DOD Personnel: Improvements Made to Housing Allowance		 
Rate-Setting Process (16-APR-01, GAO-01-508).			 
								 
About two-thirds of the married and one-third of the single	 
servicemembers in the United States live in private housing in	 
the communities surrounding military installations. These members
are given a cash housing allowance, called the basic allowance	 
for housing, to help defray the cost of renting or buying	 
housing. In fiscal year 2000, housing allowances totaled about	 
$6.0 billion and covered about 81 percent of the typical member's
housing and utility costs, with the member paying the remaining  
costs out-of-pocket. The National Defense Authorization Act for  
Fiscal Year 1998 required the Department of Defense (DOD) to make
changes in the allowance program intended to better match the	 
allowance rates with actual costs of housing in various 	 
geographic areas of the country. It was expected that the changes
would cause some rates to rise and others to decline. However, in
January 2000, rate decreases outnumbered the increases and were  
substantial in some cases. DOD responded quickly to the concerns 
about the January 2000 housing allowance rates and took steps to 
address the concerns and improve the process used to determine	 
allowance rates for 2001. However, because DOD does not routinely
provide detailed feedback to installation officials explaining	 
the basis for the rates for their areas, these officials lack	 
confidence that the process is accurate and cannot adequately	 
respond to members' questions about how their allowance rates	 
were determined. Without a clear understanding of the basis for  
their allowance rates, servicemembers can also lose trust in the 
rate development process.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-508 					        
    ACCNO:   A00817						        
    TITLE:   DOD Personnel: Improvements Made to Housing Allowance    
             Rate-Setting Process                                             
     DATE:   04/16/2001 
  SUBJECT:   Housing allowances 				 
	     Military personnel 				 
	     Housing programs					 
	     Rental rates					 
	     Rental housing					 
	     Fair market value					 

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GAO-01-508

Report to Congressional Requesters

United States General Accounting Office

GAO

April 2001 DOD PERSONNEL Improvements Made to Housing Allowance Rate-
Setting Process

GAO- 01- 508

Page i GAO- 01- 508 Military Personnel Letter 1

Appendix I Comments From the Department of Defense 16

Appendix II Housing Standards and Basic Allowance for Housing Rates 18

Tables

Table 1: Allowance Program Housing Standards for Members with Dependents 19
Table 2: Allowance Program Housing Standards for Members

Without Dependents 20 Contents

Page 1 GAO- 01- 508 Military Personnel

April 16, 2001 The Honorable John M. McHugh Chairman The Honorable Martin T.
Meehan Ranking Minority Member Subcommittee on Military Personnel Committee
on Armed Services House of Representatives

The Honorable Mike Thompson House of Representatives

About two- thirds of the married and one- third of the single servicemembers
in the United States live in private housing in the communities surrounding
military installations. These members are given a cash housing allowance,
called the basic allowance for housing, to help defray the cost of renting
or buying housing. In fiscal year 2000, housing allowances totaled about
$6.0 billion and covered about 81 percent of the typical member's housing
and utility costs, with the member paying the remaining costs out- of-
pocket. The National Defense Authorization Act for Fiscal Year 1998 1
required the Department of Defense (DOD) to make changes in the allowance
program intended to better match the allowance rates with the actual costs
of local housing in various geographic areas of the country. DOD began these
changes in January 1998 and planned to implement them over a 6- year period
ending in 2003. DOD officials knew that the changes would cause some rates
to rise and others to decline. However, in January 2000, rate decreases
outnumbered the increases and were substantial in some cases. Compared to
1999 levels, rates declined by over $200 a month for some servicemembers,
and DOD decreased rates in some areas in which housing costs were rapidly
increasing.

In response to your concerns about DOD's housing allowance rate- setting
process and the downward change in many January 2000 rates, we determined
(1) the reasons for the rate decreases, (2) DOD's response to the concerns
about the decreases, and (3) actions that might be taken to improve the
rate- setting process.

1 See Pub. L. 105- 85, sec. 603, codified at 37 U. S. C. 403.

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 01- 508 Military Personnel

In January 2000, many housing allowance rates declined simply because DOD
changed the way it determines housing allowances. Previously, DOD based
allowances primarily on servicemembers' expenditures for housing in each
geographic area. Under the new program, DOD bases allowances on the local
costs for the “housing standard” that DOD sets for each
servicemember's rank (e. g. the “housing standard” for a private
with dependents is a two- bedroom apartment). This change increased
allowances in areas where members had been spending less for housing than
the local cost of the housing under DOD's standards. Conversely, the change
decreased allowances in areas where members had been spending more for
housing than the local costs of the housing under DOD's standards. DOD had
planned a phased transition of the new program to moderate rate and
budgetary impacts. However, to benefit members living in high- cost areas,
the Congress authorized additional funding to allow DOD to accelerate
implementation of market- based housing allowance rates. 2 In other
geographic areas, the accelerated implementation also resulted in more
widespread and dramatic rate decreases.

