Project-Based Rental Assistance: HUD Should Streamline Its	 
Processes to Ensure Timely Housing Assistance Payments		 
(15-NOV-05, GAO-06-57). 					 
                                                                 
The Department of Housing and Urban Development (HUD) provides	 
subsidies, known as housing assistance payments, under contracts 
with privately owned, multifamily projects so that they are	 
affordable to low-income households. Project owners have	 
expressed concern that HUD has chronically made late housing	 
assistance payments in recent years, potentially compromising	 
owners'ability to pay operating expenses, make mortgage payments,
or set aside funds for repairs. GAO was asked to discuss the	 
timeliness of HUD's monthly housing assistance payments, the	 
factors that affect payment timeliness, and the effects of	 
delayed payments on project owners.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-57						        
    ACCNO:   A41477						        
  TITLE:     Project-Based Rental Assistance: HUD Should Streamline   
Its Processes to Ensure Timely Housing Assistance Payments	 
     DATE:   11/15/2005 
  SUBJECT:   Contract administration				 
	     Federal aid for housing				 
	     Housing programs					 
	     Internal controls					 
	     Late payments					 
	     Low income housing 				 
	     Performance measures				 
	     Subsidies						 
	     Housing projects					 
	     Timeliness 					 

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GAO-06-57

                 United States Government Accountability Office

GAO

                       Report to Congressional Requesters

November 2005

PROJECT-BASED RENTAL ASSISTANCE

HUD Should Streamline Its Processes to Ensure Timely Housing Assistance Payments

                                       a

GAO-06-57

[IMG]

November 2005

PROJECT-BASED RENTAL ASSISTANCE

HUD Should Streamline Its Processes to Ensure Timely Housing Assistance Payments

                                 What GAO Found

From fiscal years 1995 through 2004, HUD disbursed three-fourths of its
monthly housing assistance payments on time, but thousands of payments
were late each year, affecting many property owners. Over the 10-year
period, 8 percent of payments were delayed by 2 weeks or more. Payments
were somewhat more likely to be timely in more recent years (see figure).

The process for renewing HUD's subsidy contracts with owners can affect
the timeliness of housing assistance payments, according to many owners,
HUD officials, and contract administrators that HUD hires to work with
owners. HUD's renewal process is largely a manual, hard-copy paper process
that requires multiple staff to complete. Problems with this cumbersome,
paper-intensive process may delay contract renewals and cause late
payments. Also, a lack of systematic internal processes for HUD staff to
better estimate the amounts that HUD needs to obligate to contracts each
year and monitor contract funding levels on an ongoing basis can
contribute to delays in housing assistance payments.

Although HUD allows owners to borrow from reserve accounts to lessen the
effect of delayed housing assistance payments, 3 of 16 project owners told
GAO that they had to make late payments on their mortgages or other bills-
such as utilities, telephone service, or pest control-as a result of HUD's
payment delays. Owners who are heavily reliant on HUD's subsidy to operate
their properties are likely to be more severely affected by payment delays
than other, more financially stable, owners. Owners reported receiving no
warning from HUD when payments would be delayed, and several told GAO that
such notification would allow them to mitigate a delay. Nonetheless,
project owners, industry group officials, and HUD officials generally
agreed that late housing assistance payments would be unlikely to cause an
owner to leave HUD's housing assistance programs, because such a decision
is generally driven primarily by local market factors.

Timeliness of Housing Assistance Payments (Fiscal Years 1995-2004 Versus
2002-2004) Fiscal year

1995-2004

2002-2004

Payment time frames

4 weeks or more late 1-6 days late

14-27 days late Disbursed by due date

7-13 days late

Source: GAO analysis of HUD data.

Note: Percentages do not add to 100 percent due to rounding.

                 United States Government Accountability Office

Contents

  Letter

Results in Brief
Background
HUD Made Three-fourths of Its Housing Assistance Payments On

Time in Fiscal Years 1995 Through 2004

Contract Renewals, HUD Funding and Monitoring Issues, and Problems with
Some Owners' Vouchers Contributed to Payment Delays

HUD's Payment DelaysHave Caused Difficulties for Project Owners, but Are
Unlikely to Be a Significant Factor in Owners Opting Out of HUD Contracts

Conclusions
Recommendations for Executive Action
Agency Comments

1 3 5

9

16

25 30 31 32

Appendixes

Appendix I: Scope and Methodology 34

Appendix II:Comments from the Department of Housing and Urban Development
37

Appendix III: GAO Contact and Staff Acknowledgments 39

Figures	Figure 1: Figure 2: Figure 3: Figure 4:

Figure 5: Figure 6: Figure 7: Figure 8:

Contract Administration Flowchart for HUD Multifamily
Housing Assistance Payments 8
Timeliness of Housing Assistance Payments (Fiscal Years
1995 Through 2004 Versus 2002 Through 2004) 10
Percentage of Payments That Were 2 Weeks or More Late
(Fiscal Years 1995 Through 2004) 11
PercentageofContracts Experiencing at Least 1Payment
Delayed by 2 Weeks or More (Fiscal Years 1995 Through
2004) 12
Percentage of Payments That Were 2 Weeks or More Late,
by Contract Administrator (Fiscal Year 2004) 13
Percentage of PBCA-Administered Payments That Were 2
Weeks or More Late, by State (Fiscal Year 2004) 15
Percentage of Contracts Experiencing Chronically Late
Payments, by State (Fiscal Years 2002 Through 2004) 16
Percentage of Payments That Were 2 Weeks or More Late,
by Reason Code, Fiscal Years 2002 Through 2004,
PBCA- and HUD-Administered Contracts 18

Contents

Figure 9: Contract Renewal Process for PBCA-Administered Contracts 19
Figure 10: Percentage of Contract Renewals Exceeding 120 Days to Process
(Fiscal Years 2002 Through 2004) 20 Figure 11: Number of Contract Opt Outs
(Fiscal Years 1995 Through 2004) 30

Abbreviations

BPR Business Process Reengineering
HUD Department of Housing and Urban Development
OMHAR Office of Multifamily Housing Assistance Restructuring
MAHRA Multifamily Assisted Housing Reform and Affordability Act of

1997 PAS Program Accounting System PBCA performance-based contract
administrator TRACS Tenant Rental Assistance Certification System

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

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

November 15, 2005

The Honorable Michael G. Oxley
Chairman
The Honorable Barney Frank
Ranking Minority Member
Committee on Financial Services
House of Representatives

The Honorable Bob Ney

Chairman

The Honorable Maxine Waters

Ranking Minority Member

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

The Department of Housing and Urban Development (HUD) provides rental
assistance subsidies to privately owned, multifamily projects so that they
are affordable to low-income households. In fiscal year 2004, HUD assisted
approximately 1.6 million households through project-based rental
assistance contracts, committing about $4.4 billion to fund these
contracts with property owners. Owners rely on these subsidies from HUD,
often to a great extent, to pay for daily operating expenses, such as
staff salaries and maintenance, as well as to make their monthly mortgage
payments and set aside funds for contingencies and major repairs. Although
HUD's subsidy payments to owners are not subject to a statutory or
regulatory standard for timeliness, HUD's goal, with some exceptions, is
to provide the payments by the 1st business day of the month.

Project owners, and various associations representing them, have expressed
concern that HUD has been late in paying some owners their monthly subsidy
and that late payments to owners have become a chronic problem in recent
years. According to some owners, late payments can lead them to defer
maintenance, miss payments on monthly utility bills, or risk default on
their mortgages. Furthermore, late payments might influence owners to "opt
out" of HUD's rental assistance programs when their contracts with HUD
expire, potentially resulting in a reduction of affordable housing units
for low-income households.

You asked us to review the effects that late housing assistance payments
may have on project owners and the availability of affordable housing. Our
report discusses (1) the extent to which HUD makes monthly housing
assistance payments in a timely manner, (2) the factors that affect the
timeliness of the payments, and (3) the effect(s) that payment delays have
on project owners and their willingness to continue providing affordable
housing.

