New HUD Reporting Rule May Impact PHA Reserves & Compliance

Policy Deep Dive: PIH Notice 2025-20

Policy Overview

PIH Notice 2025-20, issued by HUD on July 9, 2025, introduces a new financial reporting requirement for Public Housing Authorities (PHAs) under the Operating Fund program. Specifically, it mandates that PHAs submit the Federal Financial Report (SF-425) annually for each individual Operating Fund grant received, starting with Calendar Year (CY) 2026 Operating Subsidy funds.

While the SF-425 form itself has been required by the Office of Management and Budget (OMB) since 2009, HUD’s implementation through this notice introduces substantive new obligations and interpretations that have the potential to significantly alter how PHAs manage and report their operating funds.

Key provisions include:

Annual SF-425 Submissions: All submissions must be made through HUD’s Operating Fund Portal, with the first report due April 30, 2027, covering CY 2026 Operating Subsidy funds.
Redefinition of program income: PIH Notice 2025-20 explicitly classifies rental income, non-rental income (including income from program assets like vending machines), interest earned on rental income, and third-party agreements as Operating Fund program income.
Cash-on-hand restrictions: PHAs must justify any cash balances held beyond three days of expected use.
Grant lifecycle enforcement: All funds must be obligated by the end of the grant term and liquidated by April 30. Unused funds must be returned to HUD.
Supersession of prior guidance: HUD states that this notice overrides previous communications, even where conflicts with existing regulations may exist.

These changes are not just procedural. They impact reserve use, subsidy access, modernization planning, and long-term financial obligations.

Strategic Implications for PHAs

The notice introduces new rules that change the order in which funds must be spent and how reserves are treated.

Both may have serious downstream effects:

Reserve recapture: HUD’s new guidance signals that it may reclaim portions of operating reserves. These reserves are often used by PHAs to respond to emergencies (e.g., HVAC failures, roof leaks), make capital purchases (e.g., IT upgrades), or fund pre-development work for RAD conversions. If HUD begins clawing back these funds, PHAs will lose a critical financial buffer and may be unable to respond quickly to urgent needs.
Threat to modernization efforts: Many PHAs have used accumulated reserves to make up-front repairs and improvements before converting properties under RAD. These investments are often made years in advance and are not reimbursed by HUD. If reserves are recaptured or restricted, PHAs may be forced to delay or cancel modernization plans, undermining long-term asset management strategies.
Conflict with Congressional intent: HOTMA and the Operating Fund Financing Program grant PHAs flexibility to accumulate reserves for larger projects. Stakeholders argue that HUD’s new restrictions on reserve use and expenditure order may conflict with this statutory intent, raising legal and policy questions about HUD’s authority.
Delayed access to operating funds: The requirement to spend program income first, before drawing Operating Subsidy, creates a timing problem. For example, if a PHA receives a late rent payment after planning to draw subsidy for invoices, it may be forced to reallocate that rent toward those invoices instead. This disrupts cash flow and creates uncertainty in financial planning. PHAs will need to monitor income and expenses more often to avoid compliance issues.
Disincentives for innovation: Under the new rules, PHAs must spend all program income (including interest and other earned revenue) before accessing subsidy. This means PHAs cannot retain interest income, which removes incentives to manage funds efficiently or pursue entrepreneurial activities. Worse, it may encourage PHAs to spend money faster than needed just to unlock their subsidy, leading to wasteful or rushed expenditures.

Operational & Capability Considerations

PIH Notice 2025-20 introduces a set of new administrative and compliance requirements that will be especially burdensome for small and mid-sized PHAs.

Here’s why the operational impact may be so significant:

1. Increased accounting workload:

The requirement to spend program income before drawing Operating Subsidy may mean PHAs must monitor their income and expenditures in real time. This is a major shift from current practices, which often rely on monthly or quarterly reconciliation.

2. IT system readiness:

HUD has instructed PHAs to submit SF-425 reports through the Operating Fund Portal. However, the portal is not yet fully functional, and the broader Housing Information Portal has been under development for years and remains inaccessible to many PHAs.

