Elderly Housing: Project Funding and Other Factors Delay	 
Assistance to Needy Households (17-JUN-03, GAO-03-807T).	 
                                                                 
In 2001, an estimated 2 million elderly households with very low 
incomes (50 percent or less of area median income) did not	 
receive housing assistance. The Department of Housing and Urban  
Development (HUD) considered most of these households to be "rent
burdened" because they spent more than 30 percent of their	 
incomes on rent. The Section 202 Supportive Housing for the	 
Elderly Program provides capital advances (grants) to nonprofit  
organizations to develop affordable rental housing exclusively	 
for these households. Based on a report issued in May 2003, this 
testimony discusses the role of the Section 202 program in	 
addressing the need for affordable elderly housing and factors	 
affecting the timeliness of approving and constructing new	 
projects.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-807T					        
    ACCNO:   A07228						        
  TITLE:     Elderly Housing: Project Funding and Other Factors Delay 
Assistance to Needy Households					 
     DATE:   06/17/2003 
  SUBJECT:   Housing for the elderly				 
	     Housing programs					 
	     Low income housing 				 
	     Program evaluation 				 
	     Rental housing					 
	     Federal grants					 
	     HUD Section 202 Supportive Housing for		 
	     the Elderly Program				 
                                                                 

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GAO-03-807T

Testimony Before the Special Committee on Aging, U. S. Senate

United States General Accounting Office

GAO For Release on Delivery Expected at 10: 00 a. m. EDT Tuesday, June 17,
2003 ELDERLY HOUSING

Project Funding and Other Factors Delay Assistance to Needy Households

Statement of David G. Wood, Director Financial Markets and Community
Investment

GAO- 03- 807T

As the only federal housing program that targets all of its rental units
to very low income elderly households, HUD*s Section 202 program provides
a valuable housing resource for these households. Although they represent
a small share of all elderly households, very low income elderly renters
have acute housing affordability problems because of their limited incomes
and need for supportive services. The Section 202 program offers about
260,000 rental units nationwide and ensures that residents receive rental
assistance and access to services that promote independent living.
However, even with the program*s exclusive focus, Section 202 has only
reached an estimated 8

percent of very low income elderly households. More than 70 percent of
Section 202 projects in GAO*s analysis did not meet HUD*s time guideline
for gaining approval to start construction. These delays held up the
delivery of housing assistance to needy elderly households by nearly a
year compared with projects that met HUD*s guideline. Several factors
contributed to these delays, particularly capital advances that were not
sufficient to cover development costs. Project sponsors reported that
because of insufficient capital advances, they often had to spend time
seeking additional funds from HUD and other sources. Although HUD*s policy
is to provide sufficient funding to cover the cost of

constructing a modestly designed project, HUD has acknowledged that its
capital advances for the Section 202 program sometimes fall short. Other
factors affecting the timeliness of the approval process include
inadequate training and guidance for field staff responsible for the
approval process,

inexperienced project sponsors, and local zoning and permit requirements.

Housing Cost Burdens of Very Low Income Elderly Renter Households in 2001
In 2001, an estimated 2 million elderly households with very low

incomes (50 percent or less of area median income) did not receive housing
assistance. The Department of Housing and Urban Development (HUD)
considered most of these households to be *rent burdened* because they
spent more than 30 percent of their

incomes on rent. The Section 202 Supportive Housing for the Elderly
Program provides capital advances (grants) to nonprofit organizations to
develop affordable rental housing exclusively for these households. Based
on a report issued in May 2003, this testimony discusses the role of the
Section

202 program in addressing the need for affordable elderly housing and
factors affecting the timeliness of approving and constructing new
projects.

In its report, GAO made recommendations designed to reduce the time
required for

projects to receive approval from HUD to start construction. Specifically,
GAO recommended that HUD assess the effectiveness of the methods it uses
to calculate the size of the Section 202 capital advances and make any
appropriate changes to them. GAO

also made other recommendations to improve HUD*s administration and
oversight of the 202 program*s

performance. HUD concurred with the recommendations.

