Section 8 Housing Assistance: HUD Plans to Recapture Over $400 Million of
Excess Funding in the Moderate Rehabilitation Program (Letter Report,
08/25/98, GAO/RCED-98-235).

Pursuant to a legislative requirement, GAO reviewed the Department of
Housing and Urban Development's (HUD) financial management of the
Section 8 rental assistance program, focusing on: (1) the amount of
excess budget authority in the Section 8 Moderate Rehabilitation (MOD
REHAB) Program and how HUD estimated this amount; (2) the accuracy of
HUD's estimate; and (3) HUD's plans for recapturing this excess budget
authority from housing agencies.

GAO noted that: (1) in January 1998, HUD estimated that the amount of
excess budget authority in the Section 8 MOD REHAB Program before
necessary adjustments was $814 million; after subtracting amounts
required to cover future requirements and contingencies, HUD estimated
that $439 million could be recaptured from the housing agencies that the
Department contracts with to administer the program; (2) HUD estimated
these amounts after first addressing certain known problems with the
data in its information system and then comparing the level of unspent
program funds at each participating housing agency with that agency's
future need for funding under its current contract with HUD; (3) GAO
cannot determine the accuracy of HUD's estimate of excess budget
authority in the Section 8 MOD REHAB Program at this time because HUD
has neither completed identifying and correcting discrepancies in its
data on the program nor tested the reliability of the data it used to
estimate the excess budget authority; (4) because HUD still is not
confident that its program data are sufficiently accurate, the
Department plans to require its field staff to identify and address
discrepancies in the accuracy of contract data and to work with a
contractor to further address the data's problems on-site at housing
agencies; (5) HUD officials do not expect these data cleanup efforts to
be completed before the end of fiscal year 1998; (6) HUD plans to
require its contractor to perform a statistically valid test of the
accuracy of its information system; (7) although HUD plans to recapture
the excess budget authority in the Section 8 MOD REHAB Program, the
Department has not finalized its approach or timeframe to accomplish
this task; (8) in addition to completing the planned data cleanup
efforts in the field, HUD must also develop and test the formula it will
use to recapture the excess budget authority from the housing agencies'
accounts; (9) while some factors in the formula are not within HUD's
discretion to change, policy decisions still need to be made to define
other factors; (10) for example, HUD may decide that it does not need to
leave as much excess budget authority in the housing agencies' accounts
to cover contingencies as it originally had estimated in January 1998;
(11) therefore, the actual amount recaptured from housing agencies and
available for rescission by Congress may change and perhaps be more than
the estimated amount in HUD's January 1998 analysis; and (12) HUD
officials could not provide GAO with a firm estimate of when the
Department will finalize its recapture plan and could not predict a date
of completion.

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

 REPORTNUM:  RCED-98-235
     TITLE:  Section 8 Housing Assistance: HUD Plans to Recapture Over 
             $400 Million of Excess Funding in the Moderate
             Rehabilitation Program
      DATE:  08/25/98
   SUBJECT:  Federal aid for housing
             Financial management
             Low income housing
             Budget authority
             Public housing
             Future budget projections
             Federal agency accounting systems
             Unexpended budget balances
             Data integrity
             Rental housing
IDENTIFIER:  HUD Section 8 Housing Assistance Program
             HUD Section 8 Moderate Rehabilitation Program
             
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Cover
================================================================ COVER


Report to Congressional Committees

August 1998

SECTION 8 HOUSING ASSISTANCE - HUD
PLANS TO RECAPTURE OVER $400
MILLION OF EXCESS FUNDING IN THE
MODERATE REHABILITATION PROGRAM

GAO/RCED-98-235

HUD's Moderate Rehabilitation Program

(385741)


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

  HAP - Housing Assistance Payments
  HUD - Department of Housing and Urban Development
  HUDCAPS - HUD's Central Accounting and Program System
  MODREHAB - Moderate Rehabilitation Program
  VA - Department of Veterans Affairs

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


B-280439

August 25, 1998

Congressional Committees

The Department of Housing and Urban Development's (HUD) Section 8
Assisted Housing Program provides rental subsidies for low-income
families.  Assistance is either tenant-based assistance (linked to
specific households) or project-based assistance (linked to specific
housing units).  The Section 8 Moderate Rehabilitation (MOD REHAB)
Program is a form of project-based assistance administered by state
and local housing agencies under contract with HUD.  It was created
to upgrade substandard privately owned rental housing requiring a
moderate level of rehabilitation. 

