Section 8 Program Funding
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MEMORANDUM
January 28, 2005
TO:
The Honorable Mayor and City Council Members
FROM:
Michael C. Van Milligen, City Manager
SUBJECT: Section 8 Program Funding
Housing and Community Development Department Director David Harris is transmitting
information to the City Council on recent and continuing changes in the funding
structure for the HUD Section 8 rental assistance program and summarizing action
taken by the Housing Department and Housing Commission in response to the funding
short-fall. ..
The Section 8 Program in Dubuque has been administered by the Housing Department
since 1976 and currently serves 1080 households, on the Housing Voucher and
Moderate Rehabilitation Programs. Using approximately $4 million annually received
from the US Department of Housing and Urban Development (HUD), the City
subsidizes the rents of these families by making payments directly to area landlords.
Tenants generally pay about 30% of their income for the rent; the Section 8 subsidy
pays the balance, up to a maximum rent allowed by HUD.
However, due to Congressional budget actions, beginning in FY04 the City has dealt
with a series of HUD funding reductions. In late April 04, the City was first notified that
the Fiscal Year 2004 "annual contributions contract" had been reduced, retroactively to
January 1 04. The City was not fully advised of the impact of those reductions until June
of last year.
Again in December of 04, the City was notified of additional funding reductions. Like the
first, these reduced both funding available for housing assistance payments
and for earned administrative fees, the latter being the means by which the City meets
its administrative expenses. Historically, 100% of the costs of administration of the
Section 8 Program have been supported by the fees earned for keeping the housing
vouchers fully leased.
Finally, the City received notice on 24 January of further cuts for the balance of this
fiscal year.
This has resulted in a negative cash flow for the program. The City has implemented a
number of measures to reduce rental payment costs, as well as administrative cost
reductions.
Historically, the City paid the h,ighest available rents to program landlords, subject to
"rent reasonableness" requirements. HUD sets the area rent the City can pay, called
the Fair Market Rent (FMR.) The local housing authority has the discretion to set the
"Voucher Payment Standard" at a range of 90-110% of the Fair Market Rent; the
Housing Commission previously consistently set that Standard at 110%. In this
manner, the City can actually pay subsidy toward a rent higher than the Fair Market
Rent. making the City's program as market competitive as possible to area landlords as
well as promoting housing choice for participants. In September, the City reduced the
Standards, to 95-107% of the Fair Market Rent. This had the effect of lowering the
housing assistance payments, and in most cases lowering the amount of rent the
landlord received and increasing the tenant share.
However, due to the additional HUD funding reductions now implemented as of the first
of the year, more severe responses have been mandated. At two meetings held in
January, the Housing Commission approved significant program changes.
The first reduces Voucher Payment Standards (VPS) for all types of units, to 95% of the
Fair Market Rent. This is a $25-50 per month reduction. Specifically, the City pays
$25-50 less for the monthly subsidy. The effect of this is that the landlord must either
convince the tenant to pay the difference, or accept a lower payment, or the tenant has
to move to a lower-cost unit.
The other significant action taken by the Housing Commission in January is to approve
a change in the "subsidy standards." Historically, Dubuque's program has been
generous in allocating bedrooms according to family size. For example, a family of a
parent and two children might typically receive a 3-bedroom voucher.
A policy now approved is to "down-size" families into the fewest appropriate number of
bedrooms, thereby significantly reducing the amount of subsidy the City pays. This
policy requires a 3-person household to occupy a 1-bedroom unit; and a 5-person family
to occupy a 2-bedroom unit. As the Housing Code allows use of any "habitable" room in
the unit for sleeping, this policy is locally legal and does satisfy Fair Housing standards.
These projections do illustrate that the City will achieve program equilibrium as a result
of these cost reductions, and again realize a positive cash flow. The City will have the
opportunity at that time to again assess alternatives and potentially take additional
measures to relieve some of the hardships that have been incurred by both program
participants and area landlords.
The changes that have implemented have many potential manifestations. Section 8
Program participants may have to pay a larger share of the rent. Rental property
owners will receive reduced subsidy amounts. Tenants may elect to move from current
units, seeking a lesser number of bedrooms. Landlords may feel pressure to reduce
rents, rather than losing existing tenants, Or landlords may elect to withdraw from the
program, seeking other tenants at market rental rates. This would reduce Section 8
occupancy levels and correspondingly reduce administrative revenues. It would also
reduce future funding allocations from HUD, which now bases annual allocations based
on previous year leasing rates.
