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entitled 'Project-Based Rental Assistance: HUD Should Streamline Its 
Processes to Ensure Timely Housing Assistance Payments' which was 
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Report to Congressional Requesters: 

November 2005: 

Project-Based Rental Assistance: 

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

GAO-06-57: 

GAO Highlights: 

Highlights of GAO-06-57, a report to congressional requesters: 

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 ownersí ability to pay operating expenses, 
make mortgage payments, or set aside funds for repairs. GAO was asked 
to discuss the timeliness of HUDís monthly housing assistance payments, 
the factors that affect 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 HUDís 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. HUDís 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 needs 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 billsósuch as utilities, telephone service, or pest controlóas 
a result of HUDís payment delays. Owners who are heavily reliant on 
HUDís subsidy to operate their properties are likely to be more 
severely affected by payment delays than other, more financially 
stable, 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 would be unlikely to cause an owner to 
leave HUDís housing assistance programs, because such a decision is 
generally driven primarily by local market factors. 

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

[See PDF for image] 

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

[End of figure] 

What GAO Recommends: 

GAO is making recommendations to the Secretary of HUD to improve the 
timeliness of housing assistance payments and mitigate the effects of 
delayed payments. Specifically, GAO recommends that HUD streamline and 
automate the contract renewal process to prevent errors and delays. GAO 
is also making other recommendations to improve HUDís monitoring of 
contract funding levels and notifying owners about late payments. 

HUD agreed with our conclusions and recommendations. 

www.gao.gov/cgi-bin/getrpt?GAO-06-57. 

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: 

Results in Brief: 

Background: 

HUD Made Three-fourths of Its Housing Assistance Payments On Time in 
Fiscal Years 1995 Through 2004: 

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

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

Conclusions: 

Recommendations for Executive Action: 

Agency Comments: 

Appendixes: 

Appendix I: Scope and Methodology: 

Appendix II: Comments from the Department of Housing and Urban 
Development: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Figures: 

Figure 1: Contract Administration Flowchart for HUD Multifamily Housing 
Assistance Payments

Figure 2: Timeliness of Housing Assistance Payments (Fiscal Years 1995 
Through 2004 Versus 2002 Through 2004)

Figure 3: Percentage of Payments That Were 2 Weeks or More Late (Fiscal 
Years 1995 Through 2004)

Figure 4: Percentage of Contracts Experiencing at Least 1 Payment 
Delayed by 2 Weeks or More (Fiscal Years 1995 Through 2004)

Figure 5: Percentage of Payments That Were 2 Weeks or More Late, by 
Contract Administrator (Fiscal Year 2004)

Figure 6: Percentage of PBCA-Administered Payments That Were 2 Weeks or 
More Late, by State (Fiscal Year 2004)

Figure 7: Percentage of Contracts Experiencing Chronically Late 
Payments, by State (Fiscal Years 2002 Through 2004)

Figure 8: Percentage of Payments That Were 2 Weeks or More Late, by 
Reason Code, Fiscal Years 2002 Through 2004, PBCA-and HUD-Administered 
Contracts

Figure 9: Contract Renewal Process for PBCA-Administered Contracts

Figure 10: Percentage of Contract Renewals Exceeding 120 Days to 
Process (Fiscal Years 2002 Through 2004)

Figure 11: Number of Contract Opt Outs (Fiscal Years 1995 Through 
2004): 

Abbreviations: 

BPR: Business Process Reengineering: 

HUD: Department of Housing and Urban Development: 

OMHAR: Office of Multifamily Housing Assistance Restructuring: 

MAHRA: Multifamily Assisted Housing Reform and Affordability Act of 
1997: 

PAS: Program Accounting System: 

PBCA: performance-based contract administrator: 

TRACS: Tenant Rental Assistance Certification System: 

Letter November 15, 2005: 

The Honorable Michael G. Oxley: 
Chairman: 
The Honorable Barney Frank: 
Ranking Minority Member: 
Committee on Financial Services: 
House of Representatives: 

The Honorable Bob Ney: 
Chairman: 
The Honorable Maxine Waters: 
Ranking Minority Member: 
Subcommittee on Housing and Community Opportunity: 
Committee on Financial Services: 
House of Representatives: 

The Department of Housing and Urban Development (HUD) provides rental 
assistance subsidies to privately owned, multifamily projects so that 
they are affordable to low-income households. In fiscal year 2004, HUD 
assisted approximately 1.6 million households through project-based 
rental assistance contracts, committing about $4.4 billion to fund 
these contracts with property owners. Owners rely on these subsidies 
from HUD, often to a great extent, to pay for daily 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 1st 
business day of the month. 

Project owners, and various associations representing them, have 
expressed concern that HUD has been late in paying some owners their 
monthly subsidy and that late payments to owners have become a chronic 
problem in recent years. According to some owners, late payments can 
lead them to defer maintenance, miss payments on monthly utility bills, 
or risk default on their mortgages. Furthermore, late payments might 
influence owners to "opt out" of HUD's rental assistance programs when 
their contracts with HUD expire, potentially resulting in a reduction 
of affordable housing units for low-income households. 

You asked us to review the effects that late housing assistance 
payments may have on project owners and the availability of affordable 
housing. Our report discusses (1) the extent to which HUD makes monthly 
housing assistance payments in a timely manner, (2) the factors that 
affect the timeliness of the payments, and (3) the effect(s) that 
payment delays have on project owners and their willingness to continue 
providing affordable housing. 

To determine the extent to which HUD's housing assistance payments are 
timely--that is, disbursed by the 1st business day of the month for 
most contracts--we analyzed 10 years (fiscal years 1995 through 2004) 
of HUD's monthly payment data. We analyzed trends in these data to 
determine whether payment timeliness changed over time and whether 
there were differences in payment timeliness by the type of contract 
administrator (i.e., whether HUD staff or contractors processed monthly 
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 in fiscal years 2002 through 
2004) that captured the reasons particular payments were delayed. We 
supplemented our analyses by interviewing HUD officials from 
headquarters and eight field offices (which were selected to represent 
a range of experiences by state--those with high and low percentages of 
late payments), 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 are 
currently receiving assistance from HUD. At the HUD field offices where 
we did site visits, we interviewed project owners and contract 
administrators to determine (1) the reasons owners opted out of HUD's 
programs, (2) the extent to which delayed housing assistance payments 
may have factored into this decision, and (3) what other effects (e.g., 
financial difficulties) payment delays had on project owners. We also 
discussed these issues with HUD and officials from eight industry 
associations representing property owners. We conducted our work 
between October 2004 and September 2005 in Baltimore, Maryland; Boston, 
Massachusetts; Chicago, Illinois; Des Moines, Iowa; Kansas City, 
Kansas; Kansas City, Missouri; Los Angeles, California; Manchester, New 
Hampshire; Seattle, Washington; and Washington, D.C., in accordance 
with generally accepted government auditing standards. Appendix I 
provides additional details on our scope and methodology. 

