[Federal Register Volume 70, Number 180 (Monday, September 19, 2005)]
[Rules and Regulations]
[Pages 54984-55008]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-18624]



[[Page 54983]]

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Part II





Department of Housing and Urban Development





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24 CFR Part 990



Revisions to the Public Housing Operating Fund Program; Final Rule

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / 
Rules and Regulations

[[Page 54984]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 990

[Docket No. FR-4874-F-08]
RIN 2577-AC51


Revisions to the Public Housing Operating Fund Program

AGENCY: Office of the Assistant Secretary for Public and Indian 
Housing, HUD.

ACTION: Final rule.

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SUMMARY: This rule amends the regulations of the Public Housing 
Operating Fund Program (Operating Fund Program) to provide a new 
formula for distributing operating subsidy to public housing agencies 
(PHAs) and to establish requirements for PHAs to convert to asset 
management. HUD developed the final rule with the active participation 
of PHAs, public housing residents, and other relevant parties using the 
procedures of the Negotiated Rulemaking Act of 1990. These regulatory 
changes improve and clarify the current regulations governing the 
Operating Fund Program and take into consideration the recommendations 
of the congressionally funded study by the Harvard University Graduate 
School of Design on the cost of operating well-run public housing. The 
final rule follows publication of an April 14, 2005, proposed rule, and 
takes into consideration the public comments received.

DATES: Effective Date: November 18, 2005.

FOR FURTHER INFORMATION CONTACT: Elizabeth Hanson, Public Housing 
Financial Management Division, Office of Public and Indian Housing, 
Department of Housing and Urban Development, 550 12th Street SW., Suite 
100, Washington, DC 20410; telephone (202) 475-7949 (this telephone 
number is not toll-free). Individuals with speech or hearing 
impairments may access this number through TTY by calling the toll-free 
Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 519 of the Quality Housing and Work Responsibility Act of 
1998 (Pub. L. 105-276, approved October 21, 1998) amended section 9 of 
the United States Housing Act of 1937 (42 U.S.C. 1437 et seq.) (1937 
Act). As amended, section 9 of the 1937 Act established an Operating 
Fund to make assistance available to PHAs to operate and manage public 
housing. Section 9 of the 1937 Act also required that the amount of the 
assistance to be made available to a PHA from that fund be determined 
using a formula developed through negotiated rulemaking procedures as 
provided in subchapter III of chapter 5 of title 5, United States Code, 
commonly referred to as the Negotiated Rulemaking Act of 1990 (5 U.S.C. 
561 et seq.).
    Negotiated rulemaking on the Operating Fund Program was initiated 
in March 1999, and the negotiated rulemaking committee consisted of 25 
members representing PHAs, tenant organizations, community-based 
organizations, and the three national organizations representing PHAs--
the Public Housing Authorities Directors Association (PHADA), Council 
of Large Public Housing Authorities (CLPHA), and National Association 
of Housing and Redevelopment Officials (NAHRO). Based on the 
recommendations made by the negotiated rulemaking committee, HUD 
published a proposed rule on July 10, 2000 (65 FR 42488), which was 
followed by an interim rule published on March 29, 2001 (66 FR 17276). 
The March 29, 2001, interim rule established the Operating Fund Program 
regulations that are currently in effect. These regulations are located 
in part 990 of HUD's regulations in title 24 of the Code of Federal 
Regulations.
    During the negotiated rulemaking for the Operating Fund Formula, 
Congress directed that HUD contract with the Harvard University 
Graduate School of Design (Harvard GSD) to conduct a study on the costs 
incurred in operating well-run public housing (Cost Study). This 
congressional direction was contained in the Conference Report (H.R. 
Rep. No. 106-379 at 91 (1999)) accompanying HUD's Fiscal Year (FY) 2000 
Appropriations Act (Pub. L. 106-74, approved October 20, 1999). 
Congress further directed that HUD make the results of the Cost Study 
available to the negotiated rulemaking committee and appropriate 
congressional committees.
    The Harvard GSD performed extensive research on the question of 
what the expense level of managing well-run public housing should be. 
HUD, consistent with congressional direction, made the results of the 
Cost Study available to the members of the negotiated rulemaking 
committee who developed the current Operating Fund Program regulations, 
and also invited the committee members to be active participants in the 
Harvard GSD's research for and development of the Cost Study. The 
Harvard GSD also conducted several public meetings to allow for an 
exchange of views and expectations with the public housing industry, 
beyond those industry members who were part of the negotiated 
rulemaking committee. The Cost Study was completed and officially 
released in July 2003.

II. The Negotiated Rulemaking Advisory Committee on the Operating Fund

    The FY 2004 Consolidated Appropriations Act (Pub. L. 108-199, 
approved January 23, 2004) required HUD to undertake further negotiated 
rulemaking to make changes to the Operating Fund formula.
    In response to this statutory language, HUD convened a negotiated 
rulemaking advisory committee (Committee) for the purposes of 
developing possible changes to the Operating Fund Program in response 
to the Cost Study. The Committee consisted of 28 members, including 
representatives of PHAs, public housing tenant organizations, public 
housing advocacy groups, the three national PHA organizations (CLPHA, 
NAHRO, and PHADA), the National Organization of African Americans in 
Housing (NOAAH), multifamily housing providers, and HUD. The Committee 
held four meetings. The meetings were held on March 30-April 1, 2004, 
in Washington, DC; April 13-15, 2004, also in Washington, DC; May 11-
12, 2004, in Atlanta, Georgia; and June 8-9, 2004, in Potomac, 
Maryland. Committee sessions were announced in the Federal Register and 
were open to the public. Members of the public were permitted to make 
statements during the meetings at designated times and to file written 
statements with the Committee for its consideration.
    The Committee developed a report containing several recommendations 
for revising the current Operating Fund Program regulations (Committee 
Recommendations). HUD developed a draft proposed rule based on these 
recommendations. Consistent with HUD's obligations under Executive 
Order 12866 (entitled ``Regulatory Planning and Review'') and other 
rulemaking authorities, the draft rule underwent further HUD and 
executive branch review prior to publication.
    On April 14, 2005 (70 FR 19858), HUD published its proposed rule to 
revise the Operating Fund Program in the Federal Register. As a result 
of the pre-publication review processes, ten substantive modifications 
were made to the Committee Recommendations. Specifically, the April 14, 
2005, proposed rule did not include seven of

[[Page 54985]]

the changes recommended by the Committee. In addition, the proposed 
rule contained three modifications to the Operating Fund Program that 
were not part of the Committee Recommendations. Additional information 
regarding the proposed regulatory changes to the Operating Fund 
Program, and the modifications made to the Committee Recommendations, 
can be found in the preamble to the April 14, 2005, proposed rule.

III. Differences Between This Final Rule and the April 14, 2005, 
Proposed Rule

    This final rule follows publication of the April 14, 2005, proposed 
rule and takes into consideration the public comments received on the 
proposed rule. Sections IV, V, and VI of this preamble provide a 
summary of the significant issues raised by the public commenters on 
the proposed rule and HUD's responses to the comments. After reviewing 
the public comments, HUD has made the following changes to the April 
14, 2005, proposed rule.

Adoption of Five Committee Recommendations

    HUD has adopted five of the seven Committee Recommendations that 
were omitted from the April 14, 2005, proposed rule. These are:
    1. The ten percent non-profit coefficient.
    2. The three percent vacancy allowance.
    3. The phase-in of operating subsidy gains over two years.
    4. The provision regarding the discontinuation of subsidy reduction 
through demonstration of successful conversion to asset management 
(i.e., ``stop-loss provision'').
    5. The language requiring use of an advisory committee to review 
the Project Expense Level (PEL) methodology and utility benchmarking, 
convened in accordance with the Federal Advisory Committee Act (FACA).
    With respect to the remaining two Committee Recommendations not 
adopted in the April 14, 2005, proposed rule (i.e., the change in 
methodology for inflating PELs and the elimination of the $2 per unit 
per month public entity fee), the final rule remains unchanged.

