Order Code RS22376
February 13, 2006
CRS Report for Congress
Received through the CRS Web
Changes to Section 8 Housing Voucher
Renewal Funding, FY2003-FY2006
Maggie McCarty
Domestic Social Policy Division
Summary
Changes enacted by Congress during the appropriations process in each of the past
several years have significantly altered the way that public housing authorities (PHAs)
receive funding to administer the Section 8 Housing Choice Voucher program.
Designed to curb growing federal expenditures, these new formulas have resulted in
budgets that have not kept up with cost growth for some local agencies and possibly
surplus funds for others. The Administration has proposed to reform the program,
including the funding formula, each year since FY2003. No legislation has been
enacted, but bills were introduced in the 108th Congress and have been introduced in the
109th Congress (H.R. 1999 and S. 771). This report describes changes in the formula
that were included in appropriations bills for FY2003 through FY2006; it will not be
updated. For more information on the Section 8 voucher program, see CRS Report
RL32284,
An Overview of the Section 8 Housing Programs, and CRS Report RL33270,
The Section 8 Housing Voucher Program: Reform Proposals, both by Maggie McCarty.
Each year, Congress provides funding to the Department of Housing and Urban
Development (HUD) to renew the more than 2.1 million Section 8 vouchers — also called
Housing Choice Vouchers — authorized by Congress (see
Table 1 below). The Section
8 voucher program is federally funded and governed by federal rules, but is administered
at the local level by quasi-governmental PHAs. Section 8 vouchers are rental subsidies
that low-income families use in the private market to help make up the difference between
their rent and their expected contribution toward that rent (30% of adjusted income). The
cost of a voucher to a PHA is the difference between the lesser of a tenant’s actual rent or
the maximum subsidy level set by the PHA — called a payment standard — and 30% of
a tenant’s income. That cost increases or decreases with changes in tenant incomes and
changes in rents and payment standards. In recent years, Congress has enacted, and HUD
has implemented, a series of changes in the way that voucher renewal funding is
distributed to local PHAs. These changes have led to funding uncertainty for many PHAs,
and has put pressure on Congress to adopt a permanent funding formula, possibly through
enactment of Section 8 voucher reform legislation.
Congressional Research Service ˜
The Library of Congress
CRS-2
Table 1. Section 8 Voucher Renewal Funding, FY2003-FY2006
(in millions of dollars)
FY2003
FY2004
FY2005
FY2006
Renewal Funding
11,259
12,721
13,355 13,949
Source: Figures are derived from HUD budget documents. For more details, see CRS Appropriations
Reports. The FY2006 figure is taken from HUD’s website [http://www.hud.gov/offices/pih/programs/hcv/1].
Central Reserve funding is included.
Pre-FY2003 Funding. Prior to FY2003, PHAs administering the voucher program
were funded based on their average annual per-voucher cost from the previous year,
adjusted by an inflation factor and multiplied by the number of vouchers that the PHA was
authorized to lease.1 In the event that a PHA’s voucher costs increased faster than the
inflation factor established by HUD, HUD maintained a reserve equal to one month of
voucher funding on behalf of each PHA. However, few PHAs were able to lease 100%
of their authorized vouchers, so they typically had more money in their budgets than they
needed, and they rarely had to dip into their one-month program reserves, even if their
costs rose significantly. At the end of the year, HUD and each PHA would reconcile their
budgets, and HUD was typically able to recapture unused funds from PHAs’ budgets.
HUD generally used this same formula — last year’s actual costs, plus inflation,
times the number of authorized vouchers — each year to determine how much funding to
request from Congress for the renewal of tenant-based Section 8 vouchers. HUD would
also make available to Congress for rescission those unused funds that the agency had
recaptured from PHAs. The end result of this system
for PHAs was that their funding
increased along with their costs. If their costs dropped, they were permitted to use some
of their excess funds to create new vouchers, a process called maximized leasing. The end
result of this system
for Congress was that each year it provided more funds for voucher
renewals than PHAs could reasonably be expected to use, and then recaptured those
unused funds the following year to offset the cost of that year’s appropriation.