Results 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. 
For this 10-year period, HUD disbursed 89 percent of these monthly 
payments either on time or less than 1 week late. However, 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 1 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, or 
delayed by 2 weeks or more. Timeliness also varied depending on the 
type of administrator responsible for processing the payments. In 
fiscal year 2004, payments administered by HUD staff were more likely 
to be late, while payments on contracts administered by performance-
based or traditional (nonperformance-based) contract administrators 
were more likely to be on time. Timeliness also varied by state, based 
on our analysis of fiscal year 2004 data. 

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. First, 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, according to HUD officials, property owners, and 
contract administrators. Our analysis of available HUD data on the 
reasons for some late payments in fiscal years 2002 through 2004 found 
that the most common reason for payments that were 2 weeks or more late 
was that the payment was 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 result from the failure to have in place a renewal when a 
contract reaches its expiration date. The timeliness, quality, and 
completeness of owners' renewal submissions could also cause delays in 
contract renewals, particularly when an owner's initial contract 
expires and it must be renewed for the first time. Second, various 
aspects of HUD's internal funding process may contribute to late 
payments. HUD does not know exactly how much it will pay owners each 
year because the amounts vary with tenant turnover, so HUD estimates 
how much funding it needs to obligate, or commit, to each contract and 
how quickly the contract will use these funds. However, HUD often 
underestimates how much funding a contract will need in a given year, 
and the agency lacks consistent processes for field office staff to 
monitor contracts and allocate and obligate additional funds when 
contracts use funds faster than anticipated. Failure to allocate and 
obligate additional funds to contracts promptly can cause payments to 
be late. Finally, according to HUD officials and contract 
administrators, owners' untimely, inaccurate, or incomplete monthly 
voucher submissions may also 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 have 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 had incurred late 
fees on their mortgages and other bills or had 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. For 
example, a nonprofit owner of a single, fully subsidized property 
(i.e., where all units receive a HUD subsidy) may have more difficulty 
paying the mortgage or other bills for maintenance of the property than 
would an owner with several properties that have a mix of market rate 
and subsidized units. HUD allows owners to withdraw funds from their 
replacement reserves (funds required to be set aside for future 
property repair and capital improvements) to help cover operating 
expenses when housing assistance payments are delayed. However, some 
properties may not have sufficient reserves to cover such expenses. 
Furthermore, 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. They cited market 
factors, such as an owner's ability to obtain higher rents outside of 
HUD programs, as the primary reason owners might opt out. Most of the 
owners with whom we spoke stated that they would not opt out of HUD's 
programs, because they are committed to providing affordable housing. 

This report contains specific recommendations to the Secretary of HUD 
to reduce payment delays associated with contract renewals, to better 
estimate and monitor contract funding levels, and to notify owners 
about late payments. We provided HUD with a draft of this report for 
its review and comment. HUD concurred with our conclusions and 
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. In some cases, HUD subsidized 
the construction of the housing (or substantial rehabilitation of 
existing properties) through means such as discounted mortgages insured 
by HUD's Federal Housing Administration; in others, such as the Section 
202 Supportive Housing for the Elderly Program, HUD provided grants to 
construct the housing. 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 1] 

* Second, in 1997, Congress passed the Multifamily Assisted Housing 
Reform and Affordability Act (MAHRA), as amended, in an effort, among 
other things, to ensure that the rents HUD subsidizes remain comparable 
with market rents.[Footnote 2] 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 
3] 

* 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. These performance-based contract 
administrators (PBCA) now administer the majority of contracts--over 
13,000 of approximately 23,000 contracts in fiscal year 2004. 

According to HUD officials, the department has not yet transferred all 
of its rental assistance contracts to the PBCAs. HUD plans to have 
traditional, or nonperformance-based contractors, continue to 
administer the approximately 5,000 contracts that they were 
administering until these contracts expire; at which time, these 
contracts will be assigned to the PBCAs. The traditional contract 
administrators are, often, local public housing authorities handling a 
very limited number of contracts. HUD itself also administers the 
contracts under certain programs, such as the Section 202 Supportive 
Housing for the Elderly Program and the Section 811 Supportive Housing 
for Persons with Disabilities Program. HUD announced in April 2004 that 
it was conducting a competitive sourcing effort to determine the most 
efficient and cost-effective means to administer some of these 
contracts. At the conclusion of this effort, HUD will seek new budget 
authority to pay for contract administration services. Consequently, 
while the PBCAs handle most of HUD's project-based housing, three types 
of administrators are involved in day-to-day program oversight and 
administration, including tasks involved in processing monthly housing 
assistance payments. 

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 (see fig. 1). 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. 

Figure 1: Contract Administration Flowchart for HUD Multifamily Housing 
Assistance Payments: 

[See PDF for image] 

[A] HUD is responsible for verifying vouchers submitted under HUD-
administered contracts, not PBCA-administered and traditionally 
administered contracts. 

[B] Unlike PBCA-administered contracts, for traditionally administered 
contracts HUD pays the contract administrator a fixed monthly payment 
on the basis of an annual budget, rather than monthly voucher amounts. 
Payments are reconciled at the end of the year. 

[End of figure] 

HUD has an ongoing effort to improve its rental assistance programs' 
business processes and make better use of information technology 
related to those programs. In 2004, HUD launched a Business Process 
Reengineering (BPR) initiative to, among other things, improve 
inefficient and redundant processes, as identified by HUD's contractor 
for this effort, and to integrate HUD's data systems. HUD expects its 
contractor to identify its recommended changes by June 2006. According 
to HUD officials, HUD does not currently have the funding in place to 
implement the BPR. 

HUD Made Three-fourths of Its Housing Assistance Payments On Time in 
Fiscal Years 1995 Through 2004: 

Between fiscal years 1995 and 2004, HUD disbursed three-fourths of its 
monthly housing assistance payments by the due date, but thousands of 
payments each year were late, affecting many property owners.[Footnote 
4] For this 10-year period, about 8 percent of all payments were 
delayed by 2 weeks or more, a time frame we characterize as 
significant. On average, about one-third of housing assistance 
contracts experienced at least 1 payment per year that was delayed by 2 
weeks or more. Furthermore, the timeliness of housing assistance 
payments has varied, with a decrease in 1998, but with a gradual 
improvement since 2001. Timeliness also varied by type of contract 
administrator, with payments for HUD-administered contracts more likely 
to be late, based on our analysis of fiscal year 2004 payment data. 
Timeliness varied considerably by state as well. 