To determine the extent to which HUD's housing assistance payments are
timely-that is, disbursed by the 1st business day of the month for most
contracts-we analyzed 10 years (fiscal years 1995 through 2004) of HUD's
monthly payment data. We analyzed trends in these data to determine
whether payment timeliness changed over time and whether there were
differences in payment timeliness by the type of contract administrator
(i.e., whether HUD staff or contractors processed monthly vouchers). To
determine the factors that affect the timeliness of housing assistance
payments, we analyzed the portion of HUD's monthly payment data
(generally, payments made in fiscal years 2002 through 2004) that captured
the reasons particular payments were delayed. We supplemented our analyses
by interviewing HUD officials from headquarters and eight field offices
(which were selected to represent a range of experiences by state- those
with high and low percentages of late payments), contract administrators,
project owners, and industry group officials. To assess the effects of
payment delays on project owners and their willingness to continue
providing affordable housing, we compared available HUD data on projects
that opted out of HUD's programs with monthly payment timeliness data to
determine whether these projects experienced more payment delays than
projects that are currently receiving assistance from HUD. At the HUD
field offices where we did site visits, we interviewed project owners and
contract administrators to determine (1) the reasons owners opted out of
HUD's programs, (2) the extent to which delayed housing assistance
payments may have factored into this decision, and (3) what other effects
(e.g., financial difficulties) payment delays had on project owners. We
also discussed these issues with HUD and officials from eight industry
associations representing property owners. We conducted our work between
October 2004 and September 2005 in Baltimore, Maryland; Boston,
Massachusetts; Chicago, Illinois; Des Moines, Iowa; Kansas City, Kansas;
Kansas City, Missouri; Los Angeles, California; Manchester, New Hampshire;
Seattle, Washington; and Washington, D.C., in accordance with generally
accepted government auditing standards. Appendix I provides additional
details on our scope and methodology.

Results in Brief	Most of HUD's housing assistance payments were timely-HUD
disbursed by the due date 75 percent of the 3.2 million monthly payments
for fiscal years 1995 through 2004; however, 25 percent of its payments
were late. For this 10-year period, HUD disbursed 89 percent of these
monthly payments either on time or less than 1 week late. However, 8
percent (averaging about 25,000 payments per year) were significantly
late-that is, they were delayed by 2 weeks or more, a time frame in which
some owners indicated the late payment could affect their ability to pay
their mortgages on time. HUD made payments on an average of about 26,000
contracts per month. About one-third of these contracts experienced at
least 1 payment per year that was late by 2 weeks or more. The timeliness
of HUD's monthly housing assistance payments varied over the 10-year
period, decreasing in 1998, shortly after HUD began implementing the
Multifamily Assisted Housing Reform and Affordability Act of 1997, which
contained new contract renewal and processing requirements. Timeliness
gradually improved after 2001, after HUD began using performance-based
contract administrators to administer a majority of the contracts. In the
3-year period of fiscal years 2002 through 2004, HUD disbursed 79 percent
of payments by the due date, but 7 percent of these payments were
significantly late, or delayed by 2 weeks or more. Timeliness also varied
depending on the type of administrator responsible for processing the
payments. In fiscal year 2004, payments administered by HUD staff were
more likely to be late, while payments on contracts administered by
performance-based or traditional (nonperformance-based) contract
administrators were more likely to be on time. Timeliness also varied by
state, based on our analysis of fiscal year 2004 data.

The primary factors affecting the timeliness of HUD's housing assistance
payments were the process of renewing owners' contracts; internal HUD
processes for funding contracts and monitoring how quickly each contract
uses its funding; and untimely, inaccurate, or incomplete submissions of
monthly vouchers by project owners. First, monthly housing assistance
payments were more likely to be late when owners' contracts to participate
in HUD's programs were not renewed by their expiration dates, according to
HUD officials, property owners, and contract administrators. Our analysis
of available HUD data on the reasons for some late payments in fiscal
years 2002 through 2004 found that the most common reason for payments
that were 2 weeks or more late was that the payment was being withheld
pending contract renewal. HUD officials and contract administrators said
that delays on HUD's part-stemming from a renewal process HUD officials
agreed could be cumbersome and paper intensive-

could cause (or exacerbate) late payments that result from the failure to
have in place a renewal when a contract reaches its expiration date. The
timeliness, quality, and completeness of owners' renewal submissions could
also cause delays in contract renewals, particularly when an owner's
initial contract expires and it must be renewed for the first time.
Second, various aspects of HUD's internal funding process may contribute
to late payments. HUD does not know exactly how much it will pay owners
each year because the amounts vary with tenant turnover, so HUD estimates
how much funding it needs to obligate, or commit, to each contract and how
quickly the contract will use these funds. However, HUD often
underestimates how much funding a contract will need in a given year, and
the agency lacks consistent processes for field office staff to monitor
contracts and allocate and obligate additional funds when contracts use
funds faster than anticipated. Failure to allocate and obligate additional
funds to contracts promptly can cause payments to be late. Finally,
according to HUD officials and contract administrators, owners' untimely,
inaccurate, or incomplete monthly voucher submissions may also cause late
housing assistance payments. However, the contract administrators with
whom we spoke generally indicated they were able to correct errors in
owners' submissions ahead of time to ensure timely payments.

According to project owners with whom we met, delays in HUD's housing
assistance payments have had negative financial effects and may have
compromised owners' ability to operate their properties, but the delays
were unlikely to cause owners to opt out of HUD's programs or stop
providing affordable housing. Some owners said they had incurred late fees
on their mortgages and other bills or had experienced interruptions in
services at their properties because of delayed payments. Effects of
delayed payments could vary in severity, depending on the financial
condition of the property owner and the extent to which the operation of
the property was dependent on HUD's subsidy. For example, a nonprofit
owner of a single, fully subsidized property (i.e., where all units
receive a HUD subsidy) may have more difficulty paying the mortgage or
other bills for maintenance of the property than would an owner with
several properties that have a mix of market rate and subsidized units.
HUD allows owners to withdraw funds from their replacement reserves (funds
required to be set aside for future property repair and capital
improvements) to help cover operating expenses when housing assistance
payments are delayed. However, some properties may not have sufficient
reserves to cover such expenses. Furthermore, owners said that HUD did not
notify them of when or for how long payments would be delayed, which
prevented them from taking steps to mitigate the effects of late payments.
The owners and

industry group officials generally agreed that the negative effects of
delayed payments alone would not cause owners to opt out of HUD's
programs, although they could be a contributing factor. They cited market
factors, such as an owner's ability to obtain higher rents outside of HUD
programs, as the primary reason owners might opt out. Most of the owners
with whom we spoke stated that they would not opt out of HUD's programs,
because they are committed to providing affordable housing.

This report contains specific recommendations to the Secretary of HUD to
reduce payment delays associated with contract renewals, to better
estimate and monitor contract funding levels, and to notify owners about
late payments. We provided HUD with a draft of this report for its review
and comment. HUD concurred with our conclusions and recommendations.

Background	HUD operates a variety of project-based rental assistance
programs through which it pays subsidies, or housing assistance payments,
to private owners of multifamily housing that help make this housing
affordable for lower income households. In some cases, HUD subsidized the
construction of the housing (or substantial rehabilitation of existing
properties) through means such as discounted mortgages insured by HUD's
Federal Housing Administration; in others, such as the Section 202
Supportive Housing for the Elderly Program, HUD provided grants to
construct the housing. HUD entered into long-term contracts, often 20 to
40 years, committing it and the property owners to providing long-term
affordable housing. Under these contracts, tenants generally pay 30
percent of their adjusted income toward their rents, with the HUD subsidy
equal to the difference between what the tenants pay and the contract
rents that HUD and the owners negotiate in advance.

In the mid- to late-1990s, Congress and HUD made several important changes
to the duration of housing assistance contract terms (and the budgeting
for them), the contract rents owners would receive relative to local
market conditions, and the manner in which HUD administers its ongoing
project-based housing assistance contracts. Specifically:

o 	Because of budgetary constraints, HUD shortened the terms of subsequent
renewals, after the initial 20- to 40-year terms began expiring in the
mid-1990s. HUD reduced the contract terms to 1 or 5 years, with the
funding renewed annually subject to appropriations.1

o 	Second, in 1997, Congress passed the Multifamily Assisted Housing
Reform and Affordability Act (MAHRA), as amended, in an effort, among
other things, to ensure that the rents HUD subsidizes remain comparable
with market rents.2 Over the course of the initial longer term agreements
with owners, contract rents in some cases came to substantially exceed
local market rents. MAHRA required an assessment of each project when it
neared the end of its original contract term to determine whether the
contract rents were comparable to current market rents and whether the
project had sufficient cash flow to meet its debt as well as daily and
long-term operating expenses. If the expiring contract rents were below
market rates, HUD could increase the contract rents to market rates upon
renewal (i.e., "mark up to market"). Conversely, HUD could decrease the
contract rents upon renewal if they were higher than market rents (i.e.,
"mark down to market").3

o 	Finally, in 1999, because of staffing constraints (primarily in HUD's
field offices) and the workload involved in renewing the increasing
numbers of rental assistance contracts reaching the end of their initial
terms,

1Contracts with terms for greater than 1 year include language noting that
they are "subject to annual appropriations," meaning that the terms apply
only if HUD gets an appropriation sufficient to fund the contracts beyond
the 1st year.

