Project-Based Rental Assistance: HUD Should Streamline Its	 
Processes to Ensure Timely Housing Assistance Payments		 
(17-OCT-07, GAO-08-199T).					 
                                                                 
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. This testimony, based  
primarily on a report issued in 2005, discusses the timeliness of
HUD's monthly housing assistance payments, the factors that	 
affected payment timeliness, and the effects of delayed payments 
on project owners.						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-08-199T					        
    ACCNO:   A77388						        
  TITLE:     Project-Based Rental Assistance: HUD Should Streamline   
Its Processes to Ensure Timely Housing Assistance Payments	 
     DATE:   10/17/2007 
  SUBJECT:   Contract administration				 
	     Contract terms					 
	     Funds management					 
	     Government contracts				 
	     Housing						 
	     Housing programs					 
	     Internal controls					 
	     Late payments					 
	     Low income housing 				 
	     Program evaluation 				 
	     Records management 				 
	     Schedule slippages 				 
	     Subsidies						 
	     Contract mismanagement				 

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GAO-08-199T

   

     * [1]In Brief
     * [2]Background
     * [3]From Fiscal Years 1995 through 2004, HUD Made Three-fourths
     * [4]Contract Renewals, HUD Funding and Monitoring Issues, and Pr

          * [5]HUD's Difficulties in Assessing Rate of Funding Use and Moni
          * [6]Owners' Untimely, Inaccurate, or Incomplete Submissions

     * [7]HUD's Payment Delays Caused Difficulties for Project Owners,
     * [8]Contact and Acknowledgments
     * [9]GAO's Mission
     * [10]Obtaining Copies of GAO Reports and Testimony

          * [11]Order by Mail or Phone

     * [12]To Report Fraud, Waste, and Abuse in Federal Programs
     * [13]Congressional Relations
     * [14]Public Affairs

Testimony

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

United States Government Accountability Office

GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
Wednesday, October 17, 2007

PROJECT-BASED RENTAL ASSISTANCE

HUD Should Streamline Its Processes to Ensure Timely Housing Assistance
Payments

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

GAO-08-199T

Madam Chairwoman and Members of the Subcommittee:

I appreciate the opportunity to be here today to discuss the timeliness of
subsidies paid by the Department of Housing and Urban Development (HUD) to
owners of multifamily properties. Under contracts with HUD, project owners
provide affordable rental housing to approximately 1.6 million low-income
households. Owners rely on these subsidies from HUD, often to a great
extent, to pay for 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 first business day of the month.

My statement today is based primarily on our 2005 report concerning the
timeliness of HUD's subsidy payments, along with relevant portions of our
2007 report on HUD's efforts to encourage project owners' continued
participation in the subsidy programs.^1 Specifically, my statement
discusses (1) the extent to which HUD made monthly housing assistance
payments in a timely manner during the 10-year period from 1995 through
2004, (2) the factors that affected the timeliness of those payments, and
(3) the effects of payment delays on project owners and their willingness
to continue providing affordable housing.

In preparing the 2005 report, we analyzed trends in HUD's monthly payment
data to determine whether payment timeliness had changed over time and
whether there were differences in payment timeliness depending upon the
type of contract administrator (i.e., whether HUD staff or contractors
processed monthly payment 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 from fiscal years
2002 through 2004) that captured the reasons particular payments were
delayed, and supplemented our analyses by interviewing HUD officials from
headquarters and eight field offices, 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
were currently receiving assistance from HUD at the time of our review. We
also interviewed project owners and contract administrators at HUD field
office locations we visited, and we met with officials from eight industry
associations representing property owners. In preparing the 2007 report,
among other things we conducted standardized interviews with both
for-profit and nonprofit owners of subsidized properties, housing industry
organizations, state housing finance agencies, and other stakeholders in
five localities. Collectively, we conducted this work between October 2004
and April 2007 in Baltimore, Maryland; Boston, Massachusetts; Chicago,
Illinois; Columbus, Ohio; Des Moines, Iowa; Houston, Texas; Kansas City,
Kansas; Kansas City, Missouri; Los Angeles, California; New York, New
York; Manchester, New Hampshire; Seattle, Washington; and Washington, D.C.
in accordance with generally accepted government auditing standards.

