HUD Rental Assistance: Progress and Challenges in Measuring and  
Reducing Improper Rent Subsidies (18-FEB-05, GAO-05-224).	 
                                                                 
In fiscal year 2003, the Department of Housing and Urban	 
Development (HUD) paid about $28 billion to help some 5 million  
low-income tenants afford decent rental housing. HUD has three	 
major programs: the Housing Choice Voucher (voucher) and public  
housing programs, administered by public housing agencies; and	 
project-based Section 8, administered by private property owners.
As they are in every year, some payments were too high or too	 
low, for several reasons. To assess the magnitude and reasons for
these errors, HUD established the Rental Housing Integrity	 
Improvement Project (RHIIP). In response to a congressional	 
request, GAO examined the sources and magnitude of improper rent 
subsidy payments HUD has identified and the steps HUD is taking  
to address them, including efforts to simplify the process of	 
determining rent subsidies.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-224 					        
    ACCNO:   A17978						        
  TITLE:     HUD Rental Assistance: Progress and Challenges in	      
Measuring and Reducing Improper Rent Subsidies			 
     DATE:   02/18/2005 
  SUBJECT:   Administrative errors				 
	     Erroneous payments 				 
	     Housing programs					 
	     Internal controls					 
	     Program evaluation 				 
	     Program management 				 
	     Public assistance programs 			 
	     Public housing					 
	     Rent subsidies					 
	     Rental housing					 
	     Strategic planning 				 
	     HUD Rental Housing Integrity Improvement		 
	     Project						 
                                                                 
	     HUD Section 8 Voucher Program			 

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GAO-05-224

     

     * Report to the Chairman, Subcommittee on Housing and Community
       Opportunity, Committee on Financial Services, House of Representatives
          * February 2005
     * HUD RENTAL ASSISTANCE
          * Progress and Challenges in Measuring and Reducing Improper Rent
            Subsidies
     * Contents
     * Executive Summary
          * Purpose
          * Background
          * Results in Brief
          * Principal Findings
               * HUD Has Identified Sources of Error but Lacks Complete and
                 Reliable Estimates of Improper Subsidies for Every Source
               * Although HUD Has Taken Action to Reduce Improper Rent
                 Subsidies in the Public Housing and Voucher Programs,
                 Implementation Problems Have Hampered Its Efforts
               * HUD Has Made Efforts to Strengthen Oversight of Rent Subsidy
                 Determinations in Project- Based Section 8, but Challenges
                 Remain
               * HUD Is Considering Simplifying Policies for Determining Rent
                 Subsidies, but the Effects of These Changes Require Further
                 Study
          * Recommendations for Executive Action
          * Agency Comments and Our Evaluation
     * Introduction
          * HUD's Rental Assistance Programs Vary in Size and Are
            Administered Differently
          * HUD's Oversight of Program Administrators Varies among Programs
          * Tenant Rents under Rental Assistance Programs Are Generally Based
            on Income
          * HUD Established RHIIP to Respond to Ongoing Problems with
            Improper Rent Subsidy Payments
          * Objectives, Scope, and Methodology
     * HUD Has Identified Sources of Errors but Lacks Complete and Reliable
       Estimates of Improper Subsidies for Every Source
          * HUD Has Attempted to Estimate the Improper Subsidies Caused by
            Each Identified Source of Error
               * HUD Identified Three Basic Sources of Errors That Cause
                 Improper Subsidies
               * Estimating Improper Rent Subsidies Resulting from Each
                 Source of Error Is an Important Effort under RHIIP
          * Estimates of Improper Subsidies Due to Errors by Program
            Administrators Appear Reasonably Accurate and Show a Decline
               * HUD Conducted a Study to Estimate Program Administrator
                 Errors
               * Estimated Errors by Program Administrators Declined by 39
                 Percent between Fiscal Years 2000 and 2003
               * Estimated Improper Subsidies Due to Program Administrator
                 Errors Remain Significant
          * Fiscal Year 2003 Estimate of Improper Subsidies Due to Unreported
            Tenant Income Is Not Reliable
               * Estimates of Fiscal Year 2000 and 2003 Subsidy Errors from
                 Unreported Tenant Income Are Not Comparable
               * Fiscal Year 2003 Dollar Estimate Is Not Reliable
               * HUD's Methodology Does Not Account for Possible Fraud but
                 Addressing This Limitation Would Be Difficult
          * HUD's Estimate of Improper Subsidies Due to Billing Errors Is
            Incomplete
          * Agency Comments and Our Evaluation
     * HUD Is Addressing Improper Payments for Public Housing and Vouchers,
       but Implementation Problems Hampered Efforts
          * HUD Supplemented Monitoring of PHAs with On-site Reviews but Had
            Problems Implementing Them
               * HUD Implemented RIM Reviews Under RHIIP to Address
                 Monitoring Weaknesses
               * Resource, Policy, and Compliance Problems at Field Offices
                 Hampered RIM Reviews
                    * Some Field Offices Had Difficulty Conducting RIM
                      Reviews Because of Staff Limitations
                    * HUD Did Not Always Provide or Clarify Policies in a
                      Timely Manner
                    * Field Offices Did Not Always Follow Policies and
                      Procedures for Conducting RIM Reviews and Communicating
                      Findings
               * HUD Could Not Analyze RIM Data Because It Was Incomplete and
                 Inconsistent
               * HUD Has Not Made RIM Reviews Permanent
          * HUD's New System for Verifying Tenants' Incomes Has Limitations
          * HUD's Training and Guidance for PHAs Was Not Always Adequate or
            Timely
          * Conclusion
          * Recommendations for Executive Action
          * Agency Comments and Our Evaluation
     * HUD Is Improving Oversight of Rent Subsidy Determinations for
       Project-Based Section 8, but Challenges Remain
          * HUD Has Improved Guidance and Training, but a Key Element of the
            Guidance Was Not Widely Followed
               * HUD Provided New Guidance and Training on the Subsidy
                 Determination Process
               * Guidance for Collecting Data Was Not Widely Followed
          * HUD Plans to Implement a New Income Verification System but Must
            First Address Data Security Concerns
          * HUD Will Rely on PBCAs to Address Its Monitoring Effort under
            RHIIP
               * HUD Plans to Continue Transferring Contract Administration
                 Responsibilities to PBCAs Because of Resource Constraints
               * HUD Will Rely on PBCAs to Monitor Process for Determining
                 Subsidies
               * HUD Has Strengthened Monitoring Efforts by Ensuring That
                 Program Administrators Report Comprehensive Tenant Data to
                 HUD
          * Agency Comments and Our Evaluation
     * HUD is Considering Approaches for Simplifying Rent Subsidy Policies,
       but these Approaches Need More Study
          * HUD Is in the Initial Stages of Considering Approaches for
            Simplification of Rent Subsidy Policies and Has Not Conducted
            Formal Study of These Approaches
          * HUD's Current Policies for Determining Rent Subsidies Are Complex
          * Simplifying the Process for Determining Rent Subsidies Could
            Affect Tenants and Pose Implementation Challenges
               * HUD is Considering Three Basic Approaches to Simplifying
                 Policies
               * Simplification of Policies May Significantly Affect Rents
                 for Some Tenants and May Be Difficult to Implement
          * Conclusion
          * Recommendations for Executive Action
          * Agency Comments and Our Evaluation
     * Data Tables
          * Information on Improper Rent Subsidies Resulting from Program
            Administrator Error
          * Information on the Impact of Simplifying Rent Subsidy Policies on
            Tenant Rents
     * Information on HUD's Policies for Determining Rent Subsidies
          * Step One: Gather Information on Tenants
               * Step 2: Verify Information That Tenants Report
          * Step 3: Determine Tenant Eligibility for Exclusions and
            Deductions
          * Step 4: Calculate the Tenant Rental Payments Using Verified
            Information
     * Comments from the Department of Housing and Urban Development
     * GAO Contacts and Staff Acknowledgments
          * GAO Contacts
          * Staff Acknowledgments

                 United States Government Accountability Office

Report to the Chairman, Subcommittee

on Housing and Community Opportunity, Committee on Financial Services, House of
                                Representatives

February 2005

                             HUD RENTAL ASSISTANCE

Progress and Challenges in Measuring and Reducing Improper Rent Subsidies

                                       a

HUD RENTAL ASSISTANCE

Progress and Challenges in Measuring and Reducing Improper Rent Subsidies

  What GAO Found

HUD has identified three sources of errors contributing to improper rent
subsidy payments: (1) incorrect subsidy determinations by program
administrators, (2) unreported tenant income, and (3) incorrect billing.
HUD has attempted to estimate the amounts of improper subsidies
attributable to each source but has developed reliable estimates for only
the first-and likely largest-source. HUD paid an estimated $1.4 billion in
gross improper subsidies (consisting of $896 million in overpayments and
$519 million in underpayments) in fiscal year 2003 as a result of program
administrator errors-a 39 percent decline from HUD's fiscal year 2000
(baseline) estimate. GAO estimates that the amount of net overpayments
could have subsidized another 56,000 households with vouchers in 2003.

HUD has made several efforts under RHIIP to address improper rent
subsidies for its public housing and voucher programs. Rental Integrity
Monitoring (RIM) reviews by HUD's field offices-on-site assessments of
public housing agencies' compliance with policies for determining rent
subsidies-are a key part of the initiative. However, GAO found that
resource constraints and a lack of clear guidance from HUD headquarters
hampered the reviews and that the field offices did not collect complete
and consistent data, limiting HUD's ability to analyze and make use of the
results. HUD has not incorporated RIM reviews into its routine oversight
activities. HUD expects that a second effort, a Web-based tenant income
verification system, will avoid an estimated $6 billion in improper
subsidies over 10 years, but the system is not yet fully implemented.

HUD has undertaken RHIIP efforts for its project-based Section 8 programs
but faces several challenges. HUD has improved its policies and guidance
for property owners. The agency also plans to give owners access to the
Web-based income verification system by the end of 2006. HUD plans to rely
more extensively on contractors to monitor property owners' compliance
with its policies for determining subsidies.

According to HUD, the complexity of the existing policies contributes to
the difficulties program administrators have in determining rent subsidies
correctly. For example, program administrators must assess tenants'
eligibility for 44 different income exclusions and deductions. However,
simplification will likely require statutory changes by Congress and
affect the rental payments of many tenants. HUD is considering various
approaches to simplifying policies for determining rent subsidies but has
not conducted a formal study to inform policymakers on this issue.

                 United States Government Accountability Office

Contents

Letter

3
Executive Summary
Purpose 3
Background 4
Results in Brief 4
Principal Findings 6
Recommendations for Executive Action 9
Agency Comments and Our Evaluation 10
12
HUD's Oversight of Program Administrators Varies among Programs 15
Tenant Rents under Rental Assistance Programs Are Generally Based on
Income 17
HUD Established RHIIP to Respond to Ongoing Problems with Improper Rent
Subsidy Payments 19
Objectives, Scope, and Methodology 21
Chapter 2HUD Has Identified Sources of Errors but Lacks Complete and
Reliable Estimates of Improper Subsidies for Every Source
Chapter 1
[IMG] HUD's Rental Assistance Programs Vary in Size and Are Administered
Differently 12
24
HUD Has Attempted to Estimate the Improper Subsidies Caused by Each
Identified Source of Error 24
Estimates of Improper Subsidies Due to Errors by Program Administrators
Appear Reasonably Accurate and Show a Decline 28
Fiscal Year 2003 Estimate of Improper Subsidies Due to Unreported Tenant
Income Is Not Reliable 33
HUD's Estimate of Improper Subsidies Due to Billing Errors Is Incomplete
35
Agency Comments and Our Evaluation 36

                                    Contents

Chapter 3 HUD Is Addressing Improper Payments for Public Housing and
Vouchers, but Implementation Problems Hampered Efforts

                                                                           38
HUD Supplemented Monitoring of PHAs with On-site Reviews but       
Had Problems Implementing Them                                          39 
HUD's New System for Verifying Tenants' Incomes Has                
Limitations                                                             48 
HUD's Training and Guidance for PHAs Was Not Always Adequate or    
Timely                                                                  49 
Conclusion                                                              50 
Recommendations for Executive Action                                    51 
Agency Comments and Our Evaluation                                      51 

Chapter 4 HUD Is Improving Oversight of Rent Subsidy Determinations for
Project-Based Section 8, but Challenges Remain

53 HUD Has Improved Guidance and Training, but a Key Element of the
Guidance Was Not Widely Followed 54 HUD Plans to Implement a New Income
Verification System but Must First Address Data Security Concerns 57 HUD
Will Rely on PBCAs to Address Its Monitoring Effort under RHIIP 58 Agency
Comments and Our Evaluation 62

Chapter 5 HUD is Considering Approaches for Simplifying Rent Subsidy
Policies, but these Approaches Need More Study

                                                                           63
HUD Is in the Initial Stages of Considering Approaches for         
Simplification of Rent Subsidy Policies and Has Not Conducted      
Formal Study of These Approaches                                        63 
HUD's Current Policies for Determining Rent Subsidies Are          
Complex                                                                 64 
Simplifying the Process for Determining Rent Subsidies Could       
Affect Tenants and Pose Implementation Challenges                       66 
Conclusion                                                              69 
Recommendations for Executive Action                                    69 
Agency Comments and Our Evaluation                                      70 

                                    Contents

Appendixes                                                           
                Appendix I: Data Tables                                    71 
              Appendix II:  Information on HUD's Policies for                 
                            Determining Rent Subsidies                     76
              Appendix III: Comments from the Department of Housing and       
                            Urban Development                              87
              Appendix IV:  GAO Contacts and Staff Acknowledgments GAO  93 93 
                            Contacts                                    
                            Staff Acknowledgments                          93 

                                     Tables

Table 1:  Summary of HUD's Efforts to Address Sources of Errors     
             for the Voucher and Public Housing Programs                   38 
Table 2:  Ratio of Staff to RIM Reviews, Selected HUD Field         
             Offices                                                       43 
Table 3:  Summary of HUD's Efforts to Address Sources of Errors     
             for Project-Based Section 8 Programs                          54 
Table 4:  Estimated Total Gross Improper Rent Subsidies             
              Attributable to Program Administrator Error, Fiscal Year 
2003                                                                    71 
Table 5:  Estimated Gross Improper Rent Subsidies per Household     
              Attributable to Program Administrator Error, Fiscal Year 
2003                                                                    72 
Table 6:  Estimated Subsidy Overpayments Attributable to Program    
             Administrator Error, Fiscal Year 2003                         72 
Table 7:  Estimated Subsidy Overpayment per Household               
              Attributable to Program Administrator Error, Fiscal Year 
2003                                                                    72 
Table 8:  Estimated Subsidy Underpayments Attributable to           
             Program Administrator Error, Fiscal Year 2003                 73 
Table 9:  Estimated Subsidy Underpayments per Household             
              Attributable to Program Administrator Error, Fiscal Year 
2003                                                                    73 
Table 10: Estimated Dollar and Percent Change in Rent under 30      
               Percent of Gross Income Simplification Proposal, Fiscal 
Year 2003                                                               74 
Table 11: Estimated Dollar Change in Rent under 30 Percent of       
Gross Income Simplification Proposal, Fiscal Year 2003                  74 

Contents

Figures

Table 12: Estimated Average Dollar and Percent Change in Rent      
under HUD's "27/30" Simplification Proposal, Fiscal Year           
2003                                                                    74 
Table 13: Estimated Dollar Change in Rent under HUD's "27/30"      
Simplification Proposal, Fiscal Year 2003                               75 

Figure 1: HUD's Oversight Structure of Rental Assistance

Programs 16 Figure 2: Process for Determining Rent Subsidies 26 Figure 3:
Estimated Gross Improper Rent Subsidies Due to

Program Administrator Error, Fiscal Years 2000 and

2003 30 Figure 4: Median Monthly Gross Improper Rent Subsidy per

Household Due to Program Administrator Errors, Fiscal

Years 2000 and 2003 31 Figure 5: Estimated Rent Subsidy Overpayments and

Underpayments Due to Errors Made by Program

Administrators, Fiscal Year 2003 32 Figure 6: Timing of First- and
Second-Round RIM Reviews 40 Figure 7: Percentage of PHAs without
Comparable Data for First-

and Second-Round RIM Reviews 47 Figure 8: Timing of Training and RIM
Reviews 50 Figure 9: Earned Income Allowance Timeline (Full Exclusion and

Phase-In Periods Over Consecutive Months) 84 Figure 10: Excerpt from HUD
Family Report 86

Contents

                                 Abbreviations

AMI               area median income                                       
EID               earned income disallowance                               
HUD               Department of Housing and Urban Development              
OIG               Office of Inspector General                              
PBCA              performance-based contract administrator                 
PHA               public housing agency                                    
PHAS              Public Housing Assessment System                         
PHMAP             Public Housing Management Assessment Program             
RHIIP             Rental Housing Integrity Improvement Project             
RIM               Rental Integrity Monitoring                              
SEMAP             Section 8 Management Assessment Program                  
TRACS             Tenant Rental Assistance Certification System            

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separately.

A

United States Government Accountability Office Washington, D.C. 20548

February 18, 2005

The Honorable Robert W. Ney Chairman, Subcommittee on Housing

and Community Opportunity Committee on Financial Services House of
Representatives

Dear Mr. Chairman:

This report responds to your request that we evaluate issues related to
improper rent subsidy payments in the Department of Housing and Urban
Development's (HUD) housing assistance programs. Specifically, this report
examines (1) the sources and magnitude of improper payments that HUD has
identified, (2) the actions HUD is taking under its Rental Housing
Integrity Improvement Project (RHIIP) to reduce improper payments in the
Housing Choice Voucher (voucher) and public housing programs and the
status of these initiatives, (3) the actions HUD is taking under RHIIP to
reduce improper payments in its project-based Section 8 programs and the
status of these initiatives, and (4) the status and potential impact of
HUD's efforts to reduce the risk of improper payments by simplifying the
subsidy determination process. This report includes recommendations to the
HUD Secretary.

As agreed with your office, unless you publicly announce the contents of
this report earlier, 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 will also
send copies to the HUD Secretary and make copies available to others upon
request. In addition, this report will be available at no charge on the
GAO Web site at http://www.gao.gov.

This report was prepared under the direction of Steven Westley, Assistant
Director. If you or your staff have any questions about this report,
please contact me at (202) 512-8678 or [email protected] or Mr. Westley at
(202) 512-6221 or [email protected]. Major contributors to this report are
listed in appendix IV.

Sincerely yours,

David G. Wood

Director, Financial Markets and Community Investment

Executive Summary

Purpose

The Department of Housing and Urban Development (HUD) expended about $28
billion in fiscal year 2003 for rent subsidies to public housing agencies
(PHA) and property owners to make rents affordable to about 5 million
low-income tenants. These subsidies accounted for almost 75 percent of the
department's total expenditures. Yet every year HUD makes improper
payments under these programs because it cannot ensure that tenant rental
payments and subsidies are calculated correctly. Because of their
vulnerability to waste, fraud, and abuse, GAO has designated HUD's rental
assistance programs as high risk since early 2001.1 In addition, the
President's Management Agenda for Fiscal Year 2002 identified HUD's rental
assistance programs as one of nine program areas that had severe
management challenges and that needed immediate reform.2 In response to
these assessments, HUD established the Rental Housing Integrity
Improvement Project (RHIIP) to increase accountability and reduce improper
subsidy payments.

The Chairman of the House Subcommittee on Housing and Community
Opportunity, Committee on Financial Services, asked GAO to examine HUD's
efforts to reduce improper rental assistance payments in its voucher,
public housing, and project-based Section 8 programs. Specifically, this
report discusses (1) the sources and magnitude of improper payments that
HUD has identified, (2) the actions HUD is taking under RHIIP to reduce
improper payments in the voucher and public housing programs and the
status of these initiatives, (3) the actions HUD is taking under RHIIP to
reduce improper payments in its project-based Section 8 programs and the
status of these initiatives, and (4) the status and potential impact of
HUD's efforts to reduce the risk of improper payments by simplifying the
subsidy determination process. To address these objectives, GAO obtained
and analyzed data on improper payments that HUD collected for fiscal years
2000 and 2003. We also interviewed officials from HUD's headquarters and
field offices, PHAs, and contract administrators; examined laws,
regulations, policies, and guidance related to subsidy determinations; and
reviewed relevant HUD reports and studies. Chapter 1 provides the details
of our scope and methodology. We

1GAO, Major Management Challenges and Program Risks: Department of Housing
and Urban Development, GAO-01-248 (Washington, D.C.: January 2001).

2Office of Management and Budget, The President's Management Agenda,
Fiscal Year 2002 (Washington, D.C.: August 2001).