DOD responded quickly to concerns about the rates and began a review of its
rate- setting process in January 2000. DOD determined that although the
local housing cost data used to establish the rates was accurate, the
ratesetting process included shortcomings which could, and did in at least
one geographic area, result in rates being set too low. For example, in the
Tacoma, Washington area, DOD concluded that the 2000 housing allowance rates
were set too low because some inappropriate rental housing units were
included in the samples used to determine local housing costs. In view of
its findings, DOD decided in March 2000 to revert to the higher 1999 rates
in all areas where rates had decreased. DOD also implemented several
changes, including increasing the participation of local installation
officials to improve the process used to determine rates for 2001. DOD and
service headquarters officials believe that the changes have been
successfully implemented and that the January 2001 rates are fair and
accurate in all areas of the country.

Further improvements to the rate setting process are possible. First,
concerns remain regarding the housing standards DOD uses to determine
allowance rates, including whether the standards associated with the
military ranks are appropriate and whether the standards should be the same
for members living in privately owned and government- owned

2 See the National Defense Authorization Act for Fiscal Year 2000, Pub. L.
106- 65, sec. 603. Results in Brief

Page 3 GAO- 01- 508 Military Personnel

housing. DOD has initiated a study to look at the issues related to housing
standards and allowance rates. Second, DOD could better inform installation
officials how the final housing allowance rates for their areas are
determined each year, thereby increasing local confidence in the process.
Because DOD does not now routinely provide this information, local managers
lack assurance that the rates are well- supported and calculated correctly.
Further, when members question how their rates were determined, installation
officials cannot provide specific details, such as the local housing and
utility costs estimates used to determine the rates and DOD's adjustments,
if any, to the cost data when determining the final rates.

We are recommending that the Secretary of Defense provide housing officials
at each major installation detailed information showing the basis for the
annual allowance rates established for the installation. In its comments on
our draft report, DOD agreed with the recommendation.

The intent of the basic allowance for housing program is to provide
servicemembers with accurate and equitable housing compensation when
government housing is not provided. The Under Secretary of Defense for
Personnel and Readiness is responsible for administering the basic allowance
for housing program. Similar to other DOD compensation programs, the housing
allowance program is managed centrally with allowance rates applying equally
to servicemembers in all military services.

The legislation establishing the program required that rates be based on the
cost of adequate housing for civilians with comparable incomes and that the
rates vary by a member's rank or pay grade; dependency status, that is,
either with or without dependents; and geographic location. 3 To do this,
DOD established six housing standards, ranging from a one- bedroom apartment
to a four- bedroom, single- family detached house and applied a standard to
each military pay grade. Annually, from May through July, DOD uses a
contractor to determine the average costs, including utilities and renter's
insurance, to rent adequate housing of each standard type in about 350
geographic areas of the United States. After analyzing this information,
making adjustments to the data in some cases and deducting the amount of the
housing costs that the typical member is expected to

3 See 37 U. S. C. 403. Background

Page 4 GAO- 01- 508 Military Personnel

pay out- of- pocket, DOD sets the rates that become effective on January 1.
The appendix provides further details concerning the six housing standards
and the way rates are determined.

Just over half of the local housing allowance rates for members with
dependents that became effective on January 1, 2000, decreased from 1999
levels. The decreases caused many servicemembers and installation officials
to question the fairness and accuracy of the rate- setting process. DOD
officials did not anticipate the level of concern caused by the rate
decreases because the program includes a provision called rate protection.
Under rate protection, members already living in an area with declining
rates continue to receive the old allowance rate. The new lower rates apply
only to members that move into the affected areas and assuming that the
rates were accurately set, these members should be able to find affordable
housing based on the new rates. However, rate protection permits
servicemembers in the same pay grade at the same installation to receive
different allowances depending on when they moved to the installation. In
January 2000, the differences in allowances for similarlysituated
servicemembers were significant at some installations, and many members did
not view this as fair.

Also, in January 2000, shortly after the lower allowances became effective,
the Secretary of Defense announced a major new quality- of- life initiative
to increase housing allowances across the board by eliminating the average
out- of- pocket costs over the next 5 years. Announcing an initiative to
increase housing allowances in the same month that DOD reduced many
allowances caused some members to raise additional questions about
consistency and fairness in the housing allowance program.

