Section 8 Tenant-Based Housing Assistance: Opportunities to Improve HUD's
Financial Management (Chapter Report, 02/20/98, GAO/RCED-98-47).

Pursuant to a congressional request and a legislative requirement, GAO:
(1) reviewed the accuracy of the Department of Housing and Urban
Development's (HUD) estimate of unexpended budget authority in Section 8
tenant-based program; and (2) assessed HUD's budget formulation process
for this program.

GAO noted that: (1) in 1997, HUD estimated that $20.7 billion in
unexpended budget authority existed in the Section 8 tenant-based
program and that $9.9 billion of that amount was in excess to known
program needs; (2) this is funding that housing agencies received under
contracts with HUD but did not expend because the funding was not needed
as planned to make housing assistance payments to landlords on behalf of
low-income families; (3) because HUD based its estimate largely on the
data in its tenant-based program's information system--which HUD's
Office of Inspector General and an independent audit firm have tested
and determined to be reliable--GAO believes that the estimate is
reasonably accurate; (4) after Congress rescinded a total of $4.2
billion in June and October 1997 and HUD set aside $2.2 billion for
unanticipated costs and to account for future transactions, the balance
of $9.9 billion in excess unexpended budget authority was reduced to
about $3.5 billion in October 1997 and placed in a congressionally
established Reserve Preservation Account; (5) the budget information
process that HUD used to prepare its fiscal year (FY) 1998 budget
request for renewing Section 8 tenant-based contracts did not produce an
accurate estimate of needs; (6) key HUD offices did not adequately
oversee critical steps in the process, and the process did not require
reasonable justification for substantial portions of the
estimate--including several hundred million dollars proposed for
contingency costs; (7) in addition, although at the time of its FY 1998
budget submission HUD had an estimate of the impact of welfare reform on
the cost of the Section 8 program, more recent information caused HUD to
conclude that including this estimate in the budget request was
necessary; (8) as a result, HUD eventually lowered by +$1 billion its FY
1998 budget estimate for renewing Section 8 contracts; and (9) to
improve its process, HUD has further enhanced its tenant-based program's
information system, consolidated its budget development with strategic
planning and financial management, and changed its budget process; HUD
also plans additional changes in these areas but does not have a
timetable for accomplishing them.

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

 REPORTNUM:  RCED-98-47
     TITLE:  Section 8 Tenant-Based Housing Assistance: Opportunities to 
             Improve HUD's Financial Management
      DATE:  02/20/98
   SUBJECT:  Housing programs
             Budget authority
             Low income housing
             Federal aid for housing
             Unexpended budget balances
             Financial statements
             Federal agency accounting systems
             Future budget projections
             Budgetary reserves
             Rental housing
IDENTIFIER:  HUD Section 8 Housing Assistance Program
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


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


Report to Congressional Committees

February 1998

SECTION 8 TENANT-BASED HOUSING
ASSISTANCE - OPPORTUNITIES TO
IMPROVE HUD'S FINANCIAL MANAGEMENT

GAO/RCED-98-47

Section 8 Tenant-Based Housing Assistance

(385678)


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

  CFO - Chief Financial Officer
  FY - fiscal year
  GAO - General Accounting Office
  HUD - Department of Housing and Urban Development
  OIG - Office of Inspector General
  OMB - Office of Management and Budget

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


B-277227

February 20, 1998

Congressional Committees

This report responds to a mandate in the 1997 Emergency Supplemental
Appropriations Act that we evaluate the accuracy of the Department of
Housing and Urban Development's (HUD) estimate of unexpended budget
authority in the Section 8 tenant-based program.  Our report also
responds to your request that we assess HUD's budget formulation
process for this program.  The report contains recommendations to the
Secretary of Housing and Urban Development that are designed to
improve the reporting of unexpended budget authority and the
formulation of budget requests for the Section 8 tenant-based
program. 

We are sending copies to the appropriate congressional committees;
the Secretary of Housing and Urban Development; and the Director,
Office of Management and Budget.  Copies are available to other
interested parties upon request. 

If you or your staff have any questions, 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 Louis 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

In fiscal year 1998, the Congress appropriated $25 billion in
discretionary budget authority for the Department of Housing and
Urban Development's (HUD) programs, which represented a 30-percent
increase over the fiscal year 1997 level of $19.3 billion.  HUD will
use more than a third of this funding to assist low-income households
to obtain decent housing under section 8 of the Housing Act of 1937. 
Section 8 of the act establishes two primary types of assistance for
families to rent privately owned housing units:  tenant-based
assistance provided through contracts with housing agencies and
project-based assistance provided through contracts with private
landlords.\1 In 1997, HUD reported that enough budget authority had
accumulated unneeded and unspent over the 24-year life of the
tenant-based program to equal the amount expended to fully fund the
program for fiscal year 1996.  Before 1997, however, HUD's
information systems could not identify and report the accumulation of
such excess budget authority.  Furthermore, HUD has not specifically
identified the budget authority for the tenant-based program in its
budget submission or in its consolidated financial statements, and
therefore it was not subject to annual audit. 

Expressing concern about HUD's lack of timeliness and precision in
identifying the magnitude of unspent budget authority in the
tenant-based portion of the Section 8 program, the Chairman of the
Subcommittee on VA, HUD, and Independent Agencies, House Committee on
Appropriations, asked GAO to review HUD's financial management of the
tenant-based program.  In response to that request and to a mandate
in the 1997 Emergency Supplemental Appropriations Act (P.L.  105-18)
that directs GAO to review HUD's budgeting and accounting systems for
Section 8 rental assistance,\2 GAO's objectives for this report were
to

  -- evaluate the accuracy of HUD's estimate of its unexpended funds
     in the Section 8 tenant-based program and the reasonableness of
     this amount and

  -- assess HUD's budget formulation process as it was carried out
     for the Department's fiscal year 1998 submission for the
     tenant-based Section 8 program. 


--------------------
\1 For the tenant-based program, HUD contracts with state and local
public housing agencies to manage the program's certificates and
vouchers, which assist 1.4 million households.  These agencies make
payments to private-sector landlords to subsidize the rent of
certificate and voucher holders. 

\2 This report is the first of three that GAO plans to issue in
response to this mandate.  The second report will address budgeting
and accounting issues for the Section 8 project-based program, and
the third report will address the Section 8 Moderate Rehabilitation
Program. 


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

HUD's rental housing programs help about 4.7 million low-income
households to obtain safe, decent, and affordable places to live. 
About two-thirds of these households rent units in the privately
owned housing market under the Section 8 program.  HUD's estimate for
new budget authority to renew expiring Section 8 tenant-based and
project-based\3 contracts grew from $3.6 billion in fiscal year 1997
to $8.1 billion in fiscal year 1998.  Moreover, HUD estimates that
because a significant number of the tenant-based contracts will
expire over the next 5 years, the renewal needs for the tenant-based
portion alone will increase from $2.5 billion in fiscal year 1997 to
more than $10.5 billion in budget authority by fiscal year 2002. 
Nearly one-third of all assisted households, or 1.4 million,
participate in the tenant-based program. 

To offset the budget authority requirements for renewing the
tenant-based portion of the Section 8 program, HUD began in 1995 to
draw on unspent budget authority from previous years to extend
contracts beyond their expiration dates.  Because Section 8 budget
authority is available to HUD's programs until expended, unspent
Section 8 funding that accumulates over the years as reserves remains
credited to the housing agencies.  However, for years, HUD's
information systems did not allow the Department to accurately
identify such unexpended budget authority.  In addition, since the
early 1990s, the Office of Management and Budget and HUD's Office of
the Inspector General have reported that the Department has been
unable to submit accurate estimates of its contract renewal needs
because its financial management systems have not contained adequate
data on Section 8 contracts.  This situation occurred because of
serious deficiencies in the controls and procedures for maintaining
contract and accounting data.  In an effort to more accurately
estimate contract renewal needs, HUD began an aggressive effort in
February 1996 to quantify for all participating housing agencies the
accumulated reserves available to extend contracts. 


--------------------
\3 For the project-based program, HUD contracts directly with and
provides rental subsidies to the owners of private rental housing and
state housing finance agencies.  For both the tenant-based and
project-based programs, assisted households generally pay 30 percent
of their income for rent, although this percentage can vary depending
on a family's income and the type of program. 


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

In 1997, HUD estimated that $20.7 billion in unexpended budget
authority existed in the Section 8 tenant-based program and that $9.9
billion of that amount was excess to known program needs.  This is
funding that housing agencies received under contracts with HUD but
did not expend because the funding was not needed as planned to make
housing assistance payments to landlords on behalf of low-income
families.  Because HUD based its estimate largely on the data in its
tenant-based program's information system--which HUD's Office of
Inspector General and an independent audit firm have tested and
determined to be reliable--GAO believes that the estimate is
reasonably accurate.  After the Congress rescinded a total of $4.2
billion in June and October 1997 and HUD set aside $2.2 billion for
unanticipated costs and to account for future transactions, the
balance of $9.9 billion in excess unexpended budget authority was
reduced to about $3.5 billion in October 1997 and placed in a
congressionally established Reserve Preservation Account. 

