oversight

Elderly Housing: Project Funding and Other Factors Delay Assistance to Needy Households

Published by the Government Accountability Office on 2003-06-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             United States General Accounting Office

GAO                          Testimony
                             Before the Special Committee on Aging,
                             U.S. Senate


For Release on Delivery
Expected at 10:00 a.m. EDT
Tuesday, June 17, 2003       ELDERLY HOUSING
                             Project Funding and Other
                             Factors Delay Assistance to
                             Needy Households
                             Statement of David G. Wood, Director
                             Financial Markets and Community Investment




GAO-03-807T
                                                June 2003


                                                ELDERLY HOUSING

                                                Project Funding and Other Factors Delay
Highlights of GAO-03-807T, a testimony          Assistance to Needy Households
before the Special Committee on Aging,
U.S. Senate




In 2001, an estimated 2 million                 As the only federal housing program that targets all of its rental units to very
elderly households with very low                low income elderly households, HUD’s Section 202 program provides a
incomes (50 percent or less of area             valuable housing resource for these households. Although they represent a
median income) did not receive                  small share of all elderly households, very low income elderly renters have
housing assistance. The                         acute housing affordability problems because of their limited incomes and
Department of Housing and Urban
Development (HUD) considered
                                                need for supportive services. The Section 202 program offers about 260,000
most of these households to be                  rental units nationwide and ensures that residents receive rental assistance
“rent burdened” because they spent              and access to services that promote independent living. However, even with
more than 30 percent of their                   the program’s exclusive focus, Section 202 has only reached an estimated 8
incomes on rent. The Section 202                percent of very low income elderly households.
Supportive Housing for the Elderly
Program provides capital advances               More than 70 percent of Section 202 projects in GAO’s analysis did not meet
(grants) to nonprofit organizations             HUD’s time guideline for gaining approval to start construction. These
to develop affordable rental                    delays held up the delivery of housing assistance to needy elderly
housing exclusively for these                   households by nearly a year compared with projects that met HUD’s
households. Based on a report                   guideline. Several factors contributed to these delays, particularly capital
issued in May 2003, this testimony
discusses the role of the Section
                                                advances that were not sufficient to cover development costs. Project
202 program in addressing the need              sponsors reported that because of insufficient capital advances, they often
for affordable elderly housing and              had to spend time seeking additional funds from HUD and other sources.
factors affecting the timeliness of             Although HUD’s policy is to provide sufficient funding to cover the cost of
approving and constructing new                  constructing a modestly designed project, HUD has acknowledged that its
projects.                                       capital advances for the Section 202 program sometimes fall short. Other
                                                factors affecting the timeliness of the approval process include inadequate
                                                training and guidance for field staff responsible for the approval process,
                                                inexperienced project sponsors, and local zoning and permit requirements.
In its report, GAO made
recommendations designed to
reduce the time required for                    Housing Cost Burdens of Very Low Income Elderly Renter Households in 2001
projects to receive approval from
HUD to start construction.
Specifically, GAO recommended
that HUD assess the effectiveness
of the methods it uses to calculate
the size of the Section 202 capital
advances and make any
appropriate changes to them. GAO
also made other recommendations
to improve HUD’s administration
and oversight of the 202 program’s
performance.

HUD concurred with the
recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-03-807T.

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

I appreciate the opportunity to be here today to discuss the Department of
Housing and Urban Development’s (HUD’s) Section 202 Supportive
Housing for the Elderly Program. The Section 202 program provides funds
to nonprofit organizations to develop affordable rental housing exclusively
for very low income elderly households that do not receive other forms of
housing assistance. In 2001, there were an estimated 2 million such
households in the nation, most of which HUD considered “rent burdened”
because their rents exceeded 30 percent of their household incomes.

Section 202 provides two types of financial support. First, HUD provides a
project sponsor with a capital advance—essentially a grant—to cover land
and construction costs. HUD’s policy is to have the capital advance cover
the total development costs of the project, which must be of modest
design and must comply with HUD’s minimum property standards. HUD
uses a competitive process to select projects for funding and has
guidelines calling for project sponsors and the agency’s field offices to
accomplish project processing activities—such as completing and
approving design plans—within 18 months so that construction may
commence. (HUD’s field offices may grant extensions of up to 6 months
without headquarters’ approval.) Second, after the project is completed,
HUD provides the sponsor with monthly rental assistance payments to
defray some of the operating expenses. For fiscal year 2002, Congress
appropriated about $783 million for the Section 202 program to fund the
construction of over 6,000 new units, multiyear rental assistance contracts,
and other authorized activities.

