AGENDA #17

BUDGET WORKING PAPER

TO:	Roger L. Stancil, Town Manager
FROM:	Tina Vaughn, Housing Director
SUBJECT:	Report on the Original Theory of Public Housing and the New Public Housing Model
DATE:	April 18, 2007

PURPOSE

The purpose of this memorandum is to provide information on the original theory of public housing and a description of the pubic housing model as established under federal Housing Acts of 1937 and 1949. The purpose is also, to provide information on the new public housing model asset management and project-based accounting.

Under the new public housing model and new funding structure, the U.S. Department of Housing and Urban Development limits the amount of public housing subsidy public housing agencies can use for management and overhead costs. In 2007-2008, the public housing program will have a $237,106 deficit between management and overhead costs that cannot be funded with public housing subsidy funds.

HISTORY OF THE FEDERAL PUBLIC HOUSING PROGRAM

The first federal public housing program was created by Congress under the Housing Act of 1937 to provide safe, decent and sanitary housing for low-income families. Although housing problems had existed for decades, it was not until the Great Depression in the 1930s that the federal government became actively involved in affordable housing. The federal government funded the bonds for the construction of the first public housing units. In the early years, public housing did not need any financial assistance from the federal government because rents could be set high enough to cover expenses.

However, the Housing Act of 1949 placed income limits, aimed at serving the poorest of the poor, on public housing eligibility. Throughout the 1950s and 1960s, incomes of public housing families were so low that many families could not afford to pay any rent. Almost all of the public housing agencies were not generating enough income from rents to cover operating expenses, which resulted in financial difficulties for public housing agencies.

With the passing of the Brooke Amendment in 1969, rental payments of public housing residents were limited to a maximum of 25 percent of the adjusted household income. Today, rental payments are limited to a maximum of 30 percent of the adjusted household income. The limitation of rents resulted in the establishment of the federal subsidy program (Performance Funding System) which provided assistance to public housing agencies that did not generate enough income from rents to cover expenses.

Under the Performance Funding System, public housing agencies enter into an Annual Contributions Contract (ACC) with the U.S. Department of Housing and Urban Development (HUD). According to the ACC, HUD agreed to provide financial support to public housing agencies and the public housing agencies agreed to administer their public housing programs in accordance with federal regulations.

In accordance with the ACC and federal law, the U.S. Government subsidized most of the difference between public housing rental income and operating costs. The following process was used to determine the annual subsidy amount.

An estimation of total operating costs
An estimation of rental income and other revenues
If revenues were more than costs, the subsidy amount was zero
If revenues were less than costs, the difference was funded by subsidy from HUD

THE NEW PUBLIC HOUSING MODEL

In fiscal year 2007-2008, public housing agencies are required to begin the process of converting a system of project-based accounting and asset management. The deadline to be in full compliance with asset management is July 1, 2011. Beginning in fiscal year 2011-2012, federal funding will be tied to project based performance measures.

Under the new model, HUD expects public housing agencies to operate like a private property management firm with the objective of making a profit, not housing the poor, as the ultimate goal. The new model restricts and limits the amount of federal subsidy public housing agencies can use to fund management and overhead costs.

Asset Management and Project-Based Budgeting

Asset management and project-based accounting rules requires that public housing agencies group their public units into projects, and establish a separate budget for each project. We have grouped the Town’s 336 public housing units into two projects (please see Attachment 1 for project groupings).

Unlike the current process where funding from HUD is to the public housing agency and the agency may use funds for agency-wide expenses, under the new model, funding is to each project and may only be used for direct costs associated with the project. In addition to providing direct funding to each project, HUD will fund fees for activities such as management, accounting and bookkeeping, technology, etc. However, the amount of funds generated by these fees are significantly less than estimated costs.

PROPOSED PROJECT-BASED AND ASSET MANAGEMENT BUDGET

The proposed 2007-2008 budget totals $1,583,187, a $63,744 decrease from the current year’s budget. Below is a summary of the 2007-2008 budgets for the two projects and administration and overhead (please see Attachment 3 for a complete budget).

Project One

Estimated Revenues	$667,764 ($480,348 HUD Subsidy)
Estimated Expenses	$634,017
Difference	$ 33,737

Project Two

Estimated Revenues	$723,160 ($520,376 HUD Subsidy)
Estimated Expenses	$673,064
Difference	$ 48,096

Management-Overhead

Estimated Revenues (from fees)	$286,161
Estimated Expenses	$523,267
Difference	($237,106)

The two projects do not have a shortfall. However, management and overhead has a 2007-2008 budget shortfall of $237,106. Management and overhead costs include administrative salaries and related benefits, hardware and software, and service contracts related to administrative properties. With the new funding allocation model, HUD has limited the amount of funding for management and overhead costs.

One project may cover the shortfall in another project; however, a project surplus cannot be used to cover management and overhead. Our calculations reflect the maximum allocation of federal funds for management and overhead.

The focus of federal funding is on the “projects and frontline personnel.” Given the limitations on the amount of public housing subsidy that can be used for overhead cost, assistance from the Town’s General Fund is needed if current operations are to be continued.

Reduction in Federal Funding

For the past four years the amount of public housing subsidy we have received from HUD has decreased. Funding is expected to continue to decrease.

The attached chart shows a scale of reductions in funding to public housing subsidy we have received from the U.S. Department of Housing and Urban Development over the past five years (please see Attachment 2). Reductions in funding are expected to continue.

The asset management and project-based budgeting model, along with insufficient funding, will result in significant changes in the public housing industry. These changes will, in many ways, deviate from the promise of the Housing Act of 1937 of housing the poorest of the poor.

The way we have typically managed the Chapel Hill public housing program is likely to change in 2007-2008. While new public housing residents will have household incomes that do not exceed 80 percent of the area median, as required by federal rules, we may focus on recruiting and marketing efforts to attract applicants with household incomes of 50 percent to 60 percent of the area median. This would result in families receiving public assistance remaining on the waiting list.

SUMMARY

The biggest and probably the most far-reaching change from the original premises of public housing is that public housing agencies are expected to mimic the private rental market in structure, planning, accounting, and to some extent, marketing. The bottom line is that public housing agencies are expected to make a profit.