After the Pact

Concern about the cost of contracting could lead the Housing and Urban Development Department to bring some work back in house.

Every day, federal agencies rely on contractors to handle tasks that are too specialized, too short-lived, or too costly to be performed by civil servants. Contractors are the extra hands that ensure the government gets its work done.

In 1999, the Housing and Urban Development Department decided its employees should no longer provide day-to-day oversight of a housing program that subsidizes the rent of 1.3 million low-income Americans who live in privately owned housing developments. Known as project-based Section 8, the program allows landlords to make a modest profit by housing low-income people. But Section 8 had become an albatross for HUD. With its workforce stretched thin by Clinton-era downsizing, HUD lacked the staff to properly oversee Section 8 properties. The agency sent checks to landlords without knowing the addresses of their rental properties. In some cases, HUD employees hadn't inspected properties in five years.

So HUD outsourced administration of the Section 8 program to state housing agencies, some of which subcontracted the work to private companies. Today, 43 states have assumed contract administration duties for the program, and HUD believes the results speak for themselves. On an annual basis, these states, or their private surrogates, inspect all Section 8 properties, and the states now review all of the payment vouchers submitted by landlords, so HUD can stop fraudulent payments. "I think the proof is in the outcomes," says Fred Tombar, acting deputy administrator of HUD's Office of Multifamily Housing, who has been the department's point person on the contracting initiative since the Clinton administration.

Yet four years after outsourcing, questions surround HUD's decision to contract out administration of the program. In a review prepared for the Bush administration's fiscal 2004 budget, the Office of Management and Budget withheld judgment on the effort, concluding its results "have not been documented." (OMB deemed the overall program "ineffective," its lowest possible rating.) Amid concerns that HUD outsourced too much work during the Clinton administration, the department has made the program a candidate for "in-sourcing," that is, returning the contracted work to federal employees.

Tenant advocates worry that the contractors add another layer of bureaucracy that residents must navigate to get answers out of HUD. Members of the American Federation of Government Employees' HUD Council-and even a few nonunion managers-worry about the costs of the Section 8 contracts, which some consider wildly expensive. HUD officials counter that outsourcing allowed them to dramatically upgrade oversight of a long-neglected housing portfolio. But what's striking is that HUD officials agree unanimously that outsourcing was, and is, the only way to get a handle on the project-based Section 8 stock. As they see it, HUD had no choice but to contract out the program.

ONE WAY OUT

The decision to outsource came near the end of the downsizing efforts of HUD Secretaries Henry Cisneros and Andrew Cuomo, which cut the agency's workforce from 13,300 employees to fewer than 10,000 (it has 10,514 employees today). Under pressure from a Republican-led Congress and President Clinton and Vice President Gore's effort to burnish their "New Democrat" credentials by trimming government, most agencies found it nearly impossible to increase their workforces during the Clinton years. "Everyone was worried about any growth in head count, including HUD, lest they get in trouble with the White House," says Paul Light, vice president for governmental studies at the Brookings Institution, a Washington-based think tank.

But with fewer than 2,000 employees nationwide, HUD's Office of Multifamily Housing was hard-pressed to oversee all the programs under its jurisdiction, which, along with project-based Section 8, included housing programs for senior citizens and people with disabilities. Paul Fischl, a program manager in HUD's Portland office until he retired in March, remembers the impossible workload. "We had anywhere from 105 to 130 properties for each project manager," he says. "At that level all you can do is answer phone calls; you can't get out to see all the properties."

Even if they had the time, HUD field officials often could not visit their project-based Section 8 properties because they lacked the travel money. And HUD employees were not required to conduct annual inspections, as the department's contractors are today. Instead, HUD employees were evaluated on factors such as how many properties entered the Section 8 program-events that were largely beyond their control.

In the mid-1990s, many of the original Section 8 contracts between HUD and landlords began to expire. With Congress on the hook to renew the contracts, Clinton officials saw an opportunity to ratchet up oversight of the Section 8 portfolio. And they felt that state housing agencies, which already monitored about a fifth of the project-based Section 8 contracts under an arrangement with HUD, were best positioned to do it. "Those agencies were much closer to the projects on the ground," says Shaun Donovan, who served as deputy assistant secretary for multifamily housing at HUD under Cuomo. "They had many more staff than we did. So we felt like these state agencies were the best partner."

Donovan stresses that neither he nor anyone else at HUD had ideological qualms about hiring more federal employees. But HUD estimated it would take 1,400 new federal employees, at a cost of $190 million, to handle the tasks it envisioned for its contract administrators. Adding so many federal employees was a political nonstarter. "It would require an additional 1,400 staff, and that's just not happening. The money isn't there to do something akin to that," says Tombar, who was hired to run the contracting program.

HUD's union immediately disputed these figures, saying it would take only 500 new employees to handle the workload. Carolyn Federoff, president of AFGE's HUD locals, argued that outsourcing would be more expensive than hiring civil servants. Indeed, HUD requested $209 million to pay project-based Section 8 contractors in its 2000 budget. In a September 1999 report, HUD's inspector general panned HUD's proposal, arguing it could threaten the entire Section 8 program and was based on "policy decisions to reduce the size of HUD's workforce." But Congress signed off on the plan, and, in 1999, HUD put out a request for proposals from state housing agencies. Because HUD's plan didn't eliminate any jobs-it merely shifted HUD employees off the project-based Section 8 program-the agency was exempt from federal job competition rules contained in OMB Circular A-76.

