Operating Fund Proration Increases as Funding Decreases

According to HUD, PHAs will see an increase in the proration for the Public Housing Operating Fund from 85 to 92.9 percent. This reflects funding included in the appropriations bill, or omnibus, recently passed by Congress. The 2017 omnibus provides $4.4 billion to support the operation and management of public housing. This is $100 million less than 2016 funding levels, $100 million less than what was proposed by the 2017 House Appropriations bill, and $175 million less than the Senate bill. Although 2017 Operating Fund levels are less than 2016 levels, the funding provided by the omnibus is sufficient to fund 92.9 percent of PHAs’ anticipated formula eligibility for 2017, higher than the 2016 proration. This is due to declines in Operating Fund formula eligibility from 2016 to 2017. The decline in formula eligibility was caused by high formula income inflation factors and utility expense level deflation due to declining oil and natural gas costs.

Although the proration in 2017 is higher than the proration in 2016, PHAs may still receive smaller subsidies in 2017 than 2016 due to the overall decline in Operating Fund formula eligibility. Less money will be made available to the Operating Fund overall due to the impact of these inflation and deflation factors on formula eligibility. As not all PHAs have seen increases in incomes or declines in utility expenses, some PHAs will experience declines in Operating Fund subsidies for 2017 as compared to 2016, even though the proration for 2017 is higher. PHAs need to be prepared since this issue will not disappear next year without changes to the subsidy eligibility formula. Any formula change would be a substantial process that would result in gainers and decliners for Operating Fund subsidy distribution, and will involve a lengthy process at HUD headquarters.

Many Public Housing Agencies (PHAs) have already experienced subsidy decreases in 2017 due to declining formula eligibility for the Public Housing Operating Fund and a conservative Operating Fund proration. HUD employed such a conservative proration (85 percent) for the beginning of the year as Congress had yet to pass a budget for Fiscal Year 2017. PHAs experienced decreases in Operating Fund subsidies earlier in the year due to HUD’s use of an 85 percent for January, February, March, April and May. The 2017 data, which included the income inflation factors and utility expense level deflation, were first applied to subsidy calculations in March. At this time, many PHAs saw an additional decrease in their subsidy. On top of this, because HUD used 2016 data for January and February, which were based on higher formula eligibility than 2017 data, HUD overpaid agencies for those months. As such, some PHAs saw a dramatic decline in their Operating Fund subsidy in March as HUD had to “true-up” the subsidy – this often involves HUD providing a lower subsidy for the month to account for the over-payments in January and February.

May is the closest HUD has come to providing PHAs with accurate Operating Fund subsidies based on 2017 formula eligibility, albeit with a significantly low proration. Now that the budget has passed, HUD will raise the proration from 85 percent to the higher proration in June to reflect the amount appropriated by Congress.

PHA’s should compare their May subsidies to their June subsidies to see what impact the increased proration will have on their agency. NAHRO also recommends comparing the June subsidy to the December, 2016 subsidy to determine how the change in formula eligibility will impact your agency.

HUD uses formula expense levels and formula income levels to determine the Operating Fund subsidy provided to each PHA. The formula expense level is comprised of the project expense level (PEL), the utility expense level (UEL), add-ons, and transition funding. Formula income level is rental income as calculated from the last submitted Financial Data Schedule (FDS) for each Asset Management Project (AMP). An AMP receives funding based upon the difference between the formula expense level and the formula income level. AMPs receive greater subsidies when there are higher formula expense levels and lower formula income levels, and HUD applies an inflation factor to formula income each year.

For 2017, HUD is applying inflation factors between 6 and 8 percent for 2017 formula income. This is significantly higher than HUD’s inflation factor for any other year. It is most likely that external occurrences are driving the significant increase in the income inflation factor. HUD noted that the end of the recession and the implementation of flat rents could have been contributing factors to the dramatic income inflation increase. They also noted that they use a five-year average to try to soften the impact of changes to inflation and deflation factors. The data shows that 2014 and 2015 actually saw the largest increase in income inflation and are the years driving the increase — 2016 was just 3.76 percent compared to 8.23 percent in 2014 and 6.4 percent in 2015.

HUD is also applying a 7.01 percent deflation factor for the utility expense level (UEL) due to declines in oil and natural gas costs. HUD uses data from the Bureau of Labor Statistics Consumer Price Index for All Urban Consumers (CPI-U) to determine utility expense levels. HUD applies this deflation factor at the national level, regardless of the energy source used by an AMP. Although AMPs that utilize oil or natural gas have seen savings, those that rely on other sources of energy have not.

NAHRO will continue working with HUD to ensure that they remain aware of the impact the decline in formula eligibility is having on PHAs across the country, especially those that have not seen increases in income or decreases in utility costs. NAHRO remains concerned that the decline in formula eligibility is not representative of all PHAs, and that using national data to determine formula eligibility may miss very important regional factors that would more accurately capture operating costs. NAHRO also plans to raise this concern to members of Congress and appropriations staff to ensure they are aware that even though HUD’s 2017 proration is higher than 2016, many PHAs will still see a decrease in their Operating Fund subsidies.

Please contact Eric Oberdorfer at eoberdorfer@nahro.org if your agency experiences significant Operating Fund declines due to the updated formula eligibility.

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