Would Create Resident Services Cuts and Increase Costs, Burdens
PHADA President John T. Mahon.
PHADA reported in the last Advocate that HUD issued Notice PIH 2025-20, the Operating Fund Federal Financial Report (SF-425) Submission Process. This is a very technical notice that many HAs may not have had a chance to review yet, but it is extremely important.
Big Picture Concerns
We are concerned that this notice and other recent ones effectively rewrite existing operating fund regulations and procedures. The changes will result in large administrative burdens, increased costs, and possible resident services cuts. We also believe they could result in insolvency for many HAs and operating reserve recaptures, which would hamper our ability to address unforeseen circumstances arising from Continuing Resolution uncertainties or government shutdowns.
The “cash management” guidance includes new requirements for HAs to submit the SF-425 form annually through the Operating Fund portal beginning in FY 26, which starts in two short months. Some of the most concerning provisions include those requiring HAs to now classify rental income and other revenue sources as “program income.” In Notice PIH 2025-20, HUD dictates that such program income must be expended first before operating subsidy.
It is also troubling that the notice says that previous HUD communications are “superseded.” This is despite the fact that some of the new procedures conflict with current regulations governing operating reserves, financial assessment indicators, and subsidy drawdowns.
Is The Notice Legal?
With this and other recent issuances, HUD has now published a total of four separate notices going back to last year. These include one that will severely limit the amount of interest HAs can keep, and this one, which will delay our ability to draw down operating funds.
As noted above, HUD says, “This guidance supersedes any previous language conveyed to PHAs.” PHADA has serious questions about whether the process HUD is using adheres to legal rulemaking procedures. Does HUD need to go through formal notice and comment rulemaking to make such significant changes? This is a question PHADA is examining in more detail.
Portions of the notices seem to conflict with current operating fund regulations. For instance, CFR 990 states that “HUD shall make monthly payments equal to 1⁄12 of a PHA's total annual operating subsidy under the formula by electronic funds transfers through HUD's automated disbursement system.” Yet, the new system says HAs must first spend program income before drawing subsidy.
Major Problems Will Develop
Under the notice, HUD will likely recapture some operating funds. Thus, HAs may not be able to address emergency needs or make any capital purchases like IT equipment.
It does seem a key aim of the Department is to retake operating reserves. Under current law, however, Congress has spoken and granted HAs the ability to accumulate reserves for larger projects. This is a major objective behind the replacement reserve provision in the Housing Opportunity Through Modernization Act (HOTMA). Similarly, Congress authorized the Operating Fund Financing Program.
Many HAs have used reserves and other funds for up-front repairs and modernization prior to their RAD conversions. Those dollars now may be jeopardized. On top of this, HUD’s own assessment rules mandate that HAs maintain certain levels of operating reserves, which is a basic tenet of property management.
Some other concerns:
- Many HAs have long-term financial obligations, i.e., OPEB, pensions, and other benefits. This new guidance will severely hamper our ability to pay those obligations.
- HUD also states that inquiries from HAs are to be directed to HUD field offices, which are not able or equipped to manage such matters.
- Can HUD’s Information Technology systems be designed to handle such significant changes? All this starts in 2026—just months away. The Department has been trying to institute the Housing Information Portal for several years, and it is still not ready and accessible to HAs.
- Several accountants and finance experts have told PHADA that Notice PIH 2025-20 will dramatically increase the volume of accounting work. By changing the order of expenditures, it will require a higher level of tracking. This will result in huge burdens and more costs for HAs, at a time when operating funding is already inadequate.
- Requiring program income to be spent first will eliminate any interest or other earned income, which will mean HAs do not get to keep any of that money. This creates disincentives for HA to be entrepreneurial. Similarly, it will create counterproductive incentives for HAs to spend more money, more quickly, so they can access their operating funds.
Conclusion
Collaborating with professional accountants and HA chief financial officers, PHADA has submitted a detailed list of questions and other concerns to HUD. Those questions can be found below.
PHADA has successfully solicited the other industry groups’ support and requested a meeting with PDAS Ben Hobbs and HUD Chief Financial Officer, Irving Dennis. We have asked them for a meeting to discuss both the large-scale concerns and the many technical issues and problems. We have also scheduled a session on this topic during the PHADA 2025 Legislative Forum, September 7–9, in Washington, DC.
This is a particularly important matter. PHADA will stay on top of it, make sure HUD understands our valid concerns, and keep members informed.
Questions Concerning Notice PIH 2025-20
- For Section 4 of the notice, what is the first Operating Fund grant for implementing the new requirements? Will this be applied to the 2026 Calendar Year Operating Fund grant, prospectively?
- “Beginning with their FY 26 Operating Subsidy, PHAs will be required to submit SF-425s in the Public Housing Portal for each Operating Subsidy grant on an annual basis until all grant funds are either reported as expended or returned to HUD.” (Section 4) HUD provides Operating Subsidy grants at the project level on a calendar year basis. Must HAs report based on their fiscal year, the calendar year, or the federal fiscal year?