Many states and localities were eager to apply for the contracts (under the HUD contract, city housing agencies can administer the program on a statewide basis). In Arizona and Kansas, the state legislatures even passed laws to help agencies become eligible for the program. But many of these early applicants were unqualified, so HUD's initial contracts went to agencies in just 38 states and Puerto Rico.

HUD had clear expectations for the new contractors. The department redesigned the task of administering the program into 16 separate activities, and tied contractors' pay to how well they performed them. The majority of these tasks involved routine administration-processing vouchers, verifying tenant income reports-which created several subcontracting opportunities for companies, according to Tombar.

HUD employees typically trained the new contractors, and sometimes relations were icy. "One of the first things we had to overcome was their feeling that HUD contracted this work because we did not know how to do our job," says a HUD employee. Other HUD workers describe a lengthy handholding process before contractors could master the job.

The transition left some HUD employees feeling bitter. After scraping by with so few staff, they watched the department give contractors ample funds for travel and to hire new employees. In Oregon, the state department of housing used some of its new HUD funds to buy laptop computers for employees who conducted management inspections, allowing them to file reports from the field. HUD employees never had received this kind of equipment. "The states had tremendous advantages because they had financial support," recalls Fischl.

MIDDLEMAN

Outsourcing also changed the relationship between HUD and tenants who live in Section 8 properties. For years, tenants could call HUD if their landlord was slow to resolve a health or safety problem in their building. Now they call a contractor. The Section 8 contracts have put contractors between tenants, landlords and HUD, and some are finding it's not easy to be the middleman. HUD requires contractors to answer tenant complaints involving health and safety problems, including life-threatening issues. In New York, tenants often call with questions about routine repairs, according to Luz Emiliano, regional operations director with Quadel Consulting, a Washington-based company that handles Section 8 administration for three states, including New York. Sometimes tenants just call to talk. Quadel still fields these calls, even though they're not paid under the Section 8 contract for taking them, she says.

From a tenant's perspective, dealing with the contractors can be bewildering. Consider the experience of Miriam Sharko, an 85-year old woman who lives in Renwick Gardens, a Section 8 building on the eastern edge of midtown Manhattan. On Saturday night, March 22, Sharko was cooking dinner when her smoke detector went off. In the confusion-her cats were running around, and it was smoky-Sharko locked herself out of her apartment. She was wearing only a nightgown. To get back in, she needed Renwick's superintendent to unlock her door. But the on-site superintendent had retired, and his temporary replacement lived in Queens, at least 20 minutes away by car. Afraid for her cats, Sharko called the fire department, which quickly sent firemen to unlock her door.

The next day, Sharko's friend Dian Meckler picked up her phone. Meckler's friendships within the building have turned her into something of an activist for Renwick tenants-she's a rabble-rouser, a friend says appreciatively. Sharko's accident reinforced what Meckler already believed: With a large population of elderly and disabled residents (Meckler herself uses a wheelchair), their building needed an on-site superintendent. And if the landlord was balking at hiring one, Meckler could try to nudge the process along. In the past, Meckler dialed up HUD employees when she thought her landlord needed a push. Now the new protocol was to call Quadel. When Meckler called the company, she was told that Section 8 properties are not legally required to have an on-site superintendent; there was nothing Quadel could do.

So Meckler called HUD, and then a local alderwoman, who suggested she try Rep. Carolyn Maloney, D-N.Y. Bingo. On March 27, Maloney fired off a letter to Marisel Morales, HUD's district director for New York. "It is unacceptable for residents of this building to be forced to rely upon emergency services to address the emergent needs that would otherwise be addressed by the superintendent," she wrote.

Meckler now wonders why she even bothered calling Quadel. "Who is this company?" she asks. When HUD administered Section 8, department employees sometimes attended meetings of Renwick's tenants association. Once, a HUD official helped prod the landlord to clean the building's windows after they were dirtied by nearby construction. But Quadel never has met with Renwick tenants. Meeting with tenant groups is not required by its Section 8 contract.

Tombar acknowledges that some HUD employees did take up tenants' causes when they administered the Section 8 program. "Historically there may have been some of our project managers in our local HUD offices who were more advocates on behalf of the residents than are the contract administrators." But HUD employees never met with every tenant association, and it is unreasonable to expect contractors to do that now, he says. "I know that especially in New York there are residents who would like the contract administrator to be more advocates for resident issues than they are, but that is not a responsibility that was envisioned under the contract."

In January, Quadel did meet with representatives from tenants' associations after a request from Tenants and Neighbors, a Manhattan-based tenants group. The company is now seeking to hire a resident relations specialist whose sole job would be to field calls from tenants. Overall, HUD believes most Section 8 tenants are happy with the program. In a department survey conducted during the fall of 2002, 78 percent of tenants said they were satisfied. And Tombar notes that HUD officials still meet with tenants groups. "Look, I know full well that many [HUD] folks still continue to go to residents meetings. But this is not the only thing we have to do, to advocate for residents on every little issue they have."

