Multifamily Housing: Implementation of Fiscal Year 2003 	 
Requirements Concerning Housing Choice Voucher Administrative	 
Fees (19-NOV-04, GAO-05-30).					 
                                                                 
The Department of Housing and Urban Development (HUD) received	 
$12.9 billion in fiscal year 2003 for the Housing Choice Voucher 
Program, which helps about 2 million low-income families pay rent
for privately owned housing. This amount included $1.1 billion in
administrative fee payments to the public housing agencies that  
administer the program for HUD. In the Consolidated		 
Appropriations Resolution of 2003, Congress included provisions  
to address a concern that housing agencies may have received more
in fees than they needed to run the program. Housing agencies	 
were directed to report to HUD their available reserves as of	 
January 31, 2003. HUD was directed to reduce the fees agencies	 
would receive if these levels were too high and recapture some	 
excess fees. The conference report accompanying the Consolidated 
Appropriations Act of 2004 directed GAO to review compliance with
these provisions. This report discusses (1) the extent to which  
housing agencies complied with the requirement to report to HUD  
their available administrative fee reserves as of January 31,	 
2003; (2) how these reported reserves compared with reserves	 
reported in earlier fiscal years and possible reasons for any	 
declines; (3) the extent to which HUD made required reductions to
fiscal year 2003 fees; and (4) the extent to which HUD has	 
recaptured excess fiscal year 2003 administrative fees. 	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-30						        
    ACCNO:   A13712						        
  TITLE:     Multifamily Housing: Implementation of Fiscal Year 2003  
Requirements Concerning Housing Choice Voucher Administrative	 
Fees								 
     DATE:   11/19/2004 
  SUBJECT:   Administrative costs				 
	     Fees						 
	     Housing programs					 
	     Locally administered programs			 
	     Refunds to government				 
	     Rent subsidies					 
	     Rental housing					 
	     Reporting requirements				 
	     Low income housing 				 
	     Capital reserves					 
	     HUD Housing Choice Voucher Program 		 

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GAO-05-30

                 United States Government Accountability Office

                     GAO Report to Congressional Committees

November 2004

MULTIFAMILY HOUSING

Implementation of Fiscal Year 2003 Requirements Concerning Housing Choice
                          Voucher Administrative Fees

                                       a

GAO-05-30

[IMG]

November 2004

MULTIFAMILY HOUSING

Implementation of Fiscal Year 2003 Requirements Concerning Housing Choice
Voucher Administrative Fees

                                 What GAO Found

By the end of calendar year 2004, HUD expects to have finished
implementing most of the provisions in the Consolidated Appropriations
Resolution of 2003 that address the administrative fees housing agencies
receive under the Housing Choice Voucher Program. As of September 2004,
all but 5 of the 2,477 housing agencies had reported their available
administrative fee reserves as of January 31, 2003. The reported amounts
totaled $587 million, or about $211 million (26 percent) less than the
average $798 million that housing agencies had reported in fiscal years
1999 to 2002.

GAO found several reasons for this decline. For example, the 2003
resolution allowed housing agencies to deduct from their January 2003
reported amounts funds that were not "available." Some housing agencies
deducted obligated or committed funds they considered unavailable,
although they normally include these funds in the reserve amounts they
report at their fiscal year ends. Further, between the end of their fiscal
year 2002 and the January reporting date, some housing agencies obligated
some of their reserves for expenses not related to the Housing Choice
Voucher Program, as was permitted by HUD regulations.

By December 2004, HUD plans to have completed most of the required
reductions to the estimated fiscal year 2003 administrative fees of 180
housing agencies, a total of about $37.8 million (see figure). As required
by the 2003 resolution, HUD identified housing agencies whose fees would
be reduced based on the difference between their available January 2003
reserve balances and 105 percent of the fees they earned in federal fiscal
year 2002. HUD has not recaptured any excess 2003 administrative fees but
expects to have made some of the required recaptures by December 2004.

Estimated Reductions to 180 Housing Agencies' Fiscal Year 2003 Fees

Amount of
estimated reductions:

More than $250,000

Total estimated reductions:

$100,000-$249,999 $37,800,000

Less than $100,000

Source: HUD.

United States Government Accountability Office

Contents

  Letter

Background

Results in Brief

Almost All Housing Agencies Reported Their Available Reserves, but
Agencies Interpreted the Reporting Requirement Differently

Some Housing Agencies' Available January 2003 Reserves Were Lower Than
Previously Reported Reserves for Several Reasons

HUD Is Reducing Estimated Administrative Fees by About $37.8 Million

HUD Expects to HaveRecaptured Some Excess 2003Administrative Fees by
December 2004

Agency Comments 1 3 5

7

10

13

19 21

  Appendixes

Appendix I: Scope and Methodology 22

Appendix II:	GAO Contacts and Staff Acknowledgments 24 GAO Contacts 24
Acknowledgments 24

Figures Figure 1:

Figure 2: Figure 3:

Figure 4:

Figure 5:

Figure 6:

Figure 7: Proportion of Housing Agencies Whose January 2003 Available
Reserves Were Different from Their Average Reserves from 1999 to 2002 11
Total Reserves, by Housing Agency Fiscal Year 12 How HUD Estimated
Administrative Fees Earned in Federal Fiscal Year 2002 14 HUD's Process
for Determining Reductions to Fiscal Year 2003 Fees 16 Months in Which HUD
Applied Reduced Administrative Fee Payments 18 Estimated Reductions to 180
Housing Agencies' Fiscal Year 2003 Fees 19 How HUD Determines Amounts to
Be Recaptured 20

Contents

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separately.