2Pub. L. No. 105-65, title V, 111 Stat. 1384 (Oct. 27, 1997) (set out at
42 U.S.C. S: 1437f note).

3Prior GAO reports on HUD's mark-to-market efforts include the following:
GAO, Multifamily Housing: Physical and Financial Condition of
Mark-to-Market At-Risk Properties, GAO-02-953 (Washington, D.C.: Sept. 6,
2002); Multifamily Housing: Issues Related to Mark-to-Market Program
Reauthorization, GAO-01-800 (Washington, D.C.: July 11, 2001); and
Multifamily Housing: HUD's Restructuring Office's Actions to Implement the
Mark-to-Market Program, GAO/RCED-00-21 (Washington, D.C.: Jan. 20, 2000).

HUD began an initiative to contract out the oversight and administration
of most of its project-based contracts. The entities that HUD hired-
typically public housing authorities or state housing finance agencies-
are responsible for conducting on-site management reviews of assisted
properties; adjusting contract rents; reviewing, processing, and paying
monthly vouchers submitted by owners; renewing contracts with property
owners; and responding to health and safety issues at the properties.
These performance-based contract administrators (PBCA) now administer the
majority of contracts-over 13,000 of approximately 23,000 contracts in
fiscal year 2004.

According to HUD officials, the department has not yet transferred all of
its rental assistance contracts to the PBCAs. HUD plans to have
traditional, or nonperformance-based contractors, continue to administer
the approximately 5,000 contracts that they were administering until these
contracts expire; at which time, these contracts will be assigned to the
PBCAs. The traditional contract administrators are, often, local public
housing authorities handling a very limited number of contracts. HUD
itself also administers the contracts under certain programs, such as the
Section 202 Supportive Housing for the Elderly Program and the Section 811
Supportive Housing for Persons with Disabilities Program. HUD announced in
April 2004 that it was conducting a competitive sourcing effort to
determine the most efficient and cost-effective means to administer some
of these contracts. At the conclusion of this effort, HUD will seek new
budget authority to pay for contract administration services.
Consequently, while the PBCAs handle most of HUD's project-based housing,
three types of administrators are involved in day-to-day program oversight
and administration, including tasks involved in processing monthly housing
assistance payments.

To receive their monthly housing assistance payments, owners must submit
monthly vouchers to account for changes in occupancy and tenants' incomes
that affect the actual amount of subsidy due. However, the manner in which
the owners submit these vouchers and the process by which they get paid
varies depending on which of the three types of contract administrators
handles their contract (see fig. 1). For HUD-administered contracts, the
owner submits a monthly voucher to HUD for verification, and HUD in turn
pays the owner based on the amount in the voucher. For PBCA-administered
contracts, the owner submits a monthly voucher to the PBCA, which verifies
the voucher and forwards it to HUD for payment. HUD then transfers the
amount verified on the voucher to the PBCA, which in turn pays the owner.
In contrast, for traditionally administered contracts,

HUD and the contract administrator develop a yearly budget, and HUD pays
the contract administrator set monthly payments. The owner submits monthly
vouchers to the contract administrator for verification, and the contract
administrator pays the amount approved on the voucher. At the end of the
year, HUD and the contract administrator reconcile the payments HUD made
to the contract administrator with the amounts the contract administrator
paid to the owner, exchanging payment as necessary to settle any
difference.

    Figure 1: Contract Administration Flowchart for HUD Multifamily Housing
                              Assistance Payments

Housing assistance Voucher payment

HUD-administered contracts

Traditionally administered contracts $ PBCA-administered contracts $

Sources: GAO and HUD.

aHUD is responsible for verifying vouchers submitted under
HUD-administered contracts, not PBCA-administered and traditionally
administered contracts.

bUnlike PBCA-administered contracts, for traditionally administered
contracts HUD pays the contract administrator a fixed monthly payment on
the basis of an annual budget, rather than monthly voucher amounts.
Payments are reconciled at the end of the year.

HUD has an ongoing effort to improve its rental assistance programs'
business processes and make better use of information technology related
to those programs. In 2004, HUD launched a Business Process Reengineering
(BPR) initiative to, among other things, improve inefficient and redundant
processes, as identified by HUD's contractor for this effort, and to
integrate HUD's data systems. HUD expects its contractor to identify its
recommended changes by June 2006. According to HUD officials, HUD does not
currently have the funding in place to implement the BPR.

  HUD Made Threefourths of Its Housing Assistance Payments On Time in Fiscal
  Years 1995 Through 2004

Between fiscal years 1995 and 2004, HUD disbursed three-fourths of its
monthly housing assistance payments by the due date, but thousands of
payments each year were late, affecting many property owners.4 For this
10-year period, about 8 percent of all payments were delayed by 2 weeks or
more, a time frame we characterize as significant. On average, about
onethird of housing assistance contracts experienced at least 1 payment
per year that was delayed by 2 weeks or more. Furthermore, the timeliness
of housing assistance payments has varied, with a decrease in 1998, but
with a gradual improvement since 2001. Timeliness also varied by type of
contract administrator, with payments for HUD-administered contracts more
likely to be late, based on our analysis of fiscal year 2004 payment data.
Timeliness varied considerably by state as well.

Over a 10-Year Period, 75 Percent of HUD's Payments Were On Time, but 8
Percent Were Significantly Late

Overall, from fiscal years 1995 through 2004, HUD disbursed by the due
date 75 percent of the 3.2 million monthly housing assistance payments on
all types of contracts (see fig. 2). However, 8 percent of payments,
averaging 25,000 per year, were significantly late-that is, they were
delayed by 2 weeks or more and therefore could have negative effects on
owners who relied on HUD's subsidy to pay their mortgages. During this
period, 6 percent of the total payments (averaging 18,000 per year) were 4
weeks or more late, including about 10,000 payments per year that were 8
weeks or more late.

4For contracts administered by the PBCAs and traditional contract
administrators, HUD disburses funds to the contract administrator, rather
than directly to the owner. HUD's data systems do not track the date the
owner received payment under these contracts. As a result, we do not have
data to reflect the exact payment date and, instead, for these contracts,
we characterize timeliness based on the date the U.S. Treasury disbursed
funds to the contract administrator. Based on our discussions with PBCA
officials, it takes the PBCAs generally 1 to 5 days to turn around
payments to owners.

Figure 2: Timeliness of Housing Assistance Payments (Fiscal Years 1995
Through 2004 Versus 2002 Through 2004)

Fiscal year

1995-2004

2002-2004

0 20 40 60 80 100

Percentage

Payment time frames

4 weeks or more late

14-27 days late

7-13 days late

1-6 days late

Disbursed by due date

Source: GAO analysis of HUD data.

Note: Percentages do not add to 100 percent due to rounding. Data include
HUD-administered, PBCA-administered, and traditionally administered
contracts.

HUD does not have an overall timeliness standard by which it makes
payments to owners or its contract administrators, based in statute,
regulation, or HUD guidance. However, HUD contractually requires the PBCAs
(which administer the majority of contracts) to pay owners no later than
the 1st business day of the month. HUD officials said that they also use
this standard informally to determine the timeliness of payments on
HUD-administered and traditionally administered contracts.5 Therefore, we
considered payments to be timely if they were disbursed by the 1st
business day of the month. Based on our discussions with project owners
who reported that they relied on HUD's assistance to pay their mortgages
before they incurred late fees (generally, after the 15th day of the
month), we determined that a payment delay of 2 weeks or more was
significant.

5We did not include payment data for contracts under the Section 236
Rental Assistance Payment and the Rent Supplement programs for which HUD
does not begin processing payments until after the 1st business day of the
month. These represent only 2 percent all project-based rental assistance
contracts.

