	Introduction

Each year, Congress provides funding to the Department of Housing and Urban Development (HUD) to renew the more than 2.1 million Section 8 vouchers—also called Housing Choice Vouchers—authorized by Congress (see Table 1 below). This report discusses the renewal funding formula changes that Congress has enacted as a part of the annual appropriations process, starting in FY2003, and concludes with a discussion of their effects. Low utilization rates were a major concern of Congress for several years. FY2003-FY2006: The Emergence of "Budget-Based" Funding

		FY2003 Funding Changes

In FY2003, Congress changed the way PHAs were funded in an attempt to limit recaptures of unspent funds and provide funding levels that better reflected actual use. HUD was directed in the annual appropriations bill to fund PHAs based on their average annual per-voucher cost from the previous year, increased by the inflation factor, and multiplied by the number of vouchers the PHA could reasonably be expected to lease in that year (rather than the larger number of authorized vouchers). As a result, PHAs had to alter the way in which they budget for their voucher programs to a calendar-year cycle. FY2007-Present: A Cost and Utilization-Based Funding Model

		FY2007 Funding Formula

In FY2007, the debate continued between a strictly "budget-based" funding formula, in which PHAs are given a fixed pot of funding in which to administer their programs (such as in FY2006), and a "unit-based" formula, in which PHAs are funded based on what they need to maintain a certain voucher level (such as pre-FY2003). Again, Congress rejected the President's request. Regardless of the reason, some PHAs found that their CY2009 funding was insufficient to cover the costs of all the vouchers they were using to serve families. This policy change effectively increased the amount of set-aside renewal funding provided to HUD in FY2009 to adjust agencies' budgets (originally, $100 million) and expanded its purposes to allow it to be used to prevent the termination of assistance. FY2011 and FY2012 Funding Formula

As in FY2010 and each year since FY2007, in FY2011 and FY2012 Congress directed HUD to allocate Section 8 Housing Choice Voucher renewal funding to PHAs based on their costs and utilization. Implications of Changes, FY2007-Present

As noted earlier, just prior to, and shortly after, the formula changes that began in FY2003, PHAs were serving as many, and in some cases more families, than they were authorized to serve, and they were spending nearly every federal dollar they received. Legislative Reform Proposals

In recent years, some Members of Congress from both parties have introduced voucher reform legislation containing statutory changes to the voucher renewal funding formula, generally similar to the cost and utilization based formulas contained in recent appropriations acts. Under the budget-based funding formulas in place in FY2005 and FY2006, PHAs' funding did not necessarily decrease if their costs decreased (for example, due to changes in the types of families served or changes in the rental market). The budget-based funding formula changes enacted through FY2006 were controversial with low-income housing advocates and PHA industry groups. In FY2007, PHAs were funded based on the amount of funding they were using in the previous year, rather than the amount of money they had received in the previous year. As a result, PHAs that had large funding surpluses were eligible for less funding in FY2007, although funding for the program was sufficient to provide all PHAs with over 105% of their formula eligibility, meaning PHAs could continue to serve at least all of the families they had been serving, and additional families, as long as they were not overleasing. The FY2008 and FY2009 formulas followed the FY2007 formula closely, although they included reductions in the budgets of agencies that had more reserve funding than they were legally permitted to spend, paired with rescissions. Now that the strictly "budget-based" funding model has been replaced with a cost and utilization-based model, PHAs again have an incentive to increase their utilization and spend all of their funding. Since costs and utilization are rising, so is the cost of the program to Congress.
Changes enacted by Congress during the appropriations process in each of the past several years have significantly altered the way that public housing authorities (PHAs) receive funding to administer the Section 8 Housing Choice Voucher program. Prior to FY2003, PHAs received funding for each voucher they were authorized to administer, based on their average costs from the previous year, plus inflation, referred to as "unit-based" funding. Most PHAs were not using all of their vouchers, due in part to rental market conditions, and each year the Department of Housing and Urban Development (HUD) was able to recapture unspent funds. In FY2001 and FY2002, some Members of Congress began expressing concern about the underutilization of vouchers and the amount of recaptures.
Beginning in FY2003, and culminating in FY2006, Congress fundamentally changed the way PHAs received voucher funding. The changes were designed to limit the amount of unspent funds held by PHAs and limit the cost of vouchers, which had begun to grow rapidly in 2001 and 2002, due in part to market changes and in part to policy changes. In FY2006, PHAs were funded based on the amount of funding they had received in the previous year (regardless of changes in their costs and utilization), plus an inflation adjustment, prorated to fit within the amount appropriated. Under this formula, the funding needs of the program became more predictable, but some agencies received more funding than they were legally permitted to spend, while other agencies did not receive enough funding for all of the vouchers they were authorized to administer. The Bush Administration supported this conversion to a "budget-based" formula and requested that Congress enact permanent reforms to complement the new funding method. Low-income housing advocates and PHA industry groups generally opposed both the funding changes and the Bush Administration's proposed policy reforms.
In FY2007, Congress again changed the funding formula through the appropriations process. PHA funding was based on what they were spending in the previous year (rather than what they had been allocated in the previous year). As a result, PHAs that had not been spending all of their funding in FY2006 saw a reduction in funding in FY2007. Nonetheless, the funding provided was sufficient so that all PHAs received more than 100% of their 2006 costs and utilization. In FY2008 and FY2009, Congress adopted a cost and utilization-based formula similar to FY2007, but with a reduction in funding for PHAs with excess unspent funding in reserve. In FY2009, concerns were raised about how the implementation of the FY2009 formula may have left some PHAs without sufficient funding to continue serving all eligible families. Ultimately, Congress provided HUD with access to additional funding to help address shortfalls that could have resulted in families losing assistance. In FY2010-FY2012, Congress again adopted a cost and utilization-based formula, a hybrid of the "unit-based" and "budget-based" models. While Congress did not include a reduction for excess reserves in FY2010-FY2011, they did in FY2012.
During the period of solely "budget-based" funding formulas, utilization of both authorized vouchers and of available funding declined. Since the adoption of a cost and utilization-based funding model, utilization has begun to increase again. As utilization increases, the cost of the program to Congress increases. This presents a set of policy tradeoffs between the goal of cost containment and the goal of serving as many eligible families as possible. The Section 8 voucher renewal funding formula continues to be a source of debate in the annual appropriations cycle, as well as in Section 8 voucher reform bills, which have contained proposals for statutory formula changes. This report describes changes in the formula included in appropriations bills for FY2003 to the present.