issue brief - public housing authorities directors … is not fair to change the rules in the middle...

OVER a

a. It is not fair to change the rules in the middle of the game.

4) HUD has encouraged housing authorities to increase their reserves.

a. HAs got higher scores on their evaluations with larger reserve amounts.

b. Each property is now expected to generate reserves.

ISSUE BRIEF

HUD 2012 Budget Recaptures $1 Billion in Public Housing Operating Reserves Through Subsidy Offset

HUD Also Prohibits Housing Authorities from Using Reserves for Capital Improvements

Public Housing Authorities Directors Association

OVER a

Uncle Sam to Housing Authorities: “Because of your good management, we’re able to take away

your hard-earned savings and give it to others.”

HUD’s 2012 budget requests only $3.9 billion for public housing’s operating fund, $1 billion below the required amount. If passed this funding level will be the lowest level of eligibility ever for the public housing program. The $1 billion difference will be taken from agencies with operating reserves above a certain threshold as an offset to their operating subsidy. In addition, HUD has essentially frozen spending operating reserves by changing its policy and prohibiting their use for capital improvements.

Congress Should Reject this Offset for the Following Reasons

I. Recapturing Reserves is Bad Policy That Penalizes Good Management

1) Public housing operating reserves are earned by well run housing authorities and, despite HUD assertions, recapturing them is not similar to recapturing net restricted assets in the tenant based Section 8 program.

a. Public housing funding is based on the amount private owners spend managing similar properties. Operating reserves, thus, are earned by operating efficiently and generating extra revenue.

b. Net restricted assets are housing assistance payments (HAP) that were simply unspent.

c. There is no point for a housing authority to save net restricted assets (beyond a certain point), while operating reserves could spell the difference between the survival or demise of a property.

2) Housing Authorities have a documented $20-$30 billion backlog in capital repairs.

a. It simply does not make sense to take money away from properties with such substantial needs.

b. HUD has acknowledged it can never provide the $20-$30 billion itself.

3) HUD has not set an upper limit on reserves.

5) There will be no incentive to seek out non-federal sources of revenue if HUD takes away reserves.

a. HAs have successfully increased non-federal revenues, strengthening the program.

I. Recapturing Reserves is Bad Policy (continued)

6) HAs will have no incentive to be effi cient and save money.

a. The money they save will simply be sent to other housing authorities.

7) Housing authorities will be restricted in carrying out large-scale renovations that require long term planning.

a. By recapturing reserves, HUD will not allow them to accumulate money over a period of years.

8) HUD is backing out of a deal it made with housing authorities.

a. Housing authorities were encouraged to raise rental income, within program guidelines, by being allowed to keep the increase over a three year period.

b. As a result of the increased rental revenue, federal operating subsidy requirements have been reduced by $250 million per year.

c. Now, though, HUD is proposing to recapture the increased rental revenue HAs were told they could keep as their part of the bargain.

9) Housing authorities will be less able to borrow money from the private sector.

a. HUD has said HAs need to look to the private fi nancial markets to supplement federal revenue.

b. Banks cannot rely on public housing reserves, though, since they can be recaptured at will by HUD.

10) Recapturing reserves counters HUD’s stated intention of deregulating authorities.

a. In effect, HAs will now have a regulation on the amount of reserves they can hold.

II. There Have Been Unique Conditions that Enabled Housing Authorities to Accumulate Reserves in the Recent Past

1) ARRA awards in 2009 had to be obligated in 12 months.

a. With ARRA money and regular capital funds having to be spent by their fi rm deadlines, use of operating reserves was often temporarily put on hold.

2) The Harvard Cost Study found that public housing was historically underfunded compared to private sector operators of affordable housing.

a. $500 million in eligibility was added in 2008 to bring housing authorities up to parity.

b. HAs have been frugal with these funds given concerns about federal budgetary pressures.

3) Frozen rental income provision allowed housing authorities to retain extra rental income for three years.

a. HAs earned $1.1 billion in additional revenue during the three year period 2007-2009.

4) Reserve levels in 2009 do not exceed historical norms.

a. As ARRA and frozen income no longer exist, reserve growth in the future will either be non-existent or lower.

III. HUD Makes the Recapture Policy Worse by Prohibiting Use of Operating Reserves for Capital Improvements

The Department Reverses Years of Authorizing and Approving Housing Authorities Using Their Own Money to Repair Their Properties.