Andrea Foley, interim executive director of Tenants and Neighbors, says tenants need to meet with someone-the contractor or HUD-who is accountable for the program. "A lot of times tenants just need to see a person in front of them so they can hold that person accountable," she says.

THE RIGHT PRICE

In Oregon, Fischl believes contractors have improved oversight of the state's Section 8 housing stock. He just worries about the price. "Frankly the results they are getting are much better than what we were getting. Of course, they have the resources and the support, but the problem is the cost," he says. Fischl is not alone in that concern. Since 1999, Federoff, HUD's union president, has tried to convince anyone who will listen that HUD is hemorrhaging cash by using contractors to administer project-based Section 8. Using figures available on HUD's Web site, she calculates that when contractors take over Section 8 administration in every state, the cost could be as much as $284 million a year. HUD says it would cost $270 million a year, still far more than the cost of using federal employees to do the work. "Trying to convince tax-paying HUD employees that these contracts are worthwhile is an insult," says Federoff.

The current cost of contracting is hard to figure. If contractors meet all of their performance targets, they can earn additional bonus fees of up to half the amount of the original contract. To date, HUD has awarded just under $150 million in contracts, so the program could cost up to $224 million, depending on contractor performance. Tombar says HUD has not spent more than $160 million in any year so far.

In practice, contractors sometimes get paid even if there is no work to do. If the owner of a Section 8 property decides to leave the program, contractors must send data on affected residents to HUD 90 days before the owner opts out, so the department can help tenants find other housing. Quick placement of tenants is essential to the program, so one of the performance targets in the HUD contract concerns meeting the 90-day deadline for submission of the information. But the target doesn't address what happens if no landlords opt out and no tenants are affected. Thus, contractors still get paid even if only a handful of landlords-or none-actually leaves the program in a given month. For example, in Tennessee, no landlords opted to leave the program in February, but HUD still sent $12,538 to its contractor, the Tennessee Housing and Development Agency, for meeting the 90-day target, according to documents obtained by Government Executive. No Tennessee owners left the program in December or January either. But for this three-month period, the state agency received $43,298 in performance bonuses. The agency didn't miss its target, but it also had no affected residents to report about.

Tombar defends the payments. There will always be slow months, he says, but HUD needs to make sure that the contractor performs at peak moments when several landlords decide they want out of the program. "That one I would think of as more insurance than anything else, insuring we have someone there to take care of that responsibility to the residents," says Tombar. "In some cases you may have two a month, in other cases you may have 18 or 20. There is no way to anticipate that."

The cost of contracting has caught the attention of HUD officials as well. In an internal review conducted in March and April 2002, officials questioned whether HUD employees could do the job at a lower cost, according to a copy of the review obtained by Government Executive. In 2001, the officials noted, the HUD regional office in Kansas City, Mo., paid $5.2 million to contractors in three states to handle Section 8 oversight. The officials estimated it would take 30 GS-13 employees to do the same work. GS-13s cost $90,000 each in total compensation, including benefits. Add in $1 million for training, travel and equipment, and the total cost for performing the work with 30 HUD employees would be $3.7 million, $1.5 million less than what HUD paid to its contractors. "Based on this analysis, we need to further investigate the cost-effectiveness of this initiative," the reviewers concluded.

When shown a copy of the review, Tombar declined comment. "This initiated with a [regional] director out in Kansas City, and I'm not sure where he got his numbers from, so I won't comment on them," he said. But he defends HUD's decision to contract out the work, even at a higher cost. "The underlying point is that it is less expensive to do it with HUD staff. I don't question that," he says. "Be that as it may, it would require additional staff for us, travel dollars and training dollars, equipment costs . . . all to do the things that we can right now, today, expect contract administrators to do to make sure the project-based Section 8 program provides decent, safe and sanitary housing for residents."

Fischl believes the penchant to hire contractors instead of federal employees is part of government culture, particularly at HUD. "One of the concepts that the government has is that we will not pay salaries but we will pay [for] contracts," he says. "Overall, I think the system is working better than it did before, but my God, we spent an awful lot of money on this contract."

Several Bush officials have said that HUD may in-source some work, and Tombar confirms that project-based Section 8 is a candidate. But HUD is not looking to bring large numbers of jobs back in-house-certainly no more than 100 positions, according to a knowledgeable official. Tombar says he is open to other ways of overseeing the Section 8 stock, but he sees few alternatives. "From what I know, and I dare say that I've been closer to this than almost any other individual, I just don't see any other way for us to do it."

Lorenzo Avila says he does. Avila is a HUD union official in northern California, one of seven states where HUD still is seeking a contractor to administer the Section 8 program. He's heard that HUD wants to have a contractor in place by next year, but right now HUD employees still do the job. "The staff now performing the work are doing it efficiently," he says. "We challenge HUD to keep the status quo as a means of knowing how much it should cost to administer this program in a high-quality manner."

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