A

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

November 19, 2004

The Honorable Christopher Bond
Chairman
The Honorable Barbara A. Mikulski
Ranking Minority Member
Subcommittee on Veterans Affairs, Housing and Urban Development and

Independent Agencies
Committee on Appropriations
United States Senate

The Honorable James T. Walsh
Chairman
The Honorable Alan B. Mollohan
Ranking Minority Member
Subcommittee on Veterans Affairs, Housing and Urban Development and

Independent Agencies
Committee on Appropriations
House of Representatives

The Department of Housing and Urban Development (HUD) received $12.9
billion in fiscal year 2003 appropriations to help about 2 million
low-income
families nationwide pay rent for privately owned housing through the
Housing Choice Voucher Program. About $1.1 billion of this amount was
designated for administrative fee payments to the approximately 2,500
public housing agencies that administer the program for HUD.1 The fee
payments, which are intended to compensate the housing agencies for
administrative activities such as finding property owners to participate
in
the program, inspecting rental units, and determining family eligibility,
are
not based on actual incurred expenses, but rather on a formula that takes
into account the number of vouchers administered. The difference between
the fees earned and expenses incurred are recorded annually in the
administrative fee reserve, which shows the accumulated gains and losses
housing agencies incur over time. Housing agencies can use their
administrative fee reserves for the voucher program and other
housing-related expenses.

1These 2,500 public housing agencies are among the more than 4,100 housing
agencies that administer federal housing programs on behalf of HUD.

In the Consolidated Appropriations Resolution of 2003, Congress addressed
a concern that housing agencies may have been provided more in fees than
necessary to effectively run the Housing Choice Voucher Program, as
indicated by the large amounts of some housing agencies' administrative
fee reserves. Specifically, the 2003 resolution included provisions
requiring the housing agencies to report to HUD their administrative fee
reserves available as of January 31, 2003, and requiring HUD to:

o 	withhold administrative fees for fiscal year 2003 from agencies that
did not report their January 2003 reserves;

o 	reduce the administrative fees paid in fiscal year 2003 to any agency
whose reserve amount was more than an established limit; and

o 	recapture any fees paid in fiscal year 2003 that exceeded housing
agencies' actual administrative expenses.2

However, the conference report accompanying the Consolidated
Appropriations Act of 2004 raised concerns that neither HUD nor the
housing agencies had fully complied with the requirements in the 2003
resolution. This concern was based largely on the fact that some of the
reported January 2003 reserves were far lower than had been expected. The
conference report directed GAO to review compliance with the provisions of
the 2003 resolution. Accordingly, this report:

o 	shows the extent to which housing agencies complied with the
requirement to report to HUD their administrative fee reserves available
as of January 31, 2003;

o 	compares housing agencies' reported available reserves as of January
31, 2003, with reserves reported in earlier fiscal years and discusses
possible reasons for any declines;

2These provisions were unique to the 2003 Appropriations Resolution and
were not included in previous or subsequent appropriations acts. Several
public housing industry associations and public housing agencies have
filed a lawsuit in federal district court against HUD concerning the
administrative fee provisions in the 2003 resolution. The plaintiffs
maintain that the administrative fee reserves are the property of the
pubic housing agencies and that the appropriations provisions, by
requiring the reduction and recapture of the fees earned in fiscal year
2003, are unconstitutional and violate both the contractual terms and the
Administrative Procedure Act.

o 	examines the extent to which HUD reduced fiscal year 2003
administrative fee payments, as required, in light of housing agencies'
reported reserves;3 and

o 	shows the extent to which HUD recaptured excess fiscal year 2003
administrative fees, as required.

To meet our objectives, we reviewed relevant laws and HUD guidance,
compared HUD data on the January 2003 reported amounts with reserves
reported in prior fiscal years, and interviewed officials from HUD's
Office of Public and Indian Housing and Financial Management Center. We
also visited 5 housing agencies to review financial documents related to
their administrative fee reserves and to interview staff involved in
calculating their reserves.4 We selected these 5 agencies from the 10 that
showed the largest differences between their January 2003 reported
reserves and their average reported reserves for fiscal years 1999 to
2002.5 In addition, we interviewed officials from several housing industry
associations and spoke with private-sector accountants these associations
cited as experts in housing agency accounting. We did not perform a
financial audit of the housing agencies' administrative fee reserves. We
conducted our work from January through September 2004 in Los Angeles and
Orange County, California; Broward County, Florida; Needham,
Massachusetts; Newark, New Jersey; New York, New York; and Washington,
D.C., in accordance with generally accepted government auditing standards.
Our scope and methodology are discussed in greater detail in appendix I.

Background	The federal government's Housing Choice Voucher Program helps
very-low-income families, the elderly, and the disabled pay for housing in

3Unless otherwise noted, "fiscal year" refers to the Housing Choice
Voucher Program's fiscal year, which runs from January to December.

4The agencies we visited were the Housing Authority of the City of Los
Angeles (California), the Orange County Housing Authority (California),
the Broward County Housing Authority (Florida), the Newark Housing
Authority (New Jersey), and the New York City Housing Authority (New
York).

