Rent Reform in Subsidized

Housing: Launching the Stepped

and Tiered Rent Demonstration

DISCLAIMER

The contents of this report are the views of the author and do not necessarily reflect the views or policies of the U.S. Department of Housing and Urban Development or the U.S. Government.

Rent Reform in Subsidized Housing:

Launching the Stepped and Tiered Rent Demonstration

Prepared for

U.S. Department of Housing and Urban Development Office of Policy Development and Research

Submitted by

Alexandra Ubalijoro Keith Olejniczak Nandita Verma Nina Castells James Riccio Elizabeth Saiz MDRC

December 18, 2023

Acknowledgments

The authors are grateful to many individuals for their contributions to this report. We especially thank the families who agreed to participate in the Stepped and Tiered Rent Demonstration study, without whom this evaluation would not be possible. We are also very grateful to our partners at the 10 participating housing agencies: Akron Metropolitan Housing Authority, Charleston-Kanawha Housing Authority, Everett Housing Authority, Fort Wayne Housing Authority, Housing Authority of the City of Asheville, Housing Authority of the County of Kern, Housing Authority of Washington County, Housing Connect (Housing Authority of the County of Salt Lake), Houston Housing Authority, and Portsmouth Redevelopment. We appreciate the thoughtful collaboration of leadership and staff at these agencies who participated in the policy design process and prepared their agencies to launch the demonstration. We are also very grateful to the housing specialists, property managers, supervisors, and other staff members at these housing agencies who are implementing the new policies. We also thank staff at Emphasys Software, MRI Software, and Yardi Systems for engaging in design discussions with the study team when planning for modifying the software systems to implement the new rent rules.

The U.S. Department of Housing and Urban Development’s (HUD) Office of Policy Development and Research (PD&R) sponsored this evaluation, and we especially thank the Government Technical Representative Paul Joice for his support, thoughtful guidance, and partnership during this early phase of the demonstration. We also thank him, Elizabeth Rudd, and Rhea Acuña for their careful review and insightful feedback on this report. We are grateful to Carol Star in PD&R for her support of this study. We are grateful to Alison Christenson and Chris Golden in HUD’s Moving to Work Office for collaborating in the demonstration’s early design phase.

This report also reflects the efforts and contributions of the rest of the study team. Jonathan Bigelow and Felicia Felix from MDRC; Barbara Fink from Fink Research; Jessica Porter, Penny VanderWall, Helena Widtfeldt, and Matt Gronaw from Quadel Consulting; and Don Davis from the Bronner Group worked closely with the participating housing agencies during the design phase and provided technical assistance on launching the demonstration and implementing the new rent policies. Joshua Vermette oversees data management for the study, and Bennet Otten conducts data analysis and quality control. Stephanie Rubino and Melissa West conduct resource management. We are grateful for the thoughtful review and helpful feedback on report drafts from Ingrid Gould Ellen from New York University, Jonathan Bigelow, and Barbara Fink. We also thank Jill Kirschenbaum from MDRC for editorial suggestions.

Foreword

In 1969, the Brooke Amendment established limitations on the rents charged to families and individuals in federally assisted housing. Initially, the Brooke Amendment limited rent charges to 25 percent of an assisted family’s income. Over time, numerous changes were made to the basic rent setting policy, including raising the threshold to 30 percent (enacted in 1981), adding numerous adjustments, exclusions and deductions, as well as adding minimum and ceiling rent options.

Critics of the Brooke rent policy suggest that it is administratively burdensome and creates a disincentive to work. The vast majority of HUD-assisted households who can work, do work; but the standard income-based rent rules penalize households that increase their income. In response, the U.S. Department of Housing and Urban Development (HUD) is exploring alternative ways of setting rents in HUD-assisted housing to support residents and help them achieve both economic self-sufficiency and upward mobility. The first such effort was the Rent Reform Demonstration , in which four Public Housing Authorities (PHAs) implemented a new rent policy that uses a triennial recertification cycle to reduce administrative burden and delay rent increases for tenants who increase their income. Final results from the Rent Reform Demonstration are expected later this year.

As the Rent Reform Demonstration was underway, Congress directed HUD to expand the Moving to Work (MTW) demonstration by granting MTW status to 100 additional PHAs. A Research Advisory Committee consisting of researchers, practitioners, and assisted housing residents recommended that one cohort of MTW expansion PHAs test additional rent reform ideas, beyond those in the Rent Reform Demonstration—specifically, stepped rents and tiered rents. This report describes the launch of the Stepped and Tiered Rent Demonstration (STRD).

Five PHAs are implementing a stepped rent, and another five are implementing a tiered rent. Eligible households are being randomly assigned to remain subject to the standard rent rules or to have their rent set under one of the new policies. The tiered rent policy includes the triennial recertification cycle and other provisions of the Rent Reform Demonstration policy, but also uses a tier structure; that is, households are grouped into income tiers and all households within a tier have the same total tenant payment (TTP). Any income changes within a tier or within the triennial recertification cycle will not affect the household’s rent. The stepped rent policy is a more substantial departure from the standard rent policy. Each household starts out paying an income-based TTP—nearly identical to the standard rent rules—for one year. But beginning in the second year, their TTP “steps up” by a fixed amount each year, independent of their income. The stepped and tiered rent policies both include robust hardship provisions meant to limit any negative consequences for participating households. The goals of the stepped and tiered rent policies include:

- Reducing administrative burden on PHAs and assisted households; - Providing assisted households with more predictability about the rent they will pay, and

eliminating or delaying rent increases that result from increased income; and

- Avoiding excessive hardships for assisted households.