As the Chairman of the Subcommittee on VA, HUD, and Independent
Agencies, House Committee on Appropriations, you asked us to review
HUD's financial management of the Section 8 Program.  In response to
that request and to a mandate in the 1997 Emergency Supplemental
Appropriations Act (P.L.  105-18) that directed us to review HUD's
budgeting and accounting systems for Section 8 rental assistance, we
agreed to issue three reports on HUD's financial management of the
Section 8 Program, focusing on tenant-based assistance, project-based
assistance not including the MOD REHAB Program, and the MOD REHAB
Program.  Reports we issued on tenant-based and project-based
assistance in February 1998 and July 1998, respectively,\1 focused on
identifying excess budget authority and HUD's efforts to recapture
those funds.\2 The Congress has rescinded several billion dollars of
excess budget authority that had been appropriated for Section 8
assistance in prior years. 

In this report, the third in the series, we provide information on
(1) the amount of excess budget authority in the Section 8 MOD REHAB
Program and how HUD estimated this amount; (2) the accuracy of HUD's
estimate; and (3) HUD's plans for recapturing, or taking back, this
excess budget authority from housing agencies.\3 We relied on
information provided to us from the information system that HUD uses
to manage the MOD REHAB Program and from officials in HUD's offices
of Public and Indian Housing and the Chief Financial Officer.\4


--------------------
\1 Section 8 Tenant-Based Housing Assistance:  Opportunities to
Improve HUD's Financial Management (GAO/RCED-98-47, Feb.  20, 1998)
and Section 8 Project-Based Rental Assistance:  HUD's Processes for
Evaluating and Using Unexpended Balances Are Ineffective
(GAO/RCED-98-202, July 22, 1998). 

\2 To recapture funds, HUD first identifies and confirms the amount
of excess budget authority that it has obligated to a housing agency
and then deobligates the funds, or takes the funds back from the
agency, by making the appropriate changes to the accounting system. 

\3 This report does not discuss one segment of the Section 8 MOD
REHAB Program--the Single Room Occupancy Program--because it is
administered separately from the rest of the program and, therefore,
not included in HUD's analysis of excess budget authority. 

\4 HUD's Central Accounting and Program System, called HUDCAPS,
provides accounting and program management capabilities for the
Section 8 tenant-based and MOD REHAB programs. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

In January 1998, HUD estimated that the amount of excess budget
authority in the Section 8 Moderate Rehabilitation Program before
necessary adjustments was $814 million; after subtracting amounts
required to cover future requirements and contingencies, HUD
estimated that $439 million could be recaptured--that is, taken
back--from the housing agencies that the Department contracts with to
administer the program.  HUD estimated these amounts after first
addressing certain known problems with the data in its information
system and then comparing the level of unspent program funds at each
participating housing agency with that agency's future need for
funding under its current contract with HUD. 

We cannot determine the accuracy of HUD's estimate of excess budget
authority in the Section 8 Moderate Rehabilitation Program at this
time because HUD has neither completed identifying and correcting
discrepancies in its data on the program nor tested the reliability
of the data it used to estimate the excess budget authority.  Because
HUD still is not confident that its program data are sufficiently
accurate, the Department plans to require its field staff to identify
and address discrepancies in the accuracy of contract data and to
work with a contractor to further address the data's problems on-site
at housing agencies.  HUD officials do not expect these data cleanup
efforts to be completed before the end of fiscal year 1998.  In
addition, HUD plans to require its contractor to perform a
statistically valid test of the accuracy of its information system. 