5To achieve some geographic distribution, we selected sites in both the
eastern and western parts of the country. None of the 10 housing agencies
showing the largest differences were located in the Midwest.

the private market.6 The program, which has been operating for about 30
years, provides housing vouchers that individuals and families can use to
rent houses or apartments in the private housing market if property owners
participate in the program. Voucher holders are responsible for finding
suitable housing, which must meet the health and safety standards set by
the local housing agency. Voucher holders generally pay about 30 percent
of their household income on the rent and utilities and the housing agency
pays the remainder in subsidies that are paid directly to the property
owners.

The administrative fees housing agencies earn are not tied to the actual
expenses of operating the Housing Choice Voucher Program. Rather, the fees
are based on a formula that takes into account the number of months that
each voucher is actually in use (i.e., is used to pay for a rental unit
under lease). The amounts used to calculate federal fiscal year 2003 fees
were set in the Federal Register on May 6, 2003.7 In addition, housing
agencies may also earn additional special administrative fees-for example,
the "hard-to-house" fee for certain clients, such as persons with
disabilities, who require help in locating housing.

Administrative fee payments are based on estimates of voucher use and are
reconciled with actual earned amounts at the end of each housing agency's
fiscal year. Housing agencies' fiscal years are grouped into four cycles
ending in March, June, September, and December that allow HUD to more
easily complete the fiscal-year-end settlement process, which generally is
completed a few months after the close of a housing agency's fiscal year.
HUD projects leasing activity annually based on data the housing agencies
submit and provides the agencies with monthly disbursements that are based
on these projections. HUD uses the fiscal-year-end settlement process to
reconcile the administrative fees disbursed to housing agencies with fees
earned based on actual voucher use. For example, if the fees a housing
agency earns exceed the projected amounts that HUD disbursed during the
housing agency's fiscal year, HUD pays the difference once the settlement
process is completed. Conversely, if the fees a housing agency earns are
less than the amount it was paid during its fiscal year, HUD offsets
future fee payments by the amount of the difference.

6The Housing Choice Voucher Program was formerly referred to as the
Section 8 Tenant-Based Program.

7Federal Register, Vol. 68, No. 87.

Housing agencies can use their administrative fee reserves both for
expenses associated with the voucher program and other expenses. However,
housing agencies must use their reserves for any actual administrative
expenses that exceed the total amount HUD provides for each housing agency
fiscal year. In addition, housing agencies are allowed to use
administrative fee reserves accumulated prior to fiscal year 2004
appropriations "for other housing purposes permitted by state and local
law," provided that the agencies have adequately administered the Housing
Choice Voucher Program. For example, some housing agencies we visited had
used their reserves to offset expenses incurred from rehabilitating or
producing affordable housing units, while others had used their reserves
to offset expenses from their public housing programs. In the Consolidated
Appropriations Act of 2004, Congress limited the uses of the
administrative fees earned in fiscal year 2004 to the provision of Housing
Choice Voucher Program rental assistance and related development
activities.

The amount of the administrative fee reserve is calculated based on
housing agency accounting data and does not necessarily represent cash
reserves. Housing agencies determine the amount of their administrative
fee reserve by calculating the difference (either gain or loss) between
the fees they earned that year and the expenses they actually incurred,
and adding that amount to (or subtracting it from) its last
fiscal-year-end amount. They also deduct amounts used for nonprogram
expenses. In calculating their reserves, housing agencies may deduct
amounts equal to noncash assets procured with administrative fee reserves.
For example, if a housing agency were to purchase a vehicle for program
purposes, it could deduct the purchase amount when calculating the
year-end balance for that year. However, a housing agency may include
amounts equal to noncash assets in their total reported reserve. Housing
agencies report their total administrative fee reserves to HUD as a part
of the fiscal-year-end settlement process.

Results in Brief	As of September 2004, all but 5 of the 2,477 housing
agencies that were required to report their administrative fee reserves
available as of January 31, 2003, had done so. All five housing agencies
we visited determined their reserves in a manner consistent with HUD's
guidance. However, because HUD did not define the term "available" used in
the 2003 Appropriations Resolution, they did not calculate their reserves
in exactly the same way. For example, in calculating the amount of
available reserves, some housing agencies excluded amounts committed (but
not obligated) for anticipated expenses. Moreover, two housing agencies
differed in their interpretation

of whether noncash assets should be included in available reserves; one
housing agency had excluded an amount equal to its noncash assets, while
another had not.

The total of all housing agencies' reported reserves available as of
January 31, 2003, was $587 million, or about $211 million (26 percent)
less than the average $798 million in total reserves reported for fiscal
years 1999 to 2002. Ten housing agencies, including the five we visited,
accounted for 82 percent of the total difference. Officials from HUD,
housing agencies, and housing industry groups cited several reasons why
the total reported amount declined during that time. First, the 2003
resolution allowed housing agencies to deduct from their January 2003
reported amounts funds that were not "available," a term that some housing
agencies interpreted as excluding obligated or committed funds. Housing
agencies normally include these funds in the reserve amounts they report
at their fiscal year ends. Second, prior to the reporting date, some
housing agencies used some of their reserves for expenses not related to
the Housing Choice Voucher Program, as was permitted by HUD regulations.
For example, between the end of their 2002 fiscal years and January 2003,
the housing agencies we visited had used their reserves for, among other
things, providing security services for housing developments. Finally,
changes in government accounting standards, which were phased in beginning
in 2001, could have had a small effect on some housing agencies' reported
reserves by requiring agencies to deduct from their reserves certain
liabilities, such as employees' unused leave, that they had not previously
deducted.