With 10 PHAs and an anticipated sample size of approximately 17,000, STRD will be the largest randomized controlled trial that HUD has ever conducted. STRD also builds on the Rent Reform Demonstration by including different types of households, including public housing residents and households newly admitted to the public housing and housing choice voucher programs. This initial report sets the stage for HUD’s long-term research on STRD, describing the stepped and tiered rent policies and discusses some of the policy design challenges that HUD and the PHAs had to resolve. The report also discusses implementation challenges that will provide crucial context for interpreting impacts in the future.

The process of enrolling eligible households is currently underway and expected to continue through the fall of 2024. The stepped and tiered rent policies will remain in effect for 6 years, so final results are not expected until 2030. HUD will closely monitor outcomes throughout the study period and will publish periodic interim reports to keep stakeholders apprised of this ambitious study.

In recent years, HUD has taken several important steps to innovate and improve the voucher program, and we are already seeing positive results. MTW demonstrations, such as this one, are a critical component of that work, allowing public housing authorities to exercise flexibilities and innovate in how they deliver affordable housing and essential services. As importantly, the research that accompanies MTW demonstrations allows HUD to learn from local innovation and help scale practices that are proven to work – for housing authorities, their residents and their surrounding communities. We look forward to sharing what we learn through the Stepped and Tiered Rent Demonstration about how to support HUD-assisted residents in achieving both economic self-sufficiency and upward mobility.

Solomon Greene

Principal Deputy Assistant Secretary for Policy Development and Research U.S. Department of Housing and Urban Development

Table of Contents

Executive Summary .................................................................................................................... vii

Standard Rent Policy..................................................................................................................... vii

Alternative Policies ...................................................................................................................... viii

Launching the Demonstration ....................................................................................................... xii

Evaluating the Stepped and Tiered Rent Policies ........................................................................ xiii

Looking Ahead.............................................................................................................................. xv

Chapter 1. Introduction................................................................................................................ 1

Rent Reform Debate and Evidence ................................................................................................. 2

MTW Expansion and STRD ........................................................................................................... 6

Plan and Timeline ........................................................................................................................... 9

Structure of This Report ................................................................................................................ 10

Chapter 2. The Stepped and Tiered Rent Policies ................................................................... 11

Standard Rent Rules ...................................................................................................................... 11

Stepped Rent Policy ...................................................................................................................... 12

Tiered Rent Policy ........................................................................................................................ 16

Chapter 3. Policy Design ............................................................................................................ 20

Using Retrospective Income to Set Total Tenant Payments ......................................................... 21

Using Gross Income to Set Total Tenant Payments ..................................................................... 24

Protecting Families From Hardship .............................................................................................. 26

Incompatibilities With the Family Self-Sufficiency Program ...................................................... 32

Chapter 4. Operationalizing the Policy ..................................................................................... 35

Preparing to Implement the Stepped and Tiered Rent Policies .................................................... 35

Making the Transition to New Rent Policies ................................................................................ 38

Stepped and Tiered Rent Operational Tools and Materials .......................................................... 40

Educating Households on the Stepped and Tiered Rent Policies ................................................. 41

Chapter 5. Evaluation Approach and Study Sites ................................................................... 42

The STRD Learning Agenda ........................................................................................................ 42

Implementation Analysis .............................................................................................................. 43

Impact Analysis ............................................................................................................................ 44

Cost Analysis ................................................................................................................................ 48

Data Sources ................................................................................................................................. 48

Program and Sample Eligibility .................................................................................................... 50

PHA and Household Characteristics ............................................................................................. 51

Chapter 6. Looking Forward ..................................................................................................... 55

Appendix A .................................................................................................................................. 58

Appendix B .................................................................................................................................. 59

Appendix C .................................................................................................................................. 61

References .................................................................................................................................... 65 List of Exhibits

Exhibit 1. The Stepped Rent Policy ............................................................................................... ix Exhibit 2. Tiered Rent Schedule .................................................................................................... xi Exhibit 3. Rent Reform Demonstration: Precursor to the Stepped and Tiered Rent Demonstration ......................................................................................................................................................... 5 Exhibit 4. The Moving to Work Demonstration and Recent Expansion Efforts ............................ 6 Exhibit 5. Public Housing Agencies in the Demonstration ............................................................ 8 Exhibit 6. Public Housing Agencies in the Demonstration by City and County ............................ 8 Exhibit 7. Stepped and Tiered Rent Demonstration at a Glance .................................................... 9 Exhibit 8. Timeline of the Demonstration .................................................................................... 10 Exhibit 9. Important Concepts in Determining Housing Subsidies .............................................. 11 Exhibit 10. Main Mechanisms to Achieve Key Objectives by Policy .......................................... 12 Exhibit 11. The Stepped Rent Policy ............................................................................................ 14 Exhibit 12. Kern County Stepped Rent Schedule ......................................................................... 14 Exhibit 13. Example of Income and Monthly Payments Under the Stepped Rent Versus Standard Rent Policy .................................................................................................................................... 15 Exhibit 14. Tiered Rent Schedule ................................................................................................. 17 Exhibit 15. Example of Income and Monthly Payments Under the Tiered Rent Policy Versus Standard Rent Policy..................................................................................................................... 18 Exhibit 16. Comparison of Rent Policies ...................................................................................... 19 Exhibit 17. Illustration of a 12-Month Retrospective Income Period ........................................... 22 Exhibit 18. HUD’s Standard Verification Hierarchy .................................................................... 22 Exhibit 19. Public Housing Agencies’ Alternative Verification Hierarchies ............................... 24 Exhibit 20. Stepped Rent Hardship Example: Monthly Payments and Income ........................... 28 Exhibit 21. Tiered Rent Hardship Loss of Income Example ........................................................ 29 Exhibit 22. Hardship Provisions for Large Numbers of Dependents ........................................... 30 Exhibit 23. Hardship Duration by Site .......................................................................................... 31 Exhibit 24. Public Housing Agency Trainings ............................................................................. 38 Exhibit 25. Topics and Study Components by Study Phase ......................................................... 43 Exhibit 26. Key Study Questions .................................................................................................. 45 Exhibit 27. Hypothesized Effects for Key Outcomes ................................................................... 46 Exhibit 28. Stepped and Tiered Rent Demonstration Public Housing Agency Characteristics ... 52 Exhibit 29. Public Housing Agencies’ Local Economic Context ................................................. 53 Exhibit A-1. Stepped Rent Schedules for All Five Stepped Rent Public Housing Agencies ....... 58 Exhibit B-1. First 30 Tiers of Akron, Charleston, Everett, and Washington County’s Tiered Rent Schedule ........................................................................................................................................ 59 Exhibit B-2. First 30 Tiers of Houston’s Tiered Rent Schedule ................................................... 60 Exhibit C-1. Characteristics of Households Eligible for the Demonstration for Tiered Rent PHAs, by PHA.......................................................................................................................................... 61 Exhibit C 2. Characteristics of Households Eligible for the Demonstration for Stepped Rent PHAs, by PHA .............................................................................................................................. 63