Although DOD's rate- setting process included some shortcomings that could
result in some rates being set lower than warranted, the primary reasons for
the rate decreases in January 2000 were the change from an allowance program
based on expenditures for housing to a program based on housing standards
and the accelerated implementation of the new program 3 years earlier than
originally planned. Accelerated

Implementation of the New Allowance Program Caused Dramatic Rate Decreases

Page 5 GAO- 01- 508 Military Personnel

Responding to the concerns about the 2000 rates, DOD began in January 2000
to review the allowance program and the reasons that many rates declined.
DOD concluded that most of the rate decreases effective in January 2000 were
not caused by a faulty rate development process, but rather by
implementation of the new program and the associated change in the way
housing allowances are determined. Under the prior allowance program, DOD
established allowances partially on the basis of members' expenditures for
housing. DOD conducted an annual member survey to collect actual
expenditures for housing and utilities. On the basis of the data collected
for each pay grade and in each geographic area, DOD established a variable
portion of the housing allowance. The variable portion was added to a fixed
amount for each pay grade to determine the total housing allowance for each
area of the country.

According to DOD, the previous allowance program created some problems, such
as large differences in the average out- of- pocket housing costs incurred
by members of the same pay grade who lived in different parts of the
country. Also, depending on the kind, size, and quality of housing that
members were renting, the previous program could cause allowances to be
lower or higher than expected. For example, in high cost areas, members
often spent less than normally expected on housing by obtaining smaller and
less desirable housing. When reporting their housing expenditures in the
annual survey, this could result in keeping allowances lower than would be
expected based on the cost of local housing. In other areas, where members
chose to obtain larger and more expensive housing, the opposite effect could
occur, resulting in higher- than- expected allowances.

The new housing allowance program was intended to address these problems and
improve equity by using as the basis for the allowances the local costs of
defined housing standards applied to each pay grade. The goal was to set
rates so that regardless of the assigned location within the United States,
a typical servicemember in a particular pay grade could obtain the same type
of housing and pay the same average amount out- ofpocket. Also, by using
local housing costs as the basis for allowances instead of member housing
expenditures, the new program eliminated the downward and upward allowance
biases we noted.

The change to the new allowance program tended to increase allowances in
areas where the typical member had been spending less for housing than the
average local cost of the housing standard set for the member's rank.
Conversely, the change tended to decrease allowances in areas where the
typical member had been spending more for housing than the Change in
Allowance

Programs

Page 6 GAO- 01- 508 Military Personnel

average local cost of the housing standard set for the member's rank. To
illustrate, the DOD housing standard for a member with dependents in pay
grade E- 5 is a two- bedroom townhouse or duplex. However, at a particular
installation, most E- 5 members with dependents might have been renting
three- bedroom townhouses or single family homes and spending more for
housing than the average cost of a two- bedroom townhouse in the local
community. Under the prior allowance program, the allowance for these
members would have been based on their actual expenditures for the larger
housing units. Because the allowance for E- 5 members under the new program
is based on the average local cost of the two- bedroom townhouse,
implementation of the program would result in decreased allowances for these
members. Although the members could choose to continue to spend more for
housing, they would have to spend a greater amount out- of- pocket.

Facing the change to a completely new housing allowance program, DOD
anticipated that some difficulties would be experienced as the program was
implemented. To help mitigate potential problems, DOD originally planned to
phase implementation of the new allowance program over a 6- year transition
period, starting in 1998. According to DOD officials, the transition period
would allow more time for DOD to perfect the new ratesetting process as
experience was gained each year, spread the budgetary impact from the new
program over a longer period, and moderate expected increases and decreases
in allowance rates resulting from the new program.

During the transition years, in areas where the new rate process indicated
allowances should increase, DOD planned to limit the size of the actual
increase to the rates calculated under the previous allowance program plus a
percentage of the difference between those rates and rates calculated under
the new rate process. For 2000, the third year of transition, the planned
adjustment was 50 percent of the difference between the old and new rates.
Similarly, in areas where the new rate process indicated that allowances
should decrease, DOD planned to limit the actual amount of the decrease.

In 1999, the Congress authorized DOD to speed up implementation of market-
based basic allowance for housing rates. 4 DOD officials stated that

4 See the National Defense Authorization Act for Fiscal Year 2000, Pub. L.
106- 65, sec. 603. Faster Transition to New

Housing Allowance Program

Page 7 GAO- 01- 508 Military Personnel

accelerated implementation benefited members living in areas where rates
were increasing because the amount of the increases would not be limited by
the transition plans. In areas where rates were decreasing, however, full
implementation also meant that the amount of the decreases would not be
limited. DOD did not believe that members in these areas would be negatively
impacted because under the program' s rate protection provision, the lower
rates would apply only to members moving into the affected areas. When the
full transition to the new program was completed in January 2000, allowance
rates were fully based on the local cost of the housing standards for the
first time, resulting in greater rate increases and decreases than would
have occurred under the transition plan.