FY2003 Funding Changes. In FY2003, Congress changed the way PHAs were
funded in an attempt to limit recaptures of unspent funds and provide funding levels that
better reflected actual use. HUD was directed to fund PHAs based on their average annual
per-voucher cost from the previous year, increased by the inflation factor, and multiplied
by the number of vouchers the PHA could
reasonably be expected to lease in that year
(rather than the larger number of
authorized vouchers). Specifically, the law stated,
The Secretary shall renew expiring section 8 tenant-based annual contributions
contracts for each public housing agency ... based on the total number of unit months
which were under lease as reported on the most recent end-of-year financial statement
submitted by the public housing agency to the Department, adjusted by such additional
information submitted by the public housing agency ... regarding the total number of
unit months under lease at the time of renewal of the annual contributions contract, and
1 PHAs “lease” vouchers when they sign contracts with tenants and landlords under which PHAs
agree to provide payments to landlords on behalf of tenants. Each PHA has a fixed number of
vouchers it is authorized to “lease.”
CRS-3
by applying an inflation factor based on local or regional factors to the actual per-unit
cost as reported on such statement. (P.L. 108-7, Title II, Section (1))
HUD implemented this provision so that PHAs’ budgets were based on their
utilization rates and costs as reported on their end-of-the-year statements,
or more recent
data, if available. As stated in guidance released by HUD:
Renewal calculations under the [Federal Fiscal Year] 2003 Appropriation will be
based on the total number of unit months under lease and actual cost data, as reported
on the PHA’s most recent year-end settlement or as subsequently submitted to HUD
by the PHA. Actual costs will be adjusted by applying the [Annual Adjustment
Factors]. Expiring voucher funding increments will generally be renewed for terms
of three months. The use of the most recent leasing and cost data and the short
renewal terms will enable HUD to calculate funding more accurately than previous
procedures allowed. (HUD Notice PIH 2003-23, Issued Sept. 22, 2003)
Congress also created a Central Reserve fund to be used by the Secretary to replenish
PHA one-month reserves in the event that PHAs had to use their reserves to cover the
costs of increased utilization or increased per-voucher costs. The language of the law
stated in regard to the Central Reserve fund:
The Secretary may use amounts made available in such fund, as necessary, for contract
amendments resulting from a significant increase in the per-unit cost of vouchers or
an increase in the total number of unit months under lease as compared to the per-unit
cost or the total number of unit months provided for by the annual contributions
contract. (P.L. 108-7, Title II, Section (2))
Finally, the bill instituted restrictions on maximized leasing, stating that none of the
funds provided in the act could be used to support more vouchers than a PHA was
authorized to lease in a year.
FY2004 Funding Changes. The FY2004 appropriations law continued in the
direction of the FY2003 funding bill, instructing HUD to fund PHAs based on actual
utilization of vouchers — rather than on the total number of vouchers they were authorized
to lease — and restricting the use of funds for maximized leasing. Moreover, the
conference report that accompanied the FY2004 appropriations law stated that the
conferees were concerned about “spiraling” cost increases in the voucher program and that
they expected the Secretary to control costs. As stated in the conference report:
The conferees are aware that the Secretary has the administrative authority to control
the rapidly rising costs of renewing expiring annual contributions contracts (ACC),
including the budget-based2 practice of renewing expiring ACCs, and expect the
Secretary to utilize these tools. (H.Rept. 108-235, Title II)
The FY2004 appropriations language was changed from FY2003 to state:
The Secretary shall renew expiring section 8 tenant based annual contributions
contracts for each public housing agency ... based on the total number of unit months
2 Budget-basing provides PHAs with a budget based on a fixed dollar amount, rather than a fixed
number of vouchers.
CRS-4
which were under lease as reported on the most recent end-of-year financial statement
submitted by the public housing agency to the Department, or as adjusted by such
additional information submitted by the public housing agency to the Secretary as of
August 1, 2003 (subject to verification), and by applying an inflation factor based on
local or regional factors to the actual per-unit cost. (P.L. 108-199, Title II, Section (1))
The FY2004 language also varied from the FY2003 language in terms of how the
Central Reserve fund could be used. In FY2003, the Central Reserve fund could be used
to replenish PHA reserves that had been depleted due to either increased utilization rates
or increased costs. In FY2004, the language allowed the Secretary to only use Central
Reserve funds to replenish reserves depleted because of increased utilization,
not increased
costs:
Language proposed by the House and Senate is not included to allow the Central Fund
to also be used for increased per-unit costs as such costs have been reflected in the
amount provided for renewals. (H.Rept. 108-401, Division G, Title II)
HUD issued a notice on April 22, 2004 (PIH 2004-7) implementing the FY2004
appropriations law. According to the notice, PHAs’ budgets would be based on their
utilization rates from their end-of-the-year statements, or more recent data if available, and
costs as reported on their end-of-the-year statements as of August 1, 2003, adjusted by the
annual adjustment factor (AAF),
but not adjusted by more recent data,
even if available.