Executive Summary

Federal rental assistance programs help approximately 5 million low-income households across the country afford their housing costs, making it a critical component of the nation’s social safety net. Public housing and Housing Choice Vouchers (HCV) are two of the largest federal rental assistance programs, together serving approximately 3 million households. Improving the structure and performance of these rent subsidy programs has been a longstanding public policy goal and central to the U.S. Department of Housing and Urban Development’s (HUD) Moving to Work (MTW) Demonstration, which gives public housing agencies (PHAs) flexibility to pursue three statutory objectives: reduce costs and achieve greater cost effectiveness, give incentives for families to work toward economic self-sufficiency, and increase housing choices for low-income families.

In 2021, HUD selected one cohort of 10 newly designated MTW housing agencies to test two new alternative rent policies as part of the Stepped and Tiered Rent Demonstration (STRD). Approximately 17,000 nonelderly, nondisabled households that are either in public housing or the HCV program, or are entering those programs during the enrollment period, will be randomly assigned to one of two study groups: (1) the stepped rent or tiered rent policy group, which will be subject to the new rent policy, and (2) the control group, which will be subject to the existing standard rent rules. This is HUD’s second large-scale random assignment test of alternative rent policies. The first one, the MDRC-led Rent Reform Demonstration, which tests an alternative rent policy at four MTW agencies, is nearing completion, with final results due in 2024. The present report, the first in a series of three planned for the first phase of the STRD study, introduces STRD, the alternative rent policies and their key features, the supporting MDRC-conducted evaluation, and key activities accomplished to launch the demonstration in 10 locations. The Standard Rent Policy

Since the passage of the Brooke Amendment to the federal housing law in 1969, rents in subsidized housing have been directly tied to income, with the intent to protect tenants from excessive rent burden. 1,2 In general, households receiving federal rental assistance are responsible for a portion of the rent equal to 30 percent of the household’s adjusted current income and the amount of income it anticipates in the coming year (“current/anticipated” income). PHAs recertify households for the program annually when they review household income and readjust the household’s rent portion. Despite this protective feature, the current rent system has been the target of much criticism. Critics view the standard rent policy as administratively complex and expensive for PHAs to administer and difficult for families to comprehend. Critics have also charged that subsidies tied to income discourage, rather than support, families’ efforts to increase their employment and earnings, because the rules impose a kind of “tax” on earnings gains by requiring that 30 percent of the extra income be paid toward rent and utilities (Buron et al., 2010; PHADA, 2005; GAO, 2012).

1 Housing and Urban Development Act of 1969. Public Law 91-152. 2 The standard rent policy in which a family’s rent contribution is 30 percent of its adjusted income is also known as the Brooke rent.

vii

The Alternative Policies

The STRD study is designed to test the effectiveness of potential solutions to some of the central issues that challenge the nation’s rent subsidy system. The 10 PHAs selected for this demonstration will each implement one of two alternative rent policies, with five implementing a tiered rent policy and five implementing a stepped rent policy. The Stepped Rent Policy

Under the stepped rent policy, changes in a household’s total tenant payment (TTP), which is the amount the household is expected to contribute to rent and utilities, are decoupled from changes in a household’s income. Upon enrolling in the new rent system, a household’s initial TTP is still based on its income. After the initial enrollment, its rent contribution increases annually by a fixed amount, even if its income does not increase. The amount of the increase is tied to the local area’s Fair Market Rent (FMR) based on the household’s rental unit size (number of bedrooms).

The main rationale behind the stepped rent policy is that decoupling changes in a household’s required rent contribution from changes in its income counteracts the potential disincentive to increase household earnings inherent in the standard percent-of-income policy. Under the stepped rent policy, the household’s TTP steps up by a modest amount each year, regardless of income level. Therefore, a household that increases its income by an amount that exceeds its TTP increase retains more disposable income than it would have under the standard rent rules. The stepped rent policy also simplifies the administration of housing subsidies. Households only need to recertify their continued eligibility for rental assistance once every 3 years instead of annually, and they do not need to have their TTP recalculated at that time based on changes in their income.

