On December 11, 2024, HUD published a notice establishing the Operating Cost Adjustment Factors (OCAFs) they will be using for FY25 and requesting comments on some methodological changes to how they are calculated. While often overlooked as a bureaucratic exercise, the establishment of OCAFs actually has an incredible impact on the funding level for projects with a project-based Section 8 contract serving millions of households. The OCAF for any given year determines how much the subsidy HUD provides increases–annually and at renewal–for properties with project-based Section 8.
OCAFs are particularly important for any public housing authority that has converted units under the Rental Assistance Demonstration. Once a property converts, it will receive a fixed amount of funding (typically referred to as its “RAD rent”) each year that gets adjusted annually by the OCAF. HUD publishes OCAFs at the state, territory and national level, which are used to calculate these year over year increases.
This should, in theory, help properties remain financially stable, by increasing their funding as costs rise. In practice, however, the current state-level OCAFs mask significant regional variation. For example, consider differences between the California Bay Area and lower-cost parts of the state. Furthermore, the measures HUD has historically used have not always accurately reflected the true cost increases owners experience, for example, the unprecedented rise in insurance costs faced by affordable housing providers in the past five years.
OCAFs are calculated as the sum of weighted component costs for electricity, employee benefits, employee wages, fuel oil, equipment, insurance, natural gas, property taxes, and water/sewer/trash.
With the release of the FY25 OCAFs, HUD is instituting methodological changes that will hopefully address some inconsistency with the insurance component of the OCAF. Instead of using national-level Bureau of Labor Statistics Producer Price Index Data on property insurance, the 2025 OCAFs will rely on actual state-level data with at least 100 properties with audited financial statements. According to HUD, the PPI, as a national index, overlooked significant regional variations in insurance costs.
It also begs the question of what is stopping HUD from using actual data from the thousands of Project Based Rental Assistance contracts across the other component costs, or to permit actual cost data to be submitted in regions known to have higher than average costs. There is nothing statutory prohibiting this–Congress, under the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA) delegates significant authority to HUD to set these measures, with the only real requirement being that a new year’s OCAF does not result in a reduction of rents. The more likely difficulty is limited capacity at HUD and lack of good audited financial data from property owners.
Improving this data collection and HUD’s capacity to analyze this data would not only provide more accurate adjustments, but could also help the Office of Asset Management & Portfolio Oversight identify outlier properties in need of greater scrutiny. Expanding this capacity at HUD could enable similar processes to be applied for other programs. For example, more consistent and accurate analysis of financial statements of Section 202 (elderly) or Section 811 (persons with disabilities) properties could help streamline the process by which they receive rent adjustments. Both of these programs currently rely on budget-based rent adjustments which need to be requested by the property owner. Many lower-capacity owners may go years without requesting an increase. With the right set of data, HUD could calculate regional or state cost increases and automatically apply them to these properties in a manner similar to an OCAF, ensuring these properties are able to successfully serve some of our most vulnerable neighbors.
HUD is seeking comments on these methodological OCAF changes. Comments are due January 10th.