Rural Housing Service
Standardization of Budget Estimation Processes Needed for Rental Assistance Program Gao ID: GAO-04-424 March 25, 2004The Rural Housing Service's (RHS) Section 521 Rental Assistance Program provides rental subsidies to about 250,000 rural tenants. With an annual budget of over $700 million, the program is RHS's largest line-item appropriation, accounting for approximately 70 percent of the agency's budget. In early 2003, RHS reported hundreds of millions of dollars in unexpended balances, primarily tied to 5- and 20-year contracts issued from 1978 through 1982. Concern has arisen that these unexpended balances may be the result of the agency's budget practices, especially its procedures for estimating funding needs. GAO was asked to assess the accuracy of RHS's budget estimates for the rental assistance program, the activity level of rental assistance contracts issued from 1978 through 1997, and the activity level of rental assistance contracts issued from 1998 through 2002 and the accuracy of RHS's estimates of the rate at which these funds would be used.
RHS is overestimating its budget needs for 5-year rental assistance contracts in three ways. First, the agency uses inflation factors that are higher than those OMB recommends for use in the budget process. Second, RHS does not apply its inflation rate separately to each year of a 5-year contract, but instead compounds the rate to reflect the price level in the fifth year and applies that rate to each contract year. Using these first two methods, RHS overestimated its 2003 budget needs by $51 million (6.5 percent). Third, RHS bases its estimates of future expenditure rates on recent maximum expenditures, rather than on the average rates at which rental assistance funds are expended. RHS has begun the process of automating its budget processes and certain aspects of its new model promise improvements over the current estimating methods. However, the agency continues to use its own inflation rates and incorrectly calculates those rates in such a way that would cause the agency to actually underestimate its budget needs. At current spending rates, it will take another 7 years for all the active contracts that were issued from 1978 through 1982 to expend their funds, 8 years after the last of the 20-year contracts were expected to expire. Contracts issued from 1983 through 1997 should expend their remaining funds in 2004. GAO calculated that RHS overestimated its funding needs for contracts issued from 1998 through 2002 by an average of about 8 percent each year. GAO analysis of rental assistance payment data showed that the agency has overestimated its budget needs almost every year since 1990, the earliest year for which GAO gathered data. Where GAO had sufficient data from the agency, the analysis also shows that if RHS had used and correctly applied OMB inflation rates to its base perunit rates, its estimates would have been closer to actual expenditures. Standardizing the agency's budget estimation processes would help the agency more accurately estimate its rental assistance needs and curtail future unexpended balances or budget shortfalls.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-424, Rural Housing Service: Standardization of Budget Estimation Processes Needed for Rental Assistance Program
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Report to the Ranking Minority Member, Subcommittee on Agriculture,
Rural Development, and Related Agencies, Senate Committee on
Appropriations:
March 2004:
RURAL HOUSING SERVICE:
Standardization of Budget Estimation Processes Needed for Rental
Assistance Program:
GAO-04-424:
GAO Highlights:
Highlights of GAO-04-424, a report to the Ranking Minority Member,
Subcommittee on Agriculture, Rural Development, and Related Agencies,
Senate Committee on Appropriations
Why GAO Did This Study:
The Rural Housing Service‘s (RHS) Section 521 Rental Assistance
Program provides rental subsidies to about 250,000 rural tenants. With
an annual budget of over $700 million, the program is RHS‘s largest
line-item appropriation, accounting for approximately 70 percent of
the agency‘s budget. In early 2003, RHS reported hundreds of millions
of dollars in unexpended balances, primarily tied to 5- and 20-year
contracts issued from 1978 through 1982. Concern has arisen that these
unexpended balances may be the result of the agency‘s budget
practices, especially its procedures for estimating funding needs. GAO
was asked to assess the accuracy of RHS‘s budget estimates for the
rental assistance program, the activity level of rental assistance
contracts issued from 1978 through 1997, and the activity level of
rental assistance contracts issued from 1998 through 2002 and the
accuracy of RHS‘s estimates of the rate at which these funds would be
used.
What GAO Found:
RHS is overestimating its budget needs for 5-year rental assistance
contracts in three ways. First, the agency uses inflation factors that
are higher than those OMB recommends for use in the budget process.
Second, RHS does not apply its inflation rate separately to each year
of a 5-year contract, but instead compounds the rate to reflect the
price level in the fifth year and applies that rate to each contract
year. Using these first two methods, RHS overestimated its 2003 budget
needs by $51 million (6.5 percent). Third, RHS bases its estimates of
future expenditure rates on recent maximum expenditures, rather than
on the average rates at which rental assistance funds are expended.
RHS has begun the process of automating its budget processes and
certain aspects of its new model promise improvements over the current
estimating methods. However, the agency continues to use its own
inflation rates and incorrectly calculates those rates in such a way
that would cause the agency to actually underestimate its budget
needs.
At current spending rates, it will take another 7 years for all the
active contracts that were issued from 1978 through 1982 to expend
their funds, 8 years after the last of the 20-year contracts were
expected to expire. Contracts issued from 1983 through 1997 should
expend their remaining funds in 2004. GAO calculated that RHS
overestimated its funding needs for contracts issued from 1998 through
2002 by an average of about 8 percent each year. GAO analysis of
rental assistance payment data showed that the agency has
overestimated its budget needs almost every year since 1990, the
earliest year for which GAO gathered data. Where GAO had sufficient
data from the agency, the analysis also shows that if RHS had used and
correctly applied OMB inflation rates to its base per-unit rates, its
estimates would have been closer to actual expenditures.
Standardizing the agency‘s budget estimation processes would help the
agency more accurately estimate its rental assistance needs and
curtail future unexpended balances or budget shortfalls.
What GAO Recommends:
To more accurately estimate rental assistance budget needs, GAO
recommends that the Secretary of Agriculture require program officials
to use and correctly apply the inflation rates provided by the Office
of Management and Budget (OMB) in its annual budget estimation
processes. The Department of Agriculture and OMB commented on a draft
of this report.
www.gao.gov/cgi-bin/getrpt?GAO-04-424.
