CFO Financial Notes

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HUD's financial activities interact with and are dependent upon those of the Federal government as a whole. Specifically, HUD is subject to financial decisions and management controls of the Office of Management and Budget (OMB). As a result of its relationship with other Federal government entities and OMB, HUD's operations may not be conducted, nor its financial position reported, as they would if HUD were a separate and unrelated entity.

HUD's consolidated financial statements are not intended to report the Department's proportionate share of the total federal deficit or of public borrowings by the Treasury, including interest thereon.

A. Claims, Judgments, and Relief Acts Fund

Most legal actions that affect HUD and involve an amount in excess of $2,500, with the exception of on-the-job injury claims as discussed in Note 2 and legal actions pertaining to the FHA and Ginnie Mae programs, are paid from the Claims, Judgments, and Relief Acts Fund maintained by the Department of the Treasury and administered by the General Accounting Office and the Department of Justice. HUD is not required to reimburse this fund for payments made on its behalf. During fiscal 1996 and 1995, no material amounts were paid to settle actions against HUD.

B. Other lnteragency Transactions

HUD maintains various agreements with other federal agencies under the Economy and Efficiency Act. The revenues, expenses, receivables and payables for these agreements for fiscal 1996 and 1995 are not material. HUD's two largest federal transactions are with the General Services Administration (GSA) for the use and upkeep of HUD facilities, and the Department of Agriculture's National Finance Center, for the processing of payroll and related benefits.

HUD also manages transfer appropriations from GSA, the Appalachian Regional Commission (ARC), and the Department of Energy (DOE). The GSA funding is used to pay certain building occupancy costs for HUD's Headquarters building. The ARC funding is used to facilitate joint Federal and State efforts to provide basic facilities essential to economic growth in Appalachia. The DOE funding is used to fund loans and grants related to solar energy conservation improvements. These funds are included in the "All other" category in the consolidated financial statements.

HUD's activities are subject to the Federal Credit Reform Act of 1990 (Credit Reform), which became effective on October 1, 1991. Credit Reform's effect on HUD relates primarily to how losses and costs associated with loans insured through FHA's GI and SRI funds are financed. A primary purpose of Credit Reform is to more accurately measure the "subsidy" cost of Federal credit programs. Subsidy costs generally comprise the present value of estimated disbursements or costs associated with mortgage defaults , net of the present value of estimated collections for insurance premiums charged and claims recoveries.

For morgages insured on or after October 1, 1991, upfront appropriations are required to finance credit subsidy costs. Appropriations to finance subsidy costs in the GI and SRI Funds were $152 million and $188 million in fiscal 1996 and 1995, respectively. FHA's MMI Fund has not received credit subsidy appropriations because the premiums charged are estimated to exceed associated costs.

For morgages insured prior to October 1, 1991, the effective date of Credit Reform, permanent indefinite appropriations are available to finance costs associated with such mortgages to the extent premiums, recoveries, and financing are insufficient to do so. No appropriations were drawn for pre-credit reform mortgages for fiscal 1996 and 1995.

In fiscal year 1996, FHA's MMI and GI/SRI Funds borrowed $1.6 billion from the Treasury to cover net cash inflows from the termination of the assignment program and subsidy re-estimates.

FHA also receives appropriations to finance credit-related administrative expenses of the GI/SRI funds. These annual appropriations are separate from susidy appropriations, and are not determined on a present value basis. The GI/SRI Funds, administrative costs were $202 million and $198 million for fiscal 1996 and 1995, respectively. The MMI Fund administrative costs are not covered by appropriations and are funded by operating revenues. For fiscal 1996 and 1995, the MMI Fund incurred administrative costs of $342 million and $309 million, respectively.

During fiscal 1996, mortgage notes were sold for amounts with a present value of $265 million and $533 million net of expenses, for the MMI and GI/SRI Funds, respectively. In fiscal 1995, the GI/SRI Funds generated a net of $399 million of the additional cash flows from mortgage note sales. In 1996, Congress provided standing authorization to use the proceeds to help fund program operations. In 1995, in accordance with standard Credit Reform requirements, the proceeds were returned to Treasury.