By December 2004, HUD plans to have completed most of the required
reductions to the estimated fiscal year 2003 administrative fees of 180
housing agencies, a total of about $37.8 million. As required by the 2003
Appropriations Resolution, HUD identified housing agencies whose fees
would be reduced based on the difference between (a) their January 2003
reserves and (b) 105 percent of the fees they earned in federal fiscal
year 2002. HUD made about $27.4 million in reductions to housing agencies'
estimated administrative fees over the course of calendar year 2003 (also
the fiscal year for the Housing Choice Voucher Program) and plans to
complete the remainder of the required reductions as part of the housing
agencies' next fiscal-year-end settlement process.

HUD has not yet recaptured any excess fiscal year 2003 administrative
fees. However, it has begun processing recaptures and plans to have made
some of the required recaptures by December 2004. The 2003 Appropriations
Resolution required HUD to recapture fees paid to housing agencies that

exceeded administrative expenses, except the fees necessary to maintain a
reserve of 5 percent of the fees earned in fiscal year 2003. As a result,
only housing agencies that had reserve amounts of less than 5 percent of
their fiscal year 2003 fees could add to their reserves. As of September
2004, HUD was not able to provide estimates of the number of housing
agencies that would be affected or the amount it expected to recapture.

Almost All Housing Agencies Reported Their Available Reserves, but
Agencies Interpreted the Reporting Requirement Differently

Almost all of the housing agencies that were required to report their
available administrative fee reserves as of January 31, 2003, have done
so. However, because HUD did not define the term "available" used in the
2003 Appropriations Resolution, housing agencies may have interpreted the
term-and thus calculated their reserves-differently. Although the five
housing agencies we visited determined their reserves in a manner
consistent with HUD's guidance, we found differences in their
methodologies.

Almost All Housing Agencies Reported January 2003 Reserves

As of September 2004, all but 5 of the 2,477 housing agencies required to
report their available administrative fee reserves as of January 31, 2003,
had done so. The 2003 Appropriations Resolution instructed HUD to collect
these reserves data from each housing agency administering the Housing
Choice Voucher Program. Although housing agencies had until April 9, 2003,
to report their reserves, HUD officials said they did not track which
housing agencies met that deadline. However, they said that, as directed,
HUD withheld 2003 administrative fees from housing agencies until they
reported. The officials said that HUD continued to withhold 2003
administrative fees from the 5 housing agencies that had not yet reported
their reserves.8

8The five housing agencies represented 0.02 percent of fees earned in
fiscal year 2002. Therefore, these missing data probably had little effect
on the total reserves reported as of January 2003.

The five housing agencies we visited calculated their reserves available
as of January 31, 2003, in a manner consistent with HUD's instructions.9
As directed, they began with their last fiscal-year-end reserve amounts
and employed year-end closing procedures to bring the reserves current as
of January 31, 2003. The five housing agencies had different fiscal years,
however. For example, to meet this requirement the New York City Housing
Authority had to update its reserve from its fiscal year ending December
31, 2002, while the Newark Housing Authority had to update its reserve
from its fiscal year ending March 31, 2002.10 The five housing agencies we
visited first added estimated fees earned and other income, such as
interest income, earned since their most recent fiscal year end. They then
deducted program expenses, such as staff salaries, incurred up to the
January 2003 reporting date. In addition, all of the housing agencies
deducted amounts used for housing purposes other than the Housing Choice
Voucher Program, an action allowed under HUD regulations. For example,
officials from the Broward County Housing Authority deducted $1.5 million
(13 percent of its average reserve from 1999 to 2002) from its
administrative fee reserves to offset the cost of installing air
conditioning in public housing units. Finally, officials from two of the
housing agencies deducted obligated amounts from their reported reserves.
For example, officials from the New York City Housing Authority deducted
slightly over $6 million (8 percent of its average reserve from 1999 to
2002) from the agency's reported reserve for two housing-related
development projects.

Housing Agencies Interpreted "Available" Reserves Differently Due to a
Lack of HUD Guidance

Because HUD did not define the term "available" used in the 2003
Appropriations Resolution, housing agencies interpreted the term
differently and thus may not have reported consistently defined reserve
amounts to HUD.11 HUD's regular fiscal-year-end closing procedures require
housing agencies to report their total reserves. Therefore, reporting only
their "available" reserves was a new requirement for housing agencies. HUD
program officials did not elaborate on the 2003 Appropriations

9Results from a judgmental sample cannot be used to make inferences about
a population, because in a judgmental sample some elements of the
population being studied have no chance or an unknown chance of being
selected as part of the sample.

10None of the four fiscal year ending dates (March 31, June 30, September
30, and December

31) corresponds to the January 31, 2003 reporting date required by the
2003 Appropriations Resolution.

11The 2003 resolution required housing agencies to report to HUD "the
amounts remaining available as of January 31, 2003," in their
administrative fee reserves (P.L. 108-7).