For more information, contact William B. Shear at (202) 512-4325 or
shearw@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
RHS's Current Methods Have Overestimated the Agency's Budget Needs by
as Much as 7 Percent, or $51 Million Per Year:
Unexpended Funds Primarily from Contracts Issued from 1978 through 1982
Will Not Be Exhausted until 2011:
The Activity of Contracts Issued in 1998 through 2002 Is Consistent
with Earlier Years:
Conclusions:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Scope and Methodology:
Appendixes:
Appendix I: Comments from the U.S. Department of Agriculture:
GAO Comments:
Appendix II: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Staff Acknowledgments:
Table:
Table 1: Differences between RHS and OMB Inflation Rates, 2000-2003:
Figures:
Figure 1: Example of RHS Budget and Allocation Estimation Processes:
Figure 2: Comparison of RHS and OMB-Based Budget Estimation Methods:
Figure 3: Active v. Expired Contracts and Expended v. Unexpended Amounts
from Contracts Issued from 1978 through 1982:
Figure 4: Projected Expenditures from Contracts Issued from 1978 through
1997:
Figure 5: Active v. Expired Contracts and Expended v. Unexpended Amounts
from Contracts Issued from 1998 through 2002:
Figure 6: Actual v. Estimated Rental Assistance Expenditures Per-Unit,
Per-Year, from 1990 through 2003:
Abbreviations:
AMAS: Automated Multi-Housing Accounting System:
AMI: Area Median Income:
OMB: Office of Management and Budget:
RHS: Rural Housing Service:
USDA: United States Department of Agriculture:
Letter March 25, 2004:
The Honorable Herbert Kohl:
Ranking Minority Member:
Subcommittee on Agriculture, Rural Development and Related Agencies:
Committee on Appropriations:
United States Senate:
Dear Senator Kohl:
Each year, the Rural Housing Service (RHS) of the Department of
Agriculture (USDA) provides rental subsidies through the Section 521
Rental Assistance Program to about 250,000 rural tenants living in
federally subsidized properties. With an annual budget of over $700
million, the program is RHS's largest line-item appropriation,
accounting for approximately 70 percent of the agency's budget. In
early 2003, RHS reported hundreds of millions of dollars in unexpended
balances, primarily tied to 5-and 20-year contracts issued from 1978
through 1982. Concern has arisen that these unexpended balances may be
the result of the agency's budget practices, especially its procedures
for estimating funding needs.
To help with your oversight of the Section 521 Rental Assistance
Program, you asked us to assess (1) the accuracy of RHS's budget
estimates for the rental assistance program, (2) the activity level of
rental assistance contracts issued from 1978 through 1997 that have
unexpended balances and the possibility of deobligating[Footnote 1]
these unexpended balances, and (3) the activity level of rental
assistance contracts issued from 1998 through 2002 and the accuracy of
RHS's estimates of the rate at which these funds would be used.
To respond to these objectives, we collected written information from
RHS, interviewed their representatives, and received oral verification
from Office of Management and Budget (OMB) staff on RHS's budget
estimation processes. We reviewed federal guidance on program budget
preparation and on internal controls that apply to the process. Also,
we collected and analyzed raw data from RHS's accounting database to
determine rental assistance program activity. Details about our scope
and methodology appear at the end of this letter.
We conducted our work from January 2003 through February 2004 in
Washington, D.C. and St. Louis, Missouri, in accordance with generally
accepted government auditing standards.
Results in Brief:
Using its current processes, we found that RHS has overestimated its
budget needs for 5-year rental assistance contracts in three ways.
First, the agency has used inflation factors that are higher than those
OMB has recommended for use in the budget process. Second, RHS does not
apply its inflation rate separately to each year of a 5-year contract,
but instead compounds the rate to reflect the price level in the fifth
year and applies that rate to each contract year. In 2003, for example,
RHS started with an inflation rate that was high relative to OMB's
rates and then compounded it, resulting in a budget overestimation of
over $51 million, or 6.5 percent. Third, RHS bases its estimates of
future expenditure rates on recent maximum expenditures, rather than on
the average rates at which rental assistance funds are expended. We
also found that the budget estimation and allocation processes are
largely managed by a single employee, which suggests a problem with
RHS's internal controls for the program. RHS is developing an automated
budget forecasting and allocation model that shows more promise than
the current methods it will replace, because it will allow the agency
to use more accurate data to establish per-unit costs. RHS has also
taken steps to address the weaknesses in its internal controls and has
reported that three or four employees, rather than one, will administer
the new budget forecasting and allocation processes. However, the
agency plans to continue using its own inflation rates and, in contrast
to its current methods, will calculate those rates in such a way that
would cause the agency to actually underestimate its budget needs.
About 18 percent of the rental assistance contracts issued from 1978
through 1997 are still active--even though the agency estimated that
they would expire by 2002--and together they account for $605 million
in unexpended balances. Almost 84 percent of this amount, or $510
million, involves the 5-and 20-year contracts issued from 1978 through
1982. Nearly one-third of those contracts are still active. At current
average spending rates, it will take another 7 years for all the active
contracts to expend their funds--8 years after the last of the 20-year
contracts wereexpected to expire. USDA stated that the unexpended
balances cannot be deobligated, since every rental assistance contract
RHS has executed contains a provision stating that the agreement
expires only when the assistance runs out.[Footnote 2]
Ninety percent of the 5-year contracts issued from 1998 through 2002
are still active, and RHS's estimates of the contracts' expenditure
rates were inaccurate to varying degrees. Seventy-four percent of the
total number of contracts issued in 1998 are still active, even though
RHS expected these contracts to run out during 2003, suggesting that
these contracts may have been overfunded. About 25 percent, or $114
million, of the funds remain from the 1998 contracts, and about 35
percent, or $208 million, remain from the 1999 contracts. Furthermore,
only 11 percent of the funds from the contracts issued in 2002 were
spent during the contracts' first 1½ years, suggesting that many of the
contracts from this time period are expending their funds more slowly
than RHS anticipated. Our analysis of RHS data found that these
contracts will run an average of over 6 rather than 5 years each.
To more accurately estimate rental assistance needs and curtail future
unexpended balances--or budget shortfalls--we recommend that the
Secretary of Agriculture require program officials to use and correctly
apply the inflation rates provided by OMB in their annual budget
estimation and allocation processes.
Background:
The Section 521 Rental Assistance Program, started in 1978, is
administered by RHS's Multifamily Housing Division of Portfolio
Management. The program provides rental assistance for tenants living
in units created through RHS's Multifamily Direct Rural Rental Housing
Loans and Multifamily Housing Farm Labor Loans programs.[Footnote 3]
Under the program, eligible tenants pay no more than 30 percent of
their income toward the rent, and RHS pays the balance to the project
owner.[Footnote 4] As of January 2003, approximately 53 percent of
tenants in the program's 464,604 housing units were receiving rental
assistance. According to program officials, the program has a waiting
list of approximately 80,000 eligible tenants.
RHS provides the subsidies through 5-year contracts with project
owners; 20-year contracts were also issued to units in newly
constructed properties from 1978 through 1982. The contracts specify
that owners will receive payments on behalf of tenants in a designated
number of units at the project. Contracts may be renewed as many times
as funds are made available, and additional units may be covered if
funds are available. According to program officials, about 96 percent
of the Rental Assistance Program's budget is used to renew expiring
rental assistance contracts. The remaining funds are used to provide
rental assistance for units in newly constructed properties and
additional rental assistance at existing properties. Budget needs are
estimated assuming a 5-year rental assistance contract life, although a
contract's actual life is determined by how long its funds last and
could run far beyond its estimated life if the funds are expended
slowly enough.