HUD Wants to Freeze the Use of Reserves to Make Sure They Are Available for Recapture and

Redistribution to Other Housing Authorities

1. The Code of Federal Regulations authorizes using operating funds for capital expenses.

2. The Financial Management Handbook authorizes these expenses.

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24 CFR Ch. IX (4–1–06 Edition) § 990.285

project in a manner that allows for analysis of the actual revenues and ex-penses associated with each property. Project-based budgeting and account-ing will be applied to all programs and revenue sources that support projects under an ACC (e.g., the Operating Fund, the Capital Fund, etc.).

(b)(1) Financial information to be budgeted and accounted for at a project level shall include all data needed to complete project-based financial state-ments in accordance with Accounting Principles Generally Accepted in the United States of America (GAAP), in-cluding revenues, expenses, assets, li-abilities, and equity data. The PHA shall also maintain all records to sup-port those financial transactions. At the time of conversion to project-based accounting, a PHA shall apportion its assets, liabilities, and equity to its re-spective projects and HUD-accepted central office cost centers.

(2) Provided that the PHA complies with GAAP and other associated laws and regulations pertaining to financial management (e.g., OMB Circulars), it shall have the maximum amount of re-sponsibility and flexibility in imple-menting project-based accounting.

(3) Project-specific operating income shall include, but is not limited to, such items as project-specific oper-ating subsidy, dwelling and non-dwell-ing rental income, excess utilities in-come, and other PHA or HUD-identi-fied income that is project-specific for management purposes.

(4) Project-specific operating ex-penses shall include, but are not lim-ited to, direct administrative costs, utilities costs, maintenance costs, ten-ant services, protective services, gen-eral expenses, non-routine or capital expenses, and other PHA or HUD-iden-tified costs which are project-specific for management purposes. Project-spe-cific operating costs also shall include a property management fee charged to each project that is used to fund oper-ations of the central office. Amounts that can be charged to each project for the property management fee must be reasonable. If the PHA contracts with a private management company to manage a project, the PHA may use the difference between the property management fee paid to the private

management company and the fee that is reasonable to fund operations of the central office and other eligible pur-poses.

(5) If the project has excess cash flow available after meeting all reasonable operating needs of the property, the PHA may use this excess cash flow for the following purposes:

(i) Fungibility between projects as provided for in § 990.205.

(ii) Charging each project a reason-able asset management fee that may also be used to fund operations of the central office. However, this asset man-agement fee may be charged only if the PHA performs all asset management activities described in this subpart (in-cluding project-based management, budgeting, and accounting). Asset man-agement fees are considered a direct expense.

(iii) Other eligible purposes. (c) In addition to project-specific

records, PHAs may establish central office cost centers to account for non- project specific costs (e.g., human re-sources, Executive Director’s office, etc.). These costs shall be funded from the property-management fees received from each property, and from the asset management fees to the extent these are available.

(d) In the case where a PHA chooses to centralize functions that directly support a project (e.g., central mainte-nance), it must charge each project using a fee-for-service approach. Each project shall be charged for the actual services received and only to the ex-tent that such amounts are reasonable.

§ 990.285 Records and reports. (a) Each PHA shall maintain project-

based budgets and fiscal year-end fi-nancial statements prepared in accord-ance with GAAP and shall make these budgets and financial statements avail-able for review upon request by inter-ested members of the public.

(b) Each PHA shall distribute the project-based budgets and year-end fi-nancial statements to the Chairman and to each member of the PHA Board of Commissioners, and to such other state and local public officials as HUD may specify.

(c) Some or all of the project-based budgets and financial statements and

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Changes in Financial Management and Reporting Requirements for Public Housing Agencies Under the New Operating Fund Rule

(24 CFR Part 990)

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4 . P r o j e c t - B a s e d B u d g e t i n g a n d A c c o u n t i n g

4 . 1 P R O J E C T - B A S E D O P E R A T I N G B U D G E T S

Under § 990.255 of the final rule, PHAs are required to “implement project-based management, project-based budgeting and project-based accounting.” With the exception of troubled PHAs, budget data will not be sent to HUD for approval. Budgetary approval will rest with the PHA’s board. Although PHAs have a significant amount of discretion in how the operating budget is prepared, HUD has set certain requirements for this process. Table 4.1 outlines those requirements.