My statement today is based on the report on the Section 202 program that
you requested and are releasing today.1 Specifically, my statement
discusses: (1) the role of the Section 202 program in meeting the housing
needs of elderly renter households with very low incomes, (2) the extent
to which Section 202 projects meet HUD’s time guideline for approving
projects to start construction, and (3) the factors that keep Section 202
projects from meeting the time guideline. In preparing the report, we
analyzed data from HUD and other sources on the housing needs of very
low income elderly households. In addition, we reviewed HUD program
and budget data, surveyed all 45 HUD field offices that process Section 202



1
Elderly Housing: Project Funding and Other Factors Delay Assistance to Needy
Households, May 30, 2003 (GAO-03-512).



Page 1                                                                 GAO-03-807T
    projects, and surveyed and interviewed project sponsors and consultants
    experienced in working with the Section 202 program. Our analysis
    focused on Section 202 projects funded between fiscal years 1998 and
    2000.2

    In summary:

•   As the only federal housing program that targets all of its rental units to
    very low income elderly households, Section 202 is an important source of
    affordable housing for these households. Section 202 insulates tenants in
    housing units subsidized by the program from increases in housing costs
    by limiting their rents to 30 percent of household income. As of 2001, the
    program provided housing for an estimated one-fifth of the 1.3 million
    elderly renter households with very low incomes that received some form
    of government housing assistance. However, nationwide about 1.7 million
    elderly renter households with very low incomes did not receive
    government housing assistance and had a housing affordability problem—
    that is, they paid over 30 percent of their incomes for rent. Even with the
    program’s exclusive focus, Section 202 has only reached an estimated 8
    percent of very low income elderly renter households.

•   More than 70 percent of Section 202 projects funded between 1998 and
    2000 were delayed—that is, they took longer than the 18 months set out in
    HUD’s guidelines to proceed from the date of the funding award to the
    date of HUD’s approval to start construction (the project processing
    period). However, a majority of projects were approved for construction
    within 24 months, or 18 months plus the 6-month discretionary extension.
    Projects located in metropolitan areas were more likely than projects in
    nonmetropolitan areas to exceed the 18-month guideline. Further, projects
    that exceeded the 18-month guideline ultimately took an average of 11
    months longer to finish than projects that met the time guideline, and
    these delayed projects contributed to the program’s unexpended fund
    balances. At the end of fiscal year 2002, 14 percent of the Section 202
    program’s $5.2 billion in unexpended appropriations was associated with
    projects that had not yet been approved for start of construction after 18
    months.

•   Several factors impeded the timely processing of projects, according to
    project sponsors, consultants, and HUD field office staff. First, despite



    2
     Lack of reliable program data prevented us from reviewing all Section 202 projects funded
    before fiscal year 1998.



    Page 2                                                                      GAO-03-807T
             HUD’s intent, capital advances have not always covered the cost of
             developing projects, and the resulting shortfalls often prolonged
             processing times, in part because sponsors needed to seek additional
             funding. Second, field office staff’s inconsistent implementation of
             procedures intended to streamline processing, as well as limited training
             and out-of-date guidance on processing policies and procedures, impeded
             timely processing. Third, HUD’s project monitoring system has limitations
             that may have hindered HUD’s ability to oversee project timeliness.
             Finally, other factors—including inexperienced sponsors and local permit
             and zoning requirements—prolonged processing time for some projects.

             Based on our findings, we recommended that HUD evaluate the
             effectiveness of the current methods for calculating capital advances and
             make any changes necessary to ensure that capital advances adequately
             cover development costs. We made three additional recommendations—
             concerning HUD’s training of field office staff, handbook guidance, and
             data systems—directed at more timely processing of projects. In
             commenting on the report, HUD agreed with the recommendations.


