Section 8 Project-Based Rental Assistance: HUD's Processes for Evaluating
and Using Unexpended Balances Are Ineffective (Chapter Report, 07/22/98,
GAO/RCED-98-202).

Pursuant to a legislative requirement, GAO reviewed the Department of
Housing and Urban Development's (HUD) systems for budgeting and
accounting for Section 8 rental assistance funds, focusing on whether
the systems ensure that unexpended Section 8 project-based funds do not
reach unreasonable levels and that obligations are spent in a timely
manner.

GAO noted that: (1) as of September 30, 1997, HUD's Section 8
project-based rental assistance program had about $59.1 billion in
unexpended balances in three major categories: (a) undisbursed
obligations--funds obligated to Section 8 contracts but not yet
disbursed; (b) unobligated but reserved funds--balances reserved for
specific rental assistance contracts but not yet obligated; and (c)
unobligated and unreserved funds--funds that are neither obligated nor
reserved for any specific contracts; (2) most of the unexpended
balances--$55.4 billion--represent undisbursed obligations associated
with approximately 31,000 rental assistance contracts; (3) in addition,
at the end of fiscal year (FY) 1997, HUD had about $3 billion in
unobligated funds that were reserved for but not yet obligated to
specific contracts and about $.7 billion in unobligated and unreserved
funds that were carried over for use in 1998; (4) while most of the
unexpended balances are needed for HUD to fulfill its commitments to the
Section 8 contracts for which the funds have been obligated or reserved,
GAO found at least $517 million in unexpended balances that are no
longer needed for such purposes and thus could be recaptured by HUD and
used to help fund other Section 8 contracts; (5) HUD's procedures for
identifying and deobligating funds that are no longer needed to meet its
Section 8 contractual obligations are not effective; (6) specifically,
the procedures do not ensure that all Section 8 project-based balances
are evaluated each year and that any excess balances are identified and
deobligated in a timely manner; (7) while HUD's program offices are
responsible for reviewing unexpended balances each year to determine
whether they are still needed or can be deobligated, GAO found that some
offices did not perform annual reviews in 1997 and that some funds
identified as being available for deobligation in earlier reviews were
not deobligated; (8) in addition, GAO found errors in the process HUD
used to identify and take into account unexpended balances when
formulating its budget request for FY 1999; (9) as a result, HUD's FY
1999 request for $1.3 billion in amendment funding to cover shortfalls
in existing Section 8 contracts was significantly overstated; and (10)
more recent analyses that correct most of these errors and update the
economic assumptions used indicate that HUD already has sufficient
funding available to meet its amendment needs for FY 1999.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-98-202
     TITLE:  Section 8 Project-Based Rental Assistance: HUD's Processes 
             for Evaluating and Using Unexpended Balances Are
             Ineffective
      DATE:  07/22/98
   SUBJECT:  Unexpended budget balances
             Federal aid for housing
             Low income housing
             Public housing
             Deobligations
             Rent subsidies
             Budget obligations
             Future budget projections
             Financial management
IDENTIFIER:  HUD Section 8 Housing Assistance Program
             HUD Property Disposition Program
             HUD Section 8 Loan Management Set-Aside Program
             HUD 2020 Management Reform Plan
             HUD Tenant Rental Assistance Certification System
             HUD Section 8 Rental Assistance Program
             HUD New Construction/Substantial Rehabilitation Program
             HUD Elderly/Disabled Program
             
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Cover
================================================================ COVER

Cover
================================================================ COVER


Report to Congressional Committees

July 1998

SECTION 8 PROJECT-BASED RENTAL
ASSISTANCE - HUD'S PROCESSES FOR
EVALUATING AND USING UNEXPENDED
BALANCES ARE INEFFECTIVE

GAO/RCED-98-202

Section 8 Project-Based Assistance

(385694)


Abbreviations
=============================================================== ABBREV

  BFS - Budget Forecast System
  CFO - Chief Financial Officer
  GAO - General Accounting Office
  HUD - Department of Housing and Urban Development
  OIG - Office of Inspector General
  OMB - Office of Management and Budget
  PAS - Program Accounting System
  TRACS - Tenant Rental Assistance Certification System
  VA

Letter
=============================================================== LETTER


B-279511

July 22, 1998

Congressional Committees

This report was prepared to comply with the requirements of the 1997
Emergency Supplemental Appropriations Act (P.L.  105-18, June 12,
1997), which requested that GAO study the Department of Housing and
Urban Development's (HUD) systems for budgeting and accounting for
Section 8 rental assistance funds.  HUD administers its Section 8
program in two parts:  tenant-based assistance and project-based
assistance.  This report focuses on the project-based assistance
program.  As requested, we determined whether HUD's systems ensure
that unexpended Section 8 project-based funds do not reach
unreasonable levels and that obligations are spent in a timely
manner. 

We are sending copies of this report to congressional committees and
subcommittees interested in housing, the Secretary of Housing and
Urban Development, the Director of the Office of Management and
Budget, and other interested parties.  We will also make copies
available to others upon request. 

If you or your staff have any questions about this report, please
call me at (202) 512-7631.  Major contributors to this report are
listed in appendix III. 

Judy A.  England-Joseph
Director, Housing and Community
 Development Issues

List of Committees

The Honorable Christopher S.  Bond
Chairman
The Honorable Barbara A.  Mikulski
Ranking Minority Member
Subcommittee on VA, HUD, and
 Independent Agencies
Committee on Appropriations
United States Senate

The Honorable Jerry Lewis
Chairman
The Honorable Lewis Stokes
Ranking Minority Member
Subcommittee on VA, HUD, and
 Independent Agencies
Committee on Appropriations
House of Representatives


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

The Department of Housing and Urban Development's (HUD) Section 8
program provided more than $16 billion in rental assistance payments
to low-income households in fiscal year 1997.  Because of concerns
about HUD's budgeting and accounting practices for Section 8 funds,
the 1997 Emergency Supplemental Appropriations Act (P.L.105-18, June
12, 1997) mandated that GAO determine whether HUD's systems ensure
that unexpended Section 8 funds do not reach unreasonable levels and
that obligations are spent in a timely manner.  HUD administers its
Section 8 program in two parts.  In general, HUD's Office of Public
and Indian Housing manages the tenant-based portion of the program,
while HUD's Office of Housing manages the project-based portion.  GAO
reported on the tenant-based program in February 1998.\1

This report examines the Section 8 project-based rental assistance
program, particularly (1) the categories and amounts of unexpended
rental assistance funds and (2) the effectiveness of HUD's processes
to evaluate unexpended Section 8 project-based balances, ensure they
do not reach unreasonable levels and are spent in a timely manner,
and take unexpended balances into account when determining funding
needs as part of HUD's budget process. 


--------------------
\1 Section 8 Tenant-Based Housing Assistance:  Opportunities to
Improve HUD's Financial Management (GAO/RCED-98-47, Feb.  20, 1998). 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

HUD's Section 8 project-based program provides rental assistance to
low-income tenants.  In contrast to tenant-based assistance, which is
linked to specific individuals, the project-based assistance is
linked to housing units.  Residents in subsidized units generally pay
30 percent of their income for rent, and HUD pays the balance.  The
project-based contracts--generally between HUD and the owners of
private rental housing--were entered into beginning in the 1970s and
1980s, typically for 15, 20, or 40 years.  For some of these
long-term contracts, actual expenditures have proven to be lower than
anticipated when the funds were provided.  In such cases, HUD can
recapture the unneeded funds and use them to help fund other Section
8 contracts.  However, other contracts have insufficient funding to
make rental assistance payments through the life of the contracts. 
For such contracts, the Department requests additional funding
(budget authority) to amend the contracts.\2

In addition, the long-term contracts that were entered into in the
1970s and 1980s began expiring in the early 1990s.  Initially,
contracts were renewed for 5 years.  Currently, expiring contracts
are being renewed for 1 year. 


--------------------
\2 Budget authority is the authority provided by law to enter into
financial obligations that will result in immediate or future outlays
involving federal government funds. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

As of September 30, 1997, HUD's Section 8 project-based rental
assistance program had about $59.1 billion in unexpended balances in
three major categories:  (1) undisbursed obligations--funds obligated
to Section 8 contracts but not yet disbursed; (2) unobligated but
reserved funds--balances reserved for specific rental assistance
contracts but not yet obligated; and (3) unobligated and unreserved
funds--funds that are neither obligated nor reserved for any specific
contracts.  Most of the unexpended balances--$55.4 billion--represent
undisbursed obligations associated with approximately 31,000 rental
assistance contracts.  In addition, at the end of fiscal year 1997,
HUD had about $3 billion in unobligated funds that were reserved for
but not yet obligated to specific contracts and about $.7 billion in
unobligated and unreserved funds that were carried over for use in
1998.  While most of the unexpended balances are needed for HUD to
fulfill its commitments to the Section 8 contracts for which the
funds have been obligated or reserved, GAO found at least $517
million in unexpended balances that are no longer needed for such
purposes and thus could be recaptured by HUD and used to help fund
other Section 8 contracts. 

HUD's procedures for identifying and deobligating funds that are no
longer needed to meet its Section 8 contractual obligations are not
effective.  Specifically, the procedures do not ensure that all
Section 8 project-based balances are evaluated each year and that any
excess balances are identified and deobligated in a timely manner. 
While HUD's program offices are responsible for reviewing unexpended
balances each year to determine whether they are still needed or can
be deobligated, GAO found that some offices did not perform annual
reviews in 1997 and that some funds identified as being available for
deobligation in earlier reviews were not deobligated.  In addition,
GAO found errors in the process HUD used to identify and take into
account unexpended balances when formulating its budget request for
fiscal year 1999.  As a result, HUD's fiscal year 1999 request for
$1.3 billion in amendment funding to cover shortfalls in existing
Section 8 contracts was significantly overstated.  More recent
analyses that correct most of these errors and update the economic
assumptions used indicate that HUD already has sufficient funding
available to meet its amendment needs for fiscal year 1999. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      SECTION 8 UNEXPENDED
      BALANCES ARE LARGE AND STEM
      FROM LONG-TERM CONTRACTS
-------------------------------------------------------- Chapter 0:4.1

HUD's unexpended balances for Section 8 project-based rental
assistance included $55.4 billion in outstanding undisbursed
obligations, primarily for HUD's existing contractual obligations
under approximately 31,000 rental assistance contracts.  About $32.7
billion (59 percent) of these funds are associated with long-term
Section 8 contracts supporting rents at properties that were
developed for families under HUD's new construction and substantial
rehabilitation program in the 1970s and early 1980s.  Another $15
billion (27 percent) is associated with contracts for properties that
provide housing for elderly and disabled persons, while the rest is
associated with various other HUD programs. 

Most of the unobligated funds--about $3 billion--represent funds
reserved for, but not yet obligated to, specific assistance
contracts.  About $1.3 billion of this amount was reserved for
properties being developed for elderly and disabled persons, and
another $1 billion was reserved for renewals and amendments of
existing Section 8 contracts. 

While most of the undisbursed obligations and obligated but reserved
funds will be needed during the remaining terms of the contracts to
which the funds have been assigned, GAO found at least $517 million
that was not needed and could be used for other purposes.  For
example, about $405 million ($345 million in undisbursed obligations
and $60 million in reservations) was associated with expired
contracts--many of which expired 3 or more years ago.  GAO also
identified (1) at least $77 million still in the accounting records
associated with contracts with future expirations that HUD had
terminated for various reasons, such as noncompliance with HUD's
housing quality standards, and (2) about $35 million associated with
contracts that were never executed for various reasons.  In addition,
GAO identified other balances for which the continued need is
questionable, such as $79 million that HUD has assigned to the
property disposition program, even though the Department discontinued
the use of project-based assistance for the program in 1995 and
instead uses tenant-based assistance for that program. 


      HUD'S PROCESS FOR EVALUATING
      UNEXPENDED BALANCES IS NOT
      EFFECTIVE
-------------------------------------------------------- Chapter 0:4.2

Each year, the status of HUD's unexpended balances are to be examined
under a review process the Department refers to as the annual review
of unliquidated obligations.  This review is to determine whether
recorded obligations should be continued, reduced, or canceled. 
According to HUD's Acting Assistant Chief Financial Officer for
Accounting, the annual review of Section 8 project-based balances
focuses on identifying those balances associated with contracts that
are no longer active, such as balances remaining on expired or
terminated contracts.  GAO identified a number of weaknesses with the
review process, including reviews not being done and funds identified
as no longer needed for specific contracts not being deobligated. 
These weaknesses stem from a number of factors, including limited
oversight of the process by HUD's Office of the Chief Financial
Officer. 