The stepped rent policy has a few other key features. First, a household’s initial TTP is set at 30 percent (or 28 percent in one PHA) of retrospective (prior year) adjusted income rather than current/anticipated income. 3 For the annual step increases in subsequent years, each PHA developed its own step-up schedule, setting the increases between 2 and 4 percent of the local area FMR. The stepped rent policy also includes an income-based hardship provision. If at some point a household’s income does not rise as fast as the rent steps or its income drops such that its TTP exceeds 40 percent of its current income, the household is given a temporary new TTP based on its current income.

Exhibit 1 illustrates how households can benefit from the stepped rent policy. It shows a hypothetical scenario in which a household experiences income increases during the 6-year period. The stepped rent TTP, represented by the black line, increases by a fixed amount each year, regardless of any changes in household income. The blue line with the arrow represents the household’s TTP under the standard rent policy. In this example, the household’s income increases to levels at which 30 percent of the increased income exceeds the step increases in

3 The Housing Authority of the City of Asheville uses 28 percent for the initial step instead of 30 percent. That agency preferred to use a lower percentage of income for the initial TTP to compensate for the regular stepping up

of TTPs over time. Also of note, the Housing Opportunity Through Modernization Act of 2016 requires all PHAs across the country the use of retrospective income for all recertifications. HUD expects to implement this change in 2024. It will also apply to the control group households in the STRD housing agencies. TTP; therefore, this hypothetical household keeps more of its increased earnings under the stepped rent policy than it would under the standard rent policy. Exhibit 1. The Stepped Rent Policy

Source: MDRC

The five PHAs implementing the stepped rent policy in STRD are the Fort Wayne Housing Authority (Indiana), Housing Authority of the City of Asheville (North Carolina), Housing Authority of the County of Kern (California), Housing Connect, the Housing Authority of the County of Salt Lake (Utah), and Portsmouth Redevelopment and Housing Authority (Virginia). The Tiered Rent Policy

Under the tiered rent policy, households are grouped by income into income tiers, and all households within the same tier pay the same amount in TTP. The recertification period is extended to 3 years instead of taking place annually, and income increases during the 3-year period do not affect rent until the next triennial recertification.

The tiered rent policy takes a different approach to strengthening the financial incentive for tenants to increase their earnings, simplifying the administration of public housing and HCV subsidies, reducing administrative burden, and making rent calculation more transparent for households. Administrative burden would be reduced by completing recertifications once every 3 years instead of annually, eliminating interim certifications to adjust TTP for income changes between recertifications, and by using gross income (instead of adjusted income) to calculate TTP. Using gross income eliminates the need to adjust income by applying certain deductions, which can make rent calculations opaque to households and, in the case of childcare deductions, can be administratively burdensome to document and verify. The tiered rent policy reduces the potential earnings disincentive inherent in the standard rent structure by capping TTPs for 3 years at a time, so that a household that increases its earned income will not have to pay more in rent before the triennial recertification. The tiered rent structure itself could also reduce the

potential disincentive to increase income. If a household increases its income, but its income still falls within the same tier, its TTP remains the same. 4

Thus, whereas the stepped rent policy attempts to increase financial work incentives by decoupling TTP increases from earnings increases, the tiered rent policy attempts to do so by eliminating TTP increases when earnings increase for 3-year cycles. In both policies, the respective changes in setting and modifying TTPs are expected to help reduce PHAs’ administrative burden in operating the rent subsidy system.

Exhibit 2 illustrates the tiered rent schedule. A household’s TTP, which is based on the household’s gross retrospective income (that is, income over the prior 12 months), is set according to where that annual income falls in an income category or tier. The income tiers are defined in $2,500 increments. All households in a given tier pay the same TTP, which is 28 percent of the midpoint of the tier. 5 For example, a household with an annual income of $6,000 will have a monthly TTP of $146 under the tiered rent policy. A household with an annual income of $7,000 will also have a monthly TTP of $146, because its income falls in the same tier. For both of these households, if their incomes increase during the next 3 years, their TTP will remain at $146 until the next triennial recertification. If by then they each increased their retrospective annual incomes to, say, $12,000, their TTP would jump two tiers, and they would begin paying $262 for the next 3 years. However, if their retrospective incomes fell by that time, their TTP would be set according to whichever tier then applied. If their current income dropped to a lower tier during the 3 years before the triennial recertification, they could request a temporary adjustment to lower their TTP under the policy’s hardship provisions.

4 However, households face different incentives depending on where in the income range for the tier their income

falls. For example, households with incomes near the bottom face a greater incentive to increase their income by a larger amount than households with incomes in the middle of the tier. Households with income near the bottom of the tier might even have an incentive to slightly lower their income amount to drop to a lower tier and pay a lower TTP. Households near the top of the tier might have a disincentive to increase their income if they can only increase

it by a small amount, because their TTP would jump up to the TTP in the higher tier. It is uncertain to what extent these competing incentives balance each other out. 5 The Houston Housing Authority applied for MTW status under a third option that allowed larger PHAs to propose their own version of the stepped or tiered rent policies within certain parameters set by HUD. The Houston Housing

Authority defines its tiers in $2,000 increments and uses 28 percent of the bottom of the tier (instead of the midpoint of the tier). These deviations from the initial proposed policy were intended for the new policy to have a neutral effect on the average TTP. Exhibit 2. Tiered Rent Schedule

TTP = total tenant payment.