This raises serious concerns about:

Whether HUD’s systems can support the volume and complexity of the new reporting requirements.
How PHAs will troubleshoot issues if HUD field offices (which are not equipped to handle technical inquiries) are the only point of contact.

3. Impact on long-term obligations:

Many PHAs have long-term financial commitments such as pensions, OPEB (Other Post-Employment Benefits), and debt service. These obligations are often funded through reserves or planned subsidy drawdowns. The new restrictions on reserve use and the requirement to spend program income first could:

Delay access to subsidy funds needed for scheduled payments.
Prevent PHAs from setting aside reserves for future liabilities.
Create compliance conflicts if funds are redirected to meet HUD’s new rules rather than contractual obligations.

These changes will require staff retraining, policy revisions, enhanced financial tracking systems, and possibly new IT infrastructure to ensure compliance and avoid penalties.

Legal and Regulatory Concerns

PHADA is actively examining whether HUD’s approach complies with federal rulemaking procedures:

Lack of Formal Notice-and-Comment Rulemaking

Under the Administrative Procedure Act (APA) and HUD’s own rulemaking procedures in 24 CFR Part 10, such changes typically require a formal notice-and-comment process, allowing stakeholders to review and respond before implementation. If HUD is bypassing this legal requirement, the notice may lack enforceability and could be challenged on procedural grounds

Conflict with Existing Regulations

Portions of PIH 2025-20 appear to contradict 24 CFR 990, which governs operating fund disbursements and reserve management. For example, CFR 990 states that HUD must make monthly payments equal to 1/12 of a PHA’s annual operating subsidy via electronic transfer, yet the new guidance requires program income to be spent first.

Superseding Prior Guidance Without Reconciliation

HUD’s blanket statement that previous communications are superseded creates legal ambiguity and undermines regulatory consistency.

Context: A Broader Regulatory Shift

PIH Notice 2025-20 is part of a coordinated series of HUD actions. These changes reflect tighter financial controls on cash management, transparency, and federal compliance.

Other recent notices include:

PIH Notice 2025-22 (July 17): Revises subsidy eligibility calculations for CY 2026 and introduces new certification requirements, including compliance with the ACC, federal laws, regulations, and executive orders, specifically referencing immigration enforcement. It also signals the development of a new expenditure reporting system for PHAs.
PIH Notice 2025-14 and PIH Notice 2025-17 (Early 2025): Introduce new financial assessment indicators and reserve management policies. These notices direct the order in which funds are spent, affect the timing of grant usage, and require new certifications. Collectively, they restrict flexibility and increase administrative burden.
Interest Calculation Guidance (May 7): HUD published new guidance on its Asset Management webpage to help PHAs comply with the requirement to return interest earnings over $500 to the Department of Health and Human Services (HHS).
This requirement, first introduced in PIH Notice 2024-25, mandates that PHAs deposit Operating Subsidy grants, program income, and disposition proceeds into interest-bearing accounts and remit excess interest annually. The guidance outlines acceptable methods for calculating interest (e.g., year-end balances, average daily balances) and provides instructions for reporting and remitting funds.

Recommendations for Further Insight

Track portal functionality and HUD system updates, especially the Operating Fund Portal and Housing Information Portal, to anticipate technical barriers and guide clients through implementation.
Monitor for conflicts with 24 CFR Part 990, especially around monthly disbursement rules and reserve management, and prepare briefing materials for clients navigating overlapping requirements.
Conduct internal legal reviews to assess exposure and compliance risks.
Design contingency frameworks for subsidy delays, reserve clawbacks, and cash-on-hand restrictions, including cash flow modeling and alternative funding strategies.
Evaluate long-term obligations and assess how the new rules may affect pension and benefit liabilities.
Assess IT readiness and begin planning for system upgrades or external support to meet new reporting demands.

Conclusion

PIH Notice 2025-20 is not just a technical update with potentially unlawful implications. With CY 2026 implementation beginning soon and the first SF-425 due in April 2027, this is a development that demands a close watch moving forward.

As guidance on this notice progresses, we will continue to monitor how HUD reconciles these new requirements with existing regulations and adjust our strategies accordingly.

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