Although HUD plans to recapture the excess budget authority in the
Section 8 Moderate Rehabilitation Program, the Department has not
finalized its approach or time frame to accomplish this task.  In
addition to completing the planned data cleanup efforts in the field,
HUD must also develop and test the formula it will use to recapture
the excess budget authority from the housing agencies' accounts. 
While some factors in the formula are not within HUD's discretion to
change, policy decisions still need to be made to define other
factors.  For example, after completing data cleanup efforts in the
field, HUD may decide that it does not need to leave as much excess
budget authority in the housing agencies' accounts to cover
contingencies as it originally had estimated in January 1998. 
Therefore, the actual amount recaptured from housing agencies and
available for rescission by the Congress may change and perhaps be
more than the $439 million estimated in HUD's January 1998 analysis. 
HUD officials could not provide us with a firm estimate of when the
Department will finalize its recapture plan and could not predict a
date for completing the recapture. 


   BACKGROUND
------------------------------------------------------------ Letter :2

HUD's Section 8 Assisted Housing Program provides rental subsidies
for low-income households.  Assistance is either tenant-based--the
household receives the assistance wherever it finds an acceptable
housing unit owned by a landlord who agrees to participate in the
program--or project-based--rent is paid for an eligible tenant or
tenants when they occupy a specific housing development or unit.  For
tenant-based assistance, HUD contracts with and provides funding to
local and state housing agencies to administer the program.  In turn,
these agencies make payments to private sector landlords to subsidize
the rent for eligible households.  For most project-based assistance
other than the MOD REHAB Program, HUD contracts directly with and
provides rental subsidies to the owners of private rental housing and
to state finance agencies.  Although the MOD REHAB Program is a type
of project-based assistance, it is administered by local housing
agencies under contract with HUD.  For each type of Section 8 housing
assistance, participating households generally pay 30 percent of
their income for rent, although this percentage can vary depending on
family income and program type. 

The Section 8 MOD REHAB Program was created in 1978 to add to the
existing inventory of assisted housing.  It did this by providing
funding to upgrade a portion of the estimated 2.7 million
then-unassisted rental housing units with deficiencies that required
a moderate level of repair and rental subsidies for low-income
families.  Under annual contracts with housing agencies, HUD provides
the funding for rental subsidies as well as an administrative fee to
the agencies.  The administering agencies, in turn, enter into
Housing Assistance Payments (HAP) contracts with property owners. 
Under these HAP contracts, property owners rehabilitate their housing
units by completing repairs costing at least $1,000 so their units
meet HUD's standards for housing quality and make the rehabilitated
units available to eligible families.  In exchange, the housing
agencies screen applicants for eligibility and pay the difference
between the approved contract rent and the tenants' portion of the
rent.  Initially, the contract rent is based on an owner's costs, and
housing agencies can approve rents up to 120 percent of an area's
fair market rent to compensate the owner for rehabilitation costs. 
However, when the term of a property owner's rehabilitation loan is
less than the term of a HAP contract, regulations require housing
agencies to adjust the contract rent downward at the end of the
rehabilitation loan's term to reflect the owner's reduced expenses. 

During the 11 years that the Congress funded new contracts under the
MOD REHAB Program,\5 the term for HAP contracts was 15 years.  When
the oldest of these contracts began to expire in 1995 and 1996, HUD
instructed housing agencies to replace them with Section 8
tenant-based assistance.  Since fiscal year 1997, however, the
Congress has required HUD to renew an expiring contract with a 1-year
MOD REHAB contract if the owner so requests and the property consists
of more than four housing units covered in whole or in part by a HAP
contract.  In calendar year 1997, about 25 percent of these expiring
HAP contracts were renewed as 1-year MOD REHAB contracts.  As of
January 15, 1998, the MOD REHAB Program was assisting over 81,000
households, but this represents a small proportion of the total
number of households receiving Section 8 assistance (see fig.  1). 