The notice stated that PHAs could appeal to the Secretary only if they could document that
rental costs in their areas had risen higher than the inflation factor adopted by HUD. The
notice proved controversial. Some housing advocates contended that Congress gave HUD
the authority to use a broader measure of inflation than the AAF, taking into account not
just rental costs but also other changes in PHAs’ costs, such as utility costs and changes
in their caseloads. The notice was not modified, and on August 31, 2004, HUD granted
the appeals requests of 380 agencies out of approximately 400 that applied, distributing
a total of $160 million from the Central Reserve. However, HUD did not necessarily
provide the full level requested in each appeal.
FY2005 Funding Changes. The final FY2005 Consolidated Appropriations Act
(P.L. 108-447) moved the program further in the direction of budget-based funding. It
directed the Secretary to fund PHAs based on their voucher costs and utilization rates as
of May-July 2004 plus the HUD-published AAF, adjusted for new tenant protection
vouchers.3 If a PHA’s May-July data were not available, HUD was directed to fund the
agency based on February-April 2004 data, or if these data were not available, to fund the
PHA based on its most recently submitted year-end financial statement, as of March 31,
2004. If the amount provided in the law was insufficient to fund all PHA budgets under
this formula, then the Secretary was directed to prorate agency budgets. According to the
conference report (H.Rept. 108-792), PHAs were expected to manage their voucher
programs within their budgets for FY2005, regardless of their actual costs. The report also
stated that “HUD shall provide agencies with flexibility to adjust payment standards and
portability policies as necessary to manage within their 2005 budgets.” Agency reserves
were reduced from the one-month to the one-week level and no Central Reserve was
3 Tenant protection vouchers are given to families being displaced from other HUD assistance
programs (such as public housing). PHAs’ costs may increase from one year to the next because
of an increase in the number of tenant protection vouchers they are administering.
CRS-5
provided to replenish depleted reserves. Finally, the act continued the prohibition on
maximized leasing.
HUD published guidance implementing these provisions on December 8, 2004 (HUD
Notice PIH 2005-1). Agencies received notification of their preliminary budget levels on
December 17, 2004. At that time, PHAs were directed to inform HUD of any data errors
within 10 days (although the deadline was later extended). The appeals were limited to
data errors; agencies were told that they could not appeal the actual formula used for
calculating their budgets. The final calculations, including a final proration factor, were
published on January 21, 2005. Agencies were funded generally at 4.03% less than their
May-July 2004 actual cost and utilization levels, plus the 2005 AAF. This proration factor
of just less than 96% was implemented because the amount of funding provided by
Congress for voucher renewals was not sufficient to fund agencies at 100% of the formula
amount.
According to CRS analysis of HUD funding data, the median change in PHA renewal
budgets from FY2004 to FY2005 was an increase of .17%. This number hides a wide
variance; the fifth percentile change was a decrease of 12% and the 95th percentile change
was an increase of 14%.
On February 25, 2005, HUD published Notice PIH 2005-9, entitled “[PHA]
Flexibility to Manage the Housing Choice Voucher Program in 2005.” It identified
administrative options available to PHAs to lower their costs in 2005. Suggestions
included lowering payment standards; reducing utility assistance to families; restricting
portability;4 reviewing rents to ensure they are reasonable in the market; suspending the
reissuance of vouchers when families leave the program; restricting bedroom sizes;
instituting minimum rents; monitoring income eligibility more strictly; and, most
drastically, terminating assistance to families due to insufficient funds.