- Section 5 provides a “period of performance” example using the 2024 Operating Fund grant. Will HUD apply new requirements to the 2024 Operating Fund?
- The last paragraph of Section 5a appears to create a new requirement, similar to the Capital Fund Program, that HAs may not draw down Operating Subsidy unless there are invoices that can be paid within the next three business days. Section 8 of the notice (Order of Expenditures) seems to mean that expenses are paid from Program Income (e.g. Rental Income, Rent, Interest, Other income, etc) first, then from Operating Subsidy. Therefore, no Operating Subsidy may be drawn until all other sources of Program Income are spent. Is this correct?
- Is this determined on a perpetual basis? For example, if the HA has spent all of Program Income received by the 20th of the month, then it may draw Operating Subsidy for invoices in hand that come in and exceed any other Program Income received during the rest of this month. If the HA receives a late rent payment on the 22nd (while the draw of Operating Subsidy and payment of the invoices is in process), must it pay invoices using tha rent received or may the HA pay the invoices with Operating Subsidy as it planned? HAs will need a perpetual daily tracking system for this, correct?
- HUD used FY 24 as the example in Section 5(a). Will CY 26 truly be the initial reporting year, or will HUD make PHAs calculate this retroactively for prior years? Section 4 states that beginning with their FY 26 Operating Subsidy, PHAs will be required to submit SF-425s in the Public Housing Portal. If HUD wants information on prior fiscal years, will it require separate reporting?
- A report on the status of 2026 Operating Subsidy funds for the period ending December 31 is due by the following April 30. The first time PHAs must submit the SF-425 will be April 30, 2027, for CY 26 funding, correct?
- HAs must exhaust non-federal resources before drawing Operating Subsidy. As a result, any year-end net income will consist completely of Operating Subsidy resources. Unless an AMP operates at an annual deficit requiring the use of prior year Operating Subsidy, those reserves will continue to accumulate. Operating Subsidy awards will remain active and will require an annual SF-425 submission for each AMP for each of the 7 years in the Performance Period, correct?
- Is the treatment of interest income described in Section 7 for each Operating Subsidy grant at the AMP level? The requirement in this notice does not pertain to Capital Fund Grant awards (also at the AMP level) or Section 8 program awards, correct?
- Section 6(e) of the notice (Recapturing Unliquidated Funds and Cash On Hand) states, “For PHAs that fail to submit their Final Report in a timely manner, HUD will recapture the last reported balance of Operating Funds.” 2 CFR 200.328(d) states that the “...Federal agency may extend the due date for any financial report with justification from the recipient or subrecipient.” How will HUD accept and process HAs’ requests for extensions?
- In the first sentence of Section 8 (Order of Expenditures) HUD refers to Operating “Expenses”. Should the first sentence refer to Operating “Expenditures”, which would include funds spent on operating expenses and fixed assets such as vehicles and equipment?
- Section 8 states that, “...Although non-rental income is program income, this statutory provision supersedes the order of expenditure requirement outlined in 2 CFR 200.307. However, because Operating Funds are intended to cover public housing operating expenses for a specific funding year, the expectation is that non-rental income will be obligated or expended during the same funding year in which the Operating Funds are appropriated [emphasis added].” Is there regulatory or statutory authority for this expectation?
- Section 8 states, “HUD recognizes that it has not issued regulations regarding the statutory flexibility provided to the use of non-rental income. This notice represents HUD’s interpretation of the interplay between the statute and existing regulatory requirements. HUD intends to issue regulations pertaining to this issue in the future.” This is unclear—what does this mean? When does HUD expect to issue these regulations?
- Are insurance settlements for casualty losses non-federal revenue that must be exhausted before HAs may draw Operating Subsidy?
- Is rent net of tenant accounts receivable for the purposes of the order of expenditure or must HAs exhaust gross rents charged before drawing Operating Subsidy?
- How will HUD monitor and oversee the accuracy of SF-425 submissions? Those submissions will be consistent with FDS systems only in a few instances. What data sources will HUD use to assess submission accuracy? Will HUD include a review of SF-425 submissions in its requirements for annual independent audits?
Questions Concerning Notice PIH 2025-22
- HUD has edited the SF-424 certification to align with the Administration’s executive orders. Has this change undergone an Information Collection review? A side-by-side comparison is warranted.
- The notice includes a chart that identifies FY 21 through FY 24 and Periods of Performance Ending dates of December 31, 2027, through December 31, 2030. Does HUD expect HAs to reconstruct its sources and uses of operating funds back to FY 21?
- The notice states, “For the purposes of requirements pertaining to interest, to the extent that a PHA does not account for its reserves based upon sources of funds, all such amount shall be considered Federal awards.” This implies that HAs must reconstruct the contents of reserve balances. How many years will HUD consider in this reconstruction? Will HUD apply recently announced standards concerning the retention of interest income and the order of expenditures retroactively to prior year reserve balances?