The Department has also not ensured that all available Section 8
project-based unexpended balances are identified and taken into
account as part of its budget process.  While HUD has developed a
model for estimating the funding needed to amend Section 8 contracts
with insufficient funding, it did not ensure that the data used in
the analyses supporting its fiscal year 1999 request for such
amendment funding were complete, accurate, and current.  HUD also did
not sufficiently review the analyses performed by a contractor to
ensure that the analyses were reliable.  GAO found errors in the
analyses.  For example, the funds appropriated in fiscal year 1997
were omitted from an analysis because the computer program was not
revised to receive data from new appropriation accounts, and about
1,800 active contracts were excluded from an analysis because of a
computer programming error. 

In an April 1998 analysis, HUD corrected most of these errors and
revised the assumptions used in the model to reflect the Office of
Management and Budget's economic assumptions for the fiscal year 1999
budget and legislatively mandated limits on rent increases for
certain contracts.  The revised analysis indicated that shortfalls
would be much lower and that HUD could recapture amounts much higher
than indicated in the analysis it used to support its fiscal year
1999 budget request for funding to amend existing contracts.  HUD's
estimate of long-term funding needs to amend Section 8 project-based
contracts shifted from an overall net shortfall (taking into account
both contracts with estimated shortfalls and those with funding that
is estimated to be available for recapture) of $19 billion to a
shortfall of less than $2 billion.  The analysis also indicated that
the recaptured funds that could be applied to meet HUD's fiscal year
1999 amendment needs were substantially higher than the amount
identified in the Department's budget request for fiscal year 1999. 

While the April 1998 analysis is a substantial improvement over
previous HUD analyses, it does not reflect about $1.5 billion in
additional funding that could be used to meet the Department's needs
for funding to amend the Section 8 project-based contracts, and it
still contains some errors.  Specifically, the analysis does not
include $833 million in amendment funding provided to HUD for fiscal
year 1998, $133 million in amendment funding that was not used in
fiscal year 1997 and continued to be available in 1998, and the
balances totaling $517 million that GAO found were no longer needed. 
In addition, the analysis does not accurately estimate future
expenditure rates for some contracts and omits about 1,800 contracts
that should have been included.\3 Finally, long-term amendment needs
could increase substantially if inflation rates prove to be higher
than those used in the analysis.  In connection with this concern
about inflation, HUD provided two sensitivity analyses that reflect
net funding needs of $7.5 billion and $14.2 billion, which it views
as providing a range of future funding needs.  However, neither of
these analyses incorporates the legislatively mandated limits on
future increases in contract rents, which would reduce the future
funding needs identified in the sensitivity analyses. 


--------------------
\3 These contracts are not the same 1,800 contracts that had been
erroneously excluded from an earlier analysis. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

To improve the Department's oversight of Section 8 project-based
balances, GAO recommends that the Secretary of Housing and Urban
Development require the Chief Financial Officer to revise the
procedures used in the Department's annual review of unexpended
balances to ensure that reviews are completed and that balances that
are not needed are identified and deobligated in a timely manner. 
This process should include a requirement that those officials
responsible for reviewing the balances actually certify the continued
need for the unexpended balances associated with Section 8
project-based contracts and that the Office of the Chief Financial
Officer provide sufficient oversight to determine the adequacy of the
reviews conducted. 

GAO also recommends that the Secretary require the Chief Financial
Officer and the Office of Housing to ensure that HUD's future funding
requests for the Section 8 project-based program fully take into
account the availability of unexpended balances that may be used to
offset funding needs.  To accomplish this goal, the Department would
need to establish controls to ensure that the data used in any
supporting analyses are complete, current, and accurate; that
available funding is fully reflected in these analyses; and that
sufficient checks are performed to ensure that the analyses produced
are reliable.  In addition, the Department should improve the
methodology used to estimate future expenditure rates for Section 8
project-based contracts. 


   AGENCY COMMENTS AND GAO'S
   EVALUATION
---------------------------------------------------------- Chapter 0:6

GAO provided a draft copy of this report to HUD for its review and
comment.  In commenting on the draft, HUD agreed with the data
presented in the report and with the recommendations.  However, HUD
disagreed with the way in which GAO presented the results of the
three analyses of Section 8 project-based funding needs.  More
specifically, HUD believed that the report's presentation would be
strengthened if instead of emphasizing one of the analyses, GAO
presented the results of the three analyses dated April 1998 in a
consolidated table and did more to explain the risks associated with
each analysis.  HUD also emphasized that it believes that estimates
of Section 8 project-based amendment needs are very sensitive to
inflation rates and that estimates of amendment shortfalls and
recaptures should be expressed as a range of estimates that reflects
alternative assumptions about inflation. 

GAO agrees with HUD that estimates of long-term amendment needs are
sensitive to assumptions about inflation.  In fact, the report
clearly states that HUD's long-term amendment needs could increase
substantially if inflation rates prove to be higher than currently
estimated.  However, GAO believes that its presentation of the three
analyses of Section 8 project-based funding needs is appropriate. 
The report gives more emphasis to one analysis because it is based on
legislatively mandated limits on rent increases for certain
properties and the Office of Management and Budget's economic
assumptions for the fiscal year 1999 budget.  In contrast, the other
two analyses of long-term amendment needs that HUD prepared do not
reflect the legislatively mandated limits and thus tend to overstate
the increases in Section 8 assistance that many properties would
receive under current law.  The report does recognize, however, that
HUD views the three analyses as a potential range of needs for
amendment funding.  HUD's comments and GAO's evaluation of them are
discussed in more detail in chapter 3 and appendix II. 


INTRODUCTION
============================================================ Chapter 1

Section 8 rental housing assistance, managed by the Department of
Housing and Urban Development (HUD), is the main form of federal
housing assistance for low-income tenants.  In fiscal year 1997, it
had expenditures totaling $16.4 billion.  Under the Section 8
program, residents in subsidized units generally pay 30 percent of
their income for rent and HUD pays the balance.  The Section 8
program provides rental assistance tied to specific property units
(project-based assistance) and to families and individuals who live
in affordable rental housing of their choice, as long as the units
meet HUD's rent and quality standards (tenant-based assistance). 
According to HUD data, in fiscal year 1997, the tenant-based and
project-based programs each served approximately 1.4 million
households.  This report focuses on issues concerning the
project-based rental assistance program, including the project-based
assistance associated with housing for the elderly and disabled.\1

HUD has estimated a growing need for Section 8 project-based funding
over the next 5 years to cover the costs of renewing expiring Section
8 rental assistance contracts and of providing additional funding to
existing Section 8 contracts that lack sufficient funds to cover
payments for the full term of the contracts.  As a result, the
Congress has become increasingly concerned that HUD have effective
systems in place to identify unexpended Section 8 funds that can be
used to offset future funding needs. 


--------------------
\1 For information on the tenant-based program, see our report
entitled Section 8 Tenant-Based Housing Assistance:  Opportunities to
Improve HUD's Financial Management (GAO/RCED-98-47, Feb.  20, 1998). 
A third report will address the Section 8 moderate rehabilitation
program. 


   HISTORY OF THE SECTION 8
   PROGRAM
---------------------------------------------------------- Chapter 1:1

The Section 8 housing assistance program, named for the revised
section 8 of the U.S.  Housing Act of 1937, was originally
established by the Housing and Community Development Act of 1974
(P.L.  93-383).  Section 8 rental assistance is generally limited to
families whose incomes are at or below 50 percent of the area's
median income and to rental units that meet HUD or local standards
for decent, safe, and sanitary housing.  In the project-based
program, assistance is tied to specific housing units under an
assistance contract, rather than to the families themselves, and is
therefore referred to as "project based." HUD generally contracts
directly with, and provides rental subsidies to, the owners of
private rental housing; in some cases, HUD contracts with state
finance agencies that are responsible for administering the rental
assistance program for low-income residents.  Typically, the initial
contracts were for 15, 20, or 40 years. 

In recent years, the Congress has generally preferred to provide new
Section 8 rental assistance in the form of tenant-based assistance. 
However, the Congress continues to provide funding to renew existing
Section 8 project-based contracts as they expire and to amend
contracts with insufficient funding to meet their contract terms. 
The Congress also continues to provide new project-based assistance
for properties funded under the Section 202 housing for the elderly
program and the Section 811 housing for the disabled capital advance
program.  According to HUD, about 24,000 active Section 8
project-based contracts covered about 1.4 million property units as
of September 30, 1997.  These contracts are associated with four main
programs and several smaller programs. 


      FOUR MAIN SECTION 8
      PROJECT-BASED PROGRAMS
-------------------------------------------------------- Chapter 1:1.1

The four principal project-based programs are the (1) New
Construction/Substantial Rehabilitation Program, (2) Elderly/Disabled
Program, (3) Loan Management Set Aside Program, and (4) Property
Disposition Program.  These programs are described below. 

  -- New Construction/Substantial Rehabilitation Program.  The
     purpose of this program was to encourage developers to build or
     rehabilitate projects for lower-income families by providing
     rental assistance contracts for a negotiated number of units in
     a project for periods ranging from 15 to 40 years.  The program
     was established in 1974 and repealed by the Congress in 1983
     because of its high cost.  Thus, funding for new project-based
     rental assistance contracts associated with newly constructed or
     rehabilitated properties was discontinued in 1983, except for
     new contracts associated with housing for the elderly and
     disabled. 

  -- Elderly/Disabled Program.  Since fiscal year 1992, HUD's
     programs for the elderly and disabled have provided property
     development funding to sponsors of low-income housing through
     capital advances and project-based rental assistance contracts. 
     The sponsors do not have to repay the advances as long as they
     continue to meet HUD's requirements for keeping rents
     affordable.  Thus, the rental assistance contracts need to
     subsidize only operating costs because no mortgages are
     associated with the properties.  The contracts under the current
     program are not funded under the same appropriations account as
     the Section 8 rental assistance program, but the project-based
     assistance under these programs is substantially the same as
     Section 8 project-based assistance, except that the subsidy is
     limited to operating costs.  HUD includes these contracts in its
     inventory of Section 8 project-based contracts.  New contracts
     currently being issued for project-based assistance for
     properties for the elderly and disabled are generally issued for
     5- or 20-year terms, depending upon when the project was
     initially approved. 

  -- Loan Management Set Aside Program.  This program was developed
     to provide Section 8 rental assistance to financially troubled
     projects.  Section 8 contracts under this program were initially
     for 15-year terms.  These contracts began expiring during the
     1990s and required renewal funding.  No new loan management set
     aside Section 8 contracts have been issued since fiscal year
     1994. 

  -- Multifamily Property Disposition Program.  The purpose of this
     program is to facilitate the sale or transfer to new owners
     those properties acquired through foreclosures on defaulted
     loans insured by the Federal Housing Administration. 
     Legislation enacted in 1988 required HUD to preserve some of the
     units in these properties as affordable housing for low- to
     moderate-income households.  HUD satisfied this requirement by
     providing project-based rental assistance under 15-year Section
     8 contracts with the new owners.  In 1995, HUD stopped entering
     into new project-based contracts for property disposition and
     began using Section 8 vouchers and certificates under the
     tenant-based program instead.  However, some new project-based
     contracts with 15-year terms will be executed in the future as a
     result of a demonstration program that HUD implemented in 1994
     to test the feasibility of tenant ownership options at
     foreclosed properties. 


      SMALLER SECTION 8
      PROJECT-BASED PROGRAMS
-------------------------------------------------------- Chapter 1:1.2

Other Section 8 programs include the (1) housing preservation
program, (2) project-based tenant protection program, and (3)
community investment demonstration program, also referred to as the
pension program.  These programs are described below. 

  -- Housing Preservation Program.  From 1987 to 1996, HUD issued
     project-based rental assistance contracts under the housing
     preservation program.  The Congress established the program to
     avoid displacing lower-income households and losing affordable
     housing stock.  These consequences were anticipated as the
     owners of federally insured properties, developed during the
     1960s and 1970s, were approaching eligibility to pay off their
     mortgages.  Once they have paid off the mortgages, owners do not
     have to meet existing operating restrictions, such as limits on
     residents' income levels and the rents that could be charged. 
     HUD provided project-based rental assistance as one of the
     incentives for owners to continue low-income restrictions.  The
     Congress discontinued the use of this incentive to reduce
     excessive program costs by 1997 and terminated the preservation
     program in its entirety in fiscal year 1998. 

  -- Project-Based Tenant Protection Program.  This program provides
     vouchers or certificates to eligible households who face
     displacement or rent increases for various reasons, such as the
     owners' opting out of the Section 8 project-based program or
     HUD's terminating the project-based assistance because owners
     failed to comply with housing quality standards.  Under this
     program, HUD's Office of Housing receives appropriations but
     transfers the funding over to HUD's Office of Public and Indian
     Housing, which provides the tenant-based assistance. 