Each month, project owners or their management companies must certify
the number of rental assistance units that are occupied. If a unit is
empty and rental assistance is not being used, the project owner
assigns a new tenant from the waiting list. If there are no tenants
eligible for the rental assistance, the rental assistance may be
transferred to another property.
RHS's national, state, and local offices manage the rental assistance
program. The national Office of Multifamily Housing Portfolio
Management develops and implements the program regulations, estimates
program budgets, allocates funds, and tracks nationwide program
statistics. State and local offices work directly with property owners,
property management companies, and tenants to monitor the program.
State and local responsibilities include conducting financial,
management, and physical reviews of the properties; executing rental
assistance contracts with property owners; approving rent increases;
and processing rental assistance payments. State and local staff also
collect and maintain property and tenant data for their areas. Support
for the program is also provided through two offices in St. Louis. The
Information Resources Management Office's Rural Housing Service Branch
maintains the automated databases used to manage program data. The
Office of the Deputy Chief Financial Officer uses the program data to
generate and maintain the general ledger and financial statements for
the program.
In 1982--the fourth year of the program--RHS reported in an internal
position paper that rental assistance funds were being substantially
underused. The agency found that approximately $100 million of the
rental assistance funds obligated for 5-year contracts would be lost
between 1983 and 1985, because the contracts would expire before all
the obligated funds were used.[Footnote 5] The study found that rental
assistance contracts set to expire at the end of 5 years still had
funds available for an average of 5 additional years. The agency noted
that if contract terms were extended until the funds ran out, the
tenants could receive benefits twice as long without any further
appropriation of funds. Alternately, the agency noted that terminating
contracts at the end of their terms and returning the unexpended funds
would save federal funds, assuming the contracts would not be replaced.
The paper recommended the indefinite extension of rental assistance
contracts, and the recommendation was adopted as agency policy in 1983.
Contract language was changed at that time, and previously written
contracts were amended.
RHS's Current Methods Have Overestimated the Agency's Budget Needs by
as Much as 7 Percent, or $51 Million Per Year:
Using its current methodology, RHS has overestimated its budget needs
for 5-year rental assistance contracts in three ways. First, the agency
has used inflation factors that are higher than those projected by OMB
for use in the budget process. Second, RHS compounds the inflation rate
to reflect the price level in the fifth year and applies that rate to
each contract year, rather than using an appropriate rate for each
year. Third, the expenditure rates RHS uses to estimate budget needs
may also overstate the need for rental assistance. Furthermore, RHS
budget processes do not adhere to certain internal control standards.
While a new budget forecasting model shows promise, it is, at present,
flawed.
Current Processes for Estimating Budget and Allocation Needs:
RHS's processes for estimating its budget and allocation needs have
evolved over time. An agency official who worked on the program's
initial budgets from 1978 through 1982 told us that RHS intentionally
overfunded the contracts in an effort to subsidize the poorest possible
tenant by basing tenant contributions on minimum Social Security
payments. Agency documents suggest that the agency was using inflation
rates of 10 to 20 percent to estimate future spending rates for the
life of the contracts.[Footnote 6] After this time period, the agency
made a series of changes to its processes, including increasing tenant
contributions from 25 percent to 30 percent, and differentiating per-
unit costs for rural rental housing and farm labor housing properties.
The current method for estimating budget needs was developed by two
agency officials, between 1995 and 1997, and is based on a formula that
consists of multiplying estimates for the number of expiring rental
assistance units by a national average per-unit cost and by an
inflation factor. The need for rental assistance for units in newly
constructed properties and additional rental assistance at existing
properties is also calculated. Since 1996, one official has largely
managed the process with oversight from the Rural Development Budget
Office, OMB staff, and RHS supervisors.
OMB Circular A-11, Preparation, Submission, and Execution of the
Budget, provides guidance to agency officials, stating that preparation
of agency budgets must be consistent with the economic assumptions
provided by OMB. These assumptions are listed each year in the
President's Budget, though they are made available to agencies prior to
that time for their budget preparations. However, neither OMB staff nor
the Rural Development Budget Office official we spoke with required RHS
to use these rates or objected to the agency determining its own
inflation rates. Although OMB policy does permit agencies to consider
other factors in developing their budget estimates, it does not allow
agencies to automatically apply these factors to their budget requests.
Also, although OMB staff and a Rural Development budget official review
and approve RHS's budget requests each year, neither has ever required
nor sought a justification for the rates chosen.
RHS considers its annual rental assistance needs through two different
processes prior to funding the contracts. First, the agency prepares
the submission for the President's Budget about 2 years prior to the
budget year, based on previous renewal needs, average per-unit costs,
and a compounded inflation rate. Agency officials explained that in
recent years they used 2.7 percent when preparing estimates to submit
with the President's Budget. By the time Congress appropriates a budget
based on this information, the data used by the agency are about 2
years old. Therefore, after receiving the fiscal year budget, and
before allocating the rental assistance funds, RHS rechecks the
estimated number of expiring units and average per-unit costs, based on
more current data.
For this second process, the agency prepares a report using the
Automated Multi-Housing Accounting System database (AMAS) on the
contracts expected to expire in the coming year. This report is sent to
the local offices for verification and then returned to the national
office. The agency establishes average per-unit values, based on the
contracts expiring in the coming year, by inflating the maximum per-
unit cost from the prior 3 months by a compounded inflation rate.
According to agency officials, RHS adjusts the inflation rate to more
closely approximate the level of funding received. If the original
budget estimate and the allocation estimate differ, RHS distributes any
rental assistance funds remaining after the expiring contracts are
renewed among states to create new rental assistance units.[Footnote 7]
These allocation figures then become the basis for future submissions
for the President's Budget.
Figure 1: Example of RHS Budget and Allocation Estimation Processes:
[See PDF for image]
[A] Funds for contracts expiring January-March may be allocated in last
quarter of previous year.
[B] Maximum per-unit cost from prior 3 months based on contracts
expiring in coming year.
[End of figure]
RHS's Current Methods Have Overestimated Its Budget Needs:
Because it has not followed OMB procedures, RHS has overestimated its
future budget needs. For example, although OMB's fiscal year 2003
published rates varied between 2.2 and 2.4 percent for 2003 through
2007, RHS used a rate of inflation of 2.7 percent when preparing its
budget for 5-year contracts that would be renewed in 2003. Applied to
the average per-unit, per-year base rate of $3,264, the 2.7 percent
rate created a difference of $203 per unit over the 5-year contract
period. Since RHS planned to issue 5-year contracts for 44,652 units
that year, it overestimated its budget needs by more than $9 million.
RHS did not keep documentation of the inflation rates it used prior to
2000 but, as table 1 shows, the agency's inflation rates have been
higher than OMB's rates for every year for which it has documentation.
Table 1: Differences between RHS and OMB Inflation Rates, 2000-2003:
Budget year: 2000;
RHS: for President's budget: 2.7%;
RHS: prior to allocations: 2.5%;
OMB: 2.3%.
