United States General Accounting Office

GAO Report to the Subcommittee on VA,

HUD, and Independent Agencies,

Committee on Appropriations, U.S.

Senate

June 1998 PUBLIC HOUSING

SUBSIDIES

Revisions to HUD’s

Performance Funding

System Could Improve

Adequacy of Funding

GAO/RCED-98-174

GAO United States

General Accounting Office

Washington, D.C. 20548

Resources, Community, and

Economic Development Division

B-279576 

June 19, 1998

The Honorable Christopher S. Bond

Chairman

The Honorable Barbara A. Mikulski

Ranking Minority Member

Subcommittee on VA, HUD, and Independent Agencies

Committee on Appropriations

United States Senate

In fiscal year 1998, the Congress appropriated $2.9 billion to subsidize the

operating costs of nearly 3,200 public housing agencies. Almost all housing

agencies receive subsidies because the rental income they collect from

their residents is not sufficient to cover the agencies’ operating costs. In a

report on fiscal year 1998 appropriations—Departments of Veterans

Affairs and Housing and Urban Development, and Independent Agencies

Appropriations Bill (Senate Report 105-53)—the Senate Committee on

Appropriations requested that we study the Department of Housing and

Urban Development’s (HUD) Performance Funding System (PFS) for

allocating appropriated funds to housing agencies as operating subsidies.

Under PFS, HUD determines the reasonable expenses that it will allow each

housing agency to expend in managing its assets and serving its tenants

and provides an annual subsidy to cover the difference between these

expenses and the housing agency’s projected income.

To provide information to the Congress about HUD’s administration of PFS

and to guide the revision of PFS anticipated in legislation currently pending

in the Congress, we agreed with the staff of the Senate Committee on

Appropriations’ Subcommittee on VA, HUD, and Independent Agencies to

address the following questions in our study:

• How does PFS allocate the congressionally appropriated subsidy among

public housing agencies?

• How well does PFS meet the subsidy needs of individual housing agencies?

• How does HUD develop budget estimates of housing agencies’ annual need

for operating subsidies and are the estimates appropriate?

• What are some of the possible options that HUD might have for changing

PFS to make it a more effective tool for subsidizing housing agencies?

To answer these questions, we relied on information from HUD; our visits

to four housing agencies in Los Angeles, California; Baltimore, Maryland;

Kansas City, Missouri; and Miami, Florida (see apps. I, II, III, and IV for

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summaries of our work at these housing agencies); our analysis of HUD’s

application of its PFS methodology; a database of public housing operating

expenses for fiscal years ending in 1992 through 1996 (see app. V for a

limited analysis of several aspects of that database); and work we have

completed or have under way related to other formula-driven federal

programs, including Medicaid, the Older Americans Block Grant, the Law

Enforcement Block Grant, and Highway Grant Formulas.

Results in Brief The Performance Funding System allocates the congressional

appropriation by providing an operating subsidy to each housing agency

based on that agency’s HUD-approved operating expenses during the base

year 1975, less its income, plus certain annual adjustments. The adjusted

base year cost is known as the “allowable expense level.” HUD did not

develop its allocation method on the basis of standards of housing needs

because it believed that reaching a consensus on these standards would

have been too difficult. However, twice over the last 23 years, HUD

developed and used cost models based on specific factors directly related

to the operating costs of well-managed housing agencies, including the age

and height of buildings and the prevailing government wage rates. HUD

used a model in 1975 to cap the allowable expenses of housing agencies

that had high base year expenditures, which would have resulted in the

agencies’ being overfunded; in 1992, HUD used an updated model to

increase the expense levels of some agencies that were underfunded. In

most years, the annual subsidy that HUD provides to most housing agencies

is the difference between an agency’s prior year’s allowable expense

level—adjusted for inflation, additions or deletions to its housing stock,

and an additional 0.5 percent to account for the aging of the housing stock1

 —and the projected income from rent and other sources.

The operating subsidies that the Performance Funding System provides to

housing agencies may not be adequate for agencies with base year

expenditures that were low or agencies with operating circumstances or

costs that have undergone significant change since 1975.2

 Although the

Performance Funding System provides for annual adjustments to account

for inflation and the aging of public housing stock, these increases might

not have been enough for the agencies with base year spending that did

1

From 1976 through 1986, HUD used a statistical formula to compute changes in allowable expenses

from year to year. Now, to simplify the Performance Funding System, it uses an adjustment factor of

0.5 percent in almost all cases.

2

HUD officials believe that some agencies could be receiving subsidies that are more than adequate

because their base year costs were inordinately high; however, HUD officials do not have sufficient

information to determine how many agencies are receiving adequate or inadequate subsidies.

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not adequately reflect their needs or those with expenses that have

increased more rapidly than HUD’s allowed adjustments. Furthermore,

because housing agencies generally have had little opportunity under the

Performance Funding System to appeal their allowable expense levels,

those agencies that started under the Performance Funding System with a

low base year expense level, or that have experienced significant expense

growth, might now be underfunded by the Performance Funding System.

We found that agencies have experienced significant operational changes

since 1975 that have affected their costs. For example, at the four large

housing agencies we visited in Los Angeles, Baltimore, Kansas City, and

Miami, the Performance Funding System’s relatively minor annual

adjustments to expense levels had not addressed greater changes in

operating circumstances.

To develop its budget estimate for the operating subsidies housing

agencies will need in a coming fiscal year, HUD estimates the needs of a

representative sample of housing agencies and projects this estimate to

the population of nearly 3,200 housing agencies. HUD bases the projections

on assumptions about income and expense factors—such as utility rates,

the income levels of residents, and allowable expense levels—that it must

make several years before it allocates the funds appropriated by the

Congress to housing agencies. In years when HUD’s assumptions do not

accurately reflect housing agencies’ aggregate income and expenses,

inaccuracy in the subsidy level might result and adjustment through a

supplemental funding bill might be needed. Inadequate subsidies can be a

serious problem for housing agencies that are highly dependent on

subsidies and need them to meet current obligations. In years when the

congressional appropriation is less than HUD’s budget request, the

Performance Funding System reduces subsidies to all housing agencies by

the same proportional amount, regardless of the extent to which an

agency depends on the subsidy to meet its expenses.

HUD has several options for making the Performance Funding System a

more accurate and effective funding tool. Instead of relying on historical

costs that are two decades old, HUD could, as one of its options, use an

established cost model—such as the one it developed in 1992 that relates

operating conditions to expenditures—or a new model that might base

subsidies on what a basket of standard housing services should cost at a

specific housing agency. A new model might also be based on a reliable

index of needs, such as the poverty rate in specific census tracts. In the

past, information on physical housing conditions, comparative costs, or

other data needed to implement a cost model has not been readily

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obtainable, and the cost of developing such information for all agencies

was believed to be high. However, data that HUD is currently developing on

housing agencies’ financial and physical conditions should be useful to

HUD as it considers new ways of allocating operating subsidies. Other

subsidy options include enhancing the current system with an appeals

mechanism whereby housing agencies would have the opportunity to

present significant information to justify increases in their allowable costs,

linking public housing subsidies to the cost of operating privately owned

low-income housing, and creating a block grant to fund operating

expenses. A block grant would still require a new formula be developed.

Background Under the Housing Act of 1937, as amended, the Congress created the

federal public housing program to assist communities in providing decent,

safe, and sanitary dwellings for low-income families. However, it was not

until 1975 that HUD established a permanent system known as the

Performance Funding System (PFS) for subsidizing public housing. For

years, the public housing program was self-sufficient because it was open

only to residents whose incomes were high enough for them to be able to

pay rents that would cover operating costs. The program began to move

toward serving poorer households with the Housing Act of 1949, which

required incomes of eligible households to be 20 percent below the income

necessary to rent decent private housing. Also, during the 1950s and 1960s,

the average income of public housing tenants began to fall as the more

upwardly mobile households found affordable housing elsewhere. By

1969, public housing had shifted to serving the poorest households, those

who had difficulty paying rents that were high enough to cover the full

costs of public housing operations.

As a result, the Congress passed the Brooke Amendments, beginning in

1969, which limited the rent that tenants could be charged to 25 percent of

their incomes3

 and authorized a program of federal subsidies to pay for the

operating costs that public housing agencies could no longer meet with

rental income alone. By the mid-1970s, rising subsidy costs, along with

concern in the Office of Management and Budget and the Congress that

the system did not provide an incentive for good management, led to the

1974 Housing Act mandating that the Secretary of HUD establish a

mechanism for subsidizing the cost of providing public housing. As a

result, HUD developed PFS in 1975; since then, PFS has come under almost

constant review in efforts by HUD and others to find a more effective

mechanism for allocating congressional appropriations to housing

3

The Congress raised this to 30 percent in 1981.

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B-279576 

agencies. Provisions in pending housing reform legislation would require

HUD to create a block grant to cover operating expenses and to develop a

new formula for allocating that grant.

HUD Bases Subsidies

on 1975 Operating

Costs and Used Cost

Modeling to Establish

Upper and Lower

Limits

After implementing PFS in 1975, HUD began allotting operating subsidies to

housing agencies on the basis of their costs in the base year 1975. Since

then, HUD has adjusted the base year costs annually for inflation and other

factors to update the allowable costs of operating public housing. The

subsidy that HUD provides is the difference between a housing agency’s

income and these allowable costs. Although HUD did not base housing

agencies’ allowable expenses on what it should cost to provide a standard

set of housing services, twice over the program’s life the Department has

used quantitative cost models, based on two different sets of cost data, to

better define subsidy levels: once at the outset to establish an upper limit

for allowable costs and again in 1992 to adjust some agencies’ costs that,

according to the second cost model, were less than 85 percent of their

predicted levels. HUD and its contractors did not believe that the results of

the statistical analysis provided a standard of what agency expenses

should be or need to be to efficiently provide a commonly understood

standard of service in public housing.

HUD Allocates Subsidies

on the Basis of 1975

Expenditures

HUD implemented its system for subsidizing public housing agencies in

1975, basing it on the HUD-approved operating expense level incurred by

housing agencies that year. HUD also developed a cost model, called the

“prototype equation,” that was based on the costs of a group of

well-managed agencies. The equation was used to predict housing

agencies’ operating costs and to thereby establish a limited range of costs

within which HUD expected housing agencies to operate. HUD and the

Urban Institute, which developed the model for HUD, reported that the

model did not produce an estimate of what housing agencies should or

need to spend for housing services. Instead, based on a set of five

cost-related factors,4

 the model produced for every agency a predicted, or

prototype, expense level that could then be compared with the actual

expenditures that formed the subsidy’s basis. HUD believed that this

comparison showed which agencies had spending that significantly

exceeded the comparable expenses derived from a group of well-managed

agencies, after controlling for their differences in the five factors.

4

The factors described (1) the average number of bedrooms per housing unit, (2) the age of the

project’s buildings, (3) the height of the buildings, (4) the regional cost of operating housing agencies

(by HUD region), and (5) the population of the area served by the agency.

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Without a method to establish what operating expenses are necessary to

provide some standard level of services—nor a method to define what that

standard level of services would consist of—HUD chose to use each

agency’s actual operating expenses in 1975 as its standard baseline

amount, not including utility and audit expenses.5

 Since then, the subsidy a

housing agency receives each year is its prior year’s allowable

expenses—adjusted for (1) additions or deletions to its housing stock,

(2) inflation, and (3) an additional 0.5 percent to allow for higher costs

associated with an aging housing stock6

—less the amount of rental and

other income the housing agency receives. Thus, the PFS subsidy is the

shortfall between an agency’s allowable expenses and its income. In years

when the congressional appropriation has not been sufficient to cover the

shortfall, HUD has proportionally reduced each agency’s subsidy to

conform to the amount appropriated.

HUD Developed Cost

Models to Limit Allowable

Costs and Later to Adjust

Some Agencies’ Allowable

Cost Levels

To develop the prototype equation, a 1975 study by the Urban Institute

identified certain operating characteristics of housing agencies that were

related to the agencies’ operating expenditures. On the basis of operating

performance and responses to questionnaires, the study identified a group

of local agencies considered to be well managed at the time. The Urban

Institute used these agencies’ costs to identify five characteristics of a

local agency’s housing operations that were directly related to operating

expenditures per housing unit, per month, called per unit-month costs, and

determined the relative impact of the characteristics on the overall cost of

operations. On the basis of the Urban Institute’s study, HUD established an

upper limit for expenses and beginning in 1975 limited the growth in

allowable expenses for housing agencies that had expenses that

significantly exceeded the level predicted for them by the prototype

equation.7

In 1992, HUD implemented the results of a second study in a subsidy review

process mandated by the 1987 Housing and Community Development Act.

This study’s approach was similar to the Urban Institute’s approach. It also

identified five cost factors that were related to local agencies’ operating

5

HUD also determines an allowable utility expense level to be used in the final calculation of the

housing agency’s operating subsidy.

6

The use of the 0.5-percent adjustment began in 1986. Prior to that, a cost model was used to compute

annual changes for each housing agency.

7

One study of the application of the cost model asserted that constraining high-cost agencies was

preferable to reducing program costs by spending cuts across the board. The agencies with the highest

spending after controlling for the five factors could be viewed as having the greatest opportunity to

reduce spending by improved efficiency rather than by reducing services.

Page 6 GAO/RCED-98-174 Public Housing Subsidies
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costs, but it used different factors and drew on the past expense levels of a

much larger sample of housing agencies.8

 The act required this study, in

part, to correct inequities in the base year expense level, to accurately

reflect changes in operating circumstances, and to reflect the higher cost

of operating in an economically distressed unit of local government. If an

agency’s allowable expense level was less than 85 percent of the amount

calculated by the new PFS formula developed in the 1992 study, the

allowable expense level would be increased to the 85-percent level. At that

time, this adjustment was expected to effect 868 housing agencies, most of

which were small. HUD believed that its PFS formula was not sufficiently

accurate to change agencies’ allowable costs that differed by less than

15 percent from the value predicted by the formula. A lower percentage

would have been more costly because it would have permitted more

housing agencies to increase their allowable costs. Because the agencies

that qualified for the increase in allowable expenses were comparatively

small, this review added only 1.4 percent to the total federal subsidy for

that year.

Although HUD’s 1992 study related operating costs to certain

characteristics of a housing agency, HUD did not use the new formula to

establish specific allowable expense levels for all housing agencies.

Instead, for most agencies, the allowable expense level continued to be

based on past actual costs. HUD officials believed that the 1992 cost model

improved on the prototype equation in several respects, but they still had

concerns about whether the model reflected all the important

circumstances and conditions affecting housing agencies’ costs. For

example, none of the cost factors accounted for the condition and quality

of the housing stock. In addition, neither the Urban Institute’s nor HUD’s

analysis controlled for differences in the effect that varying maintenance

practices would have had on expenditures and on the varying physical

condition of agencies’ housing stock. Consequently, the studies’ statistical

analyses simply reflect historical spending patterns rather than differences

in the cost conditions at different locations. Moreover, the spending

patterns analyzed in 1992 might not have accurately reflected the true

costs of operating public housing because spending had been limited since

1975 by housing agencies’ available revenue—the sum of the PFS subsidy

and rental and other income.

8

The five factors in the new study were (1) the number of pre-1940 rental units occupied by poor

households in 1980 as a percentage of the 1980 population of the community; (2) the local government

wage rate; (3) the number of units with two or more bedrooms available in the housing agency or

15,000, whichever is less; (4) the ratio of high-rise two or more bedroom units to total units available in

the housing agency; and (5) the ratio of three or more bedroom units to total units.

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HUD’s Subsidies May

Not Reflect Housing

Agencies’ Current

Needs

The operating subsidies that HUD provides through PFS are not sufficient to

adequately supplement some housing agencies’ operations budgets.

Although these agencies’ base year costs were limited by the prototype

formula where necessary, adjusted for inflation and other effects, and

converted into their current allowable expense levels, the expense levels

still reflect housing conditions, management policies, and, most

importantly, the spending patterns that existed almost a quarter of a

century ago. PFS has not adapted to the housing agencies’ changing needs,

residents, or operating circumstances. Therefore, the housing agencies

that either had inadequate resources in 1975 because they were serving

extremely poor residents or had changes in their operating circumstances

over the years that had a substantial impact on their costs may not be

receiving adequate subsidies today to operate effectively. For example,

each of the four large housing agencies we visited had experienced

changes in its circumstances since PFS was implemented in 1975. The

significant actions taken by the housing agencies’ managers to address

these changes demonstrate that the operating subsidies they receive from

HUD may not be sufficient to meet their agencies’ needs. These agencies

have deferred maintenance expenses, reduced staffing in critical areas,

and supplemented their operating budgets with funding from other federal

grants. The four agencies took these and other actions, despite being

reasonably well managed according to HUD’s management assessment

program.9

 Finally, we found that 17 percent of the housing agencies had

had declining operating reserves during their fiscal years ending in 1992

through 1996. In particular, 4 of the 21 extra large housing agencies (those

operating 6,600 or more housing units) had declining reserve levels in 3 of

the last 4 years. One of the uses that housing agencies make of operating

reserves is to pay for operating expenses. For example, officials at the

Miami-Dade Housing Agency stated that they use reserves to pay for

maintenance when their operating income—primarily comprising rent

receipts and the PFS subsidy—is insufficient.

9

According to the agencies’ scores from HUD’s Public Housing Management Assessment Program,

which ranks all housing agencies on eight performance indicators, two of the four agencies are high

performers, scoring over 90 on HUD’s 100-point assessment scale; the third agency’s current score is

85; and the fourth’s score is 70. In a previous report, we reviewed HUD’s management assessment

program and recommended ways that HUD could improve the program’s usefulness and accuracy. See

Public Housing: HUD Should Improve the Usefulness and Accuracy of Its Management Assessment

Program (GAO/RCED-97-27, Jan. 20, 1997). HUD is currently taking actions to adopt our

recommendations.

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Base Year Cost Variation

and the Inflation

Adjustment Method

Contribute to the

Inadequacy of the Subsidy

When HUD adopted PFS, housing agencies’ expenditure levels varied

significantly according to the rental income they could collect from their

tenants and other factors such as the quality of their housing stock and

neighborhood characteristics. Annual expenditures were driven by the

level of maintenance needed to keep the housing stock in good condition,

neighborhood and tenant characteristics that affected both security

expenses and the residents’ need for social services, local agencies’

policies regarding the volume and types of social services they made

available to residents, and agencies’ criteria for selecting and evicting

tenants. A 1980 Urban Institute study of 17 large housing agencies reported

that comparatively wide differences existed among housing agencies in

expenditures for operating activities in 1975.10 The expenditures ranged

from a low of $45.18 per unit-month in Columbus, Ohio, to $95.49 per

unit-month in Los Angeles. The variations that existed in 1975 have been

perpetuated by PFS until today, even though the operating circumstances

for many agencies are likely to have changed significantly.

Although HUD adjusts agencies’ allowable costs each year for inflation, the

adjustment may not cover the agencies’ total cost growth. In determining

the inflation adjustment to housing agencies’ allowable cost levels, one of

the factors that PFS uses is the Wages and Salaries Index of the Employer

Cost Index published by the Department of Labor. However, a similar

index, the Total Compensation Index, also tracked and published by the

Labor Department, may be more comprehensive because it includes the

value of employee benefits, such as health insurance premiums. Using the

Total Compensation Index instead of the Wages and Salaries Index would

mean a higher subsidy because over the period 1980 through 1997, the

Total Compensation Index increased by 6 percent more than did the

Wages and Salaries Index. Because labor costs are approximately 60

percent of housing agencies’ expenses, estimated annual funding needs for

PFS would more accurately reflect housing agencies’ costs each year if HUD

calculated inflation on the basis of the Total Compensation Index rather

than the Wages and Salaries Index. However, using the Total

Compensation Index would also raise the annual subsidy by 3 to 4 percent,

or approximately $100 million.

10Raymond J. Struyk, A New System of Public Housing: Salvaging a National Resource (Washington,

D.C.: The Urban Institute, 1980), pp. 87-89.

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Conditions at Four Large

Housing Agencies Indicate

That Changing

Circumstances Make PFS

Subsidies Inadequate at

Some Agencies

At each of the four large housing agencies we visited, we found conditions

similar to those described by HUD in its annual performance plan submitted

to the Congress in early 1998. The Department noted decades of mistakes

in public housing, including flawed site plans and architecture, buildings

that have outlived their useful lives, and neighborhoods that have changed

from healthy residential settings to isolated pockets of poverty and

despair. We found that because of these conditions, housing agency

managers believed that PFS significantly underfunds their need for subsidy.

They attributed inadequate subsidies primarily to PFS’ inability to recognize

that changing circumstances over the past 23 years have increased housing

agencies’ costs in areas such as crime deterrence, management

information systems, and maintenance. We observed housing conditions

and spoke with housing managers at many of the agencies’ developments,

who were nearly unanimous in their belief that crime, aging physical

stock, and the poor design and layout of the housing itself were the

primary factors causing their costs to rise today. They told us that their

operating costs are significantly higher now—even taking inflation into

account—than they were when PFS set their agencies’ allowable expense

levels in 1975. Table 1 summarizes the information we obtained at the four

housing agencies.