Table 4.1: Budget Requirements and Clarifications No. Description

1 Operating budgets shall be developed for each AMP. A COCC budget is highly recommended but not required.

2 There is no specific budget format, including for those troubled PHAs that must submit their budget to HUD for approval.18

3 While there will be no uniform/required format, all budgets must be easily reconcilable to FDS line items.

4 PHAs shall develop and maintain AMP budgets that allow for comparative analysis of budgeted line items to actual revenues and expenses.

5 Operating budgets shall include estimates for all revenue and expenses under the Operating Fund and Capital Fund Programs (CFP) that directly or indirectly support the operations of the AMP, as well as capital expenses to be paid with operating funds, including all data needed to complete AMP-based financial statements in accordance with GAAP. In this context, the operating budget should contain such CFP activities as operating transfers, management improvements, or other CFP activity allowed by the program that is not capital in nature (for example, a vacancy reduction program which is aimed at marketing).

6 Operating budget revenues shall include operating subsidy, dwelling rents, Capital Fund used for non-capital activities, and all other revenue used to support the AMP. Subsidy levels should be based on the project formula components (i.e., the AMP’s PEL, UEL, add-ons, and formula income), with an estimate of the projected proration percentage. Budgets should also include any “transfers” under the “fungibility” provisions of the final rule. (For the first year under project-based budgeting, budgets should include any “transfers” under the full fungibility provisions of the final rule. Subsequent budgets should be prepared and based on the transfer and fungibility provisions applicable in subsequent years.)

7 Operating budget expenses shall include, but are not limited to, direct administrative costs, utilities, maintenance, security, general expenses, and non-routine or capital expenses to be paid with operating funds. These categories also include any COCC front-line costs charged as fee-for-service. The budgets should also show any anticipated uses of excess cash expected to be generated by the AMP. Such amounts will be made available for transfer to other AMPs, paid under the asset management fee, or for any other eligible purposes.

18 HUD is in the process of updating Form HUD – 52564, Operating Budget, and all associated schedules to align it to the asset management model and GAAP reporting. PHAs may continue to utilize these forms; however, they are not required. Data collection for these forms is contained in OMB Approval No. 2577-0026.

to FDS line items. 4 PHAs shall develop and maintain AMP budgets that allow for comparative analysis of

budgeted line items to actual revenues and expenses. 5 Operating budgets shall include estimates for all revenue and expenses under the

Operating Fund and Capital Fund Programs (CFP) that directly or indirectly support the operations of the AMP, as well as capital expenses to be paid with operating funds, including all data needed to complete AMP-based financial statements in accordance with GAAP. In this context, the operating budget should contain such CFP activities as operating transfers, management improvements, or other CFP activity allowed by the program that is not capital in nature (for example, a vacancy reduction program which is aimed at marketing).


(24 CFR Part 990)

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exception of troubled PHAs, budget data will not be sent to HUD for approval. Budgetary approval will rest with the PHA’s board. Although PHAs have a significant amount of discretion in how the operating budget is prepared, HUD has set certain requirements for this process. Table 4.1 outlines those requirements.




3 While there will be no uniform/required format, all budgets must be easily reconcilable


(24 CFR Part 990)

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(24 CFR Part 990)

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3. The Financial Data Schedule Line Item Defi nitions authorizes these expenses as well.

4. Finally, HUD’s Frequently Asked Questions (FAQs) state that using operating funds for capital expenses is okay.

IV. There Are Many Reasons Why Housing Authorities Need These Reserves

These Funds Are Not Like Private Sector Profi ts, but Instead Must Be Retained and Used at the Properties

1) Housing authorities need reserves to contend with federal funding uncertainty.

a. For fi ve years in a row, the public housing operating fund was only funded between 80 and 90 percent of its eligibility.

b. Congress rarely passes its budget on time, requiring HAs to manage on continuing resolutions for months at a time.

2) There is a $20-$30 billion capital backlog.

a. If HUD had set a limit on the amount of operating reserves an HA could accumulate, authorities would have spent their funding on their properties in worthwhile ways.

3) Operating reserves are needed for major renovations.

a. Annual capital fund appropriations do not even cover the annual accrual of repairs.

b. Capital funds must be obligated within two years. c. One of the only ways of paying for major renovations that go

beyond two years worth of capital funds is to use operating reserves that have been accumulated over a period of time.

