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. We found that because of these conditions, housing agency managers believed that PFS significantly underfunds their need for subsidy. 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. 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. 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. 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 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. The inflation adjustments over the last 23 years have not been sufficient to account for increasing maintenance costs, they said. Thus, the agency’s allowable costs under PFS do not include the costs of developing and maintaining an information system. They attributed other increasing operating costs to the age of the development, its architectural design, and the residents. GAO Comments

1. 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. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 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. 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.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reviewed the Department of Housing and Urban Development's (HUD) Performance Funding System (PFS) for allocating appropriated funds to housing agencies as operating subsidies, focusing on: (1) how PFS allocates the congressionally appropriated subsidy among public housing agencies; (2) whether PFS meets the subsidy needs of individual housing agencies; (3) how HUD's budget estimates of housing agencies' annual need for operating subsidies are developed and whether the estimates are appropriate; and (4) some of the possible options that HUD might have for changing PFS to make it a more effective tool for subsidizing housing agencies.

What GAO Found

GAO noted that: (1) PFS 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; (2) the adjusted base year cost is known as the allowable expense level; (3) 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; (4) 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; (5) the operating subsidies that the PFS 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; (6) although the PFS 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 not adequately reflect their needs or those with expenses that have increased more rapidly than HUD's allowed adjustments; (7) GAO found that agencies have experienced significant operational changes since 1975 that have affected their costs; (8) 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; (9) inadequate subsidies can be a serious problem for housing agencies that are highly dependent on subsidies and need them to meet current obligations; (10) HUD has several options for making PFS a more accurate and effective funding tool; (11) in the past, information on physical housing conditions, comparative costs, or other data needed to implement a cost model has not been readily obtainable, and the cost of developing such information for all agencies was believed to be high; and (12) 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.