  -- Community Investment Demonstration Program.  This program,
     referred to as the pension fund program, was created by the
     Congress in 1993 to demonstrate how the leveraging of HUD's
     resources can encourage pension funds to invest in the
     production and preservation of affordable housing.  Six
     participating pension funds make or purchase uninsured loans to
     finance the construction or rehabilitation of multifamily rental
     housing for lower-income families.  To reduce the risks incurred
     by the pension funds, HUD uses Section 8 project-based funds,
     limited to 120 percent of the local fair market rent under
     contracts of up to 15 years. 


   HUD'S FUNDING REQUESTS FOR
   SECTION 8 PROJECT-BASED
   CONTRACTS
---------------------------------------------------------- Chapter 1:2

HUD receives funding (budget authority) for the project-based program
primarily to pay for contract renewals as well as for contract
amendments to fund contracts that do not have sufficient funds to
make payments for the full term of the contract.\2 The original
long-term contracts that were entered into in the 1970s and 1980s
began expiring in the early 1990s.  The Congress and HUD have worked
together to fund renewals for all of these contracts.  Renewals are
now funded for 1 year. 

While some contracts have more funding than is needed because
expenditures have been less than anticipated, other contracts are
underfunded and need contract amendments to provide funding for the
full term.  This need arises when the initial funding was not
sufficient to provide adequate rental assistance over the life of the
contract.  In 1996, the Congress revised the Section 8 program to
permit HUD to transfer any remaining budget authority from expired or
terminated Section 8 project-based assistance contracts to other
housing assistance contracts.  Prior to this change, HUD's authority
to use recaptured budget authority from expired or terminated
contracts had to be treated in accordance with the terms of the
annual appropriations acts. 

Because an increasing number of Section 8 project-based contracts are
coming due for renewal and because of the need to provide amendment
funding to existing contracts, HUD has estimated a growing need for
budget authority.  Specifically, as shown in table 1.1, HUD received
$2.4 billion for Section 8 project-based funding in fiscal year 1997
and estimates this need will grow to $6.8 billion in fiscal year
2003.\3 The future outlays associated with the program are estimated
to remain relatively constant, ranging from $8.6 billion in fiscal
year 1999 to $8.8 billion in 2003.\4



                               Table 1.1
                
                  Estimated Budget Authority and Total
                Outlays for the Section 8 Project-Based
                   Rental Assistance Program Contract
                 Renewals and Amendments, Fiscal Years
                           1997 Through 2003

                         (Dollars in billions)

Fiscal year                       Budget authority             Outlays
------------------------------  ------------------  ------------------
1997 (actual)                                 $2.4                $8.4
1998 (actual)                                  3.8                 8.5
1999                                           4.1                 8.6
2000                                           4.7                 9.0
2001                                           5.4                 8.9
2002                                           6.1                 8.8
2003                                           6.8                 8.8
----------------------------------------------------------------------
Note:  Amounts include the project-based funding associated with
properties for the elderly and disabled that is included in HUD's
fiscal year 1999 budget request under the HOME Investment
Partnerships Program. 

HUD's Budget Office was unable to provide the funding and outlay data
associated with the Section 8 project-based rental assistance program
prior to fiscal year 1997.  According to an official in that office,
such information could not be provided because the appropriations for
the tenant-based and project-based programs are provided in one lump
sum, and the Department has not tracked the two programs separately. 
Furthermore, until fiscal year 1998, HUD did not separately track new
appropriations and carryover balances from prior years. 


--------------------
\2 Budget authority is the authority provided by law to enter into
financial obligations that will result in immediate or future outlays
involving federal government funds.  In this report, we use the term
"funding" to mean budget authority. 

\3 These estimates include the project-based assistance for
properties for the elderly and disabled.  In the fiscal year 1999
budget request, this funding is requested under the HOME Investment
Partnerships Program. 

\4 Outlays are federal expenditures (payments to liquidate
obligations). 


   HUD IS CENTRALIZING ITS SECTION
   8 FINANCIAL MANAGEMENT
---------------------------------------------------------- Chapter 1:3

The Section 8 tenant-based program and the moderate rehabilitation
program are managed by the Office of Public and Indian Housing, and
the project-based program is managed by the Office of Housing. 
However, as part of the implementation of the Department's 2020
Plan,\5 HUD is currently in the process of establishing a Section 8
Financial Management Center that will centralize the management of
the Section 8 programs under the Office of Public and Indian Housing. 
The center, located in Kansas City, Missouri, will serve as the focal
point for the administrative services necessary to support all
Section 8 contracts, including both tenant-based and project-based
contracts. 

Under the plan, contract management responsibilities for most Section
8 project-based contracts would be handled in the same manner as they
currently are for the tenant-based program--that is, contract
management responsibilities would be delegated to state and local
public housing or housing finance agencies that will administer the
contracts on behalf of HUD.  Currently, most project-based contracts
are in the form of housing assistance payment contracts that are
administered by HUD personnel.  These contracts are to be converted
into annual contributions contracts administered by a public housing
agency or a housing finance agency.  HUD says that state housing
agencies currently administering Section 8 tenant-based programs
would be offered an opportunity to administer an annual contributions
contract for all the remaining project-based contracts in the state
if they have the administrative capacity to do so.  While the plan
initially estimated converting 95 percent of the project-based
contracts to annual contributions contracts by the end of fiscal year
1998, HUD officials now expect to complete the conversion by the end
of fiscal year 1999. 


--------------------
\5 In June 1997, HUD issued the "HUD 2020 Management Reform Plan" to
address its management weaknesses, including those that contributed
to GAO's designation of HUD as a high-risk area because of
long-standing departmentwide management deficiencies--weak internal
controls, inadequate information and financial management systems, an
ineffective organizational structure, and an insufficient mix of
staff with the proper skills. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:4

This report was prepared to comply with the requirements of the 1997
Emergency Supplemental Appropriations Act (P.L.  105-18, June 12,
1997), which requested that GAO study HUD's systems for budgeting and
accounting for Section 8 rental assistance funds to determine whether
HUD's systems ensure that unexpended Section 8 funds do not reach
unreasonable levels and that obligations are spent in a timely
manner.  This report examines the Section 8 project-based assistance
program, particularly (1) the categories and amounts of unexpended
rental assistance funds and (2) the effectiveness of HUD's processes
to evaluate unexpended Section 8 project-based balances, ensure they
do not reach unreasonable levels and are spent in a timely manner,
and take unexpended balances into account when determining funding
needs as part of HUD's budget process.  In addition, chapter 1 of the
report provides HUD's estimate of future funding trends for the
Section 8 project-based program for fiscal years 1999 through 2003. 

To identify unexpended Section 8 project-based balances, we obtained
information on the balances as of September 30, 1997, from HUD's
Program Accounting System (PAS), which HUD reported as being in
compliance with the Federal Manager's Financial Integrity Act.  We
reviewed the PAS documentation to confirm that we were provided with
complete information.  We did not perform a reliability assessment of
these data.  However, HUD's Office of the Inspector General has
examined funding and expenditure data as part of its financial
statement audit for fiscal years 1996 and 1997 and has not identified
data errors that were material to HUD's financial statements.  In
addition, HUD's Office of the Chief Financial Officer has retained a
contractor to evaluate the documentation supporting the PAS data (as
well as the Tenant Rental Assistance Certification System (TRACS)
data discussed below) to determine its reliability.  The contractor's
review is based on a random sample of 100 Section 8 project-based
contracts.  As of June 1998, the review was still under way.  We also
reviewed budget allotment and apportionment data as of September 30,
1997, and data for the first quarter of fiscal year 1998 to ensure
that we had included all relevant unexpended balances.  The balances
include those for project-based rental assistance contracts for
housing for the elderly and disabled, which are included in HUD's
inventory of Section 8 contracts. 

To evaluate the unexpended Section 8 project-based balances and to
ensure they do not reach unreasonable levels, we analyzed HUD's data
to identify the balances associated with contracts that had expired
on or before September 30, 1996, and with those contracts with future
expiration dates but no expenditures from March through September
1997.  The latter category will include contracts that have been
terminated.  In addition, we obtained information from Office of
Housing officials at headquarters and field office locations
concerning the status of unexpended balances associated with the
elderly/disabled, property disposition, and pension fund programs
because of issues associated with these programs, such as program
changes that affect the need for existing funds.  Additionally, we
examined HUD's reports on the status of funds on inactive projects
(also referred to as aging reports) and other documentation provided
by the Office of the Chief Financial Officer to analyze selected
inactive, expired, and pending contracts.  However, we did not
conduct a systematic analysis of all of HUD's Section 8 project-based
unexpended balances to identify funds that were no longer needed. 

To examine the effectiveness of HUD's procedures to evaluate
unexpended Section 8 project-based balances to ensure they do not
reach unreasonable levels and are spent in a timely manner, we
reviewed and analyzed HUD's annual certification process for Section
8 project-based balances and reviewed HUD's Budget Forecast System
(BFS) model, which the Department uses to estimate Section 8
amendment needs for budgeting purposes, as well as various analyses
produced by the model.  For the certification process, we reviewed
HUD's handbook and other relevant documents, including memorandums
and various accounting reports.  We interviewed HUD officials at
headquarters and six field offices (located in Chicago, Illinois;
Dallas and Fort Worth, Texas; Denver, Colorado; New York, New York;
and Seattle, Washington).  In addition, we reviewed reports by HUD's
Office of the Inspector General, as well as the supporting
workpapers, on the 1997 year-end certification process and discussed
the report's findings with officials in the Office of the Inspector
General. 

To examine the effectiveness of HUD's processes to take unexpended
balances into account when determining funding needs as part of its
budget process, we evaluated HUD's BFS model.  We met with HUD and
contractor officials to obtain information on the purpose of the
model, its methodology, and the analyses produced.  We obtained the
supporting data files and examined the model's input and output to
determine if the model was working as intended.  The funding
estimates produced by the model are in nominal dollars, not adjusted
for inflation.  We reviewed five different analyses and worked with
HUD throughout the review to correct the errors in data and
methodology that we identified.  We also reviewed HUD's fiscal year
1999 budget request for amendment funding for the Section 8
project-based program.  This request was supported by an April 1997
BFS analysis.  Because our review focused on the unexpended balances
for the existing portfolio of project-based rental assistance
contracts, we did not examine HUD's budget request for Section 8
contract renewals.  We also did not assess how HUD's Section 8
Financial Management Center would oversee unexpended balances for
Section 8 project-based contracts, such as how the annual reviews of
unexpended balances will be conducted, because this aspect of the
Center's operations was in the early planning stage at the time of
our review. 

To provide information on funding trends in the Section 8
project-based rental assistance program, we requested historical data
from HUD on the budget authority and outlays associated with the
program.  However, HUD could provide this information only for fiscal
years 1997 and 1998, along with the amounts in the fiscal year 1999
budget for fiscal years 1999 through 2003. 

We provided a draft copy of this report to HUD for its review and
comment.  HUD provided written comments on the draft, and these
comments are presented and evaluated in chapter 3 and appendix II. 
We conducted our work from August 1997 through June 1998 in
accordance with generally accepted government auditing standards. 


UNEXPENDED SECTION 8 BALANCES
TOTALED MORE THAN $59 BILLION
============================================================ Chapter 2

As of September 30, 1997, HUD had available about $59.1 billion in
unexpended Section 8 project-based funds.\1 About $55.4 billion of
the unexpended balances was obligated to about 31,000 Section 8
contracts.  HUD also had about $3.7 billion in unobligated Section 8
project-based balances.  These balances consisted of about $3 billion
reserved for specific contracts but not yet obligated and about $.7
billion in unreserved funds that carried over into fiscal year 1998. 

While we did not conduct a comprehensive analysis of all of HUD's
unexpended balances for Section 8 project-based rental assistance, we
identified about $517 million that is no longer needed because the
contracts expired, were terminated, or were never executed.  In
addition, we identified other balances for which the continued need
is questionable, such as $79 million that HUD has assigned to the
property disposition program, even though the Department discontinued
the use of project-based assistance for the program in 1995 and
instead uses tenant-based assistance. 


--------------------
\1 The unexpended balances for the Section 8 project-based program
were provided by (1) contract authority with permanent indefinite
appropriations for contracts executed before fiscal year 1988 and (2)
annually appropriated funds that remain available for obligation for
an indefinite period of time (no-year funds) covering the full cost
over the term of the contract for contracts executed after fiscal
year 1987. 