Resolution's language. In the guidance it provided housing agencies
regarding the 2003 resolution, HUD simply emphasized the word "available"
with bold and italics several times throughout the instructions. Officials
from HUD's Office of General Counsel told us that legally obligated funds
were not "available" amounts.

The lack of a clear definition of "available" resulted in two interpretive
issues. First, three of the housing agencies we visited deducted from
their "available" reserves amounts committed (but not yet obligated) for
anticipated expenses. For example, Orange County Housing Authority
officials deducted almost $900,000 (5 percent of its average reserve from
1999 to 2002) that the agency had committed for fraud investigation
services for the Housing Choice Voucher Program in future fiscal years.
Similarly, officials at the Housing Authority of the City of Los Angeles
deducted over $8 million (15 percent of its average reserve from 1999 to
2002) from its reported reserve for an expected shortfall in public
housing subsidies. HUD's guidance did not indicate whether these amounts
should or should not have been deducted from their "available" reserves.

Second, two housing agencies differed on whether to include noncash assets
in their reported reserves. Officials from the Newark Housing Authority
did not deduct amounts representing noncash assets, including computers
and vehicles, from their January 2003 reported reserve. According to these
officials, they included those amounts in the reported reserve because
they include noncash assets in the amount they report to HUD at their
fiscal year end. In contrast, officials from the Orange County Housing
Authority deducted amounts from their reported reserve for noncash
assets-primarily notes receivable from loans they had made to help
developers build affordable housing. These officials told us that they did
not consider these amounts to be "available" because the loans had not yet
been repaid.

Some Housing Agencies' Available January 2003 Reserves Were Lower Than
Previously Reported Reserves for Several Reasons

Housing agencies' total reported reserves available as of January 31,
2003, were about 26 percent less than the average total reserves reported
by the agencies for fiscal years 1999 to 2002. Declines in the amounts
reported by 10 housing agencies, including the 5 we visited, represented
82 percent of this difference. Officials from HUD, housing agencies, and
housing industry groups cited several explanations for the difference.

A Small Number of Housing Agencies Were Responsible for Most of the
Difference

The total of all the housing agencies' reported reserves available as of
January 31, 2003, was $587 million, about $211 million (26 percent) lower
than the average total reserves of $798 million for fiscal years 1999 to
2002.12 Of those housing agencies whose January 2003 available reserves
were different from their average reserves from 1999 to 2002, 984 (41
percent) housing agencies reported available reserve amounts that were
lower than their average year-end amounts, but a small number of housing
agencies was largely responsible for the overall difference (fig. 1). Of
housing agencies that reported lower amounts, most (69 percent) showed a
decline of less than $100,000, while only about 8 percent had declines of
over $500,000. Specifically, the 10 housing agencies with the largest
declines represented 82 percent ($173 million) of the decline in total
reserves; of these, the 5 we visited represented 61 percent ($129 million)
of the total difference. In contrast, most housing agencies (59 percent)
reported amounts that were higher than their average reserves from 1999 to
2002.13

12The average total reserve is based on the sum of the reserves reported
by housing agencies at the end of their fiscal years.

13We did not determine the reasons for these increases in the course of
our audit work.

Figure 1: Proportion of Housing Agencies Whose January 2003 Available
Reserves Were Different from Their Average Reserves from 1999 to 2002

Housing agencies with January All housing agencies 2003 reserve lower than
average

Decreases:

>$500,000 (81 agencies)

$100,000 - $500,000 (226 agencies)

<$100,000 (677 agencies)

January 2003 reserve higher than average

January 2003 reserve lower than average

Source: HUD.

Note: The figure above accounts for 2,398 of the 2,472 (97 percent)
housing agencies that reported a January 2003 reserve. Due to missing
data, GAO could not calculate the differences for 63 housing agencies. In
addition, 11 housing agencies reported no change between their average
reserves (1999-2002) and their January 2003 reported reserves.

The total amount of reserves reported by agencies at fiscal year ends
varied from fiscal year to fiscal year. For example, the total reserves
went from $753 million in fiscal year 1999 to $825 million in fiscal year
2000 but fell from $888 million in 2001 to $725 million in 2002 (fig.
2).14 Over a third of the total decline between 2001 and 2002 was
attributable to the New York City Housing Authority, which used $58
million to cover deficits in public housing programs sponsored by their
state and city governments.

14These fiscal year totals are the sum of the reserves housing agencies
reported at the end of their fiscal years.

            Figure 2: Total Reserves, by Housing Agency Fiscal Year

                      Reserves (dollars in millions) 1,000

We found several reasons for the difference in reported reserve amounts.
First, officials from HUD, housing industry associations, and some housing
agencies we visited told us that the different reporting requirement was
in part responsible for the lower reported amounts. As previously
discussed, the January 2003 requirement was for "available" reserves, a
term that some housing agencies interpreted as excluding funds that had
been obligated or committed. The regular year-end reporting requirement
was (and is) for total reserves, including amounts the housing agency had
either obligated or committed. As a result, the January 2003 reserves for
some housing agencies fell from the previous year-end levels-in some
cases, dramatically. For example, officials from the Broward County
Housing Authority deducted from the agency's January 2003 reported reserve
$9.5 million (80 percent of its average reserve from 1999 to 2002) that it
had committed for the redevelopment of a public housing site.