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Table 1: Summary of Information About the Adequacy of PFS Obtained at Four Housing Agencies

Is PFS adequately

funding current

expenses?

Chief reasons for

subsidy not being

adequate

Management actions to

cope with insufficient

operating funds

Comments by HUD

field office staff

Housing Authority of

Baltimore City

No (1) Increasing and new

costs not anticipated by

PFS and (2) costs of

aging stock not

recognized by PFS

Reduced maintenance

staff and activity;

supplemented operating

budget with other funds

Allowable expenses are

adequate for existing

stock but too low to

manage newly

rehabilitated housing

Housing Authority of

Kansas City

No (1) Cost of aging

housing stock and

(2) additional cost of

managing much of the

agency’s housing stock

that is located in high

crime areas

Reduced staffing,

deferred maintenance,

and used funds from

other accounts to

supplement the

operating budget

Using drug elimination

and modernization

grants to supplement

operations enables the

agency to manage well

Housing Authority of Los

Angeles

No Aging housing stock and

deteriorating

infrastructure is costing

more to maintain

Reduced staffing,

deferred maintenance,

and used portions of

other grants to defray

operating costs

The agency very

aggressively seeks

funding and appears to

need all of the funding it

obtains

Miami-Dade Housing

Agency

No (1) Increases in existing

costs that exceed

inflation, (2) new costs,

and (3) spending on

deteriorating and poorly

designed units

Reduced maintenance

and administrative staff,

deferred

maintenance, and used

operating reserves and

other resources to fund a

portion of operations

The agency has had to

provide additional

services to its tenants

without the funding to go

with the services (e.g.,

Family Self-Sufficiency

Program)

Although all the housing agency managers we spoke with believed that PFS

was insufficient to meet their agencies’ needs, this belief was not always

shared by officials at the local HUD field offices. For example, the director

of public housing in HUD’s Maryland State Office said that the Housing

Authority of Baltimore’s allowable expense levels seemed to be sufficient

to operate the agency’s developments; however, he also said that these

expense levels would not be adequate to protect the investment Baltimore

is making in its newly rehabilitated developments. He added that although

other HUD-assisted properties not owned by the housing agency receive

less revenue to operate than the Baltimore City agency receives, the

housing agency has specific circumstances—such as high-cost family

high-rises, large aged developments, very-low-income tenants, and higher

crime rates—that raise its operating costs above those of privately owned

properties. In Florida, HUD’s director of public housing said that PFS does

not provide housing agencies with sufficient subsidy, even in years when

the Congress funds it at 100 percent of HUD’s request. She said that despite

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the insufficiency of the subsidy, housing agencies generally perform

satisfactorily and often add a small amount to their operating reserves at

the end of the year. She also said, however, that most supplement their

operating budgets with funds from other sources, including HUD’s

Comprehensive Grant Program for major housing repairs and

modernization;11 HUD’s Public Housing Drug Elimination Program; and

other federal, state, and local grant programs. She said that supplemental

funding is necessary because “PFS is an antiquated system that does not

fund the operating costs of new programs that have come on-line in the

public housing industry.”

New Expense Categories

and Increases in Existing

Categories Make PFS’

Baseline Costs Obsolete

For the most part, officials at the four agencies that we visited told us that

since HUD set their allowable costs in 1975, new cost categories have

emerged and costs in established categories have risen. For example,

abating lead-based paint has become a significant cost at some agencies.

And the cost of protective services—while always necessary—has

increased along with the cost of maintaining ever-aging buildings and the

cost over time of poor geographic locations or physical layouts that

facilitate increased crime. Conditions at the following housing

developments illustrate some of the factors that increased operating costs

in recent years:

• O’Donnell Heights in Baltimore. Illegal drug activity has worsened over the

last decade but is difficult to deter because of the large size and openness

of O’Donnell Heights. Because of the high crime rate—worse than in the

surrounding neighborhood—residents frequently request to transfer or to

relocate. To help control crime, the development uses special lighting and

two police officers but does not have contract security, fencing, security

cameras, or controlled entry.

• Claremont Homes in Baltimore. Claremont’s per unit-month expenses

(before utilities) are about $383, 24 percent more than the average for the

housing agency. Claremont’s housing manager said that renovating vacant

units to abate lead hazards and replace almost all of the original plumbing

fixtures and cabinetry has had the most impact on maintenance costs.

Claremont’s low-rise units are very costly because they have the original

steam-heated radiators and plaster walls that are damp because of poor

ventilation and need constant repainting and replastering. This

maintenance must be done frequently because the paint in the units is

lead-based and poses a health hazard if it is allowed to peel and crack.

11Modernization grants are generally targeted for major repairs and the rehabilitation of deteriorated

housing stock. For fiscal year 1998, the Congress appropriated $2.5 billion for this program—nearly as

much as the $2.9 billion appropriation for operating subsidies.

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These maintenance costs have grown until they have become a significant

portion of the development’s total operating costs. Housing agency

officials are concerned about the potential for incurring additional costs

from litigation if they cannot keep up with the lead abatement needed as

the paint continues to chip and peel.

• Chouteau Courts in Kansas City. At this development, both residential

sewage and rain water feed into the same sewerage transfer system. Heavy

rains cause the sewers to back up into the basement of one of the

buildings, causing damage, creating significant health hazards, and

resulting in additional costs for the housing agency.

• Dana Strand in Los Angeles. Housing managers cited increasing

maintenance as having the greatest impact on their operating costs, and

they attributed the increase to the age of Dana Strand’s buildings. Officials

cited corroding water and gas lines, rotting window sashes, and old

electrical conduits as not only maintenance problems but also contributing

to hazardous living conditions. For example, water leaking from corroded

plumbing accelerated the corrosion of gas pipes, resulting in a gas

explosion that injured several tenants and blew off a portion of the

building’s roof and walls. Housing agency officials told us that similar

plumbing problems exist at other developments.

• Scott Homes in Miami. Increasing crime and vandalism, the age of the

development, and the need for grounds keeping and waste management all

contribute to the increased operating costs at Scott Homes. Crime in the

development and its surrounding community gives Scott Homes a bad

reputation that makes it difficult to attract residents, especially working

families. Vandals steal copper pipes and security windows from vacant

units, shoot out lights, and steal street signs. Physical deterioration of the

housing is evident in rotting door frames, water pipes that break and leak

into units, and appliances that have outlived their usefulness. Since fiscal

year 1995, grounds-keeping costs have nearly tripled because of the

extensive tree trimming needed to prevent damage to buildings and

sidewalks. Meanwhile, Miami’s strict dumping requirements have caused

the housing agency’s waste management costs to nearly double.

To Meet Operating

Expenses, Housing

Agencies Use Funds From

Other HUD Grants and

Defer Maintenance

To cope with insufficient subsidies, we found that the management teams

at the four housing agencies we visited supplemented their operating

budgets with funding from other HUD programs, including the

Comprehensive Grant Program, the HOPE VI urban revitalization program

for severely distressed housing, the Public Housing Drug Elimination

Program, and any remaining funds from the Major Rehabilitation of

Page 13 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

Obsolete Properties program that were awarded several years ago.12 Some

agencies also supplement their public housing operating budgets with a

portion of the administrative fee they receive from HUD in return for

operating Section 8 tenant-based assisted housing programs.

We found that a frequently used source of additional funding was the

Comprehensive Grant Program for modernizing and rehabilitating

deteriorated housing stock. Federal statutes and regulations have provided

two ways for housing agencies to use up to 30 percent of the grants from

this program to address operations needs. First, provisions in the HUD

appropriations acts for fiscal years 1996 and 1997 permitted housing

agencies to use 10 percent of their Comprehensive Grant Program funding

for activities related to operations. The Congress did not include this

provision in the fiscal year 1998 act, however. Second, HUD allows a

housing agency to use up to 20 percent of its Comprehensive Grant for

“management improvements.” HUD’s regulations state that eligible costs

under general management improvement include those incurred for

operating activities like management and accounting systems, security,

rent collection, and maintenance. In a survey of over 800 housing agencies

done by the Public Housing Authority Directors Association, 20 percent

responded that they use modernization funds to cover operating expenses.

The Council of Large Public Housing Authorities, which represents over

100 of the larger agencies, believes that many of its member agencies use

Comprehensive Grant funding to cover operating expenses, but the extent

of the practice is unknown. Having maintenance costs eligible under the

Comprehensive Grant is important to housing agencies because

maintenance is generally the single largest expense in their operating

budgets.

The impact on a housing agency’s operating budget of using a significant

portion of its Comprehensive Grant to cover the management and

administration of the agency can be substantial. For example, officials at

the Housing Authority of Baltimore City said that the agency generally

uses the full 20 percent of modernization funding that it is allowed to

cover management improvement costs. In fiscal year 1997, this amounted

to about $6 million of the agency’s $75 million operating budget.

An additional source of funding for operations is the Public Housing Drug

Elimination Program that was authorized in the Anti-Drug Abuse Act of

1988 and implemented by HUD the following year to help housing agencies

12Major Rehabilitation of Obsolete Properties is not a currently funded program, but grants made

under it in earlier years are still being spent by housing agencies.

Page 14 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

combat drug use and drug-related crime. The program authorizes many

activities, including security and drug education. However, because the

grants are competitive, agencies that receive a grant one year are not

guaranteed to receive a grant the next year. Moreover, the funding has

become more of a necessity in recent years. A 1994 HUD study of the

program noted that all of the agencies included in the study had suffered

from “the upsurge of drug activity during the 1980s as well as the

increasing impoverishment of public housing resident populations.”

Deferred maintenance and staffing cuts also rank high among housing

agencies’ tools for coping with funding shortfalls. In Kansas City, officials

said they reduced administrative and maintenance staff and deferred

maintenance to fund the new or increased operating expenses. Deferred

maintenance can be costly, however. For example, although the

Miami-Dade Housing Agency has in the past replaced roofs before leaks

occur, its current practice is to defer replacement until after leaks are

detected. This practice leads to other costs, including damaged walls,

floors, and electrical systems.

According to housing agency officials, the long-term consequences of their

coping strategies will be to undermine the viability of the housing stock

and to place an unjustified dependence on grants, such as the drug

elimination and HOPE VI grants, that may not continue indefinitely.

Housing officials in Baltimore told us that deferring maintenance items

means that they eventually become “extraordinary maintenance” or

emergency items that must be addressed. The comptroller of the

Baltimore agency said that although he requested modernization funds for

extraordinary maintenance at the O’Donnell Heights development, so

many other demands for this funding exist that O’Donnell’s needs are not

yet a priority. Agency officials in Baltimore said that in general, the

potential result of long-term underfunding is that many of their units

eventually will become uninhabitable and need to be demolished. They

said that HOPE VI program grants will help to deal with some of these

problems, but accomplishing adequate maintenance before excessive

deterioration becomes evident is more cost-effective. They also recognized

that the HOPE VI funding will not continue indefinitely.

Page 15 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

HUD Bases Its PFS

Budget Estimate on

Projections of

Income, Inflation, and

Expense Levels of a

Sample of Housing

Agencies

Each year, HUD’s Office of Finance and Budget forecasts how much will be

needed to fund PFS’ operating subsidies for the fiscal year by estimating the

future costs of a sample of housing agencies and projecting these costs to

the total population of nearly 3,200 agencies. HUD bases this estimate on

expense data from a stratified sample of housing agencies; factors from

the PFS formula; and several assumptions, including forecasts of tenant

income, inflation, and energy costs. However, because agencies’ expense

data may not accurately reflect their need for subsidy, the budget estimate

likewise does not accurately reflect the costs of adequately providing

public housing. In addition, in years when HUD’s budget estimate is not

fully funded by the congressional appropriation, HUD prorates the

appropriation across all agencies, which results in a relatively greater

hardship for the agencies that are more dependent on the subsidy to help

cover their expenses.

HUD’s Budget Estimate

Builds on Agencies’

Allowable Costs and

Projections of Rental

Income and Expenses

HUD’s process for developing its PFS budget estimate begins with obtaining

data on allowable expense levels, income, and utility expenses from a

sample of 213 public housing agencies. This sample includes all of the 146

large agencies (those with 1,250 or more housing units) and a randomly

selected sample of 67 small to medium-size agencies (those with 100 to

1,249 units). The 146 large agencies in the sample account for about

74 percent of total expenditures by public housing agencies to cover

operating costs. To prepare the budget estimate for fiscal year 1999, HUD

obtained data from fiscal years 1996 (the last completed fiscal year of the

housing agencies in the sample) and 1997 (to the extent that data were

available). HUD then adjusted the allowable expense level for each housing

agency in the sample to reflect major changes in circumstances—such as

significant additions or deletions to the housing stock—from fiscal year

1996 to fiscal year 1999. For agencies that reported changes in the PFS

formula’s predictive cost factors, such as the number of units built before

1940 and the local government employee wage rate, HUD used the formula

to adjust these agencies’ expense levels.

After making these adjustments to individual expense levels on the basis

of the most recent changes, HUD computed an overall weighted average for

the sample of 213 housing agencies. HUD then determined the percentage

change in the sample’s new expense level from the prior year’s level. HUD

assumed that the expense levels of all housing agencies increase in the

same proportion as the expense levels of the agencies in the sample.

Finally, HUD increased the projected allowable expense levels according to

Page 16 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

the Office of Management and Budget’s estimate of inflation in fiscal year

1999.

Other assumptions that HUD makes in preparing its budget estimates

involve utility costs and residents’ incomes. To estimate utility costs, HUD

obtains the value of utility costs in the last year for which data are

complete and adjusts the value for projected changes in utility prices,

using forecasts from the Department of Energy’s Energy Information

Administration. HUD does not attempt to adjust utility costs for changes in

weather or the aging or rehabilitation of buildings in specific markets or

nationwide. HUD also makes projections of residents’ income. For several

years in the early 1990s, HUD assumed that the income of public housing

residents—and therefore the rental income available to housing

agencies—remained unchanged. However, budget estimates for fiscal

years 1998 and 1999 have assumed a small increase in incomes, based on

recent income trends and the presumed effect of welfare reform.

For several reasons, HUD’s budget estimate for PFS may differ from actual

expenses in the budget year. As shown in figure 1, to develop projections

for fiscal year 1999, HUD began in mid-1997 and based the projections on

fiscal year 1996 data and some fiscal year 1997 data, when available. (The

time line represents a typical budget cycle; specific dates may vary from

year to year.) Thus, the data used for the 1999 budget estimate were

generated 2 to 3 years before the budget year. Furthermore, because of the

time lag between when housing agencies’ expenditures occur and when

HUD obtains these data and uses them in the budget estimate, some

estimating inaccuracy is introduced into this budget estimate. The

inaccuracy could be further magnified because of the 2-year period

between the time HUD completes its budget estimate and the time the

housing agencies spend their allocations.

Page 17 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

Figure 1: Time Line of PFS Budget Estimation Process for Fiscal Year 1999

HUD Program Office begins FY 1999 budget estimation 

process using 

FY 1996 PFS expense and income levels from a sample 

of 213 housing agencies,

FY 1997 inflation factor, and

March 1997 Department of Energy (DOE) utility 

forecasts.

May 97

June 97

HUD Program Office submits FY 1999 budget for 

Assistant Secretary's consideration. 

HUD receives June 1997 DOE utility forecast 

information and partial information on FY 1997 housing 

agency PFS requirements.

July 97

HUD's Office of Public and Indian Housing (PIH) submits 

Assistant Secretary's FY 1999 budget to Chief Financial

 Officer Departmental review. 

Hearings are held on PIH's FY 1999 budget proposals. Aug 97 Secretary completes decisions on PIH's FY 1999 budget

proposals.

Sep 97

Secretary transmits HUD's FY 1999 budget to the Office 

 of Management and Budget (OMB).

HUD receives September 1997 DOE utility forecasts.

Oct 97 Budget hearings with OMB on HUD's FY 1999 budget 

request.

Additional information and data for FY 1999 budget are 

furnished to OMB as required.

OMB passes back decisions on HUD's budget.

HUD receives actual FY 1997 housing agency PFS 

requirements. 

HUD develops FY 1998 inflation factor.

Nov 97

President submits FY 1999 budget to the Congress. Feb 98

April 98 The Congress conducts appropriations hearings on FY 

1999 budget. 

May 98-

Oct 98

FY 1999 appropriations bill enacted.

Nov 98

HUD's Program Office determines FY 1999 proration 

factor based on appropriation and most recent estimate 

 of requirements using

FY 1999 inflation factor,

September 1998 DOE utility forecasts, and

actual FY 1998 PFS subsidies for housing agencies.

Jan 99-

Sep 00

Housing agencies receive and expend FY 1999 PFS 

subsidy.

Positive or negative adjustments--based on actual 

FY1998 housing agency experience--made to housing 

agencies' FY 1998 PFS subsidy, primarily adjustments 

based on utility rates.

Jan 96-

June 97

Housing agencies receive and spend FY 1996 PFS 

subsidy. FY 1996 housing agency PFS requirements 

form the basis for HUD's FY 1999 budget estimate.

Page 18 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

Similar estimating errors are made in other agencies’ budget estimates

across the federal government; however, housing agencies are particularly

affected by errors that result in underfunding because they spend almost

all their subsidies on salaries for their staff during the year that they

receive the funds, rather than using the funds for capital expenses,

contracting, and other spending over several years. Shortages, therefore,

generally mean staff layoffs or other unplanned and immediate cost

reductions.

Because of the large number of housing agencies and the difficulty of

obtaining current data for each agency, the potential inaccuracy in HUD’s

budget estimate for PFS may be unavoidable. Instead of reducing the

inaccuracy, therefore, accommodating it through a central supplemental

or reserve fund might offer a funding cushion to absorb the effect of

inadequate subsidies. In addition, encouraging housing agencies to

maintain larger operating reserve funds at the local level could have a

similar effect. To justify a central reserve fund, HUD may need to collect

data to document the extent of any estimating inaccuracies.

HUD’s Method for

Reducing Agencies’

Subsidies to Match

Available Appropriations

May Be Inequitable

HUD’s procedure for reducing subsidy payments when the budget

appropriation does not fully fund its budget request for PFS operating

subsidies may be inequitable because it does not affect all housing

agencies equally. When the appropriation is not sufficient to fully fund

agencies’ operating subsidies, HUD reduces the amount of each agency’s

subsidy by the same percentage. Although this represents an evenhanded

reduction in the federal PFS subsidy amount across all housing agencies, it

produces unequal reductions in local agencies’ operating budgets because

some agencies depend to a higher degree than others on the PFS subsidy to

supplement their operating budgets. For example, in response to the fiscal

year 1996 appropriation for PFS being below HUD’s request by 11 percent,

HUD reduced each agency’s subsidy by 11 percent. At an agency where the

subsidy constituted 20 percent of the total revenues, that reduction in the

subsidy would result in a more than 2-percent decline in total operating

funds. At an agency where the subsidy constituted 60 percent of the total

revenues, however, the same reduction would result in a more than

6-percent decline in total operating funds.

As table 2 shows, HUD funding makes up between 20 and 60 percent of the

operating income of 2,176 housing agencies (over 70 percent of all

agencies). For 360 agencies (or 12 percent of all agencies), at least

60 percent of their operating income comes from HUD’s PFS subsidy.

Page 19 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

Table 2: Percentage of Operating

Income Provided by HUD Percentage of revenues

from HUD

Number of housing

agencies

Percentage of housing

agencies

0 86 2.8

Over 0 to 20 percent 459 14.9

Over 20 to 40 percent 1,020 33.1

Over 40 to 60 percent 1,156 37.5

Over 60 to 80 percent 330 10.7

Over 80 to 100 percent 30 1.0

Total 3,081 100.0

Source: GAO’s analysis of HUD’s Integrated Business System database, for housing agencies

with fiscal years ending in 1996.

In addition, the larger the housing agency, the greater the reliance on HUD

funding. For instance, while about 24 percent of the extra small and small

housing agencies received more than half of their operating income from

HUD, almost 41 percent of the medium-size agencies and nearly 68 percent

of large agencies received more than half of their operating income from

HUD.

13 HUD funding represented more than half of the operating income for

all 17 of the extra large agencies, which managed 31 percent of all public

housing units in the country.

