Multiple Factors Caused Funding Gaps and RHS Took Steps to Mitigate Effects

		An Interplay of Factors Contributed to Fiscal Year 2013–2015 Gaps

An interplay of factors—primarily sequestration and rescissions,  unreliable estimation methods, and limits on RHS’s ability to manage  program funds differently—resulted in the program funding falling short of  the amount needed to renew all eligible rental assistance agreements at  the ends of fiscal years 2013, 2014, and 2015. The officials  noted that RHS also did not calculate this number for fiscal year 2014  because it addressed the rental assistance needs of the affected  properties by using previously obligated funds associated with properties  that had exited the program, as discussed below. In fiscal year 2013, sequestration and  rescissions cut about $70 million of the rental assistance program’s  approximately $907 million budget. Unreliable estimation methods. In fiscal years 2013–2015, RHS calculated the amount of  renewal funding each property would receive by multiplying the number of  rental assistance units by a state-wide, per-unit average cost. Because  actual rental assistance costs at each property generally differed from the  state-wide average, this method resulted in some properties receiving  agreement renewals that provided less funds than needed for 1 year  (resulting in the need for an additional renewal within the same 12-month  period) and other properties receiving more funds than needed for 1 year  (tying up funds that could have been obligated to other properties). RHS Took Steps to Mitigate the Effects of the Funding Gaps but Some Had Negative Consequences

RHS used a variety of approaches in the years it faced funding gaps to try  to minimize effects on property owners, with mixed results. RHS Improved Rental Assistance Estimates but Some Weaknesses Exist in Budget Estimation and Execution

		RHS’s New Tool Improved Estimates of Rental Assistance Costs

To improve its rental assistance estimates and streamline the obligation  process, RHS in 2014 began developing a “rental assistance obligation  tool” (obligation tool), a model that estimates rental assistance costs  based on each property’s rental assistance payment requests over the  prior 12 months. RHS began using the tool—which is integrated with  MFIS, RHS’s management information system for the rental assistance  program—to renew agreements in fiscal year 2016 and to estimate the  program’s fiscal year 2017 budget request. Federal internal control standards call  for management to design control activities for entities’ information  systems to respond to risks. RHS Has Not Used Appropriate Inflation Rates to Estimate Its Budget Request in Recent Years

Since fiscal year 2010, RHS either has used no inflation rate or one that  differed from the President’s economic assumptions when calculating  budget request estimates for the rental assistance program (see table 1). In these cases,  state office staff are to use their judgment about whether providing a 1- year agreement renewal would be appropriate, according to RHS national  office officials. First, RHS does not have a plan for ongoing monitoring (including  testing and evaluation) of its new obligation tool and has not always  used the most relevant data for monitoring, contrary to federal internal  control standards calling for monitoring of control activities and use of  quality information. Fourth, contrary to federal internal control standards on  documentation of policies, RHS lacks written guidance on the  responsibilities of Rural Development state offices for reviewing rental  assistance agreement renewals before obligating funds. These weaknesses may exist partly because RHS continues to refine its  estimation method, which has been in effect for about 2 years. RHS  provided technical comments, which we incorporated into the report, but  did not provide comments on our recommendations. Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) the reasons the Rural Housing  Service (RHS) ran out of funds for renewing rental assistance  agreements under the Section 521 program in fiscal years 2013–2015,  and how it responded to the funding gaps in those years; and (2) what  RHS has done to help prevent future funding gaps and the extent to  which it addressed related budgetary issues. Funding Gaps and How RHS Resolved Them

To examine the reasons why RHS ran out of funds for renewing rental  assistance agreements in fiscal years 2013–2015, we reviewed  documentation from RHS that provided evidence of funding gaps,  including a list of properties whose agreements were due for renewal but  could not be renewed at the ends of the 3 fiscal years. We also examined the  extent to which RHS had developed plans for future testing. Additionally, we  interviewed OMB staff with responsibility for reviewing the rental  assistance program’s budget estimates about the inflation rates RHS  used in its budget requests.
Why GAO Did This Study

RHS provides about $1.4 billion annually in rental subsidies to owners of multifamily housing for more than 270,000 low-income rural households. RHS's agreements with property owners provide rental assistance payments estimated to last 1 year. In fiscal years 2013–2015, RHS was unable to renew all its agreements because it ran out of funds. For example, in fiscal year 2015, the funding gap was about $97 million. As a result, some property owners' rental assistance payments were delayed.
GAO was asked to examine the reasons why RHS ran out of funds and how RHS plans to improve its budget requests. This report examines (1) reasons RHS ran out of funds for renewing rental assistance agreements in fiscal years 2013–2015 and how it responded, and (2) what RHS has done to help prevent future funding gaps and the extent to which it has addressed related budgetary issues. GAO analyzed RHS budget and rental assistance data for fiscal years 2011–2016, reviewed RHS policies and procedures, and interviewed RHS national office officials and staff from15 (of 47) randomly selected state offices.

What GAO Found

An interplay of three primary factors contributed to the funding gaps that the rental assistance program of the U.S. Department of Agriculture's Rural Housing Service (RHS) faced in fiscal years 2013–2015:
Fiscal year 2013 sequestration and rescissions. An across-the-board cancelation of budgetary resources in March 2013 decreased the program's approximately $907 million budget by about $70 million.
Unreliable methods for estimating rental assistance costs. RHS used a state-wide, per-unit average cost to calculate rental assistance agreement amounts. This resulted in some properties receiving more funds than needed, tying up funds that could have been used for other properties.
Limited management flexibility. RHS had limited ability to adjust its program management to help prevent funding gaps. For example, RHS does not have authority to fund agreement renewals for less than 1 year.
RHS took steps to mitigate the effects of the funding gaps on property owners, but some had negative consequences. For example, to cover fiscal year 2014–2015 gaps, RHS used unexpended rental assistance funds from properties that had exited the program. But, as a result, the program lost the associated rental assistance units and RHS could not re-assign the units to other properties.
RHS has taken steps under its existing authorities to help prevent future funding gaps but lacks certain plans and controls to help ensure its estimates of rental assistance costs are reasonable. In fiscal year 2016, RHS began using a new cost model integrated with its program information system that more accurately estimates rental assistance agreement renewals. For instance, the model estimates renewal costs based on property-level data rather than state-wide averages. RHS also began including estimates of agreements that would need two renewals in the same fiscal year (a number of which are to be expected) in budget requests. But, GAO found weaknesses in aspects of RHS's budget estimation and execution of rental assistance. Specifically, RHS:
does not have a plan for ongoing monitoring or testing of the new estimation method. Federal internal control standards call for management to establish monitoring activities and evaluate results.
lacks controls to detect misestimates of rental assistance, a problem RHS experienced during early use of the model. Federal internal control standards call for control activities for information systems to respond to risks.
has not used the appropriate inflation rates in its budget estimates since fiscal year 2009. Office of Management and Budget guidance states budgets should be consistent with the economic assumptions it provides.
has not provided staff guidance on their responsibilities for determining whether properties' rental assistance should be renewed. Federal internal control standards call for documenting responsibilities through policies.
The weaknesses may exist partly because RHS continues to refine its estimation method, which has been in effect for about 2 years. By addressing them, RHS would have greater assurance that it will develop the best possible estimates.

What GAO Recommends

GAO recommends that RHS develop plans for testing rental assistance estimation methods, develop estimation controls, create controls to ensure use of appropriate assumptions in budget requests, and provide guidance on reviews of rental assistance renewals. RHS did not comment on GAO's recommendations.