Removal of Provisions Not Contained in the Committee Recommendations

    Additionally, HUD has removed the three proposed rule provisions 
that were not part of the Committee Recommendations. These are:
    1. The adjustment in Sec.  990.190(i) based on the Committee 
Recommendations for certain PHAs.
    2. The two-year limit on a higher subsidy for vacant units due to 
changing market conditions, and the related requirements that PHAs 
requesting such subsidy submit a plan for ending the higher subsidy 
within the two-year period.
    3. The provision authorizing sanctions on PHAs that fail to comply 
with the asset management requirements or that do not submit accurate 
and timely data.

Energy Loan Amortization Expenses

    In response to comments, HUD has also added language relating to 
the eligible expenses that can be funded under the ``add-on'' for 
energy loan amortization. This language was included in the Committee 
Recommendations, but was inadvertently omitted in the April 14, 2005, 
proposed rule.

Technical Non-Substantive Changes

    In addition to the changes described above, HUD has also made 
several technical non-substantive corrections to the April 14, 2005, 
proposed rule, such as correcting cross-references and making other 
grammatical and editorial changes.

IV. Public Comments Received on the April 14, 2005, Proposed Rule

    The public comment period for the proposed rule closed on June 13, 
2005. The proposed rule was of significant interest to the public. HUD 
received 573 public comments on the April 14, 2005, proposed rule. 
Comments were submitted by PHAs, PHA industry groups, resident 
organizations, advocates for low-income housing, housing experts, and 
other organizations and individuals. Many of the comments were part of 
a letter-writing campaign consisting of several form letters that were 
similar in substance. In some instances, individual commenters 
submitted multiple comments consisting of different form letters. In 
general, the comments objected to the modifications made to the 
Committee Recommendations and urged that HUD issue a rule adopting the 
recommendations.
    The next two sections of the preamble present a summary of the 
significant issues raised by the public comments, and HUD's responses 
to the comments. Comments are organized in two categories. Section V of 
the preamble discusses the public comments regarding the changes to the 
Committee Recommendations. Section VI of the preamble discusses 
additional topics that were raised by the commenters. Within each 
category of comments, the headings present the issue or question, 
followed by a brief description of the comment and HUD's response to 
the comment.

V. Public Comments Regarding the Changes to Committee Recommendations

General Comments

    Comment: Support for proposed rule. Four commenters supported 
implementation of the April 14, 2005, proposed rule. The commenters 
wrote that although the proposed rule contained changes to the 
Committee Recommendations and did not fulfill every resident's and 
PHA's needs, the rule maintained ``some of the more prevailing themes 
of the negotiated rulemaking agreement,'' such as the conversion to the 
PEL, which will ``lead to more efficient property-based management.'' 
The commenters wrote that with the resulting increase in subsidy, PHAs 
will be able to provide additional services to their residents and 
urged HUD to quickly implement the April 14, 2005, proposed rule.
    HUD Response. HUD agrees that this final rule will result in 
better-managed PHAs and improved services to residents.
    Comment: HUD should fully implement the Committee Recommendations. 
As noted above, the majority of the public commenters objected to the 
changes made to the Committee Recommendations and urged that HUD either 
fully implement the regulatory proposals developed during the 
negotiated rulemaking process or reconvene the Committee for new 
negotiations. Several of the commenters expressed concern that the 
``proposed rule modification of the funding methodology will have a 
long term negative impact on PHAs in order to achieve a short-term 
solution for this budget year'' and that ``budget constraints should 
more appropriately be handled by prorating the budget based on the 
level of congressional appropriations.''
    HUD Response. While it is true that the Committee Recommendations 
were developed as part of a formal process, the completion of the 
Committee's work did not conclude the rulemaking process. HUD indicated 
throughout the negotiated rulemaking sessions that the Committee 
Recommendations, like all significant rulemakings, would undergo 
further HUD and Executive Order 12866 review prior to publication and 
that the recommendations might be revised as a

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result of those review processes. The changes made to the Committee 
Recommendations were designed to further the goals of the Operating 
Fund program and the Administration policies and budgetary priorities, 
while also advancing the goals of the Committee to implement an 
improved and more accurate Operating Fund formula.
    HUD recognizes that, as part of a negotiated rulemaking process, 
concessions were made by all parties to arrive at the proposed 
regulatory changes recommended by the Committee. In light of the issues 
raised by the public commenters, HUD has reconsidered the changes to 
the Committee Recommendations, and this final rule adopts all but two 
of the provisions recommended by the Committee. HUD believes that the 
final rule furthers the implementation of the recommendations of the 
Cost Study, the policy and budgetary goals of the Administration, and 
the consensus decisions reached during the negotiated rulemaking 
process.
    Comment: HUD should initiate new rulemaking on the Operating Fund. 
Several commenters wrote that HUD should discard both the April 14, 
2005, proposed rule and the Committee Recommendations, and start the 
rulemaking process again to produce a rule that would be more 
reflective of the costs associated with well-managed public housing. 
The commenters wrote that the cuts recommended by the Cost Study would 
impair the ability of PHAs to carry out necessary functions to maintain 
decent, safe, and sanitary housing.
    HUD Response. While the Committee Recommendations and the April 14, 
2005, proposed rule may not meet with the complete satisfaction of all 
parties, both reflect the results of extensive deliberations based on 
the sound and thorough Cost Study. As HUD has previously indicated, it 
believes that the Cost Study's methodology is an interim solution, with 
the ultimate goal to establish funding levels based on actual and 
reasonable cost data by property, which is to be achieved with the 
implementation of asset management. However, HUD has acknowledged that 
PHAs that face a reduction under the new formula will need some time to 
align their resources with the new funding. Accordingly, HUD has 
provided a 5-year transition period.

Comments on Specific Regulatory Provisions

    Comment: The non-profit coefficient should be increased to ten 
percent. The Cost Study and the Committee had recommended a non-profit 
coefficient of ten percent based on estimated differences in operating 
costs between for-profit and non-profit entities according to the 
Federal Housing Administration (FHA) database of properties that was 
used for the Cost Study. The April 14, 2005, proposed rule reduced the 
non-profit coefficient from ten percent to four percent, reflecting the 
belief that the difference in costs between for-profit and non-profit 
entities represented inefficiencies that should not be supported in the 
formula.
    Many comments objected to HUD's reduction of the non-profit 
coefficient from ten to four percent on the grounds that it was 
contrary to the recommendations of both the Committee and the Cost 
Study, and that it would not provide PHAs with sufficient funding to 
support their specific non-profit operating functions.
    HUD Response. As noted above, HUD has adopted the suggestion made 
by the commenters and has adopted the non-profit coefficient as 
contained in the Committee Recommendations.
    Comment: Support for a $2 Per Unit Per Month (PUM) Public Entity 
Fee. The Committee recommended that a public entity fee of $2 PUM be 
added to the initial PELs. The public entity fee was intended to 
reimburse PHAs for additional services (above and beyond the non-profit 
coefficient) that are unique to PHAs as public entities. The April 14, 
2005, proposed rule did not adopt this additional fee. HUD's position 
was that these expenses were addressed through other means in the 
proposed rule.
    Many commenters recommended adoption of the $2 PUM public entity 
fee. Several of the commenters asked where in the April 14, 2005, 
proposed rule such expenses were covered, especially given the fact 
that the non-profit coefficient had been reduced.
    HUD Response. HUD has not revised the rule in response to these 
comments. The FHA portfolio, which was the basis for the new Project 
Expense Level (PEL) calculation, contains a high percentage of assisted 
properties, which are also subject to HUD regulations. Thus, the 
expenses associated with the public entity fee are reflected in the 
PEL's percent-assisted coefficient and the non-profit coefficient. 
Furthermore, the final rule adopts the Cost Study's recommendation of a 
ten percent non-profit coefficient, which HUD believes adequately 
covers the additional services unique to PHAs.
    Comment: Support for the three percent allowance for vacant units. 
Under the Committee Recommendations, PHAs would receive a subsidy for 
occupied dwelling units and dwelling units with an approved vacancy. 
PHAs would also receive an operating subsidy for a limited number of 
vacancies if the annualized rate is less than or equal to three 
percent, or for up to five units if the PHA has 100 or fewer units. The 
April 14, 2005, proposed rule did not adopt these recommendations.
    Many commenters recommended that HUD adopt the vacancy allowance, 
indicating that it would be unrealistic to expect any housing operator 
to maintain 100 percent occupancy at all times. Several commenters 
mentioned that the three percent vacancy allowance is the industry 
standard and that the monthly rent charge in FHA's multifamily housing 
program also reflects assumptions on occupancy loss.
    HUD Response. HUD has revised the rule in response to the 
suggestion made by the commenters. The final rule adopts the 
recommendation of the Committee with regard to vacancies. Hence, PHAs 
will receive an operating subsidy for a limited number of vacancies if 
the annualized rate is less than or equal to three percent, or for up 
to five units if the PHA has 100 or fewer units.
    Comment: Support for Committee recommendation regarding the PEL 
inflation factor. The annual inflation factors used to adjust the 
current Allowable Expense Level (AEL) are based on a 60 percent wage 
factor and a 40 percent non-wage factor. Under the Committee 
Recommendations, the weights would have remained the same, but the 
methodology for calculating the inflation factor would have changed. 
For the wage component, the factor would have been based on the 
Employment Cost Index (ECI) instead of the current formula's Bureau of 
Labor Statistics (BLS) 202 Local Government Wage series. For the non-
wage component, this factor would have been based on the Consumer Price 
Index (CPI) instead of the current formula's Producer Price Index 
(PPI). The April 14, 2005, proposed rule retained the current formula's 
inflation factor methodology for adjusting annually the PEL.
    Many commenters urged that HUD adopt the methodology recommended by 
the Committee for calculating the PEL inflation factor. The commenters 
wrote that the recommended methodology is a more accurate measure of 
inflation. The commenters wrote that the current wage factor does not 
keep pace with health care costs, which was addressed by the Committee 
with the recommended use of the ECI. In

