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entitled 'Multifamily Housing: Implementation of Fiscal Year 2003 
Requirements Concerning Housing Choice Voucher Administrative Fees' 
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Report to Congressional Committees:

November 2004:

MULTIFAMILY HOUSING:

Implementation of Fiscal Year 2003 Requirements Concerning Housing 
Choice Voucher Administrative Fees:

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-30]:

GAO Highlights:

Highlights of GAO-05-30, a report to congressional committees

Why GAO Did This Study:

The Department of Housing and Urban Development (HUD) received $12.9 
billion in fiscal year 2003 for the Housing Choice Voucher Program, 
which helps about 2 million low-income families pay rent for privately 
owned housing. This amount included $1.1 billion in administrative fee 
payments to the public housing agencies that administer the program for 
HUD. In the Consolidated Appropriations Resolution of 2003, Congress 
included provisions to address a concern that housing agencies may have 
received more in fees than they needed to run the program. Housing 
agencies were directed to report to HUD their available reserves as of 
January 31, 2003. HUD was directed to reduce the fees agencies would 
receive if these levels were too high and recapture some excess fees.

The conference report accompanying the Consolidated Appropriations Act 
of 2004 directed GAO to review compliance with these provisions. This 
report discusses (1) the extent to which housing agencies complied with 
the requirement to report to HUD their available administrative fee 
reserves as of January 31, 2003; (2) how these reported reserves 
compared with reserves reported in earlier fiscal years and possible 
reasons for any declines; (3) the extent to which HUD made required 
reductions to fiscal year 2003 fees; and (4) the extent to which HUD 
has recaptured excess fiscal year 2003 administrative fees.

What GAO Found:

By the end of calendar year 2004, HUD expects to have finished 
implementing most of the provisions in the Consolidated Appropriations 
Resolution of 2003 that address the administrative fees housing 
agencies receive under the Housing Choice Voucher Program. As of 
September 2004, all but 5 of the 2,477 housing agencies had reported 
their available administrative fee reserves as of January 31, 2003. The 
reported amounts totaled $587 million, or about $211 million (26 
percent) less than the average $798 million that housing agencies had 
reported in fiscal years 1999 to 2002. 

GAO found several reasons for this decline. For example, the 2003 
resolution allowed housing agencies to deduct from their January 2003 
reported amounts funds that were not “available.” Some housing agencies 
deducted obligated or committed funds they considered unavailable, 
although they normally include these funds in the reserve amounts they 
report at their fiscal year ends. Further, between the end of their 
fiscal year 2002 and the January reporting date, some housing agencies 
obligated some of their reserves for expenses not related to the 
Housing Choice Voucher Program, as was permitted by HUD regulations. 

By December 2004, HUD plans to have completed most of the required 
reductions to the estimated fiscal year 2003 administrative fees of 180 
housing agencies, a total of about $37.8 million (see figure). As 
required by the 2003 resolution, HUD identified housing agencies whose 
fees would be reduced based on the difference between their available 
January 2003 reserve balances and 105 percent of the fees they earned 
in federal fiscal year 2002. HUD has not recaptured any excess 2003 
administrative fees but expects to have made some of the required 
recaptures by December 2004. 

Estimated Reductions to 180 Housing Agencies’ Fiscal Year 2003 Fees: 

[See PDF for image]

[End of figure]

www.gao.gov/cgi-bin/getrpt?GAO-05-30.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact David G. Wood at (202) 
512-8678 or woodd@gao.gov.

[End of section]

Contents:

Letter:

Background:

Results in Brief:

Almost All Housing Agencies Reported Their Available Reserves, but 
Agencies Interpreted the Reporting Requirement Differently:

Some Housing Agencies' Available January 2003 Reserves Were Lower Than 
Previously Reported Reserves for Several Reasons:

HUD Is Reducing Estimated Administrative Fees by About $37.8 Million:

HUD Expects to Have Recaptured Some Excess 2003 Administrative Fees by 
December 2004:

Agency Comments:

Appendixes:

Appendix I: Scope and Methodology:

Appendix II: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

Acknowledgments:

Figures:

Figure 1: Proportion of Housing Agencies Whose January 2003 Available 
Reserves Were Different from Their Average Reserves from 1999 to 2002:

Figure 2: Total Reserves, by Housing Agency Fiscal Year:

Figure 3: How HUD Estimated Administrative Fees Earned in Federal 
Fiscal Year 2002:

Figure 4: HUD's Process for Determining Reductions to Fiscal Year 2003 
Fees:

Figure 5: Months in Which HUD Applied Reduced Administrative Fee 
Payments:

Figure 6: Estimated Reductions to 180 Housing Agencies' Fiscal Year 
2003 Fees:

Figure 7: How HUD Determines Amounts to Be Recaptured:

Letter November 19, 2004:

The Honorable Christopher Bond: 
Chairman: 
The Honorable Barbara A. Mikulski: 
Ranking Minority Member: 
Subcommittee on Veterans Affairs, Housing and Urban Development and 
Independent Agencies: 
Committee on Appropriations: 
United States Senate:

The Honorable James T. Walsh:
Chairman: 
The Honorable Alan B. Mollohan: 
Ranking Minority Member: 
Subcommittee on Veterans Affairs, Housing and Urban Development and 
Independent Agencies: 
Committee on Appropriations: 
House of Representatives:

The Department of Housing and Urban Development (HUD) received $12.9 
billion in fiscal year 2003 appropriations to help about 2 million low-
income families nationwide pay rent for privately owned housing through 
the Housing Choice Voucher Program. About $1.1 billion of this amount 
was designated for administrative fee payments to the approximately 
2,500 public housing agencies that administer the program for 
HUD.[Footnote 1] The fee payments, which are intended to compensate the 
housing agencies for administrative activities such as finding property 
owners to participate in the program, inspecting rental units, and 
determining family eligibility, are not based on actual incurred 
expenses, but rather on a formula that takes into account the number of 
vouchers administered. The difference between the fees earned and 
expenses incurred are recorded annually in the administrative fee 
reserve, which shows the accumulated gains and losses housing agencies 
incur over time. Housing agencies can use their administrative fee 
reserves for the voucher program and other housing-related expenses.

