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Discussion Staff is projecting that the annual operating expenses at Kottinger Place will be $279,893. This represents a decrease of 4.2% over estimated FY 2011/12 expenses of $292,200. This modest decrease is due primarily to a decrease in administrative salaries (discussed later) as well as minor reductions in maintenance costs. In addition, $14,685 is budgeted for Extraordinary Maintenance funded with a HUD Capital Fund Program (CFP) grant for a total budget of $294,578. The continued availability of the CFP funding will help to offset continued inflationary costs for landscape maintenance and utilities. Income Approximately 59% of the $279,893 in operating costs will be met through tenant rents, which are forecast to remain relatively stable at approximately $153,600 (as observed over the past several years, any increases in overall tenant rents are anticipated to be offset by new tenants with "zero- income"). Note that under the terms of our annual operating contract with HUD, the rents at Kottinger are fixed at 30% of the tenant's annual income, and this formula cannot be changed. As a result, if lower income tenants move into the development, the total rental revenue will decrease. Conversely, if higher income tenants move in, rental revenue will increase. Applicant selection may be based on tenant income provided that an applicant does not exceed the maximum amount which is 50% of the Area Median Income ($32,350 for a household of one person). The difference between total operating expenses and total income leaves an overall deficit to the project of $24,258. Until three years ago, Kottinger Place routinely experienced a deficit of $30,000 or more in its annual operating budget. In years past, the deficit was covered through the Kottinger Place investment account or by the City. Since introduction of the CFP grant by HUD several years ago, these additional funds for capital improvements have helped to offset the budget deficit and eliminate or reduce reliance on project reserves or City assistance. Staff was successful several years ago in applying for additional Operating Subsidy from HUD. Since 2006, the Housing Authority has received an average of about $150,000 per year in Operating Subsidy funds. These funds are generally transferred to the Housing Authority account in monthly or quarterly disbursements. The current budget anticipates a reduced amount of $99,172 from this source in FY 2012/13 based on recent trends and information from HUD. While the actual amount could change, the allocation for 2012 was 30% less than the prior year (representative of national trends). This is the primary cause for the reduced projection in Operating Subsidy and the related projected budget deficit. In communications with staff, HUD indicated that the reduction is also based on its assessment that the Authority's reserve accounts are sufficient to fund the gap and therefore this is encouraged. Staff has historically remained conservative in utilizing these reserves unless other options are unavailable, and it currently holds that position. Expenses Administration/Services The administrative expenses are projected to decrease by approximately 10% as compared to last year. The decrease is due to normal minor cost increases associated with the various administrative categories. A portion ($3,000) of the salary for the on-site manager has been transferred to the CFP (Administration) as in prior years. The budget for tenant services (i.e., recreation supplies) was Page - 2 -