   Figure 1:  Number of Households
   Receiving Assistance Through
   the Section 8 Program,
   Households in thousands

   (See figure in printed
   edition.)

Source:  The figures for tenant-based, project-based, and MOD REHAB
assistance are from data analyses performed by HUD in February 1997,
June 1997, and January 1998, respectively. 

The excess budget authority in the Section 8 MOD REHAB Program is
funding that has been obligated to the housing agencies that
administer the program but will not be needed to meet the agencies'
obligations under current contracts.  Three types of such funding
exist in the Section 8 MOD REHAB Program:  (1) funding that has been
obligated to a housing agency but never been placed under a HAP
contract, (2) budget authority that has been placed under a HAP
contract but has not been used and thus has accumulated in a housing
agency's reserve account,\6 and (3) excess funding that HUD estimates
will accrue in a housing agency's reserve account.  The third type of
excess budget authority cannot be recaptured until it actually
accumulates in a housing agency's reserve account.  HUDCAPS is
designed to capture the data necessary to calculate the total amount
of excess budget authority that has accumulated in the program on an
annual cycle as each housing agency reports its actual program costs
to HUD. 


--------------------
\5 The Congress has not funded new MOD REHAB contracts since 1989. 
After amending the MOD REHAB Program in 1989 to require, among other
things, that the minimum expenditure per unit be $3,000, the Congress
repealed the program in 1990. 

\6 Each year, an amount of budget authority equal to the difference,
if any, between the total amount authorized under a housing agency's
contract with HUD and the housing agency's actual payments under HAP
contracts with property owners is credited to the housing agency's
reserve account.  The portion of these reserves that the housing
agency will not need to meet current contract requirements is excess
budget authority. 


   COMPARING UNEXPENDED BUDGET
   AUTHORITY WITH FUTURE NEEDS FOR
   EACH HOUSING AGENCY HAS YIELDED
   AN ESTIMATED EXCESS OF $439
   MILLION
------------------------------------------------------------ Letter :3

In January 1998, HUD estimated that the excess budget authority in
the Section 8 MOD REHAB Program was $814 million before adjustments. 
After subtracting amounts required to cover future requirements and
contingencies, HUD estimated that $439 million could be recaptured
from the housing agencies that administer the program.  HUD did not
recapture the excess budget authority in the MOD REHAB Program in
September 1997, when it recaptured similar excesses in its
tenant-based program because, according to HUD program officials, the
Secretary of HUD did not have the authority to do so.  In addition,
problems with its data on the MOD REHAB Program would have made it
difficult for the Department to identify and recapture excess budget
authority.  For example, some HAP contracts had not been entered into
HUD's information system, and some of the data on the number of units
under contract had been entered incorrectly.  Therefore, HUD
instructed its field offices to address these discrepancies by
comparing the data in its central information system with the data in
the Department's original contracts with housing agencies and the
original HAP contracts and then making any necessary changes. 
Although this internal effort to correct the data ended in December
1997, HUD officials believe that the accuracy of the data could be
further improved and that approximately 10 percent of the system's
entries are inaccurate.  As discussed later, HUD plans additional
efforts to correct its data. 

After updating its information system to reflect the December 1997
corrections, the Department analyzed the system's data to estimate
the amount of MOD REHAB excess budget authority that was available
for recapture and reuse.  To estimate this amount, HUD first
calculated the excess budget authority by comparing the total
unexpended budget authority with the program's requirements for that
budget authority at each housing agency--the same method that it had
used to determine the excess budget authority in its tenant-based
program.  As shown in table 1, HUD then determined that the total
excess budget authority available as of January 15, 1998, was about
$814 million before adjustments.  Of that amount, HUD estimated that
it would need about

  -- $191 million to cover known funding shortfalls for HAP contracts
     that have not had sufficient funding obligated to them to cover
     their expected needs through the end of their terms and

  -- $184 million to cover such contingencies as unexpected decreases
     in tenants' incomes or unexpected rent increases. 