Several Options and

Other Opportunities

Are Available for

Redesigning PFS

To make PFS a system that more effectively supplements housing agencies’

operating budgets, HUD has several design options, including basing

subsidies on fair market rents, comparing private and public housing costs

to determine a reasonable cost and set of services, and using the

five-factor cost model it developed in 1992. In redesigning PFS, HUD also

will have the opportunity to better address questions of whether PFS is

adequate to fund public housing and whether it provides an equitable

subsidy to specific housing agencies, given the varying circumstances that

exist across agencies. For example, HUD will be able to revisit its policy of

not allowing housing agencies to appeal the subsidy provided to them

through PFS. Under HUD’s Management 2020 Reform initiative, the

Department plans to reorganize its field staff by creating centralized

centers for payments and oversight that may be better able to administer

an appeals process than the current network of field offices. HUD also is

developing new data on the physical conditions in public housing that

should assist the Department in understanding the magnitude of the

current need for maintenance, which, in turn, should shed light on the

13For an explanation of these size categories, see appendix V.

Page 20 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

adequacy of the operating subsidy and the Comprehensive Grant Program

to meet that need. Finally, pending legislation in the Congress (H.R. 2 and

S. 462 have passed the House and Senate, respectively, and are awaiting

the results of a House-Senate conference expected later this year) would

give public housing agencies greater flexibility in whom they house and

greater certainty in their annual funding through block grants covering

capital and operating expenses. If the pending legislation is enacted, HUD

will be required to determine new formulas for providing the block grants

to housing agencies.

Revising PFS Involves

Considering Funding

Adequacy and Equity

In revising PFS, we believe that HUD will need to address the issues of both

adequate and equitable funding. Adequacy means determining whether

available funding—both federal subsidies and income from tenants’ rents

and other sources—is sufficient to fund a consistent set of housing

services across all housing agencies to enable them to provide decent,

safe, and sanitary housing to low-income people who cannot find

affordable housing in the private market. Equity is concerned with

distributing the subsidy fairly by accounting for operating circumstances

unique to individual housing agencies. To achieve funding adequacy, HUD

could define the standard housing services it expects of a housing agency

operating a housing stock with average characteristics in terms of its age,

size, design, and construction and serving a tenant population with

average demographic characteristics, such as family size and income.

Funding equity would, in principle, account for the number of units an

agency manages and the unique operating circumstances it faces. In this

way, PFS could adjust agencies’ standard expense levels to account for

differences in housing stock, tenant population, and income received from

rent and other sources.

This model of funding adequacy and equity is represented schematically in

figure 2. Funding adequacy is represented by a national standard expense

level and equity by the factors associated with cost, the number of housing

units, and the income of the agency.

Page 21 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

Figure 2: Model of Funding Adequacy

and Equity Funding 

adequacy

 factor Funding equity factors 

National 

standard 

expense

level

X housing agency

cost adjustment 

factor

X

number 

of housing

units

- income of

housing 

authority

= Required

subsidy 

amount

Defining funding adequacy and equity is relatively simple compared with

the task of implementing these concepts in designing a new PFS.

Developing statistical indicators for both the adequacy and equity factors

involves many choices for HUD. In the following discussion, we identify the

major possibilities and some of the pros and cons of each approach.

Several Approaches Could

Be Taken to Address

Funding Adequacy

The following discussion is based on our prior work and on work that we

have ongoing to review and develop options for other formula-based

funding programs similar to PFS. In addition to issuing reports on Medicaid,

the Older Americans Block Grant, the Law Enforcement Block Grant, and

the Highway Grant Formulas, we recently worked closely with

congressional staff to develop options for targeting HUD’s Community

Development Block Grant. Thus, we believe that to develop a national

standard for operating public housing, HUD could take several approaches,

including the following:

• HUD could base a national standard on the operating expenses necessary to

deliver an allowable and expected “basket of services” at a

“well-managed” housing authority and use data from a selected sample to

estimate the national average cost of providing that mix of services. Some

of these “should-cost” data could be based on the cost per unit of services

in the private market. HUD considered this option during its formal review

process in 1992 and decided against it partly because of difficulties in

reaching a consensus as to what standards to use and what type of

non-housing agency projects to select for [making cost] comparisons.14

Although this approach would provide a comprehensive cost basis for

determining funding adequacy, HUD officials believe that it would require a

relatively large commitment of time and resources to develop consensus

14Final Rule, The Federal Register, Vol. 57, No. 23 (Feb. 4, 1992), p. 4284.

Page 22 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

on the standard service basket and its costs. It would, however, preclude

the need to determine actual housing needs and their costs for each

individual housing agency.

• A second approach would be to base a standard on the cost of operating

private low-income housing by using HUD’s data on fair market rents across

the country.15 The advantage of this approach is that it would employ

existing data that reflect rents in the private rental market. However,

because the private rental market does not provide tenant social services

but does consider replacement costs, depreciation, and taxes, it accounts

for its costs much differently from those in public housing. This means

that some research would be needed to effectively compare private and

public housing environments and costs.

Regardless of the approach chosen to resolve the adequacy issue, in

redesigning PFS HUD would have the opportunity to revisit the way it

adjusts housing agencies’ allowable costs for the aging of the housing

stock and for inflation. For most agencies, HUD’s application of an

0.5-percent adjustment across the board for aging stock is appropriate.

The inflation adjustment, however, captures only the growth in wages and

not the cost of employee benefits such as health care coverage. But as we

have discussed earlier and as housing agency officials have told us, the

cost of employee benefits has grown more rapidly than wages in general,

and this added cost has not been fully reflected in inflation adjustments

for PFS.

Options Also Are Available

That Address Equity Issues

To improve equity by distributing subsidies according to the unique

circumstances of individual housing agencies, HUD has several options,

including the following:

• As an expansion of the option of costing out a standard basket of housing

services to address the adequacy issue—if HUD were to choose to adopt

such an option—HUD could collect the information relevant to address

equity issues and develop an appropriate cost adjustment factor for each

housing agency. This effort could be excessively time-consuming,

expensive, and administratively burdensome for both HUD and housing

agencies, especially where information on relevant factors affecting costs

is not readily available or of comparable quality. Limiting the types of data

collected and the types of agencies that must report would help to lessen

the burden, though it would also lessen the accuracy of funding decisions.

15A detailed evaluation of a fair market rent option is contained in Judith D. Feins, Revised Methods of

Providing Federal Funds for Public Housing Agencies (Washington, D.C.: Abt Associates, Inc.,

June 1994), ch. 7.

Page 23 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

• Another option for developing an adjustment factor based on local

circumstances would be to apply to every housing agency the five-factor

cost model from HUD’s 1992 review of allowable expense levels. Currently,

its use is triggered only when an agency gains or loses 5 percent or more

of it units or when it gains or loses 1,000 or more units. Use of this model

would, on average, yield allowable expense levels that more systematically

reflect circumstances affecting operating costs. The cost model also has

the advantage of being readily available and therefore would not require

additional time and effort to implement. The model is based, however, on

housing agencies’ expenditures that have been constrained by the total of

PFS subsidies and tenants’ rent since 1975, and, therefore, it may not

portray an accurate picture of operating needs. Also, the model may not

apply equally well to all agencies because it may not adequately reflect the

full range of housing agencies’ circumstances and may overestimate or

underestimate costs for agencies with unusual characteristics such as very

high security costs or other circumstances not reflected in the data.

• Another approach would be to determine whether additional cost

indicators besides those identified in the 1992 review might also be

effective in developing a cost-adjustment factor. For example, under the

recently implemented Indian Housing Block Grant Formula, a combination

of historical allowable expense levels and geographic differences in fair

market rents (FMR) is used to adjust a national standard expense level.

Such an approach would allow housing agencies with comparatively high

past expense levels to continue to have those levels reflected in the

formula, while also allowing agencies that are predicted to have costs that

exceed their past levels to have those costs reflected. Thus, under this

approach, both the FMR in a housing agency’s metropolitan area and HUD’s

cost model could be considered the basis for estimating an agency’s

relative allowable costs. The Indian Housing Block Grant program also has

developed a geographic cost index that reflects labor and materials costs

associated with developing new housing units. Such an index, or other

similar indexes, might also be suitably modified to reflect differences in

labor costs associated with low-income housing maintenance and

administrative services.

Opportunity Exists to

Minimize Inequities With

an Appeals Process and a

Gradual Transition to Any

New Subsidy System

In any reforms to PFS, HUD is likely to find it difficult to fully address all the

issues associated with developing valid indicators for all the factors that

affect both funding adequacy and equity. Consequently, a process to allow

housing agencies to appeal their formula-calculated or allowable expense

levels on the basis of their unique circumstances would enhance the equity

of the overall process. When multiple factors affect the cost of delivering

Page 24 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

housing services, a thorough analysis of detailed information from all

housing projects offers the possibility of accurately gauging the need for

financial assistance.16 Similar attention to detail may aid the transition to a

new system. The immediate budgetary impact of losses in funding, if any,

could be tempered by phasing in changes. If a housing agency has few

supplementary resources and minimal reserves, the impact of a loss of

funds could swiftly result in consequences such as deferred maintenance,

decreased services, and layoffs. As a result, changes to PFS would be more

effective if implemented gradually, either by establishing a limit on the

magnitude of any reductions in funding for individual housing agencies or

by guaranteeing that funding for housing agencies does not fall below the

amounts they received in the year prior to implementing the changes to

the system.

HUD considered an appeals mechanism in the past when it responded to

the mandate in the Housing Act of 1987 that offered HUD a choice between

establishing an appeals process or giving housing agencies a one-time

opportunity to raise their allowable expense levels. At that time, HUD chose

not to allow agencies to appeal their expense levels because it could not

treat agencies in accordance with an objective standard and such a

standard would not be as administratively feasible as using the existing

approach to establishing subsidies. However, an objective standard may

exist in the near future because several of HUD’s options for redesigning

PFS would involve establishing an objective standard of expected housing

services. Moreover, HUD’s Management 2020 Reform initiatives include

establishing a centralized payment center to administer PFS, and this, in

turn, could facilitate the administration of an appeals process.

Pending Legislation

Provides for Mixed Income

and Block Grants for

Public Housing Agencies

The housing reform legislation currently pending in the Congress contains

provisions that would encourage housing agencies to admit a higher

proportion of working families and require HUD to establish a block grant

formula to fund housing agencies’ operating costs. These provisions could

make some housing authorities’ funding less dependent on federal

subsidies and more predictable and thereby assist their financial planning.

For example, higher-income tenants would contribute more toward rent

and reduce housing agencies’ vulnerability to the Congress’s not fully

funding HUD’s budget request. HUD estimates that for fiscal year 1999,

public housing tenant income nationwide will rise by 4 percent.

16As part of the adoption of the Indian Housing Block Grant program, local Indian tribes or their

designees will conduct census surveys to more accurately determine the basis for calculating the

amount of their awards.

Page 25 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

In addition, as we have discussed earlier, because some housing agencies

perceive a shortfall in PFS funding, they supplement their operating

budgets with funds from other sources, including HUD’s Comprehensive

Grant Program for modernizing housing stock and grants that are

competitive but not available each year, such as grants from the Public

Housing Drug Elimination Program. Under a block grant, funding that now

is available competitively but not with certainty could be rolled into a

single grant and provided with certainty by way of an appropriate formula.

This would be likely to achieve administrative cost savings at both the

federal and local levels.

The approaches we have discussed for redesigning PFS’ basic funding

formula would continue to be applicable under a block grant. Moreover,

the approach taken in the Indian Housing Block Grant program may offer

other alternatives to consider that address a more sweeping approach to

funding operations, modernization, and the development of new housing

stock.

Conclusions If legislative reform for public housing is enacted this year, HUD will be

mandated to assess PFS and determine whether a more adequate and

equitable system can be developed. In doing so, HUD will have the

opportunity to address questions about both the overall adequacy of PFS to

fund public housing and the equity with which it funds individual housing

agencies. Since HUD implemented PFS in 1975, public housing agencies’

subsidies have been based for the most part on the actual costs those

agencies incurred in the base year 1975, with annual

adjustments–primarily for inflation. In many cases, these annually

adjusted actual costs do not fully reflect housing agencies’ current need

for resources to adequately house and serve low-income families because

these agencies’ true funding needs have never been determined. However,

these cost levels are part of HUD’s basis for developing its annual budget

estimate for PFS and for determining subsidies each year for the nearly

3,200 housing agencies.

Over the life of PFS, housing agencies have had only one opportunity to

receive an overall correction to their adjusted base year costs to account

for either unduly low initial cost levels or for gradual but costly changes in

operating circumstances, such as the increase in crime and maintenance

costs. Although we do not know how many housing agencies’ allowable

costs are currently insufficient or excessive to meet their needs, housing

conditions at the agencies that we visited and management actions at

Page 26 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

these agencies taken to supplement operating expenses indicate that PFS

may be underfunding these and other agencies. We recognize that a

process to allow housing agencies to appeal their allowable cost levels

would be administratively burdensome and probably would increase the

level of PFS funding. However, we believe that this subsidy cost increase

could be mitigated in the near term by the increase in tenant income

projected by HUD in fiscal year 1999 and in the long term by the gradual

influx of more working families to public housing as a result of the

assisted housing reform legislation now pending in the Congress.

Recommendation In response to pending legislation, HUD is likely to begin efforts in the near

future to revise the way it provides subsidies to public housing agencies.

As HUD considers its various options for redesigning the Performance

Funding System, we recommend that the Secretary of HUD also consider

establishing a process that (1) allows housing agencies to appeal their

expense levels when they believe that significant changes have occurred

over time in their operating circumstances that cause their subsidy to be

inappropriate and (2) HUD can use to review housing agencies’ expense

levels that it believes may be excessive.

Agency Comments We provided copies of a draft of this report to HUD for its review and

comment. HUD’s written comments and our responses appear in appendix

VI.

In its comments, HUD disagreed with several specific aspects of our report

and provided detailed comments in these areas. Although HUD did not

disagree explicitly with the thrust of our recommendations in the draft, the

Department believed that the recommendations should be stated more

clearly and could provide more specific direction for what we expected it

to do. We agree with HUD and have withdrawn one recommendation and

clarified the other one.

HUD stated that we confused the issues of the adequacy of the Performance

Funding System and the accuracy of HUD’s budget estimates of the

Performance Funding System. HUD stated that the Performance Funding

System is a formula and is not intended to reconcile funding with housing

agencies’ actual expenditures. We disagree that our analysis confused the

issues. We concluded that the adequacy of the Performance Funding

System and the accuracy of HUD’s budget estimates for PFS are necessarily

interrelated. Determining allowable expense levels is not only an integral

Page 27 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

part of allocating the PFS subsidy to housing agencies, but as we describe

in our report, expense levels also play a significant role in HUD’s process of

developing its annual budget estimate for the Performance Funding

System because the estimate is based on a large sample of these expense

levels.

HUD also said that the draft report relied heavily on four case studies and

that it did not contain sufficient data to draw conclusions about the overall

adequacy of the Performance Funding System’s funding. We agree and

therefore drew no specific conclusions about the Performance Funding

System’s adequacy. On the basis of our case studies, we conclude that

some housing agencies are underfunded, but we cannot project to the

universe of all housing agencies. Therefore, we did not draw any overall

conclusions about the adequacy of subsidies nationwide. Instead, our case

studies, a survey of 800 housing agencies, and discussions with trade

group and HUD officials enabled us to conclude that operating subsidies

may not be adequate for housing agencies that had low base year

expenditures or that had operating circumstances or costs that have

undergone significant changes since 1975. On this basis, therefore, we do

question the adequacy of the Performance Funding System and believe

that options exist for improving its methodology for allocating

congressional appropriations.

HUD stated that the draft report did not define what costs subsidies should

be covering. We assume HUD is referring to the costs of managing the

housing agency and providing housing and other services to the residents

that could be legitimately covered by an operating subsidy. The Congress

did not ask us, nor did we intend, to define what specific costs the

operating subsidies should be covering. Rather, we believe that HUD is

responsible for defining the scope of costs that the Performance Funding

System should cover, and one of the options that we suggest for

redesigning the system includes developing such a definition of covered

costs.

Finally, HUD stated that much of the discussion in the report about the

level of funding dealt with housing agencies’ funding needs that are more

appropriately met through capital and grant funding. We disagree and

believe that just the opposite condition exists. We report that some

housing agencies are using substantial amounts of funding from capital

and other grants to cover their operating expenses. This indicates that

these agencies are not receiving enough funding through the Performance

Funding System and rental income alone to cover these expenses.

Page 28 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

In its more detailed comments attached to its letter, HUD said that a

recommendation in our draft report for revising the way HUD estimates its

budget request was not clear because it did not state explicitly what

changes we believed HUD should adopt. We agree and believe that it is

premature for HUD to change its budget estimating methodology until the

Department revises the way it provides subsidies to public housing

agencies, as would be required under pending legislation. We also believe

that given the data and timing constraints under which HUD must prepare

its budget estimate, the estimate is reasonably accurate. We have,

therefore, withdrawn our recommendation that the Secretary consider

revising the way HUD makes its Performance Funding System budget

estimate, and we have made changes to our report accordingly.

Scope and

Methodology

To determine how PFS estimates the amount of operating subsidy housing

agencies’ require on an annual basis, we interviewed HUD officials and

evaluated the model HUD uses to make its annual estimates. Also, we

reviewed the literature describing HUD’s methodology for establishing

housing agencies’ allowable cost levels and reviewed how HUD uses these

cost levels and other data in an estimating model for the annual PFS budget

submission. To determine how well PFS distributes the subsidy funding, we

analyzed financial data for fiscal years ending 1992 through 1996 from

housing agencies’ Statements of Operating Receipts and Expenditures in

HUD’s Integrated Business System database. We also interviewed HUD

officials at headquarters and field offices and visited four housing agencies

in different regions of the country to develop case studies of how they

cope with insufficient operating funds. To develop options for HUD in

revising its PFS, we relied on the extensive experience we have had in

reviewing other formula-funded programs and in consulting with the

Congress on options for funding these programs. A more detailed

discussion of our objectives, scope, and methodology is in appendix VII.

We are sending copies of this report to the appropriate congressional

committees; the Secretary of Housing and Urban Development; and the

Director, Office of Management and Budget. Copies are available to other

interested parties upon request.

Page 29 GAO/RCED-98-174 Public Housing Subsidies
B-279576 

If you or your staff have any questions, please call me at (202) 512-7631.

Major contributors to this report are listed in appendix VIII.

Judy A. England-Joseph

Director, Housing and Community

 Development Issues

Page 30 GAO/RCED-98-174 Public Housing Subsidies
Page 31 GAO/RCED-98-174 Public Housing Subsidies
Contents

Letter 1

Appendix I 

Housing Authority of

the City of Los

Angeles

36

Background 36

Agency Officials Believe That the Operating Subsidy Is

Inadequate

37

Incentives and Disincentives Built Into PFS Have Little Impact on

Management Actions

43

Appendix II 

Housing Authority of

Baltimore City

44

Background 44

HABC Officials Believe That the Operating Subsidy Is Inadequate 46

Impact on Operations as a Result of Incentives or Disincentives

Built Into PFS

51

Incentives for Increasing Operating Efficiency 53

Appendix III 

Housing Authority of

Kansas City

55

Background 55

HUD Officials and the Receiver Agreed the Operating Subsidy Is

Insufficient

56

PFS Offers Few Incentives for Good Management Practices 60

Appendix IV 

Miami-Dade Housing

Agency

62

Background 62

Housing Agency Officials Believe That the Operating Subsidy Is

Not Adequate

63

Changing HUD Regulations Could Improve Operating Efficiency 68

Appendix V 

Public Housing

Agency Operating

Receipts and

Expenditures

71

Background 71

Sources of Housing Agencies’ Operating Receipts 72

Housing Agencies’ Operating Expenditures 77

Nonroutine Maintenance 81

Capital Expenditures 82

Operating Reserves 83

Page 32 GAO/RCED-98-174 Public Housing Subsidies
Contents

Appendix VI 

Comments From the

Department of

Housing and Urban

Development and Our

Evaluation

88

GAO Comments 93

Appendix VII 

Objectives, Scope,

and Methodology

98

Objectives 98

Scope and Methodology 98

Appendix VIII 

Major Contributors to

This Report

101

Tables Table 1: Summary of Information About the Adequacy of PFS

Obtained at Four Housing Agencies

11

Table 2: Percentage of Operating Income Provided by HUD 20

Table I.1: HUD Grants Awarded to HACLA, Fiscal Years Ending

1993-97

41

Table II.1: Significant Federal Grants HABC Received, Fiscal

Years Ending 1993-97

45

Table III.1: Total HUD Grants Awarded to HAKC, Fiscal Years

Ending 1993-97

59

Table V.1: Number of Housing Agencies With HUD Contributions

Within Selected Percentage Ranges of Receipts, Fiscal Year

Ending 1996

74

Table V.2: Average Nonroutine Maintenance Expenses Per

Unit-Month by Housing Agency Size Range, Fiscal Years Ending

1992-96

82

Table V.3: Average Capital Expenditures Per Unit-Month by

Housing Agency Size Range, Fiscal Years Ending 1992-96

82

Figures Figure 1: Time Line of PFS Budget Estimation Process for Fiscal

Year 1999

18

Figure 2: Model of Funding Adequacy and Equity 22

Page 33 GAO/RCED-98-174 Public Housing Subsidies
Contents

Figure I.1: HACLA Operating Expenditures Per Unit-Month,

Fiscal Years Ending 1993-97

42

Figure II.1: HABC Operating Expenditures Per Unit-Month, Fiscal

Years Ending 1993-97

49

Figure III.1: HAKC Operating Expenditures Per Unit-Month,

Fiscal Years Ending 1993-97

60

Figure IV.1: MDHA Operating Expenditures Per Unit-Month,

Fiscal Years Ending 1993-97

68

Figure V.1: Average HUD Contributions Per Unit-Month by

Housing Agency Size Grouping, Fiscal Years Ending 1992-96

73

Figure V.2: Average Dwelling Rental Receipts Per Unit-Month by

Housing Agency Size Range, Fiscal Years Ending 1992-96

76

Figure V.3: Average Routine Expenses Per Unit-Month by

Housing Agency Size Range, Fiscal Years Ending 1992-96

78

Figure V.4: Average Operating Reserves Per Unit-Month by

Housing Agency Size Range, Fiscal Years Ending 1992-96

84

Figure V.5: Operating Reserves as a Percentage of Maximum

Allowable Operating Reserves by Housing Agency Size Range,

Fiscal Years Ending 1992-96

86

Abbreviations

FMR fair market rent

HABC Housing Authority of Baltimore City

HACLA Housing Authority of the City of Los Angeles

HAKC Housing Authority of Kansas City

HUD Department of Housing and Community Development

IBS Integrated Business System

MDHA Miami-Dade Housing Agency

PFS Performance Funding System

PHMAP Public Housing Management Assessment Program

VA Department of Veterans Affairs

Page 34 GAO/RCED-98-174 Public Housing Subsidies
Page 35 GAO/RCED-98-174 Public Housing Subsidies
Appendix I 

Housing Authority of the City of Los Angeles

The Housing Authority of the City of Los Angeles’ (HACLA) total

conventional public housing operating budget for 1997 was over

$45 million (55 percent of which HUD subsidized). HACLA owns and manages

over 8,000 conventional public housing units, almost half of which are over

50 years old. Despite the large number of units that are old, 99.5 percent

are occupied. However, the increasing costs of maintaining the aging

housing stock and the high crime rate associated with the developments

have reduced the agency’s ability to provide services and have forced

HACLA officials to defer maintenance and reduce their maintenance staff.

