Government Liable for Breach of Annual Contributions Contracts

Facts: In a consolidated lawsuit, over 300 PHAs sued the United States for breach of contract. They claimed that HUD breached their Annual Contributions Contracts (ACC) in 2012 when it didn’t comply with the rules set forth at Title 24 of the Code of Federal Regulations that govern the allocation of operating subsidies when funds are not available to pay them in full.

Under the Operating Fund Formula set forth in the regulations, PHAs are eligible for an operating subsidy (or annual contribution) equal to “the difference between formula expense and formula income.” The regulations contain a provision for adjusting the amount of each PHA’s operating subsidy payment in circumstances where Congress fails to appropriate sufficient funds to pay the aggregate amount due to PHAs under the Operating Fund Formula. That provision, 24 C.F.R. § 990.210(c), states that “[i]n the event that insufficient funds are available, HUD shall have discretion to revise, on a pro rata basis, the amounts of operating subsidy to be paid to PHAs.”

The Housing Act requires that “the provisions for annual contributions” made to PHAs be embodied “in a contract guaranteeing their payment.” The breach of contract claims in this case arise out of changes to the calculation and allocation of operating subsidies that HUD implemented for 2012 on the basis of the Consolidated and Further Appropriations Act of 2012.

The pertinent provisions of the 2012 Appropriations Act had their origins in the President’s proposed budget for 2012. The President’s proposal contained a provision stating that “in determining [PHAs’] . . . calendar year 2012 funding allocations . . . the Secretary shall take into account PHAs’ excess operating reserves, as determined by the Secretary.” According to the proposal, the $3,961,850,000 requested, when “coupled with $1 billion from [PHAs’] operating reserves, will fund 100 percent of PHAs’ estimated eligibility for operating subsidies under the Operating Fund formula ($4.962 billion).”

The act thus adopted the President’s proposed budget amount for operating subsidies, as well as his proposal that the Secretary be given the authority to “offset [PHAs’] allocations of operating funds in fiscal year 2012 based on excess reserves they have available to meet their operating needs.” In addition, Congress imposed certain restrictions on the amount of the offset, which were not included in the President’s proposal, to ensure that no PHA would see its reserves reduced below $100,000.

HUD’s implementation of the authority it was given under the 2012 Appropriations Act changed the methodology used for calculating the amount of operating subsidies to be paid to the PHAs. In prior years, pursuant to its regulations, HUD had reduced each PHA’s operating subsidy payment by a uniform percentage that reflected the shortfall between the total amount Congress had appropriated and the total amount payable under the Operating Formula. Because of the changes HUD made to comply with the 2012 Act, however, the reduction of the PHAs’ payments to account for the budget shortfall were not made on a proportional basis.

The PHAs alleged that HUD breached the ACCs because, by taking their excess reserves into account when determining their operating subsidy payments, HUD in fact reduced their operating subsidy payments on a non-proportional basis, in conflict with the Title 24 regulations incorporated into the ACCs. They seek compensatory damages in the aggregate amount of at least $135,836,467, as well as an award for the costs and expenses of this lawsuit. Both parties have asked for a judgment without a trial.

Ruling: The U.S. Court of Federal Claims granted the PHAs request and denied the government’s request.

Reasoning: The court found that the language in the regulations (and in the ACCs) that makes the government’s obligation to pay operating subsidies “subject to the availability of funds” does not excuse HUD’s failure to apply the methodology set forth in the regulations for determining the amount of the operating subsidy payments based on the availability of funds. Therefore, the court concluded that the government breached its obligations under the ACCs when it applied the operating expense offset in response to the 2012 Appropriations Act, rather than the proportional reduction rule prescribed by Title 24.

• Public Housing Authorities v. USA, January 2017