According to HUD, the remaining $439 million is available for
recapture and reuse to meet ongoing needs for housing assistance. 
The Congress may also decide to rescind this excess budget authority
as it did when excess budget authority was identified in the Section
8 tenant-based program. 



                                Table 1
                
                 Excess Budget Authority Available for
                          Recapture and Reuse

                         (Dollars in millions)

--------------------------------------------------------------  ------
Excess budget authority available as of January 15, 1998          $814
 (before adjustments)
Less: Amount of adjustment to cover known funding shortfalls     (191)
 in the program
Less: Amount of adjustment to cover contingencies                (184)
Excess budget authority available for recapture and reuse         $439
----------------------------------------------------------------------
Source:  HUD's Office of Public and Indian Housing. 

The $184 million reserve for contingencies is equivalent to almost 4
months of housing assistance payments to property owners
participating in the MOD REHAB Program.  When HUD recaptured the
excess budget authority in the Section 8 tenant-based program in
September 1997, the Department held in reserve for contingencies an
amount equal to only about 2 months of housing assistance payments to
property owners.  According to HUD officials, the Department
established a larger reserve for contingencies in the MOD REHAB
Program than the one it had established for the tenant-based program
because, at the time the analysis was performed, it did not have as
much confidence in its data for the MOD REHAB Program as it did in
its data for the tenant-based program. 


   THE ACCURACY OF HUD'S ESTIMATE
   CANNOT BE DETERMINED WITHOUT
   EVIDENCE OF RELIABLE DATA
------------------------------------------------------------ Letter :4

We cannot evaluate the accuracy of HUD's estimate at this time
because the Department has not completed its efforts to reconcile
discrepancies between the data in its information system and contract
documentation contained in field offices' files.  Despite HUD's
earlier efforts to improve its data on the MOD REHAB Program, the
Department was not able to correct all the discrepancies identified
before performing its analysis of excess budget authority.  For
example, at the time HUD performed its analysis, some HAP records
still were incomplete and others contained irregular data.  At the
time of our review, officials in the Office of Public and Indian
Housing qualitatively estimated that HUD's data on the MOD REHAB
Program were not entirely accurate in terms of being correct and
complete.  To further improve the data's accuracy, HUD plans to
continue correcting discrepancies in contracts that it has with
housing agencies.  HUD also plans to obtain an independent and
statistically valid evaluation of the accuracy of the data in the MOD
REHAB Program's information system. 

HUD recognizes that its data on the MOD REHAB Program are
questionable; therefore, it plans to undertake additional efforts to
verify the information.  First, HUD plans to instruct the staff in
its field offices to again compare the MOD REHAB data in its
information system with the data contained in the original contract
documentation maintained at those offices.  HUD officials explained
that potential data inconsistencies will be reported to its field
offices, which will reconcile the data by using the information in
their contract files.  However, because it believes that the
documentation at its field offices will not always be reliable, HUD
also plans to hire a contractor to follow up on and correct
discrepancies by obtaining missing or additional information from the
housing agencies that administer the program.  By taking these steps,
HUD hopes to enhance the integrity of its data on the MOD REHAB
Program.  The Department expects its field offices to complete their
portion of the data reconciliation by the end of August and the
contractor to complete the rest of the data retrieval by the middle
of October. 

For its Section 8 tenant-based program, HUD engaged a contractor to
independently evaluate its estimate of excess budget authority.  The
contractor also conducted a representative sampling of transactions
in its information system and developed a statistically valid
estimate of the system's accuracy.  HUD plans to require the
contractor that will be correcting contract discrepancies to perform
a similar evaluation of the accuracy of the MOD REHAB Program's
information system.  Until HUD completes such an evaluation, we
cannot report on the accuracy of HUD's estimate of its excess budget
authority. 


