The public housing program was established in 1937 to provide decent and safe rental housing for low-income families. Today, there are approximately 1.2 million public housing units, administered by over 3,100 local public housing agencies (PHAs).

In 1998, the Congress established a new Operating Fund Program. As part of that legislation, the Congress directed HUD to develop a formula for determining operating subsidies through negotiated-rulemaking with PHAs, industry groups, and other affected parties. The first round of negotiated-rulemaking occurred in 1999. Based on the recommendations resulting from these initial negotiated rulemaking sessions, the Congress further directed HUD to contract with Harvard University's Graduate School of Design to "conduct a study of the costs to operate well-run public housing."

The Harvard "Cost Study" was completed in 2003. It contained two major recommendations.

• First, it recommended that, based on a statistical model of operating costs in HUD's multifamily housing programs (Cost Model), public housing allowable expense levels be increased by around 6% nationwide.
   
• Second, it recommended that public housing adopt a business model similar to multifamily housing, with project-based budgeting, project-based accounting, and project-based management. This business model became known as "asset management." Following publication of the Cost Study, the Congress directed HUD to resume negotiated rulemaking. In 2004, HUD completed the second round of negotiated rulemaking. Essentially, the negotiated rulemaking committee agreed to both of Harvard's key recommendations, i.e., the adoption of the Cost Model (and new Operating Fund formula) and the conversion to asset management. In 2005, HUD published the "final rule" on the Operating Fund Program.[1][1] For all practical purposes, the final rule reflected the results of negotiated rulemaking, including both the new funding formula and the need to convert to asset management.

The New Formula

Under the new formula, approximately 74% of PHAs will experience an increase in subsidy eligibility, while 26% will experience a decline in funding. For a report of gainers and decliners under the new formula, see the Transition Analysis Report.

To ease the transition to a new funding system, the final rule allows for a five year phase-in for decliners and a two-year phase-in for gainers. HUD implemented the new formula for Calendar Year 2007. As an additional incentive, the final rule provides decliner agencies with the ability to stop their losses if they can successfully demonstrate a successful conversion to asset management also known as "Stop-Loss." To learn more about one PHA's experience see Demonstrating Successful Conversion to Asset Management, A Visit to the Charlotte, NC Housing Authority.

 

Under the new Operating Fund formula, each public housing project is assigned a model-generated "Project Expense Level", or "PEL." The PEL represents the estimated cost to operate each project, exclusive of property taxes and utilities. The final rule contains a provision in which PHAs can appeal their PELs. There are five grounds for appeals, including an appeal for local conditions. Under an appeal for local conditions, a PHA must demonstrate that, using comparable expense data in the local market, model predictions are off by more than 10%.

As provided for in the final rule, the new formula was implemented in 2007 at the agency level (i.e., PELs were aggregated into a weighted-average for the PHA as a whole). In 2008, PHAs will submit subsidy worksheets on a project-by-project basis.

Asset Management

The second major recommendation by Harvard, adopted in negotiated rulemaking and included in the final rule, was the requirement that all PHAs of 250 or more units convert to asset management, consistent with the norms in the broader multifamily management industry (24 CFR 990.255(a)).There are five core elements or building blocks of asset management, including:

	Project-based Funding
	Project-based Budgeting
	Project-based Accounting
	Project-based Management
	Project-based Oversight and Performance Assessment

To assist PHAs plan for the conversion to asset management, the Department prepared a publication entitled Preparing for Asset Management under the New Public Housing Operating Fund Rule (24 CFR 990): An Asset Management Planning Document.

The first PHAs to implement project-based budgeting and accounting are those with fiscal years beginning July 1, 2007. Detailed guidance on financial reporting requirements related to the conversion to asset management can be found in PIH Notice 2007-9, Updated Changes in Financial Management and Reporting for Public Housing Agencies Under the New Operating Fund Rule (24 CFR Part 990), issued April 10, 2007.

One of the major changes under asset management is the requirement that PHAs now charge a reasonable management fee to projects and programs for central office costs. Chapter 7 of the Supplement that accompanies PIH Notice 2007-9 includes a discussion on fees. PHAs must also now implement a fee-for-service model for any maintenance activities that are handled centrally. This fee-income that PHAs will charge their projects/programs is treated as "local" and not "program" funds.

Also to ease the transition, PHAs have until the second year of project-based budgeting/accounting to be in compliance with the new management fee and fee-for-services schedules; however, a PHA may have a two-year extension provided they include appropriate documentation in their Annual Plan.