   UNEXPENDED FUNDS FALL INTO
   THREE CATEGORIES
---------------------------------------------------------- Chapter 2:1

We identified three categories of Section 8 unexpended balances,
which we used to analyze the status of existing funding balances as
of September 30, 1997.  Broadly stated, the funds are (1) obligated
to specific Section 8 contracts, (2) reserved for specific Section 8
contracts, or (3) totally unobligated.\2

The first category, called "undisbursed obligations," is the amount
of funds obligated to the Section 8 contracts but not yet disbursed. 
This category includes balances for both active and inactive Section
8 contracts.  HUD's Office of the Chief Financial Officer also uses
the term "undisbursed contracts" to describe this category of funds. 

In the second category, referred to as "unobligated but reserved,"
HUD has funding that has been reserved for specific Section 8
contracts but has not yet been obligated to them.  This category
includes Section 8 funding for properties for which Section 8
contracts have not yet been executed, such as properties that are
still being planned or are under development or construction.  It
also includes reservations associated with active and inactive
contracts that have already had funds obligated to them.  HUD uses
the terms "uncontracted reservations" and "unobligated reservations"
to describe this category of funding. 

The third category, "unobligated and unreserved" funds, is the amount
of budget authority that HUD has received for Section 8 project-based
programs but has not yet reserved or obligated for specific
contracts.  HUD refers to this funding as "unassigned allotments" and
"unreserved assignments." These amounts are also referred to as
carryover funds at the end of the year because they become available
for reservations and obligations in the next fiscal year. 


--------------------
\2 HUD's practice is to reserve funds when the property associated
with the contract is approved for development and to obligate the
funds to the contract when the property is ready for occupancy. 


   FUND BALANCES AS OF SEPTEMBER
   30, 1997, WERE OVER $59 BILLION
---------------------------------------------------------- Chapter 2:2

As of September 30, 1997, HUD had available about $59.1 billion in
unexpended Section 8 project-based funds.  Table 2.1 presents the
$59.1 billion in the three funding categories and associates the
funds with the Section 8 project-based programs.  About $55.4 billion
of the funding represents undisbursed obligations; about $3 billion
represents funds that are unobligated but reserved; and about $.7
billion represents unobligated and unreserved funds. 



                                    Table 2.1
                     
                        Section 8 Project-Based Unexpended
                      Balances by Program and Fund Category,
                             as of September 30, 1997

                              (Dollars in billions)

                        Fund balance categories
          ----------------------------------------------------
Section
8              Undisbursed   Unobligated but   Unobligated and
program        obligations          reserved        unreserved             Total
--------  ----------------  ----------------  ----------------  ----------------
New
 constru
 ction/
 substan
 tial
 rehabil
 itation
 loans
Family               $32.7               $.7               $.1             $33.6
Elderly               12.5                .1                 0              12.6
 and
 disable
 d
================================================================================
Subtotal             $45.2               $.8               $.1             $46.2
Loan                   4.1                .5                .1              $4.7
 managem
 ent set
 aside
 (LMSA)
Elderly                2.5               1.3                 0              $3.9
 and
 disable
 d
 capital
 advance
 s
Property               2.5                .2                .1              $2.8
 disposi
 tion
Other                  1.0                .2                .3              $1.5
================================================================================
Total                $55.4              $3.0               $.7             $59.1
--------------------------------------------------------------------------------
Notes:  Some totals do not add due to rounding. 

HUD includes Section 8 housing assistance payment contracts for
properties serving the elderly and the disabled under two programs: 
the Section 202 direct loan program, which is under the new
construction/substantial rehabilitation program, and a newer program,
the Sections 202/811 elderly and disabled capital advance program,
which provides capital advances in lieu of loans.  The contracts for
the newer program are substantially the same as Section 8 rental
assistance and are provided under a project rental assistance
contract.  These contracts are included in HUD's analysis of its
long-term Section 8 project-based funding needs for contract
amendments, discussed in ch.  3. 


      UNDISBURSED OBLIGATIONS
      ACCOUNTED FOR MOST
      UNEXPENDED FUNDS
-------------------------------------------------------- Chapter 2:2.1

As shown in table 2.1, undisbursed obligations constituted the
largest segment of unexpended Section 8 project-based balances as of
September 30, 1997.  About $55.4 billion, or 94 percent of the total
unexpended fund balance of $59.1 billion, is associated with about
31,000 Section 8 contracts.\3 About $32.7 billion (59 percent) of the
$55.4 billion was allocated to contracts supporting rents at family
properties developed under the new construction/substantial
rehabilitation program.  HUD programs serving the elderly and
disabled under the new construction/substantial rehabilitation loan
program ($12.5 billion) and the elderly and disabled capital advance
program ($2.5 billion) command the second largest portion of HUD
funds, about $15 billion in total.  The loan management set aside
program accounted for about $4.1 billion (7 percent) in unexpended
balances, while about $2.5 billion (5 percent) in funds were
associated with properties covered through property disposition
programs.  The remaining $1 billion (2 percent) was for other
programs, such as the housing preservation, pension fund, and tenant
protection programs. 

While most of the undisbursed obligations are needed to fulfill HUD's
Section 8 funding commitments over the remaining life of each
contract, funding in excess of contractual needs has accumulated in
some cases.  Specifically, for 1,085 contracts that expired on or
before September 30, 1996, we identified about $345 million in
undisbursed obligations as of September 30, 1997.  About 900 of these
contracts, with balances totaling about $218 million, expired during
1994 or earlier.  These balances generally remained because rental
assistance payments were lower than HUD anticipated when the
contracts were funded.  As discussed in the next section, unobligated
but reserved balances of $60 million are also associated with expired
contracts, bringing the total balance of funding remaining on
contracts that expired on or before September 30, 1996, to $405
million. 

Additionally, we identified 440 contracts, with $503 million in
undisbursed obligations, that had future expiration dates but no
disbursements during the last 6 months of fiscal year 1997.  While
the lack of expenditures may occur in active contracts that do not
bill regularly or do not currently require a subsidy, it can also
occur in contracts that have been terminated for various reasons. 
According to our examination of a 1997 HUD field review of existing
contracts, at least $77 million was associated with contracts that
were no longer in effect.  Specifically, for 304 of the 440 contracts
without recent expenditures,\4 HUD field offices indicated that 77 of
these contracts had been terminated for various reasons.  The other
227 contracts were designated as either active, pending, or
suspended.  Included in the active category were 104 contracts with
property owners serving the elderly or disabled, with about $100
million in Section 8 balances, that were not disbursing funds at all
because the owners had not requested rental assistance payments. 
According to Office of Housing officials, in some cases a project's
costs are low enough to be supported by residents' incomes without
the need for the HUD subsidy.  They also noted that contracts may go
through periods when owners either do not file for reimbursement or
submit claims that are lower than the projected annual requirements
for rental assistance. 

Finally, a substantial number of other contracts are likely to have
unexpended balances remaining when the contracts expire.  For these
contracts, the actual subsidies required are less than those HUD
anticipated as being needed when funds were obligated to the
contract.  In chapter 3, we discuss HUD's efforts to identify such
balances and to compare them with the amounts needed to fund current
contracts that lack sufficient funding to cover payments for the full
term of the contracts. 


--------------------
\3 The balances are associated with active as well as expired
contracts that remain in HUD's accounting records.  According to HUD,
about 24,000 of the contracts are active. 

\4 HUD did not have recent information on the remaining 136 contracts
without recent expenditures. 


      UNOBLIGATED BUT RESERVED
      BALANCES TOTALED ABOUT $3
      BILLION
-------------------------------------------------------- Chapter 2:2.2

Approximately $3 billion of the $59.1 billion in unexpended balances
fell into the category of unobligated but reserved funds.  HUD has
reserved most of these funds for future contracts associated with (1)
the elderly and disabled capital advance programs, (2) renewals and
amendments of existing Section 8 contracts, (3) property disposition
programs, and (4) other programs such as the pension fund program. 
While we did not analyze all of these balances in detail, we did
identify some cases in which unneeded funds have accumulated, such as
$60 million associated with expired contracts and about $35 million
associated with contracts that HUD never executed for various
reasons, such as the property's not being constructed.\5

The elderly and disabled capital advance programs accounted for about
$1.3 billion of the $3 billion in unobligated but reserved funding as
of September 30, 1997.  In all, about 1,100 Section 8 contracts,
which will be for 5 or 20 years, depending upon when HUD reserved the
funds, had not yet been executed.  According to Office of Housing
officials, considerable time usually elapses between the date funds
are reserved for an approved project and the date that property is
ready for occupancy.  HUD officials said that in some cases it has
taken 7 or more years to complete planning, development, and
construction--at which point the Section 8 contract is executed. 

In addition, about $1 billion for renewing and amending existing
Section 8 contracts was included in the unobligated but reserved
balances as of September 30, 1997.  Approximately $753 million of the
total was from HUD's 1997 appropriations, while the remainder, about
$248 million, was appropriated for fiscal year 1996 or prior years. 
The $1 billion was reserved for contracts under the new
construction/substantial rehabilitation ($417 million), loan
management set aside ($408 million), elderly and disabled capital
advances ($131 million), and property disposition ($37 million)
programs.  (These funding amounts are not shown separately in table
2.1 but are included in the overall fund totals for each of the
Section 8 programs.)

In addition to the $37 million for the renewals and amendments of
existing property disposition contracts, HUD's property disposition
programs had another $163 million in reserved funds available on
September 30, 1997--for a total of approximately $200 million.  About
$77 million of this total was reserved for a 1994 HUD demonstration
program in which a state housing finance agency agreed to administer
the disposition of 11 foreclosed properties.  The program requires
that tenant groups receive preference in purchasing the properties. 
HUD expects to execute the 15-year contracts under this program
within 2 years. 

Another $53 million in unobligated but reserved funds in the property
disposition program was for 16 unexecuted contracts having funding
reservation dates as far back as 1984.  In the three cases we
examined, totaling $6.4 million, HUD either could not identify the
property or told us that the new owners decided not to participate in
the Section 8 program.  For example, HUD records showed that a field
office had reserved about $4.6 million for a Section 8 contract in
1985 but never executed the contract because of a change in
disposition plans.  At another office, property disposition staff
reserved about $1.4 million in August 1994 for a HUD-owned property
it planned to transfer to a unit of city government.  However, by
August 1996, the purchaser had decided to demolish the property
instead of accepting the Section 8 contract.  In another case, HUD
officials informed us that they could not identify a specific
property associated with a 1991 reservation of $423,000 that we
questioned.  In all of these situations, HUD officials stated that
the funds should have been released. 

In the category of "other" programs, HUD had about $170 million in
unobligated but reserved funds.  The largest portion of this amount,
about $123 million, was for the pension fund program, which the
Congress authorized in 1993 to test the feasibility of becoming
partners with large pension funds in the purchase, rehabilitation,
and construction of affordable housing.  HUD agreed to subsidize
these properties through 15-year Section 8 contracts, with rents
limited to 120 percent of an area's fair market rent.\6 As of April
1998, six participating pension funds had submitted applications for
the renovation of 42 properties.  HUD has approved 24 of the
proposals, and work had been completed on 15.  By the end of fiscal
year 1998, HUD expects that as many as 30 properties, consisting of
about 3,300 units, will be financed by participating pension funds. 
HUD has developed a preliminary proposal for the repeal of this
program; however, we were told that such action would not affect the
completion of projects currently in the pipeline. 

In addition to the unobligated but reserved fund balances for future
Section 8 contracts, many existing contracts that have already been
executed have unobligated but reserved balances remaining.  Our
analysis of these balances showed that some are not needed.  For
instance, 271 Section 8 contracts that had expired on or before
September 30, 1996, had about $60 million in unobligated but reserved
balances remaining.  We also found cases in which HUD continued to
record Section 8 reservations as valid in its accounting records even
though the Section 8 contracts were never executed.  For example, we
examined two reservations, made in 1980 and 1990, that totaled $29
million.  The $20 million reservation recorded in 1980 had no further
activity reflected in HUD's accounting records.  The cognizant field
office confirmed that this reservation should have been removed from
the accounting records.  The reservation had been associated with a
property that was planned under the new construction/substantial
rehabilitation program, but the commitment for the property was never
made.  Similarly, we found a $9 million reservation, recorded in
1990, that was associated with a property for the elderly and
disabled that the cognizant field office reported it could not
identify.  Funds for both of these properties remained reserved as of
September 30, 1997. 

In addition, we found that HUD had reserved approximately $25 million
of Section 8 project-based funding during the last week of fiscal
year 1997 for 82 contracts previously executed under the housing
preservation program.  However, on the basis of HUD's own projections
of contract expenditure rates through contract expiration, it is
questionable whether most of these contracts need the additional
funds. 