The Timeliness of Payments Has Varied over a 10-Year Period

The timeliness of housing assistance payments over the 10-year period
(fiscal years 1995 through 2004) has shown some variation (see fig. 3).
The percentage of payments that were significantly late increased in 1998,
which HUD and PBCA officials indicated likely had to do with HUD's initial
implementation of MAHRA and new contract renewal procedures and processing
requirements for project owners. Timeliness has gradually improved since
2001, shortly after HUD first began using the PBCAs to administer
contracts.

Figure 3: Percentage of Payments That Were 2 Weeks or More Late (Fiscal
Years 1995 Through 2004)

Percentage

25

20

15

10

5

0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year

Source: GAO analysis of HUD data.

Note: Ten-year total number of payments: 3,212,982.

The percentage of contracts experiencing significantly late payments over
the course of the year showed a similar variation over the 10-year period,
rising to 43 percent in fiscal year 1998 and decreasing to 30 percent in
fiscal year 2004 (see fig. 4). As with the percentage of late payments,
the percentage of contracts with late payments increased in fiscal year
1998 when HUD implemented requirements pursuant to MAHRA. Over the

10-year period, about one-third of approximately 26,000 contracts
experienced at least 1 payment per year that was delayed by 2 weeks or
more.

Figure 4: Percentage of Contracts Experiencing at Least 1 Payment Delayed
by 2 Weeks or More (Fiscal Years 1995 Through 2004)

                                 Percentage 50

                                       40

                                       30

                                       20

             10 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Year Source: GAO analysis of HUD data.

Note: Ten-year average: 32 percent.

Although HUD data showed a gradual decline in the percentage of late
payments and the number of contracts affected by late payments, in the
most recent 3-year period (fiscal years 2002 through 2004), the percentage
of payments that were 2 weeks or more and 4 weeks or more late was nearly
as high (7 percent and 5 percent) as over the 10-year period (see fig. 2).

The Timeliness of Payments Payments on HUD-administered contracts were
more likely to be delayed Varied Based on the Type of than those on
contracts administered by the PBCAs and traditional Contract
Administration contract administrators, based on HUD's fiscal year 2004
payment data

(see fig. 5).

Figure 5: Percentage of Payments That Were 2 Weeks or More Late, by
Contract Administrator (Fiscal Year 2004)

Type of administrator

PBCA

HUD

Traditional

0 5 10152025

Percentage

Source: GAO analysis of HUD data.

Note: Categorization by type of administrator is based on HUD contract
administration data as of February 2005. We limited our analysis to 2004
because the data from HUD do not allow us to identify for prior fiscal
years which type of contract administrator was responsible for each
contract and because, over the course of these years, HUD was in the
process of transferring contract administration responsibilities. For a
small number of the payments characterized as PBCA-administered in this
figure, HUD may have transferred processing to the PBCA during the fiscal
year.

Payments on PBCA-and HUD-administered contracts have more elaborate
monthly processing requirements than do the payments on traditionally
administered contracts that HUD processes. Payments on PBCA- and
HUD-administered contracts require that the monthly vouchers be reviewed
and processed by a PBCA or HUD field office before a payment is approved.
As previously noted, for traditionally administered contracts, HUD creates
an annual budget, amortizes the budget over 12 payments for the year,
disburses the set monthly payments, and makes any necessary adjustments
through a year-end settlement based on voucher information submitted to
the traditional contract administrators.

The percentage of chronically late payments also varied by contract
administrator.6 In fiscal year 2004, 9 percent of HUD-administered
contracts experienced chronic late payments, while 3 percent of
PBCA-administered contracts and 1 percent of the traditionally
administered contracts had chronic late payments.

6We defined chronically late payments as contracts with 6 or more payments
per year that were 2 weeks or more late.

Payment Timeliness Also Varied by State

We analyzed HUD's payment data by state and found that timeliness varied
considerably for both PBCA- and HUD-administered contracts, although the
reasons for this variation are not clear. The percentage of payments on
PBCA-administered contracts that were 2 weeks or more late in fiscal year
2004 ranged from 1 percent in North Dakota to 13 percent in the District
of Columbia (see fig. 6). With some exceptions, a single PBCA administers
all of the PBCA-administered contracts for a single state. However, late
payments may be attributable to a number of factors, and the HUD payment
data do not provide an explanation for the variations among the states.

Figure 6: Percentage of PBCA-Administered Payments That Were 2 Weeks or
More Late, by State (Fiscal Year 2004)

Sources: GAO analysis (HUD data) and Art Explosion (map).

For HUD-administered contracts, 19 states had 15 percent or more of their
payments that were 2 weeks or more late in 2004. The percentage of
payments 2 weeks or more late ranged from 2 percent in North Dakota to 35
percent in Wyoming. Again, the HUD payment data do not provide an
explanation for the state variation in payment delays.

The percentage of contracts that experienced chronic late payments also
varied by state. In fiscal years 2002 through 2004, 17 percent of the
contracts in Delaware and 13 percent in Connecticut and the District of
Columbia had 6 or more payments per year that were 2 weeks or more late
(see fig. 7). In contrast, less than 3 percent of contracts in most states
had chronic late payments.

Figure 7: Percentage of Contracts Experiencing Chronically Late Payments,
by State (Fiscal Years 2002 Through 2004)

The contract renewal process, HUD's internal processes for funding and
monitoring contracts, and owners' erroneous or untimely voucher
submissions affected payment timeliness. For instance, owners were more
likely to receive late monthly payments when their contracts with HUD had
not been renewed by their expiration dates. Moreover, HUD's process of
estimating how much funding it needs to obligate to contracts; HUD's
inconsistent approach to monitoring contracts to determine when additional
funding should be obligated; and lack of staff access to, and training on,
HUD payment databases also may have affected the timeliness of housing
assistance payments. Additionally, HUD's interpretation of legislative
restrictions on its ability to use recaptured funds may have exacerbated
payment delays. Finally, owners' erroneous or untimely

                       Source: GAO analysis of HUD data.

  Contract Renewals, HUD Funding and Monitoring Issues, and Problems with Some
  Owners' Vouchers Contributed to Payment Delays

submissions of monthly vouchers could have caused some of the untimely
payments from HUD.

Payment Delays Were More Likely When a Contract Renewal Was Pending

Late monthly voucher payments were more likely to occur when a contract
had not been renewed by its expiration date, according to many of the HUD
officials, contract administrators, and property owners with whom we
spoke. HUD's accounting systems require that an active contract be in
place with funding obligated to it before it can release payments for that
contract. Therefore, an owner cannot receive a monthly voucher payment on
a contract that HUD has not renewed.

Our analysis of HUD data from fiscal years 2002 through 2004 shows that 60
percent of the payments that were 2 weeks or more late was associated with
pending contract renewals, among late payments on PBCA- and
HUD-administered contracts for which HUD recorded the reason for the delay
(see fig. 8).7

7HUD data recorded the reason for the delay for 55 percent of the PBCA-and
HUD-administered payments that were 2 weeks or more late in fiscal years
2002 through 2004. We could not determine the reasons for the delay in the
remaining 45 percent of the late payments. For almost all of the remaining
45 percent of payments, HUD's data systems did not accept the voucher in
time for a timely payment. According to HUD officials, late acceptance of
the voucher, for example, could be the result of a problem with the
voucher or that it was submitted late by the owner or the PBCA. HUD does
not collect data that would include the reasons for delayed payments on
traditionally administered contracts.

Figure 8: Percentage of Payments That Were 2 Weeks or More Late, by Reason
Code, Fiscal Years 2002 Through 2004,

PBCA- and HUD-Administered Contracts

Percentage of late payments with
data on reason for delay  Reason for delay, by percentage

Other

Contract needed additional funds obligated to make payment

Owner's voucher required review by HUD

Payment was withheld pending contract renewal

Source: GAO analysis of HUD data.

Note: Of the 62,851 PBCA- and HUD-administered payments that were 2 weeks
or more late during this 3-year period, HUD's database included a reason
code for 34,828, or 55 percent. The "other" category includes pending
verification of bank information, pending HUD review of a rent increase,
insufficient tenant data, or other missing data on owners' payment
vouchers. We excluded payments on traditionally administered contracts
because HUD does not collect data on the reasons for delays.