Agency officials believe that the operating subsidy provided by the

Department of Housing and Urban Development (HUD) is not sufficient to

operate the housing agency effectively. To supplement their operating

budget, HACLA officials have used—in accordance with HUD’s

regulations—a part of their grant for capital improvements to defray

operating expenses.

Background HACLA owns and maintains 8,367 public housing units in 63 developments

dispersed throughout the city of Los Angeles. The developments range in

size from 2 to over 1,000 units and include many “scattered site” locations;

50 percent of HACLA’s units were built before the mid-1950s. The housing

agency provides homes to over 32,000 residents, over 1,000 of whom are

elderly. According to HUD officials, HACLA has an occupancy rate of

approximately 98 percent. This high occupancy rate has helped the agency

maintain a management assessment score in the high 90s over the last 3

years—making it a high performer in HUD’s Public Housing Management

Assessment Program. Approximately 338 people work in HACLA’s

conventional public housing program. Almost all of the maintenance

positions are funded out of the conventional public housing funds.

Between fiscal years 1994 and 1997, HACLA reduced its number of

employees from 421 to 338, or by almost 20 percent.

HACLA’s direct operating expenses for administration and maintenance of

the public housing developments are estimated at $354 per unit-month;

however, HACLA officials told us that total operating expenses for the full

range of activities pertaining to public housing are even higher. A 1995

study of actual operating costs reflected per unit -month expenses for all

services and activities (i.e., protective services, social services, and central

office administration plus direct operating expenses) of $508. In that same

year, the operating subsidy ($231) and rental income ($187) brought total

revenue to $419 per unit-month. Other sources of federal funds include

grants or portions of grants—from such programs as the Public Housing

Page 36 GAO/RCED-98-174 Public Housing Subsidies
Appendix I 

Housing Authority of the City of Los Angeles

Drug Elimination Program and the Comprehensive Grant Program for

modernizing the housing stock—make up the shortfall.

The top five factors influencing operating expenses at HACLA, in order of

importance, are the age of the developments, design features,1

 crime,

joblessness, and the percentage of working families in residence. HACLA

officials ranked the age of the developments as the factor having the most

impact on operating costs. They also said that overhead levels that are not

sufficient to support field operations and the cost of employee benefit

packages influence operating expenses.

Agency Officials

Believe That the

Operating Subsidy Is

Inadequate

Officials in HUD’s Los Angeles Field Office believe that HACLA makes

maximum use of the operating subsidy HUD provides and diligently takes

advantage of the other funding sources available to it. Nevertheless, HACLA

officials told us that the operating subsidy is inadequate. They attributed

the inadequacy to HUD’s Performance Funding System (PFS) being based on

1975 expenses. The inflation adjustments over the last 23 years have not

been sufficient to account for increasing maintenance costs, they said.

These costs include those to repair the aging housing stock and

infrastructure, such as broken water distribution lines or leaking gas

distribution lines. According to HACLA officials, the allowable expense

levels under PFS also do not adequately cover expenses for administration

or for additional activities that did not exist when HUD set HACLA’s expense

levels in 1975. To supplement its operating subsidy, the agency has

reduced staff, deferred maintenance, and drawn on funding from other

federal grants.

HACLA’s allowable costs under PFS were based on maintaining buildings

that were then 30 years old and had systems that were approaching the

end of their useful lives and needed modernizing in 1975, HACLA officials

said. However, even in 1975, the operating subsidy was not high enough to

cover the modernization needs. Those same buildings are now 50 years

old, and many years of inadequate PFS funding have caused an intractable

amount of deferred routine maintenance that must now be funded utilizing

modernization funds from HUD’s Comprehensive Grant Program that

should be used instead for major repairs.

Aging housing stock requires increased routine maintenance and is more

prone to require extra maintenance, HACLA officials said. Adding to the

expense are the replacement costs of fixtures that become irreparable

1

Design features include common areas and building types (i.e., low-rise or high-rise).

Page 37 GAO/RCED-98-174 Public Housing Subsidies
Appendix I 

Housing Authority of the City of Los Angeles

when materials in the fixtures exceed their useful life or fixtures simply

become obsolete and go out of production. For example, many units in

older developments have wooden window sashes that have dry-rotted or

metal windows that require repair parts made from “scratch” because the

manufacturer is no longer in business or does not make the part. As

housing stock ages and infrastructure—such as gas lines and water

distribution lines—ages, unplanned maintenance expenses increase.

Agency officials said that at several of HACLA’ s 50-year-old developments,

deteriorating gas and water lines may cause potentially dangerous living

circumstances. They estimate that $1 million will be needed to replace the

lines. We observed the conditions the HACLA officials told us about at two

developments—Aliso Village and Dana Strand.

Aliso Village, built in 1942, is a low-rise development comprising 33

buildings and 685 units on 34 acres in East Los Angeles. It is a family

development and home to 2,524 tenants. (The development’s housing

managers estimate that an additional 1,000 tenants live unofficially in the

development.) Aliso Village is in an area that has experienced over 60

years of gang activity. The managers said that crime in the area is a

moderately serious problem, with gang-related vandalism and graffiti the

crimes most frequently committed in the development. Still, the

development’s occupancy rate is 99 percent.

The architectural design and the age of the development are the

uncontrollable factors that have the greatest impact on operating costs at

Aliso Village. The design feature with the most impact on operating costs

is the underground electrical and plumbing lines that have corroded over

time. In addition, wooden window frames have rotted over time, and

cracks in walls from the settling of the foundation cause water leaks that

lead to leaking and rusty pipes in the walls. The age of the fixtures is also a

maintenance problem—the original free-standing heaters in the units

cannot be repaired at a reasonable cost because the manufacturer no

longer makes the heaters and cannot support their maintenance.

The Dana Strand development, built in 1942 near the Los Angeles harbor

area, provides housing for families and the elderly. It is a low-rise

development in fair condition on a 21-acre site and consists of 384 units

with an occupancy level of approximately 99 percent. The area has a

moderate crime rate, but the development itself is subject to gang-related

crimes, such as graffiti on buildings. HACLA has installed bullet-resistant

lights at Dana Strand at a cost of $800,000 to increase the level of security.2

2

Each light cost $1,000, including installation.

Page 38 GAO/RCED-98-174 Public Housing Subsidies
Appendix I 

Housing Authority of the City of Los Angeles

Before the bullet-resistant lights were installed, criminals would shoot out

lights to reduce visibility and give cover for criminal activity at the

development.

Highest on the list of factors contributing to maintenance expenditures at

Dana Strand is the age of the development. Dana Strand officials cite

deteriorating plumbing, rotting window sashes, and old underground

electrical lines as problems at the development. For example, the

plumbing in the walls of the units is corroding and, in one recent instance,

leaking water from corroded plumbing accelerated the corrosion of gas

pipes, resulting in an explosion in one unit.3

 Several tenants suffered

minor injuries in the explosion that blew off a portion of the building’s

roof and blew the walls out of two units.

Dana Strand officials listed three operating expenses that have increased:

waste management, routine maintenance, and grounds keeping. Officials

attributed the development’s increasing expenses for routine maintenance

to its age. Environmental regulations have also contributed to increasing

maintenance costs. Because of the new city requirements for waste

management, for example, HACLA had to install a clarifying pit at each of its

developments to separate caustic agents—used for cleaning stoves and

appliances—from waste water before the water is discharged into the

city’s sewer system. About once or twice per year, the pits have to be

pumped out by an authorized waste handler at a cost of $2,500 per visit.

Over the last 5 years, HACLA has reduced Dana Strand’s maintenance staff

from 10 to 7 people—a loss of a painter, a gardener, and janitor. Without

the painter, the staff had difficulty meeting the maintenance standard that

calls for each unit’s interior to be painted every 5 years.

Using HUD Grants Helps

HACLA Cope With Funding

Shortfalls

HACLA officials said that the insufficient operating subsidy and the

Congress’s periodic underfunding of the PFS appropriation are responsible

for the agency’s inability to attract and retain qualified staff, the increased

time for making vacated units available to new tenants, the deterioration

3

Dana Strand and two other developments, Ramona and Rancho San Pedro, were built during the same

period and have similar construction (i.e., raised foundation). Two problems occur with this type of

construction in the Los Angeles area: Humidity condenses under the buildings and, over time, the

metal pipes deteriorate. Pipes also deteriorate at the points where they come out of the ground and

where the vertical risers enter a building’s foundation. After the explosion at Dana Strand, inspections

showed that similar deterioration was occurring at the two other developments. The black malleable

iron pipe used at the developments is standard and still used; however, since those developments were

built, it has become the practice to wrap underground gas pipes and, where the pipes enter the

foundation on raised-foundation buildings, they are fitted into protective sleeves (to eliminate the

electrolysis that leads to the deterioration of the pipes). HACLA is replacing the deteriorated pipes but

needs funds from the modernization program to address the problem.

Page 39 GAO/RCED-98-174 Public Housing Subsidies
Appendix I 

Housing Authority of the City of Los Angeles

of the housing stock, the difficulty with funding employee benefits, and the

difficulties with providing adequate security. To address the funding

shortfalls, the HACLA officials said they had reduced administrative and

maintenance staff, deferred maintenance, and transferred funds from the

Comprehensive Grant and Section 8 programs to cover operating costs.

HUD’s director of public housing in the Los Angeles Field Office told us that

HACLA is very aggressive in seeking funding and taking advantage of

available funding sources. For example, HACLA has a large Section 8

assisted housing program and receives an administrative fee of over

$25 million for administering it. In 1997, HACLA allocated $2 million of its

Section 8 administrative fee to its public housing program. HACLA also used

the largest part of its funding from HUD’s drug elimination program to pay

for its security force in fiscal year 1996 and, as allowed under

appropriation law provisions, used 10 percent of the funds it received for

modernization to supplement its public housing program’s operating fund.

Also, HACLA used funds from its Comprehensive Grant Program grants to

pay for management improvements in its public housing program, such as

the acquisition of its management information system. According to

HACLA’s director of planning, when HUD established PFS 23 years ago, HACLA

did not have an automated management information system. Thus, the

agency’s allowable costs under PFS do not include the costs of developing

and maintaining an information system. No process exists under PFS to

change the allowable expense levels to cover new technology. Hence,

HACLA used the Comprehensive Grant Program’s Management

Improvement Program to fund the initial development of its system.

However, using a portion of the Comprehensive Grant Program allocation

that way resulted in delaying much-needed physical improvements to the

housing stock; moreover, the ongoing operating costs of the automated

system are not included in the PFS calculation.

As table I.1 shows, aside from the spike created by the HOPE VI grant in

1996, total HUD grants to HACLA peaked in 1995 (not adjusted for inflation).4

One reason for the recent decline is the downward trend for

modernization funding. The modernization awards declined during the

period that the Congress did not fully fund HUD’s budget request for PFS.

Hence, any movement of grant funds to the operating fund effectively

resulted in a net reduction of modernization funds.

4

HOPE VI is an urban revitalization program for severely distressed housing.

Page 40 GAO/RCED-98-174 Public Housing Subsidies
Appendix I 

Housing Authority of the City of Los Angeles

Table I.1: HUD Grants Awarded to

HACLA, Fiscal Years Ending 1993-97 Dollars in millions

1993 1994 1995 1996 1997

Modernization

program $29.0 $30.2 $28.5 $23.3 $22.9

HOPE VI 0.0 0.0 0.0 50.0 0.0

Resident

services

programs 1.5 0.0 2.3 0.0 1.0

Drug

elimination

program 1.3 2.0 2.2 2.2 2.2

Total $31.9 $32.2 $33.0 $75.5 $26.0

Source: HACLA grant data.

Increasing Expenses Waste disposal, employee benefits, and security are expenditures that

HACLA officials said increased. Litigation has raised HACLA’s insurance

premiums, self-insurance payments, and legal expenses. Despite a

one-time adjustment to the allowable expense level to offset higher

insurance costs,5 HACLA had to take other steps to fund its higher insurance

costs. It engaged in partnerships with community groups to provide

resident services, reduced its administrative and maintenance staffs, and

reduced the amount of maintenance being done.

HACLA officials told us that the cost of employee benefits has grown more

rapidly than wages in general and that the PFS inflation adjustments have

not fully reflected the additional cost. They singled out two areas in which

the agency’s employee benefit expenses increased: health care plans and

retirement and disability. The officials told us that health care premiums

have skyrocketed since 1975, and HACLA cannot afford to cover a full family

or even a single dependent under some health care plans. However, the

agency attempts to provide a competitive health care benefit package to

retain qualified professional staff.

HACLA officials said that if the operating subsidy is not increased in the

near future, it is likely that the housing agency will engage in more

partnerships with community groups, reduce its administrative staff even

more, and continue to defer maintenance.

5

In response to a congressional mandate to permanently compensate housing agencies for increased

insurance costs, HUD adjusted the allowable expense level by $8.45 in 1989.

Page 41 GAO/RCED-98-174 Public Housing Subsidies
Appendix I 

Housing Authority of the City of Los Angeles

Figure I.1 shows that for the most part, the proportions of the operating

subsidy that HACLA used for most categories has remained flat except for

the general expenses category, which has been erratic, and the ordinary

maintenance category, which, since 1995, has trended downward. HACLA

officials told us that maintenance expenditures charged to the

conventional public housing budget might have declined, but that the

overall maintenance expenditure is much greater. HACLA has shifted a

sizeable portion of its routine maintenance budget to the nonroutine

category, but funded it by using modernization funds.

Figure I.1: HACLA Operating Expenditures Per Unit-Month, Fiscal Years Ending 1993-97

General expense

Tenant 

services

Ordinary maintenance

Administration

Protective 

services

1993 1994 1995 1996 1997

$0

$20

$40

$60

$80

$100

$120

$140

$160

Fiscal year

PUM expense

Note: Adjusted to constant 1996 dollars.

Source: HACLA’s Statement of Operating Receipts and Expenditures for fiscal years ending 1993

through 1997.

Page 42 GAO/RCED-98-174 Public Housing Subsidies
Appendix I 

Housing Authority of the City of Los Angeles

Incentives and

Disincentives Built

Into PFS Have Little

Impact on

Management Actions

The disincentives built into PFS outnumber the incentives for HACLA to

operate efficiently. HACLA’s management has had to produce the same or

greater number of outputs (decent, safe, sanitary housing units) with a

lesser amount of inputs (dollars). However, some PFS rules discourage

efficiency because many revenue-generating or cost-saving actions result

in the housing agency losing part of its subsidy. In some respects, the

housing agency is better off doing nothing and receiving a full subsidy

allocation. For example, present rules penalize housing agencies for good

financial management in at least two areas: First, under the rules

governing interest income, the Target Investment Income formula

equation establishes a framework where interest earned cannot wholly be

retained. Second, if a housing agency receives discounts from vendors in

return for paying its bills within 30 days, the discounts must be recorded

as income for the housing agency, and the operating subsidy is reduced by

that amount. Therefore, a housing agency can only partially retain the

interest on its investments and cannot benefit from efficient purchasing

procedures.

HACLA officials believe that HUD recognized some of the disincentives to

efficient management in its notice PIH 96-24 (HA), “Performance Funding

System Policy Revision to Encourage Public and Indian Housing

Authorities to Facilitate Resident Employment and Undertake

Entrepreneurial Initiatives.” They told us that the notice temporarily

helped correct some of the problems inherent in the PFS logic, which does

not recognize that efficiencies cannot be maximized by legislative mandate

alone. Policies are needed that do not penalize a housing agency for

operating in its own self-interest when to do so is good business, they said.

HACLA officials noted that PIH 96-24 expires in 1998.

Page 43 GAO/RCED-98-174 Public Housing Subsidies
Appendix II 

Housing Authority of Baltimore City

The Housing Authority of Baltimore City (HABC) in Maryland is among the

nation’s largest housing agencies. With an annual operating budget of over

$75 million (70 percent of which is subsidized by HUD), it manages over

16,000 units of public housing. Of this total, about 14,000, or 84 percent,

are occupied. HABC officials attribute the relatively low occupancy rate

(the industry average is 92 percent) to the poor physical condition of much

of the housing stock—some is uninhabitable and almost half is 35 years

old or older—and to the high crime rate near the developments that

results in costly vandalism, property destruction, and a lack of demand for

the units. Limitations on HABC’s funding have prevented it from addressing

either problem. To the extent that the agency has attempted to address the

crime problem, it has covered the costs by forgoing routine maintenance.

HABC officials believe that PFS underfunds the agency, and their

management of the housing agency reflects this belief. They have reduced

maintenance by one-third over 5 years, used funding from federal grants

from the capital modernization program to support operations, frozen

administrative expenses, and deferred ordinary maintenance to the point

that it has, in some cases, become emergency maintenance. Officials

believe that these actions jeopardize the long-term viability of their

housing stock.

The director of public housing at HUD’s Maryland State Office had mixed

opinions about the sufficiency of HABC’s operating subsidy. He said that

HABC’s cost base was sufficient when PFS was implemented and that the

current allowable expense level seems to be adequate. But he also said

that expense levels need to be revised to better protect the investment

HABC is making in its newly rehabilitated HOPE VI developments. He added

that although other HUD-assisted properties in the area receive less

revenue to operate than HABC does, HABC has specific circumstances—such

as high-cost family high-rises; large, older developments; very low-income

tenants; and higher crime rates—that raise its operating costs above that

of privately owned properties.

Background HABC’s 16,558 housing units are located in 42 conventional developments

and 18 “scattered site” developments that are mostly vacant houses. These

developments are home to 30,414 people. Of the 42 conventional

developments, the agency rates 24 as being in fair to very good condition

and 10 as being in poor to uninhabitable condition; 8 are unrated. HABC

officials said that the poor condition of some of its developments and

crime account for its high vacancy rate—currently at 16 percent, twice the

national average. Some housing units are vacant because HABC does not

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Housing Authority of Baltimore City

have the funds to modernize the units. HABC officials would like to sell

some of the 3,000 scattered site units, where many of the vacancies exist,

but it cannot afford the repairs needed to make the dwellings salable. The

director of public housing in HUD’s Maryland State Office said that HABC

could do a better job of managing and, if necessary, of disposing of these

properties. A number of other vacancies are in developments that HABC

plans to demolish. The large number of vacancies reduces HABC’s Public

Housing Management Assessment Program score, which is currently in the

range of about 70. But only a couple of years ago, HABC’s score was in the

low 60s. Falling below 60 would have earned HABC a “troubled agency”

designation.

