**ADMINISTRATIVE REFORM INITIATIVE**

**FINANCIAL MANAGEMENT I**

**JULY 12, 2007**

***[RECOMMENDATIONS:]{.underline}***

I.  **Changes in Financial Management and Reporting for Public Housing
    Agencies Under the New Operating Fund Rule (24 CFR part 990).**

```{=html}
<!-- -->
```
1)  24 CFR §990.280(d) --

    -   An allocation method, in addition to a fee for service method,
        should be permitted for all centralized property management
        functions (including maintenance).

    -   Where actual costs exceed market rates for reasons such as
        binding union contracts, they are to be considered as meeting
        the rule's standard of reasonableness.

2)  The management fees should be re-visited to more appropriately
    reflect the costs of managing public housing units and developments.

3)  The small housing authority exemption articulated in 24 CFR §990.260
    should be extended to agencies with 500 or fewer units.

4)  Use of Capital Funds should be permitted for COCC, without
    limitation, except for those limits promulgated in accordance with
    the capital fund program.

-   For management improvements

-   For operations

> Recommendation: THERE SHOULD BE NO LIMIT ON THE USE OF THESE FUNDS,
> PROVIDED THAT THE USE COMPLIES WITH THE STATUTE AND CAPITAL FUND
> PROGRAM REGULATIONS.

5)  The \$12 PUM limitation on the use of Section 8 funds for the COCC
    should be eliminated (as long as there is an accounting mechanism in
    place to ensure that the funds are funding statutorily permitted
    Section 8 administrative costs).

6)  The prohibition against using non-federal funds for COCC to
    establish stop-loss should be repealed.

7)  A general theme of the meeting was that guidance should be
    implemented with sufficient time prior to required deadlines to
    ensure effective and efficient implementation.

8)  There was a general theme about onerous implementation concerns.
    Further, there should be a reduction in the level of micromanagement
    (i.e. central procurement cannot be expensed to the projects,
    supervisors of certain centralized property management functions
    have to be paid out of COCC), as it is not consistent with the rule
    or the best interests of the property.

9)  HUD should not require a balance sheet for each AMP. If HUD's intent
    is to determine actual costs for a property, then submission of
    property based budgets and operating statements is sufficient. A
    balance sheet is not necessary to make this determination, and in
    the interest of simplifying the regulations, it should not be
    required. The properties are not separate legal entities and so do
    not require separate balance sheets.

10) With regards to balance sheet requirements, PHAs should be provided
    with more flexibility with regards to the initial determination of
    assets, liabilities and equity. The restriction on putting 6 months
    worth of reserves into the COCC was an example of HUD's
    inflexibility.

11) The compliance requirements in 24 CFR §990.280(d) should be extended
    from 2011 to 2012.

12) The regulations at 24 CFR §990.195(c) describe the frozen rent
    period as 2007-2009. The regulations do not define, with
    specificity, what the rent determination will be after the "frozen
    rent" period. ***The committee recommends that during the frozen
    rent period, rent should be determined based on the lower of: (i)
    actual rents; and (ii) the 2004 frozen rents. The process to
    determine how rent will be determined after the frozen rent period
    should begin now and should involve consultation with housing
    authorities.***

13) The determination of excess cash flow, as described in 24 CFR
    §990.205 and §990.280 should be made more expansively than what is
    contemplated in the Supplement to HUD Handbook 7475.1 at Section
    6.6, which does not seem to permit excess cash to be utilized based
    on projections during the year.

14) The rule specifically states that excess cash can be utilized for
    any eligible expense. Excess cash should be permitted to be utilized
    for any eligible expense, as stated in the rule (including the COCC,
    which is an eligible expense).

> NOTE: SOMEONE WAS GOING TO PROVIDE CORRESPONDENCE FROM G. BYRNE, WHICH
> INDICATES THAT EXCESS CASH COULD BE SHARED FROM ONE AMP TO ANOTHER
> DURING THE YEAR IF THERE WAS CASH ON HAND -- THIS WILL BE HELPFUL TO
> SEE BECAUSE THIS IS NOT HOW "SURPLUS CASH" IS UTILIZED IN FHA DEALS,
> AND DOES NOT SEEM TO BE WHAT IS CONTEMPLATED IN THE SUPPLEMENT TO HUD
> HANDBOOK.

15) Excess Cash should be permitted to be utilized during the year for
    other AMPs and for COCC. The Excess Cash to the COCC should not be
    limited to \$10/PUM.

16) AMP's under Phase-Out- If the phase out funding is no longer needed
    for the specific AMP that receives the Phase-Out Funding, then such
    funding should be allowed to be utilized for COCC without
    limitation.