A contract renewal may be "pending" when one or more parties involved in
the process-HUD, the PBCA, or the owner-have not completed the necessary
steps to finalize the renewal. Based on our interviews with HUD officials,
contract administrators, and owners, pending contract renewals may result
from owners' failing to submit their renewal packages on time. Often the
delay occurs when owners must submit a study of market rents, completed by
a certified appraiser, in order to determine the market rent levels.
However, late payments associated with contract renewals may also occur
because HUD has not completed its required processing. For example,
according to a HUD official, at one field office we visited, contract
renewals were delayed because HUD field staff were behind in updating
necessary information, such as the new rent schedules associated with the
renewals and the contract execution dates in HUD payment systems.

HUD's contract renewal process itself also may take longer than expected,
contributing to late housing assistance payments, because the process is
largely manual and paper driven and requires multiple staff in the PBCAs
and HUD to complete (see fig. 9). Upon receipt of renewal packages from
owners, the PBCAs then prepare and forward signed contracts (in hard copy)
to HUD field offices, which execute the contracts; in turn, the field
offices send hard copies of contracts to a HUD accounting center, which
activates contract funding. In order to allow sufficient time to complete
the necessary processing, HUD's policy currently requires owners to submit
a renewal package to their PBCAs 120 days before a contract expires, and
gives the PBCAs 30 days to forward the renewal package to HUD for
completion (leaving HUD 90 days for processing). However, some of the
owners with whom we spoke told us that their contract renewals had not
been completed by the contract expiration dates, even though they had
submitted their renewal packages on time.

Figure 9: Contract Renewal Process for PBCA-Administered Contracts

Sources: GAO and HUD.

While initial contract renewals (upon expiration of the owner's initial
longterm contract) often exceeded the 120-day processing time, subsequent
renewals were less time-consuming and resulted in fewer delays, according
to HUD officials, the PBCAs, and owners. Initial renewals could be
challenging for owners because they often involved HUD's reassessment of
whether the contract rents were in line with market rents. Additionally,
the initial renewal represents the first time that owners have to provide
HUD with the extensive documentation required for contract renewals in
order to continue receiving housing assistance payments. Our analysis of
the

most recent 3 years of HUD data (fiscal years 2002 through 2004) shows
that while 25 percent of initial contract renewals exceeded the 120-day
processing time frame set by HUD, 17 percent of subsequent renewals
exceeded that time frame, as shown in figure 10. Increased timeliness on
subsequent renewals might be explained partly by owners' gaining
competency-that is, the PBCAs and owners described a "learning curve" when
owners renewed their contracts for the first time.

Figure 10: Percentage of Contract Renewals Exceeding 120 Days to Process
(Fiscal Years 2002 Through 2004)

Renewal type

Initial contract renewals

Subsequent contract renewals

0 10 20 30 40 50

Percentage

Source: GAO analysis of HUD data.

Note: HUD allows 120 days to process renewals.

The processing times for contract renewals that HUD's data show do not
include some interactions between the PBCAs and owners. More specifically,
HUD's data systems capture the dates on which it receives completed
renewal packages from the PBCAs, but do not capture the dates for earlier
steps in the process. For instance, the data systems do not capture the
dates when owners initially submit renewal packages to the PBCAs and,
thus, the amount of time it may take the PBCAs and owners to go "back and
forth" to assemble completed packages.

According to our analysis, the processing time for the contract renewals
also was likely to exceed HUD's 120-day standard when owners chose or were
subject to one of two options at their initial renewals. First, for
properties with contract rents lower than comparable market rents, owners
had the option to request contract renewals under the "mark-up-tomarket"
option, which required (1) owners to obtain an appraiser's determination
of comparable market rents and (2) HUD to reassess the contract rents in
order to raise them to applicable market level rents. For fiscal years
2002 through 2004, 60 percent of the 471 contract renewals

using the mark-up-to-market option took more than the expected 120 days.
Second, for expiring contracts with rents higher than comparable market
rents, contract administrators referred the owners to HUD's Office of
Multifamily Housing Assistance Restructuring (OMHAR), a process that can
lead to rents in renewed contracts that are lower than those in the
expiring contracts (the "mark-to-market" option).8 For fiscal years 2002
through 2004, 56 percent of the 1,276 contract renewals referred to OMHAR
to reduce rents-and, in many cases, to restructure the property owners'
debt-took more than the expected 120 days to process.

Recognizing that contract renewal is lengthy and cumbersome, HUD's goal is
to automate the renewal process and reduce the 120-day time frame through
a BPR effort for its rental assistance programs. HUD launched this
initiative in 2004 to, among other things, develop plans to improve what
it characterizes as "inefficient or redundant processes" and to integrate
data systems. For example, according to a senior HUD official, the
department's goal is to automate the entire contract renewal process by
2007, eliminating the need for HUD and owners to physically sign the
contracts. According to HUD officials, this effort would eventually
include a more streamlined and automated contract renewal process.
However, this effort is in its early stages, and is currently not focused
on streamlining the contract renewal process or addressing the problem of
late housing assistance payments. HUD does not have concrete plans
regarding how it will accomplish these goals, nor does it have funding in
place to implement any of the recommendations the reengineering effort
might develop.

8Section 571 of the Multifamily Assisted Housing Reform and Affordability
Act of 1997 established OMHAR to carry out the Mark-to-Market Program to
reduce rents to market levels and restructure the debt for properties with
expiring long-term contracts. OMHAR's existence terminated on September
30, 2004. At that time, HUD created the Office of Affordable Housing
Preservation to continue the Mark-to-Market Program.

HUD's Difficulties in Assessing Rate of Funding Use and Monitoring Funding
Levels May Have Affected Timeliness of Housing Assistance Payments

The methods HUD uses to estimate the amount of funds needed for the term
of each of its project-based assistance contracts and the way it monitors
the funding levels on those contracts may also affect the timeliness of
housing assistance payments. When HUD renews a contract, and when it
obligates9 additional funding for each year of contracts with 5-year
terms, it obligates an estimate of the actual subsidy payments to which
the owner will be entitled over the course of a year. However, those
estimates are often too low, according to HUD headquarters and field
office officials and contract administrators. For example, an
underestimate of rent increases or utility costs or a change in household
demographics or incomes at a property will affect the rate at which a
contract exhausts its funds, potentially causing the contract to need
additional funds obligated to it before the end of the year. If HUD
underestimates the subsidy payments, the department needs to allocate more
funds to the contract and adjust its obligation upwards to make all of the
monthly payments.

Throughout the year, HUD headquarters uses a "burn-rate calculation" to
monitor the rate at which a contract exhausts or "burns" the obligated
funds and to identify those contracts that may have too little (or too
much) funding. According to some HUD field office and PBCA officials, they
also proactively monitor contract fund levels. Based on the rate at which
a contract exhausts its funds, HUD obligates more funds if needed.

However, based on our analysis of available HUD data and our discussions
with HUD field office officials, owners, and contract administrators,
payments on some contracts were still delayed because they needed to have
additional funds allocated and obligated before a payment could be made.
As shown in figure 8, our analysis of HUD's payment data shows that, where
the reasons for delayed payments on PBCA-and HUD-administered contracts
were available, 11 percent of delays of 2 weeks or more were due to
contracts needing additional funds obligated. That is, those payments were
delayed because, at the time the owners' vouchers were processed, HUD had
not allocated and obligated enough funding to the contracts to cover the
payments.

9An obligation is a definite commitment that creates a legal liability of
the government for the payment of goods and services ordered or received,
or a legal duty on the part of the United States that could mature into a
legal liability by virtue of actions on the part of the other party beyond
the control of the United States. Payment may be made immediately or in
the future. An agency incurs an obligation, for example, when it places an
order, signs a contract, awards a grant, purchases a service, or takes
other actions that require the government to make payments to the public
or from one government account to another.

One potential factor contributing to payment delays related to obligating
contract funding is likely that staff at some HUD field offices-unlike
their counterparts in other field offices and staff at some of the
PBCAs-did not have access to data systems or were not trained to use them
to monitor funding levels. At some of the field offices we visited,
officials reported that they did not have access to the HUD data systems
that would allow them to adequately monitor contract funding levels. For
example, one field office official told us that he needed access to one of
HUD's accounting data systems to more accurately monitor contract funding.
According to this official, he requested "read-only" access to this
system, which requires a security clearance, but never received
information on the status of his application from HUD headquarters. HUD
field offices reported, and headquarters confirmed, that some field
officials have not received training to carry out some functions critical
to monitoring the burn rate. One field office official reported that none
of the staff in her office had received training in a payment processing
database, which is critical for monitoring the status of monthly payments.
A HUD headquarters official reported that changes in the agency's
workforce demographics posed challenges because not all of the field
offices have staff with an optimal mix of skill and experience.

