Order Code RS22557
Updated January 26, 2008
Public Housing: Fact Sheet
on the New Operating Fund Formula
Maggie McCarty
Analyst in Housing
Social Policy Division
Summary
The local public housing authorities (PHAs) that administer the federal public
housing program began receiving their annual federal operating subsidies under a new
formula in January 2007. As a result, some PHAs experienced an increase in their
eligibility for funding and others experienced a decrease, although both increases and
decreases will be phased in (over two and five years, respectively). However, the
amount that a PHA qualifies for under the new formula (whether it is an increase or a
decrease) will be reduced if Congress appropriates less money than is necessary to fund
all agencies at 100% of their eligibility. This fact sheet will be updated.
The federal government supplies subsidies to PHAs to help make up the difference
between what low-income tenants pay in rent and the cost of operating low-rent public
housing. The formula for providing these operating funds changed in January 2007.
Under the new formula, some PHAs are eligible to receive an increase in federal operating
funds and others qualify for a decrease. Both increases and decreases will be phased in;
PHAs facing decreases will have an opportunity to limit their formula eligibility losses
through the adoption of management changes. However, the amount that a PHA qualifies
for under the new operating fund formula (whether it is an increase or a decrease) is
reduced if Congress appropriates less money than is necessary to fund all agencies at
100% of their eligibility (as Congress has done in most recent years). This report is
designed to provide a brief overview of the changes to the public housing operating fund
formula that began taking place in January 2007.
Background
Public housing costs are divided into two main categories: capital costs and
operating costs. Capital costs are the costs of major renovations or modernizations.
Operating costs are the day-to-day costs of running a building, such as utility,
administrative, and routine maintenance costs. Operating costs vary based on many
factors, including the age of a building, its heating and cooling systems, and its location.
In the early years of the public housing program, PHAs were expected to meet their

---

CRS-2
operating costs through the rents they collected. Over time, tenant rents were no longer
sufficient to cover public housing operating expenses, in part because tenants became
poorer and therefore unable to pay as much in rent, and in part because the costs of
maintaining the buildings increased as they aged. In the late 1960s, Congress began
providing operating subsidies to PHAs to supplement the low rents paid by tenants.
The system in place for providing those subsidies until 2001 was the Performance
Funding System (PFS). In a 1998 public housing reform law, Congress responded to
criticisms that the PFS formula was outdated by creating a new Public Housing Operating
Fund.1 The law required the Department of Housing and Urban Development (HUD) to
use negotiated rulemaking to develop a new formula for distributing the funds. A
negotiated rulemaking committee convened in 1999 involved PHAs and other stakeholder
groups. During deliberation, it was agreed that sufficient data were not available to
determine the true costs of operating public housing, and that a study should be
undertaken.2 Until the results of the study were available, the committee agreed to use a
modified version of the PFS to create an interim operating fund formula. This interim
formula took effect in 2001.3 HUD contracted with the Harvard Graduate School of
Design to conduct the public housing operating cost study; its results were published in
2003.4 Another negotiated rulemaking committee was established to use the results of the
study to develop a final formula to replace the interim formula. HUD published a
proposed rule in the spring of 2005,5 but the rule was criticized for differing significantly
from the agreements made during negotiated rulemaking. HUD published a final rule in
the fall of 2005, which more closely resembled the initial agreement of the negotiated
rulemaking committee.6 The new formula took effect in January 2007.7
Operating Fund Formula
The operating fund provides subsidies to PHAs to make up the difference between
what it costs to run public housing and what low-income tenants pay in rent. Under the
interim formula, the calculation for determining a PHA’s operating subsidy eligibility
used two components: formula expenses (meant to represent the cost of running public
housing) and formula income (meant to represent the amount collected in tenant rents).
HUD subtracts a PHA’s formula income from its formula expenses and the amount by
1 Sec. 519, Quality Housing and Work Opportunity Responsibility Act 1998 (P.L. 105-276).
2 HUD, “Revisions to the Public Housing Operating Fund Program: Final Rule,” 79 Federal
Register 54984, September 19, 2005. (Hereinafter referred “Final Rule.”) See preamble.
3 HUD, “Allocation of Operating Subsides under the Operating Fund Formula,” 66 Federal
Register 17276, March 29, 2001. (Hereinafter referred to as “Interim Rule.”)
4 Harvard University Graduate School of Design, Public Housing Operating Cost Study: Final
Report, June 16, 2003.
5 HUD, “Revisions to the Public Housing Operating Fund Program; Proposed Rule,” 70 Federal
Register 19858, April 14, 2005. (Hereinafter referred to as “Proposed Rule.”)
6 The Final Rule replaces the existing 24 CFR Part 990 et. seq.
7 The rule initially scheduled implementation for 2006, but implementation was delayed by the
HUD notice “Revisions to the Public Housing Operating Fund Program; Correction to Formula
Implementation Date,” 70 Federal Register 61366, October 24, 2005.