In the Consolidated Appropriations Resolution of 2003, Congress 
addressed a concern that housing agencies may have been provided more 
in fees than necessary to effectively run the Housing Choice Voucher 
Program, as indicated by the large amounts of some housing agencies' 
administrative fee reserves. Specifically, the 2003 resolution included 
provisions requiring the housing agencies to report to HUD their 
administrative fee reserves available as of January 31, 2003, and 
requiring HUD to:

* withhold administrative fees for fiscal year 2003 from agencies that 
did not report their January 2003 reserves;

* reduce the administrative fees paid in fiscal year 2003 to any agency 
whose reserve amount was more than an established limit; and:

* recapture any fees paid in fiscal year 2003 that exceeded housing 
agencies' actual administrative expenses.[Footnote 2]

However, the conference report accompanying the Consolidated 
Appropriations Act of 2004 raised concerns that neither HUD nor the 
housing agencies had fully complied with the requirements in the 2003 
resolution. This concern was based largely on the fact that some of the 
reported January 2003 reserves were far lower than had been expected. 
The conference report directed GAO to review compliance with the 
provisions of the 2003 resolution. Accordingly, this report:

* shows the extent to which housing agencies complied with the 
requirement to report to HUD their administrative fee reserves 
available as of January 31, 2003;

* compares housing agencies' reported available reserves as of January 
31, 2003, with reserves reported in earlier fiscal years and discusses 
possible reasons for any declines;

* examines the extent to which HUD reduced fiscal year 2003 
administrative fee payments, as required, in light of housing agencies' 
reported reserves;[Footnote 3] and:

* shows the extent to which HUD recaptured excess fiscal year 2003 
administrative fees, as required.

To meet our objectives, we reviewed relevant laws and HUD guidance, 
compared HUD data on the January 2003 reported amounts with reserves 
reported in prior fiscal years, and interviewed officials from HUD's 
Office of Public and Indian Housing and Financial Management Center. We 
also visited 5 housing agencies to review financial documents related 
to their administrative fee reserves and to interview staff involved in 
calculating their reserves.[Footnote 4] We selected these 5 agencies 
from the 10 that showed the largest differences between their January 
2003 reported reserves and their average reported reserves for fiscal 
years 1999 to 2002.[Footnote 5] In addition, we interviewed officials 
from several housing industry associations and spoke with private-
sector accountants these associations cited as experts in housing 
agency accounting. We did not perform a financial audit of the housing 
agencies' administrative fee reserves. We conducted our work from 
January through September 2004 in Los Angeles and Orange County, 
California; Broward County, Florida; Needham, Massachusetts; Newark, 
New Jersey; New York, New York; and Washington, D.C., in accordance 
with generally accepted government auditing standards. Our scope and 
methodology are discussed in greater detail in appendix I.

Background:

The federal government's Housing Choice Voucher Program helps very-low-
income families, the elderly, and the disabled pay for housing in:

the private market.[Footnote 6] The program, which has been operating 
for about 30 years, provides housing vouchers that individuals and 
families can use to rent houses or apartments in the private housing 
market if property owners participate in the program. Voucher holders 
are responsible for finding suitable housing, which must meet the 
health and safety standards set by the local housing agency. Voucher 
holders generally pay about 30 percent of their household income on the 
rent and utilities and the housing agency pays the remainder in 
subsidies that are paid directly to the property owners.

The administrative fees housing agencies earn are not tied to the 
actual expenses of operating the Housing Choice Voucher Program. 
Rather, the fees are based on a formula that takes into account the 
number of months that each voucher is actually in use (i.e., is used to 
pay for a rental unit under lease). The amounts used to calculate 
federal fiscal year 2003 fees were set in the Federal Register on May 
6, 2003.[Footnote 7] In addition, housing agencies may also earn 
additional special administrative fees--for example, the "hard-to-
house" fee for certain clients, such as persons with disabilities, who 
require help in locating housing.

Administrative fee payments are based on estimates of voucher use and 
are reconciled with actual earned amounts at the end of each housing 
agency's fiscal year. Housing agencies' fiscal years are grouped into 
four cycles ending in March, June, September, and December that allow 
HUD to more easily complete the fiscal-year-end settlement process, 
which generally is completed a few months after the close of a housing 
agency's fiscal year. HUD projects leasing activity annually based on 
data the housing agencies submit and provides the agencies with monthly 
disbursements that are based on these projections. HUD uses the fiscal-
year-end settlement process to reconcile the administrative fees 
disbursed to housing agencies with fees earned based on actual voucher 
use. For example, if the fees a housing agency earns exceed the 
projected amounts that HUD disbursed during the housing agency's fiscal 
year, HUD pays the difference once the settlement process is completed. 
Conversely, if the fees a housing agency earns are less than the amount 
it was paid during its fiscal year, HUD offsets future fee payments by 
the amount of the difference.