HABC’s operating budget for its fiscal year ending June 30, 1997, was

approximately $75.6 million, of which HUD contributed $52.6 million, or

about 70 percent; $28.3 million came from rental income. For that fiscal

year, HUD also awarded significant grants to HABC to fund other types of

activities. (See table II.1.)

Table II.1: Significant Federal Grants

HABC Received, Fiscal Years Ending

1993-97

Dollars in millions

1993 1994 1995 1996 1997

Modernization

program $41.8 $39.7 $38.4 $30.7 $30.1

HOPE VI 0.0 49.7 22.7 20.0 31.3

Resident

services

programs

Resident

initiatives 0.0 0.0 0.0 0.0 1.1

Family

support

services 0.0 0.0 0.0 0.0 4.5a

Drug

elimination

program 0.0 4.4 4.5 0.0 4.3

Total $41.8 $93.8 $65.6 $50.7 $71.3

aThe sources for this grant were the modernization program, $1.2 million; earned income,

$1.1 million; congregate housing, $120,000; state congregate housing, $500,000; drug

elimination grant, $1.2 million; other private funds, $380,000.

Source: HABC’s Office of the Executive Director.

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Housing Authority of Baltimore City

HABC Officials

Believe That the

Operating Subsidy Is

Inadequate

Officials of HABC’s top management, housing operations, and comptroller’s

office told us that the agency is not receiving a sufficient subsidy under

PFS. They said that increasing costs not anticipated or recognized by PFS,

coupled with aging, poorly designed, and vacant housing stock, have

created significant shortfalls in the funds provided to operate the housing

agency effectively. Of the actions that HABC has taken to address this

shortfall, the most striking is its substantial reduction in ordinary

maintenance over the last few years. The maintenance cost category has

declined from $32 million in fiscal year 1993 to $22 million in fiscal year

1997. As a result of the cost-cutting, fewer staff are available to prepare

vacated housing units for new tenants. Because more units are being

vacated than can be prepared for re-leasing, unnecessary vacancies, lower

rental income, and a greater dependency on subsidies result.

Several New Costs and the

Increasing Need for

Maintenance Create a

Budget Dilemma for HABC

HABC has several new or increasing expense categories that PFS does not

recognize adequately. These categories include the costs of security,

litigation, and employee health benefits. At the time that HABC’s expense

levels were set by PFS, the agency was not incurring significant security

costs. HABC established a security force in 1987 and converted it to a sworn

police force in 1991. It now has 88 police officers and a total security staff

of 100. HABC’s deputy executive director said that HUD’s Public Housing

Drug Elimination Program helps to defray the costs of this force (funding

30 to 40 of the officer positions at any one time) but that the costs of the

force generally fall under other budgets, such as the Management

Improvement Program portion of the Comprehensive Grant Program,

which normally funds capital expenses for modernizing the housing stock

and improving its management. By using these funds for security, HABC has

less for modernization and risks continued deterioration and vacancies. In

years when no drug elimination funding is available, HABC must find other

funds to cover the security costs. The payment in lieu of taxes that HABC

makes to Baltimore City is generally in the range of $300,000 to $400,000,

which does not fund many City of Baltimore policemen to patrol and deter

crime in HABC’s housing developments.

Another cost that HABC’s allowable expense level does not adequately

cover is that of health insurance benefits for employees. Although the

agency’s operating budget now covers the costs of the benefits, these costs

increased more since 1975 than the inflation rate HUD allows under PFS. To

pay the higher benefit costs today, HABC must forgo some other

expenditures such as routine maintenance. In addition, HABC officials told

us that litigation costs have doubled from 1993 to 1997, primarily because

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Housing Authority of Baltimore City

of lawsuits filed to reduce the concentration of poor and minority

households in public housing.

HABC also faces rising costs from its aging housing stock and the combined

effects of the poor housing design, conditions, and crime. We observed

examples of these conditions at two of HABC’s developments—O’Donnell

Heights and Claremont Homes.

O’Donnell Heights is one of HABC’s largest developments, comprising 900

densely packed units with little curb appeal or open space but a great deal

of access to surrounding city streets. Most heads of households are young,

single women. Built in the early 1940s, O’Donnell Heights had significant

modernization work in the early 1980s but none in the last 5 years, and

none is planned in the next 5 years. Housing managers at O’Donnell said

that the age of the housing contributes to the cost of maintaining it

because of its general deterioration. The director of public housing at

HUD’s Maryland State Office said that HABC is not allocating sufficient

resources to O’Donnell Heights, but he could not determine whether the

housing agency had enough maintenance funding in its budget to

adequately address the development’s problems.

O’Donnell’s housing managers said illegal drug activity is difficult to deter

because of the size, openness, and demographics of the development.

Because of the high rate of crime—worse than in the surrounding

neighborhood—residents often request transfers, relocate, or move

completely out of O’Donnell. To control crime at O’Donnell Heights, the

development uses special lighting and two policemen, one from the City of

Baltimore and one from HABC’s police force. However, O’Donnell has no

contract security, fencing, security cameras, or controlled entry to the

development—all of which can deter crime in housing developments. The

development’s wide-open layout contributes to the prevalence of the

gang-related drug activity that intimidates the residents, according to

O’Donnell housing managers. They also said that the seriousness of the

crime has grown significantly during the last decade.

O’Donnell Heights’ design also contributes to the increasing maintenance

costs. For example, hardwood floors, sheet-rock walls, and separate hot

water heaters and furnaces for each unit increase costs. Each unit has two

doors, front and back, and two screen doors, the maintenance of which

increases costs; and the aluminum siding has been hard to maintain

because of the wear and tear from the children living in the development.

The many gutters and downspouts on O’Donnell’s units are also difficult to

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Housing Authority of Baltimore City

maintain, and officials described instances of water in the ground-floor

units, flooding and drainage problems, and foundation leaks.

At Claremont Homes, the most significant cost factors are the

development’s architectural design, lead-based paint, and its 46-year-old

buildings. Claremont’s low-rise units are very costly because they have the

original steam-heated radiators that, in combination with the old plaster

walls that are damp because of poor ventilation, create an almost constant

need to repaint and replaster. The paint in all of the units is lead-based and

needs frequent attention to keep it from being hazardous. The cost of

addressing the problems caused by the steam heating system, damp walls,

and lead-based paint has gradually grown over time so that it is now a

significant portion of the development’s total operating costs.

Because of Claremont’s generally stable, older population of tenants, its

strong resident council, and its effective layout, crime—except for some

minor vandalism—is not a serious problem and does not contribute

significantly to the operating costs. Nevertheless, Claremont’s per

unit-month expenses (before utilities) are about $383, 24 percent more

than the average for HABC. Claremont’s housing manager said that routine

maintenance, grounds keeping, and vacancy renovations were three costs

that had increased over the years. Of these, the highest cost was for

renovating vacated units to abate the lead-base paint hazard and replace

almost all of the original plumbing fixtures and cabinetry. HABC officials

are concerned about the potential for additional costs related to lead-paint

litigation if they cannot keep up with the lead abatement needed as the

paint continues to chip and peel.

HABC Has Taken Many

Actions to Cover

Necessary Expenses

HABC’s housing operations officials told us that crime and poor physical

conditions are the two most chronic problems at the housing agency.

Nevertheless, two of the actions that HABC officials have taken to address

perceived shortfalls in funding for operations include deferring

maintenance and reducing maintenance staff. HABC has reduced its

maintenance expenditures from $32 million to $22 million over the past 5

years, from fiscal years 1993 to 1997, a reduction of nearly one-third.

At the same time, as figure II.1 shows, the cost of protective services has

increased dramatically—nearly doubling from $16 per unit-month in fiscal

year 1993 to $30 per unit-month in fiscal year 1997, totaling $5.9 million for

fiscal year 1997. Because HABC’s operating subsidy increases each year

only to offset inflation, the agency has been unable to address the

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Housing Authority of Baltimore City

mounting need to protect its residents while at the same time maintaining

a constant expenditure for maintenance. HABC’s comptroller projects that

the agency’s security costs will be about $9 million next year–$6 million in

the security line item plus about 34 percent in fringe benefits–or about

50 percent more than the cost in 1997. He told us that the need for

protective services is more immediate and is, therefore, a higher priority

than routine maintenance.

Figure II.1: HABC Operating Expenditures Per Unit-Month, Fiscal Years Ending 1993-97

Tenant services

General expense

Ordinary maintenance

Administration

Protective services

1993 1994 1995 1996 1997

$0

$50

$100

$150

$200

Fiscal year

PUM expense

Note: Adjusted to constant 1996 dollars.

Source: HABC’s Statement of Operating Receipts and Expenditures for fiscal years ending in

1993 through 1997.

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Housing Authority of Baltimore City

Other actions that HABC has taken to address shortfalls in funding for

operations include reducing administrative staff, an action that officials

said was the most effective in allowing HABC to operate within funding

limitations; transferring funds from other programs, such as the

modernization program, the second most effective action; deferring

maintenance; reducing operating reserves in some years; and reducing

maintenance staff, which officials said was the least effective.

In addition, HABC’s HOPE VI director said that she thought that funding for

the agency’s six HOPE VI projects contributed to defraying the agency’s

operating costs in several ways. She cited the following as evidence of this

effect:

• Because HOPE VI pays for site preparation for the redevelopment, it is

likely to cover costs that the operating budget would ordinarily have had

to cover, including abatement of lead-based paint hazards created by

demolition and other costs not directly related to the redevelopment and

revitalization of the immediate area.

• Expending HOPE VI funds often relieves the pressure on funding from

other grant programs, such as the Comprehensive Grant Program for

modernizing public housing stock, and various social service grants.

Because a HOPE VI project—and its associated HUD grants, matching

community funding, and other human and community service funding—is

expected to address most of the redevelopment needs of a qualified

housing development, HABC’s other grant and subsidy funding can be more

focused on the remaining needs of the agency.

• The greater cost efficiencies inherent in a newly rehabilitated housing

development—such as more efficient heating systems, more effectively

insulated construction, and fewer routine maintenance work

orders—lower the development’s operating costs, at least in the near term,

and therefore tend to relieve the agency’s operating budget.

In the future, to cope with reduced operating funds or funding shortfalls,

HABC officials told us that the agency most likely would exercise

management options such as those listed below, ranked by the relative

ease with which they can be achieved:

• asking the City of Baltimore for a waiver of the payment in lieu of taxes,

• reducing maintenance staff,

• reducing operating reserves,

• reducing administrative staff,1

1

HABC’s administrative expenses have been frozen at about $13.50 per unit-month for the past 5 years.

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Housing Authority of Baltimore City

• reducing or deferring maintenance, and

• entering into partnerships with community or private sector groups.

Insufficient Operating

Funds Result in Vacancies

and the Potential for Loss

of Housing Stock

One of the clear effects at HABC of not having sufficient operating funds is

the necessity of laying off maintenance staff, which, in turn, leads to an

increase in the time required to “turn around” vacant housing units after

they have been vacated and return them to a rentable condition for new

tenants. At HABC, approximately 150 units (out of nearly 14,000 under

lease) are vacated each month (slightly more than a 1-percent turnover per

month). However, with limited maintenance staff, only about 120 to 130

can be reconditioned for leasing to new tenants each month. A high

vacancy rate means that rental income is below expectations, thus

creating more of a dependency on the operating subsidy provided by HUD.

As the agency has performed less and less preventive or ordinary

maintenance over the years to cope with inadequate operating funds, more

items have eventually become “extraordinary maintenance” or emergency

items. In some cases, these items are aggregated into a request to HABC’s

modernization committee to be done under the capital grant program. But

the officials said that the reality is that much maintenance is not done

because modernization funding also is not sufficient to meet HABC’s needs.

For example, HABC’s comptroller said that he requested modernization

funds for extraordinary maintenance at the O’Donnell Heights

development, but so many other demands for this funding exist that

O’Donnell’s needs are not yet a priority. HABC officials said that in general,

the potential result is that many of HABC’s units will eventually become

uninhabitable and need to be demolished. They said that HABC’s HOPE VI

program awards will help deal with some of these problems, but that it

would be more cost-effective if HABC had the money to do adequate

maintenance before excessive deterioration became evident. They also

recognized that eventually the HOPE VI money will not be available.

Impact on Operations

as a Result of

Incentives or

Disincentives Built

Into PFS

Both the director of public housing at HUD’s Maryland State Office and

HABC officials told us of ways that PFS currently affects operations and

ways that it could better influence management decisions. For example,

HUD’s director of public housing in Maryland said that combining funds for

capital improvement and operating costs would give housing agencies a

more predictable stream of income. And HABC’s deputy director said that

HUD should establish some incentive for housing agencies to earn other

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Housing Authority of Baltimore City

income. Currently, earning other income reduces an agency’s subsidy on a

dollar-for-dollar basis.

HUD Official Favors

Incentives to Perform

Needed Maintenance

HUD’s director of public housing in the Maryland State Office said that he

would favor an incentive built into PFS that would encourage a housing

agency to invest in maintaining its stock. He said that the reaction of HABC

and many other housing agencies to budget cuts is to reduce their

expenditures on maintenance. He would like to see a single formula that

would provide both operating and capital funds so that a housing agency

can predict its total income and make more informed decisions about how

best to meet both operating and capital needs. Eventually, if the housing

agencies do not adequately fund maintenance, the quality of their housing

stock declines. He also said that several disincentives are inherent in the

current formula. For example, an automatic annual inflation adjustment

creates a disincentive for efficiency. In addition, a housing agency has

little incentive to maximize its rental income over a several-year period

because if income declines, the subsidy will rise the next year to

compensate. On the other hand, if rental income increases unexpectedly

during the current year, the housing agency can keep the rental windfall

for that year. Finally, according to PFS rules, a housing agency’s fiscal audit

costs are not limited, and no incentive exists to seek the most

cost-effective contract for such audits.

The director said he favored setting new allowable expense levels for

developments that have been revitalized and rehabilitated with HOPE VI

grants. He believes that it is important to fund maintenance at a high

enough level to ensure that the investment in the property is protected. In

addition, he believed that performance indicators needed to be better

linked. For example, he said that establishing a high operating reserve

account makes the financial performance indicator look good, but creating

this high reserve at the expense of performing needed maintenance would

be wrong and should not be rewarded. Combining the two indicators for

physical and financial conditions would offer a means of better

performance measurement, in his opinion.

HABC Officials Said PFS

Has Some Impact on

Management Actions

In years when PFS is funded at 100 percent of HUD’s forecast of housing

agencies’ needs, additions that a housing agency makes to the “other

income” line item cause a dollar-for-dollar reduction in the agency’s PFS

subsidy, according to HABC’s deputy director. This provides no incentive

for housing agencies to earn income from such activities as renting space

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Housing Authority of Baltimore City

on building roofs for radio or other broadcasting antennas or to operate

services for tenants such as laundromats or day care. He also said that in

1993, HABC incurred significant operating expenses to reduce vacancies. To

cover this expense, however, HABC needed to use funds from its operating

reserve. Using this source of funding reduced the reserve to a level that

resulted in a lower management assessment score under HUD’s Public

Housing Management Assessment Program. Now, to increase the

assessment score, HABC is building up its operating reserve levels at the

expense of performing some needed maintenance, according to the deputy

director.

Although such incentives and disincentives exist, HABC’s deputy director

told us that PFS is not a needs-based system that can provide a subsidy to a

particular housing agency on the basis of what it needs to operate because

HUD’s policy has been to use a generic system to address the needs of all

housing agencies. He said that HABC makes most of its management

decisions based not on PFS, but rather on the viability of the projects and

on the long-term survival of the agency. Furthermore, small adjustments to

PFS are not likely to affect HABC’s operating behavior or to “incentivize”

better management, he said.

Incentives for

Increasing Operating

Efficiency

HABC officials said that among the actions allowable or potentially

allowable under PFS that they believe are most useful as incentives for

increasing operational efficiency, are the ability to

• expeditiously evict difficult-to-manage tenants;

• lease to easy-to-house tenants or to working tenants;

• perform preventive maintenance;

• form partnerships with the local community, nonprofits, and the city to

obtain funding for resident services or to obtain the services themselves;

• implement the income disregard options and ceiling rents; and

• implement minimum rents.

HABC’s comptroller told us that as housing agencies begin to improve their

stock through demolition and rehabilitation, they tend to lose their most

costly-to-house tenants—those who do not work consistently, violate

housing agency rules, or do not pay rent on time—and keep their best or

most affluent tenants. He said that this could explain the trends of

increasing rental income and employment of public housing tenants

nationally. Therefore, it would make sense for HUD to allow agencies to

keep at least half of the rent increases that result from higher-income

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Housing Authority of Baltimore City

residents for a given year, similar to the incentive that HUD allows for

utility cost savings. As for utility cost savings, he suggested that HUD allow

a housing agency to keep the savings beyond the current year if the agency

was instrumental in negotiating the savings with the provider.

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Housing Authority of Kansas City

Since being placed on HUD’s list of troubled housing agencies, the Housing

Authority of Kansas City (HAKC), Missouri, has been operating under

court-ordered receivership for about 3 years. The agency provides a full

range of housing services for over 1,000 households. By using portions of

other federal grants, particularly its modernization grant, to pay for some

of its operating costs, HAKC is supplementing its operating budget and

providing day-to-day maintenance of its housing stock. The availability of

other funding sources has allowed HAKC to fund most operating areas

while still increasing its operating reserve—which grew from $1.3 million

at the end of fiscal year 1994 to $2.8 million at the end of fiscal year

1997—to a level that the receiver believes is more prudent to meet

working capital and emergency repair needs of a capital nature. However,

HAKC’s housing stock is almost all more than 35 years old—most of it

located within a 5-mile radius in a high crime area. The costs of repairing

an aging stock and coping with changing circumstances, such as the

expense of deterring worsening crime, have grown significantly over the

23 years since HUD set HAKC’s allowable level of operating costs in 1975. In

recent years, HAKC has attempted to address the problem of its relatively

fixed operating subsidy from HUD by reducing spending in other areas,

such as the salaries paid for the administration of the housing agency,

although HAKC officials believe that this has threatened their ability to

retain competent staff and management.

Background In receivership for 3 years, HAKC is plagued with deteriorated housing

stock and the high vacancies that accompany such conditions. It is a large

housing agency that manages approximately 1,824 housing units; only

1,053 households occupy its conventional public housing. Its vacancy rate

under receivership has been between 3 and 5 percent, however.1

 Of those

households, 680 (or 65 percent) are in family developments, with the rest

living in developments for the elderly. Single heads of households

constitute almost 90 percent of HAKC’s households. Two of HAKC’s

developments are high-rises, both in good condition and having low

vacancy rates but experiencing high operating expenses. One of the

high-rises primarily houses elderly tenants and has high operating costs

for security and support services for this population that were not

contemplated when PFS was established. The other high-rise, which houses

frail elderly and disabled households, has even higher operating expenses.

Half of HAKC’s mid-rise units are uninhabitable, and just 13 percent of the

livable half are in better-than-fair condition. Partly because of the poor

1

HAKC’s adjusted vacancy rate excludes units covered by programs under the Comprehensive

Improvement Assistance Program, the Comprehensive Grant Program, the Major Rehabilitation of

Obsolete Properties program, and the HOPE VI program.

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Housing Authority of Kansas City

housing conditions and high vacancy rate, HAKC has had a low Public

Housing Management Assessment Program (PHMAP) score for many years.

Its PHMAP score is currently 85, which classifies it a standard performer.2

HAKC’s total expenditures for fiscal year 1997 were $5.3 million, of which

the operating subsidy funded $5.1 million or 97 percent. In addition, HAKC

used over $3 million, or an additional amount equal to slightly more than

60 percent of its operating subsidy, from various grants and the

administrative fees from its Section 8 tenant-based assisted housing

program to supplement its operating funds. The grants included its

Comprehensive Grant Program and Comprehensive Improvement

Assistance Program grants for modernization, its Public Housing Drug

Elimination Grant, its Public Housing Apprenticeship Grant, and its

Vacancy Reduction grant. HAKC used these grants to pay for salaries,

receivership administration, and software upgrades. HAKC is implementing

three HOPE VI projects to substantially replace existing developments,

which should improve the quality of HAKC’s housing stock. HAKC officials

expect the new developments to be ready for occupancy over a 3-year

period ending in 2000.