--------------------
\5 The balances associated with contracts that were not executed
represent $6.4 million under the property disposition program and $29
million under other programs. 

\6 HUD establishes fair market rents annually for geographic areas
and uses them as limits for the rents that it can subsidize under its
Section 8 rental assistance programs. 


      UNOBLIGATED AND UNRESERVED
      BALANCES ARE AVAILABLE IN
      FISCAL YEAR 1998
-------------------------------------------------------- Chapter 2:2.3

As of September 30, 1997, HUD's Section 8 project-based balances
included about $.7 billion in unobligated and unreserved funds that
it carried into fiscal year 1998.  Most of the funds were associated
with the renewals of expiring contracts, amendments for underfunded
contracts, and funds for the disposition of foreclosed multifamily
properties. 

Approximately $510 million of the unobligated and unreserved fund
balance included funds for renewing and amending Section 8
project-based contracts.  About $246 million of this total was from
funds appropriated in fiscal year 1996 or earlier.  An Office of
Housing official informed us that the carryover funds are needed to
fund expirations and amendments that occur during the first quarter
of the fiscal year because the Office of Housing does not usually
receive its fiscal year apportionments until December--or about 2
months into the fiscal year. 

Also included in the unobligated and unreserved balance was about $79
million for the disposition of failed HUD properties.  An Office of
Housing official informed us that it did not have an immediate need
for these project-based disposition funds and had carried them over
into fiscal year 1998.  As discussed previously, since 1995, HUD has
discontinued the use of project-based assistance for property
disposition and uses tenant-based assistance instead.  An official
overseeing HUD's property disposition programs said these unobligated
balances had stayed with the program in case HUD ever goes back to
using Section 8 project-based assistance for its disposition efforts. 

We also found that the Office of Housing had unobligated and
unreserved funds of about $52 million carried into fiscal year 1998
for the project-based tenant protection program.\7 According to HUD's
budget director for the Office of Housing, fiscal year 1997 program
activity, such as Section 8 contract terminations resulting from
HUD's enforcement actions or owners opting out of the Section 8
program, was slower than anticipated.  The director indicated that
the funding that was unobligated and unreserved at the end of fiscal
year 1997 remains available to meet increasing tenant displacement
needs that may materialize. 

In chapter 3, we discuss HUD's efforts to identify unexpended
balances that can be recaptured and used to help meet its future
needs for Section 8 project-based funding.  We also compare HUD's
estimates of Section 8 project-based amendment needs with the amount
of existing Section 8 project-based funding that may be used to meet
those needs. 


--------------------
\7 About $38 million in tenant protection funding transferred to the
Office of Public and Indian Housing in fiscal year 1997 was also
unobligated and unreserved at the end of the fiscal year, bringing
the total carryover for this program to about $90 million. 


HUD'S PROCESSES FOR EVALUATING AND
USING UNEXPENDED BALANCES ARE NOT
EFFECTIVE
============================================================ Chapter 3

HUD uses two processes to evaluate unexpended Section 8 project-based
balances to ensure that the balances do not reach unreasonable
levels, are spent in a timely manner, and are taken into account in
HUD's budget process.  These processes are its annual review of
unexpended balances (unliquidated obligations) and the HUD Budget
Forecast System (BFS) model, which is used to estimate Section 8
amendment needs for budgeting purposes.  We identified weaknesses in
both of these processes.  For example, some HUD offices did not
conduct the annual reviews of unexpended balances, and some funds
that were identified as being no longer needed were not deobligated. 
We also found that errors in the analyses derived from the BFS model
resulted in HUD's substantially underestimating the amount of
unexpended balances that are available for recapture.  More recent
HUD analyses, which correct most of the problems we found in the BFS
model and update information to reflect more current economic
assumptions, indicate that at the end of fiscal year 1998, the
Department will have about $1.5 billion in funding that could be used
to meet fiscal year 1999 needs.  Furthermore, these analyses do not
reflect an additional $1.5 billion in funding that could be used by
HUD to meet its fiscal year 1999 needs for contract amendments. 


   ANNUAL REVIEW OF UNEXPENDED
   BALANCES IS LIMITED BY
   WEAKNESSES
---------------------------------------------------------- Chapter 3:1

HUD's procedures for identifying and deobligating funds that are no
longer needed to meet its contractual obligations do not ensure that
all Section 8 project-based balances are evaluated each year and that
excess balances are identified and deobligated in a timely manner. 
For example, we found that some offices did not perform annual
reviews of unexpended balances, and some funds that were identified
as no longer needed were not deobligated.  These weaknesses stem from
a number of factors, including limited oversight of the process by
HUD's Office of the Chief Financial Officer. 


      HUD'S ANNUAL PROCESS TO
      REVIEW UNEXPENDED BALANCES
-------------------------------------------------------- Chapter 3:1.1

Each year, the status of HUD's unexpended balances are to be examined
under a review process the Department refers to as the annual review
of unliquidated obligations.\1 According to HUD's handbook on
incurring, recording, and adjusting obligations, the purpose of the
review is to determine whether the recorded obligations should be
continued, reduced, or canceled.  According to HUD's Acting Assistant
Chief Financial Officer for Accounting, the annual review covering
Section 8 project-based balances focuses on identifying those
balances associated with contracts that are no longer active, such as
balances remaining on expired or terminated contracts. 

The review process is based on balances as of June 30 and is to be
completed by August 31.  For decentralized programs such as the
Section 8 project-based rental assistance program, the reviews are
conducted by HUD's program offices.  The program office for the
Section 8 project-based program is the Office of Housing.  The
reviews are coordinated by HUD's field accounting divisions and
conducted by Office of Housing staff at the various field office
locations.  The annual review process is to occur in four major
steps.\2

First, HUD's field accounting divisions provide a listing of all
Section 8 project-based contracts with unexpended balances that have
had no financial activity for 6 or more months to the responsible
Office of Housing directors at the various field office locations. 

Second, Office of Housing officials are to have the balances examined
and report the results of their reviews to the field accounting
division.  These reports should specify whether each contract is (1)
active, (2) completed and cancellation action has been initiated, or
(3) completed and cancellation action will be initiated.  For
contracts for which funds are to be canceled, the Office of Housing
is to provide the appropriate documentation to the field accounting
division so that the remaining balances may be deobligated. 

Third, the field accounting divisions are to compile the results of
all of the reviews and send a certification statement to HUD's Office
of the Chief Financial Officer (CFO).  The certifications are to
state that the program offices were notified, in writing, of the
obligations that had no financial activity for 6 months or more, and
that responses were obtained from the program offices indicating
whether the obligations were valid--that is, whether the balances
were still needed or should be deobligated.  We note that HUD's
guidance on performing the review of unliquidated obligations does
not specifically define a valid obligation.  However, the guidance
for this review implies that a valid obligation represents one
associated with an active contract.  Thus, invalid obligations are
those obligations associated with expired or terminated contracts. 
While the guidance states that the review should determine whether to
continue, reduce, or cancel obligations, it does not directly address
whether active contracts should be reduced if the unexpended balances
are greater than projected needs.  HUD's Acting Assistant Chief
Financial Officer for Accounting indicated that this type of analysis
is optional. 

The certification is also to indicate, as appropriate, that efforts
were made to obtain responses from program offices when no response
was received within the requested time frame and attempts were made
to obtain the documentation needed to deobligate unneeded
obligations.  The certification is also to state that the
documentation of the review is available for future internal control
review and audits.\3

Finally, primarily on the basis of these and other certifications
covering HUD's other programs and activities, the Office of the CFO
is to certify to the Department of the Treasury that the obligation
balances in each of the agency's appropriation accounts reflect
proper existing obligations. 


--------------------
\1 HUD's annual review process is carried out pursuant to 31 U.S.C. 
1554.  The law requires all federal agencies to certify annually to
the Department of the Treasury as to the accuracy of the amount of
its obligated balances outstanding as of Sept.  30. 

\2 As discussed in ch.  1, HUD is in the process of consolidating its
management of the Section 8 tenant-based and project-based programs
in a Section 8 Financial Management Center.  It is not clear how the
annual review of unexpended balances associated with Section 8
project-based balances will be conducted for fiscal year 1998.  The
center's annual review process is directed at annual contributions
contracts.  As discussed in ch.  1, HUD estimates that most of the
project-based contracts will be converted to this type of contract by
the end of fiscal year 1999. 

\3 HUD's handbook on incurring, recording, and adjusting obligations
includes an additional statement that the assistance of the Assistant
Secretary for Administration or the Director, Office of the Regional
Administrator, as appropriate, was requested in cases where responses
and/or documentation could not be obtained from the field or program
office.  A certification of this nature was not used in fiscal year
1997. 


      THE ANNUAL REVIEW PROCESS
      HAS WEAKNESSES
-------------------------------------------------------- Chapter 3:1.2

We found a number of weaknesses in HUD's annual process for
identifying and deobligating Section 8 project-based funds that are
no longer needed, including (1) some offices not completing the
reviews and (2) funds identified for deobligation not being
deobligated.  These weaknesses stem from a number of factors,
including limited oversight of the reviews conducted by the program
offices.  As a result of the weaknesses in the review process, the
balances associated with expired or terminated contracts have
remained in the accounting records for years after contracts have
expired or been terminated. 


         IN SOME CASES, THE ANNUAL
         REVIEW IS NOT CONDUCTED
         OR IS INCOMPLETE
------------------------------------------------------ Chapter 3:1.2.1

In examining the annual process for field offices under the
jurisdiction of HUD's Midwest, Southwest, and Northwest/Alaska
locations, we found that in some cases the required annual reviews
were not conducted by the field offices responsible for reviewing
Section 8 project-based balances.\4 In other cases, the reviews were
incomplete.  For example, the Southwest location, which included 10
field offices with responsibility for Section 8 project-based
assistance, did not complete the reviews at all in 1997.  The
director of the New York field accounting division, who is
responsible for the Section 8 project-based balances managed by the
Southwest offices, did not disseminate the unexpended balances report
because of his heavy workload. 

Similarly, 3 weeks after the certification statements were due to the
Office of the CFO, we found that the unexpended balances reports had
not been distributed to the Northwest/Alaska field offices for review
because of an oversight.  As a result of our September 1997 request
for documentation of the reviews, however, the field accounting
director had the reports distributed to the location's three field
offices with responsibility for Section 8 project-based contracts. 
As a result, the Seattle field office identified $3 million in
Section 8 project-based funds that were no longer needed.\5 We noted
that while the certification letter by the director of the field
accounting division for the Northwest/Alaska offices indicates that,
as of September 16, 1997, some of the reviews were not yet completed,
the letter from the director of the New York field accounting
division does not indicate that the reports were not distributed and
thus the reviews not performed.  This certification letter only
states--incorrectly--that appropriate HUD officials and employees had
been notified of unliquidated obligations that needed to be
liquidated or deobligated. 

HUD's Office of the Inspector General (OIG) also found shortcomings
in the review process at the two field accounting divisions it
examined in 1997 as part of its annual financial statement audit of
the Department.  In that audit, the OIG reviewed the Department's
year-end certification process for the Denver and Chicago field
accounting divisions.  The OIG was to determine whether the various
program office directors at these locations responded to the field
accounting directors with the results of their reviews of unexpended
balances.  The OIG found that two multifamily housing directors did
not respond at all and that one multifamily housing director provided
an incomplete response. 


--------------------
\4 At the time of the annual review for fiscal year 1997, these
offices were responsible for 26 of HUD's 79 field offices.  Of the 26
offices, 22 had project-based contracts to oversee.  HUD has
subsequently reorganized its headquarters and field office structure. 

\5 We did not examine the subsequent reviews conducted by the other
two Northwest/Alaska field offices with responsibility for Section 8
project-based contracts. 


         FUNDS IDENTIFIED AS NO
         LONGER NEEDED ARE NOT
         ALWAYS DEOBLIGATED
------------------------------------------------------ Chapter 3:1.2.2

The review process does not always result in the deobligation of
funds identified as no longer needed for specific Section 8
project-based contracts.  For example, in 1993, the Dallas field
office identified about $17 million in balances associated with
expired or terminated contracts and prepared the necessary
documentation to deobligate the funds.  However, according to the
housing management specialist responsible for the review, the
balances were never deobligated because HUD staff in headquarters
instructed the field office to wait until it determined whether the
funds could be reprogrammed for future Section 8 program needs.  In
April 1996, the Congress provided HUD with authority to reuse these
funds.  As of September 30, 1997, however, these balances were still
in HUD's accounting records.  For example, for properties in Texas
alone, we found that as of September 30, 1997, there were 132 expired
Section 8 project-based contracts with about $45 million in
balances.\6 Many of these contracts expired in the early 1990s.  The
New York field accounting division director also told us that Office
of Housing staff have not been deobligating funds for expired
contracts for a number of years because HUD headquarters has had
plans to recapture these funds centrally.  According to the budget
director of the Office of Housing, these plans will be initiated
beginning in June 1998. 