DOD began its review of the new allowance program in January 2000 shortly
after the new rates became effective and members began to question the
rates. From the review, DOD concluded that the local housing cost data
collected and used to determine the January 2000 rates was accurate, and
that the change to the new program was the primary cause for the rate
decreases. However, DOD concluded that other aspects of the rate- setting
process included shortcomings that could, and did in at least one location,
result in rates being set too low. In March 2000, DOD took steps to address
these shortcomings and improve the rate- setting process it used to
determine the 2001 housing allowance rates.

Like DOD, we found that the contractor followed reasonable procedures to
ensure that the housing data collected was accurate. To help ensure
accuracy, the contractor, a recognized leader in the field of collecting
costof- living data, used several data verification techniques and had an
independent housing expert review and critique its data collection methods.

To compare the contractor's local housing cost data with another source, we
performed a limited analysis. For 12 geographic areas representing a cross
section of urban and rural areas, we compared the contractor's monthly
rental cost estimates with the Department of Housing and Urban Development's
(HUD) fair market rent estimates for the same areas. The two estimates are
not directly comparable due to differences in methodology and time frames.
Nevertheless, we found that on average the contractor's rental cost
estimates were 17 percent higher than HUD's estimates. This was expected
because the contractor screens out many rental units considered unacceptable
for military members. The contractor's estimates were lower than HUD's
estimates only for one area, DOD Responded

Quickly to Concerns About the Rates

Contractor Developed Accurate Housing Cost Data

Page 8 GAO- 01- 508 Military Personnel

and the average difference in the estimates for this area was $27, or 4
percent. In this case, the contractor's estimates were based on the area
immediately surrounding the military installation, which was mostly rural.
HUD's estimates, however, were based on a much larger area that included the
installation but also included more urban and higher cost areas.

We also considered a special situation at Travis Air Force Base, where the
January 2000 allowance rates declined even though the local housing market
was experiencing rapid rental rate inflation- about 15 percent annually
according to local officials. Rental cost data collected by Travis officials
indicated that local rental costs were 12 percent higher than indicated by
the contractor. This situation had led these officials to question the
accuracy of the local cost data collected by DOD's contractor.

On the basis of our review, we believe that the rate problem at Travis was
not caused by inaccurate contractor- collected data but rather by a
combination of several factors, including the lag between the time that the
contractor collected rental cost data and the effective date of the rates;
the change to and full implementation of a standard- based allowance
program; and DOD- imposed rules affecting final allowance rates in some
areas, including Travis.

First, Travis collected rental costs 7 months after the contractor and used
a weighted average technique, which the contractor did not use. Using non-
weighted data, the difference between Travis' and the contractor's costs was
about 9 percent- an amount consistent with the stated rate of inflation for
the area. Under DOD's rate- setting process for developing allowance rates,
the contractor collects rental cost data several months before the resulting
rates become effective. As a result, the rates can lag behind actual rental
costs in areas, such as Travis, that experience rapid rental rate inflation.

The contractor's rental cost data for Travis actually showed a 12- percent
increase in local rental costs during 1999- 2000. However, as part of the
transition to the new allowance program, the 1999 rates were not based
solely on the local cost of housing but rather on an adjustment to the 1998
rates, which were still based on housing expenditures. With full
implementation of the new program in 2000, rates were based on the local
cost of the housing standards for the first time. As a result, if most
members in a particular pay grade had been spending more for housing than
the average cost of the housing standard for their pay grade, then their
rates declined.

Page 9 GAO- 01- 508 Military Personnel

Complicating the matter at Travis, DOD imposed rules on the final 2000 rates
that resulted in Travis' rates being about 5 percent lower than indicated by
the contractor's housing cost data. The rules were designed to moderate the
effect of possible errors in data collection but worked to the disadvantage
of areas such as Travis.

Although the local housing cost data used to determine rates was accurate,
DOD concluded from its review that the rate- setting process had some
shortcomings. For example, DOD concluded that the process could result in
rental housing units selected for rate sampling that were not appropriate
for military families because the units were in poor condition or located in
undesirable neighborhoods. As a result, if the rental rates for these units
were lower than the average rental rate for adequate units, then the final
allowance rates for the area would be inaccurately set too low.

