Rural Housing Service: Agency Has Overestimated Its Rental	 
Assistance Budget Needs over the Life of the Program (20-MAY-04, 
GAO-04-752).							 
                                                                 
The Rural Housing Service's (RHS) Section 521 Rental Assistance  
Program provides rental subsidies to about 250,000 rural tenants 
through 5-year contracts with project owners; 20-year contracts  
were also issued from 1978 through 1982. In early 2003, RHS	 
reported hundreds of millions of dollars in unexpended balances, 
primarily tied to 5- and 20-year contracts issued from 1978	 
through 1982. Since contracts remain active until all funds are  
expired, some of these contracts will likely last as long as 38  
years. GAO was asked to assess (1) the activity level of rental  
assistance contracts issued from 1978 through 1997 that have	 
unexpended balances and the possibility of deobligating these	 
balances, and (2) the activity level of rental assistance	 
contracts issued from 1998 through 2002 and the accuracy of RHS's
estimates of the rate at which these funds would be used. The	 
Department of Agriculture commented on our responses to these	 
questions.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-752 					        
    ACCNO:   A10171						        
  TITLE:     Rural Housing Service: Agency Has Overestimated Its      
Rental Assistance Budget Needs over the Life of the Program	 
     DATE:   05/20/2004 
  SUBJECT:   Budget administration				 
	     Budget outlays					 
	     Future budget projections				 
	     Rent subsidies					 
	     Rental housing					 
	     Rural housing programs				 
	     Unexpended budget balances 			 
	     RHS Section 521 Rental Assistance			 
	     Program						 
                                                                 

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GAO-04-752

United States General Accounting Office

                     GAO Report to Congressional Requesters

May 2004

RURAL HOUSING SERVICE

Agency Has Overestimated Its Rental Assistance Budget Needs over the Life of the
                                    Program

                                       a

GAO-04-752

Highlights of GAO-04-752, a report to congressional requesters

The Rural Housing Service's (RHS) Section 521 Rental Assistance Program
provides rental subsidies to about 250,000 rural tenants through 5-year
contracts with project owners; 20-year contracts were also issued from
1978 through 1982. In early 2003, RHS reported hundreds of millions of
dollars in unexpended balances, primarily tied to 5-and 20-year contracts
issued from 1978 through 1982. Since contracts remain active until all
funds are expired, some of these contracts will likely last as long as 38
years. GAO was asked to assess (1) the activity level of rental assistance
contracts issued from 1978 through 1997 that have unexpended balances and
the possibility of deobligating these balances, and (2) the activity level
of rental assistance contracts issued from 1998 through 2002 and the
accuracy of RHS's estimates of the rate at which these funds would be
used. The Department of Agriculture commented on our responses to these
questions.

May 2004

RURAL HOUSING SERVICE

Agency Has Overestimated Its Rental Assistance Budget Needs over the Life of the
Program

Based on their age, contracts (both 5 and 20 year) issued from 1978
through 1997 should have expired by the end of 2002. As of June 2003,
approximately 18 percent of these contracts were still active, accounting
for $605 million in unexpended balances. Most of this amount ($510
million, or 84 percent) involved the 32 percent of the contracts from 1978
through 1982 that were still active. At current spending rates, it will
take another 7 years for these contracts to expend their funds, 8 years
after the last of the 20-year contracts were expected to expire. Contracts
issued from 1983 through 1997 should expend their remaining funds in 2004.
According to USDA, any effort to recapture the remaining unexpended funds
associated with rental assistance agreements entered into from 1978
through 1982 would result in a breach of those contracts and would subject
USDA to liability.

As of June 2003, 74 percent of the total number of contracts issued in
1998 were still active, even though RHS expected these contracts to run
out during 2003, suggesting that these contracts may have been overfunded.
About 25 percent, or $114 million, of the funds remain from the 1998
contracts, and about 35 percent, or $208 million, remain from the 1999
contracts. Furthermore, only 11 percent of the funds from the contracts
issued in 2002 were spent during the contracts' first 1.5 years,
suggesting that many of these contracts are expending their funds more
slowly than RHS anticipated. Based on current spending rates, and allowing
for inflation, the average contract issued during these years will likely
run out of funds during its sixth year.

GAO analysis of rental assistance payment data showed that the agency has
overestimated its budget needs almost every year since 1990, the earliest
year for which GAO gathered data. Just as GAO found that contracts issued
from 1978 through 1997 have lasted beyond their intended terms, it appears
that RHS has overestimated its budget needs over the life of the rental
assistance program.

Actual Versus Estimated Rental Assistance Expenditures Per Unit Per Year,
from 1990 through 2003

www.gao.gov/cgi-bin/getrpt?GAO-04-752.