FY2006 Funding Formula. The FY2006 HUD Appropriations Act (P.L. 109-115)
distributes renewal funding using roughly the same formula as FY2005. HUD is to allocate
renewal funds to PHAs based on the amount they were eligible to receive in FY2005 (prior
to proration), plus inflation (using the AAF), adjusted for additional tenant protection
vouchers or vouchers that were reserved for project-based use,5 and prorated to fit within
the amount appropriated. The act provides the Secretary with $45 million to adjust the
budgets of agencies in two categories: (1) those for whom the May-July period used as
the basis for FY2005 funding represented unusually low leasing or costs and who apply
to the Secretary for an adjustment; and (2) those whose costs have risen due to unforseen
circumstances or portability billings. The prohibition on maximized leasing was retained
in FY2006. HUD issued projected funding letters to all PHAs on January 19, 2006; PHAs
were directed to respond with concerns by February 3, 2006.
4 Vouchers are nationally portable, meaning that if a family moves from the jurisdiction of one
PHA to another, the family retains its assistance. However, if the new jurisdiction does not wish
to permanently accept the new voucher (a process called absorption), the new jurisdiction can
bill the old jurisdiction. This can present budget problems for the old jurisdiction if rents are
significantly higher in the new jurisdiction.
5 Vouchers are project-based when they are set aside for use in a particular unit of housing. This
adjustment is provided for PHAs who had artificially low utilization rates in May-July 2004
because they had reserved vouchers for new units that were under construction.
CRS-6
Conclusion. Prior to FY2003, the Section 8 voucher program was funded much
like an entitlement program; the amount provided by Congress was largely determined by
a formula, limiting Congress’s ability to constrain funding without facing the prospect of
directly terminating assistance to families. The final result of the funding changes,
beginning with those enacted for FY2003, has been a conversion of the program’s funding
structure into one more similar to other discretionary programs in which grantees receive
an annual fixed sum of money, regardless of changes in their costs or the number of people
served. While these changes have given Congress greater control over the program’s
budget, many PHAs say the changes have made the program more difficult to administer.
PHAs have only limited control over their costs since the value of the subsidies provided
to families are statutorily set (as roughly the difference between rent and 30% of income).
In areas where they do have control, such as in setting payment standards, selecting
families from the waiting list, and issuing vouchers, PHAs have made some changes.
Some have lowered their payment standards from 110% to 100% or less of local fair
market rents. Since changes in payment standards only affect future families in the
program, some PHAs have undertaken rent reasonableness reviews and reduced rents paid
to landlords, some of whom have accepted the cut, others of whom will not renew leases
with families. PHAs may be selecting higher-income families from the waiting list (for
whom subsidy costs are lower), although the PHAs are still constrained by a requirement
that 75% of all vouchers be targeted to the lowest-income families. Many PHAs have
intentionally reduced their utilization rates by not reissuing vouchers when families leave
the program. Agencies that intentionally lowered their utilization rates in order to save
money in FY2004 likely encountered problems in FY2005, as their budgets were capped
at their costs
and utilization rates as of the third quarter of FY2004. It is likely that, at
least for some PHAs whose costs have risen faster than their funding under the new
formula, these changes resulted in fewer households receiving vouchers in FY2005 than
in previous years. That trend should continue into FY2006.
At the same time, some agencies may now be receiving more money than they are
legally permitted to spend. Under the formulas used in the past two years, PHAs’ funding
does not necessarily decrease if their costs decrease (for example, due to changes in the
types of families they are serving). Since maximized leasing is prohibited, PHAs may
have funds that they are unable to spend recaptured by HUD, even if there are waiting lists
for vouchers in their communities.
While the formula has remained consistent between FY2005 and FY2006, the
controversy surrounding it has continued. Most low-income housing advocates have
called for a return to an actual-cost and unit-based formula, as was used prior to and during
FY2003. PHA advocacy groups have been vocal about the difficult predicament that the
current formula puts them in, given the statutory constraints under which they must run
their programs. The most recent voucher reform bills (H.R. 1999 and S. 771) would
require HUD to work with PHAs to develop a new funding allocation formula, possibly
based on independent factors such as population, poverty, and housing costs. In the
interim, the bills would use a formula similar to the FY2005 and FY2006 formula.
Modification to the current formula will result in both winners and losers, unless funding
for the program is increased significantly or hold-harmless provisions are enacted.
Therefore, the process to develop a new formula, particularly in an environment of
domestic discretionary budget constraints, will likely be difficult and controversial.