DOD determined that some units selected for rate sampling in the Tacoma,
Washington, area were not appropriate and that the 2000 housing allowance
rates for the area would have been higher if only appropriate units had been
included in the rental rate samples. From our own observations, some of the
housing units included in the rental rate sampling for the Tacoma area
either were in disrepair or were in areas that DOD officials consider
inappropriate for military families. These inappropriate housing units,
however, were not typical of the units included in the rental rate sampling
for the Tacoma area. Almost all housing units included in the samples were
considered appropriate.

? DOD identified several reasons that resulted in the inappropriate rental
properties being included in rate samples:

? The process called for the contractor to identify appropriate
neighborhoods for rental rate sampling by screening postal zip codes in each
geographic area to identify those with average civilian income levels
comparable to the average military incomes associated with each housing
standard. However, screening by zip code to identify acceptable sampling
areas was imprecise and failed to exclude areas containing neighborhoods
with unacceptable housing.

? The process called for the contractor to use newspaper advertisements to
select specific rental housing units from the identified zip codes for rate
sampling. The process did not require the contractor to obtain the detailed
knowledge and use the expertise of installation housing managers to help
identify neighborhoods appropriate for rental rate sampling. Problems in the
Ratesetting

Process

Page 10 GAO- 01- 508 Military Personnel

? The process did not require the contractor to visit installations and
directly observe rental properties selected for rate sampling to help ensure
that properties were appropriate for military members and their families.

DOD also concluded from its review that the process used to estimate the
utility cost portion of the housing allowance could be improved. In
developing the 2000 rates, DOD obtained average utility consumption data for
each of the housing standards on a county- by- county basis. With this data,
DOD estimated utility costs for all military installations located in each
county. However, because many counties are quite large and utility
consumption can vary substantially within the various areas of such
counties, DOD concluded that the utility cost estimates for some
installations could be inaccurate.

Because of the shortcomings in the rate- setting process and the
inconsistency between declining rates and DOD's new initiative to increase
housing allowances, DOD decided in March 2000 to revert to the higher 1999
rates in all areas where rates had decreased. According to headquarters
officials in each service, the reversion to the old rates reduced many of
the concerns expressed by servicemembers regarding the January 2000 housing
allowance rates.

? DOD also implemented several changes to improve the process that would be
used to determine the 2001 rates. Specifically, DOD

? improved the precision in the contractor's income- level screening of
areas for rate sampling by changing the basis used from zip codes to census
tracks, which normally include much smaller areas,

? increased the participation of local installation officials in the rate-
setting process by requesting each installation to identify specific
neighborhoods that the contractor should use to select rental units for rate
sampling,

? required the contractor to visit 50 installations during the rental rate
sampling process to directly observe and photograph typical units included
in the rate samples, and

? changed the methodology for estimating utility costs by using detailed
climate information from the National Oceanographic Data Center as the basis
for estimating utility costs.

DOD and service headquarters officials stated that the changes were
successfully implemented and resulted in an accurate determination of 2001
housing allowance rates. However, under the improved process, the 2001 rates
for many members should have decreased from the levels in place after the
March 2000 rate reversion. DOD recognized that if the DOD Actions to Improve

the Rate- Setting Process

Page 11 GAO- 01- 508 Military Personnel

January 2001 rates were allowed to decrease, many of the same concerns
expressed about the January 2000 rate decreases would surface again- such as
the fairness of two members in the same pay grade at the same location
receiving different housing allowances and the inconsistency of declining
rates when DOD has an initiative to increase rates.

In view of these concerns, in December 2000, before the 2001 rates became
effective, the Secretary of Defense approved a new policy to provide
geographic rate protection. Under this policy, DOD will not allow any rates
to decrease below current levels during the time that DOD is implementing
its initiative to eliminate average out- of- pocket housing costs. DOD
estimated that the decision to prevent any housing allowance rates from
declining in 2001 would cost about $50 million and directed the services to
realign funds for 2001 to pay for the higher costs.

DOD officials also stated that they had decided to address the issue of
rates lagging behind housing costs in areas experiencing rapid rental rate
inflation. Local rental housing cost data will continue to be collected from
May through July. In late November, before rates are finalized, DOD plans to
have its contractor perform a limited telephone survey to update rental
rates in those areas known to be experiencing rapidly increasing housing
costs. If the survey shows that costs have increased substantially since the
earlier data was collected, DOD plans to adjust the final rates.

Further, DOD officials noted that some areas of the country have recently
experienced rapidly increasing utility costs. As a result, the officials
stated that they plan to consider adjusting the utility cost estimates
before establishing the final rates each year in January. DOD may adjust the
final rates if it knows that local utility costs have increased
significantly since the utility cost estimates were made from May through
July, or will increase significantly in the near future.