Over a 10-Year Period, 75 Percent of HUD's Payments Were On Time, but 8 
Percent Were Significantly Late: 

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. 2). 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 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 2: Timeliness of Housing Assistance Payments (Fiscal Years 1995 
Through 2004 Versus 2002 Through 2004): 

[See PDF for image] 

Note: Percentages do not add to 100 percent due to rounding. Data 
include HUD-administered, PBCA-administered, and traditionally 
administered contracts. 

[End of figure] 

HUD does not have an overall timeliness standard by which it makes 
payments to owners or its contract administrators, 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 1st business day of the month. HUD officials said that 
they also use this standard informally to determine the timeliness of 
payments on HUD-administered and traditionally administered 
contracts.[Footnote 5] Therefore, we considered payments to be timely 
if they were disbursed by the 1st 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 Payments Has Varied over a 10-Year Period: 

The timeliness of housing assistance payments over the 10-year period 
(fiscal years 1995 through 2004) has shown some variation (see fig. 3). 
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 
has gradually improved since 2001, shortly after HUD first began using 
the PBCAs to administer contracts. 

Figure 3: Percentage of Payments That Were 2 Weeks or More Late (Fiscal 
Years 1995 Through 2004): 

[See PDF for image] 

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

[End of figure] 

The percentage of contracts experiencing significantly late payments 
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. 4). 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 1 payment per year that was delayed by 2 
weeks or more. 

Figure 4: Percentage of Contracts Experiencing at Least 1 Payment 
Delayed by 2 Weeks or More (Fiscal Years 1995 Through 2004): 

[See PDF for image] 

Note: Ten-year average: 32 percent. 

[End of figure] 

Although HUD data showed a gradual decline in the percentage of late 
payments and the number of contracts affected by late payments, in the 
most recent 3-year period (fiscal years 2002 through 2004), the 
percentage of payments that were 2 weeks or more and 4 weeks or more 
late was nearly as high (7 percent and 5 percent) as over the 10-year 
period (see fig. 2). 

The Timeliness of Payments Varied Based on the Type of Contract 
Administration: 

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. 5). 

Figure 5: Percentage of Payments That Were 2 Weeks or More Late, by 
Contract Administrator (Fiscal Year 2004): 

[See PDF for image] 

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 do 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] 

Payments on PBCA-and HUD-administered contracts have more elaborate 
monthly processing requirements than do the payments on traditionally 
administered contracts that HUD processes. Payments on PBCA-and HUD-
administered contracts require that the monthly vouchers be reviewed 
and processed by a PBCA or HUD field office before a payment is 
approved. As previously noted, for traditionally administered 
contracts, HUD creates an annual budget, amortizes the budget over 12 
payments for the year, disburses the set monthly payments, and makes 
any necessary adjustments through a year-end settlement based on 
voucher information submitted to the traditional contract 
administrators. 

The percentage of chronically late payments also varied by contract 
administrator.[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. 

Payment Timeliness Also Varied by State: 

We analyzed HUD's payment data by state and found that timeliness 
varied considerably for both PBCA-and HUD-administered contracts, 
although the reasons for this variation are not clear. The percentage 
of payments on PBCA-administered contracts that were 2 weeks or more 
late in fiscal year 2004 ranged from 1 percent in North Dakota to 13 
percent in the District of Columbia (see fig. 6). With some exceptions, 
a single PBCA administers all of the PBCA-administered contracts for a 
single state. However, late payments may be attributable to a number of 
factors, and the HUD payment data do not provide an explanation for the 
variations among the states. 

Figure 6: Percentage of PBCA-Administered Payments That Were 2 Weeks or 
More Late, by State (Fiscal Year 2004): 

[See PDF for image] 

[End of figure] 

For HUD-administered contracts, 19 states had 15 percent or more of 
their payments that were 2 weeks or more late in 2004. The percentage 
of payments 2 weeks or more late ranged from 2 percent in North Dakota 
to 35 percent in Wyoming. Again, the HUD payment data do not provide an 
explanation for the state variation in payment delays. 

The percentage of contracts that experienced chronic late payments also 
varied by state. In fiscal years 2002 through 2004, 17 percent of the 
contracts in Delaware and 13 percent in Connecticut and the District of 
Columbia had 6 or more payments per year that were 2 weeks or more late 
(see fig. 7). In contrast, less than 3 percent of contracts in most 
states had chronic late payments. 

Figure 7: Percentage of Contracts Experiencing Chronically Late 
Payments, by State (Fiscal Years 2002 Through 2004): 

[See PDF for image] 

[End of figure] 

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

The contract renewal process, HUD's internal processes for funding and 
monitoring contracts, and owners' erroneous or untimely voucher 
submissions affected payment timeliness. For instance, owners were more 
likely to receive late monthly payments when their contracts with HUD 
had not been renewed by their expiration dates. Moreover, HUD's process 
of estimating how much funding it needs to obligate to contracts; HUD's 
inconsistent approach to monitoring contracts to determine when 
additional funding should be obligated; and lack of staff access to, 
and training on, HUD payment databases also may have affected the 
timeliness of housing assistance payments. Additionally, HUD's 
interpretation of legislative restrictions on its ability to use 
recaptured funds may have exacerbated payment delays. Finally, owners' 
erroneous or untimely submissions of monthly vouchers could have caused 
some of the untimely payments from HUD. 

Payment Delays Were More Likely When a Contract Renewal Was Pending: 

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 shows 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. 8).[Footnote 7] 

Figure 8: 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] 

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 includes 
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 does not collect data on the reasons for delays. 

