On April 22, 2004, HUD's Office of Public and Indian Housing released new Section 8 voucher funding rules in Notice PIH 2004-7 ("Implementation of FFY2004 Consolidated Appropriations Act Provisions for the Housing Choice Voucher Program")(the "Notice," available at www.hudclips.org). The Notice has sparked alarm and controversy in the Section 8 community and the situation seems to be changing on an almost daily basis. This article identifies some of the most significant provisions of the Notice and identifies steps that national housing groups, public housing authorities ("PHAs"), owners, and others are taking to clarify the Notice and change its most draconian provisions.
Critical Provisions of the Notice
The Notice purports to implement changes to the Housing Choice Voucher program arising from the federal fiscal year ("FFY") 2004 Consolidated Appropriations Act (the "Act"). HUD has adopted a draconian interpretation of the Act, however, that will result in reduced Section 8 voucher funding to PHAs and may leave hundreds of millions of dollars of Section 8 appropriations unspent, according to the Center on Budget and Policy Priorities ("CBPP"). Here is a recap of the Notice's chief provisions:
- Capping Section 8 Voucher Funding. The Notice freezes Section 8 voucher funding to state and local agencies at August 2003 levels, subject to an inflation adjustment pegged at the current annual adjustment factor ("AAF"). For PHAs located in areas that have experienced increases in housing costs, this could result in significant shortfalls, causing the PHAs to reduce the payments to owners. Many owners will either have to accept cuts in rents or begin evicting Section 8 tenants. HUD offers several suggestions to hard-pressed PHAs to reduce shortfalls—recalculating "reasonable" rents paid to owners, imposing minimum monthly rental charges on tenants, focusing fewer vouchers on very low income families, and reverifying tenant eligibility, among others— all of which will ultimately shift burdens to tenants and owners.
Moreover, comments made by HUD underscore the harsh impact of these rules. First, according to CBPP, HUD will apply the new funding policy retroactively to January 1, 2004, so PHAs will actually have to repay excess voucher funds that were spent before the Notice was issued. There are also reports that HUD will not apply the full-year AAF to adjust funding amounts, but will prorate the AAF to the eight months since August 2003, further reducing available funding. - Appeals of Funding Shortfalls. The Notice acknowledges (at 2) that the AAFbased inflation adjustment may be insufficient in some cases, and states that it will, on a case-by-case basis, consider specific requests for higher adjustments from PHAs. Aside from calling for "all relevant documentation," however, the Notice is silent about the specific data that PHAs must submit to support such an appeal (Notice at 2). While the Notice promises that HUD will provide more specific guidance, the July 15 deadline to file appeals leaves little time for HUD to publish such guidance and for PHAs to respond.
Housing groups are urging their members to file appeals with HUD immediately, setting forth in detail why the current funding mechanism will not be sufficient to meet their Section 8 commitments and presenting current data about changes in housing costs since August 2003—rent comparability studies, leasing and cost data, and any other pertinent "hard" data that makes the case for an appeal. Presumably, such data—or something very similar—will be required by HUD whenever it finally publishes its guidance on funding shortfall appeals. To the extent that HUD publishes different requirements later, the appeal application can be amended with other information. - Program Reserve Funding. PHAs may be able to moderate the impact of the Notice's changes by using program reserve funds, which local PHAs use, among other purposes, to cover delays in HUD funding. HUD apparently did not replenish these program reserves in 2003. Although not directly addressed in the Notice, HUD has indicated that it does not intend to replenish them in 2004. The Notice does provide that PHAs may use program reserves to fund HAP costs for authorized units, but says such funds "may not be used to assist any units above the [authorized] baseline" (Notice at 3). The National Leased Housing Association ("NLHA") reports that HUD has also refused to allow PHAs to replenish the reserves with other sources, such as renewal funds. NLHA and other housing groups are trying to persuade HUD to adopt a more flexible approach to the use of program reserve funds to moderate the shortfalls resulting from other changes made by the Notice.
- Overleasing. Commentators suspect that much of HUD's motivation in issuing the Notice is to crack down on the practice of some PHAs to "overlease"—that is, to issue vouchers in excess of a PHA's HUD-authorized baseline. The Notice directs that PHAs may not use FFY2003 or 2004 funds to pay for unauthorized units. Any such funds must come other sources, such as pre-FFY2003 funds (if any remain) and administrative fee reserves. According to the Notice, the alternative is for the PHA to "take immediate steps to eliminate any current overleasing/ maximized leasing"— a euphemism for cutting rents to owners or evicting tenants (Notice at 5).
- Administrative Fees. Pursuant to the Act, the Notice caps administrative fee payments at $1.19 billion, to be allocated to PHAs on a pro rata basis. No administrative fees will be provided for overleased units. Such administrative fees can only be used "for activities related to the provision of Section 8 rental assistance," and amounts moved into administrative fee reserve accounts at yearend may not be used for non–Section 8 purposes (Notice at 2).
Further Action
HUD contends that the policies reflected in the Notice are firmly rooted in the instructions contained in the Act, but many others, including some congressional legislators, dispute that contention, arguing that HUD could have adopted equally valid interpretations of the Act with far less brutal consequences. Already, the policies reflected in the Notice are having dramatic repercussions: in Massachusetts, government officials calculated that these policies would produce a shortfall of $3.1 million, which could endanger up to 3,700 voucherholding families. After two thousand people flocked to a state house hearing, HUD relented and allowed the state to transfer $2.6 million from other accounts to meet voucher funding needs. Separately, the Boston Housing Authority has announced it plans to reduce rent payments by 7% to make up for expected shortfalls.
National housing groups are actively seeking agency clarifications of unclear portions of the Notice and are urging HUD to relax some of the Notice's most draconian provisions. Because HUD's view is that the policies reflected in the Notice are required by the Act, however, significant revisions at the agency level appear unlikely. Housing groups are trying to assemble a bipartisan congressional coalition to deal with the problems created by the Act and HUD's interpretation. PHAs, owners, and other interested persons should contact their congressional legislators to make them aware of the harsh impact the Notice will have on their ability to deliver affordable housing to low-income American families.
Persons seeking further information should call Harry J. Kelly at Nixon Peabody LLP at (202) 595-8712 or hkelly@nixonpeabody.com.