Rural Housing Service
Agency Has Overestimated Its Rental Assistance Budget Needs over the Life of the Program Gao ID: GAO-04-752 May 20, 2004The Rural Housing Service's (RHS) Section 521 Rental Assistance Program provides rental subsidies to about 250,000 rural tenants through 5-year contracts with project owners; 20-year contracts were also issued from 1978 through 1982. 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. Since contracts remain active until all funds are expired, some of these contracts will likely last as long as 38 years. GAO was asked to assess (1) the activity level of rental assistance contracts issued from 1978 through 1997 that have unexpended balances and the possibility of deobligating these balances, and (2) 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. The Department of Agriculture commented on our responses to these questions.
Based on their age, contracts (both 5 and 20 year) issued from 1978 through 1997 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. At current spending rates, it will take another 7 years for these contracts 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. 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. A s of June 2003, 74 percent of the total number of contracts issued in 1998 were 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 1.5 years, suggesting that many of these contracts are expending their funds more slowly than RHS anticipated. 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. 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. Just as GAO found that contracts issued from 1978 through 1997 have lasted beyond their intended terms, it appears that RHS has overestimated its budget needs over the life of the rental assistance program.
GAO-04-752, Rural Housing Service: Agency Has Overestimated Its Rental Assistance Budget Needs over the Life of the Program
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entitled 'Rural Housing Service: Agency Has Overestimated Its Rental
Assistance Budget Needs over the Life of the Program' which was
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Report to Congressional Requesters:
May 2004:
Rural Housing Service:
Agency Has Overestimated Its Rental Assistance Budget Needs over the
Life of the Program:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-04-752]:
GAO Highlights:
Highlights of GAO-04-752, a report to congressional requesters
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
through 5-year contracts with project owners; 20-year contracts were
also issued from 1978 through 1982. 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. Since
contracts remain active until all funds are expired, some of these
contracts will likely last as long as 38 years. GAO was asked to assess
(1) the activity level of rental assistance contracts issued from 1978
through 1997 that have unexpended balances and the possibility of
deobligating these balances, and (2) 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. The
Department of Agriculture commented on our responses to these
questions.
What GAO Found:
Based on their age, contracts (both 5 and 20 year) issued from 1978
through 1997 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. At current spending
rates, it will take another 7 years for these contracts 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. 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.
As of June 2003, 74 percent of the total number of contracts issued in
1998 were 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 1.5
years, suggesting that many of these contracts are expending their
funds more slowly than RHS anticipated. 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.
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. Just as GAO found that
contracts issued from 1978 through 1997 have lasted beyond their
intended terms, it appears that RHS has overestimated its budget needs
over the life of the rental assistance program.
Actual Versus Estimated Rental Assistance Expenditures Per Unit Per
Year, from 1990 through 2003:
[See PDF for image]
[End of figure]
www.gao.gov/cgi-bin/getrpt?GAO-04-752.
For more information, contact William B. Shear at (202) 512-4325 or
shearw@gao.gov.
[End of section]
Contents:
Letter:
Agency Comments:
Appendix:
Appendix I: Briefing to the House Committee on Financial Services:
Abbreviations:
AMAS: Automated Multi-Housing Accounting System:
OMB: Office of Management and Budget:
RHS: Rural Housing Service:
USDA: United States Department of Agriculture:
Letter May 20, 2004:
The Honorable Michael G. Oxley:
Chairman:
Committee on Financial Services:
House of Representatives:
The Honorable Sue W. Kelly:
Chairwoman:
Subcommittee on Oversight and Investigations:
Committee on Financial Services:
House of Representatives:
The Honorable Robert W. Ney:
Chairman:
Subcommittee on Housing and Community Opportunity:
Committee on Financial Services:
House of Representatives:
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. RHS provides the subsidies through 5-
year contracts with project owners; 20-year contracts were also issued
for units in newly constructed properties from 1978 through 1982. With
a fiscal year 2004 appropriation of almost $600 million, the program is
RHS's largest line-item appropriation. 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. Since
contracts remain active until all funds are expired, some of these
contracts will likely last as long as 38 years.
