On May 2, PHADA submitted comments in response to a HUD request for comments on the department’s draft notice on affiliated organizations. HUD developed this draft in response to the Inspector General's concerns about HAs’ uses of affiliate nonprofits and instrumentalities in assisted housing development. PHADA is very concerned that the notice may restrict HAs’ development capacities severely, and the association recommended that the department withdraw from this approach and convene a stakeholder group to discuss reasonable approaches to solving issues raised by the IG.

The full text of PHADA’s comments appears below.

Ms. Dominique Blom
Acting Deputy Assistant Secretary OPHI
United States Department of Housing and Urban Development
Office of Public and Indian Housing
451 7th Street, SW Room 4130
Washington, DC 20410

May 2, 2006

Dear Ms. Blom:

The Public Housing Authorities Directors Association (PHADA) is a membership organization representing approximately 1,900 public housing authority executive directors and chief executive officers. PHADA wishes to submit the following comments concerning the draft notice on affiliates and instrumentalities. These comments include six very serious concerns with the draft and the supporting OIG report, and they include a recommendation on how best to proceed developing realistic guidance on the subject.

Six concerns

1. The notice is illegitimately broad in applicability

The draft notice defines public housing funds as any funds appropriated to implement the U.S. Housing Act of 1937. These funds include appropriations for the Operating Fund, the Capital Fund, the Section 8 program, and the HOPE VI program. This definition coupled with other sections of the notice appear to limit severely HAs’ discretion in the use of funds and in the combination of funds from various federal and non-federal sources to develop affordable housing. For example, Section IV. A. appears to restrict the use of Section 8 administrative fee reserves to develop assisted or affordable housing that does not include public housing units, a restriction that appears contrary to previously allowable uses. The same section also requires the use of non-federal funds in the administration, management, or development function of projects that do not include public housing, apparently restricting the use of CDBG, HOME, or other federal funds in such properties.

2. The notice is unclear, contradictory, and opaque

The draft defines an affiliate and an instrumentality, the latter being an affiliate wholly owned and controlled by the parent HA. Although the notice offers no definition of identity of interest, Section II. indicates that an affiliate has an identity of interest with a HA if, “some or all” of the affiliate’s board members are HA board members or employees. An identity of interest exists for an instrumentality where, “the majority,” of the affiliate’s board consists of HA board members or employees. This paragraph also indicates that, “An Instrumentality is an affiliate in which assets are controlled by the PHA and acts solely at the will of the parent PHA.” These definitions and diverse guidance are not obviously congruent.

3. The notice conflates federal and non-federal activities

Section II. C. 1. requires that, “the operations of the affiliate, including the operation of public housing programs, must be carried out in accordance with the federal requirements applicable to the function being performed.” Not only does the draft notice fail to distinguish between federally funded activities and activities supported with non-federal resources, it explicitly applies federal requirements to similar non-federal functions. The notice’s reach also exceeds its grasp in applying federal requirements to functions of a partner of an affiliate if the partnership’s purpose includes performance of public housing functions.

4. The notice imposes unreasonable, inconsistent, and illegitimate requirements for and restrictions on instrumentalities

Section II. D. provides a laundry list of “requirements” and “considerations” concerning the operation of an instrumentality, some of which conflict with other notice provisions. For example, the notice acknowledges that forming instrumentalities is a matter subject to state and local (not federal) law, but it requires:

1) That the HA certify to HUD that the instrumentality is legitimate,
2) That the instrumentality provide, “legal opinions in a form acceptable to HUD,” indicating compliance with applicable state and local law, and
3) That the HA and instrumentality must make undefined documentation available to HUD for use in its monitoring activities.

All of an instrumentality’s development fees and profit must be returned to the HA to use for undefined low income housing purposes regardless of the funding that produced fees and profits.

An instrumentality may only be established for the benefit of the HA in implementing its public housing program. Although the notice had indicated that public housing funds could be used to establish an affiliate to develop housing that includes some public housing units, HAs may not use public housing funds to establish an instrumentality whose first housing development does not include public housing units. Although procurement of an instrumentality’s services is not subject to federal procurement requirements, procurements by an instrumentality are.

5. The notice embodies HUD’s ongoing intent to become deeply enmeshed in HAs’ detailed, daily activities, regardless of the funding for those activities

HUD must approve agreements between HAs and instrumentalities to permit the instrumentalities to use development fees or profits for future affordable housing purposes regardless of the sources of those fees and profits. The Assistant Secretary of Public and Indian Housing must approve granting of a security interest in any HA asset or property, whether it is public housing property or not. HUD’s Regional Offices and Field Offices must review all loans, partnership agreements and bond financing agreements between the affiliates, the HA and other entities.

6. The notice requires retroactive reimbursement of costs and restructuring of agreements based on previously unpublished, unannounced, and insupportable requirements

The draft notice includes requirements out of conformance with earlier guidance and practice. In 2003, HUD’s Deputy Assistant Secretary for Public Housing and Voucher Programs wrote a response to the flawed OIG report cited as a basis for this draft notice. There, HUD argued that the OIG report failed to consider distinctions between different kinds of development projects and failed to consider the common practices of HAs in managing funds and HUD in assessing risk. Through this notice, PIH abandons its former positions and submits to OIG’s constricted view of the role of HAs and of the relationships between HAs and HUD. In doing so, the notice spells out new requirements for HAs and their affiliates and instrumentalities to reimburse funds these entities used for what HUD previously considered legitimate purposes. The provisions of this draft notice represent an unacceptable confiscation of HA and affiliate resources that would otherwise be available for use in the development and operation of public housing and other forms of affordable housing.

Next steps

The potential mischief this draft notice may wreak is enormous. While the federal government withdraws at full tilt from its historical commitment to support public housing, HUD appears willing to submit to the OIG’s ill-considered arguments that hamstring other initiatives designed to produce housing to fill some of the gaps left by this federal abandonment. The 2004 OIG report has cast a chill over HA involvement in developing affordable housing and raised the private sector’s risks in collaborating with HAs, their affiliates and instrumentalities. While PHADA has very serious concerns with the draft notice’s language and approach, resolving issues raised by the OIG’s report is vital to local housing authorities, the public housing program, and the 1.2 million households who depend on it for decent affordable housing.

HUD must withdraw this draft notice, as it is wholly unacceptable even to the Office of Public and Indian Housing. PHADA also urges HUD to convene a group of qualified agencies and institutions with a stake in affordable and assisted housing development and negotiate resolutions of these matters. A negotiated resolution can satisfy the OIG’s concerns, protect and support HAs’ roles in developing assisted housing using public housing Capital Fund and Operating fund appropriations, and respect the boundaries that separate HUD from HAs’ development activities not supported under the 1937 Act.

Sincerely,

Timothy G. Kaiser
Executive Director

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