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United States Government Accountability Office:

GAO: 

Testimony: 

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

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

Project-Based Rental Assistance: 

HUD Should Streamline Its Processes to Ensure Timely Housing Assistance 
Payments: 

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

GAO-08-199T: 

GAO Highlights: 

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

Why GAO Did This Study: 

The Department of Housing and Urban Development (HUD) provides 
subsidies, known as housing assistance payments, under contracts with 
privately owned, multifamily projects so that they are affordable to 
low-income households. Project owners have expressed concern that HUD 
has chronically made late housing assistance payments in recent years, 
potentially compromising owners’ ability to pay operating expenses, 
make mortgage payments, or set aside funds for repairs. This testimony, 
based primarily on a report issued in 2005, discusses the timeliness of 
HUD’s monthly housing assistance payments, the factors that affected 
payment timeliness, and the effects of delayed payments on project 
owners.  

What GAO Found: 

From fiscal years 1995 through 2004, HUD disbursed three-fourths of its 
monthly housing assistance payments on time, but thousands of payments 
were late each year, affecting many property owners. Over the 10-year 
period, 8 percent of payments were delayed by 2 weeks or more.  
Payments were somewhat more likely to be timely in more recent years 
(see figure).   

The process for renewing HUD’s subsidy contracts with owners can affect 
the timeliness of housing assistance payments, according to many 
owners, HUD officials, and contract administrators that HUD hires to 
work with owners. HUD’s renewal process is largely a manual, hard-copy 
paper process that requires multiple staff to complete. Problems with 
this cumbersome, paper-intensive process may delay contract renewals 
and cause late payments. Also, a lack of systematic internal processes 
for HUD staff to better estimate the amounts that HUD needed to 
obligate to contracts each year and monitor contract funding levels on 
an ongoing basis can contribute to delays in housing assistance 
payments. 

Although HUD allows owners to borrow from reserve accounts to lessen 
the effect of delayed housing assistance payments, 3 of 16 project 
owners told GAO that they had to make late payments on their mortgages 
or other bills—such as utilities, telephone service, or pest control—as 
a result of HUD’s payment delays. Owners who are heavily reliant on 
HUD’s subsidy to operate their properties are likely to be more 
severely affected by payment delays than other, more financially 
independent, owners. Owners reported receiving no warning from HUD when 
payments would be delayed, and several told GAO that such notification 
would allow them to mitigate a delay. Nonetheless, project owners, 
industry group officials, and HUD officials generally agreed that late 
housing assistance payments by themselves would be unlikely to cause an 
owner to leave HUD’s housing assistance programs, because such a 
decision is generally driven primarily by local market factors.  

Figure: 
Timeliness of Housing Assistance Payments (Fiscal Years 1995-2004 
versus 2002-2004):  

1995-2004, Payment time frame: 
Disbursed by due date: 75%; 
1-6 days late: 14%; 
7-13 days late: 2%; 
14-27 days late: 2%; 
4 weeks or more late: 6%.  

2002-2004, Payment time frame: 
Disbursed by due date: 79%; 
1-6 days late: 11%; 
7-13 days late: 2%; 
14-27 days late: 2%; 
4 weeks or more late: 5%.  

Source: GAO analysis of HUD data.  

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

[End of figure]  

What GAO Recommends: 

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

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

To view the full product, including the scope and methodology, click on 
[hyperlink, http://GAO-08-199T]. For more information, contact David G. 
Wood at (202) 512-8678 or woodd@gao.gov. 

[End of section]  

Madam Chairwoman and Members of the Subcommittee: 

I appreciate the opportunity to be here today to discuss the timeliness 
of subsidies paid by the Department of Housing and Urban Development 
(HUD) to owners of multifamily properties. Under contracts with HUD, 
project owners provide affordable rental housing to approximately 1.6 
million low-income households. Owners rely on these subsidies from HUD, 
often to a great extent, to pay for operating expenses, such as staff 
salaries and maintenance, as well as to make their monthly mortgage 
payments and set aside funds for contingencies and major repairs. 
Although HUD's subsidy payments to owners are not subject to a 
statutory or regulatory standard for timeliness, HUD's goal, with some 
exceptions, is to provide the payments by the first business day of the 
month. 

