OPINION
Unraveling the Late HAP Debacle
By Denise B. Muha, Executive Director

          I RECALL A JOKE from years ago about a fellow named Billy Bob who was interviewing for a job with the railroad.   The interviewer asked Billy Bob what he would do if there was a train coming south on Track A and another train barreling north on the same Track?  Billy Bob replied that he would run and get his brother Joe Bob.  “Why would you do that asked the interviewer?”  “Because, said Billy Bob, he ain’t never seen a train wreck.”

        There is no other way to describe the current HAP crisis, but a train wreck.  The current shortfall is wreaking havoc on thousands of project-based assisted properties and may continue to be a problem into FY08.  This is a situation that could have been avoided.

Genesis of the Problem

        Most of you know that when the Section 8 project-based programs were new, the funding for the HAP contract (be it 20, 30 or 40 years) was funded up front.  Further, the subsidy amounts were based on the total rental costs at the time and did not consider the tenant contribution which left wiggle room for rent increases during the contract term.  When the first of the 20-year contracts started to expire around 1994, it was the first time in twenty years that Congress needed to make an appropriation to subsidize the properties.  Congress agreed to fund the renewals, but only at rents not to exceed comparable market rents (hence MAHRA which provided the M2M program and ultimately the MU2M program). 

As the number of HAP contracts renewing under MAHRA continued to increase, HUD attempted to use existing resources (recaptures, partial funding, etc) to minimize the amount of funds the Administration would need to include in its budget request to Congress.  This strategy was more or less required because of the Administration’s (Office of Management and Budget) unwillingness to sufficiently increase the size of the HUD budget.  Over the years as the costs of Section 8 renewals continued to escalate, the funding requests did not reflect the funding need.  The years of robbing Peter to pay Paul have caught up to HUD and the result is the funding debacle the industry is facing today.

FY07 Shortfall

        Over the last few years, HUD has been funding contract renewals with less than 12 months worth of funding.  This has enabled them to get by with less renewal funds one fiscal year only to fund the remaining months in the next fiscal year.  Plus, it helps mitigate the funding shortfalls when Congress did not finalize spending bills by the end of the fiscal year and HUD was funded under “continuing resolutions.”  In the fall of 2006, a HUD’s Chief Financial Officer determined that such partial funding of contracts could not continue as the CFO believed this approach to be a violation of the Anti-Deficiency Act (a law that is intended to ensure that appropriated funds are not mishandled).  This new interpretation of the law by the CFO resulted in HUD being required to begin funding renewals for the full twelve months and not in increments.

        Since the HUD budget request was based on its previous practice of partially funding contracts, a shortfall occurred.  This is despite the fact that when HUD realized it would need more funds as a result of the legal opinion, the Department requested and received $900 million more from the appropriators for FY07 than what had requested earlier in the year.  Unfortunately, the amount was too little too late, resulting in delayed funding to thousands of Section 8 properties.

        Recently, HUD’s Office of Housing has reached a compromise with its CFO office to allow partial funding of renewal contracts (versus not renewing them at all) as long as the HAP contract includes language that reflects the fact that partial funding is being provided.  For projects with a multi-year contract with an anniversary date that falls between July 1 and September 30, or a property with a contract that expires during that time-frame, HUD will issue a notification letter in the next few weeks that will information on what amount of funding is being provided and for how many months.   Example, the HAP contract expires on August 31. HUD will process a renewal for one year or multi-years (subject to annual appropriations), but not provide 12 months of funding at renewal.  The project will likely receive 60 or 90 days of funding with the expectation that the remaining months will be funded out of the FY08 appropriations.  For expiring contracts, HUD will also provide the owner with amended HAP contract language (in Section 2 of the HAP contract) that indicates that the renewal is for one year etc, but the funding will be provided incrementally. 

HUD reports that projects with HAP Anniversary dates in the first three quarters of the fiscal year (October 1, 2006 to June 20, 2007) are being funded for July and August.  These HAP contracts will also have funding reserved to the project’s next anniversary date.  In other words, if the HAP anniversary date is May 31, 2007, the contract will have funds reserved through April 30, 2008. 

Outlook for FY08

This FY07 shortfall will carry over into FY08 because HUD will need to retroactively fund the remaining months for FY07 renewals.  Further, in order to find monies to pay remaining HAP costs in FY07, the Department swept $1.2 billion from the long term contracts by reassessing inflation indicators.  This move may leave those contracts short of funding down the road. 

Despite a certain shortfall for FY08, the Administration’s budget request for FY08 contract renewals is less than what was actually provided by Congress in FY07.  The $5.829 billion appropriated for Section 8 project-based contract renewals in FY07 has proved to be at least $1 billion less than what was needed, yet the FY08 budget request is nearly $300 million less than the funding received by HUD in FY07.

To its credit, HUD reports that it is “auditing” each contract to have a better handle on the actual funding needs for FY08.  However, the results will not be available until mid to late September which may be too late for the appropriators.  According to the Congressional Budget Office (CBO), the average annual cost per unit under the Section 8 project-based program is approximately $6700.  Based on CBO’s information, we anticipate that over one million units will need to be funded in FY08 from the project-based renewal account.  It is possible that there will be additional units expiring under 30 year HAP contracts that may need funding, but HUD has not provided that information.  Our estimate indicates that HUD needs a minimum of $6.7 billion in FY08 to address its contract renewal needs.   The amounts for Section 8 project-based renewals in the FY08 House-passed HUD appropriations bill and the amounts reported out by the Senate Appropriations Committee for this purpose fall way short of what is needed. 

        In this tight budget environment, it will take a lot of effort to convince the appropriators of the desperate nature of this situation.  This is NLHA’s top priority and your participation will be requested in the coming weeks as we work with Congress and HUD.