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addition, several commenters wrote that because PHAs are not producers, 
but, instead, purchasers of goods and services, the more appropriate 
index for non-wage inflation would be the CPI.
    HUD Response. HUD has not revised the rule in response to these 
public comments. During negotiated rulemaking, HUD sought to devise a 
more accurate and transparent inflation factor methodology than the one 
used under the current regulations, one that PHAs could calculate by 
accessing the BLS Web site. After further review, HUD believes that the 
inflation factors recommended by the Committee are less accurate and no 
more transparent than the current methodology. Specifically, for the 
wage component, the current BLS-202 local government wage series is 
more accurate than the BLS--Employment Cost Index (ECI) contemplated by 
the Committee for the following reasons:
    1. The current methodology measures wages of local government 
employees, which are more similar to PHAs, whereas the ECI data 
includes State and local government employees.
    2. The current methodology includes data that is available at the 
county level, summed to either state metropolitan and nonmetropolitan 
level, whereas the methodology recommended by the Committee (i.e., ECI) 
is available at only a national level and, for private sector wages, at 
the regional level. Local wage patterns can vary significantly from 
national averages.
    For the non-wage component, the current methodology uses the 
Producer Price Index (PPI), which excludes the cost of food and energy 
and measures national average cost changes in finished goods used by 
businesses. The Committee recommended using the overall CPI, which 
primarily measures changes in the costs of food, housing, apparel, 
recreation, transportation, medical expenses, utilities, and other 
services. HUD believes the PPI is a more appropriate measure of the 
type of goods and services purchased by PHAs, and that the overall CPI 
has little relevance to the costs of PHA purchases. In addition, 
utility costs are covered in the Operating Fund formula under a 
separate component than the PEL and should be excluded from the PEL 
inflation factor.
    All factors considered, the current methodology for the inflation 
factor is considerably more appropriate than the methodology 
recommended by the Committee.
    Comment: Support for two-year phase-in of operating subsidy gains. 
Under the Committee Recommendations, PHAs that experience a gain in 
their operating subsidy would have those gains phased in over a two-
year period. The April 14, 2005, proposed rule would have phased in 
those gains over a four-year period to more closely align the gains 
with the five-year phase-in period for those PHAs that would have their 
subsidy decreased.
    Many commenters objected to the change in phase-in for PHAs gaining 
operating subsidy. The commenters indicated that the four-year phase-in 
period would be too long and that, for PHAs that have been historically 
underfunded, increases in subsidy should be distributed expeditiously.
    HUD Response. HUD has adopted the suggestion of the commenters to 
adopt the language of the Committee Recommendations so that gains in 
subsidy will be phased in over two years.
    Comment: Support for adoption of ``stop-loss'' provision. The 
Committee Recommendations allowed PHAs to discontinue their subsidy 
reduction (stop-loss) by demonstrating successful conversion to asset 
management. The April 14, 2005, proposed rule did not adopt this stop-
loss provision on the grounds that the Cost Study's results should be 
equally applied to all PHAs and that this stop-loss would weaken the 
implementation of the Cost Study. Further, PHAs that feel that their 
formula is not correctly calculated have remedies under the appeals 
provision.
    Many commenters supported adoption of the stop-loss provision. The 
commenters indicated that such a provision is necessary to prevent PHAs 
from experiencing reductions in their subsidy amounts that impact their 
staffing and PHA services. In addition, commenters wrote that the stop-
loss provision would provide PHAs with an incentive to convert to asset 
management in order to limit their decrease in subsidy.
    HUD Response. HUD has revised the rule in response to these 
comments. The final rule adopts the stop-loss provision recommended by 
the Committee, which allows PHAs to discontinue their subsidy reduction 
by demonstrating successful conversion to asset management.
    Comment: Opposition to the adjustment for certain PHAs. The April 
14, 2005, proposed rule would have established an ``add on'' for 
certain PHAs that would have gained subsidy under the Committee 
Recommendations, but would have had their subsidy decreased under the 
proposed rule. These PHAs would receive additional funding at the 
formula amount recommended by the Committee.
    Many of the public commenters objected to this special add-on. Most 
believed that this adjustment created a special class of agencies and 
essentially a two-tier, inequitable funding system.
    HUD Response. HUD agrees with the public commenters and has removed 
the adjustment for certain PHAs. All PHAs will be funded under the same 
Operating Fund formula and provisions.
    Comment: Opposition to the two-year time limit and plan 
requirements on subsidies for vacant units due to changing market 
conditions. The April 14, 2005, proposed rule included a provision that 
would have required PHAs that appeal to receive subsidy on vacant units 
due to changing market conditions. The provision would have required 
such PHAs to submit, along with their appeal, a plan to lease the units 
within two years, and imposed a two-year limit on receipt of such 
subsidy. The Committee Recommendations did not include a similar 
provision for a plan or a two-year time limit.
    Many commenters objected to the two-year time limit on subsidies 
for units vacant due to changing market conditions and the related 
requirement for submission of a plan for leasing those units within 
that time period. Many commenters also noted that HUD's regulations 
governing the mandatory and voluntary conversion of public housing 
developments to tenant-based voucher assistance (see 24 CFR part 972) 
already provide PHAs with guidelines for addressing vacancies based on 
market conditions.
    HUD Response. HUD has adopted the suggestion of the commenters and 
has removed both the two-year limit on receipt of subsidy and the 
related plan requirement.
    Comment: Opposition to sanctions for failure to convert to asset 
management and to submit accurate and timely data. The April 14, 2005, 
proposed rule included two provisions authorizing sanctions, as deemed 
necessary and otherwise provided by law, for those PHAs not in 
compliance with asset management by FY 2011 and that fail to submit 
accurate and timely data as required by the regulations. These 
sanctions might include the imposition of a daily monetary fine until 
the PHA converted to asset management.
    Many commenters objected to the new sanction provisions. The 
commenters wrote that the provisions are unnecessary, since HUD already 
has numerous remedies if PHAs are not in compliance with applicable 
requirements. In addition, the

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commenters wrote that the imposition of a daily monetary fine is 
inappropriate and will harm the people the program is designed to 
assist. Some commenters also wrote that the conversion to asset 
management is a complex task and that, even with good faith and best 
efforts, a PHA could be subject to fines for noncompliance.
    HUD Response. HUD has adopted the suggestion of the commenters and 
removed the sanction language that was found in proposed Sec. Sec.  
990.200(d) and 990.290(e). HUD agrees with the commenters that it 
already has the authority to impose a broad range of sanctions for non-
compliance with program rules.
    Comment: The 2009 review of PEL methodology should be conducted in 
accordance with the procedures of the Federal Advisory Committee Act 
(FACA). The Committee Recommendations provided that in 2009, HUD will 
convene a meeting with representatives of appropriate stakeholders to 
review the methodology to evaluate the PEL based on actual cost data 
and to establish utility benchmarking for the PEL. The provision stated 
that the meetings shall be convened in accordance with FACA procedures. 
The April 14, 2005, proposed rule modified that language to state that 
the meetings would be convened in accordance with ``FACA or such other 
authority or protocol determined appropriate.''
    Several commenters objected to the new FACA language included in 
the proposed rule. The commenters wrote that the issues to address in 
2009 as part of the discussions of the PEL methodology and utility 
benchmarking are inherently complex and that the April 14, 2005, 
proposed rule language does not provide sufficient assurances that 
interested stakeholders will have an official role in the 2009 
discussions.
    HUD Response. As noted above, HUD has adopted the language 
recommended by the Committee. Specifically, this final rule provides 
that HUD will convene a FACA committee to review the methodology to 
evaluate the PEL based on actual cost data and establish utility 
benchmarking.