Page 3 GAO-05-224 Improper Rent Subsidies

                               Executive Summary

                                   Background

conducted our work between February and December 2004 in accordance with
generally accepted government auditing standards.

HUD offers assistance to low-income renters through three major programs:
voucher, public housing, and project-based Section 8. Under each program,
HUD makes up the difference between a unit's monthly rental cost (or, for
public housing, the operating cost) and the tenant's payment, which is
generally equal to 30 percent of the tenant's adjusted monthly income.
PHAs administer the voucher and public housing programs, and private
property owners administer the project-based Section 8 programs. These
program administrators are responsible for ensuring that tenants meet
HUD's eligibility criteria and for accurately determining rent subsidies.

HUD established RHIIP in 2001 with a goal of reducing the estimated dollar
amount of improper rent subsidies by 50 percent from fiscal years 2000
(baseline year) to 2005. To accomplish this goal, HUD initiated three
program-level efforts designed to (1) increase monitoring of program
administrators, (2) establish an income verification system that allows
PHAs and property owners to compare income information reported by tenants
with income information from government agencies, and (3) providing
additional training and guidance for program administrators. HUD also
initiated two overarching efforts under RHIIP that are aimed at measuring
the amount of improper subsidies and simplifying rent subsidy policies.

HUD has identified three sources of errors that result in improper rent

Results in Brief

subsidy payments: (1) incorrect subsidy determinations made by program
administrators (program administrator errors), (2) unreported tenant
income, and (3) incorrect billing or distribution of subsidy payments
(billing errors). HUD conducted separate studies to identify the amount of
improper rent subsidies attributable to each source of error but has
developed reliable estimates for only one of the three sources-program
administrator errors-for fiscal years 2000 and 2003. HUD paid an estimated
$1.4 billion in gross improper subsidies (the sum of both overpayments and
underpayments) in fiscal year 2003 as a result of such errors. While this
amount represents a 39 percent decrease in such errors since fiscal year
2000, HUD officials stated that the decline cannot be attributed entirely
to RHIIP because many of the key efforts were in the

Executive Summary

early stages of implementation in 2003. HUD does not have reliable
estimates for unreported tenant income or billing errors.

HUD has made several program-level efforts under the RHIIP initiative to
address improper rent subsidies for its public housing and voucher
programs. An important part of these efforts was the Rental Integrity
Monitoring (RIM) review, HUD's on-site assessment of PHAs' compliance with
the department's policies for determining rent subsidies that were
conducted from 2002 to 2004. However, these reviews, while important, were
hampered by implementation problems, including a lack of clear policies
and procedures. Further, HUD has not incorporated the reviews into its
routine oversight activities. While HUD has established a database to
track the results of RIM reviews, the data are incomplete and
inconsistent, limiting their usefulness in analyzing the results of the
assessments and measuring improvements in PHAs' determinations of rent
subsidies. HUD has begun implementing a new Web-based tenant income
verification system, which is expected to reduce improper rent subsidies
due to tenant underreporting of income. HUD lacks a reliable estimate of
improper payments attributable to billing errors in these programs and, as
of December 2004, did not have an effort in place specifically to address
billing errors.

HUD has undertaken RHIIP efforts for its project-based Section 8 programs
but faces several challenges. First, HUD has improved its policies and
guidance for property owners. However, a key part of the guidance calling
for contract administrators to collect information on improper rent
subsidies at each property was not widely followed partly because the data
collection effort was not mandatory and duplicated some contract
administrators' existing procedures. Second, it plans to implement a new
Web-based income verification system but not until fiscal year 2006 after
it has taken necessary security precautions against improper disclosure of
income information. Finally, HUD plans to rely on performance-based
contract administrators (PBCA) to monitor property owners' compliance with
department policies for calculating subsidies. Although HUD's requirements
for PBCAs call for extensive monitoring of the subsidy determination
process, HUD may face challenges in ensuring that PBCAs follow these
requirements.

According to HUD, the complexity of the existing policies is one of the
reasons program administrators have difficulty calculating rent subsidies
correctly. HUD is considering ways to simplify its policies for
determining rent subsidies and is meeting with program administrators and
other

                               Executive Summary

                               Principal Findings

HUD Has Identified Sources of Error but Lacks Complete and Reliable
Estimates of Improper Subsidies for Every Source

interested groups to discuss possible approaches. Currently, three
potential approaches to simplifying policies for determining subsidies are
being examined: (1) basing rents on tenants' income but using few or no
exclusions or deductions, (2) setting flat rents for different income
tiers, and (3) a mixed approach. Changes to current policies for
determining rent subsidies could result in higher rents for some tenants
and lower rents for others. For example, some tenants might be required to
pay more if certain income exclusions and deductions for which they
currently qualify are eliminated. In addition, implementing simplified
policies could be difficult, creating confusion among program
administrators and tenants in the short term.

To determine the amounts of improper rent subsidies resulting from program
administrator errors, HUD collected data on more than 2,400 randomly
selected households participating in the voucher, public housing, and
project-based Section 8 programs for fiscal years 2000 and 2003. GAO's
analysis of the documentation and data collected indicated that these
studies provide a reasonably accurate estimate of the subsidy
determination errors that the program administrators made. Data from the
fiscal year 2003 study showed that the department paid an estimated $1.4
billion in gross improper rent subsidies (representing $896 million in
overpayments and $519 million in underpayments) as a result of program
administrator errors in fiscal year 2003-a 39 percent decrease from fiscal
year 2000.3 GAO estimates that, if these errors had not occurred, HUD
could have provided vouchers to 56,000 additional households in fiscal
year 2003-approximately the same number of households that receive
vouchers in the Los Angeles, California, area.

For the other two sources of errors, HUD did not produce complete or
reliable estimates for all three programs for fiscal years 2000 and 2003.
More specifically, HUD's fiscal year 2003 estimate of improper rent

3The margin of error at the 95 percent level of confidence for the
estimated $1.4 billion in gross improper subsidies is +-$185 million. The
margins of error for the estimated $896 million in overpayments and $519
million in underpayments are +-$132 million and $+-96 million,
respectively.

Page 6 GAO-05-224 Improper Rent Subsidies

                               Executive Summary

Although HUD Has Taken Action to Reduce Improper Rent Subsidies in the
Public Housing and Voucher Programs, Implementation Problems Have Hampered
Its Efforts

subsidies attributable to unreported tenant income was unreliable because
it was based on a sample that was too small to produce a more precise
dollar estimate. Also, significant differences in the methodologies HUD
used to make the fiscal year 2000 and 2003 estimates suggest that any
comparison between the estimates would be invalid. Furthermore, HUD has
had difficulty making an accurate estimate of billing errors for the
project-based Section 8 programs for fiscal year 2003 and does not plan to
make estimates for the voucher and public housing programs until September
2005. However, according to HUD, the low incidence of unreported income
and billing errors identified in its studies indicate that these two
sources of errors are likely small relative to program administrator
error.

HUD has undertaken several efforts under RHIIP to address improper rent
subsidies for its public housing and voucher programs. These efforts
addressed two of the three sources of errors-program administrator errors
and unreported tenant income. As of December 2004, HUD did not have an
effort in place specifically to address billing errors.

To increase monitoring of PHAs' subsidy determinations, HUD field office
staff completed RIM reviews at 722 PHAs between June 2002 and September
2003. From April 2003 through October 2004, the field offices conducted
additional reviews at 363 PHAs to determine whether the PHAs had corrected
problems identified during the original reviews. However, GAO found that
the RIM reviews were hampered by implementation difficulties. For example,
officials at several HUD field offices reported that they did not have
enough staff to perform RIM reviews in a timely manner. Additionally,
field offices did not always follow policies and procedures for conducting
reviews-for instance, by not adequately supporting findings in their RIM
review reports. Further, problems with a database containing information
on RIM reviews prevented HUD from analyzing the results of the reviews to
assess improvements in PHAs' calculations of tenant subsidies and provide
technical assistance to PHAs. Specifically, HUD staff did not always enter
information in the database because, according to HUD officials, field
offices had not submitted the data in a timely manner and headquarters
lacked staff to manage data collection and entry tasks. Although RIM
reviews are not a regular part of HUD's oversight activities, HUD is
considering permanent on-site monitoring of PHAs' subsidy determinations
but has not yet decided whether to implement it.

                               Executive Summary

HUD Has Made Efforts to Strengthen Oversight of Rent Subsidy
Determinations in Project-Based Section 8, but Challenges Remain

HUD has implemented a Web-based income verification system and has
provided training and guidance for PHAs. HUD expects that the income
verification system will help PHAs detect underreported and unreported
tenant income and yield an estimated $6 billion in savings for all of its
programs over a 10-year period. HUD has provided more training and
guidance to PHAs on topics such as how to calculate subsidies and improve
quality control procedures. However, these efforts have not always been
adequate or timely. For example, although HUD sponsored training on its
subsidy determination policies in early 2004 to prepare PHAs for RIM
reviews, the training was held after most RIM reviews had been completed.
Had the training been held prior to the RIM reviews, PHAs might have been
better able to understand the basis for the RIM review findings and the
corrective actions needed to address them.

HUD has begun to implement efforts under RHIIP that address all three
sources of errors in its project-based Section 8 programs, but the
department faces several challenges in carrying out these initiatives.
First, HUD has improved its policies and guidance for its project-based
Section 8 programs. However, contract administrators have not always
followed a key part of the guidance that called for them to collect
information on improper rent subsidies at each property because the data
collection effort was not mandatory and duplicated some contract
administrators' existing procedures. Second, HUD plans to use the same
Web-based income verification system it is implementing for its voucher
and public housing programs for its project-based Section 8 programs.
Because HUD must resolve security concerns about improper disclosure of
tenant income information to private property owners, the system will not
be used for the project-based Section 8 programs until fiscal year 2006.

Finally, HUD plans to rely on PBCAs to monitor property owners' compliance
with HUD's policies for determining rent subsidies. For the past several
years, HUD has been transferring responsibility for overseeing property
owners to PBCAs from other types of contract administrators. HUD has
transferred contract administration responsibilities to PBCAs because its
field offices lack the resources to adequately monitor properties. HUD
requires PBCAs to perform extensive annual reviews of properties'
operations, including reviewing owners' rent subsidy calculations. To
ensure that the PBCAs meet HUD's performance standards, HUD has developed
a comprehensive oversight program. Implementing these oversight measures,
however, could pose challenges for HUD.

                               Executive Summary

HUD Is Considering Simplifying Policies for Determining Rent Subsidies,
but the Effects of These Changes Require Further Study

As part of RHIIP, HUD is considering ways to simplify its policies for
determining rent subsidies but has not formulated a specific proposal.
According to HUD, the complexity of the existing policies contributes to
errors in determining subsidies. For example, program administrators
currently must determine tenants' eligibility for 44 different income
exclusions and deductions in order to calculate rent payments and
subsidies. HUD is considering several approaches for simplifying rent
subsidy policies, including

     o an income-based approach that would set tenants' rents at a percentage
       of income, possibly with a limited number of exclusions and deductions
       or none at all;
     o a tiered flat-rent system that would establish tenants' rents for
       several income bands and eliminate the need to readjust rents because
       of income changes, provided the changes were within the same band; and
     o a mixed approach that would give program administrators various rent
       structures to choose from, including income-based and tiered flat
       rents.

Adopting any simplification approach would represent a change from current
policies. Because most of HUD's policies have a basis in statute, major
changes are likely to require congressional action. Under any
simplification approach, many tenants' rental payments could be affected,
with some tenants paying higher rents and others paying lower rents-for
example, if the current system of income deductions and exclusions is
altered or eliminated, some tenants could end up paying more in rent. HUD
staff have conducted a preliminary analysis of the impact of some
simplification approaches on tenants' rental payments and program costs.
However, the department has not conducted a formal study on the impact of
policy changes to inform policymakers on this issue.

Recommendations for Executive Action

To ensure that HUD continues to reduce improper subsidies in its public
housing and voucher programs, we recommend that the HUD Secretary make
regular monitoring of PHAs' compliance with HUD's policies for determining
rent subsidies as a permanent part of HUD's oversight activities. Also, we
recommend that the Secretary study the potential impacts on tenant rental
payments and program costs of alternative strategies for simplifying
program policies.

                               Executive Summary

Agency Comments and Our Evaluation

We provided HUD with a draft of this report for review and comment. HUD
provided general comments in a letter from the Deputy Secretary, which are
discussed in detail at the end of chapters 2, 3, 4, and 5. The letter is
printed in appendix III. The department also provided technical comments
that we incorporated where appropriate.

HUD stated that our draft report did not fully present the impact of HUD's
efforts under RHIIP. For example, HUD said that the draft report did not
recognize the department's outreach, guidance, and training efforts as
contributing factors to the reduction in estimated improper payments.
Although the draft report discussed these efforts, we added language to
the final report to incorporate HUD's view that these efforts contributed
to the reduction. HUD also disagreed with the draft report's finding that
the department has complete and reliable estimates only for one source of
error. Because HUD's estimates for two of the three sources of errors had
margins of error greater than the estimates themselves and, for billing
errors, only covered project-based Section 8, we made no changes to this
finding in the final report. HUD concurred with our finding that guidance
for collecting data on the types and frequency of errors property owners
made in determining subsidies was not widely followed and stated that it
would revise its contracts with PBCAs to address this issue.

HUD agreed with and has taken steps to implement our recommendation that
the department regularly monitor PHAs' compliance with its policies for
determining rent subsidies for the public housing and voucher programs and
collect information from these monitoring efforts. HUD disagreed with our
recommendation to conduct additional analysis of data on program
administrator errors for the project-based Section 8 program because
existing data were insufficient to make a statistically valid estimate of
error by type of contract administrator. Given that HUD's existing data
would not readily allow HUD to perform this analysis, we did not include
this recommendation in our final report. HUD did not respond directly to
our recommendation that the department formally study the impact of
proposed changes for simplifying its rent subsidy policies but said that
its prior simplification proposals had undergone extensive analysis. Our
draft report discussed HUD's efforts to analyze simplification approaches.
During the course of our review, and in its technical comments on our
draft report, the department provided us only an internal analysis of a
single simplification approach, which, according to HUD, it is no longer
considering. Because simplifying HUD's policies for determining rent

Executive Summary

subsidies will likely require legislative changes, we continue to believe
that a formal study will be essential to informing congressional decision
making.

Chapter 1

Introduction

HUD's Rental Assistance Programs Vary in Size and Are Administered
Differently

In fiscal year 2003, the Department of Housing and Urban Development (HUD)
expended about $28 billion in rental assistance-about 75 percent of the
department's total expenditures-to help almost 5 million low-income
tenants afford decent housing. HUD provides rental assistance through
three major programs: Housing Choice Vouchers (vouchers), public housing,
and several project-based Section 8 programs. These programs reduce
tenants' rental payments by providing subsidies to owners of private
properties, the public housing agencies (PHA) responsible for
government-owned developments, or both. Because these subsidies involve
complicated calculations and program rules, the process of determining
them is prone to errors. In response to growing concerns about improper
rental assistance payments, in fiscal year 2001 HUD established the Rental
Housing Integrity Improvement Project (RHIIP), which is designed to
address the causes of these errors and ensure that only eligible people
receive subsidies.

This report discusses (1) the sources and magnitude of improper payments
that HUD has identified, (2) the actions HUD is taking under RHIIP to
reduce improper payments in the voucher and public housing programs and
the status of these initiatives, (3) the actions HUD is taking under RHIIP
to reduce improper payments in its project-based programs and the status
of these initiatives, and (4) the status and potential impact of HUD's
efforts to reduce the risk of improper payments by simplifying the subsidy
determination process.

HUD's voucher, public housing, and project-based assistance programs share
the common mission of making housing affordable to low-income households.
The subsidies these programs provide are not an entitlement. Typically,
the number of low-income households eligible for assistance exceeds the
number of subsidized units and vouchers that is available. Specifically,
HUD estimated that in 1999 about a quarter of all households eligible for
housing assistance received it. HUD's programs are administered
differently and vary in the number of households they assist and the
amount of funding they receive.

The voucher program, which local PHAs administer on HUD's behalf, is HUD's
largest rental assistance program. The program, authorized under Section 8
of the United States Housing Act of 1937, as amended, provides housing
vouchers that eligible individuals and families can use to rent houses or
apartments in the private housing market from property owners
participating in the program. Voucher holders are responsible for finding

Chapter 1 Introduction

suitable housing, which must meet HUD's housing quality standards. In
fiscal year 2003, the program assisted about 2 million households (42
percent of all households receiving HUD housing assistance) and had
outlays of $13.4 billion (47 percent of HUD's total rental assistance
outlays). In general, only households with very low incomes-those with
incomes that are less than or equal to 50 percent of area median income
(AMI)-are eligible for vouchers. In addition, the legislation requires
that at least 75 percent of new participants in the voucher program have
extremely low incomes-that is, their incomes must be at or below 30
percent of AMI.1 Voucher holders generally pay 30 percent of their
adjusted monthly income toward rent, and the PHA receives HUD subsidies to
pay the remainder of the rent to the property owners. The subsidies in the
voucher program are tenant based-that is, they are tied to the household
rather than to the rental unit. The approximately 2,500 PHAs that
administer the voucher program are responsible for ensuring that tenants
meet program eligibility requirements and that tenant subsidies are
calculated properly.2 PHAs are also required to develop written policies
and procedures to administer the program according to HUD regulations.

Under the public housing program authorized by United States Housing Act
of 1937, as amended, HUD subsidized the development, operation, and
modernization of government-owned properties, which are currently managed
by some 3,300 PHAs. In fiscal year 2003, HUD's public housing program
assisted 1.2 million households (25 percent of households receiving
housing assistance) and had outlays of $7.1 billion (25 percent of HUD's
total rental assistance outlays).3 To be eligible for public housing, a
household must be low income-that is, have an income that is less than or
equal to 80 percent of AMI-and the legislation stipulates that at least 40
percent of new residents have extremely low incomes-less than or equal to
30 percent of AMI.4 As in the voucher program, public housing tenants
generally pay 30 percent of their adjusted monthly income on rent. HUD
pays subsidies to the PHAs for the remainder to cover the difference
between the PHAs' operating costs and rental receipts. In contrast to the

1See 42 U.S.C. 1437n(b)(1).

2These 2,500 PHAs are among the approximately 3,300 that administer
federal housing programs on behalf of HUD. 3This figure includes both
operating and capital subsidies. 4See 43 U.S.C. 1437n(a)(2).

Page 13 GAO-05-224 Improper Rent Subsidies Chapter 1 Introduction

voucher program, the subsidies in the public housing program are project
based-that is, they are tied to the unit, and tenants receive assistance
only when they live in units eligible for subsidies. PHAs are responsible
for ensuring that tenants are eligible for public housing, that tenant
subsidies are calculated properly, and that the PHAs' policies and
procedures conform to HUD's regulations.

Under a variety of project-based Section 8 programs authorized by the
Housing and Community Development Act of 1974, as amended, HUD has
subsidized rents with multiyear rental assistance payments, which have
often been combined with construction subsidies from other HUD programs.
These programs included the New Construction, Substantial Rehabilitation,
Loan Management Set-Aside, Property Disposition, and Moderate
Rehabilitation programs. Before project-based Section 8 programs, HUD had
provided rental assistance through Rent Supplement and Section 236 Rental
Assistance Payment programs. For ease of presentation, this report refers
to all of these rental assistance programs as project-based Section 8.
Property owners and managers for about 22,000 subsidized properties
currently participate in these programs. In fiscal year 2003, HUD's
project-based programs assisted 1.6 million households (33 percent of all
households receiving assistance from HUD) and had outlays of $7.7 billion
(27 percent of HUD's total rental assistance outlays). As in HUD's other
rental assistance programs, households receiving project-based Section 8
assistance generally pay 30 percent of their adjusted income toward rent
and HUD pays a subsidy-in this case to property owners and managers-for
the remainder of the rent. In general, only households with low incomes
are eligible for HUD project-based Section 8 assistance, and at least 40
percent of new residents must have extremely low incomes. Private property
owners and managers have similar requirements to PHAs for administering
the project-based Section 8 program-they must ensure that tenants meet
program eligibility requirements and that tenant subsidies are calculated
correctly.5 They also must develop administrative policies and procedures
that are consistent with HUD's regulations.

5The only exception to this is the Section 8 Moderate Rehabilitation
program, which is administered by PHAs rather than property owners or
managers.

