RHS’s Current Methods Have Overestimated the Agency’s Budget Needs by as Much as 7 Percent, or $51 Million Per Year

Using its current methodology, RHS has overestimated its budget needs for  5-year rental assistance contracts in three ways. Second, RHS compounds the inflation rate to reflect the  price level in the fifth year and applies that rate to each contract year,  rather than using an appropriate rate for each year. Certain  aspects of the model promise improvements over the current estimating  methods. Furthermore, RHS is incorrectly calculating its historical rates of change in  a way that could cause the agency to underestimate its budget needs. 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 of it  from contracts issued from 1978 through 1982, and $126 million from  contracts issued from 1983 through 1997. The 1978 to 1982 contracts, which were funded based on inflation  projections of 10 to 20 percent, 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. Using RHS rental assistance payment data, we calculated that RHS  overestimated its funding needs for these contracts by an average of about  8 percent each year. RHS Has Overestimated Its Spending Needs in Most Years Since 1990

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. Importantly, where we had sufficient data  from the agency, our analysis also shows that if RHS had used and correctly  applied OMB inflation rates to its base per-unit rates, its estimates would  have been closer to actual expenditures. The rental assistance program, with an annual budget of over  $700 million, provides further subsidies to about half this number. RHS is updating and automating its budget estimation  process, and its new forecasting model shows some improvements over  past and current processes. A simple modification to the agency’s planned  budget estimation process would help the agency more accurately estimate  its rental assistance needs and curtail future unexpended balances—or  budget shortfalls as the case may be. As stated in this report, we believe RHS overestimates its budget  needs by using inflation factors that are higher than those projected by  OMB for use in the budget process, improperly compounding the inflation  rates, and using expenditure rates that may overstate the need for rental  assistance. To assess the activity level of rental assistance contracts issued from 1998  through 2002 and the accuracy of RHS’s estimates of the rates at which  these funds would be used, we reviewed rental assistance data from AMAS  from January 1998 through October 2003 to determine the activity level of  the unexpended balances. We assessed the accuracy of RHS’s estimates  of the rate at which the funds would be used by comparing RHS’s estimated  rental assistance expenditures to actual program expenditures. However, the resulting figure (fig. 5. 6.
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. With an annual budget of over $700 million, the program is RHS's largest line-item appropriation, accounting for approximately 70 percent of the agency's budget. 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. Concern has arisen that these unexpended balances may be the result of the agency's budget practices, especially its procedures for estimating funding needs. GAO was asked to assess the accuracy of RHS's budget estimates for the rental assistance program, the activity level of rental assistance contracts issued from 1978 through 1997, and 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.

What GAO Found

RHS is overestimating its budget needs for 5-year rental assistance contracts in three ways. First, the agency uses inflation factors that are higher than those OMB recommends for use in the budget process. Second, RHS does not apply its inflation rate separately to each year of a 5-year contract, but instead compounds the rate to reflect the price level in the fifth year and applies that rate to each contract year. Using these first two methods, RHS overestimated its 2003 budget needs by $51 million (6.5 percent). Third, RHS bases its estimates of future expenditure rates on recent maximum expenditures, rather than on the average rates at which rental assistance funds are expended. RHS has begun the process of automating its budget processes and certain aspects of its new model promise improvements over the current estimating methods. However, the agency continues to use its own inflation rates and incorrectly calculates those rates in such a way that would cause the agency to actually underestimate its budget needs. At current spending rates, it will take another 7 years for all the active contracts that were issued from 1978 through 1982 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. GAO calculated that RHS overestimated its funding needs for contracts issued from 1998 through 2002 by an average of about 8 percent each 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. Where GAO had sufficient data from the agency, the analysis also shows that if RHS had used and correctly applied OMB inflation rates to its base perunit rates, its estimates would have been closer to actual expenditures. Standardizing the agency's budget estimation processes would help the agency more accurately estimate its rental assistance needs and curtail future unexpended balances or budget shortfalls.