Budget year: 2001;
RHS: for President's budget: 2.7%;
RHS: prior to allocations: 3.0[A] %;
OMB: 2.5%.
Budget year: 2002;
RHS: for President's budget: 2.7%;
RHS: prior to allocations: 3.0[B] %;
OMB: 2.6%.
Budget year: 2003;
RHS: for President's budget: 2.7%;
RHS: prior to allocations: 2.4%;
OMB: 2.2%.
Source: GAO analysis of RHS and OMB data.
[A] The 2001 budget documents RHS provided show that RHS used different
inflation rates when reestimating its budget needs for family (3
percent compounded to the fourth year) and elderly replacement units (3
percent compounded to the fifth year) and new construction units (2.7
percent compounded to the fourth year). When asked, RHS reported that
this is not a standard practice.
[B] Agency officials told us, and agency documents state, that RHS used
a rate of 2.7 percent for its 2002 allocation estimates. However, upon
review of the data provided, we determined that they used a rate of 3
percent and RHS concurred.
[End of table]
However, it is not so much the inflation rates RHS uses as how it uses
them that has caused the agency to significantly overestimate its
budget needs. As we have seen, OMB's economic assumptions provide
inflation rates for each year, and agencies are expected to use these
individual rates for each year they are projecting, compounding the
rates separately for each subsequent year based on the previous year's
rate. But RHS uses one inflation rate for all 5 years of the contract,
compounds that rate to the fifth year, and then applies the compounded
rate to each year of the contract. This practice results in the agency
using a rate that is more than five times the rate it started with for
the first year.
For example, rather than applying its 2003 inflation rate of 2.7
percent to each year, RHS compounded this rate to the fifth year and
applied the resulting value (14.2 percent) back to each year of the
contract (fig. 2). Spending was thus assumed to be 14.2 percent higher
for each of the subsequent 5 years, although its stated inflation
projection was that prices would be only 2.7 percent higher in the next
year, about 5.4 percent higher in the following year, and so on. Thus
RHS multiplied the annual per-unit base rate of $3,264 by over 14
percent, rather than the 2.7 percent it started with, or the 2.2 to 2.4
percent projected by OMB. Compared with OMB's rates and procedures for
calculating future spending, RHS's method created a difference of
$1,147 per unit. Again, as RHS estimated it would fund contracts for
44,652 units in 2003, it actually overestimated its budget needs by
over $51 million (6.5 percent).
Figure 2: Comparison of RHS and OMB-Based Budget Estimation Methods:
[See PDF for image]
[End of figure]
The expenditure rates RHS uses to estimate budget needs may also
overstate the need for rental assistance. RHS officials claim that the
expenditure rates they use--equal to the maximum amount of monthly
rental assistance used over the previous 3 months--account for vacant
units at the properties. However, using this method treats vacant units
as if they were occupied and ignores the impact that a property's
vacancy rate has on rental assistance usage. For example, a property
with 10 units (receiving $200 of rental assistance for each unit) may
have no vacant units during the first month, one vacant unit during the
second month, and 2 vacant units during the third month. During an
average month, one of the property's units will be vacant, and the
property will require $1,800 in rental assistance ($200 from each of
the nine occupied units). However, using the maximum of 3 months, it
would appear the property has no vacant units and that rental
assistance needs are $2,000 a month. The estimation rate would be 10
percent higher than it should be, because the impact of the vacant
units on rental assistance usage was ignored. We believe using a 3-or
12-month average could produce a more accurate picture of usage. We
discussed this practice with RHS officials, and they replied that they
used the maximum monthly rate because they did not believe averages
were accurate for their purposes.
RHS Is Not Adhering to Internal Control Standards:
Finally, RHS is not adhering to internal control standards regarding
segregation of duties. A single employee within the agency is largely
responsible for both the budget estimation and allocation processes for
the rental assistance program. Furthermore, this employee's work is not
afforded a deliberative review by the Rural Development Budget Office,
OMB staff, or RHS supervisors. While the office has assigned staff to
support this employee, the employee told us that due to staff turnover,
there was no one available to help with the budget estimation and
allocation processes.
Internal control is a major part of managing an organization. Our
Standards for Internal Control in the Federal Government provide the
overall framework for establishing and maintaining internal control and
for identifying and addressing major performance and management
challenges and areas at greatest risk of fraud, waste, abuse, and
mismanagement.[Footnote 8]
Internal control activities are the policies, procedures, techniques,
and mechanisms that enforce management's directives and help ensure
that actions are taken to address risks. Control activities are an
integral part of an entity's planning, implementing, reviewing, and
accountability for stewardship of government resources. One very basic
but essential example of a control activity is the segregation of
duties. According to the standards, key duties and responsibilities
need to be divided or segregated among different people to reduce the
risk of error or fraud. This should include separating the
responsibilities for authorizing transactions, processing and
recording them, reviewing the transactions, and handling any related
assets. No one individual should control all key aspects of a
transaction or event. Based on our analysis of RHS's budget estimation
and allocation processes, and our Standards for Internal Control, it is
our view that the autonomy of this employee is not consistent with
internal control standards.
Automated Process Is an Improvement, but Problems Remain:
In March 2003, RHS began the process of automating its budget
estimation and allocation processes by developing a forecasting model
that it will use to estimate future budget needs, starting in 2006. A
team consisting of staff from the national office, state offices, and
the Information Resources Management Office's Rural Housing Service
Branch created the model. RHS also used contractors and consulted with
numerous internal experts. The model was designed to automatically
calculate rental assistance by projecting renewal needs on a property-
by-property basis and calculating future rental assistance usage
estimates using a combination of factors, including prior actual usage,
inflation, the potential for rate increases, and rental assistance
volatility. These last two factors were dropped from the model when the
agency determined that their impact on future spending was negligible.
The forecasting model is currently in the testing phase.
RHS demonstrated its new forecasting model to us in late 2003. Certain
aspects of the model promise improvements over the current estimating
methods. For example, the model (1) allows RHS to use property-level
data rather than the national averages that are currently used to
establish per-unit rates and (2) determines each property's per-unit
rate based on the average usage over the prior 12 months, rather than
the maximum usage of the previous 3 months that is currently used.
These improvements should allow for more accurate replacement estimates
based on actual rental assistance usage at each property. Furthermore,
the model properly applies the inflation rate to each of the 5 years
for which the agency is forecasting. Program officials also told us
that three to four staff members will be trained to use the model and
develop the budget and allocation estimates for the agency, which
should mitigate the segregation of duties concern.
However, the inflation calculation in the model is flawed. RHS
continues using its own inflation rates rather than those provided by
OMB, and the agency is incorrectly calculating the rates it plans to
use. RHS officials explained that they are using historical rates of
change to determine future spending rates rather than OMB's rates,
which are based on future projections of inflation. This means that RHS
is looking to past activity to determine what will happen in the
future, whereas OMB asks agencies to use projections of future change.