Housing agencies can use their administrative fee reserves both for 
expenses associated with the voucher program and other expenses. 
However, housing agencies must use their reserves for any actual 
administrative expenses that exceed the total amount HUD provides for 
each housing agency fiscal year. In addition, housing agencies are 
allowed to use administrative fee reserves accumulated prior to fiscal 
year 2004 appropriations "for other housing purposes permitted by state 
and local law," provided that the agencies have adequately administered 
the Housing Choice Voucher Program. For example, some housing agencies 
we visited had used their reserves to offset expenses incurred from 
rehabilitating or producing affordable housing units, while others had 
used their reserves to offset expenses from their public housing 
programs. In the Consolidated Appropriations Act of 2004, Congress 
limited the uses of the administrative fees earned in fiscal year 2004 
to the provision of Housing Choice Voucher Program rental assistance 
and related development activities.

The amount of the administrative fee reserve is calculated based on 
housing agency accounting data and does not necessarily represent cash 
reserves. Housing agencies determine the amount of their administrative 
fee reserve by calculating the difference (either gain or loss) between 
the fees they earned that year and the expenses they actually incurred, 
and adding that amount to (or subtracting it from) its last fiscal-
year-end amount. They also deduct amounts used for nonprogram expenses. 
In calculating their reserves, housing agencies may deduct amounts 
equal to noncash assets procured with administrative fee reserves. For 
example, if a housing agency were to purchase a vehicle for program 
purposes, it could deduct the purchase amount when calculating the 
year-end balance for that year. However, a housing agency may include 
amounts equal to noncash assets in their total reported reserve. 
Housing agencies report their total administrative fee reserves to HUD 
as a part of the fiscal-year-end settlement process.

Results in Brief:

As of September 2004, all but 5 of the 2,477 housing agencies that were 
required to report their administrative fee reserves available as of 
January 31, 2003, had done so. All five housing agencies we visited 
determined their reserves in a manner consistent with HUD's guidance. 
However, because HUD did not define the term "available" used in the 
2003 Appropriations Resolution, they did not calculate their reserves 
in exactly the same way. For example, in calculating the amount of 
available reserves, some housing agencies excluded amounts committed 
(but not obligated) for anticipated expenses. Moreover, two housing 
agencies differed in their interpretation of whether noncash assets 
should be included in available reserves; one housing agency had 
excluded an amount equal to its noncash assets, while another had not.

The total of all housing agencies' reported reserves available as of 
January 31, 2003, was $587 million, or about $211 million (26 percent) 
less than the average $798 million in total reserves reported for 
fiscal years 1999 to 2002. Ten housing agencies, including the five we 
visited, accounted for 82 percent of the total difference. Officials 
from HUD, housing agencies, and housing industry groups cited several 
reasons why the total reported amount declined during that time. First, 
the 2003 resolution allowed housing agencies to deduct from their 
January 2003 reported amounts funds that were not "available," a term 
that some housing agencies interpreted as excluding obligated or 
committed funds. Housing agencies normally include these funds in the 
reserve amounts they report at their fiscal year ends. Second, prior to 
the reporting date, some housing agencies used some of their reserves 
for expenses not related to the Housing Choice Voucher Program, as was 
permitted by HUD regulations. For example, between the end of their 
2002 fiscal years and January 2003, the housing agencies we visited had 
used their reserves for, among other things, providing security 
services for housing developments. Finally, changes in government 
accounting standards, which were phased in beginning in 2001, could 
have had a small effect on some housing agencies' reported reserves by 
requiring agencies to deduct from their reserves certain liabilities, 
such as employees' unused leave, that they had not previously deducted.

By December 2004, HUD plans to have completed most of the required 
reductions to the estimated fiscal year 2003 administrative fees of 180 
housing agencies, a total of about $37.8 million. As required by the 
2003 Appropriations Resolution, HUD identified housing agencies whose 
fees would be reduced based on the difference between (a) their January 
2003 reserves and (b) 105 percent of the fees they earned in federal 
fiscal year 2002. HUD made about $27.4 million in reductions to housing 
agencies' estimated administrative fees over the course of calendar 
year 2003 (also the fiscal year for the Housing Choice Voucher Program) 
and plans to complete the remainder of the required reductions as part 
of the housing agencies' next fiscal-year-end settlement process.

HUD has not yet recaptured any excess fiscal year 2003 administrative 
fees. However, it has begun processing recaptures and plans to have 
made some of the required recaptures by December 2004. The 2003 
Appropriations Resolution required HUD to recapture fees paid to 
housing agencies that exceeded administrative expenses, except the fees 
necessary to maintain a reserve of 5 percent of the fees earned in 
fiscal year 2003. As a result, only housing agencies that had reserve 
amounts of less than 5 percent of their fiscal year 2003 fees could add 
to their reserves. As of September 2004, HUD was not able to provide 
estimates of the number of housing agencies that would be affected or 
the amount it expected to recapture.

Almost All Housing Agencies Reported Their Available Reserves, but 
Agencies Interpreted the Reporting Requirement Differently:

Almost all of the housing agencies that were required to report their 
available administrative fee reserves as of January 31, 2003, have done 
so. However, because HUD did not define the term "available" used in 
the 2003 Appropriations Resolution, housing agencies may have 
interpreted the term--and thus calculated their reserves--differently. 
Although the five housing agencies we visited determined their reserves 
in a manner consistent with HUD's guidance, we found differences in 
their methodologies.

