Small PHAs: Capital Improvements Using Operating Subsidy

Note: See update at the bottom of this post.

Consider this a quick follow-up to last Thursday's Direct News item summarizing the administration's proposal to offset PHAs' operating reserves for 2012. 

By now you are probably aware of the letter sent to PHA Executive Directors by PIH Assistant Secretary Sandra Henriquez on February 22.  In the letter, the Assistant Secretary writes, "PHAs are also reminded 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 1937 Act)."   Many in the industry believe that certain capital improvements have long been eligible uses of operating subsidy (and by extension operating reserves), and thus the Assistant Secretary's statement to the contrary represents a policy change.

The Department has provided NAHRO with a copy of a relevant legal opinion dating from 2005.  The opinion concludes that, "because of the more restrictive nature of operating subsidy, PHAs cannot use operating reserves for development activities."  However, the opinion concedes that "the eligible uses for operating subsidy have increased over time" and cites (in a footnote) section 9(g)(2) of the 1937 Act.  (We are working to obtain an electronic copy of this opinion.)

As amended by the Quality Housing and Work Responsibility Act of 1998 (QHWRA), section 9(g)(2) of the 1937 Act refers to sections 9(d) (Capital Fund) and 9(e) (Operating Fund) and reads as follows:

FULL FLEXIBILITY FOR SMALL PHAs.Of any amounts allocated for any fiscal year for any public housing agency that owns or operates less than 250 public housing dwelling units, is not designated pursuant to section 6(j)(2) as a troubled  public housing agency, and (in the  determination of the Secretary) is operating and maintaining its public housing in a safe, clean, and healthy condition, the agency may use any  such amounts for any eligible activities under subsections (d)(1) and (e)(1), regardless of the fund from which the amounts were allocated and  provided. This subsection shall take effect on the date of the enactment of the Quality Housing and Work Responsibility Act of 1998. (emphasis added)

On February 18, 1999, HUD issued guidance informing the public of the changes to public and assisted housing programs made by QHWRA that were effective immediately.  Included in the guidance is the following passage:

Subtitle B of the QHWRA—Public Housing

Section 519—Public Housing Capital and Operating Funds. Section 519 amends section 9 of the USHA to provide for the establishment of capital and  operating funds with new formulas. Only a few parts of this statutory section are effective immediately. They are as follows:

Use of capital or operating funds by small PHAs. New subsection 9(g)(2) of the USHA, added by section 519 of the QHWRA, allows a PHA with less than 250 dwelling units (small PHAs), to use capital or operating funds for any eligible capital or operating expense if: (1) the PHA is not designated troubled; and (2) the  HA operates its public housing in a safe, clean and healthy condition, as determined by HUD. Until enactment of the QHWRA, these PHAs have been  receiving capital funds for specific purposes under the competitive Comprehensive Improvement Assistance Program (CIAP). New subsection 9(a) of the USHA, however, provides for a merger of remaining CIAP funds into the Capital Fund on October 1, 1999. With the enactment of new subsection 9(g)(2) and the pending merger of  funds, HUD construes Congressional intent to be that small, non-troubled PHAs may immediately use any CIAP or operating funds for capital or operating  purposes. (emphasis added)

We have asked HUD officials how they reconcile section 9(g)(2) of the 1937 Act with the Assistant Secretary's letter as it pertains to small agencies.  We will let you know as we learn more.

UPDATE: Shortly after this post was published, a senior HUD official emailed me to say that "small PHAs retain their flexibility as identified by 9(g)(2)."  This official has informed me that HUD will clarify this in forthcoming guidance.