Furthermore, RHS is incorrectly calculating its historical rates of
change in a way that could cause the agency to underestimate its budget
needs. RHS calculates the average per-unit expenditures for each year
over 3 years, then calculates the change from the first year to the
third and divides that number by 3. The agency should divide by 2,
since it is estimating an annual rate of change from 2 years of
changes. By dividing by a larger number than appropriate, RHS's method
will cause it to underestimate the rate of change and thus to
underestimate its budget needs. For example, if prices increased 3
percent from 2000 to 2001, and 2 percent--of the year 2000 level--from
2001 to 2002, then the average annual increase is 3 plus 2, divided by
2, which equals 2.5. If RHS divides by 3, it will come up with an
inflation rate of 1.67--lower than the average inflation rate of the
recent past.
Unexpended Funds Primarily from Contracts Issued from 1978 through 1982
Will Not Be Exhausted until 2011:
Contracts issued from 1978 through 1982 account for the majority of
unexpended balances and are expending their funds at a relatively slow
rate. Based on current average expenditures, these contracts likely
will not expend their funds completely until 2011. USDA has concluded
that these funds cannot be deobligated. Contracts issued from 1983
through 1997 also have unexpended balances; based on our analysis,
these funds likely will be expended in 2004.
Based on their age, contracts issued from 1978 through 1997 (both 5 and
20 year), should have expired by the end of 2002. As of June 2003,
approximately 18 percent of these contracts were still active,
accounting for $605 million in unexpended balances. Most of this amount
($510 million or 84 percent) involved the 32 percent of the contracts
from 1978 through 1982 that were still active (see fig. 3). Contracts
issued from 1983 through 1997 accounted for the remaining $95 million.
Figure 3: Active v. Expired Contracts and Expended v. Unexpended
Amounts from Contracts Issued from 1978 through 1982:
[See PDF for image]
Note: Data are current as of June 2003.
[End of figure]
Based on average current spending rates calculated from AMAS data and
projected forward using OMB inflation rates, RHS will not exhaust all
the unexpended balances from these contracts until at least 2011. In
2002, approximately $179 million in rental assistance funds was paid to
project owners from contracts issued from 1978 through 1997, $53
million of it from contracts issued from 1978 through 1982, and $126
million from contracts issued from 1983 through 1997. At this rate,
contracts from the 1983 to 1997 period will likely expend their
remaining $95 million during 2004. The 1978 to 1982 contracts, which
were funded based on inflation projections of 10 to 20 percent, will
not expend their $510 million in unexpended balances until 2011 on
average--8 years after the last of the 20-year contracts should have
expired.
Figure 4: Projected Expenditures from Contracts Issued from 1978
through 1997:
[See PDF for image]
Note: Contracts issued from 1978 through 1982 include 20-and 5-year
contracts.
[End of figure]
USDA Stated that Deobligating Unexpended Balances Would Result in
Breach of Contract:
The USDA regulations state that rental assistance contracts are
effective for, depending on the contract, 5 or 20 years from the
effective date of the agreement. These same regulations, however, make
it clear that the expiration date of a contract is at complete
disbursement of the funds obligated to the contract. This date, as the
USDA regulations state, may be "before or after" the 5-or 20-year term.
The rental assistance contracts that implement this policy explicitly
tie their expiration to the disbursement of rental assistance amounts
listed in the contracts. In practice, this has resulted in many of the
contracts extending beyond (in some instances, far beyond) the
contemplated 5-or 20-year term. According to USDA, any effort to
recapture the remaining unexpended funds associated with rental
assistance agreements entered into from 1978 through 1982 would result
in a breach of those contracts and would subject USDA to liability.
The Activity of Contracts Issued in 1998 through 2002 Is Consistent
with Earlier Years:
Ninety percent of the contracts issued from 1998 through 2002 are still
active and appear to be expending their funds at a slower rate than RHS
anticipated. Based on current expenditure rates, these contracts likely
will run an average of over 6 years each. These findings are consistent
with our analysis of RHS data, which shows that RHS has overestimated
its spending needs most years since 1990.
The Majority of Contracts Issued from 1998 through 2002 Are Still
Active and Expending Their Funds at a Slower Rate than RHS Anticipated:
According to RHS data, and illustrated in figure 5, a relatively small
percentage of contracts have expired. As of June 2003, 74 percent of
the contracts issued in 1998 were still active, although the average
contract should have expired by this date.[Footnote 9] The fact that so
many were still active suggests that the majority of the 1998 contracts
may have been overfunded. Furthermore, about 25 percent of the funds
remained from the contracts issued in 1998, and about 35 percent of the
funds remained from the contracts issued in 1999; only 11 percent of
the funds allocated in 2002 were spent during the contracts' first 1½
years. This suggests that the contracts are also expending their funds
more slowly than the 5 years on which RHS bases its budget needs.
Figure 5: Active v. Expired Contracts and Expended v. Unexpended
Amounts from Contracts Issued from 1998 through 2002:
[See PDF for image]
Note: Data are current as of June 2003.
[End of figure]
A document provided by the agency indicates that, since 1992, contracts
have been spending on average 3 percent in their first year, 14 to 18
percent in the second through sixth years, 8 percent in the seventh
year, and tapering off around the twelfth year. According to the
agency, this tapering indicates that overfunding of contracts is
moderate. However, it should be noted that the document projects, for
example, that about 1.7 percent of the funds allocated in 2000 will
remain by the tenth year--a balance of $10.8 million from the $640
million originally allocated.
Using RHS rental assistance payment data, we calculated that RHS
overestimated its funding needs for these contracts by an average of
about 8 percent each year. Between 1998 and 2002, almost $1.2 billion
in rental assistance payments were made from contracts originating in
those years, at an average rate of $2,808 per-unit per-year. However,
RHS budgeted these units at an average annual rate of $3,019--a
difference of $211 per-unit per-year (7.5 percent), or $1,055 per-unit
per 5-year contract.
RHS Has Overestimated Its Spending Needs in Most Years Since 1990:
Our analysis of rental assistance payment data showed that the agency
has been overestimating its budget needs since at least 1990, the
earliest year for which we gathered data. Importantly, where we had
sufficient data from the agency, our analysis also shows that if RHS
had used and correctly applied OMB inflation rates to its base per-unit
rates, its estimates would have been closer to actual expenditures.
Figure 6 below provides an example of the difference between RHS's
actual and estimated expenditures. The actual expenditures are averaged
from the entire portfolio of 5-year contracts issued from 1989 through
2002, while the estimated expenditures are averaged from only those
units for which renewal, new construction, or servicing contracts
originated in the corresponding year. Furthermore, the RHS estimated
expenditure for a given year shows the effect of the 5-year estimate in
the first year only. Due to RHS's method for calculating its estimated
expenditures over a 5-year period, the difference is largest in the
first year and declines over time as inflation raises the actual
expenditure (or more accurate estimation) closer to the estimated
expenditure (see fig. 2). The declining differentials of the second to
fifth years are not reflected in figure 6 below. Nonetheless, while the
estimated expenditures for any given year represent about 20 percent of
the portfolio, they represent almost the entire portfolio over any 5-
year period in the figure. RHS estimates are above actual expenditures
in each of the years. In addition, the corresponding estimated
expenditures using OMB inflation rates also helps to illustrate the
degree to which the RHS method has lead to overestimation. Sufficient
information was not available from the agency to extend our OMB-based
estimate of RHS expenditure prior to 2000. Our scope and methodology
section contains a discussion of the data limitations we faced in our
assessment of activity levels.