Almost All Housing Agencies Reported January 2003 Reserves:

As of September 2004, all but 5 of the 2,477 housing agencies required 
to report their available administrative fee reserves as of January 31, 
2003, had done so. The 2003 Appropriations Resolution instructed HUD to 
collect these reserves data from each housing agency administering the 
Housing Choice Voucher Program. Although housing agencies had until 
April 9, 2003, to report their reserves, HUD officials said they did 
not track which housing agencies met that deadline. However, they said 
that, as directed, HUD withheld 2003 administrative fees from housing 
agencies until they reported. The officials said that HUD continued to 
withhold 2003 administrative fees from the 5 housing agencies that had 
not yet reported their reserves.[Footnote 8]

The five housing agencies we visited calculated their reserves 
available as of January 31, 2003, in a manner consistent with HUD's 
instructions.[Footnote 9] As directed, they began with their last 
fiscal-year-end reserve amounts and employed year-end closing 
procedures to bring the reserves current as of January 31, 2003. The 
five housing agencies had different fiscal years, however. For example, 
to meet this requirement the New York City Housing Authority had to 
update its reserve from its fiscal year ending December 31, 2002, while 
the Newark Housing Authority had to update its reserve from its fiscal 
year ending March 31, 2002.[Footnote 10] The five housing agencies we 
visited first added estimated fees earned and other income, such as 
interest income, earned since their most recent fiscal year end. They 
then deducted program expenses, such as staff salaries, incurred up to 
the January 2003 reporting date. In addition, all of the housing 
agencies deducted amounts used for housing purposes other than the 
Housing Choice Voucher Program, an action allowed under HUD 
regulations. For example, officials from the Broward County Housing 
Authority deducted $1.5 million (13 percent of its average reserve from 
1999 to 2002) from its administrative fee reserves to offset the cost 
of installing air conditioning in public housing units. Finally, 
officials from two of the housing agencies deducted obligated amounts 
from their reported reserves. For example, officials from the New York 
City Housing Authority deducted slightly over $6 million (8 percent of 
its average reserve from 1999 to 2002) from the agency's reported 
reserve for two housing-related development projects.

Housing Agencies Interpreted "Available" Reserves Differently Due to a 
Lack of HUD Guidance:

Because HUD did not define the term "available" used in the 2003 
Appropriations Resolution, housing agencies interpreted the term 
differently and thus may not have reported consistently defined reserve 
amounts to HUD.[Footnote 11] HUD's regular fiscal-year-end closing 
procedures require housing agencies to report their total reserves. 
Therefore, reporting only their "available" reserves was a new 
requirement for housing agencies. HUD program officials did not 
elaborate on the 2003 Appropriations Resolution's language. In the 
guidance it provided housing agencies regarding the 2003 resolution, 
HUD simply emphasized the word "available" with bold and italics 
several times throughout the instructions. Officials from HUD's Office 
of General Counsel told us that legally obligated funds were not 
"available" amounts.

The lack of a clear definition of "available" resulted in two 
interpretive issues. First, three of the housing agencies we visited 
deducted from their "available" reserves amounts committed (but not yet 
obligated) for anticipated expenses. For example, Orange County Housing 
Authority officials deducted almost $900,000 (5 percent of its average 
reserve from 1999 to 2002) that the agency had committed for fraud 
investigation services for the Housing Choice Voucher Program in future 
fiscal years. Similarly, officials at the Housing Authority of the City 
of Los Angeles deducted over $8 million (15 percent of its average 
reserve from 1999 to 2002) from its reported reserve for an expected 
shortfall in public housing subsidies. HUD's guidance did not indicate 
whether these amounts should or should not have been deducted from 
their "available" reserves.

Second, two housing agencies differed on whether to include noncash 
assets in their reported reserves. Officials from the Newark Housing 
Authority did not deduct amounts representing noncash assets, including 
computers and vehicles, from their January 2003 reported reserve. 
According to these officials, they included those amounts in the 
reported reserve because they include noncash assets in the amount they 
report to HUD at their fiscal year end. In contrast, officials from the 
Orange County Housing Authority deducted amounts from their reported 
reserve for noncash assets--primarily notes receivable from loans they 
had made to help developers build affordable housing. These officials 
told us that they did not consider these amounts to be "available" 
because the loans had not yet been repaid.

Some Housing Agencies' Available January 2003 Reserves Were Lower Than 
Previously Reported Reserves for Several Reasons:

Housing agencies' total reported reserves available as of January 31, 
2003, were about 26 percent less than the average total reserves 
reported by the agencies for fiscal years 1999 to 2002. Declines in the 
amounts reported by 10 housing agencies, including the 5 we visited, 
represented 82 percent of this difference. Officials from HUD, housing 
agencies, and housing industry groups cited several explanations for 
the difference.