The budget formulation process that HUD used to prepare its fiscal
year 1998 budget request for renewing Section 8 tenant-based
contracts did not produce an accurate estimate of needs.  Key HUD
offices did not adequately oversee critical steps in the process, and
the process did not require reasonable justification for substantial
portions of the estimate--including several hundred million dollars
proposed for contingency costs.  In addition, although at the time of
its fiscal year 1998 budget submission HUD had an estimate of the
impact of welfare reform on the cost of the Section 8 program, more
recent information caused the Department to conclude that including
this estimate in the budget request was unnecessary.  As a result,
the Department eventually lowered by $1 billion (over 10 percent) its
fiscal year 1998 budget estimate for renewing Section 8 contracts. 
To improve its process, HUD has further enhanced its tenant-based
program's information system,\4 consolidated its budget development
with strategic planning and financial management, and changed its
budget process; HUD also plans additional changes in these areas but
does not have a timetable for accomplishing them. 


--------------------
\4 HUD's central accounting and program system for the tenant-based
program, called HUDCAPS, provides financial accounting, management
control, and financial reporting capabilities. 


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


      TENANT-BASED PROGRAM
      ACCUMULATED BILLIONS IN
      EXCESS UNEXPENDED BUDGET
      AUTHORITY
-------------------------------------------------------- Chapter 0:4.1

At the direction of the Congress and with an improved information
system, HUD identified in 1997 $20.7 billion in unexpended budget
authority in the Section 8 tenant-based program.  HUD classified $9.9
billion of that amount as excess because it would not be needed to
meet the current requirements of the tenant-based program.  An
independent review by Price Waterhouse LLP showed that these amounts
were accurate.  However, because the housing agencies that administer
the program had not demonstrated in prior years a need for
significant amounts of reserve funding, a reserve of $9.9 billion to
address unexpected program costs was excessive.  Therefore, after
deducting $2.2 billion for contingencies and other adjustments, HUD
took back $7.7 billion from the amounts formerly provided to housing
agencies under contract to administer the Section 8 program.  Of this
amount, the Congress rescinded $4.2 billion and HUD placed the
remaining $3.5 billion in a congressionally established account for
excess Section 8 reserves. 

Until HUD's actions in 1997 to identify and take back the excess
unexpended budget authority in its Section 8 contracts, the
Department had been unaware of the magnitude of the growing balances
in these accounts.  Furthermore, only after recent improvements to
its information system does HUD now have the capacity to obtain
accurate data on these balances.  HUD does not currently distinguish,
in either its budget justification materials or its consolidated
financial statements, excess balances of budget authority from
amounts that are needed to meet requirements.  However, regular
reporting of these balances would provide the Congress with a more
accurate picture of the tenant-based program's cost.  Such reporting
also would better ensure that HUD's future budget requests recognize
the availability of this funding to offset needs for new budget
authority or for other purposes. 


      FLAWS IN HUD'S BUDGET
      PROCESS FOR THE TENANT-BASED
      PROGRAM LED TO SIGNIFICANT
      OVERESTIMATES OF CONTRACT
      RENEWAL NEEDS; HUD PLANS
      IMPROVEMENTS
-------------------------------------------------------- Chapter 0:4.2

Despite improvements to the Section 8 tenant-based program's
information system, in its fiscal year 1998 budget submission to the
Congress, HUD overstated its $9.2 billion estimate of tenant-based
contract renewals by over $1 billion because of (1) fundamental flaws
in its budget development process and (2) states' experience with
welfare reform showing that welfare recipients' incomes were not
falling as anticipated.  The flaws in the budget process included the
following: 

  -- A lack of oversight by appropriate offices allowed HUD to
     double-count the administrative fee that is paid to housing
     agencies for operating the Section 8 program, thus adding
     approximately $700 million to the estimate of new budget
     authority needed to renew tenant-based contracts. 

  -- Insufficient use of supporting historical data caused HUD to
     request unneeded additions to its estimate of the annual cost
     per unit of assisted housing, which added $444 million to HUD's
     total request for contract renewal.  HUD also provided
     insufficient support for a requested $162 million for
     contingencies, an amount that it could not justify with
     information from prior years. 

Recognizing these budgeting inaccuracies and that the $179 million
that it had budgeted to address the impact of welfare reform on
tenants' incomes would not be necessary, HUD submitted a revised
budget estimate for renewing Section 8 contracts to the Congress
prior to the enactment of HUD's fiscal year 1998 appropriations bill. 
HUD reduced its estimate by $1 billion--from $9.2 billion to $8.2
billion--by, among other actions, reducing the average unit cost,
eliminating its request for funds to address unspecified contingency
costs, and increasing its use of unused funding from prior years. 

To address the problems that GAO and HUD identified in its budget
process, HUD plans to make additional improvements to its information
system and reorganize the offices responsible for preparing and
reviewing the Department's budget estimates.  Recognizing a need to
improve its budget process with better oversight and documentation,
HUD recently moved the Office of Budget under the control of the
Office of the Chief Financial Officer and plans to base future
budgets on documented historical program costs and data.  HUD
officials plan to adopt other changes--such as no longer using excess
budget authority to extend expiring contracts--to make their requests
for new budget authority more accurately reflect the needs of the
Section 8 program.  Because many of these changes have not been fully
implemented, GAO cannot determine whether they will positively affect
the budget process for fiscal year 1999 and beyond. 


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

To improve HUD's financial management of its tenant-based program and
the soundness of the budget estimates for fiscal year 2000 and
beyond, GAO recommends that the Secretary of Housing and Urban
Development

  -- direct the Office of the Chief Financial Officer to modify the
     agency's consolidated financial statements so that they (1)
     identify the portions of the unexpended appropriations for the
     Section 8 program that are attributable to the tenant-based and
     project-based programs and (2) disclose the accumulated amounts
     of budget authority in each program that are excess to current
     needs and therefore available for other uses and

  -- annually assess the balance of excess unexpended budget
     authority credited to housing agencies and take back amounts
     that accumulate above what is prudently needed to address
     contingency costs. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

GAO provided a draft of this report to HUD for its review and
comment.  In commenting on the report, HUD's Chief Financial Officer
said that HUD agreed with the report's major findings, conclusions,
and recommendations.  HUD's Office of Public and Indian Housing said
that the report presents a balanced assessment.  To provide a more
factual representation and to ensure clarity, HUD provided additional
comments.  For example, HUD's principal concern was that GAO had
characterized HUD's initial estimate of the impact on welfare reform
as unjustified.  HUD believes that while more recent conditions and
information show the estimate to be obsolete and unnecessary, the
estimate included as part of the fiscal year 1998 budget estimate was
based on the best information available at the time.  GAO agrees and
has made appropriate changes in its report to reflect HUD's concerns. 


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

In fiscal year 1998, the Congress appropriated $25 billion in
discretionary budget authority for the Department of Housing and
Urban Development's (HUD) programs, which represented a 30-percent
increase over the fiscal year 1997 level of $19.3 billion.  HUD
provides rental housing assistance-about $21 billion in fiscal year
1996--that enables about 4.7 million low-income households to obtain
safe, decent, and affordable housing.  HUD assists about two-thirds
of these households through its Section 8 housing assistance
program.\1 HUD's estimate of new budget authority to renew expiring
Section 8 tenant-based and project-based contracts\2 increases from
$3.6 billion in fiscal year 1997 to $18.1 billion in fiscal year
2002.  For the tenant-based portion of the Section 8 program, HUD
provides housing subsidies through nearly 4,300 contracts with local
housing agencies and state housing finance agencies.  Housing
agencies receive a fee from HUD for administering the tenant-based
program and working with households to determine eligibility, verify
income, and ensure that units meet quality standards.  Because a
significant number of the Section 8 tenant-based contracts will
expire over the next 5 years, the estimated cost to renew contracts
in the tenant-based program alone will rise from about $2.5 billion
in fiscal year 1997 to $10.5 billion in fiscal year 2002.  To
identify unexpended funding that could offset this growing renewal
cost, HUD recently undertook aggressive efforts to reconcile its
records in the tenant-based program. 


--------------------
\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).  It includes project-based assistance for specific
properties and tenant-based assistance for specific households. 

\2 For the project-based program, HUD contracts directly with and
provides rental subsidies to the owners of private rental housing and
state finance agencies.  In the Moderate Rehabilitation Program, HUD
contracted with landlords to rehabilitate their multifamily
properties and also provided project-based Section 8 assistance to
make them affordable for low-income households.  For each program,
assisted households generally pay 30 percent of their income for
rent, although this percentage can vary depending on a family's
income and the type of program. 