[End of figure] 

A contract renewal may be "pending" when one or more parties involved 
in the process--HUD, the PBCA, or the owner--have not completed the 
necessary steps to finalize the renewal. Based on our interviews with 
HUD officials, contract administrators, and owners, pending contract 
renewals may result from owners' failing to submit their renewal 
packages on time. Often the delay occurs when owners must submit a 
study of market rents, completed by a certified appraiser, in order to 
determine the market rent levels. However, late payments associated 
with contract renewals may also occur because HUD has 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 itself also may take longer than 
expected, contributing to late housing assistance payments, because the 
process is largely manual and paper driven and requires multiple staff 
in the PBCAs and HUD to complete (see fig. 9). Upon receipt of renewal 
packages from owners, the PBCAs then prepare and forward signed 
contracts (in hard copy) to HUD field offices, which execute the 
contracts; in turn, the field offices send hard copies of contracts to 
a HUD accounting center, which activates contract funding. In order to 
allow sufficient time to complete the necessary processing, HUD's 
policy currently requires 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 of the owners with whom we spoke 
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 9: Contract Renewal Process for PBCA-Administered Contracts: 

[See PDF for image] 

[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 represents the first 
time that owners have to provide HUD with the extensive documentation 
required for contract renewals in order to continue receiving housing 
assistance payments. Our analysis of the most recent 3 years of HUD 
data (fiscal years 2002 through 2004) shows that while 25 percent of 
initial contract renewals exceeded the 120-day processing time frame 
set by HUD, 17 percent of subsequent renewals exceeded that time frame, 
as shown in figure 10. Increased timeliness on subsequent renewals 
might be explained partly by owners' gaining competency--that is, the 
PBCAs and owners described a "learning curve" when owners renewed their 
contracts for the first time. 

Figure 10: Percentage of Contract Renewals Exceeding 120 Days to 
Process (Fiscal Years 2002 Through 2004): 

[See PDF for image] 

Note: HUD allows 120 days to process renewals. 

[End of figure] 

The processing times for contract renewals that HUD's data show do not 
include some interactions between the PBCAs and owners. More 
specifically, HUD's data systems capture the dates on which it receives 
completed renewal packages from the PBCAs, but do not capture the dates 
for earlier steps in the process. For instance, the data systems do not 
capture the dates when owners initially submit renewal packages to the 
PBCAs and, thus, the amount of time it may take the PBCAs and owners to 
go "back and forth" to assemble completed packages. 

According to our analysis, the processing time for the contract 
renewals also was likely to exceed HUD's 120-day standard when owners 
chose or were subject to one of two options at their initial renewals. 
First, for properties with contract rents lower than comparable market 
rents, owners had the option to request contract renewals under the 
"mark-up-to-market" option, which required (1) owners to obtain an 
appraiser's determination of comparable market rents and (2) HUD to 
reassess the contract rents in order to raise them to applicable market 
level rents. For fiscal years 2002 through 2004, 60 percent of the 471 
contract renewals using the mark-up-to-market option took more than the 
expected 120 days. Second, for expiring contracts with rents higher 
than comparable market rents, contract administrators referred the 
owners to HUD's Office of Multifamily Housing Assistance Restructuring 
(OMHAR), a process that can lead to rents in renewed contracts that are 
lower than those in the expiring contracts (the "mark-to-market" 
option).[Footnote 8] For fiscal years 2002 through 2004, 56 percent of 
the 1,276 contract renewals referred to OMHAR to reduce rents--and, in 
many cases, to restructure the property owners' debt--took more than 
the expected 120 days to process. 

Recognizing that contract renewal is lengthy and cumbersome, HUD's goal 
is to automate the renewal process and reduce the 120-day time frame 
through a BPR effort for its rental assistance programs. HUD launched 
this initiative in 2004 to, among other things, develop plans to 
improve what it characterizes as "inefficient or redundant processes" 
and to integrate data systems. For example, according to a senior HUD 
official, the department's goal is to automate the entire contract 
renewal process by 2007, eliminating the need for HUD and owners to 
physically sign the contracts. According to HUD officials, this effort 
would eventually include a more streamlined and automated contract 
renewal process. However, this effort is in its early stages, and is 
currently not focused on streamlining the contract renewal process or 
addressing the problem of late housing assistance payments. HUD does 
not have concrete plans regarding how it will accomplish these goals, 
nor does it have funding in place to implement any of the 
recommendations the reengineering effort might develop. 

HUD's Difficulties in Assessing Rate of Funding Use and Monitoring 
Funding Levels May Have Affected Timeliness of Housing Assistance 
Payments: 

The methods HUD uses to estimate the amount of funds needed for the 
term of each of its project-based assistance contracts and the way it 
monitors the funding levels on those contracts may also affect the 
timeliness of housing assistance payments. When HUD renews a contract, 
and when it obligates[Footnote 9] 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. However, those estimates are 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 will affect 
the rate at which a contract exhausts its funds, potentially causing 
the contract to need additional funds obligated to it before the end of 
the year. If HUD underestimates the subsidy payments, the department 
needs to allocate more funds to the contract and adjust its obligation 
upwards to make all of the monthly payments. 

Throughout the year, HUD headquarters uses a "burn-rate calculation" to 
monitor the rate at which a contract exhausts or "burns" the obligated 
funds and to identify those contracts that may have too little (or too 
much) funding. According to some HUD field office and PBCA officials, 
they also proactively monitor contract fund levels. Based on the rate 
at which a contract exhausts its funds, HUD obligates 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 8, our analysis of HUD's 
payment data shows 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 contributing to payment delays related to 
obligating contract funding is likely that staff at some HUD field 
offices--unlike their counterparts in other field offices and staff at 
some of the PBCAs--did not have access to data systems or were not 
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. For example, one field office official told us 
that he needed access to one of HUD's accounting data systems to more 
accurately monitor contract funding. According to this official, he 
requested "read-only" access to this system, which requires a security 
clearance, but never received information on the status of his 
application from HUD headquarters. HUD field offices reported, and 
headquarters confirmed, that some field officials have not received 
training to carry out some functions critical to monitoring the burn 
rate. One field office official reported that none of the staff in her 
office had received training in a payment processing database, which is 
critical for monitoring the status of monthly payments. A HUD 
headquarters official reported that changes in the agency's workforce 
demographics posed challenges because not all of the field offices have 
staff with an optimal mix of skill and experience. 

According to a senior HUD official, HUD's BPR is intended to provide a 
systematic, agencywide solution to the contract funding issues that 
field office officials have been trying to address on an ad hoc basis 
to prevent payment delays. If this effort successfully addresses 
contract funding monitoring agencywide through automation, as this 
official suggested, HUD may not have to rely solely on the intervention 
of its field officials. 