---

CRS-3
which the income is short of the expenses is the PHA’s operating subsidy eligibility. The
new operating fund formula uses the same principle, but a more complex equation with
changes to the way certain components are calculated.
Formula Expenses. Formula expenses are the sum of three categories of
estimated expenses: non-utility expenses, utility expenses, and other add-ons.
Non-Utility Expense Levels.
Non-utility expense levels are per unit estimates
of the basic non-utility operating costs of maintaining public housing.8 Under the old
formula, the non-utility expense levels set for a PHA were called Allowable Expense
Levels (AELs). They were set for most PHAs under the PFS in 1975 and subsequently
updated for inflation. The AELs were modified in 1992 and again in 2001 when the
interim rule was adopted.9 To calculate the non-utility expense component of a PHA’s
formula expenses under the interim operating fund formula, the number of public housing
units in a PHA’s inventory10 was multiplied by the agency’s AEL.
The new operating fund formula sets new non-utility expense levels for PHAs based
on the data from the Harvard study and adjusted for inflation. These new project expense
levels (PELs) are not applied at the agency level (as under the interim rule), rather, they
differ for each project within a PHA’s portfolio based on the characteristics of that
project.11 To calculate the non-utility expense component of a PHA’s formula expenses
under the new operating fund formula, the number of eligible public housing units12 in
each project in a PHA’s inventory is multiplied by each project’s PEL and those amounts
are then summed.13 For CY2007, HUD developed weighted average project expense
levels (WAPELs) for each PHA, and applied the WAPEL to all PHA units; for CY2008,
HUD will use individual PELs.14
Utility Expense Levels. Utility expense levels (UELs) are estimates of the utility
costs that can be attributed to a unit of public housing. They are calculated for each utility
based on a PHA’s consumption level and the applicable rates for that utility. The interim
formula had aspects designed to encourage PHAs to adopt more energy-efficient practices
and reduce consumption. The Harvard Cost Study did not make recommendations for
changing utility expense levels, citing a lack of available data.15 The final rule largely
8 Examples of non-utility operating costs include administrative costs (advertising the availability
of units, processing of applications), safety and security costs, and routine maintenance.
9 See Interim Rule, 24 CFR 990.105.
10 Eligible units were units available for occupancy; long term vacancies and vacancies above 3%
are not considered eligible for occupancy. See Interim Rule, 24 CFR 990.102.
11 Projects are not necessarily individual buildings. Rather, they are groupings of units
established by PHAs under 24 CFR 990.665, Final Rule.
12 Eligible units are occupied units, units with an approved vacancy, and other vacant units (not
to exceed 3% of the PHAs inventory). See 24 CFR 990.125, Final Rule.
13 See 24 CFR 990.165, Final Rule.
14 Because HUD has experienced technical difficulties with a data system, for the first several
months of CY2008, PHAs are receiving funding based on their CY2007 eligibility.
15 Harvard Graduate School of Design, Benchmarking Public Housing Utility Funding to Private
Norms: A Feasibility Study (DRAFT), March 22, 2002.