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

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

In Brief: 

Most of HUD's housing assistance payments were timely--HUD disbursed by 
the due date 75 percent of the 3.2 million monthly payments for fiscal 
years 1995 through 2004. However, 25 percent of its payments were late, 
and 8 percent (averaging about 25,000 payments per year) were 
significantly late--that is, they were delayed by 2 weeks or more, a 
time frame in which some owners indicated the late payment could affect 
their ability to pay their mortgages on time. HUD made payments on an 
average of about 26,000 contracts per month. About one-third of these 
contracts experienced at least one payment per year that was late by 2 
weeks or more. The timeliness of HUD's monthly housing assistance 
payments varied over the 10-year period, decreasing in 1998 shortly 
after HUD began implementing the Multifamily Assisted Housing Reform 
and Affordability Act of 1997, which contained new contract renewal and 
processing requirements. Timeliness gradually improved after 2001, 
after HUD began using performance-based contract administrators to 
administer a majority of the contracts. In the 3-year period of fiscal 
years 2002 through 2004, HUD disbursed 79 percent of payments by the 
due date, but 7 percent of these payments were significantly late. 

The primary factors affecting the timeliness of HUD's housing 
assistance payments were the process of renewing owners' contracts; 
internal HUD processes for funding contracts and monitoring how quickly 
each contract uses its funding; and untimely, inaccurate, or incomplete 
submissions of monthly vouchers by project owners. More specifically: 

* Monthly housing assistance payments were more likely to be late when 
owners' contracts to participate in HUD's programs were not renewed by 
their expiration dates. For example, our analysis of available HUD data 
on the reasons that payments were 2 weeks or more late from fiscal 
years 2002 through 2004 found that the most common reason was the 
payment being withheld pending contract renewal. HUD officials and 
contract administrators said that delays on HUD's part--stemming from a 
renewal process HUD officials agreed could be cumbersome and paper 
intensive--could cause (or exacerbate) late payments that resulted from 
the lack of a renewed contract. The timeliness, quality, and 
completeness of owners' renewal submissions also could cause delays in 
contract renewals, particularly when an owner's initial contract 
expired and it had to be renewed for the first time. 

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

* According to HUD officials and contract administrators, owners' 
untimely, inaccurate, or incomplete monthly voucher submissions also 
might cause late housing assistance payments. However, the contract 
administrators with whom we spoke generally indicated they were able to 
correct errors in owners' submissions ahead of time to ensure timely 
payments. 

According to project owners with whom we met, delays in HUD's housing 
assistance payments had negative financial effects and may have 
compromised owners' ability to operate their properties, but the delays 
were unlikely to cause owners to opt out of HUD's programs or stop 
providing affordable housing. Some owners said they incurred late fees 
on their mortgages and other bills or experienced interruptions in 
services at their properties because of delayed payments. Effects of 
delayed payments could vary in severity, depending on the financial 
condition of the property owner and the extent to which the operation 
of the property was dependent on HUD's subsidy. Further, owners said 
that HUD did not notify them of when or for how long payments would be 
delayed, which prevented them from taking steps to mitigate the effects 
of late payments. The owners and industry group officials generally 
agreed that the negative effects of delayed payments alone would not 
cause owners to opt out of HUD's programs, although they could be a 
contributing factor. 