Periodic subsidy re-estimates are required by Credit Reform to assure that the amount of monies necessary for credit subsidies is sufficient to cover estimated costs. Downward adjustments result from having received more subsidy than is believed needed, and the excess is deposited to a special receipt account at the Treasury. Upward adjustments result in additional monies due, which are financed by standing legislation and do not require additional Congressional action, although approval to receive and utilize the monies must be made by the Office of Management and Budget.

Ginnie Mae's credit activities have historically operated at a profit. Ginnie Mae has not incurred borrowings or received appropriations to finance its credit operations, nor does it anticipate the need to receive such funding. As of September 30, 1996, Ginnie Mae had an Investment in the U.S. Government balance of $4.5 billion after establishing reserves for potential losses on its credit activities. Pursuant to the statutory provisions under which Ginnie Mae operates, its net earnings are used to build sound reserves. In the opinion of management, Ginnie Mae is in compliance with OMB implementation requirements for the Federal Credit Reform Act.

During fiscal 1996, HUD staff developed statistical estimates of the extent of unreported income and excess rental subsidies based on an analysis of a sample of assisted households nationwide that received rental assistance during calendar year 1995 (the most recent data available for computer matching purposes). Provisions of the Omnibus Budget Reconciliation Act of 1993 and numerous HUD actions taken to ensure compliance with legal and regulatory requirements concerning computer matching made development of statistical projections to the universe of assisted households possible for fiscal 1996 financial reporting purposes.

Under HUD's Section 8 and Low Rent Public Housing programs, tenants generally are required to pay 30 percent of their income towards rent, with HUD providing the balance of the rental payment. New applicants and existing tenants are to provide income information which is used in determining the amount of rent they are to pay. Tenants are also required to recertify their income on an annual basis, and in certain other circumstances, i.e., when there is a significant increase in household income. The applicants' or tenants' failure to disclose all of their income, or the housing agencies', owners', or agents' failure to timely recertify the tenants for rental assistance, may result in the Department pay a greater rental subsidy than would be required. This additional subsidy is referred to as excess rental subsidy.

During fiscal 1996, the Department selected a sample of households from its automated systems containing tenant data, and computer matched household income shown in those systems to Social Security Administration (SSA)/ Internal Revenue Service (IRS) data. Where the computer matching identified household income differences of $3,000 or more between the tenant-reported income and the SSA/IRS data, HUD staff obtained source documents from housing agencies, owners, and agents. The $3,000 income threshold was selected to provide a reasonable and cost-effective basis for developing estimates of unreported income.

HUD staff examined source documents from housing agencies, owners, and agents to determine if the income differences contributed to excess rental subsidies or were caused by other reasons that would not contribute to excess subsidies. For example, the computer matching would not identify excess subsidies if erroneous income information had been entered into the databases of SSA/IRS and tenant-reported income information were reported for different time periods.

Based on the results of the statistical sample, the Department projects, with 95 percent confidence, that during calendar year 1995 the amount of excess rental subsidies (for the 3.2 million households included in the databases, which comprises about 76 percent of all households receiving subsidies) was $409 million + or - $122 million, and that 6.6 percent + or - 1.6 percent of the households had received excess rental assistance. Extrapolating these results to the entire universe of assisted households yields an excess rental subsidy amount of $538 million + or - $161 million. This extrapolation is based on the assumption that the characteristics of the households included in the databases from which the sample was selected are similar to those households not included in the databases. The Department expects the databases for future sampling analyses to be more complete.

The phrase "excess rental subsidies" does not necessarily equate to budgetary reductions that are realizable by eliminating the excess rental assistance. HUD's budgetary needs are affected by many variables not recognized in the above estimates.

The Department plans on conducting a similar estimate of the amount of excess rental subsidies on an annual basis. This annual estimate is part of the Department's quality control plan, designed to identify and mitigate the incidence of unreported income.