***ADMINISTRATIVE REFORM INITIATIVE***

***FINANCIAL MANAGEMENT I & II JOINT***

***RECOMMENDATIONS***

***September 13, 2007***

> The Financial Management I and Financial Management II Committees
> (collectively referred to as "the Committee") are delighted to have
> the opportunity to make the following recommendations to improve asset
> management processes and procedures. Under the final rule at 24 CFR
> Part 990, PHAs are given quite a bit of flexibility to convert to
> asset management. The guidance set forth by HUD restricts the movement
> of resources within a PHA and takes away strategic decision-making
> based on PHA's unique portfolio. In doing so, it contradicts the final
> rule. The Committee recommends that the guidance and portions of the
> final rule be re-examined to allow for strategic decision-making and
> to maximize the utilization of each PHAs competitive advantages and
> unique strengths, while implementing asset management processes and
> procedures.
>
> Specifically, the Committee recommends modifications in the following
> five areas:

I.  **Central Office Cost Center**

II. **Accounting Requirements**

III. **Small Agencies and AMPs**

IV. **Financial Reporting**

V.  **Funding Formula/Operating Subsidy**

> The Committee also recommends a number of additional recommendations
> in Section VI. The Committee looks forward to discussing these
> recommendations on September 27, 2007 and receiving written comments
> from HUD.

I.  **The Committee recommends the following to ensure the effective
    working of the Central Office Cost Center ("COCC") and to ensure
    that asset management activities and each PHA's overall portfolio
    are managed in an effective manner:**

    -   The management fees should be re-visited to more appropriately
        reflect the costs of managing public housing units and
        developments. The Revised Supplement to HUD Handbook 7475.1 (the
        "Supplement") bases the management fee on virtually all
        properties in the FHA database (and lists the 80^th^ percentile
        of such fees at Attachment A). Management fees should be
        re-visited and specifically that there should be negotiated
        rulemaking concerning such fees. In the interim, PHAs should be
        given the flexibility to charge up to the 100th percentile of
        management fees paid by FHA properties, by field office,
        reflecting the complex nature of public housing properties.
        Further, since the published management fees are based on 2005
        data, they need to be updated and adjusted to account for
        inflation between 2005 and 2007.

    -   The Supplement allows PHAs to accrue \$10 PUM as an asset
        management fee (to properties that meet the excess cash
        requirement), while the regulations at 24 CFR §990.280 (b) (5)
        permit excess cash to be used for eligible purposes. The
        Department should provide flexibility to PHAs in determining
        asset management fees *for eligible purposes* consistent with
        regulation and should remove the \$10 limitation. Furthermore,
        an asset management fee should be permitted regardless of
        whether projects cash flow -- this is especially important since
        pro-ration will frequently stop projects from cash flowing (*24
        CFR 990.280)*.

    -   HUD should clarify the rule with respect to de-federalization of
        funds to the central office and the legal basis for the rule.
        (*Discussed at 24 CFR 990.195(e)* and the *Supplement, Section
        7.2*).

    -   Consistent with QHWRA, use of Capital Funds should be permitted
        for COCC, without limitation for management improvements and for
        operations, except for those limits promulgated in accordance
        with the capital fund program.

    -   PHAs should be permitted to charge projects based on the actual
        costs of the PHA to perform the services or based on a
        reasonable allocation (consistent with OMB Circular A-87), in
        addition to charging a fee for service. The PHA should have the
        discretion of determining which services will be charged to the
        projects as a fee-for-service. (A concrete example of the need
        to utilize actual costs is those costs that result from union
        contracts) (*24 CFR 990.280(d))*.

II. **The committee recommends that accounting requirements should be
    re-considered to differentiate between those that are necessary for
    the implementation of asset management and those that are
    overburdening PHAs without producing a commensurate benefit.
    Specifically, the Committee recommends the following:**

-   HUD should maintain the Capital Fund Program (CFP) in its current
    state. Budgeting for and expensing CFP dollars to each AMP results
    in additional expense tracking and reporting costs. The P&E reports
    should be closed out prior to moving over to AMPs.

-   The excess cash computations should track the effect of pro-ration
    factors on the ability to guarantee excess cash and the lack of
    excess cash as a result of pro-ration should be carved out of excess
    cash limitations.

-   HUD should facilitate the development of focus groups aimed at
    providing guidance about accounting guidelines, specifically with
    respect to accounting for mixed-finance requirements.