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

Background: 

HUD operates a variety of project-based rental assistance programs 
through which it pays subsidies, or housing assistance payments, to 
private owners of multifamily housing that help make this housing 
affordable for lower-income households. HUD entered into long-term 
contracts, often 20 to 40 years, committing it and the property owners 
to providing long-term affordable housing. Under these contracts, 
tenants generally pay 30 percent of their adjusted income toward their 
rents, with the HUD subsidy equal to the difference between what the 
tenants pay and the contract rents that HUD and the owners negotiate in 
advance. 

In the mid-to late-1990s, Congress and HUD made several important 
changes to the duration of housing assistance contract terms (and the 
budgeting for them), the contract rents owners would receive relative 
to local market conditions, and the manner in which HUD administers its 
ongoing project-based housing assistance contracts. Specifically: 

* Because of budgetary constraints, HUD shortened the terms of 
subsequent renewals, after the initial 20-to 40-year terms began 
expiring in the mid-1990s. HUD reduced the contract terms to 1 or 5 
years, with the funding renewed annually subject to 
appropriations.[Footnote 2] 

* Second, in 1997, Congress passed the Multifamily Assisted Housing 
Reform and Affordability Act (MAHRA), as amended, in an effort to 
ensure that the rents HUD subsidizes remained comparable with market 
rents.[Footnote 3] Over the course of the initial longer-term 
agreements with owners, contract rents in some cases came to 
substantially exceed local market rents. MAHRA required an assessment 
of each project when it neared the end of its original contract term to 
determine whether the contract rents were comparable to current market 
rents and whether the project had sufficient cash flow to meet its debt 
as well as daily and long-term operating expenses. If the expiring 
contract rents were below market rates, HUD could increase the contract 
rents to market rates upon renewal (i.e., "mark up to market"). 
Conversely, HUD could decrease the contract rents upon renewal if they 
were higher than market rents (i.e., "mark down to market").[Footnote 
4] 

* Finally, in 1999, because of staffing constraints (primarily in HUD's 
field offices) and the workload involved in renewing the increasing 
numbers of rental assistance contracts reaching the end of their 
initial terms, HUD began an initiative to contract out the oversight 
and administration of most of its project-based contracts. The entities 
that HUD hired--typically public housing authorities or state housing 
finance agencies--are responsible for conducting on-site management 
reviews of assisted properties; adjusting contract rents; reviewing, 
processing, and paying monthly vouchers submitted by owners; renewing 
contracts with property owners; and responding to health and safety 
issues at the properties. As of fiscal year 2004, these performance- 
based contract administrators (PBCA) administered the majority of 
contracts--more than 13,000 of approximately 23,000 contracts. HUD also 
has two other types of contract administrators. "Traditional" contract 
administrators (typically local public housing authorities) were 
responsible for administering approximately 5,000 contracts until they 
expired; at which time, these contracts would be assigned to the PBCAs. 
Finally, HUD itself also administered a small number of contracts under 
specific types of project-based programs. 

To receive their monthly housing assistance payments, owners must 
submit monthly vouchers to account for changes in occupancy and 
tenants' incomes that affect the actual amount of subsidy due. However, 
the manner in which the owners submit these vouchers and the process by 
which they get paid varies depending on which of the three types of 
contract administrators handles their contract. For HUD-administered 
contracts, the owner submits a monthly voucher to HUD for verification, 
and HUD in turn pays the owner based on the amount in the voucher. For 
PBCA-administered contracts, the owner submits a monthly voucher to the 
PBCA, which verifies the voucher and forwards it to HUD for payment. 
HUD then transfers the amount verified on the voucher to the PBCA, 
which in turn pays the owner. In contrast, for traditionally 
administered contracts, HUD and the contract administrator develop a 
yearly budget, and HUD pays the contract administrator set monthly 
payments. The owner submits monthly vouchers to the contract 
administrator for verification, and the contract administrator pays the 
amount approved on the voucher. At the end of the year, HUD and the 
contract administrator reconcile the payments HUD made to the contract 
administrator with the amounts the contract administrator paid to the 
owner, exchanging payment as necessary to settle any difference. 

