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March 27, 2013: Effects of Sequestration on Project-Based Section 8 Program

Much of the attention about the impacts of sequestration has properly focused on the Voucher and Public Housing programs, where the impacts are significant and threaten the housing benefits of tens of thousands of families.

Project-based Section 8 should experience a less significant immediate impact because the program currently contains a cushion against a budget authority shortfall. Contracts may be for longer terms, but funding commitments are only for 12 months. In recent years, Congress has provided renewal appropriations sufficient for one-year funding commitments on all Housing Assistance Payment (HAP) contracts. Because those funding commitments expire at various points during any fiscal year, some run deep into the following fiscal year (e.g., in January through September). When funding commitments expire, HUD has ordinarily renewed them for 12 months, regardless of how many of the months actually are part of the current fiscal year.

Because many of those months of funding are actually in the following FY (in this case FY '14), in the face of a shortfall like sequestration, HUD can conserve budget authority by cutting off these longer funded tails, without having an immediate impact on tenants or owners. Even after providing such shorter-term funding, HUD can still make timely payment of any HAP payments due during the rest of FY 2013, as well as during the first quarter of FY '14 (Oct. through Dec.). (HUD had actually proposed to use this tactic in its Budget for FY 2013, in conjunction with proposing a substantial shortfall for this account, which Congress did not adopt.)

Of course, this strategy can only be used once. These funding tails do not grow back! The assumption is that Congress must and will fully fund ALL the renewals of expiring funding increments for a full 12 months in the following fiscal year. This will require an increase to prior levels, plus whatever funds are necessary to provide for cost increases or other needs under current program rules. This funding must be provided in a timely fashion. Even if sequestration is not replaced with a different approach, in FY '14 Congress will have more flexibility to allocate the sequestration cuts by moving funds among the many discretionary non-security accounts, as distinguished from the Budget Control Act's (BCA) mandated across-the-board reductions for FY '13, so long as the overall caps are observed.

On March 11, HUD issued a letter outlining this approach for FY '13:

In short, HUD plans to cut off the funding tails on those multi-year contracts with contract expiration dates after FY 2013 that have funding increments ending between January 1 and September 30 of 2013. Those contracts will receive only enough funding to carry them "into the first quarter" of FY '14, perhaps through December. This is about 11,000 contracts, probably covering about one million units.

Under the policy, full 12-month funding will be provided to all Section 8 contracts that actually expire (i.e., not just the funding increment) anytime in FY 2013, as well as to those multi-year contracts with post-FY 2013 expiration dates whose funding increments already expired in the first quarter of this FY '13 (i.e., between Oct. 1 and Dec. 31, 2012).

Limiting the short-funding policy to multi-year contracts that are not expiring and providing full funding to all expiring contracts should minimize any destabilization of the inventory that might otherwise result from potential opt-outs or lender/investor reluctance. Given the circumstances imposed by the BCA, this is probably the best approach available.

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