4) Housing authorities assume the risk for unanticipated utility expenses.

a. If the winter is colder than average, housing authorities must pay the difference.

b. If the cost per unit of energy consumed is higher than the previous year (infl ated), the housing authority is responsible for paying the extra amount.

5) The annual infl ation factor for the operating subsidy does not include the cost of health care.

a. For ten years, housing authorities have had to absorb the exceptionally high cost increases in health care from their own funds.

7) If tenant incomes decline, as they have during this recession, housing authorities must make up the difference between the lower rent roll and that of the year before.

8) Sound operating reserve levels facilitate leveraging private capital for needed property improvements.

9) Operating reserves help protect from natural disasters such as hurricanes, tornadoes, earthquakes and fl oods.

HUD is essentially saying “We’re sorry, but you can’t use your own savings to replace the roof, and by the way, you don’t have that money because you need to give us $1 billion.”


(24 CFR Part 990)

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(24 CFR Part 990)

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Financial Data Schedule Line Definition Guide

REAL ESTATE ASSESSMENT CENTER

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This FDS line item represents interest incurred on a mortgage (or bonds) issued for construction or permanent financing. 96720 Interest on notes payable (short and long term) This FDS line item reflects interest and discounts incurred on both long and short-term project operating notes. 96730 Amortization of bond issue costs This FDS line item reflects amortization expense related to organizational costs, including loan fees, organization expenses, and like expenses. 96700 Interest expense and amortization cost This FDS line is the sum of lines 96710 through 96730. FASS automatically sums lines 96710 through 96730. 96800 Severance expense This FDS line represents payments to employees for salary; unused leave not included in compensated absences on line 96210 above and other compensation, pursuant to the PHA’s established personnel policy, due upon termination of employment. 96900 Total operating expenses This FDS line is the sum of lines 91000, 92000, 92500, 93000, 94000, 95000, 96100, 96000, and 96700. This FDS line represents the total operating expenses. FASS automatically sums lines 91000, 92000, 92500, 93000, 94000, 95000, 96100, 96000, and 96700. 97000 Excess revenue over operating expenses This FDS line represents the difference between total revenue on FDS line 70000 and total operating expenses on FDS line 96900. FASS automatically calculates the difference between lines 70000 and 96900. 97100 Extraordinary maintenance This FDS line represents all costs (labor, materials and supplies, expendable equipment, and contract work) of repairs, replacements (but not replacements of nonexpendable equipment), and rehabilitation of such substantial nature that the work is clearly not a part of the routine maintenance and operating program. Examples of this would be replacement of all or a substantial portion of gas and heating lines, regrading and rehabilitation of the grounds, and the replacement of a substantial portion of roof structures. Any item budgeted as extraordinary maintenance shall be charged to this account.



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Operating Fund

Q: May Operating Funds be used for modernization activities?

Yes. Modernization work items are eligible for payment from the Operating Fund. They include:

• Alteration of exisiting dwelling space to meet the special needs of the elderly or handicapped; and • Conversion of existing dwelling space to nondwelling use.

Q: May Reserves be used for modernization activities?

Yes. Reserves may be used for all eligible Operating Fund activities.

V. Solutions—HUD Can Find the $1 Billion It Needs to Fund Public Housing and Preserve Properties for Future Generations.

1) Reduce the Transforming Rental Assistance (TRA) initiative from $200 million to $100 million—Savings: $100 million

2) Eliminate HUD’s Transformation Initiative—Savings: $120 million

3) Do not include incremental vouchers until core programs are funded—Savings: $132 million

4) Do not increase the elderly/disabled deduction from $400 to $675—Savings: $230 million

5) Eliminate the small area FMR from the tenant-based Section 8 set-aside eligibility—Savings: $40 million

6) Impose a 1 percent proration on tenant based section 8 and the public housing operating and capital funds—Savings: $260 million

Operating Reserves Are the Result of Prudent Stewardship and They Benefit the Authorities, the Residents and the Federal Government.

There Are Specific Reasons that Explain Why Reserves Have Increased Recently.

Housing Authorities Need These Reserves to Preserve Their Properties.

Recapturing Reserves Penalizes Good Management and Inhibits the Entrepreneurialism that Attracts Non-Federal Revenue.

Congress Should Reject this Ill-Advised Proposal.

Public Housing Authorities Directors Association511 Capitol Court NE • Washington, DC 20002 • (202) 546-5445 • www.phada.org

issue brief - public housing authorities directors … is not fair to change the rules in the middle...

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