A Small Number of Housing Agencies Were Responsible for Most of the 
Difference:

The total of all the housing agencies' reported reserves available as 
of January 31, 2003, was $587 million, about $211 million (26 percent) 
lower than the average total reserves of $798 million for fiscal years 
1999 to 2002.[Footnote 12] Of those housing agencies whose January 2003 
available reserves were different from their average reserves from 1999 
to 2002, 984 (41 percent) housing agencies reported available reserve 
amounts that were lower than their average year-end amounts, but a 
small number of housing agencies was largely responsible for the 
overall difference (fig. 1). Of housing agencies that reported lower 
amounts, most (69 percent) showed a decline of less than $100,000, 
while only about 8 percent had declines of over $500,000. Specifically, 
the 10 housing agencies with the largest declines represented 82 
percent ($173 million) of the decline in total reserves; of these, the 
5 we visited represented 61 percent ($129 million) of the total 
difference. In contrast, most housing agencies (59 percent) reported 
amounts that were higher than their average reserves from 1999 to 
2002.[Footnote 13]

Figure 1: Proportion of Housing Agencies Whose January 2003 Available 
Reserves Were Different from Their Average Reserves from 1999 to 2002:

[See PDF for image] 

Note: The figure above accounts for 2,398 of the 2,472 (97 percent) 
housing agencies that reported a January 2003 reserve. Due to missing 
data, GAO could not calculate the differences for 63 housing agencies. 
In addition, 11 housing agencies reported no change between their 
average reserves (1999-2002) and their January 2003 reported reserves.

[End of figure] 

The total amount of reserves reported by agencies at fiscal year ends 
varied from fiscal year to fiscal year. For example, the total reserves 
went from $753 million in fiscal year 1999 to $825 million in fiscal 
year 2000 but fell from $888 million in 2001 to $725 million in 2002 
(fig. 2).[Footnote 14] Over a third of the total decline between 2001 
and 2002 was attributable to the New York City Housing Authority, which 
used $58 million to cover deficits in public housing programs sponsored 
by their state and city governments.

Figure 2: Total Reserves, by Housing Agency Fiscal Year:

[See PDF for image] 

[End of figure] 

January 2003 Available Reserves Were Lower for Several Reasons:

We found several reasons for the difference in reported reserve 
amounts. First, officials from HUD, housing industry associations, and 
some housing agencies we visited told us that the different reporting 
requirement was in part responsible for the lower reported amounts. As 
previously discussed, the January 2003 requirement was for "available" 
reserves, a term that some housing agencies interpreted as excluding 
funds that had been obligated or committed. The regular year-end 
reporting requirement was (and is) for total reserves, including 
amounts the housing agency had either obligated or committed. As a 
result, the January 2003 reserves for some housing agencies fell from 
the previous year-end levels--in some cases, dramatically. For example, 
officials from the Broward County Housing Authority deducted from the 
agency's January 2003 reported reserve $9.5 million (80 percent of its 
average reserve from 1999 to 2002) that it had committed for the 
redevelopment of a public housing site.

Second, some housing agencies obligated some of their reserves for 
expenses not related to the Housing Choice Voucher Program, as was 
permitted by HUD regulations.[Footnote 15] Of the five housing agencies 
we visited, two had used their reserves for projects or expenses not 
related to the Housing Choice Voucher Program between the end of their 
fiscal year 2002 and the January 2003 reporting date. For example, 
officials from the Newark Housing Authority deducted about $3.4 million 
(47 percent of its average reserve from 1999 to 2002) from its reserve 
for security services at their housing developments.

Third, a new accounting requirement may have contributed to the decline 
in the total reported amount, but housing agency officials said that 
this effect was likely small. Beginning in 2001, housing agencies began 
implementing applicable provisions of the Governmental Accounting 
Standards Board Statement No. 34, Basic Financial Statements--and 
Management's Discussion and Analysis--for State and Local Governments. 
The statement directed housing agencies to deduct from their reserves 
certain liabilities that they had not been required to deduct before, 
such as employees' unused compensated leave. The largest agencies were 
required to implement this standard in June 2001. Other agencies were 
not required to implement the standard until June 2003. According to 
some housing agency officials, the effect of this accounting 
requirement was relatively small. For example, officials at the Housing 
Authority of the City of Los Angeles deducted almost $4 million (7 
percent of its average reserve from 1999 to 2002) from its reported 
reserve as a result of the conversion to this accounting standard.

HUD Is Reducing Estimated Administrative Fees by About $37.8 Million:

By December 2004, HUD plans to have completed most of the required 
reductions to the estimated fiscal year 2003 administrative fees of 180 
housing agencies, a total of about $37.8 million. As required by the 
2003 Appropriations Resolution, HUD identified housing agencies whose 
fees should be reduced because their reported January 2003 reserves 
exceeded 105 percent of the fees they earned in federal fiscal year 
2002. HUD made about $27.4 million in reductions to housing agencies' 
estimated administrative fees over the course of calendar year 2003 
(the Housing Choice Voucher Program's fiscal year). HUD plans to make 
most of the remaining reductions by December 2004 through the housing 
agencies' fiscal-year-end settlements.

HUD Identified 180 Housing Agencies That Should Receive Reductions:

To implement the reductions required in the 2003 Appropriations 
Resolution, HUD needed information on each housing agency's available 
administrative fee reserves as of January 31, 2003, and on the fees 
each housing agency earned in fiscal year 2002. According to HUD 
attorneys, HUD interpreted the term "fiscal year 2002" in the 2003 
resolution to mean federal fiscal year 2002. Because HUD generally 
collects information on fees earned based on the housing agency fiscal 
year, it had to estimate the amounts for federal fiscal year 2002 for 
all agencies except those with fiscal years that ended in September. As 
shown in figure 3, HUD used a combination of data to estimate fees 
housing agencies earned in federal fiscal year 2002.