During its fiscal year 1997 financial statement audit, the OIG also
found that funds identified for deobligation had not been processed. 
Specifically, the OIG found that during the annual review process for
fiscal year 1997, HUD's Chicago Housing Office identified nearly $34
million in Section 8 project-based funds associated with expired or
closed contracts that were no longer needed.  However, according to
the OIG's audit summary of this review, the Housing Office provided
the field accounting division director with a listing of the balances
that needed to be deobligated but not with the required documentation
to deobligate the funds.  The field accounting division's deputy
director informed the OIG that the program person responsible for
completing the task had been reassigned to another area in HUD, and
the deobligation documents were not prepared before the reassignment. 
Without the documents, the field accounting division could not
deobligate the $34 million in HUD's accounting systems.  The OIG
reported this deficiency to HUD in its May 21, 1998, management
letter for the fiscal year 1997 financial statement audit.  The OIG
recommended, among other things, that the field accounting divisions
ensure that all funds to be deobligated at year end are in fact
deobligated. 


--------------------
\6 These balances are included in the balances of $405 million
associated with expired contracts that we identified in ch.  2. 


         ADEQUACY OF PROGRAM
         OFFICES' REVIEWS IS NOT
         EXAMINED
------------------------------------------------------ Chapter 3:1.2.3

Weaknesses in the annual certification processes are also due in part
to the fact that the Office of the CFO and the field accounting
divisions provide limited oversight of the annual review process. 
The Office of the CFO relies upon the certifications received from
the directors of the field accounting divisions in order to certify
to the Department of the Treasury that all obligations at the end of
the fiscal year are proper existing obligations.  However, we found
that the certifications relied upon do not express an opinion on the
continued need for the balances and that HUD does not require the
program officials who actually perform the annual reviews to certify
that the balances are needed. 

The directors only certify that program offices were asked to perform
the reviews and that they received responses from the program offices
indicating that the obligations were still valid or should be
deobligated.  According to HUD's Acting Assistant Chief Financial
Officer for Accounting, who provided HUD's certification to the
Department of the Treasury for fiscal year 1997, the responsibility
for certifying the balances actually rests with the program offices,
such as the Office of Housing, and not the field accounting
divisions.  However, HUD's handbook does not require that the program
officials performing the reviews provide certifications on the
continued need for the unexpended balances. 

Nevertheless, we found that some program officials were asked by the
director of their respective field accounting division to provide
certifications on the continued need for the balances.  For example,
the Midwest field accounting director requests such certifications
from Housing Office officials, although some of the respondents did
not provide them.  However, not all accounting division directors
require certifications.  For example, the memorandum from the
director of the Rocky Mountain field accounting division to program
directors initiating the review for fiscal year 1997 did not request
a certification from the program offices.  The field accounting
director acknowledged that he did not specifically ask program
offices for the certification, although in his view the memorandum
did imply that program directors should certify that the balances are
accurate.  According to the director, some offices did provide a
written certification even though his memorandum did not directly ask
them do so. 

We also found that the certifications provided to the CFO by the
directors of field accounting divisions generally used the standard
certification letter provided in HUD's review guidance.  As such, the
certifications did not identify which offices were covered by the
certification and, most importantly, which of these offices had not
completed the reviews.  Thus, under this system, the Office of the
CFO is unaware of deficiencies in the review process at the field
accounting division and/or the program office level.  For example,
the Office of the CFO was not aware of the offices that had not
completed the review.  Specifically, the Office was not aware of the
New York field accounting division's failure to request the Southwest
location--which covered 10 offices with Section 8 project-based
responsibilities--to perform the fiscal year 1997 review.  Nor was it
aware of existing balances, such as the $20 million reservation made
in 1980 for a project that was subsequently canceled but was still in
HUD's accounts as of September 30, 1997. 

While the primary responsibility for the reviews appropriately rests
with the program offices, some oversight over the manner in which the
field accounting divisions and the program offices conduct their
reviews is appropriate given the reliance on their work by the Office
of the CFO.  According to the Director, Office of Financial Policy
and Procedures, Office of the Assistant Chief Financial Officer for
Systems, the Office of the CFO does not review any documentation
supporting the reviews and certifications.  Furthermore, the Acting
Assistant Chief Financial Officer for Accounting said it would not be
appropriate to have accounting staff (field accounting divisions)
evaluate programmatic decisions, such as whether to deobligate funds
for specific contracts, because accounting staff do not have the
necessary background to make such determinations. 

At a minimum, the CFO's confirmation that the reviews have been
completed and that the funds identified for deobligation have been
deobligated would improve accountability.  HUD also does not identify
certain balances--such as those associated with expired
contracts--and require the program offices to justify keeping the
funds.  For example, as discussed in chapter 2, we found about $517
million that is no longer needed because the contracts had expired,
were terminated, or were never executed. 


   HUD DOES NOT EFFECTIVELY
   IDENTIFY AND USE UNEXPENDED
   BALANCES IN ITS BUDGET PROCESS
---------------------------------------------------------- Chapter 3:2

HUD does not have effective processes in place to take unexpended
balances into account when determining its needs for Section 8
project-based funding as part of its budget process.  Specifically,
HUD's Budget Forecast System (BFS) model, used to estimate Section 8
amendment needs for budgeting purposes, has not provided reliable
information, in part because basic quality checks on the data used in
the analyses were not performed.  As a result, the Department
requested substantially more funding than is needed for contract
amendments in its fiscal year 1999 budget request.  More
specifically, HUD requested $1.3 billion for contract amendments in
fiscal year 1999, whereas more recent HUD analyses, which correct
most of the problems we found in the BFS model and update information
to reflect more current economic assumptions, indicate that at the
end of fiscal year 1998, the Department will have about $1.5 billion
in funding that could be used to meet fiscal year 1999 needs. 
Furthermore, these analyses do not reflect an additional $1.5 billion
in funding that could be used by HUD to meet its contract amendment
needs for fiscal year 1999. 


      AMENDMENT FUNDING NEEDS AND
      OVERVIEW OF THE BFS MODEL
-------------------------------------------------------- Chapter 3:2.1

Each year, the Department receives funding to amend Section 8
project-based contracts that have insufficient funding.  However,
while some contracts do not have sufficient funding, others have more
funding than is needed.  HUD refers to the amount of funds remaining
in such contracts at expiration as recaptures--that is, HUD can
recapture and use these funds for other Section 8 contracts.\7 Until
the fiscal year 1999 budget, HUD had not factored the use of
recaptures into its budget requests to offset the estimated needs for
amendment funding.  According to the budget director for the Office
of Housing, recaptures were not factored into earlier budget requests
because of data limitations that existed before HUD was able to use
computerized data from the Section 8 Tenant Rental Assistance
Certification System (TRACS). 

To estimate its amendment funding needs for fiscal year 1999, HUD
added a new analysis to its BFS model.  HUD contractor staff maintain
and operate the BFS model.  For each active Section 8 project-based
contract, the BFS model compares projected expenditures over the life
of the contract, adjusted for inflation, with funding that is
currently available and estimates whether each contract has a funding
shortfall or excess funding that can be recaptured.  The model
includes two categories of funding:  undisbursed obligations and
unobligated but reserved funds.  The BFS model provides estimates, by
year, of the projected shortfall amounts and of the recaptures
associated with expiring contracts.  The current analysis is carried
through 2035, at which point HUD data indicate that all contracts in
the portfolio as of September 30, 1997, will have expired.\8

HUD incorporates a methodology referred to as "leveling" into the
analysis.  In this methodology, HUD spreads estimated funding
shortfalls over the remaining term of the contract rather than
beginning in the year the contract is projected to run out of funds. 
For example, for a contract costing $1 million a year with 10 years
remaining and $9 million available, the $1 million shortfall would be
spread out in $100,000 increments over the next 10 years, rather than
being identified as a shortfall of $1 million in the tenth year. 
According to HUD officials, this approach enables HUD to request a
consistent annual amount to fund amendments and to avoid requesting
large amounts in later years.  Thus, the amounts identified as
shortfalls each year will include shortfalls that will actually occur
in future years. 


--------------------
\7 As noted in ch.  1, in 1996, the Congress gave HUD the authority
to use recapture balances from expiring or terminated project-based
contracts to meet its Section 8 funding needs. 

\8 According to HUD data, most Section 8 project-based contracts
expire by 2023.  HUD's database includes only eight contracts in
effect after 2023. 


      HUD'S FISCAL YEAR 1999
      BUDGET REQUEST TO AMEND
      SECTION 8 PROJECT-BASED
      CONTRACTS IS BASED ON
      INACCURATE ANALYSES
-------------------------------------------------------- Chapter 3:2.2

According to HUD's fiscal year 1999 budget request, the total amount
of funding needed to amend Section 8 project-based contracts for
fiscal year 1999 is $1.7 billion.  HUD's request also shows that this
amount can be reduced by over $463 million from recaptures from
expiring contracts, to a net funding need of $1.3 billion.  According
to HUD, the budget request was supported by an April 1997 BFS
analysis.  As shown in table 3.1, the funding need (shortfall amount)
for fiscal year 1999 was projected to be about $1,162.8 million; this
shortfall could be reduced by $540.1 million in recaptures.\9 HUD and
the Office of Management and Budget (OMB) added $500 million more to
the fiscal year 1999 budget request above the funding shortfall
identified in the analysis for 1999.  According to HUD officials,
this funding was added because of the long-term funding need for
amendments.  The April 1997 analysis showed a long-term net funding
shortfall for amendments through the year 2023 of $18.9 billion,
based on funding shortfalls of $24 billion and recaptures of $5.3
billion.  Table 3.1 provides excerpts from the April 1997 BFS
analysis covering fiscal years 1998 through 2003 and for 2023 when
all contracts were projected to be expired.\10



                               Table 3.1
                
                   April 1997 BFS Report on Section 8
                Project-Based Shortfalls and Recaptures,
                   Fiscal Years 1998-2003, and 2023.

                         (Dollars in millions)

                             Shortfall       Recapture     Net funding
Fiscal year                     amount          amount          need\a
----------------------  --------------  --------------  --------------
1998                          $1,165.7              $0        $1,165.7
1999                           1,162.8         (540.1)          $622.7
2000                           1,160.4         (621.6)          $538.8
2001                           1,150.9         (580.2)          $570.8
2002                           1,131.1         (453.8)          $677.2
2003                           1,115.9         (591.5)          $524.4
======================================================================
Total through 2023           $24,192.5      ($5,331.7)       $18,861.0
----------------------------------------------------------------------
\a Net funding need equals shortfalls minus recaptures. 

We found a number of errors in the analyses produced by the BFS model
that resulted in the shortfall estimates being overstated and the
recapture amounts understated.  We could not review the April 1997
analysis, which was based on fiscal year 1996 data and was used to
support the fiscal year 1999 budget request, because HUD could not
provide us with the supporting data files.  However, we reviewed five
different analyses from September 1997 through May 1998.  These
analyses were based on data through fiscal year 1997, whereas the
April 1997 analysis was based on fiscal year 1996 data.  We reviewed
the data supporting these analyses, identified errors and
methodological issues with each one, and worked with Office of
Housing officials to have the errors and methodology issues
corrected.\11 The budget director for the Office of Housing said that
the errors we found in the updated analyses would also occur in the
April 1997 analysis.  Among the errors we found with the analyses we
reviewed were the following: 

  -- A total of about $1.4 billion in Section 8 project-based funding
     provided to the contracts in fiscal year 1997 was not included
     in the analyses because the contractor was not told to update
     the BFS model to pick up funding data from new appropriation
     accounts for the program.  HUD corrected this error after we
     informed officials of the problem in January 1998. 

  -- Active contracts were excluded from several of the analyses
     because of either inaccurate expiration dates in HUD's database
     of Section 8 contracts or computer programming errors.\12 For
     example, about 1,000 active contracts were excluded from an
     analysis on the basis of incorrect expiration dates, and 1,800
     active contracts were excluded because of a programming error. 

  -- HUD applied an inflation factor to 1997 data in error.  HUD made
     this error because updating the data to fiscal year 1997
     required eliminating the inflation factor that was applicable to
     the earlier analysis, dated April 1997, which was based on
     fiscal year 1996 data.  However, the 1997 inflation factor was
     not eliminated from the analyses based on 1997 data until we
     identified the error. 

