Operating Reserves Offset, Executive Compensation Updates

NAHRO members:  Be sure to check out our August 30 Direct News item, which provides updates on the administration's operating reserves offset proposal as well as HUD's initiative to collect PHA compensation information.  

Even if you're not a NAHRO member (we'd of course love for you to change that), we strongly encourage you to read NAHRO CEO Saul Ramirez's August 29 letter to HUD Secretary Shaun Donovan on the offset proposal.  The letter urges the Secretary to abandon the proposal and instead embrace NAHRO's alternative to fund the Operating Fund at a responsible level for 2012. 

Here are some key excerpts from NAHRO's letter: 

The Department’s embrace of the proposed offset represents a breach of trust between HUD and the nation’s public housing professionals. Although senior HUD officials repeatedly claimed that the Department pushed back against the imposition of the offset, we know now that events unfolded in a much different manner, culminating in the inclusion of a $1 billion offset proposal in the President’s budget request.  And after spending months analyzing the proposal and the data provided by the Department intended to justify it, we have no choice but to conclude that HUD has essentially manufactured the concept of “excess” reserves for the sole purpose of delivering on $1 billion in savings prematurely and rashly promised to the White House... 

In the interest of full disclosure, NAHRO is now in possession of the FY 2012 Office of Management and Budget passback, and we are aware that the Department, to its credit, initially requested $4.962 billion for the Operating Fund for 2012, a figure that represents 100 percent of estimated operating subsidy eligibility for the upcoming year.  We also know that OMB denied HUD’s request, with the passback instead providing $4.462 billion and assuming an offset of $500 million “based on operating reserves greater than three months of…PHAs’ 2012 subsidy eligibility under the Operating Fund formula.” 

While it would appear that OMB played a role in originating the offset proposal, NAHRO notes that the passback invited the Department “to provide justification for a lower offset” if the Department “believe[d] the passback offset… [was] too high.”  We note also that the passback proposed several additional offsets that the Department could have accepted in order to “cover the difference” and restore the Operating Fund request for 2012 to 100 percent of formula eligibility.  Unfortunately and surprisingly, rather than opposing the imposition of a $500 million offset against PHAs’ operating reserves and appealing to OMB for the restoration of full funding to the Operating Fund for 2012, it is now clear to us that the Department not only abandoned its original request and embraced the proposed offset, but ultimately recommended to OMB that the offset be doubled from $500 million to $1 billion. This represents, frankly, a stunning and deeply disappointing reversal...

Surely, the Department is well aware that this concept of so-called “excess” reserves is a fiction.  Furthermore, the Assistant Secretary’s overly simplistic characterization of PHA reserves as “rainy day” funds that exist only for management and operation purposes is easily refuted.

HUD’s own policies disprove the Department’s political leadership’s claims surrounding so-called “excess” reserves.  As you know, HUD intends to implement the offset based on PHA year-end financial statements dating from June 2010 to March 2011.  During the time period reflected by these statements, PHAs were assessed under the PHAS II rule, which defined optimal reserve levels as up to the equivalent of 11 to 15 months of expenses, depending on agency size.   Under the PHAS II rule, the Department imposed a penalty on PHAs with reserve balances below the optimal range. And while a small scoring penalty was imposed on agencies with reserves above the optimal range, there has been absolutely no statutory, regulatory, or administrative limitation on the amount of reserves that PHAs may accumulate since the Department issued PIH Notice 1995-7, over sixteen years ago, in order to administratively remove the maximum allowable operating reserve level.

Using the 2008-2009 FDS data provided by the Department, NAHRO estimates that only approximately $364 million in reserves nationwide exceeded the optimal thresholds defined by HUD for the point in time the data reflects.  Furthermore, of this amount, $161 million was held by agencies with fewer than 250 units of public housing.  This distinction is important, because QHWRA provided small PHAs with total interoperability and fungibility between Operating and Capital Funds, giving these agencies the ability to save up over time in order to accumulate sufficient reserves to complete important capital projects like roof replacements and new boilers.  For these small agencies, the Department is well aware that reserves represent much more than a backstop that would allow agencies “to continue to effectively manage and operate their public housing properties if ever there were a rainy day.” Indeed, for small agencies, the offset proposal is perhaps the ultimate “rainy day”: a perfect storm of irresponsible public policy that threatens to forever wash away small agencies’ ability to physically maintain their public housing units as safe, decent, and affordable housing for low-income families...