HUD's Interpretation of Legislative Restrictions on Its Ability to Use 
Recaptured Funds May Have Exacerbated Payment Delays: 

Prior to fiscal year 2003, HUD used funds that it had recaptured from 
some contracts to augment other contracts that required additional 
funds.[Footnote 10] Based on HUD's interpretation of its appropriations 
acts for fiscal years 2003 and 2004, the agency determined that 
recaptured funds were not available in those years to fund contract 
amendments.[Footnote 11] According to HUD officials, this made it 
difficult to budget for amendments in those years and could have 
affected the timeliness with which HUD funded some contracts and made 
related housing assistance payments. HUD's fiscal year 2005 
appropriation specifically authorized the use of recaptured funds for 
contract amendments.[Footnote 12] 

According to HUD headquarters officials, operating under a continuing 
resolution rather than an appropriation should not affect the 
timeliness of housing assistance payments.[Footnote 13] According to 
HUD budget officials, under a continuing resolution, HUD has funding 
available to meet its contractual obligations to pay project owners 
and, if need be, to renew rental assistance contracts.[Footnote 14] 

Owners' Untimely, Inaccurate, or Incomplete Submissions May Have 
Affected the Timeliness of Housing Assistance Payments: 

The PBCAs with which we met estimated that 10 to 20 percent of owners 
submit 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, there 
are often several "back-and-forth" interactions with owners to resolve 
errors or inaccuracies. Typical owner submission errors include failing 
to account correctly for changes in the number of tenants or tenant 
income levels, or failing to provide required documentation. As we 
previously noted, because HUD's data systems do 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 may also be affected by a PBCA's own 
internal policies for addressing owner errors. For example, in order to 
prevent payment delays, some of the PBCA officials with whom we spoke 
told us that they often process 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 will not process an 
owner's voucher for payment unless it fully meets all of HUD's 
requirements. 

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

HUD's payment delays have had negative financial effects on project 
owners, but they are unlikely to result in owners opting out of HUD's 
programs. Owners with whom we spoke reported that they have incurred 
late fees on their mortgages and other bills and have had difficulty 
operating their properties as a result of payment delays. The severity 
of the effects depended on the financial condition of the property 
owner and the extent to which the owner relied on HUD's subsidy to make 
the mortgage payment and operate the property. HUD did not notify 
owners when payments would be late, and owners said that this lack of 
notice exacerbated the effect of late payments. However, delayed 
payments alone were unlikely to result in opt outs, although they could 
have been a contributing factor, according to owners as well as 
officials from industry groups and HUD. Finally, our analysis of HUD 
payment data indicated that there was little difference in payment 
delays between properties that have opted out of, and those that still 
participate in, HUD's programs. 

Some Owners Report Difficulties in Paying Mortgages and Other Bills and 
Operating Their Properties as a Result of Payment Delays: 

Some owners report that they have not been able to pay their mortgages 
or other bills on time as a result of HUD's payment delays.[Footnote 
15] 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 reported having paid $4,000 in late fees to a 
utility company because she was unable to pay the bill on time. 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. For example, the pest control and plumbing vendors 
would continue to provide services only if they received cash in 
advance. This owner also expressed concern about how the late and 
partial payments to vendors would affect her credit rating. Industry 
groups with whom we spoke also raised concerns about their members' 
inability to pay mortgages and other bills when HUD's housing 
assistance payments were delayed. 

If owners are unable to pay their vendors or their staff, services to 
the property and the condition of the property could suffer. At one 
affordable housing project 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. 

Effects of Delayed Payments on Owners Varied Based on Several Factors, 
Particularly the Owners' Financial Condition and Degree of Reliance on 
HUD's Subsidy: 

According to owners as well as industry group and HUD officials, owners 
who are heavily reliant on HUD's subsidy to operate their properties 
are more severely affected by payment delays than other owners. 
Particularly, owners who own only one or a few properties and whose 
operations are completely or heavily reliant on HUD's subsidies have 
the most difficulty weathering a delay. 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 3 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. For example, 
representatives of 2 of the owners stated that they did not have to 
take any measures to address delays in housing assistance. One owner is 
an investment firm for a pension fund that maintains a large portfolio 
of mostly market rate properties. According to a representative of the 
firm, delayed housing assistance payments had not caused financial 
difficulties, but the delay had presented accounting difficulties for 
the firm. The other owner is a nonprofit with several properties. 
According to a representative of the owner, the rents paid by the 
residents of all of the properties were a larger part of the 
nonprofit's revenue than the HUD subsidy, so the nonprofit was not 
negatively affected by an occasional delay in housing assistance 
payments. 

HUD allows owners to borrow from their reserve accounts to help 
mitigate the effects of delayed housing assistance payments, but some 
owners either do not have reserves or their reserves are not sufficient 
to cover the period of the delay. HUD requires HUD-insured properties 
and properties with HUD-held mortgages to set aside funds in a reserve 
account, which is designed primarily to help fund capital improvements 
on the properties. HUD also allows owners to withdraw funds from this 
account in the event of HUD's payment delays, so that owners are able 
to make their mortgage payments. However, properties that are not 
insured by HUD and do not have a HUD-held mortgage may not have a 
reserve account, and, according to HUD and industry group officials, 
owners with small or newer properties may not have sufficient reserves 
to cover delays. Even if the reserves were sufficient, industry group 
officials have pointed out that owners might have to defer capital 
improvements during payment delays, and also lose interest that they 
would otherwise accrue in the reserve account. Some projects also have 
a residual receipts account from which owners may borrow. HUD requires 
nonprofits and limited dividend multifamily projects that are HUD-
insured or have a HUD-held mortgage to maintain a residual receipts 
account for monies beyond the owner's maximum allowable distribution or 
profit.[Footnote 16] 

Lack of Notice about Payment Dates and Lengths of Delays Has 
Exacerbated Problems for Owners: 

HUD has no system for notifying owners when a payment delay will occur 
or when it will be resolved, which industry associations representing 
many owners as well as the owners with whom we met indicated impedes 
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. 

Delayed Housing Assistance Payments Were Unlikely to Cause Owners to 
Opt Out of HUD's Programs or Discontinue Involvement in Providing 
Affordable Housing: 

Project owners, industry group officials, contract administrators, and 
HUD officials we interviewed generally agreed that market factors 
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. In previous work, we reported that financial and market 
considerations were factors likely to affect owners' decisions to opt 
out of HUD's programs.[Footnote 17] 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. 

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 are "mission driven," 
or committed to providing affordable housing. 