DOD officials stated that details for implementing these new procedures
should be finalized before the 2002 rates become effective.

DOD responded quickly to the concerns about the January 2000 housing
allowance rates and made many changes to improve the rate- setting process.
However, further improvements are possible. First, questions remain
concerning the appropriateness of the housing standards DOD uses to
determine the rates for each military pay grade. Second, the basis for the
rates established for each geographic area is not clear to many installation
housing managers and servicemembers. Further

Improvements Are Possible in the RateSetting Process

Page 12 GAO- 01- 508 Military Personnel

Service headquarters officials stated that some members believe that the
standards have not been properly associated with military pay grades. The
officials noted that when DOD determined standards on the basis of housing
occupied by civilians with comparable incomes, DOD did not consider as part
of military income the special pay and bonuses received by many members. As
a result, the rates established on the basis of the standards make
appropriate housing unaffordable for members in some military pay grades.
Some officials stated that the minimum standard for members with dependents
in the lowest pay grades should be a twobedroom townhouse instead of a two-
bedroom apartment and that the standard for members with dependents in pay
grade E- 7 should be a single- family detached house instead of a townhouse.

According to DOD and service officials, differences in housing standards
depending on whether a member lives on base in government housing or off
base in private housing also have caused member concerns. The key difference
is in out- of- pocket housing costs- members living in government housing do
not pay out- of- pocket housing costs, but members living in private housing
are expected to pay some out- of- pocket costs. DOD is addressing this issue
through its initiative to eliminate average outof- pocket housing costs over
the next few years. However, another difference is that a member's family
size is considered only when the member lives on base. For example, if
living on base, a junior enlisted member in pay grade E- 3 with three
dependents would normally be assigned to a 3- bedroom townhouse or single-
family detached house. However, if living in civilian housing off base, the
housing standard used to determine the allowance rate for this member is a
two- bedroom apartment. According to DOD officials, this disparity is
another cause for many of the complaints concerning housing allowance rates.

DOD is studying the issues related to housing standards and allowance rates.
According to DOD officials, the study will require 2 or 3 years before any
recommendations for change would be proposed.

DOD normally publishes new housing allowance rates for all areas in
December, shortly before the new rates become effective on January 1.
Basically, this is the only rate information available to local officials
because DOD does not routinely provide installation officials with details
on how the housing allowance rates for their areas are established each
year. Officials at the three installations we visited- Travis Air Force Base
and McChord Air Force Base and Fort Lewis in Washington- stated that the
detailed basis for the rates at their installations was not clear. They
Concerns Over Housing

Standards Basis for Rates Is Not Clear to Installation Housing Managers

Page 13 GAO- 01- 508 Military Personnel

stated that as a result, they lacked assurance that the rates were
wellsupported and calculated correctly. Further, when members raised
questions about how their rates were determined, installation officials
stated that they could only provide a general overview of the rate- setting
process but not specific details, such as the number of rental rate samples
taken, the local rental cost estimates used for each housing standard, the
estimates used for utility costs and renter's insurance, and the reasons for
any DOD adjustments to the data when determining the final rates.

Service headquarters officials agreed that installation housing managers
need better documentation and explanation of the basis for the rates
established for their installations. They stated that improved understanding
of the data supporting the rates would increase local confidence in the
rate- setting process.

DOD responded quickly to the concerns about the January 2000 housing
allowance rates and took steps to address the concerns and improve the
process used to determine allowance rates for 2001. However, because DOD
does not routinely provide detailed feedback to installation officials
explaining the basis for the rates for their areas, these officials lack
confidence that the process is accurate and cannot adequately respond to
members' questions about how their allowance rates were determined. Without
a clear understanding of the basis for their allowance rates, servicemembers
can also lose trust in the rate development process.

To ensure that the process for developing allowance rates is open and
understandable at the installation level, we recommend that the Secretary of
Defense direct the Under Secretary of Defense for Personnel and Readiness to
provide housing officials at each major installation detailed information
showing the basis for their established annual housing allowance rates. The
information should include the number of rental rate samples taken, the
average local rental cost used for each housing standard, the estimates used
for utility costs and renter's insurance, and an explanation of any
adjustments made to the final rates.

In written comments on a draft of this report, DOD agreed with the contents
of the report and concurred with the recommendation. DOD stated that
installation commanders need to be provided with additional information on
the results of the rate- setting process and the basis for the allowance
rates. DOD stated that it currently provides the military services
Conclusions

Recommendation Agency Comments And Our Evaluation

Page 14 GAO- 01- 508 Military Personnel

with details on the rates established for their installations and will
encourage the services to share this data with each installation. In view of
the importance of this information to installation officials, we believe
that the Secretary should direct the services to provide it as we
recommended rather than simply encourage them to do so.