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 807T. To view the full product,
including the scope and methodology, click on the link above. For more
information, contact David G. Wood at (202) 512- 8678 or WoodD@ gao. gov.
Highlights of GAO- 03- 807T, a testimony

before the Special Committee on Aging, U. S. Senate

June 2003

ELDERLY HOUSING

Project Funding and Other Factors Delay Assistance to Needy Households

Page 1 GAO- 03- 807T

Mr. Chairman and Members of the Committee: I appreciate the opportunity to
be here today to discuss the Department of Housing and Urban Development*s
(HUD*s) Section 202 Supportive Housing for the Elderly Program. The
Section 202 program provides funds to nonprofit organizations to develop
affordable rental housing exclusively for very low income elderly
households that do not receive other forms of housing assistance. In 2001,
there were an estimated 2 million such households in the nation, most of
which HUD considered *rent burdened* because their rents exceeded 30
percent of their household incomes.

Section 202 provides two types of financial support. First, HUD provides a
project sponsor with a capital advance* essentially a grant* to cover land
and construction costs. HUD*s policy is to have the capital advance cover

the total development costs of the project, which must be of modest design
and must comply with HUD*s minimum property standards. HUD uses a
competitive process to select projects for funding and has guidelines
calling for project sponsors and the agency*s field offices to accomplish
project processing activities* such as completing and approving design
plans* within 18 months so that construction may commence. (HUD*s field
offices may grant extensions of up to 6 months without headquarters*
approval.) Second, after the project is completed, HUD provides the
sponsor with monthly rental assistance payments to defray some of the
operating expenses. For fiscal year 2002, Congress appropriated about $783
million for the Section 202 program to fund the construction of over 6,000
new units, multiyear rental assistance contracts, and other authorized
activities.

My statement today is based on the report on the Section 202 program that
you requested and are releasing today. 1 Specifically, my statement
discusses: (1) the role of the Section 202 program in meeting the housing
needs of elderly renter households with very low incomes, (2) the extent
to which Section 202 projects meet HUD*s time guideline for approving

projects to start construction, and (3) the factors that keep Section 202
projects from meeting the time guideline. In preparing the report, we
analyzed data from HUD and other sources on the housing needs of very low
income elderly households. In addition, we reviewed HUD program and budget
data, surveyed all 45 HUD field offices that process Section 202

1 Elderly Housing: Project Funding and Other Factors Delay Assistance to
Needy Households, May 30, 2003 (GAO- 03- 512).

Page 2 GAO- 03- 807T

projects, and surveyed and interviewed project sponsors and consultants
experienced in working with the Section 202 program. Our analysis focused
on Section 202 projects funded between fiscal years 1998 and 2000. 2 In
summary:

 As the only federal housing program that targets all of its rental units
to very low income elderly households, Section 202 is an important source
of affordable housing for these households. Section 202 insulates tenants
in housing units subsidized by the program from increases in housing costs
by limiting their rents to 30 percent of household income. As of 2001, the
program provided housing for an estimated one- fifth of the 1.3 million
elderly renter households with very low incomes that received some form of
government housing assistance. However, nationwide about 1.7 million
elderly renter households with very low incomes did not receive government
housing assistance and had a housing affordability problem* that is, they
paid over 30 percent of their incomes for rent. Even with the program*s
exclusive focus, Section 202 has only reached an estimated 8

percent of very low income elderly renter households.  More than 70
percent of Section 202 projects funded between 1998 and

2000 were delayed* that is, they took longer than the 18 months set out in
HUD*s guidelines to proceed from the date of the funding award to the date
of HUD*s approval to start construction (the project processing period).
However, a majority of projects were approved for construction within 24
months, or 18 months plus the 6- month discretionary extension. Projects
located in metropolitan areas were more likely than projects in
nonmetropolitan areas to exceed the 18- month guideline. Further, projects
that exceeded the 18- month guideline ultimately took an average of 11
months longer to finish than projects that met the time guideline, and
these delayed projects contributed to the program*s unexpended fund
balances. At the end of fiscal year 2002, 14 percent of the Section 202
program*s $5.2 billion in unexpended appropriations was associated with
projects that had not yet been approved for start of construction after 18
months.