             HUD defines elderly households as those in which the householder—the
Background   person whose name is on the lease, mortgage, or deed—or the
             householder’s spouse is at least 62 years old. Elderly households occupied
             about one-quarter (26 million) of the approximately 106 million housing
             units in the United States in 2001, according to the American Housing
             Survey.3 A large majority of these elderly households were homeowners. A
             small share of elderly households, about 19 percent or 5 million, rented
             their homes (compared to about 36 percent of nonelderly households),
             and about 3.3 million of these elderly households were renters with very
             low incomes—that is, 50 percent or less of area median income.

             The Housing Act of 1959 (P.L. 86-372) established the Section 202 program,
             which began as a direct loan program that provided below-market interest
             rate loans to private nonprofit developers, among others, to build rental
             housing for the elderly and people with disabilities. In 1990, the Cranston-
             Gonzalez National Affordable Housing Act (P.L. 101-625) modified Section



             3
              As in other surveys, estimates from the American Housing Survey are subject to both
             sampling and nonsampling errors. All numerical estimates derived from the survey have
             sampling errors of ±10 percent or less of the value of those numerical estimates, unless
             otherwise noted. All percentage estimates have sampling errors of ±6 percentage points or
             less, unless otherwise noted.



             Page 3                                                                      GAO-03-807T
202 by converting it from a direct loan program to a capital advance
program.

In its current form, Section 202 provides capital advances—effectively
grants—to private nonprofit organizations (usually referred to as sponsors
or owners) to pay for the costs of developing elderly rental housing. As
long as rents on the units remain within the program’s guidelines for at
least 40 years, the sponsor does not have to pay back the capital advance.
HUD calculates capital advances in accordance with development cost
limits that it determines annually, and HUD’s policy is that these limits
should cover the reasonable and necessary costs of developing a project of
modest design that complies with HUD’s project design and cost standards
as well as meets applicable state and local housing and building codes.

To be eligible to receive Section 202 housing assistance, households must
have very low income and one member who is at least 62 years old.
Section 202 tenants generally pay 30 percent of their income for rent.
Because their rental payments are not sufficient to cover the property’s
operating costs, the project sponsor receives rental assistance payments
from HUD to cover the difference between the property’s operating
expenses (as approved by HUD) and total tenant rental receipts.4 In
addition, the project sponsor can make appropriate supportive services,
such as housekeeping and transportation, available to these elderly
households.

From year to year, Section 202 has carried significant balances of
unexpended appropriated dollars for capital advances and rental
assistance payments. In fiscal year 2002, the unexpended balance for
Section 202 was approximately $5.2 billion. About 41 percent of this
balance was in capital advance funds and 59 percent was in rental
assistance funds. Some of these unexpended funds have not yet been
awarded to projects, and others are for projects that have not begun
construction. Once construction begins, funds are expended over several
years during the construction phase and during the term of the rental
assistance contracts.




4
 The term on rental assistance contracts is 5 years, although HUD has authorized these
contracts for as long as 20 years. After these contracts expire, HUD renews them for 5
years, subject to the availability of funds.



Page 4                                                                      GAO-03-807T
                           Other federal programs can provide housing assistance to needy elderly
                           households, albeit not exclusively. For example, low income housing tax
                           credits and tax-exempt multifamily housing bonds provide federal tax
                           incentives for private investment and are often used in conjunction with
                           other federal and state subsidies in the production of new and
                           rehabilitated rental housing. The Housing Choice Voucher Program
                           supplements tenants’ rental payments in privately owned, moderately
                           priced apartments chosen by the tenants. Currently, about 260,000 of the
                           approximately 1.5 million voucher households are elderly. Other programs
                           are discussed in an appendix to the report.


                           Section 202 is the only federal housing program that targets all of its rental
Section 202 Is an          units to very low income elderly households. Because these households
Important Source of        often have difficulty affording market rents, program funding is directed to
                           localities based in part on their proportions of elderly renter households
Housing for Elderly        that have a housing affordability problem. Section 202 insulates tenants in
Households with Very       housing units subsidized by the program from increases in housing costs
                           by limiting rents to a fixed percentage of household income. The program
Low Incomes                is a significant source of new and affordable housing for very low income
                           elderly households. Even with the program’s exclusive focus on the very
                           low income elderly, Section 202 has reached only a small share of eligible
                           households.