   1.4 MILLION HOUSEHOLDS BENEFIT
   FROM HUD'S TENANT-BASED RENTAL
   ASSISTANCE
---------------------------------------------------------- Chapter 1:1

Tenant-based assistance is an important part of the federal
government's commitment to providing safe, decent, and affordable
housing to low-income people.  In fiscal year 1996, HUD spent about
$7 billion to provide tenant-based rental assistance.  HUD's
tenant-based assisted housing programs--the Section 8 certificate and
voucher programs--provide direct rental assistance to about 1.4
million households.  These programs are designed to allow low-income
households to live in decent and affordable private rental housing of
their choice, as long as the units meet HUD's rent and quality
standards.  Generally, under the certificate program, an assisted
household pays 30 percent of its adjusted income for rent.  In
contrast, households with vouchers may elect to pay more or less than
30 percent of their income for rent, depending on the rent charged
for the unit in which they elect to live.  In turn, the voucher
program assists the household by making a subsidy payment to the
landlord equal to the difference between 30 percent of the
household's adjusted income and a payment standard for the housing
unit based on the fair market rent for a unit of a similar size in
the area. 

To operate the certificate and voucher programs, HUD enters into
contracts with local and state housing agencies, including public
housing agencies.  These housing agencies certify applicants for
eligibility, inspect units found by the tenant for compliance with
housing standards, and verify that the lease terms meet HUD's
requirements.  In addition, the housing agencies pay the rent
subsidies to owners of private rental housing for the assisted
households.  HUD also pays the housing agency a statutorily
determined administrative fee for managing the program. 


      SECTION 8 TENANT-BASED
      CONTRACTS
-------------------------------------------------------- Chapter 1:1.1

When the Section 8 program began in 1974, HUD entered into long-term
contracts with housing agencies to provide tenant-based assistance. 
Initially, contract terms for tenant-based assistance were for 15
years.  As the federal budget deficit grew larger, HUD reduced
contract terms to reduce the amount of budget authority it needed to
set aside to fully fund the contracts over their whole terms.\3 HUD
subsequently shortened the contract terms to 5 years and, later, to 3
years.  Finally, beginning in fiscal year 1995, Section 8
tenant-based contracts were written for 1-year terms, thus minimizing
the amount of budget authority HUD needs to fund contract renewals. 
HUD's actions have resulted in contract lengths ranging from as long
as 15 years to as short as 1 year. 


--------------------
\3 Budget authority is the authority provided by federal law to incur
financial obligations that will result in outlays.  Appropriations
are the most common means of providing budget authority.  Outlays are
the measure of federal spending and are payments to liquidate
obligations. 


   NEARLY A FIVEFOLD INCREASE IN
   SECTION 8 TENANT-BASED
   ASSISTANCE IS EXPECTED WITHIN 5
   YEARS
---------------------------------------------------------- Chapter 1:2

HUD estimates that the cost of Section 8 contract renewals for the
tenant-based program alone will increase from $2.5 billion in fiscal
year 1997 to $10.5 billion in fiscal year 2002--nearly a fivefold
increase in the amount of budget authority needed to fund Section 8
tenant-based contract renewals.  The increase in budget authority is
attributable to the large growth in the number of expiring Section 8
tenant-based contracts.  This growth reflects the renewal of the
initial expiration of long-term contracts, as well as the re-renewal
of shorter term contracts begun in the 1990s.  To offset the budget
authority requirements for Section 8 contract renewals, the Congress
encouraged HUD in 1995 to begin using available unexpended budget
authority that had accumulated over the years in the housing
agencies' program reserve accounts to extend the funding of expiring
Section 8 contracts. 

The Congress provides budget authority for HUD's Section 8
tenant-based assistance to (1) renew expiring contracts to maintain
existing subsidies (called contract renewals), (2) create new
contracts to increase the number of assisted households (called
incremental assistance), and (3) provide additional funds for
existing contracts when the remaining contract funds are insufficient
to pay subsidies over the remaining life of the contract (called
contract amendments).  Renewal assistance represents the vast
majority of Section 8 tenant-based assistance. 

HUD and the Congress have worked together during recent years to
renew every expiring contract.  However, renewing these contracts
will require a sharp increase in budget authority over the next few
years because the number of expiring contracts is increasing
dramatically.  The sharp growth in expirations has two causes. 
First, the number of contracts expiring for the first time will
increase sharply in the coming years.  These consist of 15-year
contracts issued in the late 1970s and early 1980s and short-term (5
years or less) tenant-based contracts issued since the early 1990s. 
Second, HUD must renew an increasing number of contracts that it has
renewed at least once previously, a circumstance that has begun to
occur more frequently as contract terms have grown shorter.  Renewing
expiring contracts will require a sharp increase in budget authority
over the next several years, as shown by figure 1.1. 

   Figure 1.1:  Estimated Budget
   Authority and Expiring Units
   for Section 8 Tenant-Based
   Contract Renewals, Fiscal Years
   1997-2002

   (See figure in printed
   edition.)

Note:  HUD applied $1.6 billion of excess budget authority to its
fiscal year 1998 Section 8 tenant-based contract renewal request,
thereby reducing it to $6.7 billion. 

Source:  Congressional Justifications for 1998 Estimates, HUD. 

In 1995, the Congress encouraged HUD to use available unexpended
funds in the Section 8 program to offset the budget authority
requirements for contract renewals.  Budget authority appropriated
for Section 8 tenant-based contract renewals is "no-year" money and
does not expire if it is not expended.  These unexpended funds have
been obligated to the housing agencies but will not be needed to meet
planned requirements; the funds are, in effect, credited to housing
agencies' program reserve accounts.  In fiscal year 1995, HUD began
to draw on unused budget authority from previous years to extend the
terms of expiring contracts. 

To identify unexpended balances to help offset the cost of Section 8
contract renewals, HUD began in February 1996 an extensive
examination, called "reconciliation," of the Section 8 tenant-based
program's reserve accounts at all housing agencies.  The results of
this examination were not completed until 1997.  In addition, in
November 1996 HUD identified approximately $1.6 billion that had not
been obligated to the tenant-based program--and therefore was also
unexpended.  HUD called this amount "carryover" and used it to offset
the Department's fiscal year 1998 contract renewal needs. 
Identifying this carryover occurred too late in the budget process to
have an impact on HUD's fiscal year 1997 budget request.  Therefore,
HUD reflected it in the Department's fiscal year 1998 budget request
by reducing the estimate of Section 8 tenant-based contract renewals
by $1.6 billion. 

At the request of the Chairman of the Subcommittee on VA, HUD, and
Independent Agencies, House Committee on Appropriations, we reviewed
HUD's fiscal year 1998 budget request for Section 8 contract renewal
funding.  In February 1997, we briefed the Subcommittee and provided
testimony for the Subcommittee's hearing on March 18, 1997.  \4

We informed the Congress that HUD had a significant amount of
unexpended funds in the Section 8 tenant-based program and that once
HUD completed its examination of the housing agencies' accounts, the
likely total amount of available unexpended funds would far exceed
the $1.6 billion that HUD disclosed in its fiscal year 1998 budget
request.  In chapter 2, we discuss HUD's actions to further identify
the unexpended budget authority in the tenant-based program. 


--------------------
\4 HUD's FY 1998 Budget Request:  Some Requests for Funding May Be
Unnecessary (GAO/T-RCED-97-108, Mar.  18, 1997). 


   ACCUMULATION OF UNEXPENDED
   BUDGET AUTHORITY IN THE SECTION
   8 TENANT-BASED PROGRAM
---------------------------------------------------------- Chapter 1:3

The accumulation of unexpended funds in housing agencies' reserve
accounts resulted from HUD's method of estimating budgets since the
beginning of the program.  According to HUD officials, at the outset
of the Section 8 tenant-based program, HUD intentionally established
program reserves during the early years of a multiyear housing
assistance contract to help fund the program in the later years. 
This practice was, in part, required by law.\5

To build up reserves, HUD based its estimate of the amount of budget
authority needed to fund the program on two conservative assumptions. 
First, HUD assumed that tenants would make a contribution of zero
toward their rent.  Therefore, as tenants had income and contributed
to their rent the amount of budget authority the housing agency drew
down from the program was less than budgeted, and program reserves
began to grow.  Second, HUD assumed that all certificates were in
constant use, even though the leasing of housing units would
necessarily take some time to accomplish while prospective tenants
shopped for housing and the housing agencies determined the tenants'
eligibility and ensured that the selected units met quality
standards.  Thus, reserves accumulated during the time housing units
were not leased because housing agencies did not make housing subsidy
payments for unleased units.  As a result, the larger housing
agencies, especially those receiving new certificates every year,
developed significant reserves. 

While HUD began to consider tenants' income in its contract renewal
budget requests for fiscal year 1991, it continued to assume that all
units were fully leased.  For instance, currently, a statutory
requirement exists that once a household discontinues its need for
and use of a certificate or voucher and returns it to the housing
agency, the housing agency must wait 3 months before reissuing that
certificate or voucher to another eligible household.  However, HUD
does not factor the effect of this requirement into its budget
estimates for Section 8 tenant-based assistance.  Therefore, during
this 3-month period, reserves accumulate in the housing agencies'
reserve accounts because the agencies do not make housing assistance
payments to landlords for housing units not under lease. 