  -- The methodology used to project future contract expenditures,
     referred to as the burn rate, does not accurately estimate
     expenditures for some contracts.  The BFS model treats contract
     expenditures as a monthly expenditure, whereas the payments for
     a number of the contracts (generally those contracts managed by
     public housing entities, referred to as annual contributions
     contracts) actually reflect expenditures for either 3, 6, or 12
     months, depending on the terms of the contracts.  In addition,
     the methodology excludes some active contracts that did not
     receive any payments during the 6 months included in the
     analysis.  HUD officials emphasized to us that the methodology
     would overstate some needs and understate others.  However, the
     Department has not examined the overall impact of this
     methodology on the estimates.  Our analysis of the expenditure
     rates indicates this problem tends to overstate expenditures to
     some degree.  HUD officials have agreed that the methodology
     should be corrected.  The Office of the CFO has developed a
     methodology for estimating Section 8 contract expenditures that
     links expenditure data with the time period covered by the
     expenditure, which appears to provide a more accurate estimate
     for the contracts that do not bill monthly.  However, this
     methodology is not used in the BFS model. 

In addition, in response to our questions about the basis for the
inflation factors and about the legislatively mandated limits on
Section 8 project-based rent increases, HUD updated the analyses to
include more current economic assumptions and to reflect the
legislatively mandated limits.\13 Specifically, the analyses provided
to us through February 1998 reflected OMB's economic assumptions
(inflation factors) for the fiscal year 1998 budget.  The subsequent
analyses, provided in April 1998, reflect OMB's economic assumptions
for the fiscal year 1999 budget, and included an analysis that used
assumptions reflecting the legislatively mandated limits on rent
increases. 

While the errors we identified had various causes, most of them
resulted from HUD's not having adequate controls in place to ensure
that the data and assumptions used in the BFS model were complete,
accurate, and current, and that the data were fully reflected in the
analyses produced by the model.  For example, we identified a number
of errors by performing basic data quality checks.  Specifically, we
examined the contracts excluded from the analyses to determine if any
active contracts were being excluded incorrectly; we matched input to
output to determine if all relevant shortfalls and recaptures were
included in output; and we matched Section 8 project-based funding
data from HUD's Program Accounting System (PAS) with the funding
included in the BFS analysis to determine if all funding was included
in the analyses.  These quality checks were not performed by the HUD
contractor nor requested by HUD officials when the contractor
provided them with various analyses.  In addition, Office of Housing
officials did not always ensure that the contractor had all the
information it needed to perform the analysis, such as information on
all relevant appropriation accounts that include Section 8
project-based funding. 


--------------------
\9 HUD did not offset its fiscal year 1999 budget request by the full
amount of recaptures identified ($540.1 million).  As stated above,
the 1999 budget reflected $463 million in recaptures. 

\10 As discussed earlier, later analyses indicate that some active
contracts will not expire until 2035. 

\11 As discussed in ch.  1, we did not conduct a reliability
assessment of the Section 8 funding data used in the analysis. 
However, HUD's OIG has examined funding and expenditure data as part
of its financial statement audit for fiscal years 1996 and 1997 and
has not identified data errors that were material to HUD's financial
statements.  In addition, HUD's CFO has retained a contractor to
evaluate the financial and contract data used by the BFS model.  This
review was ongoing as of June 1998. 

\12 HUD uses the expiration dates in its TRACS Section 8 database for
its BFS Section 8 project-based analyses.  However, the expiration
dates for many contracts that expired in fiscal year 1997--but which
were renewed by 1-year contract extensions--were incorrect.  To work
around this data problem, HUD revised its BFS model to treat
contracts with fiscal year 1997 expirations that were making rental
assistance payments as active for 1 additional year. 

\13 The Balanced Budget Act of 1997 (P.L.  105-33, Aug.  1997) made
permanent the limits on rent increases for the categories of Section
8 project-based contracts that were required by recent annual
appropriations laws.  The limits pertain to contracts that receive
rent increases in the form of annual adjustment factors. 
Specifically, new construction and substantial rehabilitation Section
8 contracts generally may not receive rent increases if the Section 8
contract rents are higher than HUD's fair market rents.  In addition,
the annual adjustment factor is to be reduced by 1 percent for all
Section 8 project-based units in which there has been no change in
occupancy (except that the factor is not to be reduced to less than 1
percent). 


      REVISED ANALYSIS SHOWS LOWER
      SHORTFALLS AND HIGHER
      RECAPTURES
-------------------------------------------------------- Chapter 3:2.3

In April 1998, HUD provided a revised analysis that reflected the
lower inflation factors OMB established for the fiscal year 1999
budget as well as the legislatively mandated limits on rent increases
for certain contracts.  As shown in table 3.2, this analysis
estimates significantly lower shortfalls, higher recaptures, and
lower net funding needs in the short term as well as the long term
compared with the prior analyses--including the April 1997 analysis
presented in table 3.1.  Specifically, the current analysis estimates
total shortfalls of $13 billion, recaptures of $11.5 billion, and a
net funding need of $1.5 billion, compared with the shortfalls of $24
billion, recaptures of $5.3 billion, and net funding needs of $18.8
billion reflected in the April 1997 analysis used to support the
fiscal year 1999 budget request.\14



                               Table 3.2
                
                April 1998 Budget Forecast System Report
                 on Section 8 Project-Based Shortfalls
                 and Recaptures Using OMB's Fiscal Year
                     1999 Economic Assumptions and
                  Incorporating Limits on Future Rent
                               Increases.

                             Shortfall       Recapture     Net funding
Fiscal year                     amount          amount          need\a
----------------------  --------------  --------------  --------------
1998                          $1,130.2      ($2,705.4)      ($1,575.2)
1999                             978.4         (971.7)            $6.6
2000                             861.5         (899.8)         ($38.3)
2001                             768.4         (903.0)        ($134.7)
2002                             712.4         (710.0)            $2.4
2003                             678.7         (928.0)        ($249.3)
======================================================================
Total through 2035           $13,021.5     ($11,474.3)        $1,547.2
----------------------------------------------------------------------
Notes:  OMB's inflation factors are 1.9 percent for fiscal year 1998;
2 percent for fiscal years 1999 and 2000; 2.1 percent for fiscal year
2001; and 2.2 percent for fiscal years 2002-35.  The inflation
factors increase future expenditures, reflecting Section 8 increases
at the inflation level.  The legislatively mandated limits on rent
increases reduce these inflation factors for most contracts. 

HUD uses different assumptions regarding future rent increases
covering six categories of contracts, depending on how the contracts
receive rent increases and the ratio between the contract rents and
HUD's Fair Market Rents.  (HUD's assumptions are summarized in app. 
I.)

\a Net funding need equals shortfalls minus recaptures.  Numbers in
parenthesis indicate that recaptures exceed shortfalls.  As discussed
below, this analysis excludes about 1,800 contracts with recaptures
in excess of shortfalls.  If these active contracts were included,
net funding needs would be reduced from about $1.5 billion to about
$1.3 billion. 

Furthermore, regarding the short-term funding needs, the April 1998
analysis indicates that the amount of recaptured funds that could be
applied toward HUD's fiscal year 1999 amendment needs is
substantially higher than HUD estimated in its budget request.  As
shown in table 3.2, the analysis indicates that contracts expiring in
fiscal year 1998 are estimated to have over $2.7 billion in
recaptures and that contracts expiring in fiscal year 1999 will have
close to $1 billion in recaptures.  As discussed earlier, HUD's
budget request indicated that $463 million in recaptures were
available to help offset fiscal year 1999 amendment needs. 

Testifying in March 1998,\15 we pointed out that updated HUD analyses
indicated that recaptures were likely to be much higher than HUD had
indicated in its budget request.  Accordingly, we stated that the
Congress may wish to consider reducing HUD's fiscal year 1999 request
for funding to amend Section 8 project-based contracts. 

While HUD's April 1998 analysis reflects a substantial improvement
over earlier estimates, it does not present a complete and accurate
picture of Section 8 project-based needs because it (1) does not
reflect all of the Section 8 project-based funding the Department has
available for funding shortfalls and (2) still contains some errors. 
Specifically, the analysis does not reflect about $1.5 billion that
could be used to offset HUD's fiscal year 1999 request for amendment
funding.  This total includes the following amounts: 

  -- $833 million in project-based amendment funding that, according
     to the budget director for the Office of Housing, was
     appropriated to the Department for fiscal year 1998, including
     amounts associated with properties funded under the capital
     advance program for the elderly and disabled;

  -- $133 million of Section 8 project-based amendment funds that
     were unobligated and unreserved at the end of fiscal year 1997
     and were carried over for use in 1998;

  -- $517 million in project-based funding that we identified in
     chapter 2 as being no longer needed. 

These funds would nearly offset the net funding needs through 2035,
as shown in table 3.2.\16

In terms of errors, this analysis again excludes about 1,800 active
contracts, which would further reduce funding shortfalls.\17 Our
analysis indicates that if these contracts were included, the total
long-term funding need would be reduced by approximately $200
million.\18 These contracts were excluded because (1) the contractor
made an error by accidently excluding 400 of the contracts and (2)
the Office of Housing provided a file of contracts to be used in the
analysis that excluded 1,400 active contracts.  In addition, this
analysis continues to use the methodology for estimating expenditures
that tends to overstate expenditures. 


--------------------
\14 Because HUD could not provide the data supporting the April 1997
analysis, we could not determine the relative impact of the various
factors that resulted in the significantly lower estimates in April
1998.  In addition to the types of data errors discussed above, other
factors that affect the results include assumptions on inflation
rates and rent increases and older (1996) data.  We discuss the
importance of inflation factors and the legislatively mandated limits
on rent increases on HUD's analyses in the next sections. 

\15 Housing and Urban Development:  Comments on HUD's Fiscal Year
1999 Budget Request (GAO/T-RCED-98-137, Mar.  25, 1998). 

\16 The analyses will also not reflect any requested new funding. 
For example, the net funding needs would be reduced to the extent
that the fiscal year 1999 budget request of $1.3 billion for
amendments is provided. 

\17 These contracts are not the same 1,800 that had been erroneously
excluded from an earlier analysis. 

\18 This estimate does not take into account the effect of the rent
limitations mandated in the Balanced Budget Act of 1997 (P.L. 
105-33, Aug.  1997). 


      HUD'S SENSITIVITY ANALYSES
      ILLUSTRATE THE EFFECTS OF
      DIFFERENT ASSUMPTIONS
-------------------------------------------------------- Chapter 3:2.4

According to HUD's Chief Financial Officer, Budget Director, and
other HUD staff, the April 1998 estimate of $1.5 billion in net
funding needs for Section 8 contract amendments (in table 3.2) could
understate actual needs because the inflation rate is low (about 2
percent) and the analysis assumes limits on rent increases for many
properties.  That is, the net funding needs produced by BFS analyses
vary depending upon the assumptions about future inflation rates and
the limits on future rent increases.  To illustrate how changes in
these assumptions can affect estimates of amendment needs, HUD
prepared two sensitivity analyses. 

The first sensitivity analysis is based on the same inflation factors
as the analysis presented in table 3.2 (ranging from 1.9 to 2.2
percent), but this analysis does not include assumptions
incorporating legislatively mandated limits on rent increases.  This
analysis projects amendment funding shortfalls for Section 8
project-based assistance of about $18 billion, recaptures of about
$10.6 billion, and net funding needs of about $7.5 billion through
2035.  Table 3.3 presents the results of this analysis. 



                               Table 3.3
                
                   April 1998 BFS Report on Section 8
                Project-Based Shortfalls and Recaptures
                 Using OMB's Fiscal Year 1999 Economic
                  Assumptions and Excluding Limits on
                         Future Rent Increases.

                         (Dollars in millions)

                             Shortfall       Recapture     Net funding
Fiscal year                     amount          amount          need\a
----------------------  --------------  --------------  --------------
1998                          $1,172.9      ($2,714.4)      ($1,541.5)
1999                           1,073.2         (980.3)           $98.2
2000                           1,008.7         (962.3)           $46.4
2001                             967.0         (871.1)           $95.9
2002                             938.4         (675.9)          $262.5
2003                             924.4         (840.1)           $84.2
======================================================================
Total through 2035           $18,071.7     ($10,619.4)        $7,452.3
----------------------------------------------------------------------
\a Net funding need equals shortfalls minus recaptures.  Numbers in
parenthesis indicate that recaptures exceed shortfalls. 

The second sensitivity analysis assumed that the inflation rate for
each year was 3.2 percent and also excluded the impact of limits on
rent increases.\19 As shown in table 3.4, this analysis projects
shortfalls of $24 billion, recaptures of $9.7 billion, and net
funding needs of $14.2 billion through 2035. 