VI. Discussion of Additional Public Comments Received on the April 14, 
2005, Proposed Rule

General Comments

    This section of the preamble discusses general comments received on 
the April 14, 2005, proposed rule not related to a specific regulatory 
provision.
    Comment: HUD should provide updated calculations by property and by 
PHA so that the impact of the rule can be understood. One commenter 
wrote that, in response to a request during the negotiations, HUD did 
not provide updated calculations modeling the impact of the rule on 
individual PHAs. Another commenter wrote that the April 14, 2005, 
proposed rule does not provide sufficient information for each PHA to 
determine the extent of the gains or losses under the formula and that 
HUD should provide this information in an easy to understand way that 
shows the percent of change and the dollar amount of the change.
    HUD Response. HUD agrees that all PHAs should understand the 
formula for calculating operating subsidy under the final rule. Data 
was presented to the Committee and later made available to the public 
housing community on the projected impact of the rule based on the 
Committee Recommendations. Similarly, HUD provided data modeling on the 
projected impact of the April 14, 2005, proposed rule on individual 
PHAs. This data was shared with representatives of the public housing 
industry groups and other stakeholders. Finally, HUD has posted a 
complete report showing the operating subsidy amounts for all PHAs and 
the methodology documents on the HUD Web site at http://www.hud.gov.
    Comment: HUD should clarify what the rule means when it refers to 
``fiscal year.'' Several commenters suggested that HUD clarify in the 
rule whether references to ``fiscal year'' mean a PHA's fiscal year or 
the federal fiscal year.
    HUD Response. HUD has revised references to the term ``fiscal 
year'' in the regulatory text of this final rule to clarify whether the 
terms refer to a federal or PHA fiscal year.
    Comment: HUD should make permanent Moving to Work Agreements. One 
commenter suggested that HUD give PHAs participating in the Moving to 
Work program the option of making their current agreement permanent.
    HUD Response. The suggestion made by the commenter is outside the 
scope of this rulemaking, which is concerned with implementation of the 
new Operating Fund formula.
    Comment: Concerns regarding implementation of future deregulatory 
changes. One commenter expressed concern about the language in the 
preamble indicating that HUD and its negotiating partners on the 
Committee may contemplate additional organizational and regulatory 
changes beyond those included in the Operating Fund in order to 
implement asset management. The commenter wrote that this language 
appears to indicate that HUD seeks deregulation, which is beyond the 
mandate of the Committee, and that HUD may try to implement significant 
policy changes by circumventing the normal regulatory process. Another 
commenter cautioned that HUD should concentrate first on implementing 
the new formula and, once implemented, then turn to these other 
regulatory items.
    HUD Response. Deregulation was part of the Cost Study's 
recommendations and, although the subject of deregulation was not 
directly before the Committee, it is an important aspect of the 
implementation of asset management. Therefore, the Committee discussed 
deregulation during the negotiated rulemaking sessions. However, any 
changes to other HUD regulations would be completed through the 
appropriate regulatory or administrative processes, which would provide 
opportunities for public comments, as appropriate. Additionally, HUD is 
sensitive to the timing of the related changes and will take that into 
consideration as it proceeds on these other elements.
    Comment: Concerns regarding reduced funding for the Operating Fund 
program. Several commenters wrote that the Operating Fund should be 
fully funded in order for PHAs that have historically been underfunded 
to realize the full gains under the new formula. Several commenters 
wrote that, with the expected decrease in funding for this program in 
2006, PHAs would have to cut critical services to residents including 
anti-crime and job training activities.
    HUD Response. The suggestion made by the commenters addresses the 
annual federal budget process and is outside the scope of this 
rulemaking, which is concerned with the implementation of the new 
Operating Fund formula.
    Comment: Rule should consider the needs of small PHAs. One 
commenter wrote that the final rule should consider the needs and 
issues facing small PHAs.
    HUD Response. HUD agrees that there are special considerations for 
smaller PHAs. The final rule authorizes small PHAs (those with under 
250 units) to treat all of their units as one project. Small PHAs are 
provided the flexibility of either maintaining their current management 
practices or converting to asset management.
    Comment: HUD should provide additional funding for PHAs to 
transition to asset management if additional regulatory relief is not 
achieved. One commenter referred to language in Sec.  990.255(b) that 
provides that ``HUD recognizes that appropriate changes in its 
regulatory and monitoring programs will be needed to support

[[Page 54989]]

PHAs'' to undertake asset management. The commenter recommended that a 
provision be added to the rule that would provide additional funding to 
transition to asset management systems should HUD fail to timely 
implement needed regulatory and monitoring changes. The commenter also 
recommended that this transition funding be based on actual costs data 
presented through the appeal process for higher project cost data under 
Sec.  990.245(e).
    HUD Response. HUD has not adopted the suggestion made by the 
commenter. Transition costs were discussed by the Committee, but were 
not part of the Committee Recommendations. The phase-in provisions, as 
well as the current level of PHA reserves, factored heavily in the 
decision not to include special transition funding.
    Comment: PHA data requirements. One commenter asked what additional 
data PHAs will be required to maintain, other than the current data, at 
a property level instead of at a PHA-level.
    HUD Response. In general, PHAs will be asked to submit additional 
data to HUD with respect to asset management and utility data as 
referenced under Sec.  990.170(f). Further information on the data 
submission requirements will be provided in subsequent HUD guidance.
    Comment: The rule imposes an unfunded mandate on PHAs. Two 
commenters wrote that the April 14, 2005, proposed rule does not meet 
the requirements of the Unfunded Mandates Reform Act of 1995 because it 
fails to take into consideration the significant budgetary impact on 
PHAs to meet the requirements of the regulation.
    HUD Response. HUD, in the development of the proposed rule, 
reviewed the regulatory proposals for compliance with all legal 
rulemaking requirements, including the requirements contained in title 
II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 1531-1538) 
(UMRA). The UMRA establishes specific thresholds and other requirements 
for determining whether a rule would impose an unfunded federal 
mandate. Neither the April 14, 2005, proposed rule, nor this final 
rule, impose any federal mandates on any State, local, or tribal 
government, nor on the private sector, within the meaning of the UMRA.