--------------------
\5 To address the effect of inflation in the early years of the
program, a provision in section 8 of the Housing Act of 1937 required
HUD to provide each housing agency with 115 percent of the estimated
amount of housing assistance that would be required to assist a
family receiving a 5-year housing voucher.  HUD adopted this
provision for certificates as well. 


   LONG-STANDING PROBLEMS WITH
   HUD'S BUDGET ESTIMATING PROCESS
---------------------------------------------------------- Chapter 1:4

The build-up of reserves in HUD's Section 8 tenant-based program is
indicative of long-standing problems with HUD's budget estimating
process.  According to HUD's Office of Inspector General (OIG), HUD,
for years, has been unable to estimate accurately the budget
authority it needs for Section 8 contract renewals and amendments. 
Historically, HUD's accounting and information systems did not
contain reliable, complete, or accurate data on Section 8 contracts. 
This situation occurred because of poor systems design and serious
deficiencies in the controls, policies, and procedures associated
with the input and maintenance of Section 8 contract and accounting
data.  As a result of these problems, HUD had to continually revise
its Section 8 estimates and often request additional funding.  While
HUD has taken action to correct these problems, budget estimating
problems still remain. 

In response to congressional concerns about HUD's budget estimating
problems, HUD and the Office of Management and Budget (OMB) formed a
joint team to evaluate HUD's fiscal year 1992 contract renewal and
cost amendment estimates and to find ways to improve the process in
the future.  The team determined that HUD was unable to accurately
estimate Section 8 contract renewal and amendment needs because HUD's
data systems were inadequate for the timely retrieval of accurate
information.\6 Furthermore, the team reported that estimating the
number of expiring Section 8 contracts--and the budget authority
required to renew them--had been a recurring problem for HUD since
1989.  For example, HUD had to re-estimate its contract renewal needs
for fiscal years 1990 and 1991 because of inadequate financial
management systems and inaccurate forecasting.  Specifically, HUD's
financial management systems did not provide summary information to
determine the number of expiring Section 8 contracts.  In addition,
HUD's cost estimates for contract renewal were based on assumptions
about average costs that proved to be inaccurate. 

In 1992, HUD's OIG reported that the Department continued to
experience problems in submitting reliable Section 8 budget requests
to the Congress.\7 Specifically, the OIG concluded that serious
deficiencies existed in (1) the controls and procedures in HUD's
Section 8 accounting and budgeting systems and (2) the input and
maintenance of contract and accounting data in the Department's
information systems.  As a result, HUD could not assure the Congress
that its Section 8 budget requests for fiscal years 1992 and 1993
were reasonably accurate.  Because HUD's management relied on the
Department's inadequate Section 8 financial management systems to
develop the budget requests and because the estimate of the cost to
fund expiring contracts turned out to be inaccurate, HUD had to
increase its Section 8 contract renewal estimates for fiscal years
1992 and 1993.  In addition, the OIG reported that HUD's original
estimates for Section 8 amendments for fiscal years 1992 and 1993 may
have been materially overstated.  However, the OIG believed that the
accuracy of the Department's tenant-based contract renewal estimate
for fiscal year 1993 appeared improved over the fiscal year 1992
estimate. 

To determine HUD's progress in improving its Section 8 budgeting
systems and processes, HUD's OIG conducted a follow-up audit in
1995.\8 The OIG found that HUD's program offices had developed and
implemented interim budgeting procedures that had improved the
Department's ability to formulate Section 8 contract renewal budget
estimates.  Nevertheless, the OIG found that HUD continued to
experience problems developing accurate and reliable Section 8
contract renewal and amendment estimates.  For example, the OIG found
that because of a breakdown in the budgeting process, the
Department's budget office did not use more reliable estimates
developed by the program offices for the Department's initial fiscal
year 1996 budget submission to OMB.  The OIG also concluded that
HUD's fiscal year 1994 amendment estimate was materially overstated
and believed that the estimates for fiscal years 1995 and 1996 also
appeared to be overstated.  In response, the Assistant Secretary for
Public and Indian Housing pointed out that the tenant-based program
had included a "cushion" in its amendment estimates to cover
shortfalls in budget authority that could not be estimated by the
Department's systems. 

To help correct the deficiencies with its accounting and budgeting
for Section 8 contracts, HUD implemented a new Section 8 tenant-based
information system in fiscal year 1995.\9

Besides containing primary information for estimating contract
renewal needs, the system contains the actual cost incurred by each
housing agency for providing rental assistance.  The system also
provided the amount of unspent budget authority credited to each
housing agency at the end of the agency's fiscal year. 


--------------------
\6 Final Report on Management of Section 8 Housing Assistance
Programs, Department of Housing and Urban Development and Office of
Management and Budget Joint SWAT Team (Nov.  1991). 

\7 Review of HUD's Fiscal Year 1992 and 1993 Budget Estimating
Processes for Section 8 Contract Renewals and Amendments (Audit
Report No.  92-TS-103-0008), HUD Office of the Inspector General
(Apr.  1992). 

\8 Audit of Section 8 Accounting and Budgeting (Audit Report No. 
97-FO-103-0001), HUD Office of Inspector General (Mar.  1995). 

\9 This is HUD's tenant-based central accounting and program system,
called HUDCAPS, that provides financial accounting, management
control, and financial reporting capabilities. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:5

The Chairman of the Subcommittee on VA, HUD, and Independent
Agencies, House Committee on Appropriations, has expressed concern
about HUD's financial management of the Section 8 tenant-based
program--specifically, HUD's lack of timeliness and precision in
identifying the magnitude of unspent budget authority in the Section
8 tenant-based program.  As a result, the Chairman asked us to review
HUD's financial management of the Section 8 tenant-based program.  In
addition, the 1997 Emergency Supplemental Appropriations Act (P.L. 
105-18) directed us to determine whether HUD's systems for budgeting
and accounting for Section 8 rental assistance ensure that unexpended
funds do not reach unreasonable levels and that obligations are spent
in a timely manner.  Our objectives for this report, therefore, were
to

  -- evaluate the accuracy of HUD's estimate of its unexpended funds
     in the Section 8 tenant-based program and the reasonableness of
     this amount and

  -- assess HUD's budget formulation process for the Section 8
     tenant-based program. 

To evaluate the accuracy of HUD's estimate of its unexpended funds in
the Section 8 tenant-based program and the reasonableness of this
amount, we reviewed documentation and discussed HUD's examination of
unexpended balances in housing agencies' reserve accounts with HUD
officials.  We reviewed and discussed the results of Price Waterhouse
LLP's independent evaluation of available unexpended funds in the
tenant-based program with officials from Price Waterhouse LLP and
with HUD officials in the Offices of Public and Indian Housing, the
Chief Financial Officer, and Inspector General.  We contacted
national associations representing housing agencies and discussed the
need for retaining unexpended funds in housing agencies' program
reserve accounts.  These organizations were the Council of Large
Public Housing Authorities, the National Association for Housing and
Redevelopment Officials, and the Public Housing Authority Directors
Association. 

To assess HUD's budget formulation process for the Section 8
tenant-based program, we reviewed HUD's process for developing the
contract renewal estimates and evaluated supporting documentation for
HUD's fiscal year 1998 budget request.  We also reviewed federal laws
and regulations, OMB policies, and HUD's guidance.  We analyzed the
impact that HUD's budgeting processes had on its fiscal year 1998
budget submission to the Congress.  In addition, we discussed
programmatic, budgeting, and financial management issues with HUD
officials from the Offices of Public and Indian Housing, Budget, the
Chief Financial Officer, Policy Development and Research, and
Inspector General. 

While we did not systematically verify the accuracy of HUD's data or
conduct a reliability assessment of HUD's databases as part of this
assignment, we relied upon the work of HUD's OIG and our review of
the OIG's audit of the consolidated financial statement, which shows
that the information in HUD's tenant-based information system is
generally reliable.  As part of its audit of HUD's fiscal year 1996
financial statements, HUD's OIG analyzed a statistical sample of
HUD's contracts.  For those contracts that were Section 8
tenant-based contracts, the OIG traced the information in the
original contract files first to HUD's Department-wide accounting
system and then to HUD's Section 8 tenant-based information system. 
The OIG concluded that, for the sample reviewed, the amounts reserved
and obligated in the Section 8 tenant-based information system were
correct.\10

As part of our audit of the federal government's consolidated
financial statement, we selected a subset of this sample and
performed similar tests at two field offices.  On the basis of these
tests, we concurred with the OIG's findings. 

We provided a draft of this report to HUD for review and comment and
we address HUD's comments at the end of each applicable chapter. 

We performed our work from May 1997 through December 1997 in
accordance with generally accepted government auditing standards. 


--------------------
\10 Audit of the U.S.  Department of Housing and Urban Development's
Fiscal Year 1996 Financial Statements (Audit Report No. 
97-FO-177-0003), HUD Office of Inspector General (Apr.  10, 1997). 