The Housing Commission will sponsor a series of informational meetings with
constituent groups regarding these program changes. These groups will include the
Landlords Association, Board of Realtors, Legal Services and local social service
agencies and tenants. All landlords and program participants will receive a letter
explaining changes and their impacts,
(YlJ ~01;11~L
Michael C. Van Milligen
MCVM/jh
Attachment
cc: Barry Lindahl, Corporation Counsel
Cindy Steinhauser, Assistant City Manager
David Harris, Housing and Community Development Department Director
CITY OF DUBUQUE, IOWA
MEMORANDUM
28 January 05
To: Mike Van ~~en, City Manager
From: David Hams, Housing and Community Development Department
Re: Section 8 Program funding
Introduction
The purpose of this memorandum is to provide you and the City Council
information on recent and continuing changes in the funding structure for the
HUD Section 8 rental assistance program. The memo also summarizes actions
taken by the Housing Department and Housing Commission in response to the
funding short-fall.
Background
The Section 8 Program in Dubuque has been administered by the Housing
Department since 1976 and currently serves 1080 households, on the Housing
Voucher and Moderate Rehabilitation Programs. Using approximately $4 million
annually received from the US Department of Housing and Urban Development
(HUD), we subsidize the rents of these families by making payments directly to
area landlords. Tenants generally pay about 30% of their income for the rent; the
Section 8 subsidy pays the balance, up to a maximum rent allowed by HUD.
We have successfully administered this program, having been recognized by
HUD for three consecutive years as a "High Performer" housing authority. We
have also been awarded recognition by the HUD Regional office and by both the
Iowa and national chapters of National Association of Housing and Redevelop-
ment Officials (NAHRO). And due to prudent fiscal management, we have been
able to accrue an administrative reserve account exceeding $300 000 to-date.
Discussion
However, due to Congressional budget actions, beginning in FY04 we have dealt
with a series of HUD funding reductions. In late April 04, we were first notified
that our Fiscal Year 2004 "annual contributions contract" had been reduced,
retroactively to January 1 04. We were not fully advised of the impact of those
reductions until June of last year.
Again in December of 04, we were notified of additional funding reductions. Like
the first, these reduced both funding available for housing assistance payments
and for earned administrative fees, the latter being the means by which we meet
our administrative expenses. Historically, 100"tO of the costs of administration of
our Section 8 Program has been supported by the fees we earn for keeping the
housing vouchers fully leased.
Finally, we received notice on 24 January of further cuts for the balance of this
fiscal year.
The major change in the way the funds are now allocated by HUD has been to
move from a cost-based model to a dollar-based, or flat rate funding model.
Previously, we were reimbursed from HUD for the total housing assistance
payments made to area landlords. The system now utilized simply establishes a
total amount we are authorized to spend, regardless of actual costs incurred.
This has resulted in a negative cash flow for the program. We have implemented
a number of measures to reduce rental payment costs, as well as administrative
cost reductions. The outflow of program dollars has continued, however, due to
the delay, required by HUD regulations, in implementing changes in the level of
assistance we pay. Any significant changes in assistance can be implemented
only over a 12 to 24 month period, due to noticing requirements to program
participants. A further explanation of those implementation delays will follow later
in this memorandum.
In explanation of the dollar-based model: HUD's June 04 notice established a
"PUG," or maximum monthly per-unit cost, allowed us for leasing of each housing
voucher, in the amount of $307. Again, this was made retroactive to January 1
2004. For FY05, (beginning in July), we have calculated that we have averaged
$316 per month, per voucher, for the housing assistance payment. Due to cost-
saving measures, we were able to progressively reduce our PUG, from $323 in
July to a low of $308 in December. We unsuccessfully appealed the arbitrary
assignment of the $307 PUG determination.
Note: We also appealed the "annual adjustment factor" that HUD assigned to us,
and were successful in that regard. We received a one-time payment of $72 979
to make up unwarranted reductions.
Again in explanation: If we lease 1000 vouchers a month, and the average
leasing cost (of $316) is $9 in excess of the allowed PUG (of $307), that means
we have paid area landlords $9000 in rental assistance that will not be
reimbursed to us by HUD. An annual deficit would be projected at $108 000. At
that rate, we would deplete our reserves account within 2-3 years and have no
further ability to absorb these losses.
The notice we received in January has further reduced the allowed PUC to $298.
Actions taken to respond to fundina reductions
We have continuously attempted to reduce our leasing costs during this fiscal
year. An initial action was to limit our losses due to "portability," a HUD
requirement that allows participants to move to another jurisdiction, and take our
housing voucher with them.