17) \$10 Asset Management Fee -- This fee should be permitted regardless
    of whether projects cash flow -- this is especially important since
    pro-ration will frequently stop projects from cash flowing, but the
    COCC continues to function.

18) There was a question about whether property management fees could
    continue to be utilized after the project is no longer an EUM. The
    Supplement to HUD Handbook 7475.1 at Section 7.5 provides that a fee
    can still be earned 75% in year 1, 50% in year 2 and 25% in year 3.
    This is consistent with the asset repositioning fee earned on those
    units.

> NOTE: SINCE THE ASSET REPOSITIONING FEE IS TRIGGERED SIX MONTHS AFTER
> THE FIRST UNIT BECOMES VACANT, IT SEEMS THAT THIS PROCESS OF
> RELOCATION, ETC. WOULD REQUIRE CONCENTRATED COCC FUNCTIONS AND
> MANAGEMENT FUNCTIONS AND SO PERHAPS THE 75/50/25% LIMITATION SHOULD
> NOT APPLY.

19) Property Management Fees and Bookkeeping fees should be allowable
    for all EUM's and should not be limited for vacant units, especially
    since those units frequently have more extensive COCC costs and
    requirements.

20) Units that have an approved vacancy in accordance with 24 CFR
    §990.145 or 24 CFR §990.150 should not have imputed rental income
    equal to the remainder of the units, but rather should assume rental
    income of \$0.

***FDS***

21) Detailed instructions need to be created and posted. Final
    instruction and forms need to be posted sufficiently in advance (at
    least 6 months in advance).

> NOTE: ONE RECOMMENDATION MIGHT BE AN ACCOUNTABILITY REQUIRMENT FOR
> HUD. IN OTHER WORDS, IF FINAL FORMS AND GUDANCE (IN AN ACCEPTABLE FORM
> AND CORRECTLY DEVELOPED) ARE NOT DEVELOPED IN ADVANCE, THEN DEADLINES
> BE MOVED BACK ACCORDINGLY. THIS WOULD BE CONSISTENT WITH THE ASSISTANT
> SECRETARY'S INSTRUCTIONS.

22) FDS needs to be simplified. For example, up until now, there has
    been one line item for maintenance contract costs. Now, it will be
    required to identify every contract cost at the project level, such
    as snow removal, garbage, extermination, elevator, painting, etc.

23) The non-audited FDS submission date should be extended by 30 days.

24) Detailed guidance needs to be provided with respect to the balance
    sheet -- concerning items such as legacy costs. \[HAS THE ISSUE WITH
    RESPECT TO LEGACY COSTS BEEN RESOLVED BY FINANCIAL HANDBOOK?\]

25) There were general concerns with capacity -- i.e. the REAC website
    was already extremely difficult to access and this will be
    exacerbated with more agencies and more AMPS.

26) There was a suggestion to explore the ability to upload excel
    spreadsheets on REAC website. This led to a discussion of PIC and
    whether PIC will be an effective tool to provide necessary data.

**II. [Investments]{.underline}**

1)  Permitted Investments -- At a minimum, Attachment A of Notice PIH
    96-33 should be re-evaluated to determine whether there are
    additional investment vehicles with similar risk characteristics.

2)  There was a proposal put on the table to consider permitting the
    investment in certain conservative stock indexes, such as the S&P
    500 (perhaps only a portion of the investment).

***[ADDITIONAL RECOMMENDATIONS:]{.underline}***

> **OPERATING FUND RULE ISSUES**
>
> **[24 CFR Part 990 - §990.280 (b) (1) Project-Based Budgeting and
> Accounting]{.underline}**
>
> ***Current Language***
>
> "Financial information to be budgeted and accounted for at a project
> level shall include all data needed to complete project-based
> financial statements in accordance with Accounting Principles
> Generally Accepted in the United States of America (GAAP), including
> revenues, expenses, assets, liabilities, and equity data. The PHA
> shall also maintain all records to support those financial
> transactions. At the time of conversion to project-based accounting, a
> PHA shall apportion its assets, liabilities, and equity to its
> respective projects and HUD-accepted central office costs centers".
>
> ***Revised Language***
>
> "Financial information to be budgeted and accounted for at a project
> level shall include all data needed to complete project-based
> financial statements in accordance with Accounting Principles
> Generally Accepted in the United States of America (GAAP), including
> revenues, expenses, assets, liabilities, and equity data. Assets and
> liabilities that are in the best interests of the PHA to centrally
> manage may be maintained in the central office cost center. The PHA
> shall also maintain all records to support those financial
> transactions. At the time of conversion to project-based accounting, a
> PHA shall apportion its assets, liabilities, and equity to its
> respective projects and HUD-accepted central office costs centers. The
> PHA will determine the equity requirements of the projects and the
> central office cost center at the time of conversion and will
> apportion the equity accordingly"
>
> **[24 CFR Part 990 - §990.280 (d) Project-Based Budgeting and
> Accounting]{.underline}**
>
> ***Current Language***
>
> "In the case where a PHA chooses to centralize functions that directly
> support a project (e.g., central maintenance), 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 extent that
> such amounts are reasonable".
>
> ***Revised Language***
>
> "In the case where a PHA chooses to centralize functions that directly
> support a project (e.g., central maintenance), 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 extent that
> such amounts are reasonable based on the actual PHA costs to perform
> the services or, if not available, based on a reasonable allocation.
> The PHA will determine which services will be charged to the projects
> as a fee-for-service"
>
> **[24 CFR Part 990 - §990.280 (b) (5) Project-Based Budgeting and
> Accounting]{.underline}**
>
> ***Current Language***
>
> "If the project has excess cash flow available after meeting all 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 reasonable asset management fee that may be
     used to fund operations of the central office. However, this asset
     management fee may be charged only if the PHA performs all asset
     management activities described in this subpart (including
     project-based management, budgeting and accounting). Asset
     management fees are considered a direct expense.