^1GAO, Project-Based Rental Assistance: HUD Should Streamline Its
Processes to Ensure Timely Housing Assistance Payments, GAO-06-57
(Washington D.C.: Nov. 15, 2005) and GAO, Project-Based Rental Assistance:
HUD Should Update Its Policies and Procedures to Keep Pace With the
Changing Housing Market, GAO-07-290, (Washington, D.C.: April 11, 2007).

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,
and 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 one 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.

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. More specifically:

           o 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. For example, our analysis of
           available HUD data on the reasons that payments were 2 weeks or
           more late from fiscal years 2002 through 2004 found that the most
           common reason was the payment 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 resulted from the lack of
           a renewed contract. The timeliness, quality, and completeness of
           owners' renewal submissions also could cause delays in contract
           renewals, particularly when an owner's initial contract expired
           and it had to be renewed for the first time.

           o HUD did not know exactly how much it would pay owners each year
           because the amounts varied with tenant turnover, so HUD estimated
           how much funding it would need to obligate, or commit, to each
           contract and how quickly the contract would use these funds.
           However, HUD often underestimated how much funding a contract
           would need in a given year, and the agency lacked consistent
           processes for field office staff to monitor contracts and allocate
           and obligate additional funds when contracts used funds faster
           than anticipated. Failure to allocate and obligate additional
           funds to contracts promptly could cause payments to be late.

           o According to HUD officials and contract administrators, owners'
           untimely, inaccurate, or incomplete monthly voucher submissions
           also might 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 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 incurred late fees on
their mortgages and other bills or 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. Further, 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.

We made several recommendations to HUD designed to improve the timeliness
of these subsidy payments, with which the agency concurred. My statement
incorporates information on the status of HUD's actions in response to
these 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. 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.^2

           o Second, in 1997, Congress passed the Multifamily Assisted
           Housing Reform and Affordability Act (MAHRA), as amended, in an
           effort to ensure that the rents HUD subsidizes remained comparable
           with market rents.^3 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").^4

           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, 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. As of fiscal year 2004, these performance-based
           contract administrators (PBCA) administered the majority of
           contracts--more than 13,000 of approximately 23,000 contracts. HUD
           also has two other types of contract administrators. "Traditional"
           contract administrators (typically local public housing
           authorities) were responsible for administering approximately
           5,000 contracts until they expired; at which time, these contracts
           would be assigned to the PBCAs. Finally, HUD itself also
           administered a small number of contracts under specific types of
           project-based programs.

^2Contracts 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 first year.

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. 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.

^3Pub. L. No. 105-65, title V, 111 Stat. 1384 (Oct. 27, 1997) (set out at
42 U.S.C. S 1437f note).

^4Prior GAO reports on HUD's mark-to-market efforts include the following:
Multifamily Housing: Physical and Financial Condition of Mark-to-Market
At-Risk Properties, [15]GAO-02-953 (Washington, D.C.: Sept. 6, 2002);
Multifamily Housing: Issues Related to Mark-to-Market Program
Reauthorization, [16]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, [17]GAO/RCED-00-21 (Washington, D.C.: Jan. 20,
2000).

From Fiscal Years 1995 through 2004, HUD Made Three-fourths of Its Housing
Assistance Payments on Time

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. 1).^5 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 had 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.

^5For 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 did 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 generally took the PBCAs from 1 to 5 days to turn around
payments to owners.

Figure 1: Timeliness of Housing Assistance Payments, Fiscal Years 1995
Through 2004 Versus 2002 Through 2004

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

HUD does not have an overall timeliness standard, by which it makes
payments to owners or its contract administrators, that is 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 first business day of the month. HUD officials said that
they also used this standard informally to determine the timeliness of
payments on HUD-administered and traditionally administered contracts.
Therefore, we considered payments to be timely if they were disbursed by
the first 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.