Notes: This illustration represents the first five tiers in the tiered rent schedule. Income tiers increase in increments of $2,500, and the associated total tenant payment is calculated as 28 percent of the midpoint of the tier. Source: HUD (2023a)

The five PHAs implementing the tiered rent policy in STRD are the Akron Metropolitan Housing Authority (Ohio), Charleston-Kanawha Housing Authority (West Virginia), Everett Housing Authority (Washington), Housing Authority of Washington County (Oregon), and Houston Housing Authority (Texas). Protecting Families From Hardship

Both the stepped and tiered rent policies have hardship provisions in place to protect families from excessive rent burden if they experience loss in income, or in the case of the stepped rent policy, if their income does not increase to keep up with the stepped rent increases. In developing these safeguards, there can be a tension between making sure they adequately protect families from hardship but also preserve the earnings incentive built into policy. There are also cost and administrative burden considerations. The hardship policies were designed to balance several objectives: making sure households are adequately protected, containing administrative burden associated with processing hardship requests and exemptions, and ensuring that PHAs do not spend too much in housing subsidies for households that no longer need the hardship exemption.

The hardship policy for the stepped rent policy is if a household’s TTP (calculated under the regular stepped rent rules) exceeds 40 percent of the household’s current adjusted income, the household qualifies for a hardship exemption. The household’s TTP is temporarily set at 40 percent of its current adjusted income. The duration of the hardship exemption ranges from 1 to 12 months, as set by the PHA. When the hardship expires, if the household’s income has not improved enough to afford the regular TTP, the household can qualify for a renewal of the hardship exemption. If the nonhardship TTP still exceeds 40 percent of the household’s income at the time of the request, the household will be granted a renewal. No limit is placed on how many renewals a household can request and be granted.

After 12 months, if a household requests to renew the hardship exemption and its income still qualifies for one, the PHA has the option to renew the hardship exemption or to do a “step reset.” A step reset restarts the household’s schedule. A new “initial” TTP is calculated using 30 percent of adjusted retrospective income, and the household’s TTP steps up annually from there in adherence with the TTP’s regular stepped rent schedule. 6 A step reset is especially appropriate for situations in which a household’s reduced income level is likely to represent an income shift that is likely to endure—for example, if a household member with income left the household, or if a household member who was previously employed experiences long-term unemployment. 7

The hardship exemption for the tiered rent policy is that if a household’s current income would place it in a lower income tier, the PHA will temporarily set the household’s TTP to that lower tier. Although income deductions are no longer used to calculate rent, the hardship policy allows applying some deductions related to dependents and childcare costs in determining whether a household qualifies for a hardship exemption and in setting its hardship TTP. Like the stepped rent policy, the duration of the hardship exemption ranges from 1 to 12 months, as set by the PHA. Hardship exemptions can be renewed per the household’s request if it remains eligible for an exemption. No limits are placed on the number of times a hardship can be renewed, but a hardship TTP is only effective up until the next triennial recertification, when the household completes a full income review and a new TTP is set for the next 3 years. Launching the Demonstration

Turning the broad vision of each of the two rent policies into operational systems that could work across the variety of local conditions and have strong buy-in from PHA staff required considerable effort on the part of the MTW PHAs, their software vendors, and HUD—with MDRC coordinating the overall process, contributing to final design decisions, and providing training and technical assistance on implementing the new rent rules.

The preparatory phase involved many rounds of discussion to flesh out the details of certain provisions of each policy and, in some cases, to modify HUD’s original specifications. This process involved determining which of these policy specifications had to be standardized across PHAs (either across five agencies implementing the tiered rent policy, across the five agencies implementing the stepped rent policy, or across all 10 PHAs in the demonstration), and which decisions could be left to local discretion. During these discussions, PHAs, HUD, and MDRC also examined how certain evaluation requirements (including the sample identification, informed consent, baseline data collection, and random assignment processes) could be implemented in ways that minimized disruption to the PHAs’ standard ways of operating, which, following the COVID-19 pandemic, relied more heavily on remote procedures for engaging with

6 As discussed previously, one PHA uses 28 percent instead of 30 percent of income to determine the initial TTP.

7 HUD did not impose a limit on the number of step resets that a household can have during the 6-year demonstration period. However, one PHA decided to cap the number of step resets at one, except for extenuating circumstances.

the households they served. As MTW agencies, PHAs were required to submit MTW Supplements and obtain HUD approval for waivers allowing them to adopt the new rent rules for the demonstration. 8

Three software vendors served the 10 PHAs with four software systems, and each vendor had to modify the PHAs’ housing subsidy software systems to correctly implement the alternative rent policies—a complex and time-consuming effort. PHAs had to determine staffing structures for implementing the new policies. Once PHAs selected the housing specialists to implement the new rules, MDRC trained those frontline staff members on the new rules, the random assignment procedures, and other research activities required by the evaluation. MDRC used a set of training manuals, quality control protocols, and study enrollment toolkits designed for this purpose. In addition, to help prepare the housing specialists to inform and educate households about the alternative rent policies, the study team worked with the PHAs to prepare detailed slide presentations with talking points and prepared fact sheets, frequently asked questions, and other materials to share with households. The study team developed strategies to gauge how well households understood the policies and reeducate households on an ongoing basis. ICF, a HUD technical assistance provider, also worked with the study team and PHAs to develop short videos that explained the main features of the two rent policies. 9 Evaluating the Stepped and Tiered Rent Policies

STRD features a comprehensive learning agenda, including a careful assessment of the implementation, impacts, and cost effectiveness of the new policies. STRD uses a two-group randomized controlled trial, which is a rigorous method for determining the effectiveness of interventions. The power of this type of research design comes from the fact that, with an adequate sample size, random assignment ensures that the new rent policy program group and the control group will be similar in their distributions of observed and unobserved characteristics when the study begins. Thus, differences between the new and existing policy groups that emerge later on can be attributed with confidence to the policy change. Evaluating the Implementation of the Stepped and Tiered Rent Policies

The implementation analysis will document how each housing agency operationalizes and implements the new rent policies and the extent to which the new policies are put into practice in a way consistent with operational plans for the policies (that is, implementation fidelity). The analysis will compare the new rent policies with the existing standard rent policy in terms of ease of administration, transparency, and burden on staff and tenants. The analysis will seek to understand how staff members at each PHA operationalize core features of the rent policies, their perspectives on the policies, and how implementation is unfolding. From the staff’s perspective, the analysis will explore what aspects of the policy families understand and what they find challenging. The analysis will also investigate what strategies the PHAs put in place to help tenants understand the available hardship protections and stronger financial incentive to increase earnings. The implementation analysis in the early phase of the evaluation will rely primarily on interviews with housing agency staff and housing subsidy data from the PHAs and HUD.