Page 14 GAO-05-224 Improper Rent Subsidies

                             Chapter 1 Introduction

HUD's Oversight of Program Administrators Varies among Programs

HUD's oversight of program administrators varies depending on the program
(see fig. 1). For vouchers and public housing, HUD field offices provide
oversight of the PHAs that administer the programs. Field office staff
conduct on-site reviews and analysis of PHAs' operations. Field offices
are also responsible for confirming the accuracy of information PHAs
submit to HUD's performance rating systems for vouchers and public
housing: the Section 8 Management Assessment Program (SEMAP) and Public
Housing Assessment System (PHAS), respectively. Both SEMAP and PHAS
provide HUD managers with performance measures in key program areas, such
as program management and the physical condition of properties.

                             Chapter 1 Introduction

Tenant Rents under Rental Assistance Programs Are Generally Based on
Income

that properties are in compliance with HUD's policies. The administrators
conduct on-site reviews of property owners' tenant information files,
process monthly payment vouchers, respond to health and safety issues, and
renew rental assistance contracts. Currently, there are three different
types of contract administrators: performance-based contract
administrators, "traditional" contract administrators, and HUD field
office staff (see chap. 4).6

Subsidies under HUD's rental assistance programs are generally based on
tenant households' adjusted annual income, or gross income less any
exclusions and deductions. Laws and HUD regulations provide for 44
different types of income exclusions and deductions. Of these, HUD's
regulations cite 20 income sources, such as income from minors, student
financial aid, and qualifying employment training programs, which are
excluded when determining households' eligibility to receive assistance
and calculating tenants' rent.7 Nineteen other income sources qualify as
exclusions under various statutes. For example, Earned Income Tax Credit
refund payments received on or after January 1, 1991, are excluded, as is
income from participating in AmeriCorps.8 A complete list and descriptions
of these exclusions appear in appendix II.

In addition to these 39 income exclusions, program administrators must
also apply five income deductions, which reduce the amount of income that
can be considered in calculating tenants' rent.9 Legislation specifies the
following five deductions from annual income:

     o a standard amount ($480) for each dependent;
     o a standard amount ($400) for elderly or disabled family members;

6Performance-based contract administrators receive an incentive fee if
they perform above a minimum quality level as determined by HUD, and their
fees are reduced if they perform below it.

7See 24 C.F.R. 5.609.

8HUD periodically identifies these federally mandated exclusions from
income in the Federal Register. See 66 Fed. Reg. 20318 (Apr. 20, 2001) for
the most recent listing.

9See 24 C.F.R. 5.611.

Chapter 1 Introduction

     o unreimbursed child care expenses that are necessary for a family
       member to remain employed;
          * the sum of the following to the extent that it exceeds 3 percent
            of annual income:
               o certain unreimbursed medical expenses for elderly or
                 disabled family members and
               o certain unreimbursed attendant care and auxiliary apparatus
                 expenses necessary for a disabled family member to be
                 employed; and

o  other deductions from annual income as determined by program
administrator.

Once program administrators have collected information from tenants on
income and applicable exclusions and deductions, HUD policy requires that
program administrators independently verify this information (thirdparty
verification). To obtain third-party verification, program administrators
must directly contact employers, welfare offices, health care providers,
and others to ensure that the information tenants have reported is
accurate and complete. However, third-party verification on its own may
not identify all income not reported (intentionally or otherwise) by
tenants. The program administrator must maintain all verified information
in the tenant's file.

After verifying tenants' income information, program administrators must
compute the amounts tenants pay in rent. HUD regulations define these
payments as the highest of the following amounts: (1) 30 percent of a
family's monthly adjusted income-that is monthly income after exclusions
or deductions; (2) 10 percent of the family's gross monthly income-that
is, monthly income before exclusions or deductions; or (3) the applicable
minimum monthly rent, which is typically between $0 and $50.10 Generally,
the amount paid by low- and very-low- income tenants is not enough to
cover the entire rent for a unit or, for public housing, to cover
operating costs. As a result, for vouchers and project-based Section 8,
HUD generally covers the difference between the unit's rent and the

10See 24 C.F.R. 5.628. For project-based Section 8 properties, the minimum
rent is $25 per month.

Page 18 GAO-05-224 Improper Rent Subsidies

                             Chapter 1 Introduction

HUD Established RHIIP to Respond to Ongoing Problems with Improper Rent
Subsidy Payments

tenant's rental payment in the form of a housing assistance payment. For
public housing, HUD pays the PHA an operating subsidy to cover the
difference between the PHA's operating costs and rental receipts. In this
report, we refer to both types of payments as rent subsidies.

RHIIP was created as a Secretarial Initiative in the spring of 2001 to
ensure that the right benefits go to the right people. RHIIP was set up as
a direct result of HUD's analysis of data it collected on improper subsidy
payments in fiscal year 2000. For the first time, HUD managers had access
to statistically valid estimates of the extent, severity, costs, and
sources of subsidy errors for vouchers, public housing, and project-based
Section 8 nationwide. The results of the analysis were issued in a June
2001 report, Quality Control for Rental Assistance Subsidies
Determinations. The report focused on subsidy errors made by program
administrators but did not attempt to determine if the tenants supplied
accurate and complete income information. In February 2002, HUD completed
a separate evaluation to determine rental assistance errors caused by
unreported tenant income. The study matched incomes tenants reported with
income information from Internal Revenue Service and Social Security
Administration databases. The results of these studies are examined
further in chapter 2.

Evaluations by GAO and HUD's Office of Inspector General (OIG) have
identified long-standing problems with HUD's monitoring of program
administrators responsible for making rent subsidy determinations. In
2001, GAO designated HUD's rental housing programs as high risk for waste,
fraud, and abuse because the department could not ensure that only
eligible households received housing subsidies or that the households
received the correct amounts.11 Also, HUD's OIG reported on material
weaknesses in HUD's monitoring of program administrators in its financial
audits of the department since 1996. The OIG found that these weaknesses

11GAO, Major Management Challenges and Program Risks: Department of
Housing and Urban Development, GAO-03-103 (Washington, D.C.: January 2003)
and GAO-01-248 .

Page 19 GAO-05-224 Improper Rent Subsidies Chapter 1 Introduction

had adversely affected HUD's ability to ensure that program administrators
were correctly calculating housing subsidies.12

RHIIP's goal is to reduce the incidence and dollar amount of improper rent
subsidies by 50 percent in fiscal year 2005 compared with fiscal year
2000, with interim goals of a 15 percent reduction by fiscal year 2003 and
a 30 percent reduction by fiscal year 2004. RHIIP's performance goals are
largely drawn from The President's Management Agenda, Fiscal Year 2002,
which established nine agency-specific goals to improve federal management
and performance.13

To accomplish RHIIP's goals, HUD has initiated the following three
program-level efforts to reduce improper subsidy payments (see chapters 3
and 4):

     o Increased monitoring of program administrators to evaluate whether
       subsidy calculations are correct, third-party verification of
       information provided by tenants is sufficient, quality control
       procedures are adequate, and tenant files are complete;
     o Income verification to allow PHAs or property owners to compare tenant
       income information, as reported by federal and state agencies, with
       the information reported by the tenant; and
     o Additional training and guidance to provide HUD staff and program
       administrators with the tools necessary to understand the complex
       requirements for determining subsidies determination.

HUD also initiated the following two overarching efforts under RHIIP:

12Office of Inspector General, Department of Housing and Urban
Development, Additional Details to Supplement Our Report on the U.S.
Department of Housing and Urban Development's (HUD) Fiscal Year 2004
Financial Statements (Washington, D.C.: November 2004).

13Office of Management and Budget, The President's Management Agenda,
Fiscal Year 2002 (Washington, D.C.: July 2001).

Page 20 GAO-05-224 Improper Rent Subsidies

                             Chapter 1 Introduction

Objectives, Scope, and Methodology

     o Error measurement to develop estimates of the magnitude of improper
       rent subsidy payments for all three programs and to assess progress in
       meeting RHIIP's goals (see chapter 2);14 and
     o Simplification of rent subsidy policies to develop approaches to
       reduce complexity of program rules that have resulted in an
       error-prone process (see chapter 5).15

To further assist its efforts under RHIIP, HUD has set up a RHIIP advisory
group responsible for advising HUD's principal staff on improper rental
assistance payments and to provide support for planning and implementing
corrective actions that will reduce the risk of improper payments to an
acceptable level. The advisory group is composed of representatives from,
among others, HUD's program management and research offices. Members of
the advisory group meet on a weekly basis to discuss progress and
coordinate efforts.

Our objectives were to determine (1) the sources and magnitude of improper
rental assistance payments that HUD has identified, (2) the actions HUD is
taking under RHIIP to reduce improper rental assistance payments in the
voucher and public housing programs and the status of these initiatives,
(3) the actions HUD is taking under RHIIP to reduce improper payments in
the project-based Section 8 program and the status of these initiatives,
and (4) the status and potential impact of HUD's efforts to reduce the
risk of improper payments by simplifying the subsidy determination
process. The scope of this work was limited to HUD's rental assistance
programs under Housing Choice Vouchers, public housing, and project-based
Section 8.

To determine the sources and magnitude of improper rental assistance
payments identified by HUD, we obtained fiscal year 2000 data on program
administrator errors that HUD collected for its 2001 Quality Control for
Rental Assistance Subsidies Determination report and similar data for
fiscal year 2003. We tested the reliability of both data files and found
them

14The Improper Payments Information Act of 2002 (Pub. L. No. 107-300) also
required HUD to report its estimate of improper rent subsidies annually.

15The President's Management Agenda also urged HUD to work with
stakeholders to simplify program rules where necessary.

Page 21 GAO-05-224 Improper Rent Subsidies Chapter 1 Introduction

reliable for the purposes of this report. We estimated the total amount of
improper rent subsidies for all three housing programs. Our estimated
totals generally agreed with those in HUD's fiscal year 2003 and 2004
Performance and Accountability Report. We also estimated improper rent
subsidies per household. To illustrate the impact of improper rent
subsidies, we estimated the number of households that could have received
assistance under the voucher programs by dividing the estimated total net
improper rent subsidy overpayments (i.e., total estimated subsidy
overpayments minus total estimate subsidy underpayments) by the average
cost of a voucher (including administrative costs) in fiscal year 2003.
Appendix I contains detailed results of our analyses. We reviewed HUD
notices, guidebooks, and reports, including HUD's 2001 Quality Control for
Rental Assistance Subsidies Determinations and HUD's 2003 and 2004
Performance and Accountability Report. We interviewed HUD headquarters
officials from the Office of Public and Indian Housing (for the vouchers
and public housing programs), the Office of Housing (for project-based
Section 8 programs), and the Office of Policy Development and Research. We
also reviewed reports by and interviewed officials from HUD's OIG.

To describe the actions HUD is taking under RHIIP to reduce improper
payments in the public housing and voucher programs and the status of
these initiatives, we analyzed RHIIP status reports and schedules,
obtained and reviewed relevant HUD policies and procedures, and
interviewed officials at HUD headquarters and seven field offices
responsible for the two rental assistance programs-Baltimore, Maryland;
Boston, Massachusetts; Chicago, Illinois; Los Angeles, California; Miami,
Florida; New York City, New York; and San Francisco, California. We
selected these field offices based on the volume of rent subsidies they
oversee and to achieve some geographic distribution. Together, these field
offices oversaw about $7.8 billion in rent subsidies payments in fiscal
year 2003, or 55 percent of the total. We also met with 14 of the largest
PHAs responsible for administering the public housing and voucher programs
in the HUD field office jurisdictions we visited and interviewed groups
that represent state and local housing agencies and tenants. To assess
HUD's implementation of Rental Integrity Monitoring reviews and public
housing authorities' progress in reducing improper rental assistance
payments, we obtained and reviewed HUD policies, procedures, and training
materials on conducting these reviews, analyzed all 31 rental integrity
monitoring reviews from 13 of the largest public housing authorities in
the country, and reviewed HUD's quality assurance reviews of HUD field
office performance.

Chapter 1 Introduction

To describe the actions HUD is taking under RHIIP to reduce improper
payments in its project-based Section 8 programs and the status of these
initiatives, we interviewed officials from HUD headquarters and at six HUD
field offices responsible for these programs-Boston, Massachusetts;
Chicago, Illinois; Los Angeles, California; New York City, New York;
Philadelphia, Pennsylvania; and San Francisco, California. We also
selected these field offices based on the volume of rent subsidies they
oversee and to achieve some geographic distribution. Together, these field
offices oversaw about $8.5 billion in rent subsidies payments in fiscal
year 2003, or 47 percent of the total. We met with the four
performance-based contract administrators responsible for administering
project-based Section 8 contracts in these HUD field office locations.16
We also obtained and reviewed HUD policies and procedures related to the
implementation of RHIIP initiatives and RHIIP status reports.

To determine the status and impact of HUD's effort to simplify the subsidy
determination process, we reviewed relevant laws and HUD regulations. We
also estimated the potential impact on tenant rents under possible
approaches using data HUD had collected for the update to its 2001 report,
Quality Control for Rental Assistance Subsidies Determinations.
Specifically, we compared the difference between the amount of rent paid
by tenants (as identified in HUD's data) and the amount tenants would pay
under the two simplification approaches. We interviewed officials at HUD
headquarters and field offices and at state and local agencies that
administer HUD's rental assistance programs.

We also met with industry groups representing state and local housing
agencies and tenants. These groups include the National Association of
Housing and Redevelopment Organization, National Leased Housing
Association, Public Housing Authorities Directors Association, and
Massachusetts Union of Public Housing Tenants.

We conducted our work from February to December 2004 in accordance with
generally accepted government auditing standards.

16At the time of our field work, HUD had not assigned project-based
Section 8 contracts to a performance-based contract administrator in
either Illinois or Northern California.

Page 23 GAO-05-224 Improper Rent Subsidies

Chapter 2

HUD Has Identified Sources of Errors but Lacks Complete and Reliable Estimates
of Improper Subsidies for Every Source

HUD Has Attempted to Estimate the Improper Subsidies Caused by Each
Identified Source of Error

As part of the Rental Housing Integrity Improvement Project's (RHIIP)
error measurement effort, the Department of Housing and Urban Development
(HUD) identified three sources of errors that resulted in improper rent
subsidy payments: (1) incorrect rent subsidy determinations made by
program administrators (program administrator errors), (2) unreported
tenant income, and (3) incorrect billing or distribution of subsidy
payments (billing errors). HUD conducted separate studies to look at the
amount of improper rent subsidies attributable to each source of error for
vouchers, public housing, and project-based Section 8 but was able to
develop reliable estimates of dollar errors for only one of the three
sources-errors made by program administrators in determining rent
subsidies-for fiscal years 2000 and 2003. HUD paid an estimated $1.4
billion in gross improper subsidies in fiscal year 2003 as a result of
such errors.1 This amount represents a decrease of 39 percent since fiscal
year 2000. HUD officials stated that this decline cannot be attributed
entirely to RHIIP because many of the activities under the RHIIP
initiative were in their early stages of implementation in 2003. However,
HUD officials indicated that their communications with program
administrators about the importance of addressing improper payments
probably led to voluntary compliance with HUD's policies for determining
rent subsidies and likely contributed to the reduction in improper
payments. HUD reported that the department paid an estimated $191 million
in fiscal year 2003 in gross improper rent subsidies due to unreported
tenant income-an 80 percent reduction compared with fiscal year 2000.
However, our analysis indicates that this figure is not reliable because
of the small sample size it was based on and because meaningful
comparisons between the 2000 and 2003 estimates cannot be made owing to
differences in the methodologies used to calculate them. Finally, HUD does
not have a complete and reliable estimate of billing errors for either
fiscal year 2000 or 2003.

HUD has identified three basic sources of errors that have resulted in
improper rent subsidy payments: (1) program administrator errors, (2)
unreported tenant income, and (3) billing errors. HUD conducted separate
studies of each type of error to assess the magnitude of the problem and
the progress that has been made in reducing them.

1Appendix I provides the margins of error for all estimates of improper
rent subsidies attributable to program administrator errors.

Page 24 GAO-05-224 Improper Rent Subsidies

 Chapter 2 HUD Has Identified Sources of Errors but Lacks Complete and Reliable
                Estimates of Improper Subsidies for Every Source

HUD Identified Three Basic Sources of Errors That Cause Improper Subsidies

HUD identified three basic sources of errors that resulted in improper
rent subsidy payments. Program administrator errors are the broadest
because, as figure 2 shows, this type of error can affect nearly all the
critical dimensions of the process for determining rent subsidies. Program
administrators are responsible for collecting information on household
income, expenses, and composition to determine tenants' eligibility to
receive housing assistance and the size of the subsidies. In performing
their work, program administrators may incorrectly determine rent
subsidies by, for example, making calculation and transcription errors or
misapplying allowed income exclusions and deductions required by HUD
policies.

Errors that result from unreported tenant income occur when tenants do not
report an income source (either for themselves or another household
member) to program administrators. According to HUD, these errors do not
include cases in which the tenants reported all sources of income but not
the correct amounts. HUD classifies these discrepancies as program
administrator errors because program administrators are required to verify
tenants' income amounts through third parties, such as employers and
public assistance agencies. Unreported income errors generally occur early
in the process for determining rent subsidies, when the tenant first
submits income information to program administrators (fig. 2). Although
some tenants may not disclose all income sources in order to qualify for
assistance and to increase the rent subsidies they receive, tenants may
also fail to report income sources unintentionally if program
administrators provide unclear instructions.

Finally, billing errors occur at the very end of the process for
determining rent subsidies (fig. 2). The procedures used by program
administrators to bill HUD for subsidy payments vary for each of the three
rental assistance programs, and as a result the specific types of mistakes
that lead to billing errors can also vary. However, in general, billing
errors arise when discrepancies exist between the amount of a rent subsidy
determined by the program administrator and the amount that is actually
billed to and paid by HUD. Billing errors can also include accounting
discrepancies between amounts paid by HUD and a property's bank statements
and accounting records.

Chapter 2 HUD Has Identified Sources of Errors but Lacks Complete and
Reliable Estimates of Improper Subsidies for Every Source

                Figure 2: Process for Determining Rent Subsidies

                Sources: GAO (analysis); Art Explosion (images).

 Chapter 2 HUD Has Identified Sources of Errors but Lacks Complete and Reliable
                Estimates of Improper Subsidies for Every Source

Estimating Improper Rent Subsidies Resulting from Each Source of Error Is
an Important Effort under RHIIP

As part of its error measurement effort under RHIIP, HUD planned to
estimate improper rent subsidies attributable to each source of error.
According to HUD, this effort was to allow the department to assess the
magnitude of improper rent subsidies and the progress made in meeting
RHIIP's goal of reducing improper subsidies. To develop these estimates,
HUD conducted separate studies on improper rent subsidies attributable to
each source of error for fiscal years 2000 and 2003. (Information on the
methodology and reliability of these studies is discussed later in this
chapter.) About two years after HUD began estimating improper rent
subsidies, Congress passed the Improper Payments Information Act of 2002,
which mandated that federal agencies submit annual estimates of improper
payments for at-risk programs.2 According to HUD, the department plans to
continue updating its estimates in subsequent years in order to comply
with the requirements of the act. HUD has reported its estimates in its
annual audited financial statements and performance and accountability
reports.

There are a number of ways to describe the size and magnitude of improper
rent subsidies. One way is simply the dollar difference between the actual
rent subsidy HUD paid and the "correct" rent subsidy-that is, the amount
of subsidy that would have been paid on behalf of the tenant if no errors
had occurred. The dollar amount erroneously paid can be either positive or
negative because errors can reflect subsidy overpayments or
underpayments.3 The gross dollar error or gross improper payment reflects
the sum of the absolute value of the subsidy overpayments and
underpayments-that is, the total of all erroneously paid funds.4 Office of
Management and Budget guidance recommends using the gross improper payment
measure to indicate the overall accuracy of the income and rent
determination process. A second indicator, net dollar error or net
improper payment, takes into account whether the difference between the
actual and correct rent subsidy amounts is positive or negative. This
measure is a useful way of expressing the impact of errors on actual
program expenditures because it accounts for the offsetting effect of
subsidy over- and underpayments.

2Pub. L. No. 107-300, Nov. 26, 2002.

3See Office of Management and Budget's guidance "Improper Payments
Information Act of 2002 (Pub. L. No. 107-300)."

4Absolute value is the magnitude of a number irrespective of whether it is
positive or negative. For example, the sum of the absolute values of -2
and 2 is 4.