For more information, contact William B. Shear at (202) 512-4325 or
[email protected].

Contents

    Letter                                                                  1 
                                          Agency Comments                   4 
Appendix                                                                 
                           Briefing to the House Committee on Financial     
            Appendix I:                      Services                       

Abbreviations

AMAS Automated Multi-Housing Accounting System
OMB Office of Management and Budget
RHS Rural Housing Service
USDA United States Department of Agriculture

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A

United States General Accounting Office Washington, D.C. 20548

May 20, 2004

The Honorable Michael G. Oxley
Chairman
Committee on Financial Services
House of Representatives

The Honorable Sue W. Kelly
Chairwoman
Subcommittee on Oversight and Investigations
Committee on Financial Services
House of Representatives

The Honorable Robert W. Ney
Chairman
Subcommittee on Housing and Community Opportunity
Committee on Financial Services
House of Representatives

Each year, the Rural Housing Service (RHS) of the Department of
Agriculture (USDA) provides rental subsidies through the Section 521
Rental Assistance Program to about 250,000 rural tenants living in
federally
subsidized properties. RHS provides the subsidies through 5-year contracts
with project owners; 20-year contracts were also issued for units in newly
constructed properties from 1978 through 1982. With a fiscal year 2004
appropriation of almost $600 million, the program is RHS's largest
line-item
appropriation. In early 2003, RHS reported hundreds of millions of dollars
in unexpended balances, primarily tied to 5- and 20-year contracts issued
from 1978 through 1982. Since contracts remain active until all funds are
expired, some of these contracts will likely last as long as 38 years.

To help with your oversight of the Section 521 Rental Assistance Program,
you asked us to assess (1) the activity level of rental assistance
contracts
issued from 1978 through 1997 that have unexpended balances and the
possibility of deobligating1 these unexpended balances, and (2) the
activity
level of rental assistance contracts issued from 1998 through 2002 and the
accuracy of RHS's estimates of the rate at which these funds would be
used.

1An agency's cancellation or downward adjustment of previously recorded
obligations.

To assess the activity level of rental assistance contracts issued from
1978 through 2002, we reviewed rental assistance data from USDA's
Automated Multi-Housing Accounting System (AMAS) from January 1990 through
October 2003 to determine the extent of the unexpended balances. We also
used these data to determine the rate at which those balances were
currently being expended. We estimated when the funds will expire by
applying Office of Management and Budget (OMB) inflation rates for future
years to the current rates of expenditure. We acquired the OMB inflation
rates for future years from the fiscal year 2004 and 2005 budgets of the
President.2 We assessed the accuracy of RHS's estimates of the rate at
which the funds would be used for contracts issued from 1998 through
2002-and again for contracts issued from 1990 through 2003-by comparing
RHS's estimated rental assistance expenditures to actual program
expenditures. We determined RHS's estimated expenditures based on data
provided by the agency. We determined actual program expenditures using
payment data from AMAS. We conducted our work from June 2003 through
February 2004 in Washington, D.C., and St. Louis in accordance with
generally accepted government auditing standards.

Based on their age, contracts (both 5 and 20 year) issued from 1978
through 1997 should have expired by the end of 2002. As of June 2003,
approximately 18 percent of these contracts were still active, accounting
for $605 million in unexpended balances. Most of this amount ($510
million, or 84 percent) involved the 32 percent of the contracts from 1978
through 1982 that were still active (see appendix, slides 4 and 5).
Contracts issued from 1983 through 1997 accounted for the remaining $95
million.

In 2002, approximately $179 million in rental assistance funds was paid to
project owners from contracts issued from 1978 through 1997, $53 million
from contracts issued from 1978 through 1982, and $126 million from
contracts issued from 1983 through 1997 (see appendix, slides 6 and 7). At
this rate, contracts from the 1983 to 1997 period will likely expend their
remaining $95 million during 2004. The 1978 to 1982 contracts will not
expend their $510 million in unexpended balances until 2011 on average-8
years after the last of the 20-year contracts should have expired (see
appendix, slide 8).

2Table S-11: Comparison of Economic Assumptions from the Budget for Fiscal
Year 2005, lists inflation rates for 2005 through 2009. For any
projections for 2010 and beyond, we used the rate for 2009.