Section 202 Targets Very   Congress specifically intended the Section 202 program to serve very low
Low Income Elderly         income elderly households and to expand the supply of affordable housing
Households and Makes       that can accommodate the special needs of this group.5 HUD takes into
                           account the need for the kind of housing Section 202 provides when
Supportive Services        allocating program funds to the field offices. The criteria for allocating
Available                  funds to the field offices include, among other things, the total number of
                           very low income elderly renters in the area and the number in this group
                           that pay more than 30 percent of their incomes for rent. According to the
                           American Housing Survey, in 2001 about 1.7 of the 3.3 million elderly
                           renters with very low incomes paid over 30 percent of their incomes for
                           rent.

                           The rent that tenants in Section 202 housing pay equals a percentage of
                           their household incomes—generally 30 percent. This percentage remains


                           5
                           12 U.S.C. 1701q(a).



                           Page 5                                                           GAO-03-807T
                             constant, so the amount of rent tenants pay increases only when
                             household income rises, protecting them from rent increases that might be
                             imposed by the private housing market when market conditions change. In
                             contrast, very low income elderly renter households that do not receive
                             this type of assistance are vulnerable to high rent burdens and increases in
                             market rents. Most of these households have few or no financial
                             resources, such as cash savings and other investments, and rely primarily
                             on fixed incomes that may not increase at the same rate as market rents.

                             Section 202 serves another important function, potentially allowing elderly
                             households to live independently longer by offering tenants a range of
                             services that support independent living—for example, meal services,
                             housekeeping, personal assistance, and transportation. HUD ensures that
                             sponsors have the managerial capacity to assess tenants’ needs,
                             coordinate the provision of supportive services, and seek new sources of
                             assistance. HUD pays a small portion of the costs of providing these
                             services through its rental assistance payments.


Section 202 Provides an      According to the American Housing Survey, in 2001 about 1.3 million, or 40
Estimated One-Fifth of All   percent, of elderly renter households with very low incomes received
Government-Subsidized        some form of rental assistance from a government housing program,
                             including Section 202. According to our analysis of HUD program data,
Housing for Very Low         about 260,000 Section 202 units with rental assistance generally served
Income Elderly Renters       very low income elderly households in 2001. Taken together, these two
                             sources of data suggest that Section 202 served around one-fifth of the 1.3
                             million assisted elderly households identified in the American Housing
                             Survey.6

                             While Section 202 is an important source of affordable elderly housing, the
                             program has reached a relatively small fraction of very low income elderly
                             renter households. Between 1985 and 2001, Section 202 reached no more
                             than about 8 percent of elderly households eligible for assistance under
                             the program. Also, during this period, many of the elderly renter
                             households with very low incomes—ranging from about 45 to 50
                             percent—had housing affordability problems. Other federal programs that
                             develop rental housing generally target different income levels, serve other
                             populations in addition to the elderly (including families with children and



                             6
                              Because this estimate is derived from two different sources, we cannot give a precise
                             percentage; thus, this estimate is intended to be illustrative.



                             Page 6                                                                       GAO-03-807T
                                           people with disabilities) and do not require housing providers to offer
                                           supportive services for the elderly.


                                           Most of the Section 202 projects funded between fiscal years 1998 and
Section 202 Projects                       2000 did not meet HUD’s guideline for approving the start of construction
Generally Did Not                          within 18 months. However, a slight majority of the projects were
                                           processed and approved to start construction within 24 months.
Meet Guidelines for                        Timeliness varied both across HUD’s field offices and by project location
Timeliness                                 (metropolitan versus nonmetropolitan areas). As well as taking longer to
                                           complete than other projects and thus delaying benefits to very low
                                           income elderly households, projects that were not approved for
                                           construction after the 18-month time frame increased the Section 202
                                           program’s year-end balances of unexpended appropriations.


HUD Took Longer Than 18                    HUD’s guidelines state that within 18 months of the funding award date,
Months to Approve Most                     field offices and project sponsors must complete various task before
Projects for Construction                  construction can commence (fig.1). Altogether, 73 percent of the Section
                                           202 projects funded from fiscal years 1998 through 2000 did not meet this
                                           18-month processing time guideline. These projects accounted for 79
                                           percent of the nearly $1.9 billion in funding awarded to projects during this
                                           period. Also during this period, 78 percent of projects located in
                                           metropolitan areas exceeded the 18-month guideline as opposed to 61
                                           percent of projects located in nonmetropolitan areas.