---

CRS-4
maintains the existing formula for calculating UELs, although the rule does state that
HUD will study options for calculating utility costs and will convene a negotiated
rulemaking committee in 2009 to come up with a new formula for 2011.16
Add-Ons. In addition to basic utility and non-utility expenses, the interim
operating fund formula included some add-on costs that PHAs could qualify to include
in their formula expenses. Some of these add-ons were flat per-unit per-month or per-unit
per-year fees; others were open-ended reimbursements. The new operating fund formula
includes several new add-ons, including the reasonable cost of a self sufficiency program;
an asset management fee for PHAs in compliance with asset management requirements
($4 per unit per month for PHAs with more than 250 units and $2 per unit per month for
PHAs with 250 units or less); information technology fees ($2 per unit per month); asset
repositioning fees (for units being removed from the public housing stock that are not
eligible for operating funds); reasonable costs for energy conservation measures; and
payment in lieu of taxes (PILOT) costs (which were included in the AELs under the old
formula).17
Formula Income. Formula income represents the income a PHA collects from
rents. Under the interim rule, formula income was calculated by computing a PHA’s
average monthly rental charge per unit, applying an upward trend factor, and multiplying
it by the number of units expected to be occupied.18 Under the new operating fund rule,
formula income will be calculated by taking the average rent charged by each PHA in its
2004 fiscal year and multiplying it by the PHA’s eligible units.19 Each PHA’s formula
income will be frozen at this 2004 level through FY2008.20 Because tenants in public
housing pay an income-based rent, as their incomes rise, so does the amount they pay in
rent. With formula income frozen at the FY2004 level under the new rule, PHAs will
have an incentive to encourage families to increase their incomes, as the increased
revenue from rents will not be used when calculating a PHA’s operating fund eligibility
until after FY2008.
Phase-In
Under the new formula, some PHAs will be “gainers,” meaning that they will be
eligible for an increase in funding, while others will be “decliners,” meaning that they will
qualify for a decrease in funding. A HUD analysis found that 74% of PHAs would have
qualified for higher funding if the new operating fund formula had been in place in
FY2004; 26% of PHAs would have qualified for less funding.21 To help ease the
transition, losses will be phased in over five years; gains will be phased in over two years
(see Table 1 for the phase-in schedule). To implement the phase-in, HUD has calculated
16 See 24 CFR 990.170-185, Final Rule.
17 See 24 CFR 990.190, Final Rule. For former add-ons, see Interim Rule, 24 CFR 990.108.
18 See Interim Rule, 24 CFR 990.109.
19 See 24 CFR 990.195, Final Rule.
20 A PHA can appeal to have its formula income adjusted if it can show that a severe local
economic hardship is affecting its ability to maintain “some semblance” of its formula income.
21 HUD, New Operating Fund Formula Rule, Transition Analysis Report, available at
[http://www.hud.gov/offices/pih/programs/ph/am/of/transitionanalys.xls].