   HUD HAS NOT FINALIZED ITS PLANS
   TO RECAPTURE THE EXCESS BUDGET
   AUTHORITY IN ITS MOD REHAB
   PROGRAM
------------------------------------------------------------ Letter :5

Although HUD plans to recapture the available excess budget authority
from housing agencies' accounts, the Department has not finalized its
plans for this activity, according to officials in HUD's offices of
Public and Indian Housing and the Chief Financial Officer.  For
example, in addition to completing the data cleanup efforts discussed
above, HUD also needs to develop and test the formula it will use to
recapture the excess budget authority from housing agencies'
accounts.  While some factors in the formula, such as the inflation
rate and certain economic assumptions prescribed by the Office of
Management and Budget, are not within HUD's discretion to change,
other aspects of the formula are still undetermined.  For example,
HUD may decide after its field offices complete their efforts to
clean up the data that it no longer needs to keep the full $184
million in the housing agencies' accounts to cover contingencies, as
it originally had estimated in January 1998.  This means that the
actual amount recaptured and available for rescission may change and
perhaps be more than the $439 million estimated in HUD's January 1998
analysis. 

HUD officials could not provide us with a firm estimate of when the
Department will finalize its recapture plan and could not predict a
date for completing the recapture. 


   CONCLUSIONS
------------------------------------------------------------ Letter :6

Once HUD identifies the amount of excess budget authority in its
Section 8 Program, the Congress has shown that it will act
expeditiously to make the most productive use of that authority. 
Therefore, we believe that HUD is correct in taking steps to identify
and plan for recapturing the excess budget authority in its MOD REHAB
Program.  Identifying, confirming, and recapturing this excess budget
authority before HUD submits its fiscal year 2000 budget request
would help to show that HUD is making progress toward improving its
financial management of the Section 8 Program.  To do this, HUD will
need to complete its work to clean up its data, evaluate the accuracy
of its data, and develop its recapture formula as soon as possible. 

Because HUD recognizes the steps it needs to take to properly report
to the Congress the amount of excess budget authority in its MOD
REHAB Program and has plans to take such steps, we are not making
recommendations at this time.  However, we will continue to monitor
HUD's budget process and review its fiscal year 2000 budget
submission to determine whether the Department's cost estimates
accurately reflect the amount of its excess budget authority. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

We provided a draft of this report to HUD for review and comment.  In
commenting on the report, HUD said that it generally agreed with our
assessment of the steps being taken to properly report to the
Congress the amount of excess budget authority in the Section 8 MOD
REHAB Program.  The Department also provided several technical
comments, which we incorporated, as appropriate.  HUD's letter
appears in appendix I. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :8

To determine how HUD estimated the excess budget authority in its
Section 8 MOD REHAB Program and the accuracy of this estimate, we
discussed with Department officials their general approach for
calculating excess budget authority and reviewed preliminary
documentation supporting their approach.  Specifically, we discussed
HUD's approach with officials in the offices of Public and Indian
Housing and the Chief Financial Officer and analyzed reports from
HUD's accounting system that showed the amount of excess budget
authority available for recapture from the housing agencies that
administer the program.  However, at the time we completed our
review, HUD had not finalized its recapture plan and the assumptions
that will determine the specific amounts to be recaptured from each
housing agency.  To determine what HUD plans to do with the excess
budget authority in the Section 8 MOD REHAB Program, we interviewed
program and budget officials and officials in HUD's Office of the
General Counsel about the Department's plans and legal authority to
recapture the program's excess budget authority and reuse it to meet
ongoing needs for housing assistance.  We performed our work from
February 1998 to July 1998 in accordance with generally accepted
government auditing standards. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this report to the appropriate House and
Senate committees; the Secretary of Housing and Urban Development;
and to the Director, Office of Management and Budget.  We also will
provide copies to others on request. 

If you or your staff have any questions concerning this report,
please contact me at (202) 512-7631.  Major contributors to this
report were Eric Marts, Assistant Director, and Paige Smith, Senior
Evaluator, of our Resources, Community, and Economic Development
Division. 

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

List of Congressional 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 Louis Stokes
Ranking Minority Member
Subcommittee on VA, HUD, and Independent Agencies
Committee on Appropriations
House of Representatives




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



(See figure in printed edition.)


*** End of document. ***