.F.R. § 982.201(g)(3). 

11. The following description is based on a presentation by HUD staff on Section 8 Funding at the HUD Section 8 Summit held in Nashville, Tenn., on August 30 - Sept. 2, 1998, and on the materials distributed and presentations made during the Negotiated Rulemaking meetings, in addition to sources specifically cited. A summary of each of these meetings is available at: <http://www.hud.gov/pih/programs/s8/s8neg-rulemaking.html>. 

12. About one-quarter of all tenant-based subsidies in 1998 were vouchers. U.S. General Accounting Office, Section 8 Tenant-Based Housing Assistance: Opportunities to Improve HUD's Financial Management, GAO/RCED-98-47, February 1998, Appendix I. 

13. PIH 96-68 (August 23, 1996); PIH 97-59 (November 26, 1997). 

14. Id.

15. Pub. L. No. 105-276,, 112 Stat. 2461, 2613 (1998). 

16. Id., §§ 556(a) (emphasis added). 

17. PIH 98-65 (Dec. 30, 1998), as corrected by PIH 99-1 (Jan. 12, 1999). 

18. 24 C.F.R. §§ 982.102(d)(1)(i). 

19. 24 C.F.R. §§ 982.102(d)(1)(ii). 

20. 64 Fed. Reg. 56,883. 

21. See n. 8, supra.

22. 24 C.F.R. §§ 982.102(e). The regulatory authority for the Section 8 annual adjustment factors is found at 24 C.F.R. Part 888. 

23. Preamble, 64 Fed. Reg. 56,884 (Oct. 21, 1999). See also the Final Report of the HUD Housing Certificate Fund Negotiated Rulemaking Advisory Committee at 18, (hereafter "Final Report"), available on the web at: http://www.hud.gov/pih/programs/s8/final-committee-report.pdf. 

24. 24 C.F.R. §§ 982.102(e)(3)(iii). 

25. See Preamble at 64 Fed. Reg. 56,883 (Oct. 21, 1999, and Part IV(C)(1) and (D)(3) of the 4/19/00 Notice. See n. 8, supra. 

26. See 24 C.F.R. §§ 982.102(b) ("If the amount of appropriated funds is not sufficient to provide the full amount of renewal funding for PHAs, as calculated in accordance with this section, HUD may establish a procedure to adjust allocations for the shortfall in funding."). To date, Congress has always fully funded tenant-based Section 8 renewals, with the exception of the three-month mandatory delay on reissuance of turnover subsidies in fiscal years 1996 to 1998. 

27. See 24 C.F.R. §§ 982.102(g), the preamble at 64 Fed. Reg. 56,884 (Oct. 21, 1999), and the Final Report at 15. 

28. 24 C.F.R. §§ 982.102(g)(1) and (4). 

29. 24 C.F.R. §§ 982.102(g)(2). 

30. Preamble at 64 Fed. Reg. 56,884 (Oct. 21, 1999). 

31. See Final Report at 13 - 15. 

32. 24 C.F.R. §§ 982.503(b)(i). 

33. 24 C.F.R. §§ 982.102(g)(3). 

34. The Notice at Part IV (C)(2) and (D)(2) emphasizes that PHAs that "maximize" leasing by using their full budget authority plus some of their reserves to lease about the "baseline" number of units are responsible for managing the shrinking of their program and the restoration of depleted reserves. However, the Notice states: "HUD may grant an exception to this policy on a case by case basis where a PHA has substantially depleted the ACC Reserve Account and HUD has determined that the PHA is not providing long term support for units not supported by annual budget authority." 

35. The Notice states that drawing on reserves to maintain subsidy payments on behalf of participating families will normally be allowed for only one year except under "exceptional circumstances." Part IV (C)(2).