Page 27 GAO-05-224 Improper Rent Subsidies

 Chapter 2 HUD Has Identified Sources of Errors but Lacks Complete and Reliable
                Estimates of Improper Subsidies for Every Source

Estimates of Improper Subsidies Due to Errors by Program Administrators
Appear Reasonably Accurate and Show a Decline

To assess the accuracy of subsidy determinations made by program
administrators, HUD collected data for fiscal years 2000 and 2003. HUD
paid an estimated $1.4 billion in gross improper rent subsidies
(consisting of an estimated $896 million in overpayments and $519 million
in underpayments) as a result of such errors in fiscal year 2003. This
amount represents a 39 percent reduction compared with fiscal year 2000.
The voucher program accounted for about half of the fiscal year 2003
errors, and the public housing and project-based Section 8 programs each
accounted for about a quarter. Between fiscal years 2000 and 2003, each of
the rental assistance programs experienced substantial decreases in
program administrator errors-50 percent for public housing and more than
30 percent for both vouchers and project-based Section 8. Despite these
reductions, the data show an estimated $377 million net subsidy
overpayment in fiscal year 2003 that reduced the amount of funds available
to assist other families with housing needs. We estimate that HUD could
have provided vouchers to 56,000 additional households in fiscal year 2003
with this amount.

HUD Conducted a Study to Estimate Program Administrator Errors

As part of its Quality Control for Rental Assistance Subsidies
Determinations study for fiscal year 2000, HUD collected data on the
subsidy determinations made by program administrators. HUD subsequently
repeated the study, using data for fiscal year 2003. Each study collected
data on over 2,400 randomly selected households participating in the
voucher, public housing, and project-based Section 8 programs. The
methodology involved reviewing tenant files, interviewing a sample of
tenants to gather income information, verifying all sources of reported
income, and recalculating rents and subsidies. HUD estimated the subsidy
errors by identifying the sum of the discrepancies between the actual rent
subsidies calculated by program administrators and the amounts calculated
by the quality control study staff. The results were projected to the
entire population of assisted households to develop a national estimate of
total improper rent subsidies. Our analysis of the documentation and the
data collected indicates that these studies provide a reasonably accurate
estimate of subsidy determination errors made by program administrators.

 Chapter 2 HUD Has Identified Sources of Errors but Lacks Complete and Reliable
                Estimates of Improper Subsidies for Every Source

Estimated Errors by Program Administrators Declined by 39 Percent between
Fiscal Years 2000 and 2003

Our analysis of data that HUD gathered for its quality control study
indicates that HUD made an estimated $1.4 billion in gross improper rent
subsidies in fiscal year 2003 as a result of errors made by program
administrators-about 39 percent less than the estimated $2.3 billion in
fiscal year 2000.5 The voucher program accounted for the largest share of
this amount-about 52 percent, or $731 million. Public housing and
project-based Section 8 accounted for 22 percent ($316 million) and 26
percent ($369 million), respectively. Appendix I contains more detailed
information on the amount of improper rent subsidies presented in this
chapter.

Each of the rental assistance programs experienced substantial reductions
in gross program administrator error-50 percent for public housing, 35
percent for vouchers, and 32 percent for project-based Section 8 (fig. 3).
These reductions exceeded HUD's interim RHIIP goal of reducing improper
rent subsidies resulting from these errors by 15 percent by fiscal year
2003.6 According to HUD, the reductions in gross improper subsidies cannot
be attributed entirely to RHIIP. Many of the initiatives under RHIIP, such
as the RIM reviews and the income verification system, were too early in
their implementation to have had any direct impact on the reductions.
However, HUD officials stated that its communications with program
administrators about the importance of addressing improper rent subsidies
and program administrators' anticipation of increased monitoring by HUD
probably led to voluntary improvements in internal control activities
(such as increased supervisory reviews, testing of files, and staff
training) and likely contributed to these reductions. In addition, some
PHAs we interviewed had already begun improving their controls before
RHIIP was established. Estimates of improper subsidies in future years may
show whether further reductions can be made and sustained as the RHIIP
initiative matures.

5We followed HUD's approach by not counting a discrepancy of $5 or less
between the rent in the tenant's file and the "correct rent" as an error
in order to eliminate minor discrepancies that have little impact on
programwide subsidy errors. Including all errors (anything greater than
$0) would increase the fiscal year 2003 estimate of program administrator
errors by less than $18 million, or about 1 percent. In addition, our
estimates of such errors for fiscal year 2003 agree with those published
in HUD's Performance and Accountability Report for Fiscal Year 2004.

6RHIIP's quantitative goal for reducing improper rent subsidies also
applies to the other sources of error.

Chapter 2 HUD Has Identified Sources of Errors but Lacks Complete and
Reliable Estimates of Improper Subsidies for Every Source

Figure 3: Estimated Gross Improper Rent Subsidies Due to Program
Administrator Error, Fiscal Years 2000 and 2003 Dollars in millions 2,500

2,303

  2,000

1,416

  1,500

1,133

  1,000

731 632 539

500

369

                                      316

0 All Vouchers Public Project-based programs housing Section 8

2000

2003 Source: GAO.

Overall, we estimate that the median gross subsidy error per household was
about $33 per month ($396 annually) for all the rental assistance programs
(fig. 4).7 In addition to having the highest total gross rent subsidy
error in fiscal year 2003, the voucher program had the highest median
gross subsidy error per household, about $41 per month. The comparable
figures for project-based Section 8 and public housing were $27 and $29
per month, respectively.

7Gross improper subsidies per household are limited to those households
with erroneous subsidies. Those households with no errors are not included
in the calculation.

Page 30 GAO-05-224 Improper Rent Subsidies

 Chapter 2 HUD Has Identified Sources of Errors but Lacks Complete and Reliable
                Estimates of Improper Subsidies for Every Source

Estimated Improper Subsidies Due to Program Administrator Errors Remain
Significant

Figure 4: Median Monthly Gross Improper Rent Subsidy per Household Due to
Program Administrator Errors, Fiscal Years 2000 and 2003 Dollars 60

56

50

41

40

38

40

33

                                       29

30

27 27

20

10

0 All Vouchers Public Project-based programs housing Section 8

2000

2003 Source: GAO.

The median dollar error per household for all the rental assistance
programs decreased by about 18 percent, or $7, between fiscal years 2000
and 2003. The median dollar error per household for vouchers and public
housing decreased by 27 percent and 24 percent, respectively, over that
time period. Although the median for project-based Section 8 did not
change, suggesting no improvement, the program experienced significant
decreases in gross subsidy error for households that had the largest error
in fiscal year 2000.

Because of program administrator errors, HUD paid an estimated $377
million in net subsidy overpayments in fiscal year 2003, reducing the
amount of funds that were available to assist additional households with
housing needs. This amount reflects the difference between $896 million in
estimated subsidy overpayments and $519 million in estimated subsidy

Page 31 GAO-05-224 Improper Rent Subsidies Chapter 2 HUD Has Identified
Sources of Errors but Lacks Complete and Reliable Estimates of Improper
Subsidies for Every Source

underpayments (fig. 5). Total estimated subsidy overpayments have
decreased by 64 percent since fiscal year 2000.

Figure 5: Estimated Rent Subsidy Overpayments and Underpayments Due to
Errors Made by Program Administrators, Fiscal Year 2003 Dollars in
millions 1,500

  1,200

900

600

300

0 All Vouchers Project-Public programs based housing Section 8

Subsidy underpayment

Subsidy overpayment Source: GAO.

As discussed earlier, calculating net improper rent subsidies permits
estimates of the errors' impact on actual program expenditures because the
calculation accounts for the offsetting effects of estimated subsidy
over-and underpayments. Because the overpayments exceeded the
underpayments in fiscal year 2003, HUD was not able to use an estimated
$377 million of its funding to assist needy low-income households. We
evaluated the impact of the estimate on the number of households that
could have been served if this amount had been available to subsidize
eligible households with new vouchers. Based on the average national
subsidy cost of subsidizing a voucher-about $6,720 annually, including
administrative costs-we determined that HUD could have provided an
additional 56,000 households nationwide with vouchers in fiscal year

 Chapter 2 HUD Has Identified Sources of Errors but Lacks Complete and Reliable
                Estimates of Improper Subsidies for Every Source

Fiscal Year 2003 Estimate of Improper Subsidies Due to Unreported Tenant
Income Is Not Reliable

2003-nearly the same number of households that are currently assisted with
vouchers in the Los Angeles, California, area.

HUD has developed a methodology to estimate the amount of rent subsidies
the department has paid improperly due to tenants who did not report all
sources of earned income to program administrators. Based on this
methodology, HUD estimated that the department paid $191 million in fiscal
year 2003 in gross improper rent subsidies due to unreported tenant
income, but our analysis found that this figure was not reliable because
of the small number of tenant files with unreported income that were used
to make the estimate. In addition, significant differences in the
methodology used to calculate the fiscal year 2000 and 2003 estimates
means that any comparison between the estimates would be invalid. Finally,
HUD's methodology does not capture other potential types of unreported
income, a limitation that would be difficult to overcome.

Estimates of Fiscal Year 2000 and 2003 Subsidy Errors from Unreported
Tenant Income Are Not Comparable

HUD developed a methodology to estimate the amounts of rent subsidies the
department paid improperly in fiscal years 2000 and 2003 because tenants
did not report all sources of earned income to program administrators.
HUD's methodology identified unreported income sources by comparing the
information reported by tenants in the quality control study database with
the information reported by employers in federal wage and income
databases. HUD first identified households that appeared not to have
reported an income source and then took various steps to screen out "false
positives" resulting from definitional and timing differences. For
example, HUD program staff eliminated those cases involving unreported
income sources, such as income from minors or training programs, that
should be excluded from family income under HUD's policies. HUD also
eliminated cases if third-party verification showed that the income fell
outside the period covered by the program administrator's most recent
income examination.

However, the methodologies used for fiscal years 2000 and 2003 have two
significant differences, and as a result any comparison between the two
estimates would not be valid. First, according to HUD, individuals who
conducted the study for fiscal year 2003 did substantially more follow-up
work to reconcile discrepancies in income sources than those conducting
the study for fiscal year 2000. As a result, the fiscal year 2000 estimate
probably included more "false positives" and overstated the amount of

 Chapter 2 HUD Has Identified Sources of Errors but Lacks Complete and Reliable
                Estimates of Improper Subsidies for Every Source

                Fiscal Year 2003 Dollar Estimate Is Not Reliable

improper rent subsidies HUD paid. Second, HUD officials stated that the
staff used to conduct the study for fiscal year 2000 had less experience
with housing programs than the staff used for the later study. The
officials said that, as a result, the staff from the earlier study may not
have known enough about HUD's program policies to reliably determine
whether tenants had or had not reported all of their income sources.

While HUD's Performance and Accountability Report for Fiscal Year 2004
states that the department paid an estimated $191 million in fiscal year
2003 in gross improper rent subsidies due to unreported tenant income,
this figure is not reliable because the number of tenant files with
unreported income that were used to make the estimate was small.
Specifically, HUD identified 30 tenant files, or 1.2 percent of the 2,401
tenant files in the sample, with at least one unreported income source.
HUD officials agreed that because of the small number of files used for
the estimate and the large variances in the amounts of income that tenants
did not report, the margin of error was so large that the estimate was not
meaningful-that is, the actual amount of improper rent subsidies for this
source of error could have been as low as zero or many times higher than
HUD's estimate. HUD officials stated that, even though the estimate may
not be meaningful, the low incidence of tenants who did not report all
sources of income could indicate that unreported income sources may not be
a major problem. However, they also recognized that the low incidence is
somewhat counterintuitive, given that tenants have an incentive to conceal
income from program administrators, and it is possible that the
methodology may not be adequately capturing the full extent of this
problem. HUD indicated that to obtain a more precise estimate of dollar
error would require a considerably larger sample, but that doing so would
be difficult and costly.

HUD also stated in its Performance and Accountability Report for Fiscal
Year 2004 that gross improper rent subsidies from unreported income
decreased by 80 percent from fiscal year 2000 to 2003. HUD recognized in
the report that the apparently significant reduction was partly due to
improvements in its methodology. However, as discussed previously, any
comparison between the two estimates is not valid because of the
limitations of the fiscal year 2003 estimate and the significant
differences in the methodologies used for the two years.

 Chapter 2 HUD Has Identified Sources of Errors but Lacks Complete and Reliable
                Estimates of Improper Subsidies for Every Source

HUD's Methodology Does Not Account for Possible Fraud but Addressing This
Limitation Would Be Difficult

Neither of HUD's fiscal year 2000 and 2003 estimates of improper rent
subsidies from unreported tenant income accounts for the different types
of problems that may exist with unreported tenant income, but overcoming
this limitation would be difficult. According to HUD, because the study's
scope was limited to identifying sources of income that tenants did not
report, the study did not evaluate differences in the amount of income
reported by a tenant's employer (and entered in the quality control study
database) and the amount reported in the new hires database. As a result,
HUD could not account for those tenants who may have colluded with their
employers to underreport their income to program administrators. Some
program administrators we interviewed stated that they believe such
collusion may be a problem, but no systematic data are available to
confirm how widespread it might be. In addition, HUD's methodology does
not account for cash income that tenants received but failed to report to
program administrators. Some program administrators we met with said
unreported cash income could be widespread but that data are not available
to confirm the extent of the problem. Although collusion and unreported
cash income are potentially significant problems, it is not likely that
there is any satisfactory way of quantifying their extent. Furthermore,
HUD officials do not believe that there is an effective way of accounting
for these problems in its methodology.

HUD's Estimate of Improper Subsidies Due to Billing Errors Is Incomplete

HUD did not produce complete and reliable estimates of the amount of
billing errors in fiscal years 2000 and 2003 for the voucher, public
housing, or project-based Section 8 programs. HUD attempted to estimate
fiscal year 2000 billing errors for the voucher program and initially
found about $1.5 billion in improper rent subsidies. However, after
reviewing the results, HUD managers questioned both the study's validity
and whether staff involved in the study had sufficient knowledge of
program policies and accounting practices that pertain to the billing
process. As a result, HUD sent program experts to conduct additional
fieldwork to confirm the estimate. The experts reexamined approximately
$1.2 billion of the total $1.5 billion in estimated billing errors, found
that the estimate was unsupportable, and reduced it by over 80 percent.
Given the questionable and incomplete nature of the original billing error
study for vouchers, HUD determined that the results were inconclusive and
unacceptable as a baseline error estimate. For the public housing program,
HUD did not attempt to estimate billing errors. HUD has begun to develop
and implement a methodology to establish a statistically valid baseline of
billing

 Chapter 2 HUD Has Identified Sources of Errors but Lacks Complete and Reliable
                Estimates of Improper Subsidies for Every Source

Agency Comments and Our Evaluation

errors for fiscal year 2003 for vouchers and public housing. According to
HUD, this effort will be completed by September 2005.

For project-based Section 8, HUD estimated that approximately $100 million
in gross improper rent subsidies were paid as a result of erroneous
amounts billed to HUD and disbursed to private property owners in fiscal
year 2003. This estimate was based on a small sample of 150 properties,
and the concentration of errors in a small number of properties resulted
in a large margin of error. However, according to HUD, the estimated
amount of improper payments due to billing errors is relatively modest
even at the high end of the error range. In its Performance and
Accountability Report for Fiscal Year 2004, HUD acknowledged that it would
need a sample six times larger to obtain normally accepted levels of
estimation accuracy.

In addition to providing technical comments that we incorporated where
appropriate, HUD stated that our draft report did not fully present the
impact of HUD's efforts under RHIIP. For example, HUD stated that the
draft report did not recognize the department's outreach, guidance, and
training efforts as contributing factors to the reduction in estimated
improper payments. The draft report discussed HUD's efforts under RHIIP,
including guidance, training, and various outreach activities. The draft
report also reflected the comments of HUD officials that program
administrators' anticipation of increased oversight and monitoring by HUD
probably led to voluntary improvements in their performance. We added
language to the final report to incorporate HUD's view that these efforts
contributed to the reduction. While we believe that HUD's view is
reasonable, the specific extent to which these efforts contributed to the
reduction in estimated improper payments is not known.

HUD disagreed with the draft report's finding that the department has
complete and reliable estimates only for one source of error. In
particular, HUD described as "misleading" our statement that its fiscal
year 2003 estimates of improper rent subsidies attributable to unreported
tenant income and billing errors were unreliable because they were based
on samples too small to produce accurate results, and questioned the need
to measure these errors more precisely. HUD also said that the estimated
"incidence of cases" where a tenant household did not report at least one
source of income was 1.2 percent and that there was a 95 percent
likelihood that the true incidence of such cases was between 0.1 and 2
percent. We do not believe that our draft report-which focused on the
estimated dollar amount of improper payments due to unreported income

Chapter 2 HUD Has Identified Sources of Errors but Lacks Complete and
Reliable Estimates of Improper Subsidies for Every Source

rather than the estimated number of households with unreported income- was
misleading. As the report stated, the margins of error for HUD's estimates
of the dollar amount of improper payments were many times larger than the
estimates themselves. Furthermore, HUD itself acknowledged in its comment
letter that a much larger sample would be necessary to make a more precise
dollar estimate. Accordingly, we made no changes to this finding. The
draft report did not intend to criticize HUD's sampling methodology or
suggest that HUD attempt to make more precise estimates, which, as HUD
indicated, could be difficult and costly. In addition, the report
recognized that the problems with the reliability of the estimates were
due partly to the small number of households with unreported income in
HUD's samples. We revised the report language where appropriate to further
clarify this point.

Chapter 3

HUD Is Addressing Improper Payments for Public Housing and Vouchers, but
Implementation Problems Hampered Efforts

The Department of Housing and Urban Development (HUD) has made several
program-level efforts under the Rental Housing Integrity Improvement
Project (RHIIP) initiative to address improper rent subsidies for its
public housing and voucher programs. However, several factors hampered
HUD's implementation of these efforts. First, HUD instituted on-site
Rental Integrity Monitoring (RIM) reviews to assess public housing
agencies' (PHA) compliance with HUD's policies for determining rent
subsidies, but these reviews, which are not a regular part of HUD's PHA
oversight activities, were poorly implemented due to, among other things,
a lack of clear policies and procedures. Second, HUD began implementing a
new Web-based tenant income verification system, which is expected to
significantly reduce tenant underreporting of income despite having some
limitations. Finally, the training and guidance HUD provided to PHAs on
its policies for determining rent subsidies were not consistently adequate
or timely.

As shown in table 1, each of these efforts attempts to address sources of
errors discussed in chapter 2 (i.e., program administrator, unreported
tenant income, and billing error) that contribute to improper rent
subsidies in the voucher and public housing programs. However, none of
these efforts directly addresses billing errors. As noted previously, HUD
does not have complete and reliable information on the extent to which
billing errors are a problem for these two programs.

Table 1: Summary of HUD's Efforts to Address Sources of Errors for the
Voucher and Public Housing Programs

                                                            Sources of errors
                                        Program Unreported tenant    
HUD effort                     administrator               income  Billing 
Rent Integrity                             X                    X 
Monitoring                                                        
Income verification                        X                    X 
Training                                   X                    X 
Revised and updated                        X                    X 
program guidance                                                  

                                  Source: GAO.

 Chapter 3 HUD Is Addressing Improper Payments for Public Housing and Vouchers,
                  but Implementation Problems Hampered Efforts

HUD Supplemented Monitoring of PHAs with On-site Reviews but Had Problems
Implementing Them

According to HUD officials, RIM reviews are the first comprehensive
reviews of PHAs' tenant information files in more than 20 years. However,
inadequate staff resources and competing work demands kept some HUD field
offices from issuing reports in a timely manner or completing all of their
other PHA oversight responsibilities. These and other factors have
prevented HUD from determining the impact of its RIM review effort.
Recognizing the importance of regular monitoring of PHAs, HUD is
considering implementing some type of on-site monitoring of PHAs' subsidy
determinations on a permanent basis.

HUD Implemented RIM Reviews Under RHIIP to Address Monitoring Weaknesses

To address weaknesses in monitoring and help reduce PHA errors in rent
subsidy calculations, in June 2002 HUD field office staff began conducting
RIM reviews as part of the RHIIP initiative. RIM reviews are on-site
evaluations of PHA procedures for collecting and verifying income
information from tenants and for calculating subsidies. HUD's Rental
Integrity Monitoring Guide (RIM Guide)-the department's manual for
conducting RIM reviews-instructs field office staff to (1) review a sample
of tenant files and recalculate the tenant's rent subsidy, based on
information in the tenant file, to identify any subsidy miscalculations
made by the PHA and (2) assess the PHA's written policies and procedures
to determine the underlying causes of these miscalculations. According to
the RIM Guide, the field offices are required to report their overall
findings- for example, violations of HUD policies, such as misapplied
deductions and lack of third-party verification of tenant income-in
writing to PHAs, along with a list of specific subsidy calculation errors
they identified. The field offices must also track PHAs' progress in
addressing findings and correcting errors and provide technical assistance
to PHAs, as needed. If a PHA fails to implement corrective actions or
rectify errors found during a RIM review, HUD can sanction the PHA by
withholding the voucher administrative fee or the public housing operating
subsidy.1 HUD requires that the written report be sent to the PHA within
30 to 45 days of

1Notice PIH 2003-34, Rental Integrity Monitoring Disallowed Costs and
Sanctions Under the Rental Housing Integrity Improvement Project
Initiative, Dec. 19, 2003.