8 MTW agencies submit an MTW Supplement to HUD annually, which specifies the policies that the agency plans

to implement in the next year. HUD must approve the MTW Supplement before the agency implements new policies or policy modifications. 9 ICF created the orientation video in consultation with MDRC, HUD, and the PHAs. Evaluating the Stepped and Tiered Rent Policies’ Effects

Both the stepped and tiered rent structures aim to increase residents’ economic self-sufficiency: the tiered rent structure with a triennial recertification, and the stepped rent structure by decoupling tenant rent changes from tenant income. Both rent policies aim to increase administrative efficiency through fewer certifications and streamlined rent calculations. HUD intends the new policies to be approximately budget neutral. Despite this intention, the policies may cause an increase or decrease in PHAs’ subsidy per household, and these effects may differ for the tiered and stepped rents.

The impact analysis will test whether the stepped and tiered rent policies lead families to increase their earned incomes and whether this increase is achieved without causing a sustained increase in PHAs’ housing subsidy. The analysis will also assess whether the new policies led to decreases (or increases) in families’ material hardship. The analysis will rely primarily on administrative records to measure employment, income, and public benefit use, and it may also include a household survey to measure material hardship and other outcomes. 10

The impact analysis will pool the housing agencies implementing the stepped rent policy into one policy cluster and the housing agencies implementing the tiered rent policy into another policy cluster. The analysis will estimate the effects of the alternative rent model for the five sites combined in each cluster. For each rent policy, the evaluation will also examine whether the new rent policy has differential effects for particular subgroups of households. Two key subgroups that will be examined for both rent policies include tenants’ work status at enrollment and whether tenants face significant barriers to work, defined by a combination of education level and work history. In addition, a third subgroup will be tailored to each rent policy: for the tiered rent group, whether the household is near the bottom or the top of its income tier, and for the stepped rent group, whether the household has a very high or very low initial stepped rent. Evaluating PHA Administrative Efficiency and Costs

The cost analysis will test the core assumptions underlying rent reform. Both the stepped and tiered rent policies have the potential to reduce the burden and costs of administering the public housing and HCV programs by reducing the frequency of regular recertifications from annually to triennially and streamlining TTP calculation. 11 Furthermore, if the new policies increase families’ earnings substantially and, thereby, encourage households to exit subsidized housing, then PHAs may serve more households over time. The administration of the hardship policies may at least partially offset those reduced costs. The evaluation will assess whether either of the alternative rent policies is less expensive to administer than the standard rent policy. The evaluation will also attempt to identify which aspects of the policy may be driving or offsetting any savings.

10 Administrative data sources include National Directory of New Hires wage records, HUD and PHA housing subsidy records, Temporary Assistance to Needy Families cash assistance and Supplemental Nutrition Assistance Programs, and Homeless Management Information System (HMIS) data.

11 The evaluation conducted as part of the Rent Reform Demonstration found that one requirement that pushes in a direction opposite to simplification was collecting and verifying retrospective income in setting and revising TTPs. With that finding in mind, HUD allowed STRD PHAs to streamline income verification procedures. Looking Ahead

Building on the Rent Reform Demonstration, the STRD evaluation promises to substantially deepen the evidence base on the operations, impacts, and costs of alternative rent policies. The Rent Reform Demonstration tested a single alternative rent policy for housing voucher recipients in several locations. In contrast, the STRD evaluation will test two new policies across a larger number of PHAs, with a larger sample, and with public housing households as well as voucher households. STRD will also include newly admitted households in addition to those already receiving assistance under the standard rules.

At the time of this writing, all 10 PHAs had launched the demonstration and are operating the stepped and tiered rent policies, and enrollment in the demonstration is still under way. Two other reports will be released as part of this evaluation’s first phase. The next report, to be submitted to HUD in 2024, will describe findings from the first round of staff interviews on the PHAs’ design, launch, and early implementation experiences. The third and final report under this evaluation’s first phase will be submitted to HUD in 2025 and will describe the baseline characteristics of the full STRD sample and include some exploratory descriptive analyses of the first certifications under the stepped and tiered rent policies for a subsample of early enrollees— if those data are available at that time. The second phase, not yet funded, will continue the evaluation through 6 years after initial certifications and seek to understand households’ experiences with the stepped and tiered rent policies. That phase will include an impact analysis that examines the effects of the stepped and tiered rent policies on households’ outcomes— including labor market outcomes, material hardship, housing subsidies, family well-being, and others.

Chapter 1. Introduction

Federal rental assistance programs help approximately 5 million low-income households to afford their housing costs, making it a critical component of the nation’s social safety net. The public housing and Housing Choice Voucher (HCV) programs are two of the largest federal rental assistance programs, together serving approximately 3 million households (CBPP, 2022). 12 Improving the structure and performance of these rent subsidy programs has been a longstanding public policy goal and central to the U.S. Department of Housing and Urban Development’s (HUD) Moving to Work (MTW) Demonstration. MTW provides public housing agencies (PHAs) the flexibility to pursue three statutory objectives: reduce costs and achieve greater cost effectiveness; give incentives for families to work toward economic self-sufficiency; and increase housing choices for families with low incomes.