According to some owners with whom we spoke, owners have accepted 
payment delays as the price of doing business with HUD. However, 
industry group and HUD officials stated that delayed payments could be 
a contributing factor in some opt outs. According to HUD officials, 
owners with primarily market rents in their buildings were more likely 
to opt out because the owners felt that the rents from subsidized units 
were not worth the burden of HUD's documentation and reporting 
requirements. Only 1 (a real estate investment firm for a pension fund) 
of the 16 owners we interviewed stated that the firm would opt out of 
HUD programs if the payment delays were longer. According to 
representatives of this firm, their company has a fiduciary 
responsibility to the pension fund. If they began losing money on their 
affordable housing projects, they would have to sell them. 

Our analysis of HUD's monthly payment data for fiscal years 1995 
through 2004 revealed little difference in the percentage of late 
payments for those contracts that opted out and those still 
participating in HUD's programs (9.6 percent and 9.2 percent, 
respectively). In addition, we found that over the 10-year period, 
1,764 housing assistance contracts out of the 13,051 that were eligible 
to do so opted out of HUD's programs. These opt outs represented 1,460 
affordable housing projects (a project may have more than 1 contract, 
hence the number of contracts exceeds the number of projects). The 
number of contracts opting out over this period peaked in fiscal year 
1998, with 392 contracts opting out, and gradually declined to 54 in 
fiscal year 2004 (see fig. 11). 

Figure 11: Number of Contract Opt Outs (Fiscal Years 1995 Through 
2004): 

[See PDF for image] 

Note: Ten-year total: 1,764. 

[End of figure] 

The number of opt outs likely declined after the passage of MAHRA and 
HUD's subsequent efforts to preserve affordable housing by allowing 
owners to increase the contract rents with HUD to market rates, thereby 
making it more financially viable for owners to continue participating 
in HUD's programs. 

Conclusions: 

HUD plays an important role in ensuring the continued availability of 
affordable housing by providing subsidies to owners of multifamily 
rental properties and encouraging owners to remain in its programs. 
Over the 10-year period we examined, HUD made most payments on time--
that is, by the 1stbusiness day of the month. However, a significant 
percentage of HUD's payments were late. The delays, particularly those 
of 2 weeks or more, can cause financial hardships for property owners. 
For example, the subsidies not only help pay mortgages, but also the 
daily operating expenses of many owners. In retrospect, new 
requirements under MAHRA and the transition to a new system of contract 
administration likely increased delays, particularly in the late 1990s. 
The initial difficulties in implementing MAHRA requirements have 
abated, and HUD largely has completed the transition to performance-
based contract administration. However, while the timeliness of housing 
assistance payments has improved in recent years, the number of 
significantly late payments remains a concern. 

Although HUD has made changes to improve contract administration, it 
has not comprehensively addressed the factors that most affect the 
timeliness of payments--that is, its contract renewal and contract 
funding and monitoring processes. HUD has recognized that its contract 
renewal process is cumbersome and inefficient and wants to cut contract 
processing time as one goal of a broader BPR effort. However, that 
effort has just gotten under way and currently is not closely focused 
on the housing assistance payment process. As a result, if HUD were to 
rely solely on the reengineering effort, it would miss opportunities to 
effect more immediate improvements to the processing of contract 
renewals. In addition, HUD effectively could prevent many delayed 
payments by better estimating the amounts it needs to obligate to 
contracts each year, more systematically monitoring contract funding 
levels on an ongoing basis, and promptly allocating and obligating 
additional funding to contracts when necessary. Currently, while 
contract funding needs can increase for unforeseen reasons, HUD often 
underestimates how much funding a contract will need when it obligates 
funds at the beginning of a year. Furthermore, HUD's existing 
monitoring has not prevented payment delays associated with contracts 
needing additional funding obligated in order for HUD to pay the owner. 

As previously noted, HUD has opportunities to improve its contract 
processes and avoid the often damaging disruptions late payments could 
cause. While project owners and industry groups have indicated that 
late housing payments alone would not lead them to opt out of HUD 
programs, late housing assistance payments have serious consequences 
for owners and potentially for the residents they serve. But, HUD also 
has opportunities to mitigate the effects of payments that it cannot 
make on time. More specifically, if HUD were to notify project owners 
of delays and their likely duration, owners could make contingency 
plans or otherwise address the delayed payments. 

Recommendations for Executive Action: 

To improve the timeliness of housing assistance payments and mitigate 
the effects on owners when payments are delayed, we recommend that the 
Secretary of Housing and Urban Development take the following three 
actions: 

* streamline and automate the contract renewal process to prevent 
processing errors and delays and eliminate paper/hard-copy requirements 
to the extent practicable; 

* 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 are promptly obligated to 
contracts when necessary to prevent payment delays; and: 

* notify owners if their monthly housing assistance payments will be 
late and include in such notifications the date by which HUD expects to 
make the monthly payment to the owner. 

Agency Comments: 

We provided a draft of this report to HUD for its review and comment. 
In a letter from the Assistant Secretary for Housing, Federal Housing 
Commissioner (see app. II), HUD stated that it concurred with our 
conclusions and agreed that the implementation of our recommendations 
would improve payment timeliness. Specifically, HUD agreed to review 
its process for renewing and amending rental assistance contracts to 
identify areas that can be streamlined and automated. HUD also agreed 
that developing a more systematic means to estimate contract funding 
needs would further improve payment timeliness. HUD stated that it has 
obtained a contractor to determine how to improve its system of 
estimating contract funding needs. Additionally, HUD agreed that 
notification to owners when payments will be late is desirable and that 
it will examine the feasibility of providing such notification. 

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
after the date of this letter. At that time, we will send copies of 
this report to the Chairman and Ranking Minority Member, Senate 
Committee on Banking, Housing, and Urban Affairs, and the Chairman and 
Ranking Minority Member of its Subcommittee on Housing and 
Transportation. We will also send copies to the Secretary of Housing 
and Urban Development and the Director of the Office of Management and 
Budget. We will make copies available to others upon request. The 
report will also be available at no charge on GAO's Web site at 
http://www.gao.gov. 

Please contact me at (202) 512-8678 or [Hyperlink, woodd@gao.gov] if 
you or your staff have any questions about this report. Contact points 
for our Offices of Congressional Relations and Public Affairs may be 
found on the last page of this report. Key contributors to this report 
are listed in appendix III. 

Signed by: 

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

[End of section] 

Appendixes: 

Appendix I: Scope and Methodology: 

To determine the extent to which the Department of Housing and Urban 
Development's (HUD) housing assistance payments are timely, we obtained 
from HUD and analyzed 10 years of monthly payment data (fiscal years 
1995 through 2004). We identified the timeliness of each payment within 
HUD's data systems by comparing the date that the U.S. Treasury 
disbursed the payment with the date that the payment was due--the 1st 
business day of the month. We did not look at the dollar amount of 
these payments. For contracts administered by performance-based and 
traditional (or nonperformance-based) administrators, the Treasury 
payment is disbursed to the administrator, which in turn makes payments 
to the project owners. In contrast, for HUD-administered contracts, the 
Treasury disburses payments directly to the owners. 