The timeliness of housing assistance payments varied over the 10-year
period (see fig. 2). 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
gradually improved after 2001, shortly after HUD first began using the
PBCAs to administer contracts.

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

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

The percentage of contracts experiencing at least one significantly late
payment 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. 3). 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 one payment per year that was delayed by 2 weeks or
more.

Figure 3: Percentage of Contracts Experiencing at Least One Payment
Delayed by 2 Weeks or More, Fiscal Years 1995 Through 2004

Note: Ten-year average: 32 percent.

Payments on HUD-administered contracts were more likely to be delayed than
those on contracts administered by the PBCAs and traditional contract
administrators, based on HUD's fiscal year 2004 payment data (see fig. 4).
Further, HUD-administered contracts were more likely to have chronically
late payments.^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 six or more
payments per year that were 2 weeks or more late.

Figure 4: Percentage of Payments That Were 2 Weeks or More Late, by
Contract Administrator, Fiscal Year 2004

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 did 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.

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

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 showed 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. 5).^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 from 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 could be the result of a problem with the voucher or late
submission by the owner or the PBCA. HUD did not collect data that would
include the reasons for delayed payments on traditionally administered
contracts.

Figure 5: Percentage of Payments That Were 2 Weeks or More Late, by Reason
Code, Fiscal Years 2002 Through 2004, PBCA-and HUD-Administered Contracts

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 included 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 did not collect data on the reasons for delays.

A contract renewal might be "pending" when one or more parties involved in
the process--HUD, the PBCA, or the owner--had not completed the necessary
steps to finalize the renewal. Based on our interviews with HUD officials,
contract administrators, and owners, pending contract renewals might
result from owners' failing to submit their renewal packages on time.
Often the delay occurred when owners had to submit a study of market
rents, completed by a certified appraiser, to determine the market rent
levels. However, late payments associated with contract renewals also
might occur because HUD had 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 was largely manual and paper driven and
required multiple staff in the PBCAs and HUD to complete (see fig. 6).
Upon receipt of renewal packages from owners, the PBCAs then prepared and
forwarded signed contracts (in hard copy) to HUD field offices, which
executed the contracts; in turn, the field offices sent hard copies of
contracts to a HUD accounting center, which activated contract funding. To
allow sufficient time to complete the necessary processing, HUD's policy
required 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 owners 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 6: Contract Renewal Process for PBCA-Administered Contracts

While initial contract renewals (upon expiration of the owner's initial
long-term 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 represented the first time that owners had to provide
HUD with the extensive documentation required for contract renewals to
continue receiving housing assistance payments.

Further, in preparing our 2007 report, some property owners we contacted
raised concerns about the renewal process, particularly on the clarity of
the HUD policies and procedures and the way the policies were applied.^8
Specifically, these owners were concerned that the contract renewal guide
that was published in 1999 had not been updated despite many changes to
HUD's policies and procedures, which has led to confusion among some
owners.

^8GAO-07-290.

To improve the timeliness of housing assistance payments, we recommended
in our 2005 report that HUD streamline and automate the contract renewal
process to prevent processing errors and delays and eliminate
paper/hard-copy requirements to the extent practicable. In its response,
HUD agreed with our recommendation and commented that streamlining and
automating the renewal process would be accomplished through its Business
Process Reengineering (BPR) effort. As we noted in our 2005 report, HUD
launched this initiative in 2004 to develop plans to improve what it
characterized as "inefficient or redundant processes" and integrate data
systems. However, according to HUD, the agency has not received funding
sufficient to implement the BPR initiative. As a result, HUD has been
pursuing other solutions aimed at streamlining and simplifying the
contract renewal process. According to HUD, the agency is planning to
implement a Web-based contract renewal process that would be paperless,
which it expects to complete in fiscal year 2010. HUD also told us that
although it does not have funding in place to fully develop this automated
renewal process, it has been implementing this new process in phases, as
funding becomes available.