HUD IDENTIFIED BILLIONS IN EXCESS
UNEXPENDED BUDGET AUTHORITY
============================================================ Chapter 2

Over the more than 20 years that HUD has provided housing assistance
through the Section 8 tenant-based program, approximately $9.9
billion of budget authority excess to program needs has accumulated
in housing agencies' reserve accounts.  This is funding that housing
agencies received under contracts with HUD but did not expend because
the funding was not needed as planned to make housing assistance
payments to landlords on behalf of low-income families.  After HUD
reported this large unexpended balance, the Congress rescinded $4.2
billion, and after other adjustments of about $2.2 billion, the
current balance is about $3.5 billion, which remains in a
congressionally established Section 8 Reserve Preservation Account. 
To identify this programwide unexpended balance, HUD conducted in
1996 and 1997 a financial data reconciliation of all of its
tenant-based housing assistance contracts.  Until completing the
reconciliation process and making recent improvements to its
information system, the Department could not accurately report its
excess balances in the tenant-based program.  However, with improved
systems and better data, HUD has the opportunity to report in more
detail its unexpended Section 8 funding and the potential
availability of this funding to offset needs for new budget authority
or for other uses. 


   ABOUT $10 BILLION OF EXCESS
   BUDGET AUTHORITY ACCUMULATED IN
   THE SECTION 8 TENANT-BASED
   PROGRAM
---------------------------------------------------------- Chapter 2:1

In March 1997, HUD completed an extensive accounting reconciliation
and data verification process that it had begun in February 1996. 
With the results of the reconciliation, HUD updated its Section 8
tenant-based information system and subsequently determined that the
unexpended budget authority in the tenant-based program was $20.7
billion and that $9.9 billion of that amount was not needed to meet
current program needs.  Because this $9.9 billion of excess budget
authority was not needed to fund current obligations, it therefore
was available to meet future Section 8 or other needs.  HUD
recaptured $7.7 billion of this excess balance and retained the
difference of $2.2 billion to cover contingencies and to account for
future transactions.  The $9.9 billion that had accumulated as excess
exceeded the $7.4 billion that housing agencies expended on payments
to landlords during fiscal year 1996.  Figure 2.1 provides a
chronology of the actions taken by the Congress and HUD to identify
and control Section 8 tenant-based funding. 

   Figure 2.1:  Actions Taken by
   the Congress and HUD to
   Identify and Control Section 8
   Tenant-Based Funding

   (See figure in printed
   edition.)

*The difference between the independently verified number of 9.9
billion and the $7.3 billion reported to the Congress is an amount
set aside to meet various contingencies. 


      $9.9 BILLION OF EXCESS
      BUDGET AUTHORITY HAD
      ACCUMULATED IN THE
      TENANT-BASED PROGRAM
-------------------------------------------------------- Chapter 2:1.1

In May 1997, HUD estimated that the amount of unexpended budget
authority that exceeded the amount needed to meet contract
requirements in the tenant-based program was $9.9 billion.  This was
HUD's second attempt to estimate this figure; the Department revised
its initial estimate after an independent accounting firm determined
that critical data used could not be verified because they were
maintained manually at HUD's field offices.  HUD's revised estimate
of $9.9 billion has been verified by an independent accounting firm. 
In contrast to the first estimate, HUD calculated its revised
estimate by using data exclusively from its Section 8 tenant-based
information system to compare total unexpended budget authority with
the housing assistance requirements for that budget authority.  By
subtracting projected program requirements of $10.2 billion and other
adjustments of $0.6 billion from the total unexpended budget
authority of $20.7 billion, HUD concluded that the amount of
unexpended budget authority that was not needed to meet existing
housing assistance needs at the beginning of fiscal year 1998 would
be $9.9 billion, as shown in table 2.1. 



                               Table 2.1
                
                   Unexpended Budget Authority in the
                 Tenant-Based Program That Is Excess to
                 Current Program Needs as of October 1,
                                  1997

                         (Dollars in billions)

--------------------------------------------------------------  ------
Total unexpended budget authority under contract as of April     $20.7
 22, 1997
Less:requirements to fund all active housing units under        (10.2)
 contract on April 22, 1997, through the expiration\ of those
 contracts
Total excess budget authority under contract as of April 22,     $10.5
 1997
Less:adjustments needed to project the balance through the end   (0.6)
 of fiscal year 1997 (September 30, 1997)
Projected excess budget authority as of October 1, 1997           $9.9
----------------------------------------------------------------------
Source:  HUD's Office of Public and Indian Housing. 

Price Waterhouse LLP assisted HUD in evaluating its revised estimate
and determined the estimate to be accurate.  During its work, Price
Waterhouse LLP performed tests on a statistical sample of 158 housing
agencies to confirm the accuracy of HUD's $9.9 billion estimate of
excess unexpended budget authority.  For this sample, the accounting
firm compared information in HUD's tenant-based information system
with information in the housing agencies' most recent year-end
settlement statements.\1 By extrapolating the results from the test
sample to the information system as a whole, Price Waterhouse LLP
found that the totals differed from HUD's by 5 percent or less and on
that basis concluded that HUD's estimate of $9.9 billion was
accurate. 


--------------------
\1 HUD field office officials review and approve housing agencies'
year-end settlement statements.  The statement documents the cost
incurred by the housing agency to run the program for the fiscal year
and the corresponding number of unit-months under leases supported by
those funds. 


      HUD ULTIMATELY RECAPTURED
      $7.7 BILLION OF THE $9.9
      BILLION
-------------------------------------------------------- Chapter 2:1.2

In the June 1997 Emergency Supplemental Appropriations Act, the
Congress directed HUD to recapture unexpended budget authority that
was not needed to meet the current obligations of the Section 8
tenant-based program.  In the act, the Congress also established the
Section 8 Reserve Preservation Account as an accounting repository
for recaptured excess budget authority.  In response to this
direction, HUD recaptured $7.7 billion of the excess budget authority
and placed it in the Preservation Account.  Of the $2.2 billion not
recaptured, about $1.2 billion was left in the participating housing
agencies' accounts as a reserve for contingencies equal to about 2
months of assisted housing payments to landlords.  The remaining $1
billion was not recaptured because it represented amounts that had
not yet been credited to housing agencies' reserve accounts at the
time of the recapture.\2 As shown in table 2.2, after two
congressional rescissions totaling $4.2 billion, GAO has calculated
on the basis of data obtained at the end of fiscal year 1997 that
about $3.5 billion remains in the Reserve Preservation Account. 
(However, more recent financial information maintained by HUD shows
that this balance may be closer to $3.7 billion.)



                               Table 2.2
                
                   Budget Authority Remaining in the
                 Section 8 Reserve Preservation Account

                         (Dollars in billions)

--------------------------------------------------------------  ------
Projected excess contracted budget authority as of October 1,     $9.9
 1997
Less: 2-month reserve for contingencies                          (1.2)
Less: amount not yet accumulated at the time of the recapture    (1.0)
Excess contracted budget authority recaptured and placed in       $7.7
 the Section 8 Reserve Preservation Account
Less:budget authority rescinded ($3.65 billion in June 1997      (4.2)
 and $0.55 billion in Oct. 1997)
Budget authority remaining in the Section 8 Reserve               $3.5
 Preservation Account
----------------------------------------------------------------------
Source:  GAO calculation based on data from HUD's Office of Public
and Indian Housing. 

While a reserve for contingencies is prudent, it is not clear that a
reserve of $1.2 billion is reasonable and necessary.  A report from
HUD's tenant-based information system shows that, in fiscal year
1996, housing agencies used $353 million\3 in excess budget authority
to cover contingencies, far less than the amount that HUD has
reserved for this purpose.  Moreover, during fiscal year 1996, an
additional $1.4 billion\4 in excess budget authority accrued.  HUD
plans to adjust its reserve level after it examines in more detail
housing agencies' actual use of available unexpended budget authority
in fiscal years 1996 and 1997.  However, given housing agencies'
experience in fiscal year 1996, much less than $1 billion likely will
be needed to meet unanticipated costs during a 1-year period. 


--------------------
\2 Some of the $9.9 billion in excess unexpended budget authority had
not yet been placed in housing agencies' reserve accounts at the time
of the recapture because some housing agencies' accounts had not been
closed via the year-end settlement process.  During this process, HUD
determines the difference between the amount of budget authority that
the housing agency is entitled to under contract and the amount of
budget authority that the housing agency actually used during the
year.  Once this difference is determined, HUD places the amount in
the housing agency's reserve account. 

\3 The $353 million includes excess budget authority used for the
Section 8 Moderate Rehabilitation Program. 

\4 The $1.4 billion includes excess budget authority accrued in the
Section 8 Moderate Rehabilitation Program. 


   OPPORTUNITIES EXIST FOR BETTER
   REPORTING OF EXCESS BUDGET
   AUTHORITY
---------------------------------------------------------- Chapter 2:2

April 1997 was the first time that HUD identified and reported to the
Congress the excess unexpended budget authority associated with the
Section 8 tenant-based program.  Until HUD's recent improvements to
its information system, such reporting could not be done accurately. 
However, better data and improved systems now offer HUD the
opportunity to use its (1) budget justification materials and (2)
financial statements as a means to report the status of unexpended
funds and their availability to offset needs for new budget authority
or for other uses. 