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

Overall, from fiscal years 1995 through 2004, HUD disbursed by the due 
date 75 percent of the 3.2 million monthly housing assistance payments 
on all types of contracts (see fig. 1).[Footnote 5] However, 8 percent 
of payments, averaging 25,000 per year, were significantly late--that 
is, they were delayed by 2 weeks or more and therefore could have had 
negative effects on owners who relied on HUD's subsidy to pay their 
mortgages. During this period, 6 percent of the total payments 
(averaging 18,000 per year) were 4 weeks or more late, including about 
10,000 payments per year that were 8 weeks or more late. 

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

[See PDF for image] 

1995-2004, Payment time frame: 
Disbursed by due date: 75%; 
1-6 days late: 14%; 
7-13 days late: 2%; 
14-27 days late: 2%; 
4 weeks or more late: 6%.  

2002-2004, Payment time frame: 
Disbursed by due date: 79%; 
1-6 days late: 11%; 
7-13 days late: 2%; 
14-27 days late: 2%; 
4 weeks or more late: 5%.  

Source: GAO analysis of HUD data.  

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

[End of figure]  

HUD does not have an overall timeliness standard, by which it makes 
payments to owners or its contract administrators, that is based in 
statute, regulation, or HUD guidance. However, HUD contractually 
requires the PBCAs (which administer the majority of contracts) to pay 
owners no later than the first business day of the month. HUD officials 
said that they also used this standard informally to determine the 
timeliness of payments on HUD-administered and traditionally 
administered contracts. Therefore, we considered payments to be timely 
if they were disbursed by the first business day of the month. Based on 
our discussions with project owners who reported that they relied on 
HUD's assistance to pay their mortgages before they incurred late fees 
(generally, after the 15th day of the month), we determined that a 
payment delay of 2 weeks or more was significant. 

The timeliness of housing assistance payments varied over the 10-year 
period (see fig. 2). The percentage of payments that were significantly 
late increased in 1998, which HUD and PBCA officials indicated likely 
had to do with HUD's initial implementation of MAHRA and new contract 
renewal procedures and processing requirements for project owners. 
Timeliness gradually improved after 2001, shortly after HUD first began 
using the PBCAs to administer contracts. 

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

[See PDF for image] 

This is a vertical bar graph that depicts the following data:  

1995: 5%; 
1996: 5%; 
1997: 5%; 
1998: 11%; 
1999: 10%; 
2000: 10%; 
2001: 9%; 
2002: 9%; 
2003: 7%; 
2004: 6%.  

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

[End of figure]  

The percentage of contracts experiencing at least one significantly 
late payment over the course of the year showed a similar variation 
over the 10-year period, rising to 43 percent in fiscal year 1998 and 
decreasing to 30 percent in fiscal year 2004 (see fig. 3). As with the 
percentage of late payments, the percentage of contracts with late 
payments increased in fiscal year 1998 when HUD implemented 
requirements pursuant to MAHRA. Over the 10-year period, about one- 
third of approximately 26,000 contracts experienced at least one 
payment per year that was delayed by 2 weeks or more. 

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

[See PDF for image] 

This is a vertical bar graph that depicts the following data:  

1995: 15%; 
1996: 18%; 
1997: 22%; 
1998: 43%; 
1999: 37%; 
2000: 40%; 
2001: 41%; 
2002: 39%; 
2003: 35%; 
2004: 30%.  

Note: Ten-year average: 32 percent. 

[End of figure] 

Payments on HUD-administered contracts were more likely to be delayed 
than those on contracts administered by the PBCAs and traditional 
contract administrators, based on HUD's fiscal year 2004 payment data 
(see fig. 4). Further, HUD-administered contracts were more likely to 
have chronically late payments.[Footnote 6] In fiscal year 2004, 9 
percent of HUD-administered contracts experienced chronic late 
payments, while 3 percent of PBCA-administered contracts and 1 percent 
of the traditionally administered contracts had chronic late payments. 