We analyzed trends in timeliness over the 10-year period as well as the 
most recent 3-year period (fiscal years 2002 through 2004) for a more 
current picture of payment timeliness. We also calculated the 
percentage of payments that had various degrees of lateness (such as 1 
to 6 days or 4 weeks or more). For fiscal year 2004, we compared 
timeliness for payments processed by the different types of contract 
administrators involved in this process (i.e., HUD field offices, 
performance-based contract administrators (PBCA), and traditional 
contract administrators, for which the HUD Financial Management Center 
processes payments). We limited our analysis to fiscal year 2004 
because the data we obtained from HUD do not allow us to identify for 
prior fiscal years which type of contract administrator was responsible 
for each contract, and, over the course of these years, HUD was in the 
process of transferring contract administration responsibilities to the 
PBCAs. To better understand the payment process, we interviewed 
officials from both HUD's Office of Multifamily Housing and HUD's 
Financial Management Center and reviewed relevant documentation on the 
payment process. 

We used various HUD databases to analyze the timeliness of housing 
assistance payments. Specifically, we used data from HUD's Program 
Accounting System (PAS) for payments on contracts administered by HUD 
and the PBCAs and data from the HUD Central Accounting and Program 
System for contracts administered by nonperformance-based contract 
administrators (traditionally administered contracts). We also used 
these data to determine the percentage of significantly late payments 
(i.e., 2 weeks or more late), including the distribution by type of 
contract administrator. We also used the PAS data to analyze 
differences in payment timeliness by state for PBCA-and HUD-
administered contracts. 

In order to assess the reliability of the data previously described, we 
reviewed related documentation and interviewed agency officials who 
work with these databases. In addition, we performed internal checks to 
determine the extent to which the data fields were populated and the 
reasonableness of the values contained in the fields. During our 
internal checks, we excluded from our analysis 7 percent of the 
payments recorded in PAS due to unreasonable values for the payment 
date. We concluded that the data we used were sufficiently reliable for 
the purposes of this report. 

To determine the factors that affect the timeliness of HUD's housing 
assistance payments, we interviewed HUD headquarters officials 
responsible for managing and budgeting for the project-based assistance 
contracts and payments as well as officials from industry groups 
representing a variety of property owners and management agents. We 
also conducted site visits to eight locations that we selected by 
including those with high and low percentages of late 
payments.[Footnote 18] For these site visits, we interviewed the 
relevant field office officials involved in processing housing 
assistance payments, renewing housing assistance contracts, and 
conducting oversight of the PBCAs. We interviewed officials of the 
PBCAs for each of the states we visited.[Footnote 19] In each of the 
eight locations, we also interviewed 2 project owners with some 
experience with payment delays. We randomly selected 15 of the 16 
owners we interviewed; HUD field office officials identified 1 of the 
project owners during the phase of our work when we were gathering 
initial background information. For all of our interviews for these 
site visits, we used a semistructured interview guide to ensure 
consistency. We also reviewed relevant documentation provided by HUD 
field officials, the PBCAs, and project owners. 

We used available HUD data to characterize the reasons for some payment 
delays for fiscal years 2002 through 2004. We matched PAS payment data 
on PBCA-and HUD-administered contracts with data on reasons for payment 
delays from HUD's Tenant Rental Assistance Certification System 
(TRACS). We could only determine the reason for delays for 55 percent 
of the late payments. For almost all of the remaining 45 percent of the 
payments, HUD's data systems did not accept the voucher--for these 
payments there was no error code associated with the delay. Although 
the data on reasons for delays are thus not representative of all late 
payments in these years, the testimonial evidence we obtained though 
our discussions with property owners, contract administrators, and HUD 
officials corroborated the results of our data analysis. HUD did not 
collect data on the reasons for delayed payments on traditionally 
administered contracts. 

We also analyzed data to examine the timeliness of contract renewals 
with the various types of rent adjustments that owners may seek. To 
determine the extent to which HUD renewed or adjusted its contracts 
with property owners within the 120-day time frame that the agency has 
established, we used data from HUD's Real Estate Management System 
covering fiscal years 2002 through 2004. In order to assess the 
reliability of the data we used to determine reasons for late payments 
and delays in contract renewals, we reviewed related documentation. In 
addition, we performed internal checks to determine the extent to which 
the data fields were populated and the reasonableness of the values 
contained in the fields. We concluded that the data we used were 
sufficiently reliable for the purposes of this report. 

To assess the effects of housing assistance payment delays on project 
owners and their willingness to continue providing affordable housing, 
we compared available HUD payment data on projects that have opted out 
of HUD's programs with those currently receiving assistance to 
determine if these projects had experienced more payment delays. We 
tested for statistically significant differences in the timeliness of 
payments among properties that had and had not opted out. We held 
meetings with a variety of industry groups to obtain their views on how 
late payments may affect project owners and their willingness to 
continue providing affordable housing. We also spoke with HUD field 
office officials, the PBCAs, and project owners on our eight site 
visits, as previously mentioned, regarding the effects of late payments 
on project owners. 

We conducted our work between October 2004 and September 2005 in 
Baltimore, Maryland; Boston, Massachusetts; Chicago, Illinois; Des 
Moines, Iowa; Kansas City, Kansas; Kansas City, Missouri; Los Angeles, 
California; Manchester, New Hampshire; Seattle, Washington; and 
Washington, D.C., in accordance with generally accepted government 
auditing standards. 

[End of section] 

Appendix II: Comments from the Department of Housing and Urban 
Development: 

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT: 
ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER: 
WASHINGTON, DC 20410-8000: 

October 25, 2005: 

Mr. David G. Wood, Director: 
Financial Markets and Community Investment: 
United States Government Accountability Office: 
441 G Street, NW: 
Washington, D.C. 20548: 

Dear Mr. Wood: 

Thank you for the opportunity to provide comments on the Government 
Accountability Office (GAO) draft report: PROJECT-BASED RENTAL 
ASSISTANCE: HUD Should Streamline Its Processes to Ensure Timely 
Housing Assistance Payments (GAO-06-57). 

The report concludes that over the 10-year period examined, HUD made 
most payments on time, as defined as the first business day of the 
month, but that a significant percentage of payments were late and that 
such delays can cause financial hardship to property owners. 