HUD is not required to and does not currently report in its annual
budget justifications the aggregate amount of excess unexpended
budget authority credited to housing agencies' reserve accounts.  By
doing so, however, the Department could ensure that the Congress is
informed about the funding on hand before appropriating new budget
authority.  Moreover, according to OMB's guidance on budget
formulation, agencies should consider available funding on hand
before requesting new funding. 

A second means for HUD to improve its reporting of excess unexpended
budget authority in the Section 8 tenant-based program is through its
financial statements.  HUD's consolidated financial statements comply
with the federal accounting requirement to disclose unexpended budget
authority by major budget account--the entire Section 8 program, for
example.  However, the statements do not currently show the amount of
unexpended budget authority for programs that are at the level of the
tenant-based and project-based Section 8 programs or whether
unexpended budget authority is needed to meet program requirements or
is available for other purposes.  The federal accounting standards
established by the Financial Accounting Standards Advisory Board
require that agencies disclose the status of budgetary resources,
including the amount obligated.  The standards do not, however,
require agencies to disclose such information below the major budget
account level.  Each agency should disclose information that is most
useful to the users of their financial statements. 

In a note to its fiscal year 1996 consolidated financial statements,
HUD disclosed unexpended appropriations by major program type.  The
note explained that unexpended appropriations include obligated,
committed, and reserved as well as excess funds.  It further said
that HUD had unexpended appropriations of $43 billion in the Section
8 program (tenant-based and project-based) at the end of fiscal year
1996.  While the note fulfills the advisory board's requirement to
report on the status of budgetary resources, the note does not
identify the portion of the $43 billion attributed to the two Section
8 assisted housing programs or the amount in excess of the programs'
needs.  By reporting excess budget authority in the two programs in
its consolidated financial statements, HUD would instill greater
confidence in the accuracy of these balances because they also would
be reviewed as part of the annual consolidated financial statement
audit required by the Chief Financial Officers Act of 1990. 
Moreover, clearly identifying the existence and amount of excess
unexpended budget authority is important if the Congress is to have
confidence in HUD's capacity to effectively manage the funding
provided for the Section 8 tenant-based program. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 2:3

We believe that to adequately address economic contingencies--such as
rising rental rates or falling tenant incomes--HUD should maintain a
reasonable level of excess budget authority; however, excess budget
authority that exceeds a full year of housing assistance payments is
excessive.  To ensure that excess unexpended budget authority does
not reach unreasonable levels, HUD would need to annually review each
tenant-based housing assistance contract it has with housing agencies
with the intent of recapturing amounts above the level prudently
needed to cover the unexpected but potential costs of administering
the contract.  Furthermore, now that HUD has corrected the data in
its tenant-based information system, the Department has several
means--including its financial statements and budget submissions--to
keep the Congress better informed in the future of the amount of
excess unexpended budget authority in the Section 8 tenant-based
program. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 2:4

To improve HUD's fiscal responsibility to the Section 8 program and
to ensure that the Congress is adequately informed about the amount
of excess unexpended budget authority at HUD in the future, we
recommend that the Secretary of HUD

  -- direct the Office of the Chief Financial Officer to modify the
     agency's consolidated financial statements so that they (1)
     identify the portions of the unexpended appropriations for the
     Section 8 program that accrued during the year and are
     attributable to the tenant-based and project-based programs,
     respectively and (2) disclose the amounts of budget authority in
     each program that are excess to current needs and therefore
     available for other uses;

  -- include in HUD's annual budget justification documents the
     amount of unexpended budget authority in the Section 8 assisted
     housing program that is in excess of current obligations and
     recapture amounts that accumulate above what is prudently needed
     to address contingent costs. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 2:5

In commenting on a draft of this report, HUD's Chief Financial
Officer said that HUD agreed with the report's major findings,
conclusions, and recommendations.  In addition, HUD's Office of
Public and Indian Housing said that the report presents a balanced
assessment.  The CFO and officials of the housing office provided
several comments to improve the report's clarity, and we incorporated
them as appropriate. 


HUD PLANS CHANGES TO IMPROVE ITS
BUDGET FORMULATION PROCESS
============================================================ Chapter 3

Accurate budget estimates are essential to federal agencies meeting
their fiscal responsibilities because such estimates facilitate sound
policy decisions and effective funding trade-offs.  In support of
agencies being fiscally responsible, OMB requires them to submit
reasonably accurate budget estimates.  However, HUD has long-standing
problems in submitting accurate estimates--since 1989, its estimates
of Section 8 contract renewals have been either too low or too high. 
This inability to accurately forecast budget needs persisted into
fiscal year 1998.  We found that HUD had problems with its budget
submission; but we also found that HUD had corrective actions planned
or in process to improve its budgeting process.  Specifically, we
found the following: 

  -- The budgeting process HUD used in fiscal year 1998 produced
     excessive estimates of key cost factors that, once discovered,
     led to HUD's reducing its request for tenant-based contract
     renewal funding by about $1 billion. 

  -- In its budget projection for fiscal years 1999 through 2002, HUD
     overestimated its need for funding to amend existing housing
     assistance contracts because accurate data were not available
     from its accounting system at the time. 

  -- HUD has acknowledged many of its problems with its budgeting
     process and has begun implementing corrective actions that
     include changing its organizational structure to improve
     oversight among the staff responsible for formulating budget
     estimates.  However, many of the changes HUD is making or has
     planned were not implemented in time to affect HUD's initial
     formulation of its fiscal year 1999 estimate, and HUD has not
     prepared a timetable for implementing these changes. 


   INEFFECTIVE BUDGET PROCESS
   CAUSED ERRORS AND RESULTED IN
   REVISED BUDGET REQUEST
---------------------------------------------------------- Chapter 3:1

HUD's fiscal year 1998 budget request contained errors and
insupportable estimates that led to HUD's overstating funding needs
for its tenant-based contract renewals by over $1 billion.  This
error was caused by an ineffective internal budget process that
lacked adequate oversight and did not make effective use of actual
expenditure data for the program.  For example, insufficient review
of the estimating methodology led to double-counting a large
component of the average cost per assisted housing unit.  Because
this cost is a key variable in determining HUD's contract renewal
needs, the double-counting caused HUD to greatly overstate its
estimate for renewing expiring contracts.  In addition, HUD's
estimate contained contingency costs that could not be justified on
the basis of program experience. 


      BUDGET PROCESS ERRED IN
      DEVELOPING UNIT COST
-------------------------------------------------------- Chapter 3:1.1

In its fiscal year 1998 budget submission of February 1997, HUD used
a value of $6,386 as the average unit cost for renewing tenant-based
housing assistance contracts.\1 Although this value is based on the
program's actual expenditure data for fiscal year 1996, it also
includes several supplementary amounts for

  -- administrative fees paid to housing agencies,

  -- contingent or unexpected costs, and

  -- increased program expenditures caused by residents losing their
     welfare assistance in 1997 and 1998. 

However, we and HUD determined that adding these three amounts to the
average unit cost either could not be justified or was not necessary. 
For the first amount--the administrative fee--HUD officials had
already included this fee in the baseline unit cost; adding it again
resulted in double-counting it.\2 Specifically, the program's fiscal
year 1996 expenditure data that HUD obtained from the accounting
system represented the total cost to HUD of providing rental
assistance and, therefore, necessarily included the administrative
fee.  However, to develop the final fiscal year 1998 average unit
cost, HUD added the fee again, resulting in raising the contract
renewal estimate by approximately $700 million.  We found, and
program officials agree, that better coordination and oversight among
the officials in the program office, the office of the comptroller,
and the departmental budget office could have prevented this error. 
For example, the program office's comptroller reviewed the actual
disbursement data obtained from the accounting system but did not
review the final average unit cost calculation until after HUD
submitted its budget to the Congress.  Moreover, departmental budget
officials accepted the program office's estimate without an
independent review of the added costs and underlying basis for the
estimate.\3

The second supplementary amount was for covering unknown costs or
contingencies.  For this supplement, HUD added approximately $204 to
the unit cost, or 2 weeks of disbursements.\4 However, at the time
that HUD developed this estimate, almost all housing agencies
participating in the tenant-based program already had individual
reserve accounts equal to at least 2 months of disbursements.  These
reserves could be used to cover contingencies such as rent increases
and decreases in tenants' income.  Section 8 program officials stated
that they added the 2-week reserve as another safeguard against the
risk that families might lose rental assistance because of unexpected
increases in program costs.  The officials said, however, that they
could not determine whether housing agencies actually needed
additional funding or were using available reserves for unanticipated
costs.  They said that because the tenant-based information system
could give them only 1 year's worth of complete and reliable
information on the use of reserves, a sufficient basis did not exist
for making informed decisions about the need for contingency funding. 