HUD's Difficulties in Assessing Rate of Funding Use and Monitoring Funding
Levels

The methods HUD used to estimate the amount of funds needed for the term
of each of its project-based assistance contracts and the way it monitored
the funding levels on those contracts also affected the timeliness of
housing assistance payments. When HUD renews a contract, and when it
obligates 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.^9 However, those estimates
were 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 would affect the rate at which a contract exhausted
its funds, potentially causing the contract to need additional funds
obligated to it before the end of the year. If HUD underestimated the
subsidy payments, the department needed to allocate more funds to the
contract and adjust its obligation upwards to make all of the monthly
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.

Throughout the year, HUD headquarters used a "burn-rate calculation" to
monitor the rate at which a contract exhausted or "burned" the obligated
funds and identify those contracts that may have had too little (or too
much) funding. According to some HUD field office and PBCA officials, they
also proactively monitored contract fund levels. Based on the rate at
which a contract exhausted its funds, HUD obligated 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 5, our analysis of HUD's payment data showed 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.

One potential factor that likely contributed to payment delays related to
obligating contract funding was staff at some HUD field offices--unlike
their counterparts in other field offices and staff at some of the
PBCAs--lacking access to data systems or not being 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. HUD field
offices reported, and headquarters confirmed, that some field officials
had not received training to carry out some functions critical to
monitoring the burn rate. A HUD headquarters official reported that
changes in the agency's workforce demographics posed challenges because
not all of the field offices had staff with an optimal mix of skill and
experience.

We recommended in our 2005 report that HUD 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
were promptly obligated to contracts when necessary to prevent payment
delays. HUD agreed that this recommendation would improve the timeliness
of payments, noting that it planned on achieving improvements through
training, data quality reviews, and data systems maintenance. To determine
how best to improve the current estimation/allocation system, HUD stated
that it had obtained a contractor to analyze current data systems and make
recommendations on improvements that would allow better identification of
emerging funding requirements as well as improved allocation of available
resources. As of October 2007, HUD reported that it was in the process of
verifying and correcting data critical to renewing project-based rental
assistance contracts in its data systems to produce a "clean universe of
contracts." Based on its preliminary results, HUD officials told us that
the data appeared to be reasonably accurate for the purposes of estimating
renewal funding amounts. In addition, HUD has evaluated the current
methodology for estimating its budget requirements for the project-based
programs and developed a "budget calculator" to estimate renewal funding
amounts. HUD has been pursuing contracting services to implement this
"calculator" using the recently verified contract data; however, HUD could
not provide a specific date by which it expected to complete these
improvements.

Owners' Untimely, Inaccurate, or Incomplete Submissions

The PBCAs with which we met estimated that 10 to 20 percent of owners
submitted 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, they often
participated in several "back-and-forth" interactions with owners to
resolve errors or inaccuracies. Typical owner submission errors included
failing to account correctly for changes in the number of tenants or
tenant income levels, or failing to provide required documentation.
Because HUD's data systems did 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 also might be affected by a PBCA's internal
policies for addressing owner errors. For example, to prevent payment
delays, some of the PBCA officials with whom we spoke told us that they
often processed 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 would not process an owner's voucher for
payment unless it fully met all of HUD's requirements.

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

In preparing our 2005 report, some owners reported that they had not been
able to pay their mortgages or other bills on time as a result of HUD's
payment delays.^10 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 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.
This owner also expressed concern about how the late and partial payments
to vendors would affect her credit rating.

If owners were unable to pay their vendors or their staff, services to the
property and the condition of the property could suffer. At one affordable
housing property 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.

According to owners as well as industry group and HUD officials, owners
who were heavily reliant on HUD's subsidy to operate their properties were
more severely affected by payment delays than other owners. Particularly,
owners who owned only one or a few properties and whose operations were
completely or heavily reliant on HUD's subsidies had the most difficulty
weathering a delay. For example:

^10We did not independently assess the owners' ability to meet their
financial obligations without the HUD subsidy payments that were late.

           o 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.
           o 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 three
           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.