Figure 1: Section 202 Project Processing




                                           HUD field offices may grant an extension of up to 6 months after the 18-
                                           month guideline for projects needing more time to gain approval to start


                                           Page 7                                                          GAO-03-807T
                            construction, and many projects were approved within that 6-month time
                            frame. Of the projects funded from fiscal years 1998 through 2000, HUD
                            approved 55 percent for construction within 24 months of the funding
                            award—27 percent within 18 months and 28 percent within 19 to 24
                            months. The remaining 45 percent of projects took longer than 24 months
                            to be approved.

                            We looked at the performance of HUD’s 45 field offices that process
                            Section 202 projects and found that they had varying degrees of success in
                            meeting the 18-month guideline. We evaluated their performance by
                            estimating the percentage of projects approved for construction within 18
                            months for each field office. Among these offices, the median project
                            approval rate for construction within 18 months was 22 percent, but their
                            performance varied widely. Eight field offices had no projects that met the
                            18-month guideline, while at one office more than 90 percent of projects
                            met the guideline. Field offices’ performance varied by region, with those
                            located in the northeast and west being least likely to approve projects
                            within 18 months of the funding award.


Delayed Projects Affected   Meeting processing time guidelines is important because most of the
the Program’s Production    delays in total production time—that is, the time between funding award
Times and Expenditures      and construction completion—stem from the project processing phase.
                            When we compared the average total production times for completed
                            projects that did not meet HUD’s 18-month processing guideline and those
                            that did, the delayed projects took 11 months longer than other projects to
                            proceed from funding award to construction completion. Since the
                            average time taken for the construction phase was very similar for all
                            projects, most of the 11-month difference in total production time was
                            attributable to the extra 10 months that delayed projects took to complete
                            the processing phase.

                            Delayed processing of Section 202 projects also affected the Section 202
                            program’s overall balances of unexpended appropriations. At the end of
                            fiscal year 2002, for example, HUD had a total of $5.2 billion in
                            unexpended Section 202 funds. A relatively small part of these
                            unexpended funds—about 14 percent—was attributable to projects that
                            had not yet been approved to start construction and had exceeded HUD’s
                            18-month processing time guideline. Consequently, none of the funds
                            reserved for these projects had been expended. By contrast, the remaining
                            86 percent of unexpended funds were associated with projects for which
                            HUD was in the process of expending funds for construction or rental
                            assistance. For example, almost half of the unexpended balances—about

                            Page 8                                                         GAO-03-807T
                         48 percent—resulted from projects that had already been completed but
                         were still drawing down their rental assistance funds as intended under
                         the multiyear project rental assistance contract between HUD and the
                         project sponsor.


                         Our review of projects funded from fiscal years 1998 through 2000 shows
Various Factors Can      that several factors impeded Section 202 projects from meeting the 18-
Delay the Approval of    month processing time guideline, including insufficient capital advances,
                         limited training and guidance for HUD field office staff on processing
Projects for             policies and procedures, and limitations in HUD’s project monitoring
Construction             system. Factors external to HUD, such as sponsors’ level of development
                         experience and requirements established by local governments, also
                         hindered processing.


Insufficient Capital     Although HUD policy intends for capital advances to fund the cost of
Advances Caused Some     constructing a modestly designed project, capital advances have not
Sponsors to Seek Other   always been sufficient to cover these expenses.7 HUD field office staff,
                         project sponsors, and consultants reported that program limits on capital
Funding                  advances often kept projects from meeting HUD’s time guideline for
                         approving projects for construction. Most field offices, and every sponsor
                         and consultant that we surveyed, reported that insufficient capital
                         advances negatively affected project processing time, and a substantial
                         majority of respondents indicated that this problem occurred frequently.
                         Many respondents also reported that securing secondary financing to
                         supplement the capital advance amount often added to processing time.
                         According to nearly all sponsors and consultants, the capital advance
                         amounts set by HUD were frequently inadequate to cover land, labor, and
                         construction costs as well as fees imposed by local governments. As a
                         result, sponsors had to seek secondary financing from other federal, state,
                         and local sources—including other HUD programs—or redesign projects
                         to cut costs, or both. According to a HUD official, the agency is currently
                         initiating steps to study the sufficiency of capital advances in covering
                         project development costs.