The third supplementary amount that HUD used to develop its fiscal
year 1998 unit cost was for mitigating the anticipated impact of
welfare reform on Section 8 costs.  For 1998, HUD valued the welfare
supplement at $138 per unit ($46 in 1997 and $92 in 1998).\5

However, after submitting its budget estimate to the Congress in
February 1997, HUD determined that this amount was unnecessary.  HUD
found that its assumption that housing agencies would begin to feel a
significant impact from welfare reform starting in 1997 was not borne
out by what was happening across the country.  Instead, the states'
early experiences with the impact of welfare reform showed little or
no increased cost to the program as a result of the falling incomes
of assisted housing residents.  As a result, adding a cost factor to
address the impact of welfare reform was not necessary. 

In addition to the inflated unit cost estimate, HUD's fiscal year
1998 contract renewal estimate contained a line item requesting a
contingency allowance of $162 million.  Although program officials
said that the funding was needed to cover unanticipated costs in the
program, they could not provide supporting information to justify
their request.  Subsequently, HUD adjusted its fiscal year 1998
budget request and removed this request for funding.  HUD's Deputy
Assistant Secretary confirmed that because HUD would use historical
data as the basis for future budget estimates, HUD would make no
future requests for contingency funding for the tenant-based program. 


--------------------
\1 Appendix I shows HUD's calculation of the $6,386 average unit cost
used to estimate the amount of budget authority that would be needed
to renew housing assistance contracts in fiscal year 1998. 

\2 The value that HUD used for the fee was $561 per unit. 

\3 In 1995, HUD's Inspector General reported that the departmental
budget office was responsible for determining the reasonableness of
all estimates provided by the program offices for the agency's budget
request. 

\4 The added cost for contingencies increased the contract renewal
estimate by approximately $265 million. 

\5 The welfare factor increased the contract renewal estimate by
approximately $179 million. 


      BECAUSE OF BUDGET ESTIMATING
      ERRORS, HUD LOWERED ITS
      FISCAL YEAR 1998 CONTRACT
      RENEWAL REQUEST
-------------------------------------------------------- Chapter 3:1.2

As a result of misestimating the unit cost and using cost estimates
in its February budget submission that HUD later determined to be
unnecessary, in September 1997 HUD proposed--and the Congress
accepted--changes in its contract renewal estimate that lowered the
average unit cost by approximately 14 percent, from $6,386 to
$5,499.\6 As shown in table 3.1, for the 1,265,625 Section 8 housing
certificates, vouchers, and moderate rehabilitation units being
renewed, this change represented a decrease of $1.123 billion in the
budget authority requested by HUD for its tenant-based program. 



                               Table 3.1
                
                 HUD's Changes to Its Fiscal Year 1998
                  Tenant-Based Contract Renewal Budget
                                Estimate

                                  Original                   Change to
                                  estimate  New estimate   fiscal year
                              submitted in   proposed in   1998 budget
                                  February     September   request (in
                                      1997          1997     billions)
----------------------------  ------------  ------------  ------------
Average unit cost                   $6,386        $5,499       -$1.123
Allowance for Contingencies   $162,000,000            $0       -$0.162
Total                                                          -$1.285
----------------------------------------------------------------------
HUD's revised unit cost estimate produced the most substantial
reduction to the original contract renewal estimate.  According to
HUD's Deputy Assistant Secretary responsible for the tenant-based
program, HUD developed the revised unit cost using only the program's
historical expenditure data from the tenant-based information
system.\7 She also stated that in the future HUD would not supplement
the average unit cost with additional amounts even if they made sense
from a policy standpoint unless the supplementary amounts could be
supported with historical or other data.  Two of these supplements
were an amount to reflect the impact of welfare reform and an amount
to cover contingent costs.  An official from HUD's Office of Policy
Development and Research stated that the amount to reflect welfare
reform's impact was removed from the average unit cost because
states' early experiences with welfare reform did not show an
increased cost to the program. 


--------------------
\6 Appendix II shows the complete list of changes that HUD made to
the fiscal year 1998 contract renewal request and that HUD added some
costs to the revision as well. 

\7 The actual disbursements were inflated by 4.4 percent over the
2-year period in accordance with the OMB-established factor of 2.2
percent per year. 


   HUD'S FUNDING REQUEST FOR
   FUTURE YEARS' CONTRACT
   AMENDMENTS IS NOT WELL
   SUPPORTED
---------------------------------------------------------- Chapter 3:2

As part of its fiscal year 1998 budget request, HUD predicted an
annual need of $150 million for fiscal years 1998 through 2002 to
amend its contracts with public housing agencies that administer its
Section 8 tenant-based and moderate rehabilitation assisted housing
programs.\8 Generally, amending contracts refers to the process of
changing specific housing assistance contracts to add more funding. 
These contracts might need additional funding because the budget
authority initially obligated to them--as long ago as 15 years--may
not have been sufficient to provide adequate rental assistance over
the life of the contract.  In addition to the fiscal year 1998 budget
request for amendment funding, HUD's budget submission also predicted
that the need for amendments to the tenant-based contracts through
the year 2002 would be approximately $600 million. 

Although HUD has supporting documentation for its need for amendment
funding for fiscal year 1998, the Department's prediction of needing
future amendment funding is not consistent with the significant
changes HUD has made to its contracting practices.  In fiscal year
1995, HUD began reducing the terms for renewed expiring contracts
from 3 to 5 years to 1 year.  Therefore, under this policy HUD will
renew the contracts receiving amendment funding in fiscal year 1998
for 1 year after their expiration.  This change to shorter contract
terms has made estimating contract renewal needs more certain because
changes in housing costs or tenants' incomes could be predicted more
easily over the shorter period.  In addition, a HUD official told us
that the tenant-based information system more accurately estimates
funding needs 1 year at a time and, therefore, greatly lowers the
risk of underfunding contracts and could ultimately eliminate the
need for amendment funding.  They also said most of the tenant-based
contracts should have 1-year terms by fiscal year 2003.  Therefore,
because of the greater certainty about the future costs of a program
operating under contracts with mostly 1-year terms, HUD does not
appear to need additional funding for tenant-based amendments beyond
fiscal year 1998. 


--------------------
\8 Although the budget line item for amendments was $850 million, HUD
officials said that informally they earmarked $150 million for the
Office of Public and Indian Housing to fund the needs of the
tenant-based and moderate rehabilitation programs.  The remaining
$700 million was planned for the project-based program. 


   HUD PLANS TO IMPROVE ITS
   PROCESS FOR ESTIMATING CONTRACT
   RENEWALS
---------------------------------------------------------- Chapter 3:3

HUD officials have made or plan to make several important changes to
HUD's information system and organization to address the problems
that they and we have identified in HUD's budgeting process.  In
response to the fiscal year 1995 Financial Statement Audit prepared
by HUD's OIG,\9 HUD recently enhanced its tenant-based information
system and plans changes to related procedures to improve the
accuracy of its budget estimates.  Also recognizing the need for
improving coordination and oversight among the HUD officials involved
in preparing and reviewing the budget submission, HUD moved the
Office of Budget under the control of the Office of the Chief
Financial Officer.  HUD officials believe that these improvements
will correct past problems and enhance their efforts to more
accurately estimate their Section 8 budget needs. 


--------------------
\9 HUD's Fiscal Year 1995 Financial Statements (Audit Report No. 
96-FO-177-0003), Aug.  1996, HUD's Office of the Inspector General. 


      ENHANCEMENTS TO ACCOUNTING
      SYSTEM AND PROCEDURAL
      CHANGES COULD IMPROVE BUDGET
      ESTIMATE
-------------------------------------------------------- Chapter 3:3.1

HUD is enhancing the Section 8 tenant-based information system by
automating and integrating the "reservation pricing" used to estimate
the amount of budget authority each housing agency is likely to need
annually to operate its tenant-based program.  In the past, HUD field
offices deducted tenants' expected contributions to rent (generally
about 30 percent of a tenant's family income) from the local fair
market rent to develop an estimate of the cost to HUD of assisting
low-income families to live in decent housing during the coming year. 
However, after obtaining the estimated costs, HUD did not compare
these estimates with the actual cost of that assistance for the most
recently completed year.  As a result, HUD overfunded many
tenant-based contracts, and the excess funding contributed to the
accumulation of program reserves.  By creating a "reservation
pricing" subsystem within the information system, HUD now will use
the actual historical cost data to evaluate the fair market rents and
tenants' contributions.  HUD officials believe that this process will
eliminate overfunding and improve the accuracy of the budget
estimating for contract renewals. 

HUD also plans the following additional modifications to the
tenant-based Section 8 information system and the budgeting
procedures used to estimate contract renewal needs, although our work
did not focus on evaluating the potential benefits of these actions: 

  -- HUD plans to modify its information system to calculate the
     actual average cost per unit before completing the annual
     settlement process at each housing agency.  This change will
     verify the reasonableness of the average cost per unit before
     HUD settles all program costs at the end of the year with the
     housing agency. 

  -- In response to the data access problems noted by HUD's OIG, HUD
     plans to improve the security over access to the unit tables
     within the information system and to compare monthly the number
     of contracted units in the system to the previous month's total
     to reconcile any differences. 