In 2021, one cohort of 10 newly designated MTW housing agencies was selected to test two new alternative rent policies as part of the Stepped and Tiered Rent Demonstration (STRD). This report introduces STRD, the alternative rent policies, and their key features. This report discusses the supporting evaluation being conducted by MDRC, and key activities accomplished to launch the demonstration in 10 locations. 13 This demonstration is HUD’s second large-scale random assignment test of alternative rent policies. The first one was the Rent Reform Demonstration, also led by MDRC. That study is nearing completion, with final results expected in 2024 to generate evidence that is relevant to STRD.

Since the passage of the Brooke Amendment in 1969, rents in subsidized housing have been directly tied to income, with the intent to protect tenants from excessive rent burden. 14 In general, households receiving HUD rental assistance are responsible for a portion of their housing costs called a total tenant payment (TTP). The TTP is equal to 30 percent of the household’s adjusted current income and the amount of income it anticipates in the coming year (“current/anticipated” income), after accounting for various deductions. PHAs recertify households for the program annually when they review household income and readjust the household’s rent portion. Despite this protective feature, the current rent system has been the target of much criticism. Critics view the standard rent policy as administratively complex and expensive for PHAs to administer and difficult for families to comprehend. The critics have also charged that subsidies tied to income discourage, rather than support, families’ efforts to increase employment and earnings, because the rules impose a kind of “tax” on that earnings gain by requiring that 30 percent of the extra income be paid toward rent and utilities (Buron et al., 2010; PHADA, 2005; GAO, 2012).

The STRD study is designed to test the effectiveness of potential solutions to some of the central issues that challenge the nation’s rent subsidy system. The 10 PHAs selected for this demonstration will each implement one of two alternative rent policies. Five PHAs will

12 Three of HUD’s programs—HCV, public housing, and Project-Based Rental Assistance—assist about 90 percent of the households receiving federal rental assistance, administered by 3,300 public housing agencies (NHLP, n.d.). 13 The MDRC study team also includes Barbara Fink (Fink Research). Ingrid Gould Ellen (New York University) serves as an advisor, and Quadel Consulting and the Bronner Group were a part of the technical assistance team that

helped prepare the PHAs for demonstration launch. 14 The standard rent policy, in which a family’s rent contribution is 30 percent of its adjusted income, is also known as the Brooke rent.

implement a tiered rent policy, and five will implement a stepped rent policy.15 The tiered rent model is tied to income, but unlike HUD’s standard rent policy, households are grouped by income into tiers, and all families whose incomes fall within the same tier pay the same TTP. The tiered rent TTP is capped, even if household earnings grow, until the next regular recertification. If a family’s income increases, its rent contribution may jump to a higher tier at recertification, which takes place every 3 years rather than annually. In the interim, as a safeguard, a family with an income decrease may be placed in a lower tier prior to the triennial recertification.

Stepped rents, on the other hand, are decoupled from income and increase annually, unless eligible hardship circumstances are present. Triennial recertifications are conducted under the stepped rent model only to determine families’ continued eligibility for HUD housing subsidies.

STRD is also the subject of a comprehensive evaluation, which uses a randomized controlled trial and includes implementation, impact, and cost-study components. Approximately 17,000 nonelderly, nondisabled households that are either in public housing or the HCV program, or are entering those programs during the enrollment period, will be randomly assigned to two study groups: the stepped rent or tiered rent policy group, which will be subject to the new rent policy, and the control group, which will be subject to the existing standard rent rules. 16 The Rent Reform Debate and Evidence

Housing assistance to low-income renters is provided through three primary means. HCVs, also referred to as Section 8, are rental subsidies that tenants can use in privately owned rental housing units of their own choosing. Project-based assistance provides building owners with government subsidies to reduce rents. The third source of assistance is public housing. More than 5 million low-income households receive help through these programs, the largest of which is the HCV program, providing rental assistance to a little more than 2 million low-income households (CBPP, 2022). Most public housing residents and HCV recipients pay 30 percent of their income, adjusted for exclusions and deductions, for rent and utilities. 17 Payment standards tied to local Fair Market Rents (FMRs) limit HCV subsidies. 18 Protecting households with low incomes and very low incomes from paying excessive proportions of their incomes for rent has been the primary rationale of HUD and Congress for the percent-of-income system. Previous efforts to modify the system, such as allowing housing agencies to establish minimum rents, have also required those agencies to establish policies exempting households for which minimum rents would pose severe hardship.

Public housing industry groups and other stakeholders have criticized the percent-of-income system as having unintended consequences. One is that it may have negative effects on tenant

15 One PHA implementing the tiered rent policy is implementing its own proposed tiered rent model that conforms with HUD’s criteria for the demonstration but deviates in some ways from the HUD-specified tiered rent model. The study relies on HUD regulations to define working-age and nondisabled households. Chapter 5 more fully 16

describes the program and participant selection criteria. 17 This discussion draws on Riccio, Deitch, and Verma (2017) and Castells et al. (2021). 18 When HCV holders first receive a voucher or move, they are allowed to rent a unit costing up to 40 percent of their adjusted income, but they are responsible for any additional rent exceeding the payment standard. Since

enactment of the Quality Housing and Work Responsibility Act of 1998, housing agencies can establish minimum rents of up to $50. For public housing, tenants pay a rent amount of 30 percent of their adjusted income. When their income increases, they have the option to pay a flat rent that the PHA sets at 80 percent (or higher) of FMR.