The rental assistance contracts that implement the rental assistance
program explicitly tie their expiration to the disbursement of rental
assistance amounts listed in the contracts. In practice, this has resulted
in many of the contracts extending beyond (in some instances, far beyond)
the contemplated 5-or 20-year term. According to USDA, any effort to
recapture the remaining unexpended funds associated with rental assistance
agreements entered into from 1978 through 1982 would result in a breach of
those contracts and would subject USDA to liability.3

As of June 2003, 74 percent of the total number of contracts issued in
1998 were still active, even though RHS expected these contracts to run
out during 2003, suggesting that these contracts may have been overfunded.
About 25 percent, or $114 million, of the funds remain from the 1998
contracts, and about 35 percent, or $208 million, remain from the 1999
contracts. Furthermore, only 11 percent of the funds from the contracts
issued in 2002 were spent during the contracts' first 1.5 years,
suggesting that many of these contracts are expending their funds more
slowly than RHS anticipated (see appendix, slide 10). Based on current
spending rates, and allowing for inflation, the average contract issued
during these years will likely run out of funds during its sixth year.

In fact, our analysis of rental assistance payment data showed that the
agency has been overestimating its budget needs since at least 1990, the
earliest year for which we gathered data. Slide 12 (see appendix) provides
an example of the difference between RHS's actual and estimated
expenditures from 1990 to 2003.4 RHS estimates are above actual
expenditures in each of the years. Just as we found that contracts issued

3We will issue a separate legal opinion on this issue.

4The actual expenditures are averaged from the entire portfolio of 5-year
contracts issued from 1989 through 2002, while the estimated expenditures
are averaged from only those units for which new (including renewal)
contracts originated in the corresponding year. Furthermore, the
RHS-estimated expenditure for a given year shows the effect of the 5-year
estimate in the first year only. Due to RHS's method for calculating its
estimated expenditures over a 5-year period, the difference is largest in
the first year and declines over time as inflation raises the actual
expenditure (or more accurate estimation) closer to the estimated
expenditure. The declining differentials of the second to fifth years are
not reflected in slide 12. Nonetheless, while the estimated expenditures
for any given year represent about 20 percent of the portfolio, they
represent almost the entire portfolio over any 5-year period in the
figure. RHS estimates are above actual expenditures in each of the years.
For more discussion, see U.S. General Accounting Office, Rural Housing
Service: Standardization of Budget Estimation Processes Needed for Rental
Assistance Program, GAO 04-424 (Washington, D.C.: Mar. 25, 2004).

from 1978 through 1997 have lasted beyond their intended terms, it would
appear that RHS has overestimated its budget needs over the life of the
rental assistance program.

Agency Comments	We provided USDA with a draft of our report Rural Housing
Service: Standardization of Budget Estimation Processes Needed for Rental
Assistance Program, which included these two objectives, for review and
comment.5 The Acting Undersecretary for Rural Development for USDA raised
concerns about our analysis of RHS's rental assistance expenditure data.
Specifically, USDA believed our finding that contracts issued from 1998
through 2002 are expected to exhaust their funds in their sixth year
validates the method of budget estimating that RHS has used in recent
years. While we agree that RHS's contracts are not lasting as long as they
did in the past, a 6-year average contract life is still 20 percent
greater than the intended contract life. USDA claimed we assert that the
contracts issued from 1998 through 2003 are expending funds at a level
consistent with contracts funded from 1978 through 1997. We do not make
this assertion; we state that the activity of contracts issued from 1998
through 2002 is consistent with earlier years and, in particular, that RHS
has overestimated its spending needs in most years since 1990.

As agreed with your office, unless you publicly announce the contents of
this report, we plan no further distribution until 30 days from the report
date. At that time, we will send copies of this report to interested
Members of Congress and congressional committees. We also will send copies
to the Secretary of the Department of Agriculture and make copies
available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.

5GAO-04-424 addressed three objectives, two of which are discussed here,
in GAO-04-752. See GAO-04-424 for USDA's complete comments on all three
objectives.

If you or your staff have any questions about this report, please contact
me at (202) 512-4325, Andy Finkel at (202) 512-6765, or Katherine Trimble
at (202) 512-5033. William Bates, Emily Chalmers, Jamila Jones, Austin
Kelly, Marc Molino, and Julie Trinder made key contributions to this
report.

William B. Shear Director, Financial Markets and Community Investment

Appendix I

Briefing to the House Committee on Financial Services

Appendix I Briefing to the House Committee on Financial Services

Appendix I Briefing to the House Committee on Financial Services

Appendix I Briefing to the House Committee on Financial Services

Appendix I Briefing to the House Committee on Financial Services

Appendix I Briefing to the House Committee on Financial Services

Appendix I Briefing to the House Committee on Financial Services

Appendix I Briefing to the House Committee on Financial Services

Appendix I Briefing to the House Committee on Financial Services

Appendix I Briefing to the House Committee on Financial Services

Appendix I Briefing to the House Committee on Financial Services

Appendix I Briefing to the House Committee on Financial Services

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