Figure 6: Actual v. Estimated Rental Assistance Expenditures Per-Unit,
Per-Year, from 1990 through 2003:
[See PDF for image]
Note: (1) RHS estimated expenditures for 1990 to 2002 are based on the
agency's allocation estimates prior to obligation of appropriated
funds; complete data of original estimates for the President's Budget
were not available from the agency. As noted, in some years RHS's
allocation amounts were smaller than the original submitted budgets;
therefore, the RHS estimated numbers depicted may be smaller than the
per-unit per-year amounts the agency actually received through
appropriations. The 2003 estimated expenditures are based on the
request submitted for the President's Budget. (2) RHS estimated
expenditures show the effect of the 5-year estimate in the first year.
Over time, the difference will decline as inflation raises the actual
expenditures closer to the estimated expenditures. (3) Actual
expenditures are for 5-year contracts issued 1989 to 2002; 2003 actual
expenditures are estimated based on 10 months of available data. (4)
RHS did not keep documentation of the inflation rates it used prior to
2000; therefore, we did not have sufficient information to estimate the
impact of using OMB rates in its estimates prior to that time.
[End of figure]
Between 1998 and 2002, RHS planned to fund 5-year contracts for an
average of 42,000 units each year; the difference between the actual
rate of expenditure and what RHS budgeted may mean that the agency had
a surplus of approximately $43 million per year during this period, or
more than $220 million total over the last 5 years.
Based on current spending rates, and allowing for inflation, the
average contract issued during these years will likely run out of funds
during its sixth year. That is, the average contract issued in 2000 or
2001 will completely expend its funds during 2006 or 2007,
respectively, and the average contract issued in 2002 will completely
expend its funds during 2008.
Conclusions:
RHS provides subsidized rental housing to almost half a million people
each year. The rental assistance program, with an annual budget of over
$700 million, provides further subsidies to about half this number. RHS
budget estimating processes have caused the agency to overstate its
spending needs over the life of the rental assistance program,
resulting in hundreds of millions of dollars in unexpended balances.
Consistently overstating funding needs for one program also undermines
the congressional budget process by not allowing those funds to be
available for other programs. RHS is updating and automating its budget
estimation process, and its new forecasting model shows some
improvements over past and current processes. However, there are some
flaws with the model. The agency plans to use its own inflation rates,
which are based on historic rates of change, rather than the inflation
rates provided by OMB, which predict future rates of change.
Furthermore, RHS is incorrectly calculating the rates it plans to use,
which may cause the agency to underestimate its future contract needs.
A simple modification to the agency's planned budget estimation process
would help the agency more accurately estimate its rental assistance
needs and curtail future unexpended balances--or budget shortfalls as
the case may be.
Recommendation for Executive Action:
To more accurately estimate rental assistance budget needs, we
recommend that the Secretary of Agriculture require program officials
to use and correctly apply the inflation rates provided by OMB in its
annual budget and allocation estimation processes.
Agency Comments and Our Evaluation:
We provided USDA and OMB with a draft of this report for their review
and comment. The Acting Undersecretary for Rural Development for USDA
raised several concerns about our analysis of RHS's budgeting practices
and rental assistance expenditure data. In particular, the Acting
Undersecretary argued that OMB's Circular A-11 encourages the use of a
per-property microscale rate of change, rather than a blanket national
rate. OMB's Circular A-11 states that all budget materials must be
consistent with the economic assumptions provided by OMB. While OMB
policy permits consideration of certain factors in developing out-year
estimates, this does not mean that an agency should automatically use
its own economic assumptions without providing documentation and
justification. As we note in our report, neither OMB staff nor the
Rural Development Budget Office required a justification for the
agency's inflation rates.
Furthermore, according to the Acting Undersecretary, we did not
demonstrate that using inflation rate projections from the President's
Budget would provide a more accurate budget estimate. We believe that
figure 6 in this report illustrates that using the inflation
projections from the President's Budget would have brought the agency's
budget estimates closer to its actual expenditures, without running the
risk of underfunding the rental assistance contracts.
USDA also disagreed with our finding that RHS's budget estimates were
too high. As stated in this report, we believe RHS overestimates its
budget needs by using inflation factors that are higher than those
projected by OMB for use in the budget process, improperly compounding
the inflation rates, and using expenditure rates that may overstate the
need for rental assistance. Our estimates reflect the extent to which
RHS may have overestimated its budgets when compared with estimates
based on OMB budget guidance documents and appropriate application of a
compounding formula. USDA's complete written comments and our responses
appear in appendix I.
We received oral comments from OMB. OMB representatives did not have
comments on the specific findings or conclusions of this report. They
did, however, note that they are always open to suggestions that would
help the Administration provide more accurate budget projections along
with the related oversight.
Scope and Methodology:
To assess the accuracy of RHS's budget estimates for the rental
assistance program, we collected written and testimonial information
from agency officials on current budget estimation methods and the
budget automation plan that is being developed. We reviewed OMB
guidance on preparing agency budgets and the inflation rates provided
by OMB for agency use, and interviewed OMB staff that oversee the
rental assistance program. Finally, we consulted our Standards for
Internal Control in the Federal Government to review control activities
that apply to RHS's budget estimation processes. In describing RHS's
current process for estimating its budget needs, we faced the problem
that the agency has no official written documentation for that process.
Most information was provided verbally, and the information the agency
did provide outlined only its elementary budget processes.
To assess the activity level of rental assistance contracts issued from
1978 through 1997 with unexpended balances, we reviewed rental
assistance data from the agency's Automated Multi-Housing Accounting
System (AMAS) from January 1990 through October 2003 to determine the
extent of the unexpended balances. We also used these data to determine
the rate at which those balances were currently being expended; by
applying OMB inflation rates for future years to the current rates of
expenditure, we estimated when the funds will expire. We acquired OMB
inflation rates for future years from the fiscal year 2004 and 2005
President's Budgets.[Footnote 10]
To assess the activity level of rental assistance contracts issued from
1998 through 2002 and the accuracy of RHS's estimates of the rates at
which these funds would be used, we reviewed rental assistance data
from AMAS from January 1998 through October 2003 to determine the
activity level of the unexpended balances. We also used these data to
determine the rate at which those balances were currently being
expended; by applying OMB inflation rates for future years to current
rates of expenditure we estimated when the funds will expire. We
assessed the accuracy of RHS's estimates of the rate at which the funds
would be used by comparing RHS's estimated rental assistance
expenditures to actual program expenditures. We determined RHS's
estimated expenditures based on data provided by the agency. We
determined actual program expenditures using payment data from AMAS.
