LIPH Operating Reserves: A Flawed Calculation?

May 2017

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Another rumor is floating around that Public Housing Authorities (PHAs) have accumulated over $4 billion in public housing operating reserves. HUD believes this is high because it approximately equates to one year’s worth of operating subsidy. Even though the offset of a 2012 law suit with HUD ruled in favor of the PHAs, HUD could find other methods to reduce public housing operating reserve levels.

Many PHAs feel compelled to find methods to better to protect and utilize their operating reserve levels before they become attractive to HUD and possibly offset or recaptured. A recapture is when the PHA issues a check to HUD to return money. An offset is when HUD reduces operating subsidy from the PHA’s subsidy eligibility. Either way, the net effect is a reduction in operating reserves.

HUD will calculate the amount of operating reserves and the number of months of operating reserves for each PHA. The amount of operating reserves is calculated from the Financial Data Schedule (FDS). HUD will combine the all the Asset Management Projects (AMPs) of a PHA to determine the amount of reserves.

Operating reserves represent the amount of cash a PHA has, including amounts expected to be collected or paid out in the near future (one year). The formula that HUD used in 2012 is below.

 

Line #

FDS Line

Description

1

111

Unrestricted Cash

2

114

Tenant Security Deposit Cash

3

120

Total Receivables

4

131

Unrestricted Investments

5

142

Prepaid Expenses & Other Assets

6

144

Inter-Program Due From

7

145

Assets Held For Sale

8

 

Total (1+2+3+4+5+6+7)

9

310

Total Current Liabilities

10

343

Current Portion of Capital Fund Debt

11

 

Total (9-10)

12

 

Total Operating Reserves (8-11)


This formula is overstating the amount of operating reserves because it is including assets held for sale. Assets held for sale are not always easily converted to cash, thus inflating the amount of operating reserves HUD is calculating for a PHA. Furthermore, Other Post Employment Benefits (OPEB) and unfunded pension liabilities (mandatory by some states) are not included in the liabilities and, again, HUD is overstating the amount of operating reserves but understating these liabilities or a portion of liabilities of a PHA.

Once the amount of operating reserves are calculated in dollars, the number of months of operating reserves can be calculated for a PHA; this translation of dollars of reserves into months answers the question, “how many months can a PHA operate without any additional funding from HUD?” In 2012, the offset used the following calculation to translate dollars in reserves to months of reserves:

Operating Reserves / ((PEL+UEL+Add-on’s+Transition Funding) ÷ 12 months)

HUD is using a formula expense level directly from the operating subsidy calculation. The formula expense level was created to determine the projected costs to operate a well-run AMP. The project expense level (PEL) consists of ten variables and their associated coefficients (examples include the age of buildings, type of building, elderly or family, geographic locations, etc.) that are calculated in a formula to estimate operating costs. The utility expense level (UEL) represents utility costs paid by the PHA. Add-on’s refer to other costs such as PILOT, audit, and asset management fees just to name a few, that can vary from agency to agency and that are not included in the PEL. Transition funding was provided to PHAs that converted to asset management early to prevent any loss of funding. Transition funding was built into the operating subsidy calculation, thus increasing the formula expense level and considered a true operating cost of the AMP.

The concerns with employing the formula expense level to calculate months of reserves is that this amount is based on “projected” expense rather than actual expenses, which are readily available from the FDS. The Months Expendable Net Asset Ratio (MENAR), one of the sub-indicators of the Financial Assessment Sub-System (FASS), is a very similar reserves calculation that uses actual operating expenses and excludes assets held for sale. The Operating Fund Financing Program (OFFP) is a HUD program that allows a PHA to leverage their future operating subsidy for capital improvements for their public housing units/buildings. A PHA is required to have a certain amount of operating reserves to determine the amount of funds they can leverage in the OFFP. The OFFP program’s calculation to determine the amount of dollars of operating reserves is the same as the offset calculation, but the monthly expense level (denominator) is based on actual costs specifically: total operating expenses, extraordinary maintenance costs and casualty losses as indicated in the FDS.

So the question is, why would HUD use actual PHA costs for the FASS and OFFP expense level, but projected costs for the subsidy offset? Is it because that by employing projected costs rather than actual costs, HUD is able to offset more funds? The operating reserve offset calculation is a bit misleading and should be updated to be consistent with other indicators that measure reserve levels and include additional FDS line items to properly reflect the solvency of PHAs.

If you have questions related to matters discussed above, please contact Brian Alten.

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