Comments Regarding Subpart A--Purpose, Applicability, Formula, and 
Definitions

    Comment: Disagrees with HUD issuing non-codified guidance. One 
commenter objected to the language in Sec.  990.110(c), which provides 
that, for certain secondary elements that will be used in the formula, 
HUD will provide information in various forms of non-codified guidance 
HUD deems appropriate. The commenter wrote that, without notice and 
comment procedures, errors in the guidance cannot be challenged and 
adjusted except through appeals, which may not fit the appeal 
categories. The commenter suggested that HUD implement secondary 
formula elements by interim rulemaking, thereby allowing comments and 
requests for modification.
    HUD Response. HUD has not revised the rule in response to this 
comment. HUD will use notice and comment rulemaking procedures when 
such procedures are appropriate or necessary (for example, when a 
policy change would require the revision of regulatory language 
codified by this final rule). In other instances, where rulemaking is 
neither appropriate nor required, but where HUD has determined that 
clarification of existing regulatory requirements is needed, HUD will 
issue such guidance through non-regulatory means. Rulemaking can be a 
time-consuming process and use of such procedures where not required 
might unnecessarily delay the issuance of needed guidance. Non-
regulatory guidance can be amended or updated in a more expeditious 
manner. In addition, non-codified guidance provides greater flexibility 
to make changes, if necessary, in a more expeditious manner. As 
appropriate, HUD will consult with stakeholders and other interested 
parties in the development of non-regulatory guidance on the Operating 
Fund.
    Comment: HUD should establish a definition for the term ``asset 
repositioning fee.'' One commenter made this suggestion.
    HUD Response. HUD has not added a definition for the term ``asset 
repositioning fee.'' During the negotiated rulemaking it was agreed 
that the definitions would be limited to essential terms. Because the 
asset-repositioning fee is described in detail in Sec.  990.190(h), it 
has not been added to the definitions section at Sec.  990.115. The 
asset repositioning fee established in this final rule is the 
counterpart to the phase-down funding fee in the current part 990 
regulations and, in accordance with the provisions in Sec.  990.190, 
will be paid to PHAs that transition projects or buildings out of their 
inventory.
    Comment: The definition of ``rolling base consumption level'' 
should state that the 36-month period ends on June 30th. One commenter 
made this suggestion.
    HUD Response. HUD agrees with this suggestion and has revised the 
rule accordingly.

Comments Regarding Subpart B--Eligibility for Operating Subsidy

    Subpart B of the rule describes the requirements and procedures 
governing the computation of eligible unit months. A public housing 
unit may receive operating subsidy for each unit month that it 
qualifies as an occupied dwelling unit or a dwelling unit with an 
approved vacancy. The total number of eligible unit months for each PHA 
will be calculated from July 1st to June 30th prior to the first day of 
the applicable funding period and will consist of eligible units as 
defined in this rule. The rule reserves to HUD the right to determine 
the status of any public housing units based on information in HUD's 
information systems. In addition, the rule provides for a change in a 
PHA's formula within each one-year funding period based on the addition 
and deletion of units in a PHA's inventory.
    Comment: HUD should provide operating subsidy for new units. One 
commenter, citing Sec.  990.150, asked how HUD expects PHAs to operate 
new units without operating subsidy funds. The commenter wrote that the 
rule requires PHAs to report new units periodically, but does not 
provide funding until the next funding cycle.
    HUD Response. The commenter has misinterpreted Sec.  990.150, which 
requires that PHAs report the addition of new units and deletion of 
units on a quarterly basis. This section goes on to state that once the 
PHA has reported that the new unit is online, HUD will assume that the 
unit is fully occupied for the balance of the funding period, and HUD 
will provide funds from the current funding cycle. However, in the 
following year, once actual data is available, HUD will make an 
adjustment to the PHA's funding amount that would take into account the 
actual occupancy of the new unit(s).
    Comment: HUD should clarify the definition of ``occupied unit.'' 
One commenter, citing Sec.  990.140, requested that HUD clarify when a 
unit is considered occupied. Two examples provided were: (1) When a 
tenant is hospitalized and (2) When a PHA refuses to renew a lease for 
failure to comply with the community service requirements. The 
commenter suggested that HUD define ``occupied'' as a unit with an 
occupant or where the occupant is paying rent.
    HUD Response. Consistent with Sec.  990.140 of this final rule, a 
unit that is under lease to a public housing-eligible family is 
considered to be occupied.

[[Page 54990]]

    Comment: Units with approved vacancies under the current 
regulations should be included in the final rule. Several commenters 
requested that all of the units for which PHAs may receive subsidy 
under the current part 990 regulations be included in this final rule, 
stating that changes would result in decreases in their operating 
subsidy eligibility. One commenter asked for subsidy for units vacant 
due to federal and state laws and regulations and another asked for 
subsidy for units vacant due to HUD approved desegregation plans.
    HUD Response. HUD has not made any changes to the rule in response 
to these comments. The provisions on subsidy eligibility for vacant 
units, which were discussed extensively during the negotiated 
rulemaking sessions, have been clarified and streamlined. Under Sec.  
990.145, units undergoing modernization and units used for special 
uses, such as resident services or anticrime activities, are eligible 
for subsidy. On a project-by-project basis, units that are vacant due 
to litigation (which includes units vacant due to desegregation plans), 
disasters, and casualties are eligible for subsidy. PHAs may appeal to 
HUD to receive operating subsidy for units that are vacant due to 
changing market conditions. While the final rule no longer expressly 
provides subsidy eligibility for units vacant due to laws (Federal or 
State laws of general applicability, or their implementing 
regulations), the final rule does provide subsidy eligibility for units 
if they are undergoing modernization, including those undergoing 
modernization in order to meet construction or habitability standards.
    Comment: Add community and management spaces to approved vacancies. 
One commenter wrote that the final rule should include a vacancy 
allowance for units converted to community and management spaces and 
for units that are reconfigured to comply with litigation and legal 
requirements.
    HUD Response. As noted above in this preamble, this final rule has 
adopted the Committee Recommendation under which PHAs are eligible to 
receive subsidy for three percent of their vacancies, or up to five 
units if the PHA has less than 100 units. PHAs also are eligible to 
receive subsidy for special use units, which are described in Sec.  
990.145(b) as units approved and used for resident services, resident 
organization offices, and related activities such as self sufficiency 
and anti-crime activities. With regard to unit reconfiguration due to 
litigation or a legal requirement, if a unit has to be vacant during 
this reconfiguration, then the unit may be eligible for subsidy under 
Sec.  990.145(c), which provides subsidy eligibility for units vacant 
due to litigation.

Comments Regarding Subpart C--PEL

    Subpart C describes how formula expenses will be calculated under 
the revised Operating Fund formula. Specifically, the rule provides a 
detailed description with respect to the computation of the PEL. The 
PEL is calculated in terms of PUM costs and represents the costs 
associated with the project except for utilities and add-ons. HUD will 
calculate the PEL using the ten variables from the Cost Study and their 
associated coefficients (i.e., values that are expressed in percentage 
terms).
    Comment: HUD should make further adjustments to the Cost Study 
methodology for calculating the PEL. Several commenters suggested 
changes in the Cost Study's methodology for developing the PEL. 
Suggestions provided by the commenters included: (1) Eliminating 
ceilings; (2) providing additional funding to take into account costs 
associated with older properties; (3) removing the four percent 
reduction for PELs greater than $325; and (4) modifying statistical 
techniques.
    HUD Response. HUD has not adopted the suggestions made by the 
commenters for changes in the Cost Study methodology for calculating 
the PEL. All of the suggested changes to the PEL methodology were 
discussed by the Committee during the negotiated rulemaking sessions. 
HUD believes that the Cost Study methodology is sound and should be 
preserved. The final rule provides certain add-ons that went beyond the 
Cost Study's recommendations (for example, the information technology 
(IT) fee) and provides additional financial incentives (for example, 
the freezing of rental income for three years).
    Comment: HUD should clarify application of the rule to mixed-
finance projects. Referring to Sec.  990.165(g), which grandfathers 
existing mixed-finance agreements for purposes of funding, one 
commenter raised technical and implementation issues regarding the 
applicability of the rule and, in particular, the asset management 
provisions, including project-based budgeting and accounting, and the 
calculation of operating subsidy for mixed-finance developments. The 
commenter asked about the treatment of the development-wide replacement 
reserves in the determination of the PEL for mixed-finance developments 
and the use of the non-profit coefficient when determining the PEL for 
mixed-finance developments. The commenter also inquired about the 
requirements for project-based budgeting and accounting, as well as 
about determination of compliance with asset management for mixed-
finance developments that are owned and managed by entities other than 
PHAs and for which the owner and manager handle all management and 
provide information and financial reports to PHAs for review and 
monitoring.
    HUD Response. HUD views all public housing units under an Annual 
Contributions Contract (ACC) as public housing assets, regardless of 
where they are located or whether they are part of a mixed-finance 
development or a public housing development. As such, the non-profit 
coefficient will be applied to the PEL for public housing units in 
mixed-finance developments. However, there will be no separate add-on 
to cover the cost of replacement reserves that are established in 
mixed-finance developments, which are not operating costs, per se. With 
regard to how the requirements for project-based budgeting and 
accounting and how the determination of compliance with asset 
management will apply to mixed-finance developments, HUD will issue 
this information in future guidance on these matters.
    Comment: Mixed-finance developments should not receive different 
subsidy amounts. One commenter wrote that Sec.  990.165(g) allows PHAs 
with certain mixed developments to receive a higher PEL immediately, 
rather than requiring the higher PEL to be phased in, and that this is 
contradictory to the provisions of Sec.  990.235.
    HUD Response. The provision in Sec.  990.165(g) regarding the level 
of funding that PHAs would receive for certain mixed-finance projects 
was included in the regulation for the express purpose of honoring the 
structure of those mixed-finance agreements. Because the financing and 
approval in mixed-finance agreements is tied to a specific level of 
funding, the Committee agreed that future funding should continue at 
that level, subject to appropriations.