According to a senior HUD official, HUD's BPR is intended to provide a
systematic, agencywide solution to the contract funding issues that field
office officials have been trying to address on an ad hoc basis to prevent
payment delays. If this effort successfully addresses contract funding
monitoring agencywide through automation, as this official suggested, HUD
may not have to rely solely on the intervention of its field officials.

HUD's Interpretation of Legislative Restrictions on Its Ability to Use
Recaptured Funds May Have Exacerbated Payment Delays

Prior to fiscal year 2003, HUD used funds that it had recaptured from some
contracts to augment other contracts that required additional funds.10
Based on HUD's interpretation of its appropriations acts for fiscal years
2003 and 2004, the agency determined that recaptured funds were not
available in those years to fund contract amendments.11 According to HUD
officials, this made it difficult to budget for amendments in those years
and could have affected the timeliness with which HUD funded some
contracts and made related housing assistance payments. HUD's fiscal year
2005 appropriation specifically authorized the use of recaptured funds for
contract amendments.12

According to HUD headquarters officials, operating under a continuing
resolution rather than an appropriation should not affect the timeliness
of housing assistance payments.13 According to HUD budget officials, under
a continuing resolution, HUD has funding available to meet its contractual
obligations to pay project owners and, if need be, to renew rental
assistance contracts.14

10Recaptured funds are funds that an agency had previously obligated
(e.g., agreed to pay in a housing assistance payment contract) but that
the agency deobligated when it determined that the funds would not be
needed for these contracts. In some cases, an agency may use recaptured
funds for other program activities, reducing its need for new
appropriations. In other cases, Congress may rescind recaptured funds.

11A contract amendment is a mutually agreed-upon change (between HUD or a
contract administrator and a project owner) to an obligation of funds. For
example, a contract amendment may be allowed to cover increased contract
rents resulting from increased costs, decreases in family incomes, or
both.

12Consolidated Appropriations Act, 2005, Pub. L. No. 108-447, div. I,
title II, 118 Stat. 2809 (Dec. 8, 2004).

13A continuing resolution is legislation enacted by Congress to provide
budget authority for federal agencies and/or specific activities to
continue in operations until the regular appropriations are enacted.
Continuing resolutions are enacted when action on appropriations is not
completed by the beginning of a fiscal year.

14Some PBCAs, project owners, and industry group representatives with whom
we spoke were under the impression that continuing resolutions might
preclude contract renewals or cause untimely housing assistance payments.
Many of them indicated they had been told by HUD field officials that
payment delays in the beginning of the federal fiscal year were a result
of continuing resolutions.

Owners' Untimely, Inaccurate, or Incomplete Submissions May Have Affected
the Timeliness of Housing Assistance Payments

The PBCAs with which we met estimated that 10 to 20 percent of owners
submit late vouchers each month. For example, one PBCA reported that about
20 percent of the payments it processed in 2004 were delayed due to late
owner submissions. However, the PBCAs also reported that they generally
could process vouchers in less than the allowable time-20 days-agreed to
in their contracts with HUD and resolve any errors with owners to prevent
a payment delay. According to PBCA officials, there are often several
"back-and-forth" interactions with owners to resolve errors or
inaccuracies. Typical owner submission errors include failing to account
correctly for changes in the number of tenants or tenant income levels, or
failing to provide required documentation. As we previously noted, because
HUD's data systems do not capture the back-and-forth interactions PBCA
officials described to us, we could not directly measure the extent to
which owners' original voucher submissions may have been late, inaccurate,
or incomplete.

HUD officials and the PBCAs reported that owners had a learning curve when
contracts were transferred to the PBCAs because the PBCAs reviewed monthly
voucher submissions with greater scrutiny than HUD had in the past. The
timeliness of payments may also be affected by a PBCA's own internal
policies for addressing owner errors. For example, in order to prevent
payment delays, some of the PBCA officials with whom we spoke told us that
they often process vouchers in advance of receiving complete information
on the owners' vouchers. In contrast, at one of the PBCAs we visited,
officials told us that they will not process an owner's voucher for
payment unless it fully meets all of HUD's requirements.

  HUD's Payment Delays Have Caused Difficulties for Project Owners, but Are
  Unlikely to Be a Significant Factor in Owners Opting Out of HUD Contracts

HUD's payment delays have had negative financial effects on project
owners, but they are unlikely to result in owners opting out of HUD's
programs. Owners with whom we spoke reported that they have incurred late
fees on their mortgages and other bills and have had difficulty operating
their properties as a result of payment delays. The severity of the
effects depended on the financial condition of the property owner and the
extent to which the owner relied on HUD's subsidy to make the mortgage
payment and operate the property. HUD did not notify owners when payments
would be late, and owners said that this lack of notice exacerbated the
effect of late payments. However, delayed payments alone were unlikely to
result in opt outs, although they could have been a contributing factor,
according to owners as well as officials from industry groups and HUD.
Finally, our analysis of HUD payment data indicated that

there was little difference in payment delays between properties that have
opted out of, and those that still participate in, HUD's programs.

Some Owners Report Difficulties in Paying Mortgages and Other Bills and
Operating Their Properties as a Result of Payment Delays

Some owners report that they have not been able to pay their mortgages or
other bills on time as a result of HUD's payment delays.15 Three of the 16
owners with whom we spoke reported having to pay their mortgages or other
bills late as a result of HUD's payment delays. One owner reported that he
was in danger of defaulting on one of his properties as a direct result of
late housing assistance payments. Another owner reported having paid
$4,000 in late fees to a utility company because she was unable to pay the
bill on time. Another owner was unable to provide full payments to
vendors, including utilities, telephone service, plumbers, landscapers,
and pest control services during a 3-month delay in receiving housing
assistance payments. According to this owner, her telephone service was
interrupted during the delay and her relationship with some of her vendors
suffered. For example, the pest control and plumbing vendors would
continue to provide services only if they received cash in advance. This
owner also expressed concern about how the late and partial payments to
vendors would affect her credit rating. Industry groups with whom we spoke
also raised concerns about their members' inability to pay mortgages and
other bills when HUD's housing assistance payments were delayed.

If owners are unable to pay their vendors or their staff, services to the
property and the condition of the property could suffer. At one affordable
housing project for seniors that we visited, the utility services had been
interrupted because of the owner's inability to make the payments. At the
same property, the owner told us that she could not purchase cleaning
supplies and had to borrow supplies from another property. One of the 16
owners with whom we spoke told us that they were getting ready to furlough
staff during the time that they were not receiving payments from HUD.
According to one HUD field office official, owners have complained about
not being able to pay for needed repairs or garbage removal while they
were waiting to receive a housing assistance payment. According to one
industry group official, payment delays could result in the gradual
decline of the condition of the properties in instances where owners were
unable to pay for needed repairs.

15We did not independently assess the owners' ability to meet their
financial obligations without the HUD subsidy payments that were late.

Effects of Delayed Payments on Owners Varied Based on Several Factors,
Particularly the Owners' Financial Condition and Degree of Reliance on
HUD's Subsidy

According to owners as well as industry group and HUD officials, owners
who are heavily reliant on HUD's subsidy to operate their properties are
more severely affected by payment delays than other owners. Particularly,
owners who own only one or a few properties and whose operations are
completely or heavily reliant on HUD's subsidies have the most difficulty
weathering a delay. Two of the 16 owners with whom we spoke reported that
they could not pay their bills and operate the properties during a payment
delay. These owners were nonprofits, each operating a single property
occupied by low-income seniors. In both cases, the amount of rent they
were receiving from the residents was insufficient to pay the mortgage and
other bills. Neither of these owners had additional sources of revenue.

In contrast, owners with several properties and other sources of revenue
were less severely affected by HUD's payment delays. Three of the owners
with whom we spoke reported that they were able to borrow funds from their
other properties or find other funding sources to cover the mortgage
payments and other bills. All 3 of these owners had a mix of affordable
and market rate properties. According to HUD and PBCA officials, owners
who receive a mix of subsidized and market rate rents from their
properties would not be as severely affected by a payment delay as owners
with all subsidized units. For example, representatives of 2 of the owners
stated that they did not have to take any measures to address delays in
housing assistance. One owner is an investment firm for a pension fund
that maintains a large portfolio of mostly market rate properties.
According to a representative of the firm, delayed housing assistance
payments had not caused financial difficulties, but the delay had
presented accounting difficulties for the firm. The other owner is a
nonprofit with several properties. According to a representative of the
owner, the rents paid by the residents of all of the properties were a
larger part of the nonprofit's revenue than the HUD subsidy, so the
nonprofit was not negatively affected by an occasional delay in housing
assistance payments.