Beginning last year, a trend was noted, in which participants were moving to
higher-cost urban areas. In years past, this would not have been a problem as
most housing authorities "absorbed" the portable voucher - of the in-coming
participant - and returned our voucher to us. However, due to the effect of cost
reductions, authorities began to refuse to absorb, in effect "keeping" our former
participant on their program, but at our expense.
What this meant for us was an outflow of program dollars. For example, a
participant moving to the Chicago area might receive a local monthly housing
assistance subsidy of $700-1000, while HUD reimburses us $307, costing us
$400-700 per month. As a result, the Housing Commission approved a policy
change, to no longer allow portability of vouchers to higher-cost areas where
housing authorities refuse to absorb our housing voucher. Unfortunately, those
participants who previously did exercise their portability rights remain our clients.
They are costing us about $35 000 in unreimbursed expenses annually.
Previously, we "pro-rated" rents and placed a participant on the program as soon
as the unit passed the initial inspection. This helped both tenants and landlords
and was extended as a program courtesy to both. With the HUD changes,
however, we were no longer reimbursed for partial month rentals. As a result, we
have ceased making pro-rated subsidy payments.
Historically, we always paid the highest available rents to program landlords,
subject to "rent reasonableness" requirements. HUD sets the area rent we can
pay, called the Fair Market Rent (FMR) The local housing authority has the
discretion to set the "Voucher Payment Standard" at a range of 90-11 0% of the
FMR; the Housing Commission previously consistently set that Standard at
110%. In this manner, we can actually pay subsidy toward a rent higher than the
Fair Market Rent, making our program as market competitive as possible to area
landlords as well as promoting housing choice for participants. In September, we
reduced the Standards, to 95-107% of the FMR This had the effect of lowering
our housing assistance payments, and in most cases lowering the amount of rent
the landlord received and increasing the tenant share.
However, due to the additional funding reductions now implemented as of the
first of the year, more severe responses have been mandated. At two meetings
held in January, the Housing Commission approved significant program changes.
The first reduces Voucher Payment Standards (VPS) for all types of units, to
95% of the Fair Market Rent. This is a $25-50 per month reduction. Specifically,
we pay $25-50 less for the monthly subsidy. The effect of this is that the landlord
must either convince the tenant to pay the difference, or accept a lower payment,
or the tenant has to move to a lower-cost unit.
Mentioned previously was the HUD requirement for extended notices for
implementing these cost saving measures. For instance, to reduce the Voucher
Payment Standard, we must provide a 12-month notice - from the annual
renewal date of the housing voucher. That means that the effect of the reduced
VPS becomes effective for the earliest renewing tenants in 12 months; and that
the fully realized effect of the reductions for all program participants occurs in 24
months. That obviously occurs too late, given our negative cash flow.
The reduced Payment Standard does take effect immediately, however, for all
program participants who move, and for all new admissions. We calculate about
32 participants either leave the program or move to other program units, each
month (a turn-over rate of about 24%.) For those families, the effect of the
reduced subsidies occurs now.
The other significant action taken by the Housing Commission in January is to
approve a change in the "subsidy standards." Historically, our program has been
generous in allocating bedrooms according to family size. For example, a family
of a parent and two children might typically receive a 3-bedroom voucher.
A policy now approved is to "down-size" families into the fewest appropriate
number of bedrooms, thereby significantly reducing the amount of subsidy we
pay. This policy requires a 3-person household to occupy a 1-bedroom unit; and
a 5-person family to occupy a 2-bedroom unit. As the Housing Code allows use
of any "habitable" room in the unit for sleeping, this policy is locally legal and
does satisfy Fair Housing standards. (A habitable room is any room which meets
requirements for size, light, heating and ventilation; typically, these include living
rooms. A kitchen is not considered a habitable room.)
Reduction in our housing assistance payment, from a 2-bedroom to a 1-bedroom
unit, results in about $120 less in Section 8 subsidy. Again, either the family
pays the difference, the landlord accepts less, or the tenant will have to move, to
a smaller or less costly unit. The landlord does not have to accept the lower
subsidy amount. But the effect of this policy change will, in most cases, result in
a tenant move.
The implementation time for this policy change is immediate. All households on
the program will receive 30-notice at their voucher renewal date of this change in
their subsidy amount. This means the effect of the policy implementation is fully
realized in 12 months. As well, the policy applies immediately for all families who
move and for all new admissions. We calculate about 85 renewals per month; of
these, we estimate about 12 families will be forced to accept a reduced bedroom
subsidy. Note: Approximately 47% of our program participants are 1-bedroom
households, either elderly or disabled. These households are not subject to the
bedroom subsidy reductions.