(iii) Other eligible purposes."

> ***Revised Language***
>
> "If the project has excess cash flow available after meeting all 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. The
    movement of excess cash flow will be determined by the PHA. No
    restrictions shall be set by HUD on the maximum/minimum amounts to
    be transferred. A PHA shall have maximum flexibility in determining
    the frequency of transfers.

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

(iii) Other eligible purposes including but not limited to the central
      office cost center".

> **[HUD PIH NOTICE 2006-14 (Table 6, 1d)]{.underline}**
>
> ***Current Language***
>
> "The sum of the operating statements for each public housing project
> must equal the total for the PHA's public housing program, i.e., they
> must be inclusive of all central office charges, including management
> fees, fees for centralized services, etc".
>
> ***Revised Language***
>
> "The sum of the operating statements for each public housing project
> and the central office cost center must equal the total for the PHA's
> public housing program, i.e., they must be inclusive of all central
> office charges, including management fees, fees for centralized
> services, etc."
>
> **[HUD PIH NOTICE 2006-14 (Table 6, 4d)]{.underline}**
>
> ***Current Language***
>
> "Centralized service charges must be reasonable based on demonstrated
> data from the local market".
>
> ***Revised Language***
>
> "Centralized service charges must be reasonable based on the actual
> PHA costs to perform the services or, if not available, based on a
> reasonable allocation. The PHA will determine which services will be
> charged to the projects as a fee-for-service".
>
> **[HUD PIH NOTICE 2006-14- (Table 6, Criteria 3c)]{.underline}**
>
> ***Current Language***
>
> "Solely for the purposes of stop-loss, a PHA may not fund the
> operation of the central office cost center with: (1) proceeds from
> the sale of assets acquired with public housing funds; (2) amounts
> from the Capital Fund Program other than those permitted for
> administration/planning. For example, an agency requesting stop-loss
> cannot use "Management Improvement" funds to pay for general
> accounting staff; or (3) funds received from state or local
> governments for the purpose of supporting operations of the center
> office cost center, i.e., non fee-income".
>
> .
>
> ***Revised Language***
>
> "The PHA will be given maximum flexibility to fund the central office
> cost center. PHAs will be allowed to use the following revenues to
> fund the central office cost center: (1) proceeds from the sale of
> assets acquired with public housing funds; (2) amounts from the
> Capital Fund Program other than those permitted for
> administration/planning; (3) funds received from state or local
> governments for the purpose of supporting operations of the center
> office cost center, i.e., non fee-income. The use of these revenues to
> fund the central office cost center will not compromise stop-loss
> compliance".
>
> [**HUD** **PIH Notice 2006-14, paragraph 7 (a) (2) **]{.underline}
>
> ***Current Language***
>
> The amounts included in Attachment A to this notice. Attachment A
> lists the 80^th^ percentile management fee paid by all for-profit and
> unlimited dividend FHA properties, by field office, excluding such
> programs as cooperatives and nursing homes. Information is based on
> 2004 Annual Financial Statements (the most recent available data).
>
> ***Revised Language***

"PHAs will charge a reasonable management fee to fund the operation of
the central office. PHA will be given the flexibility to charge up to
the 100^th^ percentile of management fees paid by all for-profit and
unlimited dividend FHA properties, by field office, excluding such
programs as cooperatives and nursing homes. Information will be based on
2004 Annual Financial Statements or the most recent available data".

**IMPORTANT NOTICE:**

**THE ABOVE RECOMMENDATIONS ARE NOT FINAL AND ARE SUBJECT TO FURTHER
DISCUSSIONS BY THE GROUP.**