Figure 3: How HUD Estimated Administrative Fees Earned in Federal 
Fiscal Year 2002:

[See PDF for image] 

[A] HUD used August 2002 data for these months because it was the 
nearest monthly data available.

[End of figure] 

Using these estimates and housing agencies' reported January 2003 
reserves, HUD determined which housing agencies should receive less in 
administrative fees and the amounts of the reductions.[Footnote 16] HUD 
identified 180 housing agencies whose fiscal year 2003 administrative 
fees should be reduced because their available reserves as of January 
31, 2003, exceeded 105 percent of the fees they earned in federal 
fiscal year 2002. The total reduction for each agency was the lower of 
(a) the difference between its January 2003 reserve and 105 percent of 
the fees it earned in federal fiscal year 2002, or (b) the total 
administrative fees the housing agency would earn in fiscal year 2003. 
HUD did not reduce the fees of some housing agencies by the full 
difference between their January 2003 reserves and 105 percent of the 
fees earned in federal fiscal year 2002, because the 2003 resolution 
did not require HUD to make reductions to housing agencies' 
administrative fees that exceeded the amounts they earned in fiscal 
year 2003. Figure 4 shows, for three possible scenarios, how HUD 
determined the reduction, if any, in a housing agency's fiscal year 
2003 fees. In the first scenario, no reduction would be made, because 
the reserves were less than the 105 percent level; the housing agency 
would receive all of the fiscal year 2003 fees it earned. In the second 
scenario, the reduction would equal the full difference between the 
January 2003 reserves and the 105 percent level, and the housing agency 
would receive the remainder of its fiscal year 2003 administrative 
fees. In the third scenario, the reduction would equal the full amount 
of the housing agency's fiscal year 2003 fees, and the housing agency 
would not receive any administrative fees.

Figure 4: HUD's Process for Determining Reductions to Fiscal Year 2003 
Fees:

[See PDF for image] 

[End of figure] 

HUD Reduced Administrative Fees in Two Stages:

As noted previously, HUD normally makes monthly disbursements to 
housing agencies based on projections of their earnings for each month, 
and reconciles these disbursements with the agencies' actual earnings 
during the fiscal-year-end settlement process.[Footnote 17] To 
implement the reductions required by the 2003 Appropriations 
Resolution, HUD estimated each agency's total reduction (as described 
above) and the estimated monthly reduction, based on the total fees 
earned in federal fiscal year 2002 divided by 12. Using these amounts, 
HUD reduced some housing agencies' monthly payments over the course of 
calendar year 2003 (also the fiscal year for the Housing Choice Voucher 
Program) and will make any remaining reductions during the housing 
agencies' fiscal-year-end settlement process.

In the first stage of reductions, HUD lowered the monthly disbursements 
for the housing agencies' estimated administrative fees by a total of 
about $27.4 million between September and December 2003. Although HUD 
began calculating reductions in May 2003, HUD did not apply any 
reductions to fee disbursements until September 2003, after housing 
agencies' budgets were revised.[Footnote 18] The September payments 
reflected up to 5 months of estimated monthly reductions (May through 
September), even if the reduction affected not only the administrative 
fees but also the payments for tenants' housing assistance. In 
contrast, fees for October through December 2003 were reduced by no 
more than the estimated monthly reduction. According to HUD officials, 
HUD initially stopped reductions with the December 2003 payment after 8 
months of estimated monthly reductions because of uncertainty about 
applying the 2003 Appropriations Resolution retroactively to January 
through April 2003, the first 4 months of the Housing Choice Voucher 
Program fiscal year.

Although HUD has already made these estimated reductions, it must 
complete the housing agencies' fiscal-year-end settlements to determine 
the actual amount of fees to which reductions should be applied. HUD 
will not have the data to calculate the actual reductions for all 
housing agencies until after December 2004 (when the September 2004 
fiscal-year-end settlements are due), because housing agencies whose 
fiscal years ended in June and September received reduced payments over 
the course of two of their fiscal years, as illustrated in figure 5. 
The actual reductions might be higher or lower than the estimated 
amounts, depending on each agency's actual voucher use.

Figure 5: Months in Which HUD Applied Reduced Administrative Fee 
Payments:

[See PDF for image] 

[End of figure] 

HUD will implement a second stage of reductions because its general 
counsel determined that the reductions should apply to the entire 
period during which fiscal year 2003 appropriations were used. In July 
2004, HUD developed procedures to make adjustments to housing agencies' 
January, February, March, and April 2004 payments using the fiscal-
year-end settlement process. HUD will use actual fees earned to 
determine the amount of additional reductions to be made to the fees of 
housing agencies whose fees have not been reduced by the full amount 
required by the 2003 Appropriations Resolution. HUD estimated that 
these additional 4 months of administrative fee reductions would total 
about $10.4 million, bringing the total reduction to about $37.8 
million. As shown in figure 6, most housing agencies will receive total 
reductions of less than $250,000. By December 2004, HUD plans to have 
completed reductions for the majority of housing agencies.

Figure 6: Estimated Reductions to 180 Housing Agencies' Fiscal Year 
2003 Fees:

[See PDF for image] 

[End of figure] 

HUD Expects to Have Recaptured Some Excess 2003 Administrative Fees by 
December 2004:

The 2003 Appropriations Resolution required HUD to recapture from 
housing agencies administrative fees that they earned in fiscal year 
2003 that exceeded administrative expenses, except for an amount 
necessary to maintain a reserve equal to 5 percent of the fees earned 
in the Housing Choice Voucher Program fiscal year 2003. HUD began 
processing recaptures in July 2004, but had not completed any at the 
time of our review.