HUD allows owners to borrow from their reserve accounts to help mitigate
the effects of delayed housing assistance payments, but some owners either
do not have reserves or their reserves are not sufficient to cover the
period of the delay. HUD requires HUD-insured properties and properties
with HUD-held mortgages to set aside funds in a reserve account, which is
designed primarily to help fund capital improvements on the properties.
HUD also allows owners to withdraw funds from this account in the event of
HUD's payment delays, so that owners are able to make their mortgage
payments. However, properties that are not insured by HUD and do not have
a HUD-held mortgage may not have a reserve account, and, according

to HUD and industry group officials, owners with small or newer properties
may not have sufficient reserves to cover delays. Even if the reserves
were sufficient, industry group officials have pointed out that owners
might have to defer capital improvements during payment delays, and also
lose interest that they would otherwise accrue in the reserve account.
Some projects also have a residual receipts account from which owners may
borrow. HUD requires nonprofits and limited dividend multifamily projects
that are HUD-insured or have a HUD-held mortgage to maintain a residual
receipts account for monies beyond the owner's maximum allowable
distribution or profit.16

Lack of Notice about Payment Dates and Lengths of Delays Has Exacerbated
Problems for Owners

HUD has no system for notifying owners when a payment delay will occur or
when it will be resolved, which industry associations representing many
owners as well as the owners with whom we met indicated impedes their
ability to adequately plan to cover expenses until receiving the late
payment. Most of the owners with whom we spoke reported that they received
no warning from HUD that their payments would be delayed. Several of the
owners told us that notification of the delay and the length of the delay
would give them the ability to decide how to mitigate the effects of a
late payment. For example, owners could then immediately request access to
reserve accounts if the delay were long enough to prevent them from paying
their mortgages or other bills on time. Industry group officials with whom
we met agreed that a notification of a delayed payment would benefit their
members.

Delayed Housing Assistance Payments Were Unlikely to Cause Owners to Opt
Out of HUD's Programs or Discontinue Involvement in Providing Affordable
Housing

Project owners, industry group officials, contract administrators, and HUD
officials we interviewed generally agreed that market factors primarily
drove an owner's decision to opt out of HUD programs. Owners generally opt
out when they can receive higher market rents or when it is financially
advantageous to convert their properties to condominiums. In previous
work, we reported that financial and market considerations were factors
likely to affect owners' decisions to opt out of HUD's programs.17 For
profit-motivated owners, this decision can be influenced by the condition

16HUD requires nonprofit and limited dividend property owners to deposit
surplus cash into a residual receipts account, which is an asset of the
owner but held under HUD's control.

17GAO, Multifamily Housing: More Accessible HUD Data Could Help Efforts to
Preserve Housing for Low-Income Tenants, GAO-04-20 (Washington, D.C.: Jan.
23, 2004).

of the property and the income levels of the surrounding neighborhood.
Owners were more likely to opt out if they could upgrade their properties
at a reasonable cost to convert them to condominiums or rental units for
higher income tenants.

Most of the owners with whom we spoke, including some profit-motivated
owners, reported that they would not opt out of HUD programs because of
their commitment to providing affordable housing. Industry group officials
also stated that most of their members are "mission driven," or committed
to providing affordable housing.

According to some owners with whom we spoke, owners have accepted payment
delays as the price of doing business with HUD. However, industry group
and HUD officials stated that delayed payments could be a contributing
factor in some opt outs. According to HUD officials, owners with primarily
market rents in their buildings were more likely to opt out because the
owners felt that the rents from subsidized units were not worth the burden
of HUD's documentation and reporting requirements. Only 1 (a real estate
investment firm for a pension fund) of the 16 owners we interviewed stated
that the firm would opt out of HUD programs if the payment delays were
longer. According to representatives of this firm, their company has a
fiduciary responsibility to the pension fund. If they began losing money
on their affordable housing projects, they would have to sell them.

Our analysis of HUD's monthly payment data for fiscal years 1995 through
2004 revealed little difference in the percentage of late payments for
those contracts that opted out and those still participating in HUD's
programs (9.6 percent and 9.2 percent, respectively). In addition, we
found that over the 10-year period, 1,764 housing assistance contracts out
of the 13,051 that were eligible to do so opted out of HUD's programs.
These opt outs represented 1,460 affordable housing projects (a project
may have more than 1 contract, hence the number of contracts exceeds the
number of projects). The number of contracts opting out over this period
peaked in fiscal year 1998, with 392 contracts opting out, and gradually
declined to 54 in fiscal year 2004 (see fig. 11).

                             Contract opt outs 400

                                      350

                                      300

                                      250

                                      200

                                      150

                                    100 50 0

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year

Source: GAO analysis of HUD data.

Note: Ten-year total: 1,764.

The number of opt outs likely declined after the passage of MAHRA and
HUD's subsequent efforts to preserve affordable housing by allowing owners
to increase the contract rents with HUD to market rates, thereby making it
more financially viable for owners to continue participating in HUD's
programs.

Conclusions	HUD plays an important role in ensuring the continued
availability of affordable housing by providing subsidies to owners of
multifamily rental properties and encouraging owners to remain in its
programs. Over the 10-year period we examined, HUD made most payments on
time-that is, by the 1st business day of the month. However, a significant
percentage of HUD's payments were late. The delays, particularly those of
2 weeks or more, can cause financial hardships for property owners. For
example, the subsidies not only help pay mortgages, but also the daily
operating expenses of many owners. In retrospect, new requirements under
MAHRA and the transition to a new system of contract administration likely
increased delays, particularly in the late 1990s. The initial difficulties
in

implementing MAHRA requirements have abated, and HUD largely has completed
the transition to performance-based contract administration. However,
while the timeliness of housing assistance payments has improved in recent
years, the number of significantly late payments remains a concern.

Although HUD has made changes to improve contract administration, it has
not comprehensively addressed the factors that most affect the timeliness
of payments-that is, its contract renewal and contract funding and
monitoring processes. HUD has recognized that its contract renewal process
is cumbersome and inefficient and wants to cut contract processing time as
one goal of a broader BPR effort. However, that effort has just gotten
under way and currently is not closely focused on the housing assistance
payment process. As a result, if HUD were to rely solely on the
reengineering effort, it would miss opportunities to effect more immediate
improvements to the processing of contract renewals. In addition, HUD
effectively could prevent many delayed payments by better estimating the
amounts it needs to obligate to contracts each year, more systematically
monitoring contract funding levels on an ongoing basis, and promptly
allocating and obligating additional funding to contracts when necessary.
Currently, while contract funding needs can increase for unforeseen
reasons, HUD often underestimates how much funding a contract will need
when it obligates funds at the beginning of a year. Furthermore, HUD's
existing monitoring has not prevented payment delays associated with
contracts needing additional funding obligated in order for HUD to pay the
owner.

As previously noted, HUD has opportunities to improve its contract
processes and avoid the often damaging disruptions late payments could
cause. While project owners and industry groups have indicated that late
housing payments alone would not lead them to opt out of HUD programs,
late housing assistance payments have serious consequences for owners and
potentially for the residents they serve. But, HUD also has opportunities
to mitigate the effects of payments that it cannot make on time. More
specifically, if HUD were to notify project owners of delays and their
likely duration, owners could make contingency plans or otherwise address
the delayed payments.

Recommendations for To improve the timeliness of housing assistance
payments and mitigate the Executive Action effects on owners when payments
are delayed, we recommend that the

Secretary of Housing and Urban Development take the following three
actions:

o 	streamline and automate the contract renewal process to prevent
processing errors and delays and eliminate paper/hard-copy requirements to
the extent practicable;

o 	develop systematic means to better estimate the amounts that should be
allocated and obligated to project-based housing assistance payment
contracts each year, monitor the ongoing funding needs of each contract,
and ensure that additional funds are promptly obligated to contracts when
necessary to prevent payment delays; and

o 	notify owners if their monthly housing assistance payments will be late
and include in such notifications the date by which HUD expects to make
the monthly payment to the owner.