On February 22, the Assistant Secretary transmitted a letter to every PHA executive director in the country warning them of the “potentially dire consequences” of spending down reserve balances.  Despite the fact that no new rulemaking was undertaken or notice issued, the letter contradicted longstanding regulatory and administrative policy by stating that “Operating Reserve balances may only be used for Operating Fund purposes and cannot be used for capital or modernization activity as defined within the United States Housing Act of 1937.”  The letter emphasized that “there is a strong possibility that the reserve estimate used to determine a PHA’s potential offset could be based on prior year financial statements,” a reminder clearly intended to produce a chilling effect on PHAs’ reserve expenditures. 

On April 15, the counsel to the three public housing industry groups transmitted a letter to the Assistant Secretary that, among other purposes, took issue with the February 22 letter’s directive that operating reserves not be used for modernization.  The letter reviews the numerous administrative and regulatory policies that support the industry’s belief “that substantial capital work can be undertaken with operating funds,” including operating reserves.  We remain convinced that the administration’s proposal to effectively confiscate reserves, in combination with HUD’s sudden onset of amnesia regarding the use of operating subsidy for expenditures such as property betterments and extraordinary maintenance, will short-circuit the ability of PHAs to maintain their public housing units and ameliorate to a small extent the negative consequences of inadequate capital subsidy.    NAHRO notes that the Department has not yet responded to the April letter. 

There is no disputing that the February letter’s blanket assertion concerning the use of reserve balances for capital or modernization activity is demonstrably false as it pertains to agencies with fewer than 250 units of public housing.  Section 9(g)(2) of the 1937 Act, as amended by QHWRA, clearly states that non-troubled PHAs with less than 250 units may use capital or operating funds interchangeably for any eligible capital or operating expense.  Small PHAs receive small annual funding allocations; these agencies must accumulate funds over a period of years in order to make major purchases.  Because Capital Funds must be obligated within two years, small PHAs typically transfer these funds to operations in order to comply with statutory timelines and enable effective capital planning. 

NAHRO has repeatedly urged the Department to formally clarify that the ability of small PHAs to use operating reserves for Capital Fund-eligible activities is embedded in statute and has not changed.  On February 28, a senior HUD official notified NAHRO by email that the Department would make such a clarification as part of forthcoming guidance advising PHAs on the eligible uses of operating subsidy and reserves.  On March 1, this same official advised NAHRO that the Department was reviewing a draft of the guidance and hoped to issue it within 48 hours.  Nearly six months later, the Department has failed to issue this guidance and has still done nothing to formally clarify that key portions of the February letter were not applicable to small agencies...

NAHRO continues to believe that the most judicious course of action would be to fully fund public housing operations for 2012 through direct appropriations.  If, however, the Congress insists on identifying savings as provided for under the Administration’s proposal, then a more prudent approach should be considered.  To that end, we note that on several occasions the Assistant Secretary has encouraged public housing industry groups to put forward an alternative to the administration’s offset proposal.  NAHRO took this charge seriously and has shared a proposed alternative with the Congress. 

Although the approach NAHRO suggests would still result in what we consider to be an inadequate level of federal investment in the public housing program, NAHRO’s proposed alternative would lessen the threat of irreparable harm to the public housing inventory.  Furthermore, NAHRO’s approach would affect all agencies proportionately, rather than impose ill-conceived penalties for responsible and entrepreneurial behavior. We therefore urge you to abandon the proposed offset and instead lend your support to NAHRO’s proposal, which would provide PHAs with an estimated 95 percent proration for 2012 while still producing a total of $1 billion in savings by combining direct appropriations for the Operating Fund with a rescission against prior year unobligated balances throughout the Department...

Again, we strongly urge all PHAs to read NAHRO's letter to the Secretary in its entirety.  If you have any comments, questions, or concerns regarding the letter, please feel free to email me