-   Grant program accounting, including ELOCCS funding requests, should
    be modified to align with Project-Based Accounting (PBA)
    requirements and Generally Accepted Accounting Principles (GAAP);
    i.e., the 1400 series used for grant accounts should be eliminated.

-   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. If balance sheets are required, 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.

III. **The Committee recommends that the small agency exemption be
     increased, the AMP grouping requirements be consistently applied
     and that FDS reporting be modified. Specifically, the Committee
     recommends the following:**

-   The small agency exemption should be extended to agencies with 500
    or fewer units, as the new asset management requirements are overly
    burdensome for small agencies (24 CFR §990.260).

-   There is an inconsistency in field offices with respect to the
    development of AMPs, especially with respect to stop-loss agencies.
    Some field offices were allowing PHAs to have only one AMP while
    others have requested multiple AMPS from similar PHAs. A consistent
    policy should be implemented across field offices.

IV. **The Committee Recommends that Financial Reporting Requirements be
    simplified and modified in the following manner:**

-   The compliance requirements in 24 CFR §990.290(d) (the deadline for
    full compliance with asset management) should be extended from 2011
    to 2012.

-   FDS reporting needs to be simplified. By way of illustration, until
    now, there has been one line item for maintenance contract costs.
    Now, PHAs will be required to identify every contract cost at the
    project level, such as snow removal, garbage, extermination,
    elevator, painting, etc. The Committee recommends that this be an
    auditing item, rather than a reporting item.

-   At a minimum, Attachment A of Notice PIH 96-33, which describes
    permissible permitted investments, should be re-evaluated to
    determine whether there are additional investment vehicles with
    similarly acceptable risk characteristics. The current Attachment A
    does not reflect a number of investment vehicles that are widely
    viewed as being low-risk.

-   The unaudited FDS should not be required to be submitted to HUD, as
    it creates unnecessary work and reduces available time to prepare
    the audited FDS. (If the unaudited FDS continues to be required, it
    should be submitted to REAC 90 days after the end of the PHA's
    fiscal year and should be automatically accepted. No HUD review and
    approval should be required).

V.  **The Committee recommends the following modifications to the
    Funding Formula/Operating Subsidy Requirements in order to correctly
    effectuate the intent of the various requirements:**

-   Add-on fees that are a component of PHA funding are presented in
    real dollars (i.e. \$2 information and technology, \$4 asset
    management, \$25 resident participation), and the Committee
    recommends that these fees should be adjusted by an inflation
    factors (24 CFR 990.190).

-   The negotiated rulemaking committee (with HUD approval) selected an
    inflation factor that included accounting for inflation in both
    wages and benefits as is done in OCAF used in the multifamily
    program. HUD unilaterally changed this factor to exclude benefits,
    and the committee recommends a return to an inflation factor agreed
    to by the parties.

-   In addition, HUD has misapplied the utility inflation factor.
    Utilities are currently based on costs from a period 18 months prior
    to the period which will be financed. HUD is only inflating this
    cost by 12 months, though, and not the necessary 18 months. The
    Committee recommends that HUD inflate the utility inflation factor
    by the full 18 months reflect current costs.

-   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 to reflect fully funded units, as intended by the
    regulation.

-   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.

-   Utility incentives at 24 CFR §990.185 provide for annual costs of
    financed programs. SAGIS must accommodate the incentives as
    approved, and PHAs should have full flexibility applying the 25%
    allowable cash savings to either the AMPs or the COCC.

VI. **The Committee provides the following additional
    recommendations/comments:**

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1)  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.

2)  There should be clear language stating that PHAs and Field Offices
    will be given broad discretion in determining property management
    fees for PHA's.

3)  PHA's should have some guarantee that a management fee for the
    Housing Choice Voucher program will remain voluntary.

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

5)  Notice PIH 2007-16, which requires operating statements (with
    respect to stop loss), should be revised to permit such statements
    to be submitted 60 days after the end of the period for which
    information is required (currently, there is sometimes as little as
    15 days to prepare such information).

6)  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.

7)  As an alternative to Number 6 above, if a balance sheet is requires,
    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.

8)  Assets and liabilities that are in the best interests of the PHA to
    centrally manage should be permitted to be maintained in the central
    office cost center. The PHA should have the ability to determine the
    equity requirements of the projects and the central office cost
    center at the time of conversion and to apportion the equity
    accordingly.

9)  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.

10) AMP's under Asset Repositioning- If the funding is no longer needed
    for the specific AMP that receives the funding, then such funding
    should be allowed to be utilized for COCC without limitation.