                                      800

                                      600

                                      400

                           200 0 1999 2000 2001 2002

                     January 2003 (available reserves only)

Fiscal year

Source: HUD.

January 2003 Available Reserves Were Lower for Several Reasons

Second, some housing agencies obligated some of their reserves for
expenses not related to the Housing Choice Voucher Program, as was
permitted by HUD regulations.15 Of the five housing agencies we visited,
two had used their reserves for projects or expenses not related to the
Housing Choice Voucher Program between the end of their fiscal year 2002
and the January 2003 reporting date. For example, officials from the
Newark Housing Authority deducted about $3.4 million (47 percent of its
average reserve from 1999 to 2002) from its reserve for security services
at their housing developments.

Third, a new accounting requirement may have contributed to the decline in
the total reported amount, but housing agency officials said that this
effect was likely small. Beginning in 2001, housing agencies began
implementing applicable provisions of the Governmental Accounting
Standards Board Statement No. 34, Basic Financial Statements-and
Management's Discussion and Analysis-for State and Local Governments. The
statement directed housing agencies to deduct from their reserves certain
liabilities that they had not been required to deduct before, such as
employees' unused compensated leave. The largest agencies were required to
implement this standard in June 2001. Other agencies were not required to
implement the standard until June 2003. According to some housing agency
officials, the effect of this accounting requirement was relatively small.
For example, officials at the Housing Authority of the City of Los Angeles
deducted almost $4 million (7 percent of its average reserve from 1999 to
2002) from its reported reserve as a result of the conversion to this
accounting standard.

HUD Is Reducing By December 2004, HUD plans to have completed most of the
required

reductions to the estimated fiscal year 2003 administrative fees of
180Estimated housing agencies, a total of about $37.8 million. As required
by the 2003 Administrative Fees by Appropriations Resolution, HUD
identified housing agencies whose fees About $37.8 Million should be
reduced because their reported January 2003 reserves exceeded

105 percent of the fees they earned in federal fiscal year 2002. HUD made

about $27.4 million in reductions to housing agencies' estimated

15HUD regulations permitted housing agencies to use administrative fee
reserves accumulated prior to 2004 for other housing purposes permitted by
state or local law. The Consolidated Appropriations Act of 2004 prohibited
housing agencies from using administrative fees earned under the period
covered by the act for purposes not related to the program.

administrative fees over the course of calendar year 2003 (the Housing
Choice Voucher Program's fiscal year). HUD plans to make most of the
remaining reductions by December 2004 through the housing agencies'
fiscal-year-end settlements.

HUD Identified 180 Housing Agencies That Should Receive Reductions

To implement the reductions required in the 2003 Appropriations
Resolution, HUD needed information on each housing agency's available
administrative fee reserves as of January 31, 2003, and on the fees each
housing agency earned in fiscal year 2002. According to HUD attorneys, HUD
interpreted the term "fiscal year 2002" in the 2003 resolution to mean
federal fiscal year 2002. Because HUD generally collects information on
fees earned based on the housing agency fiscal year, it had to estimate
the amounts for federal fiscal year 2002 for all agencies except those
with fiscal years that ended in September. As shown in figure 3, HUD used
a combination of data to estimate fees housing agencies earned in federal
fiscal year 2002.

Figure 3: How HUD Estimated Administrative Fees Earned in Federal Fiscal
Year 2002

                                  Source: GAO.

aHUD used August 2002 data for these months because it was the nearest
monthly data available.

Using these estimates and housing agencies' reported January 2003
reserves, HUD determined which housing agencies should receive less in
administrative fees and the amounts of the reductions.16 HUD identified
180 housing agencies whose fiscal year 2003 administrative fees should be
reduced because their available reserves as of January 31, 2003, exceeded
105 percent of the fees they earned in federal fiscal year 2002. The total
reduction for each agency was the lower of (a) the difference between its
January 2003 reserve and 105 percent of the fees it earned in federal
fiscal year 2002, or (b) the total administrative fees the housing agency
would earn in fiscal year 2003. HUD did not reduce the fees of some
housing agencies by the full difference between their January 2003
reserves and 105 percent of the fees earned in federal fiscal year 2002,
because the 2003 resolution did not require HUD to make reductions to
housing agencies' administrative fees that exceeded the amounts they
earned in fiscal year 2003. Figure 4 shows, for three possible scenarios,
how HUD determined the reduction, if any, in a housing agency's fiscal
year 2003 fees. In the first scenario, no reduction would be made, because
the reserves were less than the 105 percent level; the housing agency
would receive all of the fiscal year 2003 fees it earned. In the second
scenario, the reduction would equal the full difference between the
January 2003 reserves and the 105 percent level, and the housing agency
would receive the remainder of its fiscal year 2003 administrative fees.
In the third scenario, the reduction would equal the full amount of the
housing agency's fiscal year 2003 fees, and the housing agency would not
receive any administrative fees.

16The 2003 Appropriations Resolution did not require HUD to reduce the
fees of any housing agency that earned less than $100,000 in
administrative fees in fiscal year 2003.

  Figure 4: HUD's Process for Determining Reductions to Fiscal Year 2003 Fees

                                  Source: GAO.