To help with your oversight of the Section 521 Rental Assistance
Program, you asked us to assess (1) 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 (2) 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 assess the activity level of rental assistance contracts issued from
1978 through 2002, we reviewed rental assistance data from USDA'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. We estimated when the funds
will expire by applying Office of Management and Budget (OMB) inflation
rates for future years to the current rates of expenditure. We acquired
the OMB inflation rates for future years from the fiscal year 2004 and
2005 budgets of the President.[Footnote 2] We assessed the accuracy of
RHS's estimates of the rate at which the funds would be used for
contracts issued from 1998 through 2002--and again for contracts issued
from 1990 through 2003--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
conducted our work from June 2003 through February 2004 in Washington,
D.C., and St. Louis in accordance with generally accepted government
auditing standards.
Based on their age, contracts (both 5 and 20 year) issued from 1978
through 1997 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 appendix, slides 4
and 5). Contracts issued from 1983 through 1997 accounted for the
remaining $95 million.
In 2002, approximately $179 million in rental assistance funds was paid
to project owners from contracts issued from 1978 through 1997, $53
million from contracts issued from 1978 through 1982, and $126 million
from contracts issued from 1983 through 1997 (see appendix, slides 6
and 7). At this rate, contracts from the 1983 to 1997 period will
likely expend their remaining $95 million during 2004. The 1978 to 1982
contracts 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 (see appendix, slide 8).
The rental assistance contracts that implement the rental assistance
program 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.[Footnote 3]
As of June 2003, 74 percent of the total number of contracts issued in
1998 were 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 1.5
years, suggesting that many of these contracts are expending their
funds more slowly than RHS anticipated (see appendix, slide 10). 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.
In fact, 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. Slide 12 (see appendix)
provides an example of the difference between RHS's actual and
estimated expenditures from 1990 to 2003.[Footnote 4] RHS estimates are
above actual expenditures in each of the years. Just as we found that
contracts issued from 1978 through 1997 have lasted beyond their
intended terms, it would appear that RHS has overestimated its budget
needs over the life of the rental assistance program.
Agency Comments:
We provided USDA with a draft of our report Rural Housing Service:
Standardization of Budget Estimation Processes Needed for Rental
Assistance Program, which included these two objectives, for review and
comment.[Footnote 5] The Acting Undersecretary for Rural Development
for USDA raised concerns about our analysis of RHS's rental assistance
expenditure data. Specifically, USDA believed our finding that
contracts issued from 1998 through 2002 are expected to exhaust their
funds in their sixth year validates the method of budget estimating
that RHS has used in recent years. While we agree that RHS's contracts
are not lasting as long as they did in the past, a 6-year average
contract life is still 20 percent greater than the intended contract
life. USDA claimed we assert that the contracts issued from 1998
through 2003 are expending funds at a level consistent with contracts
funded from 1978 through 1997. We do 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.
As agreed with your office, unless you publicly announce the contents
of this report, 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
make copies available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at [Hyperlink,
http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-4325, Andy Finkel at (202) 512-6765, or
Katherine Trimble at (202) 512-5033. William Bates, Emily Chalmers,
Jamila Jones, Austin Kelly, Marc Molino, and Julie Trinder made key
contributions to this report.
Signed by:
William B. Shear:
Director, Financial Markets and Community Investment:
[End of section]
Appendixes:
Appendix I: Briefing to the House Committee on Financial Services:
[See PDF for image]
[End of figure]
(250160):
FOOTNOTES
[1] An agency's cancellation or downward adjustment of previously
recorded obligations.
[2] Table S-11: Comparison of Economic Assumptions from the Budget for
Fiscal Year 2005, lists inflation rates for 2005 through 2009. For any
projections for 2010 and beyond, we used the rate for 2009.
[3] We will issue a separate legal opinion on this issue.
[4] 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 new
(including renewal) 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. The declining differentials of the
second to fifth years are not reflected in slide 12. 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. For more discussion, see U.S.
General Accounting Office, Rural Housing Service: Standardization of
Budget Estimation Processes Needed for Rental Assistance Program, GAO
04-424 (Washington, D.C.: Mar. 25, 2004).
[5] GAO-04-424 addressed three objectives, two of which are discussed
here, in GAO-04-752. See GAO-04-424 for USDA's complete comments on all
three objectives.
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