Comments Regarding Subpart C--Utilities

    Subpart C describes the Utilities Expense Level (UEL) component of 
the Operating Fund formula. The UEL includes the computation of the 
current consumption level and the rolling base consumption level. In 
addition, a PHA that undertakes energy conservation measures financed 
by an entity other than HUD may qualify under this rule

[[Page 54991]]

for financial incentives with HUD approval.
    Comment: HUD should clarify that ``other direct costs'' are also 
eligible for additional operating subsidy as part of an energy 
conservation contract and define what constitutes ``direct costs.'' 
Several commenters wrote that proposed Sec.  990.185(a)(3) 
inadvertently omitted language agreed to by the Committee which 
provided that the PHA is eligible for additional operating subsidy for 
the cost of amortizing the loan and ``other direct costs related to the 
energy project under the contract.'' In addition, the commenter 
suggested that HUD define the type of costs that are eligible for 
additional operating subsidy.
    HUD Response. The language regarding the ``other direct costs'' was 
inadvertently omitted from the April 14, 2005, proposed rule. As noted 
above in this preamble, HUD has adopted the suggestion of the 
commenters and has inserted the suggested language in Sec.  
990.185(a)(3) of this final rule. HUD will provide additional 
clarification in subsequent guidance as to the types of direct costs 
that will be eligible for the additional operating subsidy.
    Comment: HUD should modify the definition of ``utility rate'' from 
``actual average rate'' to ``actual weighted average.'' The April 14, 
2005, proposed rule at Sec.  990.115 defined ``utility rate'' as ``the 
actual average rate for any given utility for the most recent 12-month 
period that ended the June 30th prior to the beginning of the 
applicable funding period.'' One commenter requested that the 
definition be modified to provide for an ``actual weighted average'' 
rather than an ``actual average weight.'' The commenter wrote that a 
simple average may understate the true utility rate because natural gas 
and heating oil prices tend to be higher during winter when usage is 
higher, and lower in the summer when usage is reduced. Conversely, 
electricity prices will tend to be lower in winter and higher in 
summer. Thus, in order to capture the true rate over a 12-month period, 
a weighted average would more accurately take into account seasonal 
usage and rates in use at that time.
    HUD Response. HUD has not adopted the suggestion made by the 
commenters. The Committee discussed various ways to calculate the UEL 
and it was determined that an actual average rate, not a weighted 
average, was the most appropriate means to capture utility rates for 
the past year. The final rule states that funding for utility expenses 
will be based on the most recent 12-month period, which includes both a 
heating and cooling season and will include an inflation/deflation 
factor. Furthermore, by shifting the funding to a calendar cycle and 
standardizing the rolling base to a July 1st to June 30th cycle, all 
PHAs will be funded for utilities on the same cycle.
    Comment: HUD should not prorate the incentives for energy 
conservation improvements. One commenter wrote that PHAs may be 
reluctant to undertake energy conservation measures because the 
incentives are subject to proration, and PHAs will be unable to realize 
the full amount of the subsidy associated with the incentives. The 
commenter suggested that the incentives for energy conservation 
improvements not be subject to proration.
    HUD Response. HUD has not adopted the suggestion made by the 
commenters. The Department believes that it would be inequitable to the 
approximately 3,200 PHAs nationwide to provide special treatment for 
any one component of the formula. Because HUD regards all components of 
the Operating Fund formula to be of equal importance, HUD believes that 
it is more equitable when there is a proration to uniformly prorate 
operating subsidy eligibility based on all components.
    Comment: HUD should allow PHAs to substitute ``future approved 
rates'' as the basis for calculating a PHA's utility subsidy. One 
commenter wrote that basing utility subsidy on the ``most recent 12-
month period that ended the June 30th prior to the beginning of the 
applicable funding period'' may not adequately address near-term 
changes in utility costs. Specifically, the commenter wrote that rates 
used in the utility subsidy calculation may be at least nine months old 
at the time of calculation and over 12 months old at the beginning of 
the new fiscal year. The commenter suggested that language applicable 
to the current Operating Fund formula be added. The current formula 
language allows ``future approved rates'' to be used as the basis for 
utility subsidy calculation when these rate changes have been approved 
and published prior to the due date of the operating subsidy 
eligibility calculation to HUD.
    HUD Response. HUD has not adopted the suggestion made by the 
commenter. During the negotiated rulemaking sessions, the Committee 
recognized that the utility subsidy calculation time frame as specified 
in the rule might not adequately address near-term changes in utility 
rates. To address this concern, the Committee provided for the 
inclusion of an inflation/deflation factor in each PHA utility 
calculation.
    Comment: HUD should provide for large utility rate increases. One 
commenter requested that the PHAs that experience large utility rate 
increases that are greater than the inflation factor be given 
consideration in the calculation of the utility subsidy.
    HUD Response. In the negotiations, the Committee acknowledged and 
discussed that utility rate spikes above the rate of inflation have 
occurred in past fiscal years and could occur again. However, the 
Committee agreed that since year-end adjustments to the utility funding 
could no longer be processed due to congressional appropriation 
language, the new system of funding utilities under this final rule 
(based on the actual average rate from the last twelve months that 
ended on June 30 of the year prior to the funding year to be adjusted 
by an inflation/deflation factor) was the most reasonable and 
consistent way to fund utilities for all PHAs. If utility rates spike 
during the course of a PHA's fiscal year, that increase will be picked 
up in the calculation of the UEL during the next fiscal year.
    Comment: Increases in utility costs lower rental income to PHAs 
with resident-paid utilities. One commenter wrote that when utility 
costs increase, PHAs with resident-paid utilities must increase utility 
allowances, thus lowering rental income to the PHA. The commenter wrote 
that since formula income will be frozen at the 2004 level, the PHA 
will have no recourse but to request a waiver for an adjustment to 
rental income.
    HUD Response. Section 990.170(e) addresses this issue in providing 
that, with regard to resident-paid utilities, increases/decreases in 
tenant utility allowances shall result in a commensurate increase/
decrease in operating subsidy. HUD will issue guidance regarding the 
implementation of this language.
    Comment: HUD should provide incentives for PHAs that achieve energy 
efficiency programs. One commenter made this suggestion.
    HUD Response: HUD has retained the current incentives for energy 
efficiency programs, which are contained in Sec.  990.185.