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

[See PDF for image] 

This is a horizontal bar graph that depicts the following data:  

Type of Administrator: PBCA;
Percentage: 5% (210,972);  

Type of Administrator: HUD;
Percentage: 13 (61,679);  

Type of Administrator: Traditional; 
Percentage: 5% (57,375).  

Source: GAO analysis of HUD data. 

Note: Categorization by type of administrator is based on HUD contract 
administration data as of February 2005. We limited our analysis to 
2004 because the data from HUD did not allow us to identify for prior 
fiscal years which type of contract administrator was responsible for 
each contract and because, over the course of these years, HUD was in 
the process of transferring contract administration responsibilities. 
For a small number of the payments characterized as PBCA-administered 
in this figure, HUD may have transferred processing to the PBCA during 
the fiscal year.  

[End of figure] 

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

Late monthly voucher payments were more likely to occur when a contract 
had not been renewed by its expiration date, according to many of the 
HUD officials, contract administrators, and property owners with whom 
we spoke. HUD's accounting systems require that an active contract be 
in place with funding obligated to it before it can release payments 
for that contract. Therefore, an owner cannot receive a monthly voucher 
payment on a contract that HUD has not renewed. 

Our analysis of HUD data from fiscal years 2002 through 2004 showed 
that 60 percent of the payments that were 2 weeks or more late was 
associated with pending contract renewals, among late payments on PBCA- 
and HUD-administered contracts for which HUD recorded the reason for 
the delay (see fig. 5).[Footnote 7] 

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

[See PDF for image] 

This figure is a display of two pie charts. The first depicts the 
following data: 

Percentage of late payments with data on reason for delay: 55%; 
Percentage of late payments with data on reason not available: 45%.  

The second pie-chart depicts the following data: 

Reason for delay, by percentage:
Payment was withheld pending contract renewal: 60%; Owner's voucher 
required review by HUD: 24%; Contract needed additional funds to make 
payment: 11%; Other: 5%.  

Note: Of the 62,851 PBCA-and HUD-administered payments that were 2 
weeks or more late during this 3-year period, HUD's database included a 
reason code for 34,828, or 55 percent. The "other" category included 
pending verification of bank information, pending HUD review of a rent 
increase, insufficient tenant data, or other missing data on owners' 
payment vouchers. We excluded payments on traditionally administered 
contracts because HUD did not collect data on the reasons for delays. 

Source: GAO analysis of HUD data. 

[End of figure] 

A contract renewal might be "pending" when one or more parties involved 
in the process--HUD, the PBCA, or the owner--had not completed the 
necessary steps to finalize the renewal. Based on our interviews with 
HUD officials, contract administrators, and owners, pending contract 
renewals might result from owners' failing to submit their renewal 
packages on time. Often the delay occurred when owners had to submit a 
study of market rents, completed by a certified appraiser, to determine 
the market rent levels. However, late payments associated with contract 
renewals also might occur because HUD had not completed its required 
processing. For example, according to a HUD official, at one field 
office we visited, contract renewals were delayed because HUD field 
staff were behind in updating necessary information, such as the new 
rent schedules associated with the renewals and the contract execution 
dates in HUD payment systems. 

HUD's contract renewal process was largely manual and paper driven and 
required multiple staff in the PBCAs and HUD to complete (see fig. 6). 
Upon receipt of renewal packages from owners, the PBCAs then prepared 
and forwarded signed contracts (in hard copy) to HUD field offices, 
which executed the contracts; in turn, the field offices sent hard 
copies of contracts to a HUD accounting center, which activated 
contract funding. To allow sufficient time to complete the necessary 
processing, HUD's policy required owners to submit a renewal package to 
their PBCAs 120 days before a contract expires, and gives the PBCAs 30 
days to forward the renewal package to HUD for completion (leaving HUD 
90 days for processing). However, some owners told us that their 
contract renewals had not been completed by the contract expiration 
dates, even though they had submitted their renewal packages on time. 