GAO has noted that while timeliness of payments has improved since the 
ramp up of the post-MAHRA (Multifamily Assisted Housing Reform and 
Affordability Act of 1997) requirements, and the implementation of the 
Performance Based Contract Administrator (PBCA) conversion, additional 
measures should be undertaken to address factors that most affect the 
timeliness of payments and to mitigate the effects of payments that 
cannot be made on time. HUD concurs in these conclusions. GAO has made 
three specific recommendations for improvement: 

1. Streamline and automate the contract renewal process to prevent 
processing errors and delays and eliminate paper/hard copy requirements 
to the extent practicable. 

2. 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 additional funds are promptly obligated to 
contracts when necessary to prevent payment delays. 

3. Notify owners if their monthly housing assistance payments will be 
late and include in such notifications the date by which HUD expects to 
make the monthly payment to the owner. 

HUD agrees that the implementation of these recommendations would 
improve the timeliness of payments and has the following specific 
comments: 

Streamlining and automating the business process for renewing and 
amending assistance contracts will require a comprehensive review of 
existing procedures and policies. This review is currently being 
undertaken as part of comprehensive program Business Process 
Reengineering (BPR). We anticipate that this initiative will identify 
areas where efficiencies in process can be realized, including 
addressing the fact that the current renewal and amendment process 
relies heavily on paper transactions and extensive participation of 
HUD, PBCAs, and project owners. 

Developing more systematic means to estimate funding needs and a more 
efficient allocation plan would also improve the timeliness of 
payments. The Department plans on achieving improvements in this area 
through training, data quality reviews, and data systems maintenance. 
To determine how best to improve the current estimation/allocation 
system, HUD has obtained a contractor to analyze the current systems 
and make recommendations as to improvements that will allow us to 
better identify emerging funding requirements as well as improve the 
allocation of available resources. 

Finally, HUD agrees that notification of owners if anticipated payments 
are delayed is desirable. HUD believes that the systemic enhancements 
outlined above will lead to a clearer understanding of the reasons for 
delayed payments and identify measures that may resolve such problems. 
HUD will also examine the feasibility of notifying project owners if 
HUD anticipates that there will be a significant delay in payment due 
to an issue beyond the control of the owner. 

In conclusion, HUD appreciates the GAO's review and recommendations and 
recognizes the need for improvements identified. We look forward to 
working with GAO and our other partners in addressing these issues over 
the coming months. 

Sincerely, 

Signed by: 

Brian D. Montgomery: 

Assistant Secretary for Housing-Federal Housing Commissioner: 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

David G. Wood, (202) 512-8678: 

Staff Acknowledgments: 

In addition to those named above, Bill MacBlane, Assistant Director; 
Jackie Garza; Patty Hsieh; Jane Kim; Don Porteous; Julianne Stephens 
Dieterich; Alison Martin; Marc Molino; Linda Rego; Barbara Roesmann; 
and Stu Seman made key contributions to this report. 

(250216): 

FOOTNOTES 

[1] 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 1st year. 

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

[3] Prior GAO reports on HUD's mark-to-market efforts include the 
following: GAO, 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). 

[4] 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 
do 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 takes the PBCAs generally 1 to 5 
days to turn around payments to owners. 

[5] We did not include payment data for contracts under the Section 236 
Rental Assistance Payment and the Rent Supplement programs for which 
HUD does not begin processing payments until after the 1st business day 
of the month. These represent only 2 percent all project-based rental 
assistance contracts. 

[6] We defined chronically late payments as contracts with 6 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 in 
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, for example, could be the 
result of a problem with the voucher or that it was submitted late by 
the owner or the PBCA. HUD does not collect data that would include the 
reasons for delayed payments on traditionally administered contracts. 

[8] Section 571 of the Multifamily Assisted Housing Reform and 
Affordability Act of 1997 established OMHAR to carry out the Mark-to-
Market Program to reduce rents to market levels and restructure the 
debt for properties with expiring long-term contracts. OMHAR's 
existence terminated on September 30, 2004. At that time, HUD created 
the Office of Affordable Housing Preservation to continue the Mark-to-
Market Program. 

[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] Recaptured funds are funds that an agency had previously obligated 
(e.g., agreed to pay in a housing assistance payment contract) but that 
the agency deobligated when it determined that the funds would not be 
needed for these contracts. In some cases, an agency may use recaptured 
funds for other program activities, reducing its need for new 
appropriations. In other cases, Congress may rescind recaptured funds. 

[11] A contract amendment is a mutually agreed-upon change (between HUD 
or a contract administrator and a project owner) to an obligation of 
funds. For example, a contract amendment may be allowed to cover 
increased contract rents resulting from increased costs, decreases in 
family incomes, or both. 

[12] Consolidated Appropriations Act, 2005, Pub. L. No. 108-447, div. 
I, title II, 118 Stat. 2809 (Dec. 8, 2004). 

[13] A continuing resolution is legislation enacted by Congress to 
provide budget authority for federal agencies and/or specific 
activities to continue in operations until the regular appropriations 
are enacted. Continuing resolutions are enacted when action on 
appropriations is not completed by the beginning of a fiscal year. 

[14] Some PBCAs, project owners, and industry group representatives 
with whom we spoke were under the impression that continuing 
resolutions might preclude contract renewals or cause untimely housing 
assistance payments. Many of them indicated they had been told by HUD 
field officials that payment delays in the beginning of the federal 
fiscal year were a result of continuing resolutions. 

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

[16] HUD requires nonprofit and limited dividend property owners to 
deposit surplus cash into a residual receipts account, which is an 
asset of the owner but held under HUD's control. 

[17] GAO, Multifamily Housing: More Accessible HUD Data Could Help 
Efforts to Preserve Housing for Low-Income Tenants, GAO-04-20 
(Washington, D.C. Jan. 23, 2004). 

[18] These were California, the District of Columbia, Illinois, Iowa, 
Maryland, Massachusetts, New Hampshire, and Washington. 

[19] We chose to interview the PBCAs rather than traditional contract 
administrators because the PBCAs handle the bulk of HUD's housing 
assistance contracts--over 13,000 out of about 23,000 in fiscal year 
2004--and, thus, their experiences and perspectives are applicable to 
more of the universe of HUD's payments. Furthermore, HUD is gradually 
assigning more of the traditional contract administrators' duties to 
the PBCAs, which, considering the time available to us to conduct these 
site visits, added to our judgment that focusing on the PBCAs was 
appropriate. 

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