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Department of Housing and Urban Development

Recommendations and Actions

HUD10: Reduce Operating Subsidies for Vacancies

Background

The Department of Housing and Urban Development (HUD) provides subsidies to public housing authorities (PHAs) and Indian housing authorities (IHAs) to assist in funding the operating and maintenance expenses of their owned buildings in accordance with Section 9 of the U.S. Housing Act of 1937, as amended. The program was created in the late 1960s to cover the difference between the actual costs of running projects and rent collections. Filling this gap was essential to help maintain services and provide minimum operating reserves.

Subsidies are provided under the Performance Funding System (PFS), a formula-based system that assists most PHAs as if they were operating at a 97 percent occupancy rate. It takes into consideration activities that may reduce the actual occupancy rate, such as disposition, demolition, conversion, and modernization.

The problem with the current system is that PHAs with high vacancy rates for extended periods of time, beyond what can be reasonably attributed to acceptable delays in occupancy, have little incentive to aggressively address their vacancy problems. They can maintain the status quo and still continue to get full operating subsidies, based on a 97 percent occupancy rate, although HUD does have the ability to make selected small adjustments based on individual cases. Failure to fill vacant units means that fewer eligible tenants are served and leads to a continuing cycle of unit deterioration. Too often, vacant units become safe havens for those involved in crime and drug abuse. The result is an increasingly dangerous and unhealthy environment for those poor residents and their children remaining in the project who have no other housing alternative.

At the end of fiscal year 1992, about 100,000 of the nation's 1.4 million public housing units were vacant, a national vacancy rate of about 7 percent--i.e., an occupancy rate of 93 percent. HUD provided subsidies based on a PFS formula which is premised on a 97 percent ideal occupancy rate. Budget outlays in fiscal year 1993 for operating subsidies are expected to total $2.4 billion for the 1.4 million PHA/IHA units under management, or about $1,800 per unit per year.(1)

Actions

1. HUD should establish an agency goal of achieving an average 97 percent occupancy rate in units owned and managed by public and Indian housing authorities, by the end of fiscal year 1999.

2. HUD should reduce annual operating subsidies to PHAs and IHAs with consistently high vacancy rates possibly by reducing the per-unit subsidy for vacant units to 50 percent of the subsidy level for occupied units.

3. HUD should enter into contractual agreements with those PHAs receiving reduced subsidies, which should include proposed PHA action plans to reduce vacancy rates and measurable performance goals and milestones.

4. HUD should restructure its PFS formula to provide for increasing levels of operating subsidies tied to the achievement of occupancy level targets.

Implications

Beginning in 1989, efforts were made to raise the acceptable full occupancy level to 98 percent and reduce operating subsidies for vacant units to only 20 percent of occupied unit levels. Congress expressly prohibited the implementation of these proposed regulations. However, the proposed actions contemplate only reducing subsidies possibly to one-half of the subsidy level for occupied units. This level recognizes that there are still costs associated with vacant units, such as normal maintenance, heating costs, security, and repair of vandalism damage. These reductions would be assessed on those PHAs that might be characterized as low-performing agencies that have not taken the aggressive action necessary to reduce vacancy rates.

By changing the subsidy depending on how successful PHAs are at raising their occupancy rates, this policy provides a financial incentive to encourage PHAs to take action to increase occupancy. The financial incentive to PHAs to get their house in order and lower their vacancy rates should increase the available stock of affordable housing, reduce the public housing waiting lists, and produce some reduction in the numbers of poor families currently living in shelters and other facilities for the homeless.

Fiscal Impact

In fiscal year 1993, HUD-projected outlays for operating subsidies totaled $2.4 billion. The national average occupancy rate for the 1.4 million units of public housing was 93 percent. Assuming that the 93 percent occupancy rate held through 1994, during which the design and implementation of the new subsidy reduction program could take place, reductions could commence at the beginning of fiscal year 1995. As PHAs with unacceptably high vacancy rates make progress, the overall occupancy rate is projected to increase each year, until it reaches 97 percent in 1999.

The projected six-year savings cannot be estimated at this time. Savings associated with a proposal similar to this were included in the President's budget request for fiscal 1994.

Endnote

1. Interview with Harold W. Henry, Director, Office of Management and Planning Administration, Department of Housing and Urban Development, Washington, D.C., May 6, 1993.

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