Comments Regarding Subpart C--Add-ons

    Comment: HUD should clarify which ``coordinators'' are funded under 
the self-sufficiency add-on. Several commenters asked for clarification 
as to which program coordinators are included under Sec.  990.190(a) 
and also whether additional coordinators could be funded.
    HUD Response. Section 990.190(a) provides that the self-sufficiency 
add-on will be ``in accordance with HUD's self-

[[Page 54992]]

sufficiency program regulations and notices.'' HUD has issued guidance 
indicating that the Operating Fund will provide subsidy for elderly and 
disabled service coordinators for those PHAs that previously received 
funding under the Resident Opportunities and Self Sufficiency (ROSS) 
program, and at the levels they received funding under the ROSS 
program. This guidance may change to reflect program objectives; 
however, at present, there is no additional funding for these 
activities.
    Comment: HUD should provide PHAs with additional operating subsidy 
for Family Self-Sufficiency (FSS) coordinators. One commenter wrote 
that in FY 2004, HUD began to fund the cost of the FSS Coordinator 
program from the ROSS program, which led to the loss of FSS funding for 
many PHAs because ROSS is a competitive grant program. To compensate 
for this loss, the commenter recommended that every PHA with at least 
25 public housing FSS slots approved in its FSS action plan receive 
operating subsidy for the full cost of one coordinator. Costs for other 
coordinators would fall outside the Operating Fund Program.
    HUD Response. At this time, in accordance with recent HUD guidance, 
funding for FSS coordinators is available only through the ROSS 
program. However, funding self-sufficiency coordinators is an eligible 
activity under the Operating Fund and, although no additional funds 
will be provided, PHAs can spend their operating subsidy on this type 
of activity.
    Comment: HUD should exclude FSS escrow deposits from calculation of 
formula income. One commenter wrote that under HUD's current 
procedures, a PHA excludes FSS escrow deposits from the tenant income 
that are reported to HUD. The commenter expressed concern that under 
the new formula, which would freeze tenant income based on data from 
the audited financial statements for the purposes of determining 
operating subsidy, that FSS escrow deposits would no longer continue to 
be excluded from the formula income calculation.
    HUD Response. The rental income amount collected on PHA's financial 
statements already excludes amounts from FSS escrow deposits. Thus, HUD 
will continue to exclude FSS escrow deposits when calculating the 
formula income component.
    Comment: HUD should provide PHAs with operating subsidy for 
contributions to FSS escrow accounts. One commenter wrote that the cost 
of contributions to the FSS escrow accounts should be included as an 
add-on to operating subsidy. The commenter indicated that HUD had in 
the past paid for the costs of the FSS escrow accounts by allowing PHAs 
to deduct contributions to the FSS escrow account from the rent roll 
reported to HUD for calculating operating subsidy.
    HUD Response. HUD has not adopted the suggestion made by the 
commenter to provide an add-on for PHA contributions to the FSS escrow 
account. HUD does not believe that a separate add-on is needed. As 
stated above, HUD will continue to exclude the FSS escrow deposits in 
the calculation of the formula income component.
    Comment: Other HUD grant programs for self-sufficiency activities 
should not be eliminated. One commenter asked if, with implementation 
of this final rule, other grant programs will be eliminated and whether 
PHAs will have to request and fund program coordinators through the use 
of operating subsidy.
    HUD Response. This final rule applies only to the Operating Fund 
Program. The final rule does not establish a new requirement, or remove 
or alter any existing requirement for the ROSS Program.
    Comment: HUD should provide additional funding through the 
Operating Fund formula to well-managed PHAs for resident services. One 
commenter made this suggestion.
    HUD Response. HUD has not adopted the suggestion of the commenter. 
While operating subsidy may be used to provide resident services (i.e., 
that is an eligible use of funds), HUD disagrees that additional 
funding should be provided outside the add-ons that already exist for 
self-sufficiency, as described in Sec.  990.190(a), and resident 
participation, as described in Sec.  990.190(e).
    Comment: HUD should clarify whether PHAs will receive the add-on 
for payment in lieu of taxes (PILOT) in circumstances when the PILOT 
payment to the local municipality is waived. One commenter posed this 
question regarding the PILOT add-on described in Sec.  990.190(i).
    HUD Response. The final rule provides that the add-on is based on a 
PHA's ``cooperation agreement or latest actual PILOT payment.'' 
Providing that a cooperation agreement is in place, HUD will provide 
funding for PILOT regardless of whether the local government waives 
payment.
    Comment: HUD should clarify which activities can be funded with the 
add-on for resident participation. One commenter posed this question 
regarding the add-on described in Sec.  990.190(e).
    HUD Response. The final rule provides that the add-on is for the 
funding of ``resident participation activities, including but not 
limited to those described in 24 CFR part 964.'' The intent of this 
language was to allow resident participation funds to be used for a 
broader range of activities than outlined in 24 CFR part 964, including 
resident services.
    Comment: There may be an error in the example on the repositioning 
fee in Sec.  990.190(h)(4). One commenter submitted this observation.
    HUD Response. The language in Sec.  990.190(h)(4) should have 
referenced a PHA with a 1,000 unit inventory, not a 1,000 EUM 
inventory. The language in this rule has been changed accordingly, and 
the calculation is now correct.
    Comment: HUD should provide an add-on to cover the cost of employee 
benefits. Several commenters wrote that because their PHA is part of 
the state retirement system and because much of their work force is 
unionized, the costs associated with employee benefits including 
retirement, health, and dental benefits have increased dramatically. 
The commenters wrote that these costs are not reflected in the FHA cost 
structure or in other PHAs. The commenters suggested that HUD provide 
an add-on to cover the costs associated with employee benefits.
    HUD Response. HUD has not adopted the suggestion made by the 
commenters. As the commenters acknowledged, their PHAs may be somewhat 
unique in that they belong to a state pension system, which is not the 
case for most PHAs. To provide such an add-on would be unfair to other 
PHAs. The new Operating Fund formula takes a ``benchmark'' approach. It 
represents what essentially other non-profit operators would spend on 
housing in the same market with similar characteristics. The model does 
not attempt to reimburse PHAs for requirements imposed uniquely on them 
by state or local governments. Rather, the formula represents a 
reasonable amount that other housing operators would incur to run the 
properties.
    Comment: HUD should use interim rulemaking to issue procedures for 
changes in subsidy due to changes in laws, regulations, or the economy. 
Section 990.190(i) provides that in the event that HUD determines that 
enactment of a Federal law or revision in HUD or other Federal 
regulations has caused or will cause a significant change in 
expenditures of a continuing nature above the PEL and UEL, HUD may, at 
its sole discretion, decide to prescribe a procedure under which the 
PHA may apply for or may receive an

[[Page 54993]]

adjustment in operating subsidy. One commenter suggested that HUD 
should use interim rulemaking to establish such procedures. The 
commenter wrote that this would ensure that the relevant factors have 
been considered and that adequate procedures are provided.
    HUD Response. HUD has not revised the rule in response to this 
comment. The language referred to by the commenter, which was agreed to 
by the Committee, grants HUD the necessary authority to determine the 
process under which PHAs may apply for subsidy adjustments. Where 
appropriate, HUD will issue an interim rule to establish these 
procedures. However, interim rulemaking may not be the best choice in 
all circumstances, and HUD does not believe it would be appropriate to 
limit the available options as suggested by the commenter.

Comments Regarding Subpart D--Formula Income

    Comment: HUD should provide for regulatory review in determining 
changes to the formula income component after FY 2008. Several 
commenters objected to the preamble language of the April 14, 2005, 
proposed rule indicating that HUD, after FY 2008, will determine how 
PHA income is to be treated through non-regulatory means. The commenter 
suggested that HUD clarify that the determination of changes to PHA 
income post-FY 2008 be accomplished through regulatory means so that 
the public can comment.
    HUD Response. HUD has not revised the rule in response to these 
comments. However, HUD does agree that residents, organizations 
representing residents, and other interested parties should have an 
opportunity to submit comments. To that end, the preamble to the April 
14, 2005, proposed rule explicitly stated that the public will have an 
opportunity to comment before HUD makes the post-2008 policy 
determination on the income component of the formula (see 70 FR 19858 
at 19862, first column).