During the fiscal-year-end settlement process, HUD will review housing 
agencies' actual earned fees (including any reductions resulting from 
the 2003 Appropriations Resolution) and compare them with expenses:

incurred to determine any amounts that should be recaptured.[Footnote 
19] According to the provisions of the 2003 resolution, if a housing 
agency's fiscal year 2003 fees did not exceed its fiscal year 2003 
program expenses, it will not be subject to any fee recaptures, 
regardless of the amount of its reserves. However, if a housing 
agency's fiscal year 2003 fees exceeded its fiscal year 2003 program 
expenses, HUD will compare the housing agency's last fiscal-year-end 
reserve with 5 percent of the fees it earned in fiscal year 2003. HUD 
will then recapture the entire difference or, if the agency has a very 
low reserve, HUD will recapture an amount that will leave the housing 
agency with a reserve equaling 5 percent of its fiscal year 2003 fees 
(fig. 7). Thus, this provision prevented housing agencies from adding 
to their reserves unless they had reserve amounts of less than 5 
percent of their fiscal year 2003 fees.

Figure 7: How HUD Determines Amounts to Be Recaptured:

[See PDF for image] 

[End of figure] 

HUD has not yet recaptured any excess fiscal year 2003 administrative 
fees. In July 2004, HUD began implementing the recapture process for 
the first housing agencies for which data were available--those whose 
fiscal years ended in December 2003. As with the reduction process, HUD 
will have all the data needed to calculate recaptures following the 
receipt of September 2004 fiscal-year-end settlements. HUD plans to 
complete the recaptures for the first group of housing agencies by 
December 2004. As of September 2004, HUD could not estimate the number 
of housing agencies that would be affected or the total amount to be 
recaptured and could not give a date when the process would be 
completed.

Agency Comments:

HUD agreed with our findings and provided technical comments, which we 
incorporated into this report as appropriate.

We are sending copies of this report to the Secretary of Housing and 
Urban Development and will make copies available to others upon 
request. In addition, the report will be available at no charge on the 
GAO Web site at [Hyperlink, http://www.gao.gov]. Please contact me at 
(202) 512-8678 if you or your staff have any questions concerning this 
report. Key contributors to this report are listed in appendix II.

Signed by: 

David G. Wood: 
Director, Financial Markets and Community Investment:

[End of section]

Appendixes:

Appendix I: Scope and Methodology:

To meet our objectives, we reviewed relevant laws and HUD guidance, 
analyzed HUD data, and interviewed officials from HUD's Office of 
Public and Indian Housing and Financial Management Center. We also 
visited five housing agencies to review financial documents related to 
their reserves and to interview staff involved in calculating the 
reserves. In addition, we interviewed officials from several housing 
industry associations and spoke with private-sector accountants these 
associations cited as experts in housing agency accounting. We did not 
perform a financial audit of the housing agencies' administrative fee 
reserves.

To determine the extent to which housing agencies reported to HUD their 
available administrative fee reserves as of January 31, 2003, we 
analyzed data from HUD showing all of the housing agencies that had 
reported their January 2003 reserves and the amounts they had reported. 
In addition, to compare the January 2003 reserves with reserves 
reported in prior fiscal years, we analyzed HUD data showing the 
fiscal-year-end reserves for the housing agencies participating in the 
Housing Choice Voucher Program in fiscal years 1999 to 2002. We 
reviewed the reliability of these data through electronic data testing 
and interviews with HUD staff familiar with the databases from which 
this information was extracted and determined that the data were 
sufficiently reliable for the purposes of our report. We also 
interviewed HUD officials from the Financial Management Center to 
confirm the number of housing agencies that had not reported their 
available reserves as of January 31, 2003. Because the January 2003 
reporting date did not coincide with any other reporting requirements 
HUD places on housing agencies, we could not validate the accuracy of 
the January 2003 reported reserves.

To determine how housing agencies calculated their reserves as of 
January 31, 2003, and the possible reasons for declines in the reported 
amounts, we selected 5 of the 10 housing agencies that had the largest 
differences between the average of their reserves reported for fiscal 
years 1999 to 2002 and the amount they reported as of January 
2003.[Footnote 20] To achieve some geographic distribution, we selected 
sites in both the eastern and western parts of the country. None of the 
10 housing agencies with the largest differences were located in the 
Midwest. The sites we selected were the Housing Authority of the City 
of Los Angeles (California), the Orange County Housing Authority 
(California), the Broward County Housing Authority (Florida), the 
Newark Housing Authority (New Jersey), and the New York City Housing 
Authority (New York).[Footnote 21] Prior to our site visits, we sent 
each housing agency a data collection instrument on which they 
documented how their reserves had changed from their last fiscal year 
end to the January 2003 reporting date. During our site visits, we 
obtained documentation to support the financial information recorded in 
the data collection instrument and interviewed housing agency officials 
involved in preparing financial information submitted to HUD. In 
addition, to determine why the January 2003 amounts might have been 
lower than previously reported amounts, we interviewed officials from 
HUD, the five housing agencies, and several public housing industry 
associations, as well as private-sector accountants working for housing 
agencies.