Agency Comments	We provided a draft of this report to HUD for its review
and comment. In a letter from the Assistant Secretary for Housing, Federal
Housing Commissioner (see app. II), HUD stated that it concurred with our
conclusions and agreed that the implementation of our recommendations
would improve payment timeliness. Specifically, HUD agreed to review its
process for renewing and amending rental assistance contracts to identify
areas that can be streamlined and automated. HUD also agreed that
developing a more systematic means to estimate contract funding needs
would further improve payment timeliness. HUD stated that it has obtained
a contractor to determine how to improve its system of estimating contract
funding needs. Additionally, HUD agreed that notification to owners when
payments will be late is desirable and that it will examine the
feasibility of providing such notification.

As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this letter. At that time, we will send copies of this
report to the Chairman and Ranking Minority Member, Senate Committee on
Banking, Housing, and Urban Affairs, and the Chairman and Ranking Minority
Member of its Subcommittee on Housing and Transportation. We will also
send copies to the Secretary of Housing and Urban Development and the
Director of the Office of Management and Budget. We will make copies

available to others upon request. The report will also be available at no
charge on GAO's Web site at http://www.gao.gov.

Please contact me at (202) 512-8678 or [email protected] if you or your staff
have any questions about this report. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Key contributors to this report are listed in appendix
III.

David G. Wood Director, Financial Markets and Community Investment

Appendix I

Scope and Methodology

To determine the extent to which the Department of Housing and Urban
Development's (HUD) housing assistance payments are timely, we obtained
from HUD and analyzed 10 years of monthly payment data (fiscal years 1995
through 2004). We identified the timeliness of each payment within HUD's
data systems by comparing the date that the U.S. Treasury disbursed the
payment with the date that the payment was due-the 1st business day of the
month. We did not look at the dollar amount of these payments. For
contracts administered by performance-based and traditional (or
nonperformance-based) administrators, the Treasury payment is disbursed to
the administrator, which in turn makes payments to the project owners. In
contrast, for HUD-administered contracts, the Treasury disburses payments
directly to the owners.

We analyzed trends in timeliness over the 10-year period as well as the
most recent 3-year period (fiscal years 2002 through 2004) for a more
current picture of payment timeliness. We also calculated the percentage
of payments that had various degrees of lateness (such as 1 to 6 days or 4
weeks or more). For fiscal year 2004, we compared timeliness for payments
processed by the different types of contract administrators involved in
this process (i.e., HUD field offices, performance-based contract
administrators (PBCA), and traditional contract administrators, for which
the HUD Financial Management Center processes payments). We limited our
analysis to fiscal year 2004 because the data we obtained from HUD do not
allow us to identify for prior fiscal years which type of contract
administrator was responsible for each contract, and, over the course of
these years, HUD was in the process of transferring contract
administration responsibilities to the PBCAs. To better understand the
payment process, we interviewed officials from both HUD's Office of
Multifamily Housing and HUD's Financial Management Center and reviewed
relevant documentation on the payment process.

We used various HUD databases to analyze the timeliness of housing
assistance payments. Specifically, we used data from HUD's Program
Accounting System (PAS) for payments on contracts administered by HUD and
the PBCAs and data from the HUD Central Accounting and Program System for
contracts administered by nonperformance-based contract administrators
(traditionally administered contracts). We also used these data to
determine the percentage of significantly late payments (i.e., 2 weeks or
more late), including the distribution by type of contract administrator.
We also used the PAS data to analyze differences in payment timeliness by
state for PBCA-and HUD-administered contracts.

Appendix I
Scope and Methodology

In order to assess the reliability of the data previously described, we
reviewed related documentation and interviewed agency officials who work
with these databases. In addition, we performed internal checks to
determine the extent to which the data fields were populated and the
reasonableness of the values contained in the fields. During our internal
checks, we excluded from our analysis 7 percent of the payments recorded
in PAS due to unreasonable values for the payment date. We concluded that
the data we used were sufficiently reliable for the purposes of this
report.

To determine the factors that affect the timeliness of HUD's housing
assistance payments, we interviewed HUD headquarters officials responsible
for managing and budgeting for the project-based assistance contracts and
payments as well as officials from industry groups representing a variety
of property owners and management agents. We also conducted site visits to
eight locations that we selected by including those with high and low
percentages of late payments.1 For these site visits, we interviewed the
relevant field office officials involved in processing housing assistance
payments, renewing housing assistance contracts, and conducting oversight
of the PBCAs. We interviewed officials of the PBCAs for each of the states
we visited.2 In each of the eight locations, we also interviewed 2 project
owners with some experience with payment delays. We randomly selected 15
of the 16 owners we interviewed; HUD field office officials identified 1
of the project owners during the phase of our work when we were gathering
initial background information. For all of our interviews for these site
visits, we used a semistructured interview guide to ensure consistency. We
also reviewed relevant documentation provided by HUD field officials, the
PBCAs, and project owners.

We used available HUD data to characterize the reasons for some payment
delays for fiscal years 2002 through 2004. We matched PAS payment data on
PBCA-and HUD-administered contracts with data on reasons for payment
delays from HUD's Tenant Rental Assistance Certification System

1These were California, the District of Columbia, Illinois, Iowa,
Maryland, Massachusetts, New Hampshire, and Washington.

2We chose to interview the PBCAs rather than traditional contract
administrators because the PBCAs handle the bulk of HUD's housing
assistance contracts-over 13,000 out of about 23,000 in fiscal year
2004-and, thus, their experiences and perspectives are applicable to more
of the universe of HUD's payments. Furthermore, HUD is gradually assigning
more of the traditional contract administrators' duties to the PBCAs,
which, considering the time available to us to conduct these site visits,
added to our judgment that focusing on the PBCAs was appropriate.

Appendix I
Scope and Methodology

(TRACS). We could only determine the reason for delays for 55 percent of
the late payments. For almost all of the remaining 45 percent of the
payments, HUD's data systems did not accept the voucher-for these payments
there was no error code associated with the delay. Although the data on
reasons for delays are thus not representative of all late payments in
these years, the testimonial evidence we obtained though our discussions
with property owners, contract administrators, and HUD officials
corroborated the results of our data analysis. HUD did not collect data on
the reasons for delayed payments on traditionally administered contracts.

We also analyzed data to examine the timeliness of contract renewals with
the various types of rent adjustments that owners may seek. To determine
the extent to which HUD renewed or adjusted its contracts with property
owners within the 120-day time frame that the agency has established, we
used data from HUD's Real Estate Management System covering fiscal years
2002 through 2004. In order to assess the reliability of the data we used
to determine reasons for late payments and delays in contract renewals, we
reviewed related documentation. In addition, we performed internal checks
to determine the extent to which the data fields were populated and the
reasonableness of the values contained in the fields. We concluded that
the data we used were sufficiently reliable for the purposes of this
report.

To assess the effects of housing assistance payment delays on project
owners and their willingness to continue providing affordable housing, we
compared available HUD payment data on projects that have opted out of
HUD's programs with those currently receiving assistance to determine if
these projects had experienced more payment delays. We tested for
statistically significant differences in the timeliness of payments among
properties that had and had not opted out. We held meetings with a variety
of industry groups to obtain their views on how late payments may affect
project owners and their willingness to continue providing affordable
housing. We also spoke with HUD field office officials, the PBCAs, and
project owners on our eight site visits, as previously mentioned,
regarding the effects of late payments on project owners.

We conducted our work between October 2004 and September 2005 in
Baltimore, Maryland; Boston, Massachusetts; Chicago, Illinois; Des Moines,
Iowa; Kansas City, Kansas; Kansas City, Missouri; Los Angeles, California;
Manchester, New Hampshire; Seattle, Washington; and Washington, D.C., in
accordance with generally accepted government auditing standards.

Appendix II

Comments from the Department of Housing and Urban Development

Appendix II
Comments from the Department of Housing
and Urban Development

Appendix III

                     GAO Contact and Staff Acknowledgments

GAO Contact David G. Wood, (202) 512-8678

Staff 	In addition to those named above, Bill MacBlane, Assistant
Director; Jackie Garza; Patty Hsieh; Jane Kim; Don Porteous; Julianne
Stephens Dieterich;

Acknowledgments	Alison Martin; Marc Molino; Linda Rego; Barbara Roesmann;
and Stu Seman made key contributions to this report.

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