We faced limitations in our assessment of actual program expenditures
using AMAS data. We had compared actual expenditures averaged from the
entire portfolio of contracts issued from 1978 through 2002 with
estimated expenditures averaged from only those units for which
renewal, new construction, or servicing contracts originated in the
corresponding year. In response to agency concerns, we eliminated
contracts issued prior to 1989 because they represented a mix of
contracts that were expending funds normally and contracts that
exhibited unusual behavior resulting in abnormally low expenditures.
The agency opined that the annual expenditures from these abnormal
contracts could not be compared with their estimates. Due to the
structure of AMAS data, we were unable to isolate the abnormal behaving
contracts. However, the resulting figure (fig. 6), based on their
comments, looks very similar to the original figure.
For the AMAS data we used, we requested and received the most current
data available from the system. We assessed the reliability of the data
by (1) reviewing existing information about the systems and the data,
(2) interviewing agency officials knowledgeable about the data, and (3)
examining the data elements (fields) used in our work by comparing
known and/or anticipated values. When inconsistencies were found, we
discussed our findings with agency officials to understand why
inconsistencies could exist. We determined that the data were
sufficiently reliable for the purposes of this report.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to interested Members of Congress and congressional committees. We also
will send copies to the Secretary of the Department of Agriculture and
the Director of the Office of Management and Budget and make copies
available to others upon request. In addition, this report will be
available at no charge on the GAO Web site at [Hyperlink,
http://www.gao.gov].
Please contact me at (202) 512-4325, or Andy Finkel at (202) 512-6765,
if you or your staff have any questions concerning this report. Key
contributors to this report are listed in appendix III.
Sincerely yours,
Signed by:
William B. Shear:
Director, Financial Markets and Community Investment:
[End of section]
Appendixes:
Appendix I: Comments from the U.S. Department of Agriculture:
USDA:
United States Department of Agriculture:
Office of the Secretary
Washington, D.C. 20250:
MAR 8 2004:
Mr. William B. Shear:
Director, Financial Markets and Community Investment:
United States General Accounting Office:
441 G Street, NW Room 2A10:
Washington, DC 20548:
Dear Mr. Shear,
Thank you for providing the United States Department of Agriculture
(USDA), Rural Development, with your draft report on Standardization of
Budget Estimation Processes Needed for Rental Assistance Program, Audit
No. GAO-04-424. I would like to offer the following comments for your
consideration and ask that a copy of this response be included in your
final report.
USDA provides affordable multifamily housing to almost a half-million
residents in rural America. One of the most important tools available
is the Rental Assistance (RA) program, which enables eligible very low
and low-income residents to pay only 30 percent of their income towards
rent. USDA takes very seriously its stewardship of this program.
While USDA acknowledges that there is evidence that we have
inadvertently overestimated the cost of RA contracts in the past, we do
not believe that the report supports an estimation of $51 million a
year in over funding in Fiscal Year (FY) 2003. It should be noted that
at no point were government funds at risk and there has been no loss of
funds due to the Agency's RA budget estimation policy. Funds
appropriated for RA contracts have allowed any balance remaining at the
end of the five-year contract period to be used for the extension of
those contracts. Otherwise, these contracts would have required
additional funds for renewal.
The General Accounting Office (GAO) found that contracts are now
expected to exhaust funds in the sixth year. USDA believes this
validates the method of estimating that Rural Housing Service (RHS) has
used in recent years. RHS has succeeded in narrowing down estimated
expenditure rates without the benefit of complete automation. RHS's:
estimating methods have evolved. Over time, assumptions, factors and
circumstances require us to re-evaluate and change our methods.
Multifamily property and health insurance costs, taxes and operating
expenses all increase over time. Given the dynamic nature of our
portfolio, we believe it is inconclusive to determine at this time that
active contracts within their renewal period are over funded.
GAO identified three ways that overestimating occurs: inflation rate,
compounding rate and expenditure rate.
Inflation Rate:
GAO notes that RHS has not used the Office of Management and Budget
(OMB) inflation rate or followed OMB procedures. However, USDA would
argue that OMB Circular A-1 l actually encourages the use of a per
property micro-scale rate of change rather than a blanket national
rate. We believe our budgeting is in accordance with OMB budget
planning guidance as required by OMB Circular A-11.
OMB is currently consulted but we will implement a more formal process.
As in the past, USDA will work with OMB to develop a mutually
acceptable rate. USDA will also continue to evaluate use of the per
project rate of change as an indicator of future RA use because we
believe it is the best method of determining what is happening in a
specific property.
GAO attempts to show in Figure 6 that RHS estimates have exceeded
actual expenditures for 1990-2003. However, Figure 6 is flawed for two
reasons: (1) it presents only Year 1 of a five-year contract to compare
estimates to expenditures. A truer picture of any overestimation claim
would follow a contract through its life span and compare the estimate
against actual expenditures. Showing only the first year gives a
distorted view, and (2) as noted by GAO, RHS budget estimation process
data was not available for years prior to 2000. We were unable to trace
the per unit values shown back to any source.
Inflation Rate Compounding Calculation:
USDA agrees that the compounding calculation used most recently may
have resulted in contracts outliving their expected renewal term by
three to six months. Similarly, the proposed RA Forecasting Tool has
been revised to address GAO's preliminary tool review concerns.
Expenditure Rate:
The third factor cited by GAO for overestimation of the RA budget needs
is the expenditure rate that RHS used in its calculations. It is
important to note that RHS developed the average rate in an effort to
balance out the high and low vacancy rates; vacancies were not ignored
as claimed in the report. It should also be noted that RA is only paid
on occupied units and not on vacant units. USDA believes that using the
most recent 3 months' history represented a more realistic picture of
occupancy going forward vs. the occupancy 12 months previous, absent
the availability of historic property data, now available with the
proposed automated Forecasting Tool. Also through this process, RHS
instilled quality control by investigating any abnormally high or low
rates prior to calculating the contract amount; we did not
automatically renew without examination.
USDA believes the discussion in the report does not convey RHS's
attempts to achieve balance in its estimating calculations.
USDA reiterates that GAO has not demonstrated that use of OMB's
inflation rate would result in exact five-year contracts or that use of
the OMB rate matches the RA needs at our multifamily properties. To
require use of a blanket national rate as a basis for funding RA
contracts jeopardizes the property and the tenants. Under funding
contracts is as equally serious a problem as over funding. One of the
major reasons RHS developed the proposed automated RA Forecasting Tool
is to have the ability to drill down to a property level and determine
that specific property's RA needs. USDA is committed to protecting
tenants and the financial viability of the housing they occupy.
USDA disagrees with GAO's assertion that the 1998-2003 contracts are
expending funds at a level consistent with contracts funded in 1978-
1997. The following chart reflects that the contracts funded in the
last six years (1998-2003) are expending their funds at a faster rate
than the historic rate.