Figure 6: Contract Renewal Process for PBCA-Administered Contracts: 

[See PDF for image] 

This figure is a timeline that represents Days until the contract 
expires, from more than 120 to 0. The following descriptions, with 
their attachment to the timeline are depicted: 

Project Owner: Complete renewal package;
* Due to PBCA 120 days prior to contract expiration.  

120 days prior:
* Performance-based contract administrators: 
- Upon receipt of completed renewal package, PBCA has 30 days to 
prepare contracts and send signed copies to HUD field office.  

90 days prior:
* HUD field office:
- HUD enters data into system to execute contracts;
- Physical copies of signed contracts are sent. 

0 days prior:
* Fort Worth Accounting Center:
- HUD activates funding for renewed contracts. 

Source: GAO and HUD.  

[End of figure] 

While initial contract renewals (upon expiration of the owner's initial 
long-term contract) often exceeded the 120-day processing time, 
subsequent renewals were less time-consuming and resulted in fewer 
delays, according to HUD officials, the PBCAs, and owners. Initial 
renewals could be challenging for owners because they often involved 
HUD's reassessment of whether the contract rents were in line with 
market rents. Additionally, the initial renewal represented the first 
time that owners had to provide HUD with the extensive documentation 
required for contract renewals to continue receiving housing assistance 
payments. 

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

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

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

The methods HUD used to estimate the amount of funds needed for the 
term of each of its project-based assistance contracts and the way it 
monitored the funding levels on those contracts also affected the 
timeliness of housing assistance payments. When HUD renews a contract, 
and when it obligates additional funding for each year of contracts 
with 5-year terms, it obligates an estimate of the actual subsidy 
payments to which the owner will be entitled over the course of a 
year.[Footnote 9] However, those estimates were often too low, 
according to HUD headquarters and field office officials and contract 
administrators. For example, an underestimate of rent increases or 
utility costs or a change in household demographics or incomes at a 
property would affect the rate at which a contract exhausted its funds, 
potentially causing the contract to need additional funds obligated to 
it before the end of the year. If HUD underestimated the subsidy 
payments, the department needed to allocate more funds to the contract 
and adjust its obligation upwards to make all of the monthly payments. 

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

However, based on our analysis of available HUD data and our 
discussions with HUD field office officials, owners, and contract 
administrators, payments on some contracts were still delayed because 
they needed to have additional funds allocated and obligated before a 
payment could be made. As shown in figure 5, our analysis of HUD's 
payment data showed that, where the reasons for delayed payments on 
PBCA-and HUD-administered contracts were available, 11 percent of 
delays of 2 weeks or more were due to contracts needing additional 
funds obligated. That is, those payments were delayed because, at the 
time the owners' vouchers were processed, HUD had not allocated and 
obligated enough funding to the contracts to cover the payments. 

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

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

Owners' Untimely, Inaccurate, or Incomplete Submissions: 

The PBCAs with which we met estimated that 10 to 20 percent of owners 
submitted late vouchers each month. For example, one PBCA reported that 
about 20 percent of the payments it processed in 2004 were delayed due 
to late owner submissions. However, the PBCAs also reported that they 
generally could process vouchers in less than the allowable time--20 
days--agreed to in their contracts with HUD and resolve any errors with 
owners to prevent a payment delay. According to PBCA officials, they 
often participated in several "back-and-forth" interactions with owners 
to resolve errors or inaccuracies. Typical owner submission errors 
included failing to account correctly for changes in the number of 
tenants or tenant income levels, or failing to provide required 
documentation. Because HUD's data systems did not capture the back-and- 
forth interactions PBCA officials described to us, we could not 
directly measure the extent to which owners' original voucher 
submissions may have been late, inaccurate, or incomplete. 