Page 39 GAO-05-224 Improper Rent Subsidies Chapter 3 HUD Is Addressing
Improper Payments for Public Housing and Vouchers, but Implementation
Problems Hampered Efforts

the end of the review. HUD field office staff completed 722 RIM reviews-
the first of two rounds of reviews-between June 2002 and September 2003
(fig. 6).2

In April 2003, HUD began conducting a second round of RIM reviews at
selected PHAs to confirm whether (1) the calculation errors identified
during the first round of RIM reviews had been corrected, (2) those PHAs
that were required to implement corrective action plans to address
findings from previous RIM reviews had done so, and (3) the implementation
of corrective action plans led to a reduction in subsidy calculation
errors. From April 2003 through October 2004, HUD field offices conducted
second-round RIM reviews at 363 PHAs (fig. 6).3

            Figure 6: Timing of First- and Second-Round RIM Reviews

Source: GAO.

According to HUD and officials at several PHAs we met with, HUD did not
routinely oversee subsidy determinations for public housing and voucher
programs at PHAs before the RIM reviews began in 2002. According to HUD,
prior to 1980 the department reviewed, among other things, PHAs'
management of their properties and their compliance with HUD policies and
procedures. These reviews included an assessment of PHAs' subsidy

2HUD conducted the first round of RIM reviews in two phases. Between June
2002 and March 2003, HUD staff completed 376 RIM reviews (phase 1 of the
first round). Between March and September 2003, HUD staff selected another
490 PHAs for review (144 from phase 1 and 346 additional PHAs-together,
phase 2 of the first round).

3Only those PHAs that were part of phase 2 of the first round of RIM
reviews received second-round RIM reviews. According to HUD, some of these
PHAs received two second-round RIM reviews-one for the voucher program and
one for the public housing program. Other PHAs-either those with only one
program or those with two programs, but only one that required a
second-round RIM review-received one second-round RIM review. As a result,
the number of PHAs that received second-round RIM reviews is smaller than
the total number of second-round reviews.

Chapter 3 HUD Is Addressing Improper Payments for Public Housing and
Vouchers, but Implementation Problems Hampered Efforts

determinations but not at the same level of detail as RIM reviews.
Starting in the early 1980s and continuing through the 1990s, HUD did
little to oversee the subsidy determination process at PHAs and instead
focused its resources primarily on assessing the PHAs' physical and
financial condition.

Starting in 1998, HUD increased its oversight of the voucher and public
housing programs by creating two management and performance assessment
systems. The Public Housing Assessment System (PHAS)4 evaluates four
aspects of PHAs' operations-physical condition, financial condition,
management operations, and resident satisfaction-but does not include an
indicator for subsidy determinations.5 In contrast, the Section 8
Management Assessment Program (SEMAP) includes an indicator that requires
PHAs that administer voucher programs to self-certify to HUD annually that
they have correctly determined each household's adjusted annual income-the
basis for calculating rent subsidies. However, according to HUD, the
limited scope of the reviews (SEMAP confirmatory reviews) field offices
perform does not adequately ensure that PHAs' self-certifications are
accurate. In most cases, the sample used to confirm a PHA's
self-certification with SEMAP requirements is smaller than the sample
reviewed as part of a RIM review. In addition, while PHAs selected

4PHAS replaced the Public Housing Management Assessment Program (PHMAP) in
1998. Implemented in 1992, PHMAP was designed to evaluate PHAs' management
performance. Under PHMAP, PHAs were given scores of high, standard, or
troubled based on self-certified information submitted by PHAs to HUD.

5Under PHAS, HUD may sanction PHAs for poor performance and noncooperation
with the department in addressing problems. For example, HUD may place
restrictions and conditions on PHA expenditures or suspend or remove PHA
officials. See GAO, Public Housing: New Assessment System Holds Potential
for Evaluating Performance, GAO-02-282 (Washington, D.C: Mar. 15, 2002).

 Chapter 3 HUD Is Addressing Improper Payments for Public Housing and Vouchers,
                  but Implementation Problems Hampered Efforts

Resource, Policy, and Compliance Problems at Field Offices Hampered RIM
Reviews

Some Field Offices Had Difficulty Conducting RIM Reviews Because of Staff
Limitations

for SEMAP confirmatory reviews are generally limited to those that are
moving into or out of "troubled" status, RIM reviews cover a broader range
of PHAs.6

Inadequate resources and noncompliance with review policies and procedures
affected field offices' efforts to implement RIM reviews. We examined 31
RIM review reports for 13 of the largest PHAs and HUD's quality assurance
reviews-evaluations of the field offices' RIM reviews- of eight field
offices. Our examination showed that limited resources and lack of clear
and timely guidance from HUD headquarters contributed to inconsistencies
in the way field offices interpreted the department's policies and
conducted RIM reviews.

Officials from most of the HUD field offices we met with said that they
did not have enough staff to conduct all of their first-round RIM reviews
within the 5- to 7- month period established by HUD and still fulfill
their other oversight responsibilities. Also, several HUD quality
assurance reports showed that field offices had limited staff to perform
the reviews. As a result of these resource constraints, some field offices
had to use staff with little or no experience in monitoring PHAs to
perform RIM reviews, issue their RIM review reports late, and postpone
other monitoring activities such as inspections of troubled properties.

6Each year, HUD assigns each PHA a rating for each of the individual SEMAP
indicators and an overall performance rating of high, standard, or
troubled. If a PHA is assigned an overall rating of troubled, HUD will
conduct an on-site review at that PHA to assess the magnitude and
seriousness of the problem. Troubled PHAs are also required to implement
corrective action plans and receive additional HUD monitoring to ensure
improvement in program management. Under Notice 2003-34, HUD can reduce a
PHA's SEMAP score if a RIM review does not support the PHA's
self-certification that it has correctly determined adjusted annual income
for each household. If the reduced score places the PHA in troubled
status, HUD may also impose additional sanctions. PHAS uses a similar
rating system in which HUD assigns PHAs individual scores for each of the
components and an overall composite rating; however, because PHAS does not
assess PHAs' subsidy determinations, HUD cannot reduce PHAS scores under
Notice 2003-34.

 Chapter 3 HUD Is Addressing Improper Payments for Public Housing and Vouchers,
                  but Implementation Problems Hampered Efforts

The number of staff assigned to RIM reviews and the number of reviews per
staff member varied among the seven field offices we contacted.7 For
example, we found that the number of first-round RIM reviews per staff
member ranged from 0.8 in New York City to 3.5 in San Francisco (table 2).
The average figure for all seven field offices was two RIM reviews per
staff person. Notwithstanding other factors-such as the size of the PHA
reviewed-that might have affected the ability of field offices to meet RIM
review timing requirements, we found that those field offices with a low
ratio of staff to reviews were likely to issue their reports after the 30-
to 45day deadline.

       Table 2: Ratio of Staff to RIM Reviews, Selected HUD Field Offices

                    Number of HUD field office Number of        Number of RIM 
                                               first-round RIM    reviews per 
HUD field office       staff conducting RIM          reviews  staff member 
                                       reviews                  
San Francisco                            11               39           3.5 
Baltimore                                9a               27             3 
Los Angeles                               9               24           2.7 
Boston                                   30               44           1.5 
Miami                                    12               17           1.4 
Chicago                                  16               17           1.1 
New York                                 18               14           0.8 
Average                                  15               26           2.0 

Source: HUD.

aBaltimore field office officials told us that they generally used four
staff to conduct RIM reviews but that for some PHAs they used additional
staff. As a result, the number of RIM reviews per staff member may be
understated for Baltimore.

Recognizing that some field offices were having difficulty completing
their RIM reviews within the 5- to 7-month time frame, HUD alleviated the
burden at some of the field offices by assigning contractors or staff from
other field offices to complete or assist with second-round reviews. For
example, according to HUD, contractors completed 60 percent of the
second-round RIM reviews assigned to the San Francisco field office. In
addition, HUD relieved field offices of certain other oversight
responsibilities to give them time to complete the RIM reviews within the
required time frame. For example, HUD reduced the number of SEMAP

7HUD does not have criteria for the number of staff required to conduct a
RIM review.

 Chapter 3 HUD Is Addressing Improper Payments for Public Housing and Vouchers,
                  but Implementation Problems Hampered Efforts

confirmatory reviews field offices had to complete and allowed them to
combine RIM and SEMAP reviews at larger PHAs.

HUD Did Not Always Provide or HUD did not provide clear, timely policies
for RIM reviews. In some cases, Clarify Policies in a Timely the lack of
clear and timely policies resulted in inconsistencies in the way Manner
field offices interpreted the department's policies and conducted RIM

reviews. The following are some examples of these inconsistencies:

     o HUD did not clarify whether its policy on the use of outdated tenant
       income information applied to data obtained through HUD's income
       verification system.8 The RIM Guide states that PHAs should not use
       documentation that is more than 90 to 120 days old to verify
       tenant-reported incomes. HUD policy also requires that PHAs use data
       from HUD's income verification system if they have access to it.
       However, in conducting RIM reviews, some HUD field offices cited PHAs
       for not using data from this system, even though the PHAs had
       determined that the data were more than 120 days old.
     o HUD changed its definition of a "systemic finding" while the RIM
       reviews were under way. Although HUD had initially defined a systemic
       finding as an error (such as a misapplied deduction) that represented
       30 percent or more of the total errors identified at one PHA, the
       department later redefined the term to mean violations of policy that
       were made "consistently," leaving the interpretation of "consistently"
       up to the field offices. Based on the RIM review reports we examined,
       we found that field offices had different interpretations. For
       example, one field office interpreted "consistent" as errors found in
       15 percent or more of the files, while another field office
       interpreted it as errors found in 30 percent or more of the files.
     o As of December 2004, HUD had not developed a policy on the extent to
       which PHAs should correct the calculation errors found in their tenant
       files. As a result, the field offices we spoke with had varying
       requirements, with resulting variations in the amounts of time and

8HUD's income verification system is a Web-based application that allows
PHAs to compare Social Security income information reported by tenants
with information reported by the Social Security Administration. This
system is currently available to all PHAs. The income verification system
will be expanded to allow PHAs to compare earned income information
reported by tenants with information that employers report to government
agencies. HUD is in the process of expanding the income verification
system, and it is currently available to PHAs in a limited number of
states. Income verification is discussed later in this chapter.

 Chapter 3 HUD Is Addressing Improper Payments for Public Housing and Vouchers,
                  but Implementation Problems Hampered Efforts

Field Offices Did Not Always Follow Policies and Procedures for Conducting
RIM Reviews and Communicating Findings

resources PHAs expended to address the errors. For example, according to
the PHAs we spoke with, some field offices required that PHAs review and
correct all of their tenant files for errors-in one case 17,000
files-while others required PHAs to correct only the files that HUD
examined during the RIM reviews.

o  HUD did not issue a policy on how to address PHAs' disagreements with
RIM review findings until May 2004, over 8 months after completing the
first round of reviews and 13 months after the field offices began
conducting the second round of reviews. Prior to the release of this
policy, the field offices had each handled PHAs' disagreements
differently.

Our review of 31 RIM review reports completed by seven of HUD's field
offices showed that the field offices did not consistently follow policies
and procedures when conducting RIM reviews, analyzing the results of those
reviews, and communicating the results of the reviews to PHAs.
Specifically, we found that these field offices, contrary to HUD guidance,
did not consistently provide appropriate support for each observation and
finding-for example, by describing the problem, the reason for it, and its
impact. Similarly, HUD's quality assurance reviews of field offices' RIM
reviews revealed that several offices either had not supported their
report findings or had failed to provide written reports to the PHAs.

The RIM review reports we reviewed also did not demonstrate that the field
offices we visited had a clear understanding of the difference between
observations and findings. HUD had defined observations as deficiencies in
performance that were not based on a regulatory or statutory requirement
but that should be brought to the attention of the PHA. HUD defined
findings as conditions that were not in compliance with handbook,
regulatory, or statutory requirements. Fifteen of the 31 RIM review
reports we reviewed mischaracterized one or more "findings" as
"observations" or vice versa. Properly classifying findings and
observations is important because HUD policy requires PHAs to implement
comprehensive corrective actions for findings but not for observations.

Finally, HUD's RIM Guide stipulated that the field offices must provide a
written report to the PHA no more than 30 days after the RIM review ended,
but 18 of the 31 RIM review reports we reviewed were not released

 Chapter 3 HUD Is Addressing Improper Payments for Public Housing and Vouchers,
                  but Implementation Problems Hampered Efforts

HUD Could Not Analyze RIM Data Because It Was Incomplete and Inconsistent

within the 30-day time frame.9 One PHA told us that it did not receive a
report until 5 months after the completion of the RIM review and then only
after PHA officials called HUD to request it.

Incomplete and inconsistent data kept HUD from analyzing the results of
RIM reviews to assess improvements in PHAs' calculations of tenant
subsidies and provide targeted oversight and technical assistance to PHAs
to help them address specific errors. When the RIM reviews started in
2002, the department designed a database to collect information on the
results of the RIM reviews, including the total amount of subsidy
overpayments and underpayments, as well as the efforts PHAs had made to
improve policies and procedures. According to HUD guidance, field offices
must submit a report on subsidy calculation errors and systemic findings
for each PHA to HUD headquarters within 30 days of receiving the PHA's
response to the RIM review report. However, as of November 2004, HUD had
not entered data in many of the fields in the database. HUD officials
attributed this problem to field offices that did not submit the data in a
timely manner and to a lack of personnel to manage data collection and
entry tasks.

Even if the database were complete, HUD would not be able to perform a
meaningful analysis of the RIM review data for most PHAs because of the
changes it made to the criteria for selecting PHAs and tenant files.
Because of these changes, HUD does not have comparable first- and
second-round RIM review data for about 70 percent of the PHAs that it
reviewed. Figure 7 shows the specific reasons why the data for PHAs were
not comparable for the two rounds.

9In a later memorandum, dated April 28, 2003, HUD instructed field offices
to provide written reports to PHAs no more than 45 days after the RIM
review ended, conflicting with the requirement in the RIM Guide. If we use
the 45-day time frame, 13 of the 31 RIM reports we reviewed (about 42
percent) were issued late.

Page 46 GAO-05-224 Improper Rent Subsidies

 Chapter 3 HUD Is Addressing Improper Payments for Public Housing and Vouchers,
                  but Implementation Problems Hampered Efforts

HUD Has Not Made RIM Reviews Permanent

Figure 7: Percentage of PHAs without Comparable Data for First- and
Second-Round RIM Reviews

Change in PHA selection criteria resulted in 359 PHAs reviewed in the
first round but not included in the second round

Due to a policy change, HUD used different tenant file selection criteria
for first- and second-round RIM reviews at 144 PHAs

219 PHAs had comparable data for both rounds

Percentage of PHAs with comparable data between review rounds Percentage
of PHAs without comparable data between review rounds

                                  Source: GAO.

HUD is considering conducting additional rounds of RIM reviews sometime in
2005 but has not made any decisions on how it will determine which PHAs
should be reviewed and how often these reviews should be conducted.
Currently, RIM reviews are not a regular part of HUD's PHA oversight
activities. HUD had initially intended to review each PHA one or two times
to identify weaknesses in their policies and procedures for making subsidy
determinations. According to HUD officials, they had not planned to
implement routine monitoring of PHAs' subsidy determination processes.
However, HUD officials said that, based on the results of the RIM reviews,
they recognize that routine monitoring of PHAs may be necessary to
mitigate the risk of improper rent subsidies in the future. As a result,
the department is now considering making permanent some type of on-site
monitoring of PHAs' subsidy determinations. For example, HUD officials
said that they are considering incorporating RIM reviews into the existing
performance measurement systems or conducting reviews at high-risk PHAs
every 2 or 3 years. However, according to these officials, budget and
staff resources will ultimately determine the extent to which the
department is able to monitor PHAs in the future.

 Chapter 3 HUD Is Addressing Improper Payments for Public Housing and Vouchers,
                  but Implementation Problems Hampered Efforts

HUD's New System for Verifying Tenants' Incomes Has Limitations

To address tenant underreporting of income, HUD has implemented a new
Internet-based income verification system that allows PHAs to compare
income information they receive from tenants with income information
employers report to government agencies. According to HUD officials, the
system is intended not only to help PHAs detect unreported incomes but
also to provide them with a more convenient and accurate way to verify
tenant-reported information. HUD estimates that the system will yield
savings of approximately $6 billion over a 10-year period for all of its
rental assistance programs. Currently, the data in the system, which HUD
obtained through agreements with state wage and income collection
agencies, are available to 2,366 PHAs in 22 states. HUD continues to work
to provide access for the PHAs in the remaining 28 states. To increase the
effectiveness and efficiency of its income verification effort, HUD
intends to replace the data from the individual state agencies with
similar data from a single source, the National Directory of New Hires-a
database containing quarterly federal and state wage data, quarterly
unemployment data, and monthly new hire data reported by employers to
state agencies and compiled by the Department of Health and Human
Services. Congress passed legislation in January 2004 that grants HUD the
authority to request and obtain data from this directory.10 In addition,
HUD officials told us that Social Security income information, which PHAs
currently access through an existing system, will eventually be accessible
through this new system.

According to HUD, regardless of the data source used, the income
verification system does not capture unreported cash income and certain
types of wages that may not be required to be reported to state agencies.
In addition, income from unauthorized tenants (i.e., tenants who are not
on the lease but who live in the apartment and help pay the rent) is not
captured. However, some PHAs have developed ways to capture these types of
income and recover improper subsidy payments. For example, several PHAs we
spoke with have fraud detection units, and several have partnered with
state and local agencies, including departments of labor and human
services, to obtain welfare and other wage information.

Although officials of most of the 14 PHAs we contacted said that they
welcomed new tools such as the income verification system that would help
them verify tenant incomes and more accurately determine tenant subsidies,
several also expressed concerns that the wage and income data

10Consolidated Appropriations Act, 2004, Pub. L. No. 108-199, Jan. 23,
2004.

 Chapter 3 HUD Is Addressing Improper Payments for Public Housing and Vouchers,
                  but Implementation Problems Hampered Efforts

HUD's Training and Guidance for PHAs Was Not Always Adequate or Timely

were too old to verify tenant income. HUD policy states that data used to
verify income must be no more than 120 days old (or about 4 months) on the
date of the tenant's certification or recertification of eligibility.11
HUD estimates that the income verification data are approximately 3 months
old. However, due to large caseloads-sometimes as many as 750 tenants per
caseworker-the PHAs generally begin collecting tenant income information 3
to 4 months prior to conducting an annual meeting to recertify the
tenant's eligibility for housing assistance and recalculate the rent
subsidy amount. As a result, verification data can be up to 6 months old
on the date of recertification.12 HUD officials told us that they are
aware of this problem and are working with the Department of Health and
Human Services to improve the timeliness of the data in the National
Directory of New Hires.

HUD provided training and guidance to PHAs on topics such as how to
calculate subsidies, improve quality control procedures, and comply with
third-party income verification requirements, but these efforts were not
always adequate or timely. For example, although HUD sponsored training
for PHAs in January and February of 2004 in order to prepare PHAs for RIM
reviews, the training took place after all of the first-round RIM reviews
and 54 (15 percent) of the second-round RIM reviews had been completed
(fig. 8). This training addressed program basics, including how to
interview prospective tenants, verify tenant income information, and
calculate rents. It also provided guidance to PHAs on developing policies
and procedures that would prevent future subsidy calculation errors.
According to some PHAs, had the training been held prior to the RIM
reviews, they would have been better able to understand the basis for the
RIM review findings and the corrective actions needed to address them. In
addition, all of the 14 PHAs we spoke with said that they had sent a
limited number of staff to the training because, for example, HUD had held
only two training sessions- one in California and one in Florida. Some
PHAs said that they did not have sufficient travel funds to send their
staff to these locations.

11Program administrators must certify incomes and eligibility for
assistance when households first apply for assistance and at least
annually thereafter.

12This problem affects recertifications, not initial certifications,
because information in HUD's income verification system is limited to
tenants who are already receiving housing assistance.

Page 49 GAO-05-224 Improper Rent Subsidies

 Chapter 3 HUD Is Addressing Improper Payments for Public Housing and Vouchers,
                  but Implementation Problems Hampered Efforts

                  Figure 8: Timing of Training and RIM Reviews

                                     Sept.e

                                      pril

                                    Jan.Feb.

                                     Oct.n

                                       Ju

                                       A

Source: GAO.