We performed our work at the Office of the Secretary of Defense and the
headquarters of the Army, the Navy, the Air Force, and the Marine Corps. We
also visited three installations that had expressed concern about the 2000
housing allowance rates for their areas- Fort Lewis and McChord Air Force
Base in the Tacoma, Washington, area and Travis Air Force Base, California.
At each location, we interviewed responsible agency personnel and reviewed
applicable policies, procedures, and documents. We also obtained information
from DOD's contractor for obtaining local housing cost information,
Runzheimer International.

To determine the reasons that many January 2000 allowance rates decreased,
we reviewed the history and objectives of the housing allowance program and
the allowance program it replaced, examined the policies and procedures
established for setting rates, reviewed the data and documentation
supporting the final January 2000 rates, compared contractor- collected
rental cost data with fair market rent data developed by HUD, discussed the
rate development process and outcomes with DOD and service headquarters
officials and with officials at the installations visited, and observed
rental housing units used for rate sampling at the installations visited.

To determine DOD's response to the rate decreases, we discussed the results
of DOD's review of the rate- setting process with DOD and service
headquarters officials and with officials at the installations visited,
documented the changes DOD made in the rate- setting process for 2001,
reviewed and compared the final housing allowance rates for 2000 with 2001
rates, and discussed with DOD headquarters officials additional changes
planned for the rate- setting process.

To identify any improvements DOD might make to the rate- setting process, we
obtained views from DOD and service headquarters officials and officials at
the installations visited concerning the effectiveness of changes already
made to the rate- setting process and the need for any additional changes.
We also reviewed past reports prepared by DOD's contractor that discussed
possible improvements to the rate development process. Scope And

Methodology

Page 15 GAO- 01- 508 Military Personnel

We conducted our review from August 2000 through February 2001 in accordance
with generally accepted government auditing standards.

We are sending copies of this report to the Honorable Donald H. Rumsfeld,
Secretary of Defense; the Honorable Joseph W. Westphal, Acting Secretary of
the Army; the Honorable Robert B. Pirie, Jr., Acting Secretary of the Navy;
the Honorable Lawrence J. Delaney, Acting Secretary of the Air Force;
General James L. Jones, Commandant of the Marine Corps, and appropriate
congressional committees. We will also make copies available to others upon
request.

If you or your staff have any questions concerning this report, please call
William Beusse at (202) 512- 3517 or me at (202) 512- 5140. Major
contributors to this report were Gary Phillips and Jim Ellis.

Carol R. Schuster Director, Defense Capabilities

and Management

Appendix I: Comments From the Department of Defense

Page 16 GAO- 01- 508 Military Personnel

Appendix I: Comments From the Department of Defense

Appendix I: Comments From the Department of Defense

Page 17 GAO- 01- 508 Military Personnel

Appendix II: Housing Standards and Basic Allowance for Housing Rates

Page 18 GAO- 01- 508 Military Personnel

As the basis for establishing servicemember basic allowance for housing
rates, the Department of Defense (DOD) uses the costs of adequate housing
for civilians with comparable incomes. 1 To do this, DOD has identified six
housing standards, ranging from a one- bedroom apartment to a four- bedroom,
single- family detached house and has applied, or anchored, a standard to
each military rank, or pay grade, matching the type of housing normally
occupied by civilians with comparable incomes. 2 DOD established separate
housing standards for members with and without dependents and established a
method to ensure that allowance rates would increase with each pay grade.
Using the housing standards and the local costs of each standard in about
350 geographic areas of the country, DOD establishes the allowance rates for
each year.

Tables 1 and 2 show the program's housing standards for members with and
without dependents and show how rates increase with each pay grade. As an
illustration, consider an enlisted member with dependents in pay grade E- 7.
Table 1 shows that the housing standard for this member is a three- bedroom
townhouse or duplex. However, the allowance rate for this member is equal to
the average local cost of a three- bedroom townhouse plus 36 percent of the
difference in this cost and the average local cost of the next higher
housing standard- a three- bedroom single family house. In January 2000, the
national average monthly housing allowance for this member was $806, with
the typical member paying $186 out- of- pocket for housing and utilities.