HUD officials and the PBCAs reported that owners had a learning curve 
when contracts were transferred to the PBCAs because the PBCAs reviewed 
monthly voucher submissions with greater scrutiny than HUD had in the 
past. The timeliness of payments also might be affected by a PBCA's 
internal policies for addressing owner errors. For example, to prevent 
payment delays, some of the PBCA officials with whom we spoke told us 
that they often processed vouchers in advance of receiving complete 
information on the owners' vouchers. In contrast, at one of the PBCAs 
we visited, officials told us that they would not process an owner's 
voucher for payment unless it fully met all of HUD's requirements. 

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

In preparing our 2005 report, some owners reported that they had not 
been able to pay their mortgages or other bills on time as a result of 
HUD's payment delays.[Footnote 10] Three of the 16 owners with whom we 
spoke reported having to pay their mortgages or other bills late as a 
result of HUD's payment delays. One owner reported that he was in 
danger of defaulting on one of his properties as a direct result of 
late housing assistance payments. Another owner was unable to provide 
full payments to vendors (including utilities, telephone service, 
plumbers, landscapers, and pest control services) during a 3-month 
delay in receiving housing assistance payments. According to this 
owner, her telephone service was interrupted during the delay and her 
relationship with some of her vendors suffered. This owner also 
expressed concern about how the late and partial payments to vendors 
would affect her credit rating. 

If owners were unable to pay their vendors or their staff, services to 
the property and the condition of the property could suffer. At one 
affordable housing property for seniors that we visited, the utility 
services had been interrupted because of the owner's inability to make 
the payments. At the same property, the owner told us that she could 
not purchase cleaning supplies and had to borrow supplies from another 
property. One of the 16 owners with whom we spoke told us that they 
were getting ready to furlough staff during the time that they were not 
receiving payments from HUD. According to one HUD field office 
official, owners have complained about not being able to pay for needed 
repairs or garbage removal while they were waiting to receive a housing 
assistance payment. According to one industry group official, payment 
delays could result in the gradual decline of the condition of the 
properties in instances where owners were unable to pay for needed 
repairs. 

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

* Two of the 16 owners with whom we spoke reported that they could not 
pay their bills and operate the properties during a payment delay. 
These owners were nonprofits, each operating a single property occupied 
by low-income seniors. In both cases, the amount of rent they were 
receiving from the residents was insufficient to pay the mortgage and 
other bills. Neither of these owners had additional sources of revenue. 

* In contrast, owners with several properties and other sources of 
revenue were less severely affected by HUD's payment delays. Three of 
the owners with whom we spoke reported that they were able to borrow 
funds from their other properties or find other funding sources to 
cover the mortgage payments and other bills. All three of these owners 
had a mix of affordable and market-rate properties. According to HUD 
and PBCA officials, owners who receive a mix of subsidized and market 
rate rents from their properties would not be as severely affected by a 
payment delay as owners with all subsidized units. 

While HUD's payment delays had negative financial effects on project 
owners, the delays appeared unlikely to result in owners opting out of 
HUD's programs. Project owners, industry group officials, contract 
administrators, and HUD officials we interviewed generally agreed that 
market factors, not late payments, primarily drove an owner's decision 
to opt out of HUD programs. Owners generally opt out when they can 
receive higher market rents or when it is financially advantageous to 
convert their properties to condominiums. For profit-motivated owners, 
this decision can be influenced by the condition of the property and 
the income levels of the surrounding neighborhood. Owners were more 
likely to opt out if they could upgrade their properties at a 
reasonable cost to convert them to condominiums or rental units for 
higher-income tenants. In preparing our 2007 report, we also found that 
although the majority of the owners who opted out of the program did so 
for economic or market factors, growing owner frustration over a 
variety of administrative issues, including late payments, could upset 
the balance causing more owners to consider opting out even when 
economic conditions could be overcome or mitigated.[Footnote 11] 
However, most of the owners with whom we spoke, including some profit- 
motivated owners, reported that they would not opt out of HUD programs 
because of their commitment to providing affordable housing. Industry 
group officials also stated that most of their members were "mission 
driven," or committed to providing affordable housing. 