labor force participation. Decreased labor force participation can keep the housing subsidy levels per household high, and it may even reduce the proportion of households that increase their incomes to the point that they no longer need or no longer qualify for housing subsidies. This would in turn limit the number of households with similar needs that can be offered subsidies, raising questions of fairness or horizontal equity. The percent-of-income rent structure may also discourage adding working adults to the household or including some working adults on the lease, which could have similar implications. Other criticisms suggest that the system is intrusive in tenants’ lives, that it leads to inaccurately reported incomes, and that it can have negative effects on housing agency finances and administrative complexities and costs. At the same time, housing agencies report that the current system sometimes confuses voucher applicants and recipients as to what rents they are expected to pay from year to year. It can also have adverse effects on the morale of housing agency staff members, who must collect and verify household income in what some have described as an invasive process. 19

Numerous policymakers and stakeholders have advocated for reform of the standard rent system to reduce perverse economic incentives for assisted households, simplify the administration of the system, and improve the operational efficiency of housing agencies. The Housing Opportunity Through Modernization Act of 2016 (HOTMA) is an important step in this direction. HUD published the final rule in 2023, and it went into effect on January 1, 2024. 20 The act includes reforms that modify how PHAs calculate income for rent determination—such as allowing prior year income and using income determinations from other federal programs—and reduce the frequency of interim recertifications for income changes. PHAs are required to implement these changes during the next few years.

However, HOTMA does not make any fundamental changes to the percent-of-income rent structure under the standard rent policy, and sweeping rent policy reform has been elusive. Transforming the rent system involves some fundamental tradeoffs around which agreement has been hard to achieve. For example, simplifying the rent structure may make it more difficult for agencies to ensure that tenants with the greatest need receive the most assistance. At the same time, offering deep subsidies for an unlimited term makes it difficult to serve families with equal need on waiting lists because of a fixed appropriation level and the nonentitlement status of HUD’s housing programs. Also, the advantages of standards and protections built into a common or consistent federal approach must be weighed against the risks and benefits of allowing local agencies to set rent rules based on local conditions. Finding the right balance in the mission of housing assistance between a strict focus on providing decent affordable housing versus other objectives, such as promoting family self-sufficiency, is another source of tension among stakeholders. Each subject has been discussed and debated for years, with little in the way of definitive new evidence about the use and consequences of changing or improving current rent policies.

Furthermore, only PHAs designated as MTW agencies are authorized by Congress to make changes to many housing policies. These MTW agencies have the administrative flexibility to change certain policies, provided they notify the public and receive approval from HUD and

19 Buron et al. (2010) and other papers described many of these criticisms.

20 In this context, the final rule represents HUD regulations that have progressed through the various stages of administrative rulemaking (proposed rule, public comment, and notification in the Federal Register with the date it goes into effect).

from their boards of directors. That flexibility extends to rent rules that otherwise require changes in legislation or regulations. Until recently, only 39 of the more than 3,000 PHAs in the country had an MTW designation and could exercise administrative flexibility. 21

Although some efforts have been made to reform the rent system, most have been modest, such as simplifying income deductions, changing the process for calculating assets, or reducing the frequency of recertifications for fixed-income households. Around the time STRD was designed, some MTW agencies had initiated more substantial rent reform efforts, including versions of the policies now tested as part of STRD. For instance, the Keene Housing Authority in New Hampshire was implementing a stepped rent, the Cambridge Housing Authority in Massachusetts had introduced tiered rent, the Housing Authority of Santa Clara eliminated deductions and set the TTP at 35 percent of gross income, and some PHAs had introduced flat rents for public housing and the HCV program (Castells, 2020; Levy et al., 2019).

HUD commissioned a large-scale demonstration called the Rent Reform Demonstration to test the effectiveness of an alternative rent policy (see exhibit 3). The four participating PHAs implemented a package of policy changes, undertaking a comprehensive retooling to transform how rent subsidies were calculated and the related operational procedures and processes for staff and families. 22 These PHAs joined the demonstration to find ways to improve on their existing rent policies and practices, and the demonstration appealed to them because it offered the opportunity to learn whether the changes were effective. The PHAs worked closely with HUD and MDRC to build an alternative rent policy that extended the recertification period, introduced a 12-month retrospective income look-back period for establishing household income, simplified the rent calculation by eliminating income deductions, and simplified the method for estimating utility costs. Unlike STRD, which includes both current public housing residents and voucher recipients as well as new households entering the subsidy programs during the enrollment period, the Rent Reform Demonstration focused on existing voucher households.

21 See Levy, Edmonds, and Long (2020) for the administrative flexibility the first 39 MTW agencies exercised. 22 All the PHAs, with the exception of the District of Columbia Housing Authority, implemented the new rent policy for a full 6-year period, which included two 3-year triennial recertification periods. Exhibit 3. Rent Reform Demonstration: Precursor to the Stepped and Tiered Rent Demonstration The Rent Reform Demonstration, commissioned by the U.S. Department of Housing and Urban

Development (HUD), includes the first major attempt to test the effectiveness of an alternative rent policy for families receiving federal housing choice vouchers. Four public housing agencies (PHAs) with Moving to Work designation joined the demonstration. They helped to design a single alternative rent policy that each of

them then implemented, but with some local adaptations. The new policy fundamentally altered key aspects of HUD’s Public Housing Agencies in the standard rent policy (referred to as “traditional rent policy” in Rent Reform Demonstration the study) for voucher holders. It changed the ways in which • District of Columbia Housing families’ contributions to their rental costs were calculated Authority, Washington, D.C. and their housing subsidies determined, introduced, or • Lexington-Fayette Urban County increased the minimum contribution families were