  -- Finally, to maintain better control over the amount of program
     reserves, HUD plans to no longer extend expiring tenant-based
     contracts with excess budget authority within the program
     reserves. 


      HUD PLANS MANAGEMENT REFORMS
      TO IMPROVE COORDINATION AND
      OVERSIGHT
-------------------------------------------------------- Chapter 3:3.2

HUD has recognized the need for improving coordination and oversight
among program, budget, and financial management officials in order to
achieve more reliable budget estimates, including estimates of
Section 8 contract renewals.  HUD's Management Reform Plan states
that the Chief Financial Officer has lacked the ability to link
budgeting with strategic planning and financial management because
HUD's budget operations have been fragmented and disjointed,
preventing clear accountability and the necessary coordination.  As a
result, HUD has recently placed all departmental budget operations
under the Office of the CFO to ensure that budgeting is integrated
with financial management oversight. 

HUD also is in the process of implementing two changes directly
related to the budget estimate.  First, all program divisions are
hiring a chief financial officer to mirror the operations of the
Department's Office of the CFO.  Previously, the program division's
budget director and comptroller reported to a deputy assistant
secretary.  Under the new structure, the division's budget director
and comptroller will report to the program's chief financial officer
who will coordinate the agency's CFO and the program office to ensure
adequate oversight.  However, at the time of our review, a chief
financial officer for the tenant-based program had not been hired and
the program's comptroller had been detailed to the Department's
Office of General Counsel.  Second, the Office of the CFO is
developing a model to analyze all budget submissions, including the
contract renewal estimate.  Previously, the departmental budget
office accepted the cost estimates with only limited review of the
supporting documentation that detailed how the estimates were
developed. 

Although the Office of the CFO also plans to develop budget
estimating policies and procedures that build in enough time for
adequate coordination, oversight, and communication, these plans have
not been completed.  HUD's CFO did state, however, that the planned
improvements should be operational in time for HUD's fiscal year 2000
budget submission.  In addition, according to HUD's Director of the
Office of Budget, HUD submitted its fiscal year 1999 contract renewal
estimate to OMB in September 1997 with limited analysis.  He also
said that because of time constraints, his office was limited to
reviewing the budget estimates for their numerical accuracy and could
not question the estimates' reasonableness or their underlying basis. 
For example, he stated that the Budget Office was unaware of the
program office's budgeting assumption that all tenant-based
certificates are in constant use.  This assumption, however, does not
reflect the current practice of housing agencies that administer the
tenant-based program.  As stipulated by current appropriations law,
after a certificate is turned in by the current holder, the housing
agency must wait 90 days before reissuing it to a new household.  But
because the budget estimate assumes constant use, the effect is to
estimate more funding than will actually be needed although HUD could
recapture such excess funding when it analyzes the housing agency's
reserve account at the end of the year. 

HUD's Office of the CFO also is leading the effort to improve HUD's
financial management performance by linking HUD's budget functions
with performance measures and program delivery.  Specifically, to
improve financial management oversight, HUD will consolidate the 10
accounting divisions in HUD's field offices into one office
responsible for all accounting operations.  In addition, the Office
of the CFO will develop management controls to ensure that employees
are accountable for the Department's fiscal integrity.  HUD also has
implemented a risk management program, directed by the Office of the
CFO, to protect resources from fraud, waste, and abuse and to
maintain the agency's financial integrity.  As part of this effort,
the CFO has collected all financial management deficiencies
identified by HUD's OIG, GAO, and others and is working to correct
these deficiencies within all HUD programs.  While these actions
appear to be responsive to the problems identified, HUD has no
specific time frames for their completion. 


   CONCLUSIONS
---------------------------------------------------------- Chapter 3:4

HUD's fiscal year 1998 budget process had inadequate oversight of
procedures and insupportable estimates or assumptions underlying key
values.  Although HUD recognizes these problems and has plans to
correct them, it is too soon to measure the effectiveness of the
remedies because many have not been implemented.  More importantly,
HUD has a lengthy history of budget estimating problems and faces
some uncertainty now about personnel to oversee and make policy for
the budgeting function.  Therefore, we are concerned with the
agency's ability to sustain such recent corrective actions and
implement those it has planned.  Furthermore, many of the actions
that HUD has taken or plans to take were not completed at the time
HUD prepared its initial contract renewal budget estimate for fiscal
year 1999 and sent it to OMB in September 1997.  We believe that
HUD's Office of the CFO will need to exercise strong leadership to
complete these changes and to develop specific budget procedures to
guide the new organizational changes.  Otherwise, HUD's fiscal year
2000 budget estimate--which HUD will begin to prepare in May
1998--and future estimates may also misestimate program funding
needs. 

Because HUD has recognized many weaknesses in its budget process for
estimating contract renewal needs and has undertaken significant
actions to improve its process, we are not making recommendations at
this time.  However, we will continue to monitor HUD's budget process
and review its fiscal year 1999 budget submission to determine
whether cost estimates are adequately supported. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 3:5

In commenting on a draft of this report, HUD agreed with the report's
major findings and conclusions.  HUD also provided several comments
to improve the report's factual representation and to ensure clarity. 
In particular, HUD believed that we should recognize that its initial
estimate of the impact of welfare reform on fiscal year 1998 budget
needs was based on the best information available.  We agreed and
made changes to reflect this concern. 


HUD'S DEVELOPMENT OF ITS FISCAL
YEAR 1998 AVERAGE UNIT COST
ESTIMATE FOR TENANT-BASED CONTRACT
RENEWALS
=========================================================== Appendix I

                              Certificates      Vouchers     Mod Rehab
----------------------------  ------------  ------------  ------------
FY 1996 average disbursement
----------------------------------------------------------------------
Disbursements                 $5,554,798,0  $1,874,533,0  $594,843,000
                                        00            00
Divided by number of units       1,078,480       348,948       109,871
Average disbursements per           $5,151        $5,372        $5,414
 unit

FY 1997 average per unit calculation
----------------------------------------------------------------------
1996 average                        $5,151        $5,372        $5,414
2-week reserve                         198           207           208
Admn. fee                              561           561           561
======================================================================
Subtotal                            $5,910        $6,140        $6,183
Add 2.2% inflation                     130           135           136
Add welfare reform                      46            46            46
FY 1997 average unit cost           $6,086        $6,321        $6,365

FY 1998 average per unit calculation
----------------------------------------------------------------------
1997 average                        $6,086        $6,321        $6,365
Add 2.2% inflation                     134           139           140
Add welfare reform                      92            92            92
FY 1998 average unit cost           $6,312        $6,552        $6,597

Weighted average calculation for FY 1998 estimate
----------------------------------------------------------------------
70% certificates                    $4,418
25% vouchers                         1,638
5% moderate rehabilitation             330
======================================================================
Total                               $6,386
----------------------------------------------------------------------
Source:  HUD's Office of the Chief Financial Officer. 


HUD'S SEPTEMBER 1997 CHANGES TO
THE SECTION 8 CONTRACT RENEWAL
ESTIMATE ORIGINALLY SUBMITTED IN
THE FEBRUARY 1997 BUDGET REQUEST
========================================================== Appendix II

Fiscal Year 1998 original contract
renewal estimate                              $9,232 million
--------------------------------------  ----  ------------------------
Reduction in the average per unit cost
 (from $6,386 to $5,499)                       -1,123 million
Cost to convert tenant-based                  +471 million
 assistance from fiscal to calendar
 years\a
Cost due to increase in tenant-based          +306 million
 unit estimate (from 1,265,625 to
 1,321,230)\b
Deducting additional carryover to             -206 million
 offset contract renewal costs (from
 $1,594 million to $1,800 million)\c
Allowance for contingencies (from $162        -162 million
 million to $0)
Other changes related to project-             -338 million
 based housing assistance
======================================================================
Total change to estimate                      $1,052 million
Fiscal year 1998 revised contract             $8,180 million
 renewal estimate
----------------------------------------------------------------------
\a HUD officials stated that the conversion from fiscal year
financing to calendar year financing was necessary to ensure that all
housing assistance contracts were funded on time.  For example, they
said that delays in receiving federal funding caused by government
shutdowns or continuing resolutions could jeopardize the housing
agencies' ability to provide the rental assistance payments. 

\b HUD officials also stated that the increase in units was necessary
to fund the conversion from fiscal year financing to calendar year
financing. 

\c In the February 1997 justification for the fiscal year 1998
contract renewal estimate, HUD reported approximately $1.6 billion in
carryover that could be used to offset or decrease the amount of
funding needed for Section 8 contract renewals.  The carryover is
previously appropriated budget authority that was not obligated to
any housing agency for the provision of rental assistance.  Once HUD
determined the funding was not needed to meet current program needs,
the funding was used to decrease the amount of budget authority
needed for the next year's contract renewals. 


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

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION

Eric A.  Marts, Assistant Director
Carol Anderson-Guthrie
Donna M.  Lucas
Anne-Marie Olson
Terri Russell
A.  Paige Smith


*** End of document. ***