HUD had no system for notifying owners when a payment delay would occur 
or when it would be resolved, which industry associations representing 
many owners as well as the owners with whom we met indicated impeded 
their ability to adequately plan to cover expenses until receiving the 
late payment. Most of the owners with whom we spoke reported that they 
received no warning from HUD that their payments would be delayed. 
Several of the owners told us that notification of the delay and the 
length of the delay would give them the ability to decide how to 
mitigate the effects of a late payment. For example, owners could then 
immediately request access to reserve accounts if the delay were long 
enough to prevent them from paying their mortgages or other bills on 
time. Industry group officials with whom we met agreed that a 
notification of a delayed payment would benefit their members. 

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

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

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

Contact and Acknowledgments: 

For further information on this testimony, please contact David G. Wood 
at (202) 512-8678 or woodd@gao.gov. Individuals making key 
contributions to this testimony included Daniel Garcia-Diaz, Grace 
Haskins, Roberto Piñero, Linda Rego, and Rose Schuville.  

[End of section]  

Footnotes:  

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

[2] Contracts with terms for greater than 1 year include language 
noting that they are "subject to annual appropriations," meaning that 
the terms apply only if HUD gets an appropriation sufficient to fund 
the contracts beyond the first year. 

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

[4] Prior GAO reports on HUD's mark-to-market efforts include the 
following: Multifamily Housing: Physical and Financial Condition of 
Mark-to-Market At-Risk Properties, GAO-02-953 (Washington, D.C.: Sept. 
6, 2002); Multifamily Housing: Issues Related to Mark-to-Market Program 
Reauthorization, GAO-01-800 (Washington, D.C.: July 11, 2001); and 
Multifamily Housing: HUD's Restructuring Office's Actions to Implement 
the Mark-to-Market Program, GAO/RCED-00-21 (Washington, D.C.: Jan. 20, 
2000). 

[5] For contracts administered by the PBCAs and traditional contract 
administrators, HUD disburses funds to the contract administrator, 
rather than directly to the owner. HUD's data systems do not track the 
date the owner received payment under these contracts. As a result, we 
did not have data to reflect the exact payment date and, instead, for 
these contracts, we characterize timeliness based on the date the U.S. 
Treasury disbursed funds to the contract administrator. Based on our 
discussions with PBCA officials, it generally took the PBCAs from 1 to 
5 days to turn around payments to owners. 

[6] We defined chronically late payments as contracts with six or more 
payments per year that were 2 weeks or more late. 

[7] HUD data recorded the reason for the delay for 55 percent of the 
PBCA-and HUD-administered payments that were 2 weeks or more late from 
fiscal years 2002 through 2004. We could not determine the reasons for 
the delay in the remaining 45 percent of the late payments. For almost 
all of the remaining 45 percent of payments, HUD's data systems did not 
accept the voucher in time for a timely payment. According to HUD 
officials, late acceptance of the voucher could be the result of a 
problem with the voucher or late submission by the owner or the PBCA. 
HUD did not collect data that would include the reasons for delayed 
payments on traditionally administered contracts. 

[8] GAO-07-290. 

[9] An obligation is a definite commitment that creates a legal 
liability of the government for the payment of goods and services 
ordered or received, or a legal duty on the part of the United States 
that could mature into a legal liability by virtue of actions on the 
part of the other party beyond the control of the United States. 
Payment may be made immediately or in the future. An agency incurs an 
obligation, for example, when it places an order, signs a contract, 
awards a grant, purchases a service, or takes other actions that 
require the government to make payments to the public or from one 
government account to another. 

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

[11] GAO-07-290. 

[End of section]  

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