 Several factors impeded the timely processing of projects, according to
project sponsors, consultants, and HUD field office staff. First, despite

2 Lack of reliable program data prevented us from reviewing all Section
202 projects funded before fiscal year 1998.

Page 3 GAO- 03- 807T

HUD*s intent, capital advances have not always covered the cost of
developing projects, and the resulting shortfalls often prolonged
processing times, in part because sponsors needed to seek additional
funding. Second, field office staff*s inconsistent implementation of
procedures intended to streamline processing, as well as limited training
and out- of- date guidance on processing policies and procedures, impeded
timely processing. Third, HUD*s project monitoring system has limitations
that may have hindered HUD*s ability to oversee project timeliness.
Finally, other factors* including inexperienced sponsors and local permit
and zoning requirements* prolonged processing time for some projects.

Based on our findings, we recommended that HUD evaluate the effectiveness
of the current methods for calculating capital advances and make any
changes necessary to ensure that capital advances adequately cover
development costs. We made three additional recommendations* concerning
HUD*s training of field office staff, handbook guidance, and data systems*
directed at more timely processing of projects. In commenting on the
report, HUD agreed with the recommendations.

HUD defines elderly households as those in which the householder* the
person whose name is on the lease, mortgage, or deed* or the householder*s
spouse is at least 62 years old. Elderly households occupied about one-
quarter (26 million) of the approximately 106 million housing units in the
United States in 2001, according to the American Housing Survey. 3 A large
majority of these elderly households were homeowners. A small share of
elderly households, about 19 percent or 5 million, rented their homes
(compared to about 36 percent of nonelderly households), and about 3.3
million of these elderly households were renters with very low incomes*
that is, 50 percent or less of area median income.

The Housing Act of 1959 (P. L. 86- 372) established the Section 202
program, which began as a direct loan program that provided below- market
interest rate loans to private nonprofit developers, among others, to
build rental housing for the elderly and people with disabilities. In
1990, the CranstonGonzalez National Affordable Housing Act (P. L. 101-
625) modified Section

3 As in other surveys, estimates from the American Housing Survey are
subject to both sampling and nonsampling errors. All numerical estimates
derived from the survey have sampling errors of +- 10 percent or less of
the value of those numerical estimates, unless otherwise noted. All
percentage estimates have sampling errors of +- 6 percentage points or
less, unless otherwise noted. Background

Page 4 GAO- 03- 807T

202 by converting it from a direct loan program to a capital advance
program. In its current form, Section 202 provides capital advances*
effectively grants* to private nonprofit organizations (usually referred
to as sponsors or owners) to pay for the costs of developing elderly
rental housing. As long as rents on the units remain within the program*s
guidelines for at least 40 years, the sponsor does not have to pay back
the capital advance. HUD calculates capital advances in accordance with
development cost

limits that it determines annually, and HUD*s policy is that these limits
should cover the reasonable and necessary costs of developing a project of
modest design that complies with HUD*s project design and cost standards

as well as meets applicable state and local housing and building codes. To
be eligible to receive Section 202 housing assistance, households must
have very low income and one member who is at least 62 years old. Section
202 tenants generally pay 30 percent of their income for rent. Because
their rental payments are not sufficient to cover the property*s operating
costs, the project sponsor receives rental assistance payments from HUD to
cover the difference between the property*s operating expenses (as
approved by HUD) and total tenant rental receipts. 4 In addition, the
project sponsor can make appropriate supportive services, such as
housekeeping and transportation, available to these elderly households.

From year to year, Section 202 has carried significant balances of
unexpended appropriated dollars for capital advances and rental assistance
payments. In fiscal year 2002, the unexpended balance for Section 202 was
approximately $5.2 billion. About 41 percent of this balance was in
capital advance funds and 59 percent was in rental assistance funds. Some
of these unexpended funds have not yet been awarded to projects, and
others are for projects that have not begun construction. Once
construction begins, funds are expended over several years during the
construction phase and during the term of the rental assistance contracts.

4 The term on rental assistance contracts is 5 years, although HUD has
authorized these contracts for as long as 20 years. After these contracts
expire, HUD renews them for 5 years, subject to the availability of funds.