                               Table 3.4
                
                   April 1998 BFS Report on Section 8
                Project-Based Shortfalls and Recaptures
                Using a 3.2-Percent Inflation Factor and
                    Excluding Limits on Future Rent
                               Increases.

                         (Dollars in millions)

                             Shortfall       Recapture     Net funding
Fiscal year                     amount          amount          need\a
----------------------  --------------  --------------  --------------
1998                          $1,218.9      ($2,702.0)      ($1,483.1)
1999                           1,156.5         (969.1)          $187.4
2000                           1,122.8         (942.9)          $179.9
2001                           1,105.6         (837.8)          $267.8
2002                           1,095.6         (638.3)          $457.3
2003                           1,099.1         (768.0)          $331.1
======================================================================
Total through 2035           $23,936.9      ($9,705.2)       $14,231.7
----------------------------------------------------------------------
\a Net funding need equals shortfalls minus recaptures.  Numbers in
parenthesis indicate that recaptures exceed shortfalls. 

HUD officials view the estimates shown in table 3.2 and the
sensitivity analyses shown in tables 3.3 and 3.4 as a range of
potential amendment funding needs.  However, it is important to note
that both sensitivity analyses exclude the effect of the
legislatively mandated limits on future rent increases--that is, they
assume that the limits are repealed and that the inflation estimates
apply to all Section 8 contracts.  At this time, we are not aware of
any major legislative efforts to repeal the limits on rent increases. 
As shown in table 3.2, the legislatively mandated limits
substantially lower the estimate of long-term amendment needs. 


--------------------
\19 HUD did not provide an analysis using an inflation factor of 3.2
percent that includes the legislatively mandated limits on future
rent increases. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:3

HUD's policies and procedures for identifying and deobligating funds
that are no longer needed do not ensure that all Section 8
project-based balances are evaluated each year and that balances that
are no longer needed for specific Section 8 project-based contracts
are identified and deobligated in a timely manner.  The current
review process does not provide HUD with adequate assurance that the
reviews are being conducted properly and that identified funds are
being deobligated.  Assurance is inadequate because HUD does not
adequately oversee the review process conducted by program offices
and because the program officials who are responsible for reviewing
the balances are not required to certify that the unexpended balances
associated with the Section 8 project-based contracts continue to be
needed.  As we discussed in chapter 2, we identified about $517
million in funding that was still reflected in HUD's accounting
system as of September 30, 1997, and that was no longer needed
because the contracts expired, were terminated, or were never
executed.  If such funding had been identified by HUD, it could have
been used to help offset the Department's need for Section 8
amendment funding. 

In addition, the Department has requested more funding for Section 8
contract amendments than needed because it does not have effective
processes in place to take unexpended balances into account when
determining funding needs as part of its budget process.  While HUD
uses a model to perform such analysis, we found a number of errors in
the analysis it used for formulating its fiscal year 1999 budget
request.  These errors included active contracts being excluded, all
available funding not being fully reflected, and weaknesses in the
methodology used to estimate expenditure rates.  These errors stemmed
from the Department's not ensuring that the data used in the model
were complete, accurate, and current and that sufficient quality
checks were performed either by HUD or contractor staff to ensure
that the analyses were reliable.  While HUD and contractor staff took
actions to correct most of the problems that we identified during our
review, it is important that HUD have effective controls in place to
ensure that these problems do not recur in future analyses.  In
addition, HUD has yet to correct problems with the methodology used
by the BFS model to estimate future expenditure rates. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 3:4

To improve the Department's oversight of Section 8 project-based
balances, we recommend that the Secretary of Housing and Urban
Development require the Chief Financial Officer to revise the
procedures used in the Department's annual review of unexpended
balances to ensure that reviews are completed and that balances that
are not needed are identified and deobligated in a timely manner. 
This process should include a requirement that those officials
responsible for reviewing the balances actually certify the continued
need for the unexpended balances associated with Section 8
project-based contracts and that the Office of the Chief Financial
Officer provide sufficient oversight to determine the adequacy of the
reviews conducted. 

We also recommend that the Secretary require the Chief Financial
Officer and the Office of Housing to ensure that HUD's future funding
requests for the Section 8 project-based program fully take into
account the availability of unexpended balances that may be used to
offset funding needs.  To accomplish this goal, the Department would
need to establish controls to ensure that the data used in any
supporting analyses are complete, accurate, and current; that
available funding is fully reflected; and that sufficient checks are
performed to ensure that the analyses produced are reliable.  In
addition, the Department should improve the methodology used to
estimate future expenditure rates for Section 8 project-based
contracts. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 3:5

We provided a draft copy of this report to HUD for its review and
comment.  In commenting on the draft, HUD agreed with the data
presented in the report and with the recommendations.  However, HUD
disagreed with the way in which we presented the results of three
analyses of Section 8 project-based funding needs.  HUD believed that
the report's presentation would have been strengthened if instead of
emphasizing one of the analyses, we presented the results of the
three analyses dated April 1998 in a consolidated table and did more
to explain the risks associated with each analysis.  In this regard,
HUD stated that our report highlights a HUD-prepared analysis that
uses the low inflation assumptions for the 1999 budget and
essentially "freezes" much of the expenditures on Section 8 contracts
at current rates for long periods.  HUD stated that a more realistic
assumption is that rents and incomes will increase in the future
(notwithstanding current law limiting certain rent increases) and
these increases will result in a growing drain on the obligated
balances on those contracts.  HUD also emphasized that it believes
that estimates of Section 8 project-based amendment needs are very
sensitive to inflation rates and that estimates of amendment
shortfalls and recaptures should be expressed as a range, based on
alternative inflation assumptions. 

We agree with HUD that estimates of long-term amendment needs are
sensitive to assumptions regarding inflation.  In fact, the report
clearly states that HUD's long-term amendment needs could increase
substantially if inflation rates prove to be higher than currently
estimated.  However, we believe that our presentation of the three
analyses of Section 8 project-based funding needs is appropriate. 
The report gives more emphasis to one analysis because that analysis
is based on legislatively mandated limits on rent increases for
certain properties and OMB's economic assumptions for the fiscal year
1999 budget.  In contrast, the other two analyses of long-term
amendment needs that HUD prepared do not reflect the legislatively
mandated limits on rent increases and thus tend to overstate the
increases in Section 8 assistance that many properties would receive
under current law.  Accordingly, we do not agree with HUD's assertion
that these analyses reflect more realistic assumptions concerning
Section 8 project-based amendment needs.  Our report does recognize,
however, that HUD views the three analyses as a potential range of
amendment funding needs. 

HUD also stated that the report leads to a conclusion that remaining
balances can be diverted out of the project-based inventory with no
long-range consequences.  Instead, HUD states that each dollar taken
from the inventory will have to be replaced with budget authority at
some point in the future.  Our report does not conclude that
remaining balances can be diverted from the program.  However, we do
not agree that HUD is in a position to conclude that each dollar
taken from Section 8 project-based amendment funding would
necessarily have to be replaced at some point in the future.  Before
a reliable conclusion on the long-term funding needs of the Section 8
project-based program can be made, HUD needs to implement our
recommendation to improve the methodology used to estimate future
expenditure rates for the Section 8 project-based contracts because
the methodology currently used may substantially overstate
expenditure rates.  In addition, HUD needs to establish controls to
ensure that the data used in its analyses are complete, current, and
accurate.  Once these actions are completed, we believe the
Department will be in a better position to reach reliable conclusions
concerning its short- and long-term funding needs.  (The complete
text of HUD's comments are provided in app.  II.)


HUD'S METHODOLOGY FOR
INCORPORATING LIMITS ON RENT
INCREASES INTO ITS BUDGET FORECAST
SYSTEM MODEL
=========================================================== Appendix I

In the Balanced Budget Act of 1997 (P.L.  105-33, Aug.  1997), the
Congress made permanent the limits on rent increases for those
categories of Section 8 project-based contracts that had been
included in recent annual appropriations laws.  The limits pertain to
contracts that process rent increases through the Department of
Housing and Urban Development's (HUD) annual adjustment factors--that
is, the contract rents are increased each year by these factors.  The
limits generally do not permit rent increases for new construction
and substantial rehabilitation Section 8 contracts if the contract
rents are higher than HUD's fair market rents.  In addition, the
annual adjustment factor is to be reduced by 1 percent for all
Section 8 project-based units in which there has been no change in
occupancy (except that the factor is not to be reduced to less than 1
percent). 

HUD's April 8, 1998, analysis of Section 8 project-based amendment
needs discussed in chapter 3 incorporates assumptions to reflect the
legislatively mandated limits into the Budget Forecast System (BFS)
model.  To accomplish this, HUD divided the Section 8 contracts into
six categories, depending on the type of amendment funding received
and the ratio of contract rents to fair market rents.  HUD developed
inflation rates for each of the categories to use in the BFS model to
project contract expenditures until expiration.  The inflation rates
for the Section 8 contracts that have budget-based rents are not
reduced because the limits are not applicable to these contracts. 
The inflation factors used for such contracts reflect the economic
assumptions the Office of Management and Budget used in the fiscal
year 1999 budget.  However, for contracts that receive increases with
annual adjustment factors, the inflation rates are reduced as shown
in table I.1. 



                               Table I.1
                
                HUD's Methodology Incorporating Contract
                     Rent Limits Into Its BFS Model

                                Ratio of contract
                                rent to fair
Amendment type                  market rent         Inflation rates
------------------------------  ------------------  ------------------
Budget-based contracts          Not applicable      1.9 percent for
                                                    1998
                                                    2.0 percent for
                                                    1999
                                                    2.1 percent for
                                                    2000
                                                    2.2 percent for
                                                    2001 and
                                                    thereafter

Annual adjustment factor        Contract rents are  1.0 percent for
                                below fair market   1998
                                rents (allowed to   1.1 percent for
                                have rent           1999
                                increases, but      1.2 percent for
                                increases are       2000
                                reduced when        1.3 percent for
                                occupancy does not  2001 and
                                change)             thereafter

Annual adjustment factor        100 percent to 120  0 percent for
                                percent of fair     first 5 years, 1.3
                                market rents        percent thereafter

Annual adjustment factor        121 percent to 140  0 percent for
                                percent of fair     first10 years, 1.3
                                market rents        percent thereafter

Annual adjustment factor        141 percent to 160  0 percent for
                                percent of fair     first 15 years,
                                market rents        1.3 percent
                                                    thereafter

Annual adjustment factor        Above 160 percent   0 percent for all
                                of fair market      years
                                rents
----------------------------------------------------------------------



(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
=========================================================== Appendix I



(See figure in printed edition.)



   GAO COMMENTS
--------------------------------------------------------- Appendix I:1

1.  We believe that our presentation of HUD's analyses of Section 8
project-based funding needs is appropriate.  The report gives more
emphasis to one analysis because that analysis is based on the
legislatively mandated limits on rent increases for certain
properties and the Office of Management and Budget's economic
assumptions for the fiscal year 1999 budget.  In contrast, the other
two analyses of long-term amendment needs that HUD prepared do not
reflect the legislatively mandated limits and thus tend to overstate
the increases in Section 8 assistance that many properties would
receive under current law.  Accordingly, we do not agree with HUD's
assertion that these analyses reflect more realistic assumptions
concerning amendment needs for the Section 8 project-based program. 

2.  Our report does not conclude that remaining balances can be
diverted from the program.  However, we do not agree that HUD is in a
position to conclude that each dollar taken from Section 8
project-based amendment funding would necessarily have to be replaced
at some point in the future.  Before a reliable conclusion on the
long-term funding needs of the Section 8 project-based program can be
made, HUD needs to implement our recommendation to improve the
methodology used to estimate future expenditure rates for the Section
8 project-based contracts because the methodology currently used may
substantially overstate expenditure rates.  In addition, HUD needs to
establish controls to ensure that the data used in its analyses are
complete, current, and accurate.  Once these actions are completed,
we believe the Department will be in a better position to reach
reliable conclusions concerning its short- and long-term funding
needs. 

3.  We agree with HUD that estimates of long-term amendment needs are
sensitive to assumptions regarding inflation.  In fact, the report
clearly states that HUD's long-term amendment needs could increase
substantially if inflation rates prove to be higher than currently
estimated.  In addition, our report does recognize that HUD views the
three analyses as a potential range of amendment funding needs. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

HOUSING AND COMMUNITY DEVELOPMENT
ISSUE AREA

Mark H.  Egger
Christine M.B.  Fishkin
Richard A.  Hale
Joseph M.  Raple
Rose M.  Schuville

ECONOMIC ANALYSIS GROUP

Austin J.  Kelly

OFFICE OF THE GENERAL COUNSEL

John T.  McGrail


*** End of document. ***