In addition to training, HUD provided technical assistance through a
contractor to PHAs that were deemed high risk on the basis of their
performance in the first round of RIM reviews. According to a HUD
official, 10 PHAs received technical assistance from the contractor
between October 2002 and April 2004. The technical assistance focused on
areas such as organizing tenant files, verifying tenant incomes, and
calculating rent subsidies.

Finally, HUD updated or developed guidance for PHAs on how to correctly
calculate rent subsidies and reduce errors. However, some of this guidance
was released late in the RIM review process, contradicted other guidance,
or did not provide enough information. For example, HUD did not revise its
public housing guidebook-PHAs' basic program reference-to reflect changes
in program regulations until June 2003, a year after the RIM reviews
began.13 In addition, HUD did not reconcile minor discrepancies between
the voucher and public housing guidebooks on acceptable forms of
third-party income verification until it issued detailed instructions on
HUD's income verification policies in March 2004.

Until recently, HUD did little oversight of PHA's subsidy determinations
for

Conclusion

the voucher and public housing programs. Although introducing SEMAP and
PHAS in the late 1990s allowed HUD to better oversee PHAs'

13The guidebook covers a range of issues, including admitting applicants
to programs, calculating subsidies, and terminating leases.

Page 50 GAO-05-224 Improper Rent Subsidies

 Chapter 3 HUD Is Addressing Improper Payments for Public Housing and Vouchers,
                  but Implementation Problems Hampered Efforts

performance, SEMAP provides only limited monitoring of PHAs' compliance
with HUD's policies for determining rent subsidies, and PHAS provides none
at all. HUD began implementing RIM reviews in 2002 but has not made the
reviews a permanent part of its oversight activities. In the absence of
regular monitoring, HUD cannot determine the extent to which individual
PHAs comply with its policies for determining rent subsidies. Furthermore,
although HUD conducted over 700 RIM reviews, it did not collect complete
or consistent information from these reviews. As a result, HUD cannot
assess PHAs' performance over time or identify those that have made errors
in determining subsidies and thus may require additional oversight and
technical assistance. Further, the lack of complete and consistent
information on the results of RIM reviews limits HUD's ability to identify
the factors that contribute the most to improper subsidy determinations
and target its corrective efforts.

To enhance HUD's ability to reduce improper subsidies in its public
housing and voucher programs, we recommend that the HUD Secretary take the
following two actions: (1) make regular monitoring of PHAs' compliance
with HUD's policies for determining rent subsidies a permanent part of
HUD's oversight activities and (2) collect complete and consistent
information from these monitoring efforts and use it to help focus
corrective actions where needed.

Recommendations for Executive Action

Agency Comments and Our Evaluation

HUD agreed with our recommendation that the department regularly monitor
PHAs' compliance with its policies for determining rent subsidies for the
public housing and voucher programs and collect information from these
monitoring efforts. HUD said that it recently updated its RHIIP plan to
address this recommendation. However, in addition to providing technical
comments that we incorporated where appropriate, HUD commented that the
draft report did not adequately recognize the increase in HUD's monitoring
resulting from the RIM reviews or acknowledge that the scale of its
monitoring efforts depends on the level of budgetary resources it
receives. Specifically, HUD commented that the steady downsizing of the
department's staffing over the past decade had caused HUD to rely on
remote monitoring systems, risk-based monitoring practices, and voluntary
compliance by third-party program administrators. Our draft report stated
that the RIM reviews represented a significant increase in HUD's
monitoring of PHAs compared with its efforts over the previous 20 years.
Further, the draft report recognized that budget

Chapter 3 HUD Is Addressing Improper Payments for Public Housing and
Vouchers, but Implementation Problems Hampered Efforts

resources will ultimately determine the extent to which the department is
able to monitor PHAs.

Chapter 4

HUD Is Improving Oversight of Rent Subsidy Determinations for Project-Based
Section 8, but Challenges Remain

The Department of Housing and Urban Development (HUD) has taken steps to
implement Rental Housing Integrity Improvement Project (RHIIP) efforts for
its project-based Section 8 programs but also faces several challenges.
First, HUD has improved its policies and guidance for its project-based
Section 8 programs and trained property owners, contract administrators,
and HUD field office staff on their administrative and oversight
responsibilities. However, a key part of the guidance calling for contract
administrators to collect information on improper rent subsidies at each
property was not widely followed partly because the data collection effort
was not mandatory and duplicated some contract administrators' existing
procedures. Second, to improve verification of tenant income, HUD has
gained access to a national database of employment and wage information.1
But HUD will not be able to use the database for its project-based Section
8 programs until at least fiscal year 2006 because of data security issues
surrounding the disclosure of tenant income information to private
property owners. Finally, to implement RHIIP's monitoring effort, HUD
plans to rely on performance-based contract administrators (PBCA) to
monitor property owners' compliance with HUD's subsidy determination
policies. HUD's requirements for PBCAs call for extensive monitoring of
the process for determining subsidies, but HUD may face challenges in
ensuring that PBCAs follow these requirements.

As shown in table 3, these efforts collectively attempt to address the
sources of errors discussed in chapter 2 (i.e., program administrator,
unreported tenant income, and billing errors) that contribute to improper
rent subsidies in the project-based Section 8 programs.

1The database will also be used for HUD's public housing and voucher
programs.

    Chapter 4 HUD Is Improving Oversight of Rent Subsidy Determinations for
                 Project-Based Section 8, but Challenges Remain

Table 3: Summary of HUD's Efforts to Address Sources of Errors for
Project-Based Section 8 Programs

                                                            Sources of errors
                                         Program           Unreported         
HUD effort                            administrator  tenant income Billing
Provide training and update program                X             X       X 
policies and guidance                                              
Income verification                                X             X 
Assignment of monitoring                           X             X       X 
responsibilities to PBCAs                                          

                                  Source: GAO.

As part of RHIIP, HUD improved its project-based Section 8 guidance and
training for property owners, contract administrators, and HUD field staff
in order to improve their understanding of HUD's policies for determining
rent subsidies. Although HUD's new monitoring guidance called for contract
administrators to collect information on improper rent subsidies at each
property, compliance with this guidance was limited.

HUD Has Improved Guidance and Training, but a Key Element of the Guidance
Was Not Widely Followed

HUD Provided New Guidance and Training on the Subsidy Determination
Process

HUD's handbook for project-based Section 8 sets forth the requirements and
procedures that property owners must follow in administering these
programs, including determining rent subsides.2 In May 2003, HUD revised
this handbook to reflect regulatory and policy changes that have occurred
since the last significant revision in 1995. The 2003 revision included
updated information on tenant screening, eviction, and citizenship
requirements, as well as a new method of estimating future medical
expenses. Officials at four PBCAs and five HUD field offices we contacted
generally agreed that the revised handbook represented a significant
improvement over the previous one. To supplement the handbook, HUD
established various resources, such as field office RHIIP coordinators,
and a Web-based "help desk" that allows HUD to respond to questions about
program policies submitted by HUD field office staff, contract

2HUD Handbook 4350.3 REV-1, "Occupancy Requirements of Subsidized
Multifamily Housing Programs," May 2003.

Page 54 GAO-05-224 Improper Rent Subsidies Chapter 4 HUD Is Improving
Oversight of Rent Subsidy Determinations for Project-Based Section 8, but
Challenges Remain

administrators, and property owners. HUD also provided additional
information on proper rent subsidy determinations and the RHIIP
initiative. For example, HUD issued "fact sheets" on the rent
determination process for property owners and tenants, which described
tenants' rights and responsibilities regarding income disclosure and
third-party verification of income. HUD also issued periodic newsletters
that included a description of the status of the initiative.

In August 2003, HUD issued a new monitoring guide to help contract
administrators improve their oversight of property owners' subsidy
determinations. HUD intended the guide to provide contract administrators
with a consistent approach for identifying and recording errors in subsidy
determinations during management and occupancy reviews. Management and
occupancy reviews are detailed assessments of a property's management,
physical and financial condition, and compliance with program policies and
procedures, including policies concerning the eligibility of tenants and
accuracy of subsidy determinations.3 However, the new guide was not
mandatory, and the contract administrators we contacted-including PBCAs
and HUD field offices-said that they used the guide to varying degrees.
HUD is currently revising its management and occupancy review policies,
which include detailed procedures for assessing rent subsidy
determinations.4 According to HUD, the revised policies, unlike the
monitoring guide, will be mandatory for contract administrators. The
revised policies are currently under departmental review, and the date of
their implementation is uncertain.

HUD accompanied these efforts with training for property owners, contract
administrators, and HUD field offices on the updated handbook and new
monitoring guide. HUD-sponsored training was primarily targeted to HUD
field office staff and contract administrators and, according to HUD,
nearly 2,000 individuals participated in 45 training sessions on HUD's
revised program handbook from June through December 2003. In addition,
nearly 700 HUD staff and contract administrator personnel attended a
satellite broadcast session on the revised program handbook and the new

3Prior to the guide's issuance, HUD's procedures for conducting management
and occupancy reviews were not sufficiently detailed to identify and
record information on improper rent subsidies, leading some PBCAs and
field offices to develop their own detailed procedures.

4HUD Handbook 4350.1 REV-1, "Multifamily Asset Management and Project
Servicing," January 1996.

Page 55 GAO-05-224 Improper Rent Subsidies

    Chapter 4 HUD Is Improving Oversight of Rent Subsidy Determinations for
                 Project-Based Section 8, but Challenges Remain

Guidance for Collecting Data Was Not Widely Followed

monitoring guide. Reaction to the HUD-sponsored training from the four
PBCAs and five HUD field offices we spoke with was generally positive.
Most of the PBCAs and HUD field offices indicated that HUD had done a
satisfactory job of using training to emphasize the importance of properly
determining rent subsidies.

In addition to HUD-sponsored training, private training organizations,
including professional training companies and housing industry groups,
offered courses on project-based Section 8 program policies. For example,
according to HUD, property owners, contract administrators, and HUD staff
attended sessions on the revised program handbook, which covers HUD's
policies for determining rent subsidies. HUD officials stated that
sessions on HUD's program policies occur regularly. On the basis of a
survey of major training organizations, the department estimated that
nearly 10,000 property owners and contract administrators attended such
sessions from June through December 2003.

To monitor property owners' compliance with HUD's policies, HUD planned to
collect information from contract administrators on the types and
frequency of errors property owners made in determining subsidies. In the
monitoring guide issued in August 2003, HUD recommended that contract
administrators record subsidy errors identified during management and
occupancy reviews and monthly voucher payment reviews in a uniform
"tracking log."5 However, for several reasons, the tracking log was not
widely used. First, because the log was part of HUD's recommended guidance
and, therefore, not mandatory, HUD could not require contract
administrators to use it. Second, according to some PBCA and HUD
officials, some contract administrators found the log duplicative because
they were already collecting much of the information, although not in a
uniform manner.6 Finally, some HUD and PBCA officials said that the
tracking log was problematic because errors caught during the voucher
review process were generally rectified before property owners were paid
and should not have been recorded on the log as subsidy errors.

5Contract administrators review monthly payment voucher requests from
property owners to verify, among other things, that the amount of the
payment for each tenant is correct and that the request does not include
payment for any units that are not eligible for Section 8 rental
assistance.

6PBCAs' contracts with HUD require that they collect this information but
do not specify how this information should be collected and in what form.

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    Chapter 4 HUD Is Improving Oversight of Rent Subsidy Determinations for
                 Project-Based Section 8, but Challenges Remain

HUD Plans to Implement a New Income Verification System but Must First
Address Data Security Concerns

As noted previously, HUD is in the process of revising mandatory
procedures for contract administrators to use in identifying and recording
subsidy errors during management and occupancy reviews. According to HUD,
the revised procedures will require contract administrators to collect
uniform information on subsidy errors, as the tracking log was intended to
do. Because these revised procedures apply only to management and
occupancy reviews, they will not cover information on subsidy
errors-including program administrator errors-found during monthly payment
voucher reviews, which PBCAs already track separately.

HUD plans to implement a Web-based income verification system for
project-based Section 8, a key effort under RHIIP, after it addresses data
security concerns. According to HUD, income verification systems are a
critical component of the department's efforts to reduce improper subsidy
payments because these systems provide property owners with information
necessary to independently check the accuracy of the incomes tenants
report and identify any income source not reported by the tenant. As
discussed in chapter 3, Congress granted HUD access to the National
Directory of New Hires (new hires) database to verify tenant incomes in
its rental assistance programs, including its project-based Section 8
programs, and required that HUD demonstrate to the Department of Health
and Human Services that all necessary steps had been taken to prevent the
inappropriate disclosure of information from the database before program
administrators are given access.

To alleviate concerns about releasing sensitive information to private
property owners, HUD will initially make the data available only to public
housing agencies (PHA) and confirm that the system is secure. If the
Department of Health and Human Services is satisfied with HUD's security
precautions, HUD plans to make the data from the new hires database
available to private owners of project-based Section 8 properties by
fiscal year 2006. Once the system is implemented, property owners will be
able to access earned income data from a secure Web site. In addition, HUD
officials told us that Social Security income information, which property
owners can currently access through an existing system, will eventually be
accessible through the new system.

    Chapter 4 HUD Is Improving Oversight of Rent Subsidy Determinations for
                 Project-Based Section 8, but Challenges Remain

HUD Will Rely on PBCAs to Address Its Monitoring Effort under RHIIP

HUD plans to rely on PBCAs to monitor property owners' compliance with
HUD's policies for determining rent subsidies. For the past several years,
HUD has been transferring contract administration responsibilities for
project-based Section 8 properties from HUD field offices to the PBCAs
but, due to resource constraints, has had difficulty monitoring the nearly
6,300 properties that are still the responsibility of field office staff.
Although HUD's requirements for PBCAs call for extensive monitoring of the
subsidy determination process, HUD may face challenges in ensuring that
PBCAs follow these requirements. Finally, HUD has continued to work with
contract administrators and property owners to improve the completeness of
tenant income information in a database used, among other things, to
monitor property owners' subsidy calculations.

HUD Plans to Continue Transferring Contract Administration
Responsibilities to PBCAs Because of Resource Constraints

In 2000, prior to the start of RHIIP, HUD began transferring the
administration of project-based Section 8 contracts from HUD field offices
to PBCAs. As of October 2004, HUD's project-based Section 8 program
consisted of about 21,900 properties, and HUD had transferred contracts
for about 11,800 of these properties to PBCAs. As of the same date,
according to HUD, field offices served as contract administrators for
about 6,300 properties, including 2,200 properties to be transferred to
PBCAs sometime in fiscal year 2005 and about 4,100 properties with
contracts that HUD will competitively source to a new contract
administrator by the end of fiscal year 2005.7 HUD also plans to transfer
about 3,800 additional properties to PBCAs that are currently the
responsibility of "traditional" (i.e., not performance-based) contractors
as these properties' contracts come up for renewal.

7Currently, HUD cannot transfer to PBCAs contracts for approximately 4,100
properties that fall under several programs: the Section 202 Supportive
Housing for the Elderly, Section 811 Supportive Housing for Persons With
Disabilities, Rent Supplement, and Rental Assistance Payment. According to
HUD, the department cannot transfer these contracts because program
legislation does not allow appropriated program funds to pay fees for
contract administration by third-party entities. HUD announced in April
2004 that it would competitively source the administration of these
contracts and determine the most cost-effective way of administering them.
Under Office of Management and Budget policy, federal employees (including
HUD field office staff) can compete with private sector employees to
provide contract administration services. According to HUD, after the
department determines the most cost-effective contract administrator, it
will seek new budget authority to pay for these services.

Chapter 4 HUD Is Improving Oversight of Rent Subsidy Determinations for
Project-Based Section 8, but Challenges Remain

HUD has transferred contract administration responsibilities to PBCAs
because its field offices lack the resources to adequately monitor
properties. HUD requires PBCAs to perform annual management and occupancy
reviews for all of their assigned properties and conduct monthly reviews
of all payment vouchers submitted by property owners. In contrast, HUD
field offices are not conducting the same level of monitoring for all of
their 6,300 properties. For example, HUD conducted management and
occupancy reviews for about 1,800, or approximately 30 percent, of these
6,300 properties in fiscal year 2004. According to HUD, the field offices
did not perform annual management and occupancy reviews for all of these
properties because of insufficient staff and funding. HUD policy also
requires review of monthly payment vouchers for their properties. However,
HUD's Office of Inspector General (OIG) reported in its audit of HUD's
fiscal years 2002 and 2003 financial statements that the field offices
were performing monthly voucher reviews for only about 2 percent of the
vouchers for their assigned properties.8

According to HUD, traditional contract administrators also have generally
not conducted management and occupancy reviews each year for all of their
properties or routinely reviewed monthly vouchers submitted by property
owners. HUD officials we contacted also said that although the department
required that the traditional contractors perform management and occupancy
reviews and voucher reviews, their contracts (unlike those with PBCAs) did
not specify how frequently.9 HUD officials stated that, similar to HUD
field offices, traditional contract administrators had concentrated their
monitoring efforts on troubled properties. In fiscal year 2004,
traditional contract administrators conducted management and occupancy
reviews for 900, or 24 percent, of their assigned properties. HUD does not
have data on the number of payment vouchers reviewed for properties with
traditional contract administrators.

8U.S. Department of Housing and Urban Development, Office of Inspector
General, Audit of the U.S. Department of Housing and Urban Development
Financial Statements for Fiscal Years 2003 and 2002, 2004-FO-0003
(Washington, D.C.: December 2003).

9HUD pays PBCAs an incentive fee if they perform above a minimum quality
level as determined by HUD or reduces their fee if they perform below it.
Unlike for PBCAs, HUD pays traditional contract administrators a fixed fee
for their services.

Page 59 GAO-05-224 Improper Rent Subsidies

    Chapter 4 HUD Is Improving Oversight of Rent Subsidy Determinations for
                 Project-Based Section 8, but Challenges Remain

HUD Will Rely on PBCAs to Monitor Process for Determining Subsidies

By transferring more of its project-based Section 8 properties to PBCAs,
HUD plans to increase oversight of these properties and meet RHIIP's goal
of reducing improper rent subsidy payments. According to HUD, the ongoing
PBCA initiative precluded the need for HUD to implement a monitoring
process for its project-based Section 8 programs similar to the Rental
Integrity Monitoring (RIM) reviews for the voucher and public housing
programs. HUD officials also said that, because of limited resources and
the large number of project-based Section 8 properties, the field offices
would not have been able to carry out a monitoring effort as extensive as
the RIM reviews. (About 22,000 property owners administer project-based
Section 8 programs, compared with about 3,300 PHAs that administer
vouchers and public housing.)

As noted previously, PBCAs are responsible for performing annual
management and occupancy reviews for all of their assigned properties and
monthly reviews of all payment vouchers. As part of these reviews, PBCAs
are required to determine whether the owners have properly calculated
subsidy determinations and independently verified tenant-reported
information. As of October 2004, about 11,800 properties were assigned to
PBCAs, and over 90 percent of these properties received a management and
occupancy review.10 In reviewing payment vouchers, PBCAs must ensure that
the tenant information in HUD's databases is consistent with the requested
payment amount. When errors are found, the PBCA must correct the voucher
by the amount of the error.

To ensure that the PBCAs meet HUD's performance standards, HUD has
developed a comprehensive oversight program. Specifically, HUD field
office staff are required to review status reports provided by the PBCAs,
conduct annual compliance reviews, and use the results of these reviews to
determine the compensation PBCAs should receive. Implementing these
oversight measures could pose challenges for HUD. For example, the OIG
reported in its fiscal year 2004 financial statement audit of HUD that two
of the four PBCAs it reviewed were not consistently verifying whether the
project owner had properly calculated subsidy amounts and independently

10In fiscal year 2004, 879 properties that were assigned to PBCAs did not
receive a management and occupancy review. According to HUD, these
properties were not reviewed primarily because they were assigned to PBCAs
in the last 6 months of the fiscal year, and PBCAs have 12 months to
review newly assigned properties.

Page 60 GAO-05-224 Improper Rent Subsidies

    Chapter 4 HUD Is Improving Oversight of Rent Subsidy Determinations for
                 Project-Based Section 8, but Challenges Remain

HUD Has Strengthened Monitoring Efforts by Ensuring That Program
Administrators Report Comprehensive Tenant Data to HUD

verified tenant-reported information.11 In addition, prior GAO work has
shown that HUD has often not provided adequate oversight of contractors, a
factor that in 2003 led us to designate acquisitions management as one of
HUD's major management challenges.12

According to HUD, ensuring the completeness of tenant data by enforcing
HUD's data reporting policy is a critical component of RHIIP that will
enable the department to reduce the amount of improper rent subsidies.
Contract administrators use HUD's Tenant Rental Assistance Certification
System (TRACS) to monitor property owners, including identifying
discrepancies between owners' payment voucher requests and the rent
subsidy information. To perform their monitoring function effectively,
contract administrators must ensure that property owners submit complete
and accurate data in TRACS, as required by HUD policy.