To determine the extent to which HUD reduced fiscal year 2003 
administrative fees in light of the reported January 2003 reserves, we 
obtained data from HUD showing all of the housing agencies subject to 
reductions and the estimated amount of those reductions. We reviewed 
the reliability of these data and determined that the data were 
sufficiently reliable for the purposes of our report. To assess HUD's 
processes and how they related to the legislation, we reviewed 
applicable legislation, HUD notices, and policies concerning 
administrative fees, as well as a contractor's analysis of HUD's 
process for determining which housing agencies were subject to a 
reduction in fees. We also interviewed HUD officials regarding the 
implementation of the process.

To determine the extent to which HUD recaptured excess fiscal year 2003 
administrative fees, we reviewed applicable legislation and HUD 
policies regarding the recapture process. In addition, we interviewed 
HUD officials regarding the implementation of the process.

We conducted our work from January through September 2004 in Los 
Angeles and Orange County, California; Broward County, Florida; 
Needham, Massachusetts; Newark, New Jersey; New York, New York; and 
Washington, D.C., in accordance with generally accepted government 
auditing standards.

[End of section]

Appendix II: GAO Contacts and Staff Acknowledgments:

GAO Contacts:

David G. Wood (202) 512-8678 Steven Westley (202) 512-6221:

Acknowledgments:

In addition to those named above, Daniel Blair, Christine Bonham, Emily 
Chalmers, Eben Darling, David Dornisch, John McGrail, Phillip McIntyre, 
Marc Molino, Gretchen Maier Pattison, and Mijo Vodopic made key 
contributions to this report.

(250188):

FOOTNOTES

[1] These 2,500 public housing agencies are among the more than 4,100 
housing agencies that administer federal housing programs on behalf of 
HUD.

[2] These provisions were unique to the 2003 Appropriations Resolution 
and were not included in previous or subsequent appropriations acts. 
Several public housing industry associations and public housing 
agencies have filed a lawsuit in federal district court against HUD 
concerning the administrative fee provisions in the 2003 resolution. 
The plaintiffs maintain that the administrative fee reserves are the 
property of the pubic housing agencies and that the appropriations 
provisions, by requiring the reduction and recapture of the fees earned 
in fiscal year 2003, are unconstitutional and violate both the 
contractual terms and the Administrative Procedure Act.

[3] Unless otherwise noted, "fiscal year" refers to the Housing Choice 
Voucher Program's fiscal year, which runs from January to December. 

[4] The agencies we visited were the Housing Authority of the City of 
Los Angeles (California), the Orange County Housing Authority 
(California), the Broward County Housing Authority (Florida), the 
Newark Housing Authority (New Jersey), and the New York City Housing 
Authority (New York).

[5] To achieve some geographic distribution, we selected sites in both 
the eastern and western parts of the country. None of the 10 housing 
agencies showing the largest differences were located in the Midwest.

[6] The Housing Choice Voucher Program was formerly referred to as the 
Section 8 Tenant-Based Program.

[7] Federal Register, Vol. 68, No. 87.

[8] The five housing agencies represented 0.02 percent of fees earned 
in fiscal year 2002. Therefore, these missing data probably had little 
effect on the total reserves reported as of January 2003. 

[9] Results from a judgmental sample cannot be used to make inferences 
about a population, because in a judgmental sample some elements of the 
population being studied have no chance or an unknown chance of being 
selected as part of the sample.

[10] None of the four fiscal year ending dates (March 31, June 30, 
September 30, and December 31) corresponds to the January 31, 2003 
reporting date required by the 2003 Appropriations Resolution.

[11] The 2003 resolution required housing agencies to report to HUD 
"the amounts remaining available as of January 31, 2003," in their 
administrative fee reserves (P.L. 108-7).

[12] The average total reserve is based on the sum of the reserves 
reported by housing agencies at the end of their fiscal years. 

[13] We did not determine the reasons for these increases in the course 
of our audit work.

[14] These fiscal year totals are the sum of the reserves housing 
agencies reported at the end of their fiscal years. 

[15] HUD regulations permitted housing agencies to use administrative 
fee reserves accumulated prior to 2004 for other housing purposes 
permitted by state or local law. The Consolidated Appropriations Act of 
2004 prohibited housing agencies from using administrative fees earned 
under the period covered by the act for purposes not related to the 
program. 

[16] The 2003 Appropriations Resolution did not require HUD to reduce 
the fees of any housing agency that earned less than $100,000 in 
administrative fees in fiscal year 2003. 

[17] Housing agencies receive a monthly disbursement from HUD to cover 
both their administrative fees and the housing assistance payments that 
the agencies pay to property owners on behalf of tenants in the Housing 
Choice Voucher Program.

[18] In January through August 2003, HUD disbursed fees according to 
housing agencies' existing budgets until they were revised in August 
2003.

[19] This process, which calculates the difference between actual fees 
earned and actual expenses incurred, differs from the regular fiscal-
year-end settlement process, which calculates the difference between 
the projection-based monthly disbursements and the actual fees earned 
based on voucher use. 

[20] Our sample was a judgmental sample, so our results cannot be used 
to make inferences about the population. In a judgmental sample, some 
elements of the population being studied have no chance or an unknown 
chance of being selected for the sample. 

[21] The other five housing agencies with the largest differences were 
the Housing Authority of the County of Santa Clara (California), the 
Oakland Housing Authority (California), the Housing Authority of the 
County of Tulare (California), the City and County of Honolulu 
(Hawaii), and the Boston Housing Authority (Massachusetts).

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