---

CRS-5
a transition amount for each PHA. The transition amount is the difference between a
PHA’s operating subsidy eligibility in FY2004 and what the PHA’s eligibility would have
been if the new formula had been in effect. The transition amount for each PHA will be
adjusted by each year’s phase-in level and then either added or subtracted to each PHA’s
operating subsidy eligibility level for that year.
For example, if a PHA’s operating subsidy eligibility was $500,000 in FY2004, but
would have been only $450,000 if the new formula had been in place, the PHA would be
considered a decliner, and its transition amount would be $50,000. Under the phase-in
schedule, declines are limited to 5% in the first year, and so $47,500 (50,000 x 95%),
adjusted for the number of eligible units, would be added to the PHA’s FY2007 operating
subsidy eligibility. If the situation were reversed and the PHA would have gone from
$450,000 under the old formula to $500,000 under the new formula, the PHA would be
considered a gainer. Its transition amount would still be $50,000, but since gains are
limited to 50% in the first year, $25,000, adjusted for the number of eligible units, would
be subtracted from the PHA’s FY2007 operating subsidy eligibility.
Table 1. Phase-in Rates for Operating Subsidy Funding Changes
Year
Phase-in for Declines
Phase-in for Gains
1 (2007)
-5%
50%
2 (2008)
-24%
100%
3 (2009)
-43%
100%
4 (2010)
-62%
100%
5 (2011)
-81%
100%
6 (2012)
-100%
100%
Source: HUD, “Public Housing Operating Fund Program; Revised Transition Funding Schedule for
FY2008 Through FY2012: Proposed Rule,” 71 Federal Register 68404, November 24, 2006.
PHAs that wish to limit their losses can transition to asset-based management in
advance of the 2011 deadline (discussed below).22 PHAs that transition to asset-based
management in the preceding year will stop their losses for the following year and
thereafter at that year’s phase-in rate.23 For example, a PHA that has adopted asset-based
management by the deadline in the first year will limit its losses to 5%, meaning that
HUD will add 95% of its transition amount to its operating subsidy eligibility each year.
Asset-Based Management.24 One major recommendation of the Harvard study
was that PHAs should transition to asset-based management. In the past, PHAs budgeted
and were funded on an agency-wide basis, rather than on a project-by-project basis. They
were also permitted to manage all of their units from a central office. This system
differed from private market multifamily housing norms, where each property is treated
22 See HUD, “Public Housing Operating Fund Program; Revised Transition Funding Provision
for Federal Fiscal Year 2007; Proposed Rule,” 71 Federal Register 68408, November 24, 2006.
23 Initially, HUD stated that PHAs were required to comply before April 15, 2007 to limit their
losses to 5% in the first year (HUD Notice PIH 2006-35). HUD later stated that it would extend
the deadline to October 15, 2007, for the first year. In the second year, PHAs will have to comply
by April 15, 2008, if they wish to stop their losses at 24%. In the third year, PHAs wishing to
stop their losses by 43% will have to comply by October 15, 2008.
24 See 24 CFR 990 Subpart H, Final Rule.

---

CRS-6
as an individual asset and managed on an individual basis. In the final operating fund
rule, HUD directed PHAs to adopt project-based budgeting and project-based accounting
by PHA FY2007, and project-based management by PHA FY2011.
Operating Subsidy Funding
The amount of operating subsidy a PHA is eligible to receive is not necessarily the
amount of funding it will actually receive. The amount of funding appropriated by
Congress for the operating fund is generally less than the amount necessary to fund all
PHAs at 100% of their eligibility. As a result, HUD must apply an across-the-board cut
to PHAs’ operating subsidy levels in order to stay within the amount appropriated by
Congress. The percentage of formula eligibility PHAs receive after the across-the-board
cut is referred to as the proration level. As shown in Table 2, proration levels have been
declining in recent years, meaning that PHAs have been receiving a smaller and smaller
share of the total funding for which they are eligible.
Table 2. Operating Fund Prorations, FY1998-2007
Appropriation
Proration
FY
(in millions of nominal $)
(%)
2007
3,864
83.4
2006
3,564
86.0
2005a
2,437
88.8
2004
3,579
98.1
2003
3,577
94.7
2002
3,495
100.0
2001
3,235
99.5
2000
3,138
98.5
1999
2,818
92.5
1998
2,900
100.0
Source: Table prepared by CRS. Appropriation figures are taken from the Office of Management and
Budget’s public budget database; proration levels are taken from data available on HUD’s website:
[ h t t p : / / w w w . h u d . g o v / o f f i c e s / p i h / p r o g r a m s / p h / a m / o f / p r o r a t i o n l e v e l s . p d f ] ,
[http://www.hud.gov/offices/pih/programs/ph/am/of/2006prorationexpl_sept06.pdf] and
[http://www.hud.gov/offices/pih/programs/ph/am/of/2007prorationexplfnl.pdf].
a. In 2005, Congress enacted a budgeting change that led to a one-time appropriations savings, without a
corresponding decrease in the program level.
The Harvard Operating Cost study found that, on the whole, the government has
been under-funding the operating costs of PHAs. HUD’s own transition analysis indicated
that if the new formula had been in place in FY2004, PHAs would have been eligible for
an additional $264 million. That means that if the new formula had been in place in
FY2004, with the same appropriations level, the proration level for FY2004 would have
been lower (and PHAs would have received less than 98% of their funding eligibility).
Because, in aggregate, PHAs will qualify for more funding under the new formula
than under the old formula, unless appropriations increase, proration levels can be
expected to continue to decrease.

---