Effect of cost reductions
The attached spread sheet has been prepared at our request by Dawn Lange,
Budget Director. At the writing of this memorandum, we have not yet calculated
the impact of reduced administrative fees on our operations. We expect to
determine additional financial deficits, which will effect current year planned
expenditures as well as necessitate a revised FYOS Maintenance Budget.
The sheet incorporates the reductions achieved by reduced Voucher Payment
Standards and reductions in subsidies caused by down-sized occupancy
standards. The projections show cessation of negative cash flow by July OS. At
that point, we will have spent about $SS 000 from our reserves, in FYOS, to keep
the program functioning. I emphasize that this is an optimistic projection, as it is
certain we are experiencing an excess of expenditures over revenues in
administrative costs as well.
These projections do illustrate that we will achieve program equilibrium as a
result of these cost reductions, and again realize a positive cash flow. We will
have the opportunity at that time to again assess our alternatives and potentially
take additional measures to relieve some of the hardships that have been
incurred by both program participants and area landlords.
Other considerations
As previously mentioned, HUD's funding reductions were implemented
retroactively to January 04 - reductions to which we had no opportunity to
respond and reduce our costs in Fiscal Year 2004. For this reason, we will also
realize an operating deficit for the last six months in FY04 as well, resulting in
additional reduction of our reserve account. HUD has not yet notified us of their
response to the filing of our annual settlement statement last August.
Depending on the outcome of that settlement, we may have to consider
additional funding reduction mechanisms. One would be to immediately reduce
Voucher Payment Standards for all participants, at their renewal date. It was
noted earlier in this memorandum that the implementation of a reduced VPS, for
continuing program families, must occur 12 months from their next annual
renewal date. However, we learned at a recent teleconference sponsored by the
National Housing Law Project of a possible way to circumvent this regulation.
According to this telecast, it is possible to enforce the reduced VPS by
terminating the existing housing assistance payments contract with the landlord,
and then immediately reissuing the contract, at the reduced Payment Standard.
The effect is immediate. We will research this option with our HUD Field Office
to determine its feasibility.
A positive note is that we filed an appeal with HUD, in December, in response to
that funding reduction notice, requesting a higher reimbursement rate. We were
funded at a leasing rate of 95.5%; subsequently, we raised that rate to 99-100%.
A provision in the regulations allows an appeal, to restore reimbursement to
reflect increased leasing. HUD will respond to that request within the month.
Summary
The changes we have implemented have many potential manifestations. Section
8 Program participants may have to pay a larger share of the rent. Rental
property owners will receive reduced subsidy amounts. Tenants may elect to
move from current units, seeking smaller bedroom sizes. Landlords may feel
pressure to reduce rents, rather than losing existing tenants. Or landlords may
elect to withdraw from the program, seeking other tenants at market rental rates.
This would reduce our occupancy levels and correspondingly reduce
administrative revenues. It would also reduce future funding allocations from
HUD, which now bases annual allocations based on previous year leasing rates.
Landlords receiving reduced rents may experience financial stress, as they
attempt to meet operating costs with reduced revenues. Our program tenants, all
with incomes less than 50% of the area median, will be faced with difficult
choices as their share of rents is increased. For many households, there is no
marginal income available for increased expenses.
Many of these factors will be ultimately determined by the dynamics of the rental
market. In a higher-vacancy environment such as we have experienced in recent
years, tenants may be in a better position to negotiate lower rents. In a higher-
demand market, tenants may be forced to choose from a smaller inventory of
older, lower-priced units. This could lead to a greater concentration of lower-
income households in the older residential sections of the downtown.
The Housing Commission will sponsor a series of informational meetings with
constituent groups regarding these program changes. These groups will include
the Landlords Association, Board of Realtors, Legal Services and local social
service agencies and tenants. All landlords and program participants will receive
a letter explaining changes and their impacts.
Given the fiscal climate in Washington and the constantly changing regulations, it
can be expected that our situation will continue to be in a state of flux. We have
likened these budget reductions to a "moving target," as we have continued to
attempt to catch up by revising our local policies to absorb the financial impacts.
We are advised that HUD's FY06 budget will propose further reductions. We will
maintain our best effort to preserve the viability of the Section 8 Program, with
the goal of providing rental assistance to as many participant families as
possible.
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