HUD Officials and the

Receiver Agreed the

Operating Subsidy Is

Insufficient

Officials at HUD’s Kansas City Field Office and HAKC’s receiver stated that

the operating subsidy is inadequate for HAKC to reasonably meet its

expenses. The receiver said that the funding provided by PFS does not

adequately supplement rental and other income because of the flawed

composition of the formula that HUD uses to determine the amount of

operating subsidy. He said that routine maintenance—HAKC’s highest

expense category—and extraordinary maintenance are not adequately

recognized under the PFS formula because factors affecting maintenance,

such as building age and vandalism, have changed drastically since PFS’s

implementation in 1975. Because of the inadequate operating subsidy,

HAKC continues to face a wide range of operating problems, he said. The

problems cited included the inability to attract and maintain qualified staff,

the inability to fund employee benefits, the increased time required to

prepare vacated units for new tenants, the deterioration of housing stock,

and the inability to provide adequate security. To address funding

shortfalls, HAKC has reduced administrative and maintenance staff, reduced

employee training, and used funds from other programs when allowed

2

The PHMAP score required for a housing agency to be removed from receivership varies from

receiver to receiver. Essentially, HAKC is in a management and compliance receivership, and thus,

regardless of the PHMAP score it receives, it will not be removed until the judge in the case is satisfied

that housing conditions have improved. The receiver intends to initiate discussions in 1999 on the

future of HAKC’s governance with the plaintiffs to the receivership action and the interested parties in

the case.

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Housing Authority of Kansas City

under HUD’s regulations. Under the receivership, HAKC has been successful

in obtaining special grant funds that have enabled the agency to make

management improvements. The receiver is concerned that many of the

grant funds are essentially nonrecurring, special purpose capital and social

services funding. HAKC cannot rely on these funds to cover ongoing

operations.

Crime, Aging Stock, and

Other Factors Create

Budget Difficulties

Having developments located near high-crime areas increases the cost of

preparing units for new households after previous tenants have departed.

In HAKC’s developments, the primary crime problem is vandalism by drug

users who break into unoccupied units, damaging screens, windows, and

doors. After breaking in, drug users deface walls and floors or set fires

and, once units have been broken into, children enter and cause further

damage. Damage to a unit already prepared for new tenants means

additional work for maintenance crews at a cost that could exceed the

initial cost of preparing the unit. HAKC’s housing stock is also expensive to

maintain because of its age and because of the quality of public housing

design and construction in the era in which it was built. We observed some

of the effects of these conditions at HAKC’s Chouteau Courts and West Bluff

developments.

Chouteau Courts, built in 1958, is a 140-unit mid-rise development that is

home to 124 families. It is located in a high-crime area. The site manager

estimated that more than half of Chouteau Courts’ units were in good to

excellent condition. Within the last 5 years, the heating and air

conditioning systems were modernized, and plans call for additional

modernization within the next 5 years. The site manager told us that the

selling of narcotics in and around the development is the criminal offense

that is the most detrimental to the housing stock.

The site manager described the continuing maintenance required by the

way the development was built and said that utility costs at Chouteau

Courts could be lower if the units were better insulated. Building

specifications at the time the development was constructed did not require

exterior walls to be insulated. Because the walls have a cement block

core, insulating them now would be expensive. When it rains heavily,

drainage problems cause sewer backups into the basement of one of the

buildings because the basement is lower than the sewer line. Many units

have doors that are difficult or impossible to open because the doorjambs

are metal and have rusted to the point that the doors do not hang straight.

HAKC is directing a substantial amount of modernization funds for repairs

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Housing Authority of Kansas City

at this development through its comprehensive 5-year plan for

Comprehensive Grant Program funds. The per unit-month expense for

Chouteau Courts is $266, which contrasts with $189 for West Bluff, a

newer development located in an area with a lower crime rate.

West Bluff, built in 1964, consists of 100 townhome units and is home to 89

families. The site manager told us that all of the units were in excellent

condition. Modernization work has been done on the roofs, windows,

plumbing, and air conditioning systems within the last 5 years. Within in

the next 5 years, HAKC plans to modernize the exterior water and sewer

lines. HAKC officials rate crime at West Bluff as a moderately serious

problem.

HAKC officials said the following crimes and design features have an impact

on the operating costs at West Bluff:

• Drug users breaking into vacant units cause 25 percent of the damage

done to units at West Bluff.

• Prior to 1997, gang-related vandalism and damage to units from gang

incidents also had an impact on the high operating costs at this

development.

• Prior modernization efforts were partial and did not address all physical

deficiencies. The lack of insulation in exterior walls has resulted in

isolated incidents of frozen pipes.

• The pitched roof design, with valleys where the townhouses connect at a

common wall between units, results in leaks in the units because, over

time, the sheet metal that serves as the base for the valleys has separated

between many units.

In addition, HAKC officials told us that their costs for waste disposal and

security had grown significantly and that HUD’s allowable expense levels

for these costs are no longer adequate. Of the two cost categories, security

is the greater; but together, these increasing costs are having a moderate

to severe impact on HAKC’s operating expenditures.

Other Income Sources and

Cost Reductions Are Used

to Cover Expenses

HAKC’s receiver told us that because the operating subsidy from HUD is

insufficient, the housing agency has had to supplement its operating

budget with funds from other sources. These sources include its grants

from the Comprehensive Grant Program and Comprehensive Improvement

Assistance Program established to modernize developments, the HOPE VI

program established to rehabilitate distressed properties, the Public

Page 58 GAO/RCED-98-174 Public Housing Subsidies
Appendix III 

Housing Authority of Kansas City

Housing Drug Elimination Program, remaining funds from grants received

several years ago under the Major Rehabilitation of Obsolete Properties

program,3

 and a portion of the administrative fee reserve received from

HUD in return for operating a large Section 8 tenant-based assisted housing

program. In addition, HAKC has formed partnerships with local government

and community groups, reduced administrative and maintenance staff, and

deferred maintenance. Of these measures, the staff reductions were the

most effective in freeing up operating funds to pay for increasing operating

expenses. To address budget shortfalls in the future, HAKC officials said

they would continue the partnerships and would use operating reserves

rather than continue to reduce staff and maintenance. Table III.1 shows

the grants HAKC received from HUD in fiscal years 1993 through 1997.

Table III.1: Total HUD Grants Awarded

to HAKC, Fiscal Years Ending 1993-97 Dollars in millions

1993 1994 1995 1996 1997

Modernization

program $11.2 $3.4 $10.3 $2.9 $2.9

HOPE VI 47.6 0.0 0.0 0.0 13.0

Resident

services

programs 0.0 1.0 0.4 0.0 0.1

Drug

elimination

program 0.0 0.0 0.0 1.5 0.5

Total $58.8 $4.4 $10.7 $4.4 $16.5

Source: HAKC grant documents.

Insufficient Operating

Funds Result in the

Inability to Attract

Qualified Staff and

Perform Necessary

Maintenance

Although HAKC’s pay scales are comparable to those of other government

entities in the region, the pay scales are significantly lower than the those

in private industry. HAKC’s financial analyst, for example, left the agency

for a higher paying position in the private sector. Also, HAKC’s pay scale for

its maintenance staff is low when compared to the private sector; its

entry-level wage for a maintenance worker is about $6.80 per hour, while

the wage for a comparable worker in the private sector is between $8.00

and $9.00 per hour.

3

The Major Rehabilitation of Obsolete Properties program is not a currently funded program, but

grants made under it in earlier years are still being spent by housing agencies.

Page 59 GAO/RCED-98-174 Public Housing Subsidies
Appendix III 

Housing Authority of Kansas City

Figure III.1 shows that over the last 5 fiscal years, except for ordinary

maintenance and operations, HAKC’s expenses have remained relatively flat

when adjusted for inflation.

Figure III.1: HAKC Operating Expenditures Per Unit-Month, Fiscal Years Ending 1993-97

Tenant 

services

General 

expense

Ordinary maintenance

Administration

Protective 

services

1993 1994 1995 1996 1997

$0

$20

$40

$60

$80

$100

$120

Fiscal year

PUM expense

Note: Adjusted to constant 1996 dollars.

Source: HAKC’s Statement of Operating Receipts and Expenditures for fiscal years ending in

1993 through 1997.

PFS Offers Few

Incentives for Good

Management

Practices

HAKC’s receiver believes that PFS provides few incentives for good

management. He offered the following observations on PFS:

• The artificial cost structure that PFS imposes on the housing agency places

it in the position of constantly seeking funds because, under PFS, HUD has

not defined the actual group of services the housing agency should provide

Page 60 GAO/RCED-98-174 Public Housing Subsidies
Appendix III 

Housing Authority of Kansas City

and PFS does not address changing needs. Thus, the only incentive the

housing agency has is to always look for ways to supplement an operating

subsidy that is inadequate for the needs and services it provides.

• No incentive exists for a housing agency to maximize rental income, as

would be the case in the private sector, because increased rental income

results in the subsidy being reduced by an equal amount.

• PFS does not correctly address the expenses of newer developments that

replace older developments. Units in newer developments are not brought

back on line at an amount that is incrementally equal to the developments

that they replace. When developments are modernized, they are

sometimes reconfigured to decrease density. Less dense developments

nurture more positive behaviors among tenants. Although the new

development might have fewer units, the reduction in units is not

commensurate with the loss in subsidy. When density is decreased, fixed

costs are not necessarily reduced as a result.

Page 61 GAO/RCED-98-174 Public Housing Subsidies
Appendix IV 

Miami-Dade Housing Agency

The Miami-Dade Housing Agency (MDHA) in Florida is one of the largest

housing agencies in the country. In fiscal year 1997, it had an operating

budget for public housing of over $38 million and a total agency budget of

over $216 million. MDHA manages over 10,000 units of public housing and

administers over 15,000 Section 8 certificates and vouchers. Over 4,400 of

MDHA’s public housing units are at least 30 years old, with some units over

60 years old. MDHA officials said that much of their housing stock is in dire

need of continual maintenance and major modernization and

rehabilitation. They attributed a significant portion of that need to their

allowable expense level under PFS not having kept pace with the agency’s

increasing costs for such activities as security and employee benefits. As a

result, MDHA has not been able to do all needed routine and preventive

maintenance and has reduced maintenance staff. Moreover, because of the

deferred maintenance, MDHA officials believe that the problems with the

physical condition of their housing stock will worsen as the properties

continue to age. To supplement its operating expenses, MDHA has relied on

other sources of funding, including the Comprehensive Grant and the

Public Housing Drug Elimination programs.

Background MDHA maintains 10,100 conventional public housing units in 87

developments and serves over 33,000 individuals. MDHA also has 596

Section 8 project-based units and 506 units that are mixed income

properties.1 MDHA contracts with four private companies to manage

approximately 1,772 of its conventional public housing units. MDHA’s

conventional public housing stock consists primarily of low-rise

developments, with the high-rise developments occupied by elderly

residents. A substantial number of the public housing units are over 30

years old, with some as old as 60. MDHA’s most recent occupancy rate was

93 percent. Its Public Housing Management Assessment Program (PHMAP)

score was 91 percent for fiscal year 1996 and 95.5 percent for fiscal year

1997, making it a high performer.

MDHA’s operating budget for public housing totaled over $38 million in

fiscal year 1997, with over $25 million, or 66 percent, coming from the PFS

operating subsidy and nearly $12 million from rental income. Other major

sources of income in fiscal year 1997 that were used to supplement MDHA’s

operating budget for public housing included nearly $13 million in

1

MDHA acquired three properties from HUD and the Resolution Trust Corporation under their

affordable housing disposition programs. At these properties, a percentage of the units is reserved for

low and very low-income residents, with the remaining units housing residents paying market rate

rents. No federal assistance is provided to operate these properties, and their units for low-income

residents are cross-subsidized by the market rate units.

Page 62 GAO/RCED-98-174 Public Housing Subsidies
Appendix IV 

Miami-Dade Housing Agency

Comprehensive Grant Program modernization funds and $2.7 million in

Public Housing Drug Elimination Program funds. MDHA relies entirely on

rents, grants, and subsidies from HUD to operate its public housing. The

agency employs a staff of 708, 360 of whom are assigned as public housing

support personnel. The employees are part of the Dade County system of

government and also belong to the state’s retirement system; 97 percent of

them belong to employee unions that represent supervisory employees,

general employees, and professional employees.

Most MDHA residents (79 percent) are unemployed, and 61 percent of the

residents receive welfare. Heads of households are mostly female

(93 percent), with 40 percent of the households headed by residents who

are 20 to 30 years old.

Housing Agency

Officials Believe That

the Operating Subsidy

Is Not Adequate

Officials from MDHA’s top management, housing operations, and finance

and administration office told us that PFS does not provide an adequate

subsidy. They said that increasing existing costs, combined with new costs

not anticipated or recognized by PFS and deteriorating and poorly designed

units, have created significant shortfalls in the funds needed to operate the

housing agency effectively. The most significant impact of the insufficient

funding has been on the physical condition of the housing stock because

of the practice of deferring preventive maintenance to conserve funding.

MDHA performs what preventive maintenance is possible under its budget,

but each year it defers a substantial amount. Inadequate funding has also

required MDHA to reduce staff, services to residents, and operating

reserves. To cope with inadequate subsidies, MDHA officials told us that

they supplement their operating budget with funding from other federal

sources such as modernization and drug elimination grants, portions of

which can be used to cover operating costs.

The director of public housing at HUD’s Florida State Office stated that the

PFS operating subsidy is inadequate for MDHA. She said that since PFS was

established, MDHA has been required to provide additional services to its

tenants, such as the Family Self-Sufficiency Program, without being given

the funding to administer these programs. Moreover, MDHA, like other

housing agencies, has not received its full subsidy in recent years when the

Congress did not appropriate 100 percent of the funds HUD requested.

Page 63 GAO/RCED-98-174 Public Housing Subsidies
Appendix IV 

Miami-Dade Housing Agency

Several New and Existing

Costs and the Increasing

Need for Maintenance

Create Budget Dilemma for

MDHA

MDHA has experienced several new or increasing expense categories that

PFS does not adequately recognize. These include the costs of employee

benefits, insurance, and security. Employee benefits are a major cost

category at MDHA because housing agency employees are county

employees, and their pay is based on county wage rates. MDHA employees

also belong to the Florida State Retirement System. MDHA officials said that

their employees’ benefits package is equal to 42 percent of salaries, which

is significantly higher than the 28-percent average at housing agencies

nationwide.

Property-related insurance rates for MDHA have increased dramatically in

recent years. From fiscal year 1993 through fiscal year 1997, MDHA’s

property insurance costs have risen by 166 percent. The primary reason

for this increase is the damage done by Hurricane Andrew in 1992. MDHA

officials also said that insurers are reluctant to insure MDHA properties,

partly because of their deteriorating condition.

In 1975, when MDHA’s allowable expense levels were set by under PFS, the

housing agency was not incurring significant security costs. Since then,

however, MDHA has had to hire Dade County police officers to provide

additional protection to its developments outside municipalities and to

hire security guards for its housing developments for the elderly. MDHA

initially used part of a subsidy it received from the county government to

cover these costs.2

 When the county discontinued the subsidy in fiscal year

1996, the housing agency used its grants from HUD’s drug elimination

program to pay for security services at its developments for the elderly

instead of at developments in other parts of the county. MDHA also used the

county funds to provide some resident services and to help pay for

employee benefits. In fiscal year 1995, for example, MDHA supplemented

each development’s budget by $6 per unit-month to help pay for employee

benefits. When the county discontinued funding in fiscal year 1996,

developments had to absorb the reduction into their budgets.

Ever-increasing city code requirements have also increased MDHA’s costs

for maintenance. For example, the city code requires MDHA to have

removable security screens in its units’ windows. Residents continually

open and close the security screens, which causes the screens to need

more maintenance because of the additional wear and tear.

2

From fiscal year 1986 through fiscal year 1995, Dade County subsidized MDHA. In the first year,

MDHA received $10 million from the county, but in subsequent years, the subsidy declined until, in the

final year, MDHA received $3.3 million. Of the $3.3 million it received in fiscal year 1995, MDHA used

$1.2 million to pay for security guards at housing developments for the elderly.

Page 64 GAO/RCED-98-174 Public Housing Subsidies
Appendix IV 

Miami-Dade Housing Agency

MDHA’s operating costs are rising because its housing stock is aging and

poor housing design, conditions, and crime combine to drive costs up. We

observed examples of these conditions at two of MDHA’s

developments—Liberty Square and Scott Homes.

The Liberty Square Housing Development was constructed in 1937, with

additional buildings completed in the late 1940s. It is one of MDHA’s largest

developments, comprising 753 units in one- and two-story buildings in a

predominantly residential neighborhood. Liberty Square is a family

development that is 93-percent occupied. Approximately 95 percent of the

households are headed by single females. Liberty Square employs 17

full-time staff: 7 administrative staff and 10 maintenance staff. Security

features at Liberty Square include city police patrols, fencing along the

perimeter of the property, lighting, and security screens in the residents’

windows.

Liberty Square officials attributed the development’s increased operating

costs to crime, vandalism, the location and age of the development, its

architectural design, and the type of residents. The officials said that crime

was a very serious problem, with drug-related crimes occurring most

frequently. Replacing the lights that are shot out by drug dealers and

practically anything of value that vandals can steal from vacant units

raises the development’s costs. Appliances are not stolen because the

maintenance staff removes them immediately after a resident vacates a

unit, but the time spent moving the appliances in and out of the units is

costly. Painters spend 25 percent of their time covering graffiti.

Housing management officials at Liberty Square said that the property is

so old that the concrete walls are disintegrating, plaster is falling off the

walls, pipes are rusting and leaking, and bathtubs are deteriorating.

Because appliances have gone past their useful life, the staff receives

approximately 20 calls a day from tenants asking to have refrigerators

repaired. Design features of the buildings contribute to higher costs

because the buildings are not insulated and the front doors have mail slots

that criminals use to break into units and through which vandals insert

water hoses and flood the units.

The Scott Homes Housing Development was constructed in 1954 and

consists of 754 units in two-story buildings. It is managed by a private

management company. Primarily a family development, Scott Homes has a

97-percent occupancy rate, and employs 19 full-time staff. The

development is in a neighborhood with a mixture of residences and

Page 65 GAO/RCED-98-174 Public Housing Subsidies
Appendix IV 

Miami-Dade Housing Agency

commercial businesses. Over the past 5 years, approximately 290 units

have had some modernization work done, and within the next 5 years,

MDHA’s plans are to completely rebuild Scott Homes if the development

receives a HOPE VI grant; however, MDHA’s application for such a grant has

failed twice to receive HUD approval. Overall, officials at Scott Homes said

approximately 40 percent of the units are in fair to poor condition. Eight

units are in such bad condition that MDHA does not plan to rent or repair

them because it would be too costly to bring the units up to standard.

Security features at Scott Homes include county police patrols, fencing

along the outside perimeter of the property, lighting, and security screens

in the residents’ windows. Scott Homes provides the space, utilities, and

furnishings for a police substation at the development.

Despite the security measures and the police substation on site, Scott

Homes officials attributed some of the development’s increasing costs to

crime and vandalism. They attributed other increasing operating costs to

the age of the development, its architectural design, and the residents.

Crime is a serious problem at Scott Homes with drug-related crimes being

the most serious. Because of the crime, the development and its

surrounding community have a bad reputation that makes it difficult for

the development to generate rental income, especially by attracting

higher-income residents. Vandalism is also costly. Vandals rip out copper

pipes from vacant units, steal security windows and street signs, and shoot

out lights. The units’ age contributes to the cost of their maintenance

because door frames are deteriorating, water pipes break and leak into

units, and screen doors and appliances have outlived their useful life and

are constantly in need of repair. Housing management officials attributed

other increasing costs to the development’s architectural design: Porches

and sidewalks have no underlying support, and the building pilings are

sinking or leaning, becoming safety hazards to residents. Finally, officials

at Scott Homes told us that residents contribute to higher operating costs

because families with children cause a great deal of wear and tear on units

and also use more utilities.

Scott Homes officials also pointed to increased costs for such activities as

grounds keeping and waste management, noting that since fiscal year

1995, grounds-keeping costs at Scott Homes have increased nearly

300 percent because staff have to trim tree limbs and roots to keep them

from damaging the buildings and sidewalks. In addition, ground erosion

has become a major problem at Scott Homes, and Miami’s strict dumping

requirements have caused waste management costs to nearly double since

fiscal year 1995.

Page 66 GAO/RCED-98-174 Public Housing Subsidies
Appendix IV 

Miami-Dade Housing Agency

Officials at Scott Homes said the increased costs and inadequate operating

subsidy have resulted in seven maintenance staff and one administrative

person being laid off, primarily because of a reduction in the operating

subsidy of $400,000 in 1996. Because of the reduction in the maintenance

staff, the deferral of maintenance has increased further. The buildings are

not being painted nearly as often as they should be, for example.

MDHA Has Attempted to

Address the Funding

Shortfall Through Several

Actions

To address the shortfall in its funding for operations, MDHA has reduced

administrative and maintenance staff, used reserves for current expenses,

and sought other sources of funding to supplement its operating budget,

according to officials. The immediate effect of reducing the maintenance

staff by 10 percent in 1996 was to delay preventive maintenance. For

example, although MDHA previously replaced roofs before leaks occurred,

the current practice is to defer replacement until after leaks are noticed.

This results in damaged walls, floors, and electrical systems and other

problems. MDHA officials also said that they have reduced the level of the

operating reserve to maintain operations. For example, in fiscal year 1993,

MDHA maintained 57 percent of the maximum amount that HUD allows in its

operating reserve; in 1997, MDHA reduced that level to 39 percent.