                         7
                         See 66 Fed. Reg. 6647 (Jan. 22, 2001).



                         Page 9                                                         GAO-03-807T
Varying Field Office       In 1996, to help ensure that field office staff and project sponsors could
Practices and Inadequate   complete project processing requirements within the 18-month time
Staff Training and         guideline, HUD adopted changes that were intended to streamline
                           processing procedures.8 One of the key changes included requiring field
Guidance Affected Timely   office staff to accept sponsor-provided certifications of architectural
Processing                 plans, cost estimates, and land appraisals. Previously, field office staff
                           performed detailed technical reviews of these items.

                           According to our survey, differences in the procedures field offices used to
                           approve projects for construction and the lack of staff training and
                           experience affected project processing time. For example, most
                           consultants and sponsors in our survey responded that inconsistent
                           implementation of streamlined processing procedures by field offices
                           caused delays, as did insufficient training for and inexperience of field
                           office staff. Some consultants and sponsors whom we interviewed told us
                           that some field offices continued to conduct much more detailed and time-
                           consuming technical reviews of project plans than HUD’s current policies
                           require.

                           HUD has provided limited guidance for field office staff on the current
                           processing policies and procedures. At the time of our review, most field
                           office staff had not received any formal training on Section 202 project
                           processing. According to HUD, in 2002, the agency required
                           representatives from each field office to attend the first formal training on
                           project processing for field office staff since at least 1992. Although HUD
                           headquarters expected those who attended to relay what they had learned
                           to other staff members in their own offices, our survey showed that by
                           November 2002 no on-site training had occurred at about a quarter of the
                           field offices. We also found that HUD’s field office staff was relying on out-
                           of-date program handbooks that did not reflect the streamlined processing
                           procedures.


Administrative and         HUD’s project monitoring system was not as effective as it could have
Oversight Weaknesses at    been and may have impeded HUD’s oversight of project processing. HUD
HUD Headquarters           officials told us that headquarters periodically uses its Development
                           Application Processing (DAP) system to identify projects that have
Contributed to Delays      exceeded the 18-month processing time guideline. In addition,
                           headquarters contacts field offices on a quarterly basis to discuss the


                           8
                           HUD Notice H 96-102.



                           Page 10                                                          GAO-03-807T
                  status of these delayed projects. Nevertheless, HUD officials have
                  acknowledged that there are data inaccuracies in the DAP system. The
                  lack of reliable, centralized data on the processing of Section 202 projects
                  has limited HUD headquarters’ ability to oversee projects’ status,
                  determine problematic processing stages, and identify field offices that
                  may need additional assistance. HUD officials indicated that enhancing the
                  DAP system is a priority, but that a lack of funding has hindered such
                  efforts.

                  Finally, other factors outside of HUD’s direct control kept some projects
                  from meeting the time guideline, according to field office representatives
                  and sponsors and consultants responding to our survey. Almost all survey
                  respondents agreed that project processing time was negatively affected
                  when sponsors were inexperienced in project development. Nearly 60
                  percent of field offices, and almost 40 percent of sponsors and
                  consultants, indicated that this problem occurred frequently. A majority of
                  survey respondents reported that local government permitting and zoning
                  requirements prolonged project processing, although we found differences
                  of opinion on whether these problems occurred frequently. Community
                  opposition and environmental issues were also reported to negatively
                  affect project processing time, but not frequently.

                  Mr. Chairman, this concludes my prepared statement. I would be happy to
                  answer any questions at this time.


                  For further information on this testimony, please contact David G. Wood
Contacts and      at (202) 512-8678 or Paul Schmidt at (312) 220-7681. Individuals making
Acknowledgments   key contributions to this testimony included Emily Chalmers, Mark Egger,
                  Daniel Garcia-Diaz, William Sparling, and Julianne Stephens.




(250146)
                  Page 11                                                         GAO-03-807T
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