Expenditure Rates FY 1998 - 2003 (Historic vs. Current):
[See PDF for image]
Note: Year I represents FY 2003 contracts in their I ° year of renewal;
Year 2 represents FY 2002 contracts in their 2'D year of renewal, etc.
through FY 1998 contracts in 6` year). Data as of March 4, 2004.
[End of figure]
RHS, through a number of methods, monitors the appropriate use of RA,
guards against fraud, waste and abuse, and continues to improve and
revamp its procedures and processes. USDA believes it would be an error
to base any budgetary decisions on the claim of $51 million in over
funding for FY 2003 simply because we did not use the OMB inflation
rate. FY 2003 contracts have just started their five-year renewal
cycle.
USDA is committed to the future of rural communities and we continue to
work toward improving our rental assistance program.
Thank you for this opportunity to comment on the report. If you have
any questions, please contact John M. Purcell, Director, Financial
Management Division, at (202) 692-0080.
Signed by:
GILBERT G. GONZALEZ:
Acting Under Secretary Rural Development:
The following are GAO's comments on the U.S. Department of
Agriculture's letter dated March 8, 2004.
GAO Comments:
1. Our $51 million figure is based on data provided by the U.S.
Department of Agriculture (USDA), analyzed in a manner consistent with
the Office of Management and Budget (OMB) budgetary guidance,
correcting for the areas where we believe USDA overestimates its
budgetary requirements. As we state in the report, this number is an
estimate of the extent to which the Rural Housing Service (RHS) may
have overestimated its budget when compared with an estimate based on
OMB budget guidance documents and appropriate application of a
compounding formula.
2. Although we concur that a budget estimation process, by itself, will
not necessarily put government funds at risk, consistently overstating
funding needs undermines the congressional budget process. In addition,
without performing a detailed internal controls review, we cannot state
that the current process for allocating budget funds has not put
government funds at risk or led to a loss of funds. We do note that RHS
is not adhering to internal control standards regarding segregation of
duties for both its estimation and allocation processes, and such an
internal control lapse could introduce a risk of error or fraud.
3. We agree that RHS's contracts are not lasting as long as they did in
the past, however, a 6-year average life contract is still 20 percent
greater than the intended contract life.
4. Circular A-11 states that "all budget materials, including those for
out-year policy and baseline estimates, must be consistent with the
economic assumptions provided by OMB. OMB policy permits consideration
of price changes for goods and services as a factor in developing
[outyear] estimates. However, this does not mean that you should
automatically include an allowance for the full rate of anticipated
inflation in your request." If the agency has evidence that a property
will perform above or below the Consumer Price Index, which is the
basis for OMB's economic assumptions, we would agree that this evidence
should be used. OMB guidance indicates that the agency should document
this evidence and justify that its proposed budget-estimation
methodology would create a more accurate budget estimate.
5. We note in our report that the difference declines over time. Figure
2 shows this decline and shows that RHS is still overestimating its
budget needs in the fifth year, albeit by less than in years 1 through
4.
6. As stated in the note in figure 6, RHS's estimated expenditures are
based on data provided by the agency. Actual RHS expenditures are based
on data from RHS's Automated Multi-Housing Accounting System (AMAS). As
noted in the report, RHS did not document the inflation rate it used in
its budget and allocation estimates prior to 2000. This is the lack of
data to which we refer. It only affected our OMB-based estimate of RHS
expenditures by preventing us from backing out agency rates and
replacing them with the inflation projections from the President's
Budget for years prior to fiscal year 2000. We clarified the text on
this point.
7. Our concern centers on the fact that the agency is using the highest
of the most recent 3 months instead of an average of all 3 months, not
on the use of 3 months of data versus 12 months of data.
8. We concur that these rates are, in fact, an estimate, but as figure
6 illustrates, using these rates would have brought the agency's
estimates closer to its actual expenditures. Furthermore, as shown in
figure 6, budget estimates based on the inflation projections from the
President's Budget would still have been higher than actual program
expenditures, which should alleviate USDA's concern that using this
method would underfund contracts.
9. Our report does not make this assertion. We state that the activity
of contracts issued from 1998 through 2002 is consistent with earlier
years, and in particular, that RHS has overestimated its spending needs
in most years since 1990.
10. The $51 million overestimate does not stem from the inflation rate
only. It also stems from RHS compounding the rate to the fifth power
and then applying that rate back to each year of the contract. We
concur that we will not know the outcome of the contracts issued in
2003 until 2008 or later. This is our best estimate based on data
provided by the agency and following OMB budgetary guidance.
[End of section]
Appendix II: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Andy Finkel (202) 512-6765 f [Hyperlink, finkela@gao.gov]
inkela@gao.gov Katherine Trimble (202) 512-5033 t [Hyperlink,
trimblemk@gao.gov] rimblemk@gao.gov:
Staff Acknowledgments:
In addition to those named above, William Bates, Emily Chalmers, Jamila
Jones, Austin Kelly, Marc Molino, and Julie Trinder made key
contributions to this report.
(250122):
FOOTNOTES
[1] An agency's cancellation or downward adjustment of previously
recorded obligations.
[2] We will issue a separate legal opinion on this issue.
[3] The Section 515 Multifamily Direct Rural Rental Housing Loans
program provides loans, subsidized as low as 1 percent interest, to
developers to build rental housing. The Section 514 Multifamily Housing
Farm Labor Loans program provides grants and loans subsidized at 1
percent interest to build rental housing for farm laborers either off
or on the farmer's property. Only "off-farm" labor housing is eligible
for rental assistance subsidies. All projects must be established on a
nonprofit or limited profit basis to receive rental assistance.
[4] Eligible tenants are persons with very low and low incomes, the
elderly, and persons with disabilities who are unable to pay the basic
monthly rent within 30 percent of their adjusted monthly income. Very
low income is defined as below 50 percent of the area median income
(AMI); low income is between 50 and 80 percent of AMI.
[5] The study did not consider 20-year contracts, likely because the
first of these would not expire until 1998.
[6] The actual inflation rate, as measured by the Consumer Price Index,
ranged from 8.9 percent to 13.3 percent from 1978 through 1981, and
fell to 3.8 percent in 1982.
[7] In 2002, for example, there was a difference of $30 million
(overestimation) between the agency's budget request and actual
allocation needs.
[8] U.S. General Accounting Office, Standards for Internal Control in
the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1,
1999).
[9] Contracts are funded quarterly, based on their estimated renewal
needs between January and December. Therefore, the average contract is
funded based on a June renewal time frame, and an average contract
lifetime would run from June of the first year to June of the fifth
year (e.g., June 1998 to June 2003).
[10] Table S-11: Comparison of Economic Assumptions from the Budget for
Fiscal Year 2005, lists inflation rates for 2005 to 2009. For any
projections 2010 and beyond, we used the rate for 2009.
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