Page 5 GAO- 03- 807T

Other federal programs can provide housing assistance to needy elderly
households, albeit not exclusively. For example, low income housing tax
credits and tax- exempt multifamily housing bonds provide federal tax
incentives for private investment and are often used in conjunction with
other federal and state subsidies in the production of new and
rehabilitated rental housing. The Housing Choice Voucher Program
supplements tenants* rental payments in privately owned, moderately priced
apartments chosen by the tenants. Currently, about 260,000 of the
approximately 1.5 million voucher households are elderly. Other programs
are discussed in an appendix to the report.

Section 202 is the only federal housing program that targets all of its
rental units to very low income elderly households. Because these
households often have difficulty affording market rents, program funding
is directed to localities based in part on their proportions of elderly
renter households

that have a housing affordability problem. Section 202 insulates tenants
in housing units subsidized by the program from increases in housing costs
by limiting rents to a fixed percentage of household income. The program
is a significant source of new and affordable housing for very low income
elderly households. Even with the program*s exclusive focus on the very
low income elderly, Section 202 has reached only a small share of eligible
households.

Congress specifically intended the Section 202 program to serve very low
income elderly households and to expand the supply of affordable housing
that can accommodate the special needs of this group. 5 HUD takes into
account the need for the kind of housing Section 202 provides when
allocating program funds to the field offices. The criteria for allocating
funds to the field offices include, among other things, the total number
of very low income elderly renters in the area and the number in this
group that pay more than 30 percent of their incomes for rent. According
to the American Housing Survey, in 2001 about 1.7 of the 3.3 million
elderly renters with very low incomes paid over 30 percent of their
incomes for rent.

The rent that tenants in Section 202 housing pay equals a percentage of
their household incomes* generally 30 percent. This percentage remains

5 12 U. S. C. 1701q( a). Section 202 Is an

Important Source of Housing for Elderly Households with Very Low Incomes

Section 202 Targets Very Low Income Elderly Households and Makes
Supportive Services Available

Page 6 GAO- 03- 807T

constant, so the amount of rent tenants pay increases only when household
income rises, protecting them from rent increases that might be imposed by
the private housing market when market conditions change. In contrast,
very low income elderly renter households that do not receive

this type of assistance are vulnerable to high rent burdens and increases
in market rents. Most of these households have few or no financial
resources, such as cash savings and other investments, and rely primarily
on fixed incomes that may not increase at the same rate as market rents.

Section 202 serves another important function, potentially allowing
elderly households to live independently longer by offering tenants a
range of services that support independent living* for example, meal
services, housekeeping, personal assistance, and transportation. HUD
ensures that sponsors have the managerial capacity to assess tenants*
needs, coordinate the provision of supportive services, and seek new
sources of assistance. HUD pays a small portion of the costs of providing
these services through its rental assistance payments.

According to the American Housing Survey, in 2001 about 1.3 million, or 40
percent, of elderly renter households with very low incomes received some
form of rental assistance from a government housing program, including
Section 202. According to our analysis of HUD program data, about 260,000
Section 202 units with rental assistance generally served very low income
elderly households in 2001. Taken together, these two sources of data
suggest that Section 202 served around one- fifth of the 1.3 million
assisted elderly households identified in the American Housing Survey. 6
While Section 202 is an important source of affordable elderly housing,
the

program has reached a relatively small fraction of very low income elderly
renter households. Between 1985 and 2001, Section 202 reached no more than
about 8 percent of elderly households eligible for assistance under the
program. Also, during this period, many of the elderly renter households
with very low incomes* ranging from about 45 to 50 percent* had housing
affordability problems. Other federal programs that develop rental housing
generally target different income levels, serve other populations in
addition to the elderly (including families with children and 6 Because
this estimate is derived from two different sources, we cannot give a
precise

percentage; thus, this estimate is intended to be illustrative. Section
202 Provides an Estimated One- Fifth of All

Government- Subsidized Housing for Very Low Income Elderly Renters

Page 7 GAO- 03- 807T

people with disabilities) and do not require housing providers to offer
supportive services for the elderly.