Since RHIIP began, HUD has improved the completeness of tenant data in
TRACS. Specifically, according to HUD, the percentage of units in TRACS
for which owners reported tenant income information (i.e., the reporting
rate) increased from 88 percent in December 2003 to about 95 percent in
October 2004. Properties with contracts administered by PBCAs had a higher
average reporting rate, as of October 2004-over 95 percent-than properties
administered by HUD field offices or traditional contract administrators.
This is because PBCAs perform monthly voucher reviews for all payments and
thus must ensure that the information in TRACS is complete. As of that
same date, HUD field offices and traditional contract administrators,
which conduct fewer payment voucher reviews, had average reporting rates
of 85 and 75 percent, respectively.

HUD has continued to work with contract administrators and property owners
to improve TRACS information by enforcing the data reporting policy. In
October 2004, HUD began notifying property owners that the department
would withhold subsidy payments if tenant information was not provided for
at least 85 percent of tenants. According to HUD, the department suspended
subsidy payments for 10 noncompliant property

11U.S. Department of Housing and Urban Development, Office of Inspector
General,

Additional Details to Supplement Our Report on the U.S. Department of
Housing and Urban Development's Fiscal Year 2004 Financial Statements,
2005-FO-0003 (Washington, D.C.: November 2004).

12GAO-03-103.

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    Chapter 4 HUD Is Improving Oversight of Rent Subsidy Determinations for
                 Project-Based Section 8, but Challenges Remain

Agency Comments and Our Evaluation

owners in November 2004 and expects to suspend payments for another 1,800
owners in December 2004.

HUD concurred with our finding that guidance for collecting data on the
types and frequency of errors property owners made in determining
subsidies was not widely followed and stated that it would revise its
contracts with PBCAs to address this issue. HUD disagreed with a
recommendation in our draft report that the department analyze data it has
collected on program administrator errors by differentiating among types
of contract administrators and use this information to determine whether
additional efforts to reduce this source of error are needed in the
project-based Section 8 programs. HUD's letter characterized our
recommendation as "expand[ing] the process" to provide for separate error
rates, noting that sample sizes would need to be tripled to permit
statistically valid comparisons, and questioning whether such an effort
would be cost-beneficial. Recognizing HUD's increasing use of PBCAs, our
recommendation concerned only data that HUD had already collected and was
not intended to expand the scope of future data collections. In light of
HUD's comments on the insufficiency of its existing data, we did not
include this recommendation in our final report.

Noting the relationship between its ability to monitor and the level of
resources it is provided, HUD stated that it "remains to be seen" whether
requested resources will be provided to achieve comparable monitoring
levels of program administrators for all of its project-based assistance
programs. We agree that budget resources will ultimately determine the
extent of HUD's monitoring. Further, prior GAO work has shown that HUD has
not always provided adequate oversight of program intermediaries, a
contributing factor to our designation of the department's rental
assistance programs as a high-risk area.13

13GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005).

Chapter 5

HUD is Considering Approaches for Simplifying Rent Subsidy Policies, but these
Approaches Need More Study

HUD Is in the Initial Stages of Considering Approaches for Simplification
of Rent Subsidy Policies and Has Not Conducted Formal Study of These
Approaches

As part of the Rental Housing Integrity Improvement Project (RHIIP), the
Department of Housing and Urban Development (HUD) is considering ways to
simplify its policies for determining rent subsidies. HUD has met with
program administrators and other interested groups to discuss
simplification approaches. However, HUD has not conducted a formal study
on the impact of these approaches on tenant rental payments and program
costs. According to HUD, a major reason for subsidy calculation errors is
the complexity of the existing policies. For example, program
administrators must determine tenants' eligibility for 44 different income
exclusions and deductions to determine their rent payments and subsidies.
One key concern is the impact that simplification could have on how much
tenants pay in rent. Specifically, some tenants could end up paying a
larger share of their income toward rent if the income deductions and
exclusions that currently provide additional rent relief to them are
eliminated, although others could pay less under certain approaches. In
addition, the transition to simplified policies could create confusion
among program administrators and tenants in the short-term.

As one of its efforts under RHIIP, and as mandated by The President's
Management Agenda for Fiscal Year 2002, HUD is considering various
approaches for statutory, regulatory, and administrative streamlining and
simplification of its policies for determining rent subsidies. According
to HUD, simplification is a key part of the department's long-term
strategy for reducing the risk of improper rent subsidies that result from
the complexity of HUD's current policies. As of December 2004, however,
HUD had not officially proposed any approach to simplification for all of
its rental assistance programs. HUD intends to formulate a proposal early
in calendar year 2005 after it meets with industry stakeholders. Because
most of HUD's policies for determining rent subsidies have a basis in
statute, major changes to these policies would likely require
congressional action.

In order to reform program administration and control rising subsidy
costs, HUD proposed legislative changes for the voucher program in its
fiscal year 2004 and 2005 budget proposals through the Housing Assistance
for Needy Families and the Flexible Voucher program, respectively. These
two initiatives called for simplification of the voucher program's
policies, including those for determining rent subsidies. Specifically,
the initiatives would have provided administering agencies with the
flexibility to determine their own rent policies. However, Congress did
not include either of these initiatives in HUD's appropriations acts.

 Chapter 5 HUD is Considering Approaches for Simplifying Rent Subsidy Policies,
                      but these Approaches Need More Study

HUD's Current Policies for Determining Rent Subsidies Are Complex

In October 2004, HUD met with various program administrators and industry
and tenant groups to discuss different approaches for simplifying HUD's
policies for determining rent subsidies and to gauge the extent to which
program stakeholders support simplification. According to HUD, most of the
participants agreed on the need for simplification and discussed how best
to meet this goal. HUD field office staff, program administrators, and
industry groups that we spoke with also generally agreed on the need for
simplification. Specifically, all of the HUD field office staff we
interviewed supported some form of simplification, and nearly all of the
14 program administrators we interviewed also supported simplification,
but many were concerned about the impact on existing tenants. The major
industry groups we met with were also supportive of simplification.

The October 2004 meeting concluded with HUD considering performing more
extensive analysis of the various approaches to simplifying its policies
for determining rent subsidies. However, HUD has not determined when it
will begin performing this analysis. Although prior to this meeting HUD
staff had conducted preliminary internal analyses of the impact of certain
simplification approaches on tenant rental payments and program costs, as
of December 2004, HUD has not conducted a formal study on the possible
impact of policy changes for consideration by policymakers.

A 2001 HUD study characterized HUD's policies for determining rent
subsidies as "detailed, complex, sometimes ambiguous, and subject to
relatively frequent legislative changes."1 HUD field offices, program
administrators, and industry groups we interviewed frequently cited the
complexity of these policies as a concern and identified it as a major
obstacle in reducing improper rent subsidies. For example, HUD's current
policies include 44 income exclusions and deductions that program
administrators must consider when determining rent subsidies and tenants'
rental payments. The purpose of some of these income exclusions and
deductions is to provide additional relief to certain tenants, such as
elderly and disabled households with large medical expenses, by reducing
the amount they contribute toward rent. Other income exclusions exist to
counteract potential work disincentives-for example, increasing income

1U.S. Department of Housing and Urban Development, Quality Control for
Rental Assistance Subsidies Determinations (Washington, D.C.: June 2001).

Page 64 GAO-05-224 Improper Rent Subsidies Chapter 5 HUD is Considering
Approaches for Simplifying Rent Subsidy Policies, but these Approaches
Need More Study

resulting in higher tenant rental payments-in housing assistance programs.

As an example, some HUD field office staff and program administrators we
spoke with cited the earned income disallowance as a complex income
exclusion. The earned income disallowance was initially established in
1990 by the Cranston-Gonzalez National Affordable Housing Act (Pub. L. No.
101-625) and was revised in 1998 by the Quality Housing and Work
Responsibility Act (Pub. L. No. 105-276). The disallowance policy provides
special treatment to families whose earned income increases as a result of

(1) employment of a family member who was previously unemployed for one or
more years or (2) participation of a family member in a family
self-sufficiency or other job training program.2 Families that qualify
under these provisions are not subject to increases in their rental
payments (that usually occur if their incomes grow for other reasons) for
a 12-month period known as the "full exclusion period." The rent may be
increased during the following 12-month period, called the "phase-in
period," but the increase may not be greater than 50 percent of the amount
of the full rent increase that would occur otherwise. After completion of
both the full exclusion and phase-in periods, tenant rent increases by the
full amount. However, low-income tenants often have jobs with little
security-that is, they move in and out of employment and training programs
and their income may vary considerably from job to job. To account for
this, HUD developed additional administrative guidelines. For instance,
during the full exclusion and phase-in periods, the months for which a
family can claim the disallowance do not need to be consecutive.
Consequently, a household member can become unemployed and stop claiming
the disallowance and then become reemployed in a later month and begin
claiming the disallowance again. However, keeping track of when tenants
are employed and the amount by which the income increased is difficult and
adds a significant burden on program administrators.

The process for determining rent subsidies is further complicated by the
difficulty some program administrator staff may have in understanding and
implementing HUD's program requirements. According to multiple field
office staff, program administrators, and industry groups we met with,

2Eligible families can also qualify for the disallowance if they are, or
were within the previous 6 months, assisted by the Temporary Assistance
for Needy Families program and their earned income increased. In addition,
unlike the public housing program, the voucher program restricts the
disallowance to families whose income increases due to the employment or
increased earnings of a household member with disabilities.

Page 65 GAO-05-224 Improper Rent Subsidies

 Chapter 5 HUD is Considering Approaches for Simplifying Rent Subsidy Policies,
                      but these Approaches Need More Study

Simplifying the Process for Determining Rent Subsidies Could Affect
Tenants and Pose Implementation Challenges

program administrator staff responsible for calculating rent subsidies are
often poorly paid, have large caseloads, and have limited education. These
factors can contribute to misapplication of program policies that result
in errors in subsidy calculations. In addition, these same groups
commented that these types of positions have high turnover, and as a
result it is difficult for program administrators to retain knowledgeable
and experienced staff.

As noted previously, HUD is considering various approaches for statutory,
regulatory, and administrative streamlining and simplification of its
subsidy determination policies. Regardless of the approach HUD ultimately
adopts, a major concern is the effect that policy simplification will have
on tenant rental payments. It is possible that tenants' rental payments
could decrease under certain simplification approaches. However, tenants
could also see rent increases if, all other things being equal, the income
deductions and exclusions that currently provide additional rent relief to
them are eliminated. In addition, simplification of HUD's policies for
determining rent subsidies could be difficult to implement and could
create confusion among program administrators and tenants in the
short-term.

HUD is Considering Three HUD is currently considering three basic
approaches to simplifying its subsidy determination policies: (1)
income-based rents, (2) tiered flat rents,

Basic Approaches to

Simplifying Policies and (3) mixed approaches. Descriptions of these three
approaches follow:

     o Under an income-based approach, the tenant rental payment is set at a
       certain percentage of the tenant's income. The rent subsidy covers the
       difference between the contract rent for the unit (or the operating
       cost for a public housing unit) and the amount that the tenant pays. A
       simplified income-based approach could involve a limited number of
       exclusions or deductions or none at all. For example, one approach
       could involve tenants paying 30 percent of their gross income in rent
       with qualifying tenants receiving standard deductions for special
       needs. A different approach HUD has considered would allow elderly,
       disabled, and working families to pay 27 percent of their gross income
       in rent while all others pay 30 percent. No other deductions or
       exclusions would be used in determining the subsidy amount under this
       approach.
     o Under a tiered flat rent system, tenant rents would be calculated for
       several income bands-for example, low, very low, and extremely low
       income-and tenants would not see their rents adjusted as their

 Chapter 5 HUD is Considering Approaches for Simplifying Rent Subsidy Policies,
                      but these Approaches Need More Study

Simplification of Policies May Significantly Affect Rents for Some Tenants
and May Be Difficult to Implement

incomes changed provided that their incomes remain within the same tier.3
This option is somewhat similar to that used at properties developed with
Low-Income Housing Tax Credit assistance. Under the tax credit program,
property owners reserve some of their units for tenants at or below
certain income limits-either 50 or 60 percent of the area's median gross
income. The owners must restrict tenant rents in these units to 30 percent
of the income limit, adjusted for the number of bedrooms.

o  Under a mixed approach, HUD would give program administrators various
rent structures to choose from, including income-based rents and tiered
flat rents. This approach would give program administrators the
flexibility to choose the method that best fits their community
demographics and other factors. Currently, HUD's Moving-to-Work
demonstration program allows participating public housing agencies (PHA)
to obtain exemptions from certain public housing and voucher program
rules, including those related to the calculation of rent subsidies, and
to design and test various approaches to providing and administering
housing assistance.4 As long as the PHA serves substantially the same
number of households that it served under the public housing and voucher
programs, the PHA is free to design its own rent structure for its
tenants. HUD plans to study PHAs' experiences under the Moving-to-Work
demonstration as a possible model for simplifying its policies.

Regardless of which simplification approach is ultimately adopted, a major
concern of program stakeholders is the effect that policy simplification
will have on tenant rent burdens. Although changes to policies could
result in some tenants paying less in rent, some tenants could end up
paying more in rent if, all other things being equal, the current system
of income exclusions and deductions that provides additional rent relief
were eliminated. To illustrate, we analyzed the potential effects of using
a simple

3Tenant rents, however, could change for other reasons, such as annual
adjustments for inflation.

4Authorized under the Omnibus Consolidated Rescissions and Appropriations
Act of 1996 (Pub. L. No. 104-134), the purpose of the Moving-to-Work
demonstration program is to: (1) reduce costs and achieve greater
cost-effectiveness in the public housing and voucher programs, (2) give
incentives to families with children to become economically
self-sufficient, and (3) increase housing choices for low income families.

Chapter 5 HUD is Considering Approaches for Simplifying Rent Subsidy
Policies, but these Approaches Need More Study

income-based approach in which tenant rents are set at 30 percent of gross
income.5 Based on our analysis of HUD's data for fiscal year 2003, we
found that tenants would see their rent go up by an average of $30 per
month ($360 annually), or 16 percent. About 10 percent of these households
would see their rents go up by at least $72 per month (or $864 annually).

Elderly and disabled households and large families who currently benefit
the most from HUD's exclusions and deductions would be hit the hardest by
the elimination of these income adjustments. To take these households into
account, we also estimated the average change in tenant rents using an
approach in which elderly, disabled, and working families would pay 27
percent of their gross income in rent, all others would pay 30 percent,
and no other deductions or exclusions would apply. Again using HUD's
tenant data from fiscal year 2003, our analysis showed that this option
would increase tenant rents, on average, by $16 per month ($192 annually),
or 12 percent. About half of current tenants would see modest increases of
less than $10 per month, and around one-quarter could see increases of at
least $28 per month. In addition, the rents for about 25 percent of the
tenants would remain unchanged or decrease under this approach. A more
detailed study by HUD would be necessary to determine the impact of the
other policy simplification approaches on tenants' rental payments as well
as on program costs.

Simplification of HUD's policies for determining rent subsidies may be
difficult to implement and will have a direct impact on how program
administrators conduct their work. Depending on the magnitude of program
changes, program administrators-over the approximately 22,000 property
owners and 3,000 PHAs-will have to retrain staff, update written
procedures and administrative plans, and make potentially costly
modifications to their software applications. Program administrators will
also have to perform tenant outreach to explain changes to existing and
new tenants. If HUD determines that these tenants would be protected from
any increases in rent that result from simplified policies, program
administrators would have to deal with the difficulties of treating
existing and new tenants under different sets of policies. Furthermore,
gradually phasing in rent increases for existing tenants would add
additional complexities to the administration of the programs and require
extensive

5We conducted this analysis to illustrate the potential implications of
specific simplification approaches, not to draw conclusions about
simplification of rent policies generally. Small changes in the
assumptions used in our analysis could yield significantly different
results.

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 Chapter 5 HUD is Considering Approaches for Simplifying Rent Subsidy Policies,
                      but these Approaches Need More Study

regulatory guidance from HUD. These changes would likely take time and
involve some trial-and-error before they are fully implemented. It is
possible, at least in the short-term, that transitioning to simplified
policies for determining rent subsidies would result in confusion among
program administrator staff and errors in calculating rent subsidies. This
problem is more likely if the changes made to program policies are
comprehensive, requiring extensive retraining of staff. Because HUD is in
its early stages of developing a policy simplification strategy and has
not conducted a formal study of these issues, it is not possible to
describe how HUD intends to address these difficulties.

Although part of HUD's long-term strategy to reduce the risk of improper
rent subsidy payments under RHIIP involves simplifying statutory and
regulatory policies for determining rent subsidies, the department has not
conducted a formal study of possible simplification approaches. According
to HUD and program administrators, existing policies are difficult to
implement and have made the process prone to error. Many of these policies
are intended to provide additional relief to tenants by reducing their
rents under certain circumstances. However, HUD must weigh the degree of
relief these policies provide against the administrative burden they
create and the increased risk of error they generate. Because most current
policies stem from specific statutes, simplifying them would likely
require congressional action. In order to inform potential debate on this
issue, policymakers will need to fully understand how simplification could
affect the amount of rent subsidy errors, program administrators'
workload, tenants' rental payments, and program costs. Regardless of the
simplification approach that is adopted, HUD will face many difficulties
in implementing the necessary policy changes. In particular, HUD will need
to promote an efficient transition and assist program administrators in
making the necessary adjustments to their procedures.

                                   Conclusion

Recommendations for Executive Action

To ensure that HUD's rental assistance programs are administered
effectively and that policymakers have sufficient information with which
to consider potential simplification approaches, we recommend that the HUD
Secretary study the possible impact of alternative strategies for
simplifying program policies on subsidy errors, tenant rental payments,
program administrators' workload, and program costs. As part of the study,
HUD should determine how it intends to implement proposed changes and

 Chapter 5 HUD is Considering Approaches for Simplifying Rent Subsidy Policies,
                      but these Approaches Need More Study

Agency Comments and Our Evaluation

indicate how the department would help tenants transition from the old to
the new rent structures.

HUD stated that our draft report did not mention legislative initiatives
in its fiscal year 2004 and 2005 budget justifications-the Housing
Assistance for Needy Families and the Flexible Voucher programs-to
simplify the voucher program's policies for determining rent subsidies.
These two initiatives were primarily intended to reform the funding
mechanism for and the administration of the voucher program but also would
have allowed administering agencies the discretion to define their
policies on tenant eligibility and for determining rent subsidies. We
included a description of these two initiatives in our final report.

HUD did not respond directly to our recommendation that the department
study the impact of simplifying policies for determining rent subsidies
but said that the report incorrectly stated that HUD has not conducted
formal studies on or otherwise considered the effects of its program
simplification proposals. HUD also stated that all of its proposals for
simplifying subsidy determination policies had undergone extensive
analysis. Our draft report did not state that HUD had not considered the
effects of program simplification and, in fact, cited HUD's efforts to
analyze simplification approaches. Further, during the course of our
review and in its technical comments on our draft report, the department
provided us only an internal analysis of a single simplification approach,
which, according to HUD, it is no longer considering. Moreover, HUD has
not issued a study of any simplification proposal that analyzes the impact
of simplification, explains how HUD intends to implement proposed changes
and help tenants transition from the old to the new rent structures, and
is available to policymakers. Because simplifying HUD's policies for
determining rent subsidies will likely require legislative changes, we
continue to believe that a formal study will be essential to informing
congressional decision making.

Appendix I

Data Tables

Information on Improper Rent Subsidies Resulting from Program
Administrator Error

This appendix contains the results of our analysis of the Department of
Housing and Urban Development's (HUD) fiscal year 2003 data on improper
rent subsidies resulting from errors made by program administrators, as
described in chapter 2. This appendix also provides the results of our
analysis of the impact of two proposals to simplify HUD's policies for
determining rent subsidies on tenant rents.

Tables 4 and 5 contain information on the estimated gross dollar amount of
improper rent subsidies attributable to program administrator error in
fiscal year 2003 for each HUD program.1 These tables show the sum total of
both estimated overpayments and estimated underpayments. In contrast,
tables 6 and 7 provide information on estimated overpayments alone, and
tables 8 and 9 have information on estimated underpayments alone.2 We
followed HUD's approach of not counting a discrepancy of $5 or less
between the rent on file and the "correct rent" as an error. This was done
to eliminate minor calculation discrepancies that have little impact on
programwide subsidy errors.