HUD Reduced As noted previously, HUD normally makes monthly disbursements
to Administrative Fees in Two housing agencies based on projections of
their earnings for each month, Stages and reconciles these disbursements
with the agencies' actual earnings

during the fiscal-year-end settlement process.17 To implement the
reductions required by the 2003 Appropriations Resolution, HUD estimated
each agency's total reduction (as described above) and the estimated

17Housing agencies receive a monthly disbursement from HUD to cover both
their administrative fees and the housing assistance payments that the
agencies pay to property owners on behalf of tenants in the Housing Choice
Voucher Program.

monthly reduction, based on the total fees earned in federal fiscal year
2002 divided by 12. Using these amounts, HUD reduced some housing
agencies' monthly payments over the course of calendar year 2003 (also the
fiscal year for the Housing Choice Voucher Program) and will make any
remaining reductions during the housing agencies' fiscal-year-end
settlement process.

In the first stage of reductions, HUD lowered the monthly disbursements
for the housing agencies' estimated administrative fees by a total of
about $27.4 million between September and December 2003. Although HUD
began calculating reductions in May 2003, HUD did not apply any reductions
to fee disbursements until September 2003, after housing agencies' budgets
were revised.18 The September payments reflected up to 5 months of
estimated monthly reductions (May through September), even if the
reduction affected not only the administrative fees but also the payments
for tenants' housing assistance. In contrast, fees for October through
December 2003 were reduced by no more than the estimated monthly
reduction. According to HUD officials, HUD initially stopped reductions
with the December 2003 payment after 8 months of estimated monthly
reductions because of uncertainty about applying the 2003 Appropriations
Resolution retroactively to January through April 2003, the first 4 months
of the Housing Choice Voucher Program fiscal year.

Although HUD has already made these estimated reductions, it must complete
the housing agencies' fiscal-year-end settlements to determine the actual
amount of fees to which reductions should be applied. HUD will not have
the data to calculate the actual reductions for all housing agencies until
after December 2004 (when the September 2004 fiscal-year-end settlements
are due), because housing agencies whose fiscal years ended in June and
September received reduced payments over the course of two of their fiscal
years, as illustrated in figure 5. The actual reductions might be higher
or lower than the estimated amounts, depending on each agency's actual
voucher use.

18In January through August 2003, HUD disbursed fees according to housing
agencies' existing budgets until they were revised in August 2003.

Figure 5: Months in Which HUD Applied Reduced Administrative Fee Payments

Source: GAO.

HUD will implement a second stage of reductions because its general
counsel determined that the reductions should apply to the entire period
during which fiscal year 2003 appropriations were used. In July 2004, HUD
developed procedures to make adjustments to housing agencies' January,
February, March, and April 2004 payments using the fiscal-year-end
settlement process. HUD will use actual fees earned to determine the
amount of additional reductions to be made to the fees of housing agencies
whose fees have not been reduced by the full amount required by the 2003
Appropriations Resolution. HUD estimated that these additional 4 months of
administrative fee reductions would total about $10.4 million, bringing
the total reduction to about $37.8 million. As shown in figure 6, most
housing agencies will receive total reductions of less than $250,000. By
December 2004, HUD plans to have completed reductions for the majority of
housing agencies.

 Figure 6: Estimated Reductions to 180 Housing Agencies' Fiscal Year 2003 Fees

Amount of
estimated reductions:

                               More than $250,000

Total estimated reductions: $37,800,000

                               $100,000-$249,999

                               Less than $100,000

                                  Source: HUD.

HUD Expects to Have Recaptured Some Excess 2003 Administrative Fees by
December 2004

The 2003 Appropriations Resolution required HUD to recapture from housing
agencies administrative fees that they earned in fiscal year 2003 that
exceeded administrative expenses, except for an amount necessary to
maintain a reserve equal to 5 percent of the fees earned in the Housing
Choice Voucher Program fiscal year 2003. HUD began processing recaptures
in July 2004, but had not completed any at the time of our review.

During the fiscal-year-end settlement process, HUD will review housing
agencies' actual earned fees (including any reductions resulting from the
2003 Appropriations Resolution) and compare them with expenses

incurred to determine any amounts that should be recaptured.19 According
to the provisions of the 2003 resolution, if a housing agency's fiscal
year 2003 fees did not exceed its fiscal year 2003 program expenses, it
will not

19This process, which calculates the difference between actual fees earned
and actual expenses incurred, differs from the regular fiscal-year-end
settlement process, which calculates the difference between the
projection-based monthly disbursements and the actual fees earned based on
voucher use.

be subject to any fee recaptures, regardless of the amount of its
reserves. However, if a housing agency's fiscal year 2003 fees exceeded
its fiscal year 2003 program expenses, HUD will compare the housing
agency's last fiscal-year-end reserve with 5 percent of the fees it earned
in fiscal year 2003. HUD will then recapture the entire difference or, if
the agency has a very low reserve, HUD will recapture an amount that will
leave the housing agency with a reserve equaling 5 percent of its fiscal
year 2003 fees (fig. 7). Thus, this provision prevented housing agencies
from adding to their reserves unless they had reserve amounts of less than
5 percent of their fiscal year 2003 fees.

             Figure 7: How HUD Determines Amounts to Be Recaptured

                                  Source: GAO.