11) Utility incentives at 24 CFR §990.185 provide for annual costs of
    financed programs. A) **SAGIS must accommodate the incentives as
    approved (frozen rolling base by site; utility allowance
    adjustment/surcharges),** and PHAs should have full flexibility
    applying the 25% allowable cash savings to either the AMPs or the
    COCC.  B) **Allow up to 25% Cost Savings to flow to the COCC
    annually:** 24 CFR 990.185 requires the PHA to use at least 75% of
    the cost savings from conservation projects to pay off the
    contractor or bank loan, and limits the PHA to retained cash of no
    more than 25% of the total savings. Financial Mgt Handbook 4/2007-
    7475.1REV CHG1 - pages 23-24 adds to that requirement that ½ of the
    25% (12.5%) must be applied at the AMP level and ½ (12.5%) may be
    used to fund COCC. Since many contracts have been approved to
    apply cash savings for eligible costs related to these programs that
    may require COCC efforts, and since the combined effects of
    proration and the BLS CPI inflation factor for utilities (see
    990.170(d)) in any given year could be up to twice the 12.5% allowed
    to apply to the COCC, we make the recommendation to allow a PHA to
    apply cash savings of up to 25% of total savings at either the AMP
    level or the COCC. **C) A regulatory issue exists in terms of
    Applicable Rate in instance of Concurrent Consumption Reductions at
    990.185(a) and Rate Reduction at 990.185(b):** In the case of a PHA
    undertaking concurrent utility usage and utility rate initiatives,
    the 'actual rate' applying to utility usage *savings* under
    990.185(a) should be equal to the utility rate that would apply in
    the absence of the rate reduction effort.

12) Detailed FDS instructions need to be created and posted. Final
    instruction and forms need to be posted sufficiently in advance (at
    least 6 months in advance of the effective date of implementation).
    It creates inefficiency and added costs when PHAs have to reach back
    and manually gather data because of changes in requirements during a
    reporting period.

13) There committee recommends that there be added capacity to upload
    excel spreadsheets on REAC website.

14) The Committee recommends that HUD address capacity issues-- i.e. the
    REAC website was already extremely difficult to access during stop
    loss reporting and this will be exacerbated with more agencies and
    more AMPS.

15) HUD should explore expanding permitted investments to include
    indexes such as the S&P 500.

16) Environmental review should be included in the Capital Fund Program
    portion to speed up the funding process. It is critical that PHAs
    have access to funds as soon as possible.

17) Rent determination should be structured. There should be a
    pre-determined table for rent at a tier level; use the most current
    EIV information.

18) Self-certification for Community Service should be implemented or
    remove the community service requirement. This is more of an
    administrative burden than a requirement from residents.

19) 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.

20) 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.

21) HUD's fee structure requirements are essential to a housing
    authority's future success, but the fee structure would work with
    one or two Asset Management projects (AMPs) versus 15 or 20 AMPs.
    HUD should reevaluate its requirements and allow housing authorities
    to consolidate a greater number of units into a single AMP.

22) Instead of a HUD-mandated nationwide asset management structure,
    local field offices should have the authority to accept or reject
    specific housing authority asset management structures.

23) Housing authorities are now required to submit project-level data
    instead of agency-level data. HUD should review this reporting model
    requirement. PHAS will need to be redefined based on the new
    requirements since HUD does not have the capacity to review data for
    each project/AMP.

24) HUD should request AMP-specific data if an overall agency-wide issue
    was noticed, since data entry by AMP based on the Uniform Financial
    Reporting Standards is burdensome and cost prohibitive. Housing
    authorities would still be required to maintain records by AMP.

25) HUD should review allowable cost allocations since HUD-prescribed
    asset management requirements (Central Office Cost Center versus
    Front-Line) are too stringent.

26) HUD should provide information to housing authorities so that
    industry professionals understand how HUD will interpret and monitor
    AMP data.

27) Utility subsidy prorations should be reviewed. Utility subsidy that
    is prorated should result in prorated utility allowances.

28) Utility subsidy prorations should be reviewed. In lieu of prorating
    total subsidy amounts, only non-utility subsidy should be prorated.

29) Subsidy prorations should be reviewed in relation to audit costs
    (Auditors continue to charge the full cost of an audit regardless of
    subsidy prorated amount).

30) HUD should provide more guidance related to accounting for CFP if
    intended regulations are fully implemented.

31) Consistent with 24 CFR 990.135 and 990.140, PHAs should receive
    operating subsidy with respect to the lease-up of units in a new
    development, even when such units are leased up in July, August or
    September.