Most of the Section 202 projects funded between fiscal years 1998 and 2000
did not meet HUD*s guideline for approving the start of construction
within 18 months. However, a slight majority of the projects were
processed and approved to start construction within 24 months. Timeliness
varied both across HUD*s field offices and by project location
(metropolitan versus nonmetropolitan areas). As well as taking longer to
complete than other projects and thus delaying benefits to very low income
elderly households, projects that were not approved for construction after
the 18- month time frame increased the Section 202 program*s year- end
balances of unexpended appropriations.

HUD*s guidelines state that within 18 months of the funding award date,
field offices and project sponsors must complete various task before
construction can commence (fig. 1). Altogether, 73 percent of the Section
202 projects funded from fiscal years 1998 through 2000 did not meet this

18- month processing time guideline. These projects accounted for 79
percent of the nearly $1.9 billion in funding awarded to projects during
this period. Also during this period, 78 percent of projects located in
metropolitan areas exceeded the 18- month guideline as opposed to 61

percent of projects located in nonmetropolitan areas.

Figure 1: Section 202 Project Processing HUD field offices may grant an
extension of up to 6 months after the 18- month guideline for projects
needing more time to gain approval to start Section 202 Projects

Generally Did Not Meet Guidelines for Timeliness

HUD Took Longer Than 18 Months to Approve Most Projects for Construction

Page 8 GAO- 03- 807T

construction, and many projects were approved within that 6- month time
frame. Of the projects funded from fiscal years 1998 through 2000, HUD
approved 55 percent for construction within 24 months of the funding
award* 27 percent within 18 months and 28 percent within 19 to 24 months.
The remaining 45 percent of projects took longer than 24 months to be
approved.

We looked at the performance of HUD*s 45 field offices that process
Section 202 projects and found that they had varying degrees of success in
meeting the 18- month guideline. We evaluated their performance by
estimating the percentage of projects approved for construction within 18
months for each field office. Among these offices, the median project
approval rate for construction within 18 months was 22 percent, but their
performance varied widely. Eight field offices had no projects that met
the 18- month guideline, while at one office more than 90 percent of
projects met the guideline. Field offices* performance varied by region,
with those located in the northeast and west being least likely to approve
projects within 18 months of the funding award.

Meeting processing time guidelines is important because most of the delays
in total production time* that is, the time between funding award and
construction completion* stem from the project processing phase. When we
compared the average total production times for completed projects that
did not meet HUD*s 18- month processing guideline and those that did, the
delayed projects took 11 months longer than other projects to proceed from
funding award to construction completion. Since the average time taken for
the construction phase was very similar for all projects, most of the 11-
month difference in total production time was attributable to the extra 10
months that delayed projects took to complete the processing phase.

Delayed processing of Section 202 projects also affected the Section 202
program*s overall balances of unexpended appropriations. At the end of
fiscal year 2002, for example, HUD had a total of $5.2 billion in

unexpended Section 202 funds. A relatively small part of these unexpended
funds* about 14 percent* was attributable to projects that had not yet
been approved to start construction and had exceeded HUD*s 18- month
processing time guideline. Consequently, none of the funds reserved for
these projects had been expended. By contrast, the remaining 86 percent of
unexpended funds were associated with projects for which HUD was in the
process of expending funds for construction or rental assistance. For
example, almost half of the unexpended balances* about Delayed Projects
Affected the Program*s Production

Times and Expenditures

Page 9 GAO- 03- 807T

48 percent* resulted from projects that had already been completed but
were still drawing down their rental assistance funds as intended under
the multiyear project rental assistance contract between HUD and the
project sponsor.

Our review of projects funded from fiscal years 1998 through 2000 shows
that several factors impeded Section 202 projects from meeting the 18month
processing time guideline, including insufficient capital advances,
limited training and guidance for HUD field office staff on processing

policies and procedures, and limitations in HUD*s project monitoring
system. Factors external to HUD, such as sponsors* level of development
experience and requirements established by local governments, also
hindered processing.