The other funding sources that MDHA uses include the Comprehensive

Grant Program for modernization projects and the Public Housing Drug

Elimination Program grant. An MDHA official estimated that the agency will

use approximately $1.6 million, or 13 percent of $12.5 million in

Comprehensive Grant Program funds for fiscal year 1998, to help pay the

salaries of agency staff involved in resident services, accounting, housing

operations, and the reinspection of units to ensure they meet HUD’s

Housing Quality Standards. MDHA also uses the drug elimination grants to

cover its security costs. This funding strategy is risky, however, because a

housing agency cannot always count on receiving these competitive

grants. Because MDHA did not receive a drug elimination grant in fiscal year

1998, and if an appeal does not result in an award of a grant, MDHA might be

forced to discontinue its security services.

Figure IV.1 shows that MDHA’s ordinary maintenance expenditures initially

rose after 1993, but by fiscal year 1997, they had decreased 10 percent

below the fiscal year 1993 level. It also shows that administrative

expenditures increased 48 percent and general expenses increased 11

percent, while tenant services expenditures decreased 75 percent and

protective services expenses decreased 89 percent. Protective services as

a component of operating costs decreased because MDHA has begun using

Page 67 GAO/RCED-98-174 Public Housing Subsidies
Appendix IV 

Miami-Dade Housing Agency

drug elimination funding to pay for this activity. In fiscal year 1996, MDHA

used $1.1 million of its drug elimination funding and $312,000 of its

operating funds to pay for security. In contrast, in fiscal year 1993, MDHA

used $1.2 million of its operating funds for security.

Figure IV.1: MDHA Operating Expenditures Per Unit-Month, Fiscal Years Ending 1993-97

Tenant services

General expense

Ordinary maintenance

Administration

Protective services

1993 1994 1995 1996 1997

$0

$20

$40

$60

$80

$100

$120

$140

Fiscal year

PUM expense

Note: Adjusted to constant 1996 dollars.

Source: MDHA’s Statement of Operating Receipts and Expenditures for fiscal years ending in

1993 through 1997.

Changing HUD

Regulations Could

Improve Operating

Efficiency

Although MDHA officials provided little information about incentives that

they believed exist under PFS or that should be added, they did have some

opinions about other regulatory incentives or changes that could be made

that would permit more efficient operations:

Page 68 GAO/RCED-98-174 Public Housing Subsidies
Appendix IV 

Miami-Dade Housing Agency

• Housing agencies should be allowed to evict residents under state eviction

guidelines rather than federal eviction requirements. Operating under state

guidelines would greatly reduce the time needed to remove residents.

Judges are familiar with state eviction guidelines because they continually

review them for private landlords seeking to evict residents. Judges are

much less knowledgeable about federal eviction guidelines and, therefore,

take much longer and are more reluctant to evict public housing residents.

Accelerating the eviction process would allow MDHA to more quickly house

residents on its waiting list.

• MDHA needs a great deal more flexibility in the rents that are set for

residents. The current HUD allowance to set minimum rents needs to be

made permanent. MDHA also needs more discretion in the amount of the

minimum rent and in the selection criteria for residents. More flexibility in

rent-setting and resident selection would allow MDHA to increase its rental

income and become less dependent on the PFS subsidy.

• HUD needs to change the regulations on project-based waiting lists.

Currently, the household at the top of the list has to accept the first

apartment that is available regardless of location. If the household does

not want the available housing unit, the household is placed at the bottom

of the waiting list and can decline only twice. Because MDHA’s housing

developments are up to 69 miles apart, the first apartment available to a

household on the waiting list is often not where they want to live. For

working families, the regulation creates even more of an inconvenience

and an added burden for MDHA because the agency is attempting to

encourage residents to work. If residents accept units they truly do not

want, they then can develop justification to transfer to other units. For

example, a doctor’s opinion that a resident is not in good enough physical

condition for a long commute is enough justification for a resident to

receive a transfer. Every transfer increases MDHA’s maintenance costs.

Finally, MDHA officials stated that although they have had excellent

working relationships with the four private management companies that

manage 1,772 of the agency’s housing units, they have seen no direct cost

savings from the private management companies operating their

properties. The officials did say, however, that they have learned a great

deal from these companies and that they are operating their other

developments more efficiently as a result.

MDHA officials also told us that basing the operating subsidy on HUD’s fair

market rent (FMR) would be the most efficient way of distributing the

funds. A system based on FMR would more accurately reflect what the

rents should be for public housing in a given municipality, they said. Even

Page 69 GAO/RCED-98-174 Public Housing Subsidies
Appendix IV 

Miami-Dade Housing Agency

if the subsidy was based only on a percentage of FMR, at least the

measuring would be based on a market-generated indicator that is

independent and is based on current information. The amount of subsidy

to be awarded to housing agencies could easily be calculated by

subtracting the rental income and utility allowance from FMR.

Page 70 GAO/RCED-98-174 Public Housing Subsidies
Appendix V 

Public Housing Agency Operating Receipts

and Expenditures

The annual data HUD collects from approximately 3,200 housing agencies

nationwide show that average rental income is generally declining, while

operating expenses are increasing. As a result, HUD’s contributions in the

form of subsidies have increased. The data also show that, possibly as the

result of outside influences and funding from sources other than HUD’s

operating subsidies, many housing agencies have increased their operating

reserves. HUD’s performance measurement program, for instance, might

have influenced some agencies to increase their operating reserves to gain

higher performance scores. Also, some housing agencies might have used

grant funding from other sources to finance a portion of their

administrative costs, routine maintenance, or protective services, allowing

them to use a larger portion of their HUD-funded operating subsidies to

cover increases in their operating reserves.

Background Data used in this analysis are from HUD’s Integrated Business System (IBS),

which contains financial data provided by public housing agencies on

HUD’s Form 52599. On HUD’s Form 52599, housing agencies report their

operating receipts and expenses for their public housing properties. The

data, however, may not be indicative of the financial condition of a

housing agency or the sufficiency of PFS funding because the data do not

include all sources of income. Additional HUD funds are provided by the

Comprehensive Grant Program, the HOPE VI Grant Program, and the

Public Housing Drug Elimination Program. The IBS data do not include

such supplemental income. Thus, our analyses, based solely on IBS data,

are limited in their presentation of the overall financial picture of housing

agencies. In addition, factors outside the housing agencies may influence

their financial decisions.

To even out its workload, HUD established four ending dates for the fiscal

years of the local housing agencies it funds—the last day of March, June,

September, and December. In doing our analyses, we annualized the IBS

financial data reported in this appendix based on each housing agency’s

fiscal year ending date. In addition, we adjusted all financial data to

constant 1996 dollars. Finally, we categorized the housing agencies by size

according to the number of their dwelling units, as follows:

• Extra small housing agencies have 1 to 99 dwelling units.

• Small housing agencies have 100 to 499 dwelling units.

• Medium housing agencies have 500 to 1,249 dwelling units.

• Large housing agencies have 1,250 to 6,599 dwelling units.

• Extra large housing agencies have more than 6,599 dwelling units.

Page 71 GAO/RCED-98-174 Public Housing Subsidies
Appendix V 

Public Housing Agency Operating Receipts

and Expenditures

Sources of Housing

Agencies’ Operating

Receipts

As reported on HUD’s Form 52599, housing agencies have three basic

sources of operating receipts: (1) HUD’s contributions in the form of

operating subsidies; (2) dwelling rental incomes; and (3) other operating

income.

HUD’s Contributions HUD’s contributions were a major source of income for housing agencies in

the fiscal years ending in 1992 through 1996; in fact, for large and extra

large housing agencies, HUD’s contributions represented more than half of

their total income for the fiscal year ending in 1996. As figure V.1 shows,

the average housing agency’s per unit-month HUD contribution, when

adjusted to constant 1996 dollars, generally increased between 1992 and

1996.

Page 72 GAO/RCED-98-174 Public Housing Subsidies
Appendix V 

Public Housing Agency Operating Receipts

and Expenditures

Figure V.1: Average HUD Contributions Per Unit-Month by Housing Agency Size Grouping, Fiscal Years Ending 1992-96

1992 1993 1994 1995 1996

$0

$50

$100

$150

$200

$250

$300

Fiscal year ending

PUM contributions

Small

Extra large

Medium

Extra small

Large

Note: Adjusted to constant 1996 dollars.

Source: GAO analysis of HUD’s IBS data for housing agencies reporting in fiscal years ending in

1992 through 1996.

In the fiscal year ending in 1996, HUD’s average per unit-month contribution

increased for each successively larger size of housing agency, from an

average of nearly $77 per unit for extra small housing agencies to a per

unit average of almost $261 for extra large housing agencies. In addition,

for each successively larger size of housing agency, HUD’s contributions

represented a larger portion of the housing agency’s income in the same

period. This portion ranged from an average of 35 percent of extra small

Page 73 GAO/RCED-98-174 Public Housing Subsidies
Appendix V 

Public Housing Agency Operating Receipts

and Expenditures

housing agencies’ total income, including dwelling rental, to 61 percent for

extra large housing agencies, while small, medium, and large housing

agencies received, on average, 41, 47, and 56 percent of their total income

from HUD’s contributions, respectively. Additionally, HUD’s average

contribution, in constant 1996 dollars, increased in each size category

when comparing the fiscal year ending in 1992 with 1996. However, while

the average HUD contribution for large and extra large housing agencies

increased by 12 and 10 percent when comparing the fiscal year ending in

1992 to 1996, for that same period the average HUD contribution increased

by between 18 and 21 percent in all other sized housing agencies.

Almost three-quarters of housing agencies submitting HUD Form 52599 data

in the fiscal year ending in 1996 reported having received over 20 percent,

but not more than 60 percent, of their income from HUD’s contributions. As

table V.1 shows, 28 percent of the housing agencies received more than

half their income from HUD’s contributions.

Table V.1: Number of Housing

Agencies With HUD Contributions

Within Selected Percentage Ranges of

Receipts, Fiscal Year Ending 1996

Portion of total income provided by

HUD

More than Not more than

Number of housing

agencies

Percentage of all

housing agencies

0% 86 2.8%

0% 10 203 6.6

10 20 256 8.3

20 30 464 15.1

30 40 556 18.0

40 50 663 21.5

50 60 493 16.0

60 70 251 8.1

70 80 79 2.6

80 90 26 0.8

90 4 0.1

Source: GAO analysis of HUD’s IBS data for housing agencies reporting in fiscal year ending

1996.

For the fiscal year ending in 1996, for each successively larger size of

housing agency, the percentage receiving at least half of their income from

HUD’s contributions increased. About one-quarter of the extra small and

small housing agencies received over 50 percent of their income from HUD

contributions. About 41 and 68 percent of medium and large housing

agencies, respectively, received over 50 percent of their income from HUD’s

Page 74 GAO/RCED-98-174 Public Housing Subsidies
Appendix V 

Public Housing Agency Operating Receipts

and Expenditures

contributions. HUD’s contributions represented more than half of the

income of all extra large housing agencies.

Dwelling Rental Receipts In the fiscal year ending in 1996, dwelling rental receipts constituted over

90 percent of housing agencies’ average operating receipts, exclusive of

HUD’s contributions in the form of subsidies. Figure V.2 shows that,

comparing the fiscal year ending in 1992 with 1996, the average per

unit-month dwelling rental income declined, except for housing agencies

with fewer than 100 units.

Page 75 GAO/RCED-98-174 Public Housing Subsidies
Appendix V 

Public Housing Agency Operating Receipts

and Expenditures

Figure V.2: Average Dwelling Rental Receipts Per Unit-Month by Housing Agency Size Range, Fiscal Years Ending 1992-96

1992 1993 1994 1995 1996

$0

$50

$100

$150

$200

Fiscal year ending

PUM receipts

Small

Extra large

Medium

Extra small

Large

Medium

Extra small

Large

Note: Adjusted to constant 1996 dollars.

Source: GAO analysis of HUD’s IBS data for housing agencies reporting in fiscal years ending in

1992 through 1996.

Comparing the fiscal year ending in 1992 with 1996, the average monthly

dwelling rental income per unit declined by over 9 percent for small and

extra large housing agencies and by 8 percent for large housing agencies.

Medium-sized housing agencies saw their rental income decline by

6 percent. Only extra small housing agencies maintained a consistent level

of rental income. However, while extra small housing agencies maintained

their rental income in constant 1996 dollars, possibly because they had

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Public Housing Agency Operating Receipts

and Expenditures

large increases in their operating expenses relative to housing agencies of

other sizes, HUD made larger increases in its contributions to smaller

housing agencies than it did for housing agencies in all other size

categories.

Other Operating Income Other operating income represented about 9 percent of a housing

agencies’ income in the fiscal year ending in 1996, exclusive of HUD’s

contributions. Other sources of operating income reported in this category

include nondwelling rental (e.g., from renting rooftop space for signs or

broadcasting antennas), interest they earn on general fund investments,

and receipts from other sources (e.g., from operating services for tenants,

such as laundromats or day care centers).

Housing Agencies’

Operating

Expenditures

Operating expenses, as reported on the HUD Form 52599 consist of six

major categories: (1) utilities, (2) ordinary maintenance and operations,

(3) administration, (4) general expenses, (5) tenant services, and

(6) protective services.

As can be seen in figure V.3, a definite diseconomy of scale exists in the

average per unit-month operating expenses of a housing agency. For each

successively larger size of housing agency, the average total routine

expense per unit increased.

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Figure V.3: Average Routine Expenses Per Unit-Month by Housing Agency Size Range, Fiscal Years Ending 1992-96

Small

Extra large

Medium

Extra small

Large

1992 1993 1994 1995 1996

$0

$100

$200

$300

$400

$500

Fiscal year ending

PUM expenses

Note: Adjusted to constant 1996 dollars.

Source: GAO analysis of HUD’s IBS data for housing agencies reporting in fiscal years ending

between 1992 and 1996.

Utilities Utilities, including water, electricity, gas, fuel, and related labor expense,

constituted approximately one-fourth of housing agencies’ routine

expenses. In the fiscal year ending in 1996, utility expenses ranged from a

low of 22 percent of the average routine expenses for an extra small

housing agency up to 27 percent for large and extra large housing

agencies. However, unlike other routine expenses, HUD calculates utilities

on a 3-year rolling base system, so we could not analyze utilities in

conjunction with the other routine expense categories. Thus, any

references to total routine expenses are exclusive of utilities.

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Ordinary Maintenance and

Operations

Ordinary maintenance and operations consist of expenses for labor,

materials, contracts, and garbage fees. On average, this category of routine

expenses comprised the largest portion of a housing agency’s operating

expenses in their reports for the fiscal year ending in 1996. Regardless of a

housing agency’s size, on average over 40 percent of its per unit-month

expenses were for ordinary maintenance and operations. The average per

unit-month costs for this expense category were about $59 for extra small

housing agencies, ranging up to an average per unit-month expense of

$134 for extra large housing agencies. Small, medium, and large housing

agencies reported average ordinary maintenance and operation expenses

of approximately $62, $78, and $93, respectively.

Although they did not have the largest increase in constant 1996 dollars,

extra small housing agencies experienced the largest percentage change in

their ordinary maintenance and operation expenses, when the fiscal year

ending in 1992 is compared with 1996. While extra small housing agencies

had an increase of over 9 percent (over $5 per unit) during that period,

small and medium housing agencies had increases of 0.2 and 3 percent

(about $0.15 and $2 per unit), respectively. Although, at about $8 per unit,

the dollar amounts of the increases in large and extra large housing

agencies were greater than those in other size housing agencies, they

represented a smaller percentage change (9 and 6 percent, respectively)

than that of the extra small housing agencies.

Administration Administration includes administrative salaries, legal expenses, staff

training, travel, accounting fees, auditing fees, sundry, and outside

management costs. In the fiscal year ending in 1996, the average per

unit-month expense for administration represented between one-quarter

and one-third of the housing agencies’ total routine expenses. Except for

small agencies, for successively larger sizes of housing agencies, the

average per unit administration expense increased. With the exception of

large agencies, these expenses represented an increasingly smaller

percentage of the housing agencies’ total expenses for successively larger

sizes of agencies.

In the fiscal year ending in 1996, extra small housing agencies spent an

average of $48 or nearly one-third of their total routine expenses for

administration, whereas extra large housing agencies spent an average of

$78 per unit-month, or one-quarter of their total routine expenses on

administration. Small, medium, and large housing agencies spent an

average of $41, $48, and $58 per unit-month, respectively, for their

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and Expenditures

administration, which represented about 27 percent of their total routine

expenses.

With the exception of extra small housing agencies, for successively

smaller sizes of housing agencies, both the amount of their administration

expenses per unit, in constant 1996 dollars, and the percentage change in

those expenses, decreased when comparing the fiscal years ending in 1992

and 1996. The over $4 (10 percent) increase extra small housing agencies

experienced in their administration expenses was greater than the nearly

$1 and $3 (2 and 6 percent) increases for small and medium sized housing

agencies, respectively, but less than the approximate $6 and $10 (12 and

15 percent) increases experienced by large and extra large housing

agencies.

General Expenses General expenses include insurance, payments made to local governments

in lieu of taxes, terminal leave payments, employee benefit contributions,

collection losses, interest on administrative and sundry notes, and other

general expenses. For the fiscal year ending in 1996, housing agencies

reported that they spent, on average, between 24 and 28 percent of their

total per unit-month expenses in this category. The lowest average per

unit-month expense was about $37 by extra small housing agencies and

the highest was nearly $80 by extra large housing agencies. Small housing

agencies spent an average of more than $41, while medium and large

housing agencies each spent about $50.

When comparing the fiscal year ending in 1992 with 1996, extra small

housing agencies had almost a $3 increase in general expenses, the largest

of any size group. In contrast, small and extra large housing agencies had

reductions in their expenses in this category of less than $1 each. As a

percentage change, the 8-percent increase incurred by extra small housing

agencies between the fiscal years ending in 1992 and 1996 was greater than

that for all other sizes. While small and extra large housing agencies had

decreases, the change for medium and large housing agencies was 3 and

4 percent, or about $1 and $2, respectively.

Tenant Services Tenant services cover salaries, recreation, publications, contract costs,

training, and other expenses. In the fiscal year ending in 1996, the average

per unit-month expense for tenant services ranged from about $1.50, or

less than 1 percent of their average routine expenses, for extra small

housing agencies to $6 for extra large housing agencies, which represented

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Public Housing Agency Operating Receipts

and Expenditures

2 percent of their total routine expenses. The largest increase (in constant

1996 dollars) and percentage change in this expense category were

experienced by extra small and small housing agencies. While medium,

large, and extra large housing agencies had increases of 7, 1, and

11 percent (about $0.30, $0.05, and $0.60), respectively, when comparing

the fiscal years ending in 1992 and 1996, extra small and small housing

agencies had increases of 65 and 29 percent (nearly $0.60 each).

Protective Services Protective services include expenses for labor, materials, and contract

costs. In the fiscal year ending in 1996, except for extra large housing

agencies, the average per unit-month amount expended on protective

services ranged from nearly $1 in extra small housing agencies to almost

$4 in large housing agencies, which represented between 0.4 and

1.7 percent of their average per unit-month routine expenses, respectively.

For extra large housing agencies, the average per unit-month expense for

protective services was $21, or 6 percent of their average per unit-month

total routine expenses. However, extra small housing agencies had the

largest percentage change increase in this category. In fact, their

139-percent increase was the largest increase for any size housing agency

and in any expense category. However, in constant 1996 dollars, the extra

small housing agencies’ average increase of $0.40 was less than that of

either medium ($0.45) or extra large ($0.50) housing agencies which, when

comparing fiscal year ending 1992 to 1996, had increases of 21 and

2.5 percent, respectively.

Nonroutine

Maintenance

In general, the average per unit-month expenditures for nonroutine

maintenance declined, in constant 1996 dollars, between the fiscal years

ending in 1992 and 1996. The exception was extra large housing agencies,

which had a net increase of about $0.10 per unit-month during that period.

However, as table V.2 shows, the housing agencies did not experience a

consistent decline in nonroutine maintenance expenses. All housing

agency size groups had increases in the expenses in this category before

showing decreases in the fiscal years ending in 1995 and 1996.

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Table V.2: Average Nonroutine

Maintenance Expenses Per Unit-Month

by Housing Agency Size Range, Fiscal

Years Ending 1992-96

1992 1993 1994 1995 1996

Extra small $6.08 $6.58 $6.48 $5.68 $4.17

Small 6.14 5.86 5.99 4.94 3.61

Medium 5.36 5.21 4.47 4.88 3.59

Large 8.21 6.66 5.70 6.01 5.06

Extra large 4.85 5.35 5.88 5.09 4.97

Note: Adjusted to constant 1996 dollars.