HUD has not yet recaptured any excess fiscal year 2003 administrative
fees. In July 2004, HUD began implementing the recapture process for the
first housing agencies for which data were available-those whose fiscal
years ended in December 2003. As with the reduction process, HUD will have
all the data needed to calculate recaptures following the receipt of
September 2004 fiscal-year-end settlements. HUD plans to complete the
recaptures for the first group of housing agencies by December 2004. As of
September 2004, HUD could not estimate the number of housing agencies that
would be affected or the total amount to be recaptured and could not give
a date when the process would be completed.

Agency Comments	HUD agreed with our findings and provided technical
comments, which we incorporated into this report as appropriate.

We are sending copies of this report to the Secretary of Housing and Urban
Development and will make copies available to others upon request. In
addition, the report will be available at no charge on the GAO Web site at
http://www.gao.gov. Please contact me at (202) 512-8678 if you or your
staff have any questions concerning this report. Key contributors to this
report are listed in appendix II.

David G. Wood Director, Financial Markets and Community Investment

Appendix I

Scope and Methodology

To meet our objectives, we reviewed relevant laws and HUD guidance,
analyzed HUD data, and interviewed officials from HUD's Office of Public
and Indian Housing and Financial Management Center. We also visited five
housing agencies to review financial documents related to their reserves
and to interview staff involved in calculating the reserves. In addition,
we interviewed officials from several housing industry associations and
spoke with private-sector accountants these associations cited as experts
in housing agency accounting. We did not perform a financial audit of the
housing agencies' administrative fee reserves.

To determine the extent to which housing agencies reported to HUD their
available administrative fee reserves as of January 31, 2003, we analyzed
data from HUD showing all of the housing agencies that had reported their
January 2003 reserves and the amounts they had reported. In addition, to
compare the January 2003 reserves with reserves reported in prior fiscal
years, we analyzed HUD data showing the fiscal-year-end reserves for the
housing agencies participating in the Housing Choice Voucher Program in
fiscal years 1999 to 2002. We reviewed the reliability of these data
through electronic data testing and interviews with HUD staff familiar
with the databases from which this information was extracted and
determined that the data were sufficiently reliable for the purposes of
our report. We also interviewed HUD officials from the Financial
Management Center to confirm the number of housing agencies that had not
reported their available reserves as of January 31, 2003. Because the
January 2003 reporting date did not coincide with any other reporting
requirements HUD places on housing agencies, we could not validate the
accuracy of the January 2003 reported reserves.

To determine how housing agencies calculated their reserves as of January
31, 2003, and the possible reasons for declines in the reported amounts,
we selected 5 of the 10 housing agencies that had the largest differences
between the average of their reserves reported for fiscal years 1999 to
2002 and the amount they reported as of January 2003.1 To achieve some
geographic distribution, we selected sites in both the eastern and western
parts of the country. None of the 10 housing agencies with the largest
differences were located in the Midwest. The sites we selected were the
Housing Authority of the City of Los Angeles (California), the Orange

1Our sample was a judgmental sample, so our results cannot be used to make
inferences about the population. In a judgmental sample, some elements of
the population being studied have no chance or an unknown chance of being
selected for the sample.

Appendix I Scope and Methodology

County Housing Authority (California), the Broward County Housing
Authority (Florida), the Newark Housing Authority (New Jersey), and the
New York City Housing Authority (New York).2 Prior to our site visits, we
sent each housing agency a data collection instrument on which they
documented how their reserves had changed from their last fiscal year end
to the January 2003 reporting date. During our site visits, we obtained
documentation to support the financial information recorded in the data
collection instrument and interviewed housing agency officials involved in
preparing financial information submitted to HUD. In addition, to
determine why the January 2003 amounts might have been lower than
previously reported amounts, we interviewed officials from HUD, the five
housing agencies, and several public housing industry associations, as
well as private-sector accountants working for housing agencies.

To determine the extent to which HUD reduced fiscal year 2003
administrative fees in light of the reported January 2003 reserves, we
obtained data from HUD showing all of the housing agencies subject to
reductions and the estimated amount of those reductions. We reviewed the
reliability of these data and determined that the data were sufficiently
reliable for the purposes of our report. To assess HUD's processes and how
they related to the legislation, we reviewed applicable legislation, HUD
notices, and policies concerning administrative fees, as well as a
contractor's analysis of HUD's process for determining which housing
agencies were subject to a reduction in fees. We also interviewed HUD
officials regarding the implementation of the process.

To determine the extent to which HUD recaptured excess fiscal year 2003
administrative fees, we reviewed applicable legislation and HUD policies
regarding the recapture process. In addition, we interviewed HUD officials
regarding the implementation of the process.

We conducted our work from January through September 2004 in Los Angeles
and Orange County, California; Broward County, Florida; Needham,
Massachusetts; Newark, New Jersey; New York, New York; and Washington,
D.C., in accordance with generally accepted government auditing standards.

2The other five housing agencies with the largest differences were the
Housing Authority of the County of Santa Clara (California), the Oakland
Housing Authority (California), the Housing Authority of the County of
Tulare (California), the City and County of Honolulu (Hawaii), and the
Boston Housing Authority (Massachusetts).

Appendix II

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	David G. Wood (202) 512-8678 Steven Westley (202) 512-6221

Acknowledgments	In addition to those named above, Daniel Blair, Christine
Bonham, Emily Chalmers, Eben Darling, David Dornisch, John McGrail,
Phillip McIntyre, Marc Molino, Gretchen Maier Pattison, and Mijo Vodopic
made key contributions to this report.

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