Although HUD policy intends for capital advances to fund the cost of
constructing a modestly designed project, capital advances have not always
been sufficient to cover these expenses. 7 HUD field office staff, project
sponsors, and consultants reported that program limits on capital advances
often kept projects from meeting HUD*s time guideline for approving
projects for construction. Most field offices, and every sponsor and
consultant that we surveyed, reported that insufficient capital advances
negatively affected project processing time, and a substantial majority of
respondents indicated that this problem occurred frequently. Many
respondents also reported that securing secondary financing to supplement
the capital advance amount often added to processing time. According to
nearly all sponsors and consultants, the capital advance amounts set by
HUD were frequently inadequate to cover land, labor, and construction
costs as well as fees imposed by local governments. As a result, sponsors
had to seek secondary financing from other federal, state, and local
sources* including other HUD programs* or redesign projects

to cut costs, or both. According to a HUD official, the agency is
currently initiating steps to study the sufficiency of capital advances in
covering project development costs.

7 See 66 Fed. Reg. 6647 (Jan. 22, 2001). Various Factors Can

Delay the Approval of Projects for Construction

Insufficient Capital Advances Caused Some Sponsors to Seek Other Funding

Page 10 GAO- 03- 807T

In 1996, to help ensure that field office staff and project sponsors could
complete project processing requirements within the 18- month time
guideline, HUD adopted changes that were intended to streamline

processing procedures. 8 One of the key changes included requiring field
office staff to accept sponsor- provided certifications of architectural
plans, cost estimates, and land appraisals. Previously, field office staff
performed detailed technical reviews of these items.

According to our survey, differences in the procedures field offices used
to approve projects for construction and the lack of staff training and
experience affected project processing time. For example, most consultants
and sponsors in our survey responded that inconsistent implementation of
streamlined processing procedures by field offices caused delays, as did
insufficient training for and inexperience of field office staff. Some
consultants and sponsors whom we interviewed told us that some field
offices continued to conduct much more detailed and timeconsuming
technical reviews of project plans than HUD*s current policies require.

HUD has provided limited guidance for field office staff on the current
processing policies and procedures. At the time of our review, most field
office staff had not received any formal training on Section 202 project
processing. According to HUD, in 2002, the agency required representatives
from each field office to attend the first formal training on

project processing for field office staff since at least 1992. Although
HUD headquarters expected those who attended to relay what they had
learned to other staff members in their own offices, our survey showed
that by November 2002 no on- site training had occurred at about a quarter
of the

field offices. We also found that HUD*s field office staff was relying on
outof- date program handbooks that did not reflect the streamlined
processing procedures.

HUD*s project monitoring system was not as effective as it could have been
and may have impeded HUD*s oversight of project processing. HUD officials
told us that headquarters periodically uses its Development Application
Processing (DAP) system to identify projects that have exceeded the 18-
month processing time guideline. In addition, headquarters contacts field
offices on a quarterly basis to discuss the

8 HUD Notice H 96- 102. Varying Field Office

Practices and Inadequate Staff Training and Guidance Affected Timely
Processing

Administrative and Oversight Weaknesses at HUD Headquarters Contributed to
Delays

Page 11 GAO- 03- 807T

status of these delayed projects. Nevertheless, HUD officials have
acknowledged that there are data inaccuracies in the DAP system. The lack
of reliable, centralized data on the processing of Section 202 projects
has limited HUD headquarters* ability to oversee projects* status,
determine problematic processing stages, and identify field offices that
may need additional assistance. HUD officials indicated that enhancing the
DAP system is a priority, but that a lack of funding has hindered such
efforts.

Finally, other factors outside of HUD*s direct control kept some projects
from meeting the time guideline, according to field office representatives
and sponsors and consultants responding to our survey. Almost all survey
respondents agreed that project processing time was negatively affected
when sponsors were inexperienced in project development. Nearly 60 percent
of field offices, and almost 40 percent of sponsors and consultants,
indicated that this problem occurred frequently. A majority of survey
respondents reported that local government permitting and zoning
requirements prolonged project processing, although we found differences

of opinion on whether these problems occurred frequently. Community
opposition and environmental issues were also reported to negatively
affect project processing time, but not frequently. Mr. Chairman, this
concludes my prepared statement. I would be happy to answer any questions
at this time.

For further information on this testimony, please contact David G. Wood at
(202) 512- 8678 or Paul Schmidt at (312) 220- 7681. Individuals making key
contributions to this testimony included Emily Chalmers, Mark Egger,
Daniel Garcia- Diaz, William Sparling, and Julianne Stephens. Contacts and

Acknowledgments

(250146)

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