How will the new flat rent regulations impact PHAs? Part IV

As part of the 2014 appropriations act, Congress authorized several rule changes for both the public housing and housing choice voucher (HCV) programs intended to reduce program costs and administrative burdens for housing authorities. Perhaps the most widely discussed of these changes was the new requirement for PHAs to adjust public housing flat rents to no less than 80 percent of the local fair market rent (FMR) by October 31.

While the rule is expected to increase rent revenues and reduce the need for operating subsidies, industry groups and PHAs have also expressed concern about the impact of the new flat rent requirement, fearing that it could result in many families moving out of public housing rather than pay increased flat rents, thereby increasing vacancy rates and concentration of poverty. Concerned parties also fear that the rule may create an undue burden for low-income families.

In this blog series, we'll take a look at the background of flat rents, HUD actions to date, and actions required of the PHA. We'll also examine industry concerns surrounding the new rule.

• Part I: Some background on the history of flat rents
• Part II: HUD actions to implement the new flat rent rule
• Part III: What does this mean for my PHA?
• Part IV: Looking ahead—what's next for our industry?

Looking ahead—what's next for our industry?

In discussing the changes to flat rent rules, PHA staff and industry groups frequently comment that residents currently paying flat rent cannot afford to pay 80 percent of FMR, and suggest that families may be forced to move out of public housing when faced with the large rent increases required under the new rule. However, as noted in both Notice PIH 2014-12 and the HUD FAQs, each resident will still be offered the choice between flat rent and income-based rent at each annual reexamination. If the new flat rent exceeds income-based rent, the family may decide to switch to income-based rent.

Income-based rent is most often 30 percent of a family's monthly adjusted income, and housing costs which do not exceed 30 percent of income are considered affordable by definition. According to the 2010 study we discussed in Part I, virtually every family paying flat rent would pay a higher amount of income-based rent.

For example, an agency in Arizona currently charges $450 as flat rent for a one-bedroom unit. The one-bedroom FMR for the agency's jurisdiction is $774, and 80 percent of FMR is $619. The increase from $450 to $619 is 38 percent, and flat rent increases cannot exceed 35 percent per year. At their next annual reexaminations, current residents will be offered a choice between income-based rent and a flat rent of $608 for a one-bedroom unit.

How will this affect residents currently paying flat rent? Imagine that a resident currently pays the flat rent of $450. The PHA determines that the income-based rent for this resident would be $575. At the next annual reexamination, the resident may choose to pay income-based rent of $575 (30 percent of monthly adjusted income) or the new flat rent of $608. Rental income to the PHA increases by at least $100.

But what if public housing units can't compete with the private market? This is the second major area of concern for PHAs and industry groups. In the example above, what might happen at the time of the annual reexam if there's comparable rental housing available in the community for $500? The resident might not be willing to pay an income-based rent of $575 and might decide to move to one of the private market units. What if a lot of residents move out of public housing under these conditions? Public housing developments could lose stability with the departure of large numbers of long-term residents, resulting in increased vacancy rates and high unit turn-over costs. Concentration of poverty could also increase if higher-income, flat rent-paying residents are replaced with lower-income waiting list applicants.

The likelihood of a mass exodus of flat rent-paying residents will probably vary by community. According to HUD's Office of Policy Development and Research (PD&R), FMRs are intended to represent the 40th percentile of local rents. 80 percent of FMR, then, should equal the 32nd percentile (in other words, rent is higher for 68 percent of local rental units). One thing that every PHA can do today is compare the new flat rent levels to local market conditions. Consult local rental advertisements or the staff of your local HCV program. Is housing available in your jurisdiction at 80 percent of FMR? Is it comparable to your agency's public housing units in location, size, and quality? The availability and quality of market-rate units may be an indicator of the willingness of current public housing residents to move.

What if the waiting list is long, and the PHA determines that there is plentiful, comparable housing available in the private market at or below the new flat rent rates? According to the 2010 HUD study, heads of household paying flat rent are more likely to be employed and less likely to be disabled than other public housing residents. Is it equitable, then, for a number of public housing units to be occupied by families who can afford to pay market rent on their own?

As noted in the introduction to this article, Congress enacted the flat rent changes as a way to increase rental revenues to PHAs and reduce the need for operating subsidy. If large numbers of residents paying flat rent leave public housing as a consequence of the change, they will most likely be replaced by lower-income applicant families. Should that happen, the change will have the opposite effect of what Congress intended and the need for operating subsidy could in fact increase.

Within the next four months, HUD will open formal rulemaking by publishing a proposed rule. PHAs and other stakeholders will have the opportunity to provide input and feedback at that time. For now, though, PHAs have no choice but to implement the changes as directed by HUD.

With over 25 years of experience in welfare and public housing, Annie Stevenson shares her expertise in many ways at NMA, serving as a trainer to thousands of housing authority staff every year; as a technical researcher who analyzes and deciphers new HUD regulations; and as a technical writer, contributing to NMA Master Books, seminars, and model policies as well as writing the popular daily PIH Alert. Say hi to Annie at the 2014 NMA and GoSection8 Housing Conference, where she'll be presenting a hands-on session on administrative plan policies.

Does your agency have a proven methodology for setting flat rents? GoSection8.com can help. Specializing in rent reasonableness, Go8 has served tenants, landlords, and public housing agencies across the United States since 2004. To learn more about how you can bring Go8 to your agency, email sales@nanmckay.com.