Source: GAO analysis of HUD’s IBS data for housing agencies reporting in fiscal years ending

between 1992 and 1996.

The decline in average per unit-month nonroutine maintenance expenses

ranged between nearly $2 to just over $3. Except for extra large housing

agencies, which had a 3-percent increase in their nonroutine maintenance,

all other housing agency sizes showed a decrease when comparing fiscal

year ending in 1992 to 1996. The largest decrease was 41 percent for small

housing agencies, and the least was 31 percent for extra small housing

agencies. Medium and large housing agencies had decreases in their

expenses in this category of 33 and 38 percent, respectively.

Capital Expenditures Table V.3 shows that in at least 1 year, capital expenditures increased in

each housing agency size group. However, in every size group, reductions

occurred in expenditures in this line item between the fiscal years ending

in 1992 and 1996. In addition, every size group had a net decrease in its

average per unit-month capital expenditures when comparing the fiscal

year ending in 1992 with 1996.

Table V.3: Average Capital

Expenditures Per Unit-Month by

Housing Agency Size Range, Fiscal

Years Ending 1992-96

1992 1993 1994 1995 1996

Extra small $6.60 $6.55 $7.14 $6.79 $6.50

Small 7.67 7.63 8.16 7.19 5.73

Medium 6.05 5.81 7.12 5.60 3.79

Large 5.74 6.18 6.07 5.89 4.23

Extra large 6.01 6.09 5.55 6.00 4.53

Note: Adjusted to constant 1996 dollars.

Source: GAO analysis of HUD’s IBS data for housing agencies reporting in fiscal years ending

between 1992 and 1996.

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In constant 1996 dollars, the range of the average per unit-month decrease

was $0.10 for extra small housing agencies to almost $2.30 for medium

housing agencies, with decreases of almost $2 for small agencies and

about $1.50 for both large and extra large housing agencies. The decrease

in capital expenditures for extra small housing agencies was almost

negligible, representing a decrease of less than 2 percent. However, the

average per unit-month expenses decreased about one-quarter in small,

large, and extra large housing agencies and about 37 percent in

medium-sized housing agencies.

Operating Reserves HUD requires housing agencies to maintain an operating reserve to cover

emergency expenses and deficits in their operating budgets. Figure V.4

shows that, in constant 1996 dollars, the average per unit-month operating

reserve amounts increased in all sizes of public housing agencies when

comparing the fiscal year ending in 1992 with 1996.

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Figure V.4: Average Operating Reserves Per Unit-Month by Housing Agency Size Range, Fiscal Years Ending 1992-96

1992 1993 1994 1995 1996

$0

$20

$40

$60

$80

$100

$120

Fiscal year ending

PUM operating reserves

Small

Extra large

Medium

Extra small

Large

Medium

Extra small

Large

Note: Adjusted to constant 1996 dollars.

Source: GAO analysis of HUD’s IBS data for housing agencies reporting in fiscal years ending

between 1992 and 1996.

When adjusted to constant 1996 dollars, the increase in average per

unit-month operating reserves ranged from $20 (25 percent) for small

housing agencies to just over $28 (34 percent) for both medium and large

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Public Housing Agency Operating Receipts

and Expenditures

housing agencies, when comparing fiscal year ending in 1992 to 1996.

While the extra large housing agencies’ $25 increase in their per

unit-month operating reserve was the second smallest, at 39 percent, it

represented the largest percentage change increase of all housing agency

size groups, when comparing fiscal year ending in 1992 with 1996.

HUD administratively established a maximum allowable operating reserve

that, until the fiscal year ending in 1995, limited the amount a housing

agency could accumulate to 50 percent of its approved operating budget’s

total routine expenses or $100,000, whichever was greater. During that

period, HUD could reduce the amount of a housing agency’s operating

subsidy if the housing agency’s estimated year-end operating reserve

balance exceeded its established maximum allowable operating reserve. In

February 1995, HUD removed this requirement and replaced it with the

operating reserve measure used in its Public Housing Management

Assessment Program. The revised 1997 Public Housing Management

Assessment Program measure gave its highest score to housing agencies

with cash reserves greater than 15 percent of their total actual routine

expenditures. As a housing agency’s cash reserves—as a percentage of its

routine expenditures—decreased, the housing agency’s score also

decreased.

Figure V.5 shows operating reserves as a percentage of estimated

maximum allowable operating reserves, using pre-1996 criteria, for the

fiscal years ending in 1992 through 1996. This analysis uses actual routine

expenses as a surrogate for the HUD-approved budgeted routine

expenditure.

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Figure V.5: Operating Reserves as a Percentage of Maximum Allowable Operating Reserves by Housing Agency Size

Range, Fiscal Years Ending 1992-96

Small

Extra large

Medium

Extra small

Large

1992 1993 1994 1995 1996

0%

20%

40%

60%

80%

100%

120%

Fiscal year ending

Reserves

Source: GAO analysis of HUD’s IBS data for housing agencies reporting in fiscal years ending

between 1992 and 1996.

In general, housing agencies showed consistent increases in their

operating reserves. Almost half (1,558) of the housing agencies reported

increases in their operating reserves in at least 3 of the 4 fiscal years we

analyzed, and 15 percent (485) had increases in all 4 years. However,

17 percent (530) of the housing agencies reported declines in their

operating reserves for at least 3 of the 4 analyzed fiscal years and 2 percent

(66) showed declines in all 4 fiscal years.

Comparing the fiscal years ending in 1992 and 1996, for all housing agency

size groups, on average, operating reserves in constant 1996 dollars got

closer to the maximum allowed. Because the average per unit-month

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operating reserve for an extra small housing agency was about $111 in the

fiscal year ending in 1996, and extra small housing agencies have less than

100 units, their average operating reserve would almost always be less

than the $100,000 maximum allowed. Therefore, extra small housing

agencies were allowed to maintain operating reserves in excess of

50 percent of their routine expenses without suffering a reduction in their

subsidy.

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and Urban Development and Our Evaluation

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

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and Urban Development and Our Evaluation

See comment 1.

See comment 2.

See comment 3.

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and Urban Development and Our Evaluation

See comment 4.

See comment 5.

See comment 6.

See comment 7.

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See comment 8.

See comment 9.

See comment 10.

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See comment 11.

See comment 12.

See comment 13.

See comment 14.

See comment 15.

See comment 16.

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Appendix VI 

Comments From the Department of Housing

and Urban Development and Our Evaluation

The following are GAO’s comments on the Department of Housing and

Urban Development’s letter dated June 5, 1998. The comments are

organized in the order of the major sections of the attachment to HUD’s

letter.

GAO Comments 1. Although we report the statements of officials at four housing agencies

and the conditions we found there, we have not drawn any overall

conclusions about the adequacy of PFS funding nationwide. Instead, on the

basis of our case studies, a survey of 800 housing agencies done by a trade

group representing housing agencies, discussions with officials of trade

groups and HUD, we conclude that operating subsidies may not be

adequate for housing agencies whose base year expenditures were low or

whose operating circumstances or costs have undergone significant

change since 1975.

We provide income and expense trends in an appendix to our report. Our

analyses focused on HUD’s database of housing agencies’ statements of

operating receipts and expenses. The analyses are limited and we draw

few conclusions because the underlying data do not fully reflect housing

agencies’ incomes and because their expenditures are limited by the

income available to cover them. We were unable to obtain complete

information on housing agencies’ incomes—including income from states

and other federal grants—even from the four agencies we visited.

Nevertheless, we believe that the analyses we present will provide other

analysts with insights not available previously.

The Congress did not ask us nor did we intend to define what costs the

operating subsidies should be covering. Rather, it is HUD’s responsibility to

define the scope of costs that the PFS subsidies should cover, and one of

the options that we suggest HUD might consider for redesigning PFS

includes developing such a definition of covered costs.

Finally, we disagree that much of the discussion in the report deals with

needs that are more appropriately met through capital and grant funding

instead of operating subsidies. Our analysis shows that just the opposite is

true. We report that some housing agencies are using substantial amounts

of funding from capital and other grants to fund their operating expenses.

This indicates that these agencies are not receiving enough funding

through PFS and rental income alone to cover these expenses.

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and Urban Development and Our Evaluation

2. We disagree that we confuse the issues of PFS adequacy and the

accuracy of HUD’s budget estimate. In fact, we conclude that the adequacy

of PFS for individual housing agencies, which is determined by their

HUD-approved allowable expense levels, and the accuracy of HUD’s budget

estimates for PFS are interrelated. We show that determining allowable

expense levels is an integral part of the PFS methodology, and we explain

that these expense levels also play a large role in developing the annual PFS

budget estimate. We conclude that to the extent that expense levels are

too low for agencies whose base year expenditures were low or whose

operating circumstances or costs have undergone significant change since

1975, HUD’s budget estimate may also be too low.

3. We agree with HUD’s comment on our recommendation for revising the

way HUD estimates its PFS budget request. It is premature for HUD to change

its budget estimating methodology until the Department revises the way it

provides subsidies to public housing agencies, as would be required under

pending legislation. We also believe that given the data and timing

constraints under which HUD must prepare its budget estimate, the

estimate is reasonably accurate. We have, therefore, withdrawn our

recommendation that the Secretary consider revising the way HUD makes

its PFS estimate, and we have made changes to our report accordingly.

4. HUD raises several concerns about the draft report’s recommendation

that the Department consider an appeals process. In recommending such

an appeals process, we intended that HUD could address both overfunded

and underfunded housing agencies, and our recommendation now reflects

this intent. Whether HUD designs a process that entails a labor-intensive,

subjective review of all housing agencies or an analysis-based,

formula-driven review would be HUD’s decision.

5. We agree with HUD that the best way of knowing whether housing

agencies are adequately funded is to establish a set of core services that

should be provided and to determine what the cost of those services

should be in each case. In our report, we offer this as one of the options

available to HUD as it plans to revise PFS. However, we believe that HUD

should be able to recognize whether some agencies are underfunded even

if it does not precisely know the best composition of the set of core

services. Our report shows that symptoms of inadequate funding are clear

at certain housing agencies, and that if left to worsen, the condition of the

housing stock is threatened.

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and Urban Development and Our Evaluation

6. HUD states that its approach to dealing with housing stock deterioration

and social problems in public housing is to address the root causes of such

problems with supplementary and competitive grants to provide

protective services, maintenance, and resident services rather than to

increase the subsidy. However, these activities are also covered under

long-standing public housing operating expense categories that are

designed to be funded with rental income or, if necessary, the operating

subsidy. We conclude, therefore, that the supplementary grants are

necessary because the operating subsidy has been insufficient to

adequately fund these activities.

7. Our draft report noted examples of housing agencies’ using funding

from their operating budgets to temporarily repair their housing stock—as

in painting over peeling lead-based paint—instead of performing necessary

modernization work. However, this practice results in unexpected uses of

the operating subsidy and inadequate funding in other areas.

8. HUD’s letter to us lists several changes adopted by the PFS, including

add-ons for legislative changes to social security, unemployment

compensation, and flood insurance. HUD states that the draft report did not

recognize these and other changes showing that PFS has adapted to

housing agencies’ changing needs. We recognize that over the years,

several changes have been adopted by PFS for application across the

board. However, the changes that HUD notes in its comments have little

relation to the cost increases—including the costs of deteriorating housing

stock and increasing crime and poverty—that agencies told us accounted

for most of the increases in their operating costs.

9. HUD’s letter disagrees with our conclusion that employee benefits have

not been adequately factored into the PFS wage inflation factor increases.

HUD states that we incorrectly assumed that the cost of employee benefits

has grown more rapidly than the increases in the PFS wage inflation factor.

In response, we contacted HUD to obtain further elaboration on HUD’s

inflation adjustment factor. A HUD official in its Policy Development and

Research office explained that HUD’s methodology for adjusting its budget

estimate from 1975 to 1988 used wage survey data but excluded

observations which showed a decrease in wages. As a result, HUD’s

inflation adjustments were too high. On this basis, we agree with HUD’s

comment that its wage inflation methodology kept up with actual changes

in wages and benefits, albeit for the wrong reasons. Although HUD no

longer adjusts the wage data in this manner, it still uses wages as its

measure of labor cost change. Because housing agencies pay both wages

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Comments From the Department of Housing

and Urban Development and Our Evaluation

and benefits, we still believe that a broader measure of compensation

would provide a more accurate basis for making adjustments for inflation.

10. We chose not to include the issue of utilities in our report because

utility expenses are relatively straightforward compared to other issues we

report on. Changes in utility rates are covered by HUD, and the utility

expense level is adjusted at the end of the year to reflect changes in

estimated consumption. Housing agencies and HUD share on a 50-50 basis

the savings or additional costs because of reductions or increases in

energy consumption.

11. We have changed the text of our report accordingly.

12. We disagree with HUD and believe that at some housing agencies the

overall level of income in the base year and earlier did have an impact on

the initial allowable expense level and, therefore, on whether the housing

agency is currently adequately funded. HUD states that before PFS was

implemented, operating subsidies were based on a HUD-approved operating

budget that was subsidized to cover the gap between rental income and

approved expenditures. However, during the interim period from 1972 to

1974, HUD placed a cap on operating expenditures, which meant that even

these HUD-approved and subsidized budgets could have been inadequate.

Moreover, the amount of HUD’s subsidy was based on what was available

from the Congress in the first few years of subsidizing public housing—an

amount that grew quickly from $233 million in 1972 to over $700 million by

1979.

13. We have reconciled these points with the relevant housing agencies

and made changes to our report where necessary.

14. We stand by our conclusion that for a housing agency to make

extensive use of modernization and other supplementary funding to cover

operating expenses is evidence of an inadequate operating subsidy. In

addition, we neither state nor imply that housing agencies were using their

operating subsidies for capital replacement needs, and we disagree with

HUD’s statement that the operating subsidy should not accommodate

increases in an established operating cost category such as protective

services. Moreover, by using significant portions of their modernization

funding to cover operating costs, housing agencies are jeopardizing the

viability of the housing stock that is in need of major repair.

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and Urban Development and Our Evaluation

We also disagree with HUD’s conclusion that housing agencies that use

their supplementary funding to maintain or increase their operating

reserves are doing very well. Some housing agencies might add to their

operating reserves in order to score better in HUD’s Public Housing

Management Assessment Program, and increasing operating reserves

might reflect this motivation and mask underfunding.

15. HUD correctly points out that we have reported in the past that wide

differences in costs exist among public housing developments. Within a

single housing agency, in fact, high-cost and low-cost developments can

exist. However, cost differences among developments do not mean that

housing agencies themselves are receiving sufficient subsidies.

Furthermore, knowing whether public housing costs are higher or lower

than the cost to house families under the Section 8 Certificate and

Voucher Program does not in itself determine whether housing agencies

are receiving enough subsidy to cover their expenses. Therefore, we

conclude that those housing agencies with operating circumstances that

have changed significantly or whose initial base year expenses might have

been too low might be currently underfunded.

16. We are aware of both of the studies mentioned by HUD and reviewed

them closely as part of our background research. These studies for the

most part compare expenditures of public housing with those of

alternative housing programs or funding options and do not draw

conclusions regarding the adequacy of PFS funding to meet public housing

needs. As a result, we believe that these studies do not provide data

showing that housing agencies are adequately funded.

Page 97 GAO/RCED-98-174 Public Housing Subsidies
Appendix VII 

Objectives, Scope, and Methodology

Objectives In Senate Report 105-53 in support of the Departments of Veterans Affairs,

Housing and Urban Development, and Independent Agencies

Appropriations Bill, 1998, the Senate Committee on Appropriations

requested that we study HUD’s Performance Funding System (PFS) for

allocating appropriated funds to housing agencies as operating subsidies.

To provide information to the Congress about HUD’s administration of PFS

and to guide the revision of PFS so that it better accommodates changing

operational costs and circumstances in public housing and permits greater

local flexibility in managing public housing, we agreed with the staff of the

Committee on Appropriations’ Subcommittee on VA, HUD, and Independent

Agencies to address the following questions in our study:

• How does PFS allocate the congressionally appropriated subsidy among

public housing agencies?

• How well does PFS meet the subsidy needs of individual housing agencies?

• How does HUD develop budget estimates of housing agencies’ annual need

for operating subsidies and are the estimates appropriate?

• What are some of the possible options that HUD might have for changing

PFS to make it a more effective tool for subsidizing housing agencies?

Scope and

Methodology

To determine how PFS allocates the congressionally appropriated subsidy

among public housing agencies, we reviewed and evaluated the history

and documentation of the PFS prototype formula. We also reviewed the

studies done by HUD and its contractors on the development of PFS, its

shortcomings, and the various implications of PFS for the effective funding

and functioning of public housing. We also interviewed HUD officials to

obtain their views on the historical development and strengths and

weaknesses of PFS.

To determine how well PFS meets the subsidy needs of housing agencies,

we visited four housing agencies and developed case studies of their use

of funds based on our review of their financial data and interviews with

housing agency officials. To obtain information on PFS’ adequacy to fund

operations at these housing agencies and to discuss the impact of potential

underfunding, we visited two developments owned by each housing

agency. We discussed with housing managers at these developments the

impact that various factors, such as location and crime, have on the

operating costs of those developments. To ensure that we asked officials

at the housing agencies the same questions, we developed and used a

standardized interview guide.

Page 98 GAO/RCED-98-174 Public Housing Subsidies
Appendix VII 

Objectives, Scope, and Methodology

In addition to our visits to the housing agencies, we reviewed and analyzed

housing agency data from HUD’s Integrated Business System (IBS) for fiscal

years ending in 1992 through 1996. These data comprised 15,705 records

and contained detailed information on each housing agency’s Statement of

Operating Receipts and Expenditures. IBS data represent only data

collected on HUD’s Form 52599. Many housing agencies supplement their

income with funding from other HUD grants and their local governments.

This funding is not captured in the IBS data, and obtaining information on it

was beyond the scope of this report. Our analyses were limited to the data

housing agencies report on their Statement of Operating Receipts and

Expenditures. We adjusted all financial data in the IBS records to constant

1996 dollars, using the Consumer Price Index for all items as reported in

the February 1998 Economic Report of the President. We also reviewed

documents describing the development and implementation of IBS, tested

the edit criteria specified in the system documents, and checked the data’s

internal validity.

We discussed the reliability of IBS with its developers and users at HUD, and

we selected a random sample of 300 records from the IBS data spanning

fiscal years ending in 1992 through 1996. HUD officials asked the public

housing directors in HUD field offices to send us copies of the original

forms provided to HUD by the housing agencies. We received 222 usable

forms of the 300 requested and checked the data on them against the data

in IBS. On the basis of our sample, we estimated that the error rate for the

IBS amount field was between 0.2 and 0.6 percent. This estimate applies to

about 75 percent of the records in the database. On the basis of the

response rate to our request and the limited number of data errors we

found in our data verification process, we are satisfied that the IBS data are

of sufficient accuracy to be useful in our analyses.

To determine how HUD develops budget estimates of housing agencies’

annual need for operating subsidy, we interviewed HUD officials and

reviewed and analyzed HUD’s methodology for developing its estimates.

Our review included the time frames involved in the process and the steps

involved in the process. In addition, we reviewed the documentation for

the model HUD uses to calculate the budget estimate and the assumptions

used in the model. Also, we discussed with HUD officials the sampling

process HUD uses as part of the estimating process.

To determine what options HUD has for changing PFS to make it a more

effective tool for subsidizing housing agencies, we reviewed relevant

literature and interviewed HUD officials and representatives of industry

Page 99 GAO/RCED-98-174 Public Housing Subsidies
Appendix VII 

Objectives, Scope, and Methodology

professional groups. We relied on our prior experience and ongoing work

to develop options for other formula-based funding programs, including

the Indian Housing Block Grant, Medicaid, the Older Americans Block

Grant, Law Enforcement Block Grant, the Chapter I Education Grant,

Highway Grant formulas, and technical assistance to the Congress for

options in targeting HUD’s Community Development Block Grant.

To advise us on all aspects of our work, we retained Mr. Wayne S.

Sherwood, a consultant with extensive knowledge of the history and

functioning of PFS and expertise in the operations of public housing

agencies.

We performed our work from August 1997 through May 1998 in

accordance with generally accepted government auditing standards.

Page 100 GAO/RCED-98-174 Public Housing Subsidies
Appendix VIII 

Major Contributors to This Report

Resources,

Community, and

Economic

Development Division

Leslie D. Albin, Writing and Editing Group

Thomas W. Barger, Jr., Dallas Regional Office

Andy C. Clinton, Dallas Regional Office

Austin J. Kelly, Economic Analysis Group

Eric A. Marts, Assistant Director

Judy K. Pagano, Design, Methodology, and Technical Assistance Group

Willie D. Watson, Dallas Regional Office

Health, Education,

and Human Services

Division

Robert J. Dinkelmeyer, Economist

Jerry C. Fastrup, Assistant Director

(385697) Page 101 GAO/RCED-98-174 Public Housing Subsidies
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