 Table 4: Estimated Total Gross Improper Rent Subsidies Attributable to Program
                     Administrator Error, Fiscal Year 2003

                     Number of tenant                         Margin of error 
                                                                         (95% 
Program                   files in  Estimated dollar           confidence) 
                               sample        error        
Public housing                 447        $316,107,576       +-$58,175,726 
Vouchers                       568         730,955,871         182,078,577 
Project-based                  462         368,789,321          75,105,022 
Section 8                                              
Total (all programs)         1,477       1,415,852,768         185,371,036 

                                  Source: GAO.

1The estimate for the voucher program includes a very small number of
Section 8 Moderate Rehabilitation units, which, like vouchers, are
administered by public housing agencies.

2We also show the percentile distribution of values appearing in multiple
tables in this appendix. These percentiles indicate what percentage of
households had values equal to or less than the value shown in the table.
For example, in table 5, 25 percent of households had dollar errors of $13
or less for all programs. (Another way of interpreting this would be that
75 percent of households had dollar errors greater than $13.)

                             Appendix I Data Tables

 Table 5: Estimated Gross Improper Rent Subsidies per Household Attributable to
                 Program Administrator Error, Fiscal Year 2003

                                                                   Percentile
                                                                          50%
Program                          10%   25%     (median)     75%        90% 
Public housing                    $8     $12     $29        $93       $162 
Vouchers                           9      16      41        91         193 
Project-based Section 8            7      11      27        66         161 
Total (all programs)               8      13      33        86         170 

                                  Source: GAO.

 Table 6: Estimated Subsidy Overpayments Attributable to Program Administrator
                            Error, Fiscal Year 2003

                     Number of tenant                         Margin of error 
                                                                         (95% 
Program                   files in  Estimated dollar           confidence) 
                               sample        error        
Public housing                 255        $198,822,140       +-$43,038,878 
Vouchers                       310         447,434,740         120,874,596 
Project-based                  257         250,232,869          64,151,393 
Section 8                                              
Total (all programs)           822         896,489,749         131,973,665 

                                  Source: GAO.

  Table 7: Estimated Subsidy Overpayment per Household Attributable to Program
                     Administrator Error, Fiscal Year 2003

                                                                   Percentile
                                                                          50%
Program                         10%   25%     (median)     75%         90% 
Public housing                   $9     $15     $41        $107       $170 
Vouchers                         10      18      44        102         248 
Project-based Section 8           9      15      33         96         209 
Total (all programs)              9      16      40        102         211 

                                  Source: GAO.

                             Appendix I Data Tables

 Table 8: Estimated Subsidy Underpayments Attributable to Program Administrator
                            Error, Fiscal Year 2003

                     Number of tenant                         Margin of error 
                                                                         (95% 
Program                   files in Estimated dollar            confidence) 
                               sample error               
Public housing                 192        $117,285,436       +-$36,747,257 
Vouchers                       258         283,521,130          88,835,202 
Project-based                  205         118,556,452          31,745,109 
Section 8                                              
Total (all programs)           655         519,363,019          95,571,528 

                                  Source: GAO.

 Table 9: Estimated Subsidy Underpayments per Household Attributable to Program
                     Administrator Error, Fiscal Year 2003

                                                                   Percentile
                                                                          50%
Program                          10%   25%     (median)     75%        90% 
Public housing                    $8     $11     $23        $77       $135 
Vouchers                           9      15      38        82         147 
Project-based Section 8            6       9      18        48         111 
Total (all programs)               8      12      28        72         136 

Information on the Impact of Simplifying Rent Subsidy Policies on Tenant
Rents

                                  Source: GAO.

As an illustration of the potential effects of rent simplification
approaches, we used HUD's fiscal year 2003 data to determine the impact on
tenant rents by estimating how tenant rental payments would change
(compared with current policies) under two specific scenarios. Tables 10
and 11 show the impact of a change that would require all families to pay
30 percent of gross income toward rent. Tables 12 and 13 reflect the
impact of the change that would require all elderly, disabled, and working
families to pay 27 percent of gross income toward rent and all other
families to pay 30 percent.

                             Appendix I Data Tables

Table 10: Estimated Dollar and Percent Change in Rent under 30 Percent of Gross
                  Income Simplification Proposal, Fiscal Year

Program                 Average dollar change Average percentage change in 
                                         in rent                         rent 
Public housing                            $26                          16% 
Vouchers                                   30                           15 
Project-based Section 8                    33                           19 
Total (all programs)                       30                           16 

                                  Source: GAO.

Table 11: Estimated Dollar Change in Rent under 30 Percent of Gross Income
                   Simplification Proposal, Fiscal Year 2003

                                                                   Percentile
                                                                          50%
Program                           10%   25%     (median)     75%       90% 
Public housing                     $0     $10     $13        $36       $64 
Vouchers                           10      10      22        36         61 
Project-based Section 8             0      10      18        41         88 
Total (all programs)                0      10      21        36         72 

                                  Source: GAO.

Table 12: Estimated Average Dollar and Percent Change in Rent under HUD's
               "27/30" Simplification Proposal, Fiscal Year 2003

Program                 Average dollar change Average percentage change in 
                                         in rent                         rent 
Public housing                            $12                          12% 
Vouchers                                   13                           10 
Project-based Section 8                    23                           16 
Total (all programs)                       16                           12 

                                  Source: GAO.

                             Appendix I Data Tables

         Table 13: Estimated Dollar Change in Rent under HUD's "27/30"
                   Simplification Proposal, Fiscal Year 2003

                                                                   Percentile
                                                                          50%
Program                           10%   25%     (median)     75%       90% 
Public housing                   $-34   $-1            $10   24        $54 
Vouchers                          -28      -4           10   24         49 
Project-based Section 8           -21   10              11   36         82 
Total (all programs)              -27       0           10   28         62 

                                  Source: GAO.

Appendix II

Information on HUD's Policies for Determining Rent Subsidies

As discussed in chapter 5, the Department of Housing and Urban
Development's (HUD) policies for determining rent subsidies are complex
and require program administrators to collect comprehensive personal
information from tenants. This appendix describes the policies and
procedures related to the process for determining tenant rental
payments-the basis for calculating rent subsidy amounts. Specifically, we
identified four key steps in determining tenant rental payments: program
administrators must (1) gather information on tenants, (2) verify
information that tenants report, (3) determine tenants' eligibility for
income exclusions and deductions, and (4) calculate tenant rental
payments.

Step One: Gather Program administrators must obtain comprehensive
information on tenants' household composition, sources of income, assets,
public

Information on Tenants

assistance, and expenses. This information allows program administrators
to determine tenants' gross household incomes, their eligibility for
income exclusions and deductions, and their rental payments. If program
administrators do not request all the required information from tenants,
they cannot make correct subsidy determinations. Following are examples
from HUD guidance of the typical questions that program administrators
should ask tenants:

     o Does any household member receive full- or part-time earnings from any
       type of employment, including self-employment?
     o Has anyone in your household started a new job or had an increase in
       earnings? If yes: (a) Is this a person with a disability? (b) Has this
       person been unemployed for one year or longer? (c) Is this person
       participating in any type of economic self-sufficiency program? (d)
       Has this person received welfare benefits in the past 6 months?
     o Does any household member receive cash, tips, bonuses, commissions, or
       any type of compensation, worker's compensation, or severance pay?
     o Does any household member receive child support or alimony?
     o Does any household member receive welfare benefits or any other public
       assistance?

Appendix II Information on HUD's Policies for Determining Rent Subsidies

     o Does any household member receive income from any assets, including
       interest on checking or savings accounts and interest or dividends on
       stocks or bonds?
     o Does any household member receive Social Security or supplemental
       security income benefits?
     o Does anyone outside your household pay for any of your household bills
       or living expenses? Or does anyone in your household receive money
       from someone outside your household to pay bills or living expenses?
     o Does anyone in your household participate in a job training program?
     o Does anyone in your family receive any type of income, money, or
       financial support from any sources other than the ones asked about?
     o Does any household member have a checking or savings account?
     o Does any household member own stocks or bonds?
     o Does any household member have child care expenses for a child 12
       years or under?
     o Is any portion of the child care expenses reimbursed by any person or
       agency?
     o Do you pay for a care attendant or for any equipment for any household
       member with disabilities that is necessary to permit that person or
       someone else in the household to work? Are these expenses reimbursed
       by a person or agency?
     o Is any adult in your household a full-time student?
     o Is any family member actively seeking work?
     o Does any household member pay for Medicare?
     o Is any household member paying on past medical bills or anticipate any
       medical expenses during the next 12 months that will not be reimbursed
       by any source outside the household?
     o Does any household member pay for any type of medical insurance?

    Appendix II Information on HUD's Policies for Determining Rent Subsidies

Step 2: Verify Information That After gathering information from tenants,
program administrators must

Tenants Report verify the income, asset, and expense information that the
tenant reports. According to HUD policy, program administrators should
begin by obtaining, where possible, the highest level of verification-that
is, verification from an independent third party, such as government
income databases or written statements from employers, banks, and
government agencies. When third-party verification cannot be obtained,
program administrators can use a lower level of verification, such as
reviewing documents supplied by tenants. However, in such cases, program
administrators must document in the tenant's file why other forms of
verification were not used. HUD has outlined the following guidelines for
verifying tenant asset and income information:

     o Automated income verification system: Program administrators obtain
       this form of income verification through an independent source that
       systematically and uniformly maintains income information in
       computerized form for a large number of individuals. This form of
       verification includes information on Social Security income from HUD's
       Tenant Assessment Subsystem and earned income from state agencies and
       the Department of Health and Human Services' National Directory of New
       Hires.
     o Written third-party verification: Program administrators contact
       third-party sources, such an employer, a bank, a government agency, or
       a child care service provider, to obtain a written statement
       supporting the income and expenses that tenants report. Program
       administrators must receive the written statement directly from the
       independent source. If the tenant handles the written verification
       statement in any way, HUD policy no longer considers it third-party
       verification.
     o Oral third-party verification: Program administrators can verify
       income and expense information directly via telephone or an in-person
       meeting with the third-party source. Program administrator staff
       should document in the tenant file the date and time of the telephone
       call or meeting, the name of the person contacted and contact
       information, and the confirmed verified information. This verification
       method is commonly used when the independent source does not respond
       to the program administrator's request for written verification in a
       reasonable time frame (e.g., 10 business days).
     o Document review: Program administrators review original documents
       provided by tenants in support of their reported income, assets, and

    Appendix II Information on HUD's Policies for Determining Rent Subsidies

Step 3: Determine Tenant Eligibility for Exclusions and Deductions

expenses. Program administrators can use this verification method only
when third-party verification cannot be obtained. When the program
administrators resort to reviewing tenant-provided documents, they must
document in the tenant file why third-party verification was not obtained.

o  Tenant declaration: Program administrators may accept a notarized
statement or affidavit from tenants declaring their income, assets, and
expenses. As with a document review, program administrators must document
in the tenant file why third-party verification was not obtained.

A tenant's rent is based on the family's anticipated gross annual
income-that is, income from all sources received by the family head,
spouse, and each additional family member who is 18 years or older-less
applicable exclusions and deductions. We identified 44 exclusions and
deductions from tenant income, most of which were statutorily based (e.g.,
deductions for elderly and disabled households are mandated by the United
States Housing Act of 1937, as amended). These exclusions and deductions
are described below.

Federally mandated exclusions cited in 66 Fed. Reg. 20318, April 20, 2001,
are as follows:

 1. The value of the allotment provided to an eligible household under the
       Food Stamp Act of 1977.
 2. Payments to volunteers under the Domestic Volunteers Services Act of
       1973.
 3. Payments received under the Alaska Native Claims Settlement Act.
 4. Income derived from certain submarginal land of the United States that
       is held in trust for certain Indian tribes.
 5. Payments or allowances made under the Department of Health and Human
       Services Low-Income Home Energy Assistance program.
 6. Payments received under programs funded under the Job Training
       Partnership Act/Workforce Investment Act of 1998.

Appendix II Information on HUD's Policies for Determining Rent Subsidies

 1. Income derived from the disposition of funds to the Grand River Band
       of Ottawa Indians.
 2. The first $2,000 of per capita shares received from judgment funds
       awarded by the Indian Claims Commission or the U.S. Claims Court, the
       interests of individual Indian in trust or restricted lands, including
       the first $2,000 per year of income received by individual Indians
       from funds derived from interests held in such trust or restricted
       lands.
 3. Amounts of scholarships funded under Title IV of the Higher Education
       Act of 1965, including awards under federal work-study programs or
       under the Bureau of Indian Affairs student assistance programs.
 4. Payments received from programs funded under Title V of the Older
       Americans Act of 1985.
 5. Payments received on or after January 1, 1989, from the Agent Orange
       Settlement Fund or any other fund established pursuant to the
       settlement in In Re Agent-product liability litigation.
 6. Payments received under the Maine Indian Claims Settlement Act of
       1980.
 7. The value of any child care provided or arranged (or any amount
       received as payment for such care or reimbursement for costs incurred
       for such care) under the Child Care and Development Block Grant Act of
       1990.
 8. Earned income tax credit refund payments received on or after January
       1, 1991.
 9. Payments by the Indian Claims Commission to the Confederated Tribes
       and Bands of Yakima Indian Nation or the Apache Tribe of Mescalero
       Reservation.
10. Allowances, earnings, and payments to AmeriCorps participants under
       the National and Community Service Act of 1990.
11. Any allowance paid under the provisions of 38 U.S.C. 1805 to a child
       suffering from spina bifida who is the child of a Vietnam veteran.

Appendix II Information on HUD's Policies for Determining Rent Subsidies

 1. Any amount of crime victim compensation (under the Victims of Crime
       Act) received through crime victim assistance (or payment or
       reimbursement of the cost of such assistance) as determined under the
       Victims of Crime Act because of the commission of a crime against the
       applicant under the Victims of Crime Act.
         1. Allowances, earnings, and payments to individuals participating
            in programs under the Workforce Investment Act of 1998.
         2. Exclusions cited in 24 C.F.R. 5.609(c) are as follows:
 2. Income from employment of children (including foster children) under
       the age of 18 years.
 3. Payments received for the care of foster children or foster adults
       (usually persons with disabilities, unrelated to the tenant family,
       who are unable to live alone).
 4. Lump-sum additions to family assets, such as inheritances, insurance
       payments (including payments under health and accident insurance and
       worker's compensation), capital gains and settlement for personal or
       property losses.
 5. Amounts received by the family that are specifically for, or in
       reimbursement of, the cost of medical expenses for any family member.
 6. Income of a live-in aide.
 7. The full amount of student financial assistance paid directly to the
       student or the educational institution.
 8. The special pay to a family member serving in the armed forces who is
       exposed to hostile fire.
 9. Amounts received under training programs funded by HUD.
10. Amounts received by a person with a disability that are disregarded
       for a limited time for purposes of supplemental security income
       eligibility and benefits because they are set aside for use under a
       Plan to Attain Self-Sufficiency.

Appendix II Information on HUD's Policies for Determining Rent Subsidies

 1. Amounts received by a participant in other publicly assisted programs
       that are specifically for or in reimbursement of out-of-pocket
       expenses incurred (special equipment, clothing, transportation, child
       care, etc.) and that are made solely to allow participation in a
       specific program.
 2. Amounts received under a resident service stipend. A resident service
       stipend is a modest amount (not to exceed $200 per month) received by
       a resident for performing a service for the program administrator, on
       a part-time basis, that enhance the quality of life in the
       development.
 3. Incremental earnings and benefits resulting to any family member from
       participating in qualifying state or local employment training
       programs and training of a family member as resident management staff.
       Amounts excluded by this provision must be received under employment
       training programs with clearly defined goals and objectives and are
       excluded only for the period during which the family member
       participates in the employment training program.
 4. Temporary, nonrecurring, or sporadic income (including gifts).
 5. Reparation payments paid by a foreign government pursuant to claims
       filed under the laws of that government by persons who were persecuted
       during the Nazi era.
 6. Earnings in excess of $480 for each full-time student 18 years or
       older (excluding head of household and spouse).
 7. Adoption assistance payments in excess of $480 per adopted child.
 8. Deferred periodic amounts from supplemental security income and Social
       Security benefits that are received in a lump sum amount or in
       prospective monthly amounts.
 9. Amounts received by the family in the form of refunds or rebates under
       state or local law for property taxes paid on the dwelling unit.
10. Amounts paid by a state agency to a family with a member who has a
       developmental disability and is living at home to offset the cost of
       services and equipment needed to keep the developmentally disabled
       family member at home.

Deductions cited in 24 C.F.R. 5.611 are as follows:

Appendix II Information on HUD's Policies for Determining Rent Subsidies

 1. $480 for each dependent.
 2. $400 for any elderly family or disabled family.
         1. The sum of the following, to the extent the sum exceeds 3 percent
            of annual income:
              1. unreimbursed medical expenses of an elderly family or
                 disabled family;
              2. unreimbursed reasonable attendant care and auxiliary
                 apparatus expenses for each member of the family who is a
                 person with disabilities, to the extent necessary to enable
                 any member of the family (including the member who is a
                 person with disabilities) to be employed.
 1. Any reasonable child care expenses necessary to enable a member of the
       family to be employed or to further his or her education.
         1. Program administrators may adopt additional deductions from
            annual income. These deductions must be set forth in the written
            policies of the program administrator.
         2. Earned income disallowance (EID) for public housing and voucher
            tenants cited 24 C.F.R. 960.255 and 24 C.F.R. 5.617 are as
            follows:
 2. The disallowance policy provides special treatment to families whose
       earned income increased as a result of (1) employment of a family
       member who was previously unemployed for one or more years and (2)
       participation of a family member in a family self-sufficiency or other
       job training program. In addition, families who received assistance
       through the Temporary Assistance for Needy Family program and their
       earned income increased within the previous 6 months can also qualify
       for the disallowance. In addition, unlike the public housing program,
       the voucher program also requires that the disallowance be restricted
       to household members with disabilities. Families that qualify under
       these provisions are not subject to increases in their rental
       contributions due to higher income from employment or job training for
       a 12-month period (full exclusion period). The rent may be increased
       during the following 12-month period (phase-in period) but the
       increase may not be greater than 50 percent of the amount of the full
       rent increase that would be otherwise applicable. After completion

    Appendix II Information on HUD's Policies for Determining Rent Subsidies

Step 4: Calculate the Tenant Rental Payments Using Verified Information

of both the full exclusion and phase-in periods, tenant rent increases by
the full amount (fig. 9). Tenants can claim the disallowance over
nonconsecutive months if their employment status changes, but HUD imposes
a lifetime limit of 48 months starting on the date of the initial
exclusion.

Figure 9: Earned Income Allowance Timeline (Full Exclusion and Phase-In
Periods Over Consecutive Months)

Months: 12                                       24 36 Count all income 48 
    Unused time First 12 months of EID at 100%                             
    Second 12 months of EID at 50%                                         

                                  Source: GAO.

Finally, after obtaining all the required information and determining
which exclusions and deductions the tenant is eligible to receive, the
program administrator can calculate the tenant rental payment. According
to HUD regulations, tenants must contribute the greater of the following
toward rent for a subsidized unit:

     o 30 percent of a family's monthly adjusted income, or monthly income
       less exclusion and deductions;
     o 10 percent of the family's gross monthly income, or monthly income
       before exclusions and deductions; or
     o the applicable minimum rent, which is typically between $0 and $50, as
       determined by the program administrator.

Appendix II Information on HUD's Policies for Determining Rent Subsidies

Using verified tenant income information, program administrators must
complete the family report.1 In addition to information on household
members' names, birthdates, and Social Security numbers, the family report
also contains forms that program administrators use to calculate tenant
rental payments. Figure 10 is an excerpt from the family report that
illustrates some of the calculations and analysis that program
administrators must perform.

1HUD Form 50058 is used for public housing and vouchers and Form 50059 for
project-based Section 8.

Page 85 GAO-05-224 Improper Rent Subsidies Appendix II Information on
HUD's Policies for Determining Rent Subsidies

                                  Source: GAO.

                   Page 86 GAO-05-224 Improper Rent Subsidies

Appendix III

Comments from the Department of Housing and Urban Development

Appendix III Comments from the Department of Housing and Urban Development
Appendix III Comments from the Department of Housing and Urban Development
Appendix III Comments from the Department of Housing and Urban Development
Appendix III Comments from the Department of Housing and Urban Development
Appendix III Comments from the Department of Housing and Urban Development

Appendix IV

                     GAO Contacts and Staff Acknowledgments

David G. Wood (202) 512-8678

GAO Contacts

Steven Westley (202) 512-6221

In addition to the individuals named above, Daniel Garcia-Diaz, Cory

Staff

Roman, and Rose Schuville made key contributions to this report. Also
contributing to this report were Carl Barden, Emily Chalmers, John T.
McGrail, Marc W. Molino, Terry Richardson, and Jerry Sandau.

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