1 See the National Defense Authorization Act for Fiscal Year 1998, Pub. L.
105- 85, sec. 603. 2 For compensation, DOD used regular military
compensation for each pay grade. Regular military compensation includes
basic pay, housing and subsistence allowances, and the tax advantage from
the nontaxable housing and subsistence allowances. Appendix II: Housing
Standards and Basic

Allowance for Housing Rates

Appendix II: Housing Standards and Basic Allowance for Housing Rates

Page 19 GAO- 01- 508 Military Personnel

Table 1: Allowance Program Housing Standards for Members with Dependents Pay
grade DOD's housing standard

Allowance rate is anchor rate plus this

percentage of the difference with the next

higher anchor rate January 2000

national average monthly housing

allowance rate January 2000

national average monthly out- ofpocket amount

E- 1, E- 2 2- bedroom apartment 0% $564 $130 E- 3 Anchor 2- bedroom
apartment 0% 564 130 E- 4 2- bedroom apartment 39% 603 140 E- 5 Anchor 2-
bedroom townhouse/ duplex 0% 665 154 O- 1 2- bedroom townhouse/ duplex 11%
676 156 O- 2 2- bedroom townhouse/ duplex 98% 757 175 E- 6 Anchor 3- bedroom
townhouse/ duplex 0% 758 176 W- 1 3- bedroom townhouse/ duplex 1% 759 176 E-
7 3- bedroom townhouse/ duplex 36% 806 186 O- 1E 3- bedroom townhouse/
duplex 44% 815 189 W- 2 3- bedroom townhouse/ duplex 52% 827 191 E- 8 3-
bedroom townhouse/ duplex 75% 857 198 O- 2E 3- bedroom townhouse/ duplex 93%
879 204 O- 3 3- bedroom townhouse/ duplex 98% 886 205 W- 3 Anchor 3- bedroom
single family house 0% 888 206 E- 9 3- bedroom single family house 16% 920
213 W- 4 3- bedroom single family house 22% 933 216 O- 3E 3- bedroom single
family house 26% 940 218 W- 5 3- bedroom single family house 48% 983 228 O-
4 3- bedroom single family house 58% 1,005 233 O- 5 Anchor 4- bedroom single
family house 0% 1, 088 252 O- 6 4- bedroom single family house 1% a 1,097
254 O- 7 4- bedroom single family house 2% a 1, 109 257

Note: The National Defense Authorization Act for Fiscal Year 2001, Pub. L.
106- 398, sec. 607, required a change in the housing standard used to
determine allowance rates for members with dependents in pay grades E- 1
through E- 4. Beginning on July 1, 2001, the allowance rate for these
members will be based on the average local cost of a two- bedroom apartment,
plus 50 percent of the cost difference between a two- bedroom apartment and
a two- bedroom townhouse. a For these pay grades, the allowance rates are
equal to the rate for a 4- bedroom single family house

increased by the indicated percentage. Source: DOD

Appendix II: Housing Standards and Basic Allowance for Housing Rates

Page 20 GAO- 01- 508 Military Personnel

Table 2: Allowance Program Housing Standards for Members Without Dependents
Pay grade DOD's housing standard

Allowance rate is anchor rate plus this percentage of the difference with
the

next higher anchor rate January 2000

national average monthly housing

allowance rate January 2000

national average monthly out- ofpocket amount

E- 1, E- 2 1- bedroom apartment 0% $477 $110 E- 3 1- bedroom apartment 0%
477 110 E- 4 Anchor 1- bedroom apartment 0% 477 110 E- 5 1- bedroom
apartment 67% 535 124 O- 1 Anchor 2- bedroom apartment 0% 564 130 E- 6 2-
bedroom apartment 7% 570 132 W- 1 2- bedroom apartment 31% 595 138 E- 7 2-
bedroom apartment 53% 618 143 O- 2 2- bedroom apartment 83% 648 150 O- 1E
Anchor 2- bedroom townhouse/ duplex 0% 665 154 W- 2 2- bedroom townhouse/
duplex 19% 683 158 E- 8 2- bedroom townhouse/ duplex 20% 684 158 O- 2E 2-
bedroom townhouse/ duplex 44% 707 163 E- 9 2- bedroom townhouse/ duplex 51%
713 165 W- 3 2- bedroom townhouse/ duplex 54% 716 165 O- 3 2- bedroom
townhouse/ duplex 64% 725 168 O- 3E Anchor 3- bedroom townhouse/ duplex 0%
759 175 W- 4 3- bedroom townhouse/ duplex 9% 771 178 O- 4 3- bedroom
townhouse/ duplex 40% 811 187 W- 5 3- bedroom townhouse/ duplex 45% 817 189
O- 5 3- bedroom townhouse/ duplex 63% 842 194 O- 6 Anchor 3- bedroom single
family house 0% 889 205 O- 7 3- bedroom single family house 2% a 907 209

a For this pay grade, the allowance rate is equal to the rate for a 3-
bedroom single family house increased by the indicated percentage. Source:
DOD

(702088)

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