While HUD's payment delays had negative financial effects on project
owners, the delays appeared unlikely to result in owners opting out of
HUD's programs. Project owners, industry group officials, contract
administrators, and HUD officials we interviewed generally agreed that
market factors, not late payments, 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. For profit-motivated owners, this
decision can be influenced by the condition 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. In
preparing our 2007 report, we also found that although the majority of the
owners who opted out of the program did so for economic or market factors,
growing owner frustration over a variety of administrative issues,
including late payments, could upset the balance causing more owners to
consider opting out even when economic conditions could be overcome or
mitigated.^11 However, 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 were
"mission driven," or committed to providing affordable housing.

^11GAO-07-290.

HUD had no system for notifying owners when a payment delay would occur or
when it would be resolved, which industry associations representing many
owners as well as the owners with whom we met indicated impeded 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.

To mitigate the effects on owners when payments were delayed, we
recommended in our 2005 report that HUD notify owners if their monthly
housing assistance payments would be late and include in such
notifications the date by which HUD expected to make the monthly payment
to the owner. HUD agreed with the recommendation and noted it would
examine the feasibility of notifying project owners if HUD anticipated
that there would be a significant delay in payment due to an issue beyond
the control of the owner.

Based on discussions with HUD, the agency does not appear to have made
significant progress in implementing this recommendation. HUD stated that
it had begun notifying owners regarding the amount of funding available
under their contracts, which would allow owners to judge when their
contracts are likely to experience shortfalls (and thus possibly
experience late payments). However, the notification would not warn owners
that their payments would be delayed or advise them on the length of the
delay. Without this information, it would be difficult for owners to plan
for such a contingency.

Madam Chairwoman, this concludes my prepared statement. I would be happy
to answer any questions at this time.

Contact and Acknowledgments

For further information on this testimony, please contact David G. Wood at
(202) 512-8678 or [email protected]. Individuals making key contributions to
this testimony included Andy Finkel, Daniel Garcia-Diaz, Grace Haskins,
Roberto Pinero, Linda Rego, and Rose Schuville.

(250379)

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Highlights of [25]GAO-08-199T , a testimony to the Subcommittee on Housing
and Community Opportunity, Committee on Financial Services, House of
Representatives

October 2007

PROJECT-BASED RENTAL ASSISTANCE

HUD Should Streamline Its Processes to Ensure Timely Housing Assistance
Payments

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. This testimony, based primarily
on a report issued in 2005, discusses the timeliness of HUD's monthly
housing assistance payments, the factors that affected payment timeliness,
and the effects of delayed payments on project owners.

[26]What GAO Recommends

In the 2005 report discussed in this testimony, GAO made recommendations
to the Secretary of HUD to improve the timeliness of housing assistance
payments and mitigate the effects of delayed payments. Specifically, GAO
recommended that HUD streamline and automate the contract renewal process,
better estimate and monitor contract funding levels, and notify owners
about late payments.

HUD agreed with our conclusions and recommendations but has not fully
implemented them.

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 needed 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 independent, 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 by
themselves 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)

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

References

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  15. http://www.gao.gov/cgi-bin/getrpt?GAO-02-953
  16. http://www.gao.gov/cgi-bin/getrpt?GAO-01-800
  17. http://www.gao.gov/cgi-bin/getrpt?GAO/RCED-00-21
  18. http://www.gao.gov/
  19. http://www.gao.gov/
  20. http://www.gao.gov/fraudnet/fraudnet.htm
  21. mailto:[email protected]
  22. mailto:[email protected]
  23. mailto:[email protected]
  24. http://www.gao.gov/cgi-bin/getrpt?GAO-08-199T
  25. http://www.gao.gov/cgi-bin/getrpt?GAO-08-199T
*** End of document. ***