Over Income Households: Who Really Pays?

Over Income Households: Who Really Pays?

Todd M. Richardson, Associate Deputy Assistant Secretary for Policy Development.

On July 21, 2015, HUD’s Office of the Inspector General (IG) issued a report that showed the number of households living in public housing who have remained in their units after an increase in income caused them to exceed HUD’s low-income limit.

Income mixing in public housing was explicitly encouraged in 1998 with the passage of the Quality Housing and Work Responsibility Act (QHWRA). The IG report shows some modest success at achieving this QHWRA goal when it found that 25,226 (2.38%) of the 1.03 million households living in public housing were over income in 2014.

Who the over income families are is interesting, and I discuss that more below. First, however, I want to discuss what I see as a misguided assumption in the highlights section of the IG’s report: “We estimate that HUD will pay $104.4 million over the next year for public housing units occupied by over income families that otherwise could have been used to house low-income families.”

The report’s estimate that HUD pays $104 million to cover the maintenance and operation of units occupied by over-income tenants is incorrect. In reality, these tenants reduce the federal government’s annual subsidy to public housing agencies (PHAs) by $116.5 million. And if the over-income tenants were to move out and be replaced with very poor tenants, the needed increase in appropriation would be $20 to $40 million more than the $116.5 million.

So why is there such a big difference between the IG’s calculation and the calculation by the staff that run the program? The authors of the IG report do not say how they reached an estimate of $104 million, but my best guess is that they multiplied the 25,226 over-income tenants by the per-unit monthly subsidy HUD pays to PHAs nationwide through the Operating Fund formula ($337) and multiplied that result by 12 months.

The HUD staff who run the public housing program, however, know that HUD’s Operating Fund Formula is the difference between the estimated cost to operate and manage a public housing development (“formula expenses”) and the rents received (“formula income”). That is, more rent from tenants equals less subsidy needed from HUD. The reverse is also true: the lower the rent collected from tenants, the higher the subsidy required from HUD. The rent paid by over-income tenants cannot be lower than 80 percent of the area’s Fair Market Rent. This per unit “formula income” paid by the over-income tenants averages $756 per month, which is substantially more than the $370 monthly per unit “formula expenses”. This leads to a cross-subsidy of $116.5 million that the over-income tenants are contributing toward the cost of operating the public housing development for their lower-income neighbors. This cross-subsidy is important for Public Housing Authorities who are chronically underfunded with a documented backlog of $25 billion in modernization needs and annual accrual needs of $3.4 billion. The rents paid by a PHA’s over-income tenants contribute a small amount toward addressing these modernization costs.

The IG correctly notes that moving over-income tenants out of public housing provides lower-income tenants on the waiting list with an opportunity to have affordable housing. This statement is reasonable. It is also reasonable to say that there is an opportunity cost to not having poorer tenants in affordable housing. This opportunity cost, however, is being borne not by the federal government but by the families not receiving assistance, in the form of higher rents or homelessness. Our recently released Family Options study is a terrific examination of the benefits of longer-term rental housing for families that have been homeless.

To be clear, for PHAs to serve poorer families instead of the over income families, it will either cost the federal government more money than is currently being appropriated or cost the families living in public housing with fewer resources to address the modernization backlog for public housing.

Who are these over-income tenants, and how did they become over income?

IG provided a few “egregious examples” of over-income tenants, and, in my opinion, the IG is correct to note these startling cases; a few households with very high earnings or substantial assets are living in public housing. PHAs need to have policies that help these tenants move along and free up public housing units for others.

The egregious cases, however, are extremely rare. Table 1 shows a breakdown of the over-income tenants in June 2015 by their actual income levels . You might be surprised to find that, according to this table, some tenants with incomes below $25,000 are considered over income. Most of these tenants live in Puerto Rico, where a two-person household is considered over income if their annual income exceeds $15,850.

Table 1. 2015 Over-Income Households by Annual Income

Income Level	Number	Percentage of Over-Income	Percentage of All Public Housing Tenants
$10,000 to $24,999	464	1.8%	0.044%
$25,000 to $49,999	8,122	32.2%	0.765%
$50,000 to $74,999	10,404	41.2%	0.981%
$75,000 to $99,999	4,149	16.4%	0.391%
$100,000 to $149,999	1,768	7.0%	0.167%
$150,000 or greater	332	1.3%	0.031%
TOTAL	25,239	100.0%	2.379%

Source: PIH Information Center Quarterly Extracts, June, 2015

At the other end of the spectrum, there are about 332 households, or 0.031 percent of all public housing tenants, who have incomes of $150,000 or more. HUD is working on policy to address these egregious cases.

We need to take care, however, that resolving the issue of the few egregious cases of over-income households does not cause substantial harm to other families. A recent study funded by a Research Partnership grant from the Office of Policy Development and Research used longitudinal data from HUD’s Moving to Opportunity research to examine what happens to those who leave assisted housing. The researchers found that among households leaving public housing because of an increase in income, 66 percent were housing cost burdened at the time of the follow-up survey, and 36 percent had a severe housing cost burden (paying more than 50% of their income for rent).

Even with this risk, many over-income public housing tenants do leave, and of those who do not leave, many have not sustained their increased income. Looking at the tenants who were over income in 2011, we can see that 60 percent had either left public housing (34%) or were no longer over income (26%) by 2015.

Table 2. What Happened to 2011 Over-Income Households by 2015?

	Not Earning Wages in 2011	Earning Wages in 2011	Total
Over income in 2011	2,231	20,595	22,826
Percentage still receiving assistance and still over income in 2015	41%	40%	40%
Percentage still receiving assistance and no longer over income in 2015	14%	27%	25%
Percentage leaving the program between 2011 and 2015	45%	33%	34%

Source: PIH Information Center Quarterly Extracts, June, 2011 and June, 2015

The vast majority of over-income households (90%) get most of their income from wage earnings, and a significant source of wage income leading to an “over income” status is due to a second or third income in the household, 43 percent of the over income wage earning households have two or more wage earners. We need to be careful not to discourage households from pursuing a second income, or, more problematically, discourage families from reporting a second income.

In sum, when discussing over income families we need to make sure we get the math right on the costs and benefits of moving over income families out of public housing. Let’s get the math right so we can make well-informed, evidence-based policy.