Comments Regarding Subpart E--Determination and Payment of Operating 
Subsidy

    Comment: Clarify the phrase ``two funding levels.'' One commenter 
wrote that it is not clear what is meant by the phrase ``two funding 
levels'' in Sec.  990.230(a). The commenter wrote that neither funding 
level is explained clearly or referenced.
    HUD Response. The phrase ``two funding levels'' refers to the 
funding level under the current formula and the funding level under the 
new formula established by this final rule, as explained in Sec.  
990.225, which describes how HUD will determine the amount of a PHA's 
increase or decrease in subsidy.
    Comment: The application of the inflation factor each year will 
result in a higher PEL during the phase-in of subsidy reductions. One 
commenter wrote that the application of the inflation factor each year 
will result in an increase in the PEL, thereby changing the dollar 
amounts of the subsidy reductions that will occur each year during the 
five-year phase-in of reductions.
    HUD Response. As provided in Sec.  990.225, HUD will calculate the 
amount of a PHA's reduction or gain in operating subsidy only one time 
after the effective date of the final rule. The calculation will be 
made in terms of 2004 dollars. The resulting dollar amount of the loss 
or gain is the amount that all reductions or gains will be built on 
during the respective phase-in periods. Thus, the inflation factor will 
not impact the calculation of the PEL each year for purposes of the 
amount of loss or gain.
    Comment: Objection to calendar funding when PHAs have different 
fiscal year ends. One commenter wrote that HUD should consider the 
impact that calendar year funding will have on PHAs whose fiscal years 
are not calendar years. The commenter wrote that, when PHAs receive 
subsidy from two different federal fiscal years, they would experience 
operating budget and reporting issues that HUD should address.
    HUD Response. Congress directed HUD to change from funding the 
operating subsidy on a fiscal year basis to funding it on a calendar 
year basis in HUD's 2005 appropriations. HUD has implemented this 
change without requiring PHAs to change their fiscal year ends and will 
issue guidance to assist PHAs in this change in the funding cycle. When 
completing operating budgets and financial reports, PHAs will use 
procedures similar to those that they currently use for capital fund, 
ROSS, and Section 8, which HUD does not fund on a PHA fiscal year 
basis.

Comments Regarding Subpart F--Transition Policy and Transition Funding

    Comment: When calculating transition funding, HUD should take into 
account changes in a PHA's inventory. One commenter wrote that the rule 
does not address how transition funding is calculated if a PHA's 
property inventory changes during the transition period, which would 
result in a different subsidy calculation. The commenter suggested that 
this section be rewritten to take into account changes in a PHA's 
property inventory during the transition period.
    HUD Response. HUD has not adopted the suggestion made by the 
commenter. The Committee addressed this matter during the negotiated 
rulemaking sessions. The Committee decided that, overall, it would be 
unnecessarily complicated and administratively burdensome to 
recalculate the five-year transition funding for ``decliners'' and two-
year transition funding for ``gainers'' on an annual basis. Instead, 
the rule provides that the transition funding will be calculated in the 
first year based on FY 2004 data and is unchanged during the transition 
funding period. That said, the commenter's suggestion is addressed 
through the PEL calculation, which provides that as properties leave or 
enter the PHA's inventory, these changes will be reflected in the 
annual PEL calculation.
    Comment: The reductions in subsidy should be phased in differently. 
One commenter recommended that the reductions in subsidy be phased in 
differently, with more of the reductions occurring in the later years. 
Rather than phasing in reductions over five years at 24 percent the 
first year, 43 percent the second year, 62 percent the third year, 81 
percent the fourth year, and with the full amount of the reduction 
being realized in the fifth year, the commenter suggested that the 
reduction would be managed more prudently by PHAs over five years at 18 
percent the first year, 37 percent the second year, 56 percent the 
third year, 76 percent the fourth year, and with the full amount of the 
reduction being realized in the fifth year.
    HUD Response. HUD has not adopted this approach to phasing in the 
reductions to subsidy. The final rule at Sec.  990.230 retains the 
five-year phase in schedule that was set forth in the April 14, 2005, 
proposed rule and agreed to by the Committee. The Committee discussed 
the phase in of reductions at length and agreed on this schedule as 
reasonable.

Comments Regarding Subpart G--Appeals

    Comment: The Operating Fund formula does not provide adequate 
funding. A number of commenters wrote that the Operating Fund formula 
did not provide PHAs with sufficient funding to maintain well-run 
public housing.
    HUD Response. HUD has not revised the rule in response to these 
comments. Subpart G of the final rule provides five

[[Page 54994]]

types of appeals for PHAs that feel that their formula amount is 
inadequate.
    Comment: HUD should allow for appeals of individual property PELs. 
Two commenters inquired about the permissibility of PHAs appealing on 
an individual property PEL rather than on a portfolio basis.
    HUD Response. HUD has not adopted the suggestion of the commenters. 
As discussed by the Committee during negotiations, Sec.  990.240(b) 
provides that appeals must cover an entire portfolio, not single 
projects, with the exception that the Assistant Secretary for Public 
and Indian Housing may accept appeals for less than an entire portfolio 
for PHAs with more than 5,000 public housing units.
    Comment: For appeals under Sec.  990.245(e), HUD should accept 
information other than actual expenses. One commenter stated that other 
information beyond actual expenses should be accepted as part of an 
appeal, because actual expenses are constrained by actual funding and, 
therefore, the costs of a PHA that has been underfunded will be 
understated.
    HUD Response. HUD has not revised the rule in response to this 
comment. However, HUD will provide subsequent guidance to clarify the 
type of data that is indicative of actual project costs and that will 
be accepted as part of an appeal.
    Comment: PEL calculation does not reflect the unique circumstances 
of certain PHAs. Several commenters wrote that the PEL calculations for 
their PHAs are incorrect. Several commenters wrote that the geographic 
coefficient applied to their PHA does not take into account the unique 
geographical location of the PHA and the location of its properties. 
Higher transportation costs, therefore, translate into higher costs for 
goods and services.
    HUD Response. During the negotiated rulemaking sessions, the 
Committee recognized that it was important that accurate data be used 
in the new formula calculations. As a result, the Committee determined 
that it would be appropriate to provide PHAs with the opportunity to 
appeal subsidy amounts under five different categories. Therefore, PHAs 
that believe that an Operating Fund formula component has a ``blatant 
and objective flaw'' and/or that the model's predictions are not 
accurate because of ``specific local conditions'' can appeal their 
operating subsidy amount.
    Comment: A PHA cannot determine whether there is variance of ten 
percent or greater without knowing the factors or variables that can 
vary or be challenged. One commenter requested clarification on the 
sentence in Sec.  990.245(c) that reads: ``To be eligible, the affected 
PHA must demonstrate a variance of ten percent or greater in its PEL.'' 
The commenter wrote that a PHA cannot know if there is a variance of 
ten percent or more in order to appeal without knowing the factors or 
variable that can vary or be challenged.
    HUD Response. This ground of appeal covers the appeals of specific 
variables in the formula model that are not reliable for a particular 
PHA. Thus, any of the ten variables in the PEL calculation may be 
challenged. While HUD will be issuing more guidance on appeals, an 
example of an appeal under this paragraph would be when a PHA is 
physically located in a non-city central metropolitan area, but 
actually has all of the characteristics of a location in a city central 
metropolitan area.
    Comment: The independent assessors should be familiar with PHAs. 
One commenter urged that the professional who will conduct the 
independent assessments for appeals and determinations of compliance 
with asset management be familiar with PHAs, their mission, and how HUD 
requirements affect their structure and operations.
    HUD Response. The primary purpose of the appeals is to determine if 
the cost estimate produced by the formula is valid. Because the Harvard 
Cost Study was based on a benchmark model, so too will the appeals be 
based on what other non-profit operators of federally subsidized 
housing would spend to run the subject properties. Similarly, the asset 
management assessments would be based on basic principles of asset 
management for owners of subsidized housing.

Comments Regarding Subpart H--Asset Management

    Comment: HUD should reconsider the requirement that PHAs with 250 
units or more implement project-based budgeting and accounting. A 
number of commenters submitted comments on the requirement for project-
based accounting and project-based accounting. Some of the commenters 
wrote that the requirement is unnecessary and a financial and 
administrative burden, particularly on smaller PHAs. Others commenters 
proposed different thresholds for applicability of the asset management 
requirements, such as 500 units and 1,249 units. Another commenter 
wrote that, based on the number of units in its portfolio and their 
locations, it would be impossible to be an asset manager.
    HUD Response. HUD has not adopted the suggestion of the commenters. 
PHAs with less than 250 units can treat their entire public housing 
portfolio as one ``project.'' Implementation of project-based budgeting 
and accounting, as well as project-based management, were fundamental 
elements of both the Cost Study and the Committee Recommendations. HUD 
remains committed to their implementation.
    Comment: HUD should phase in the implementation of asset 
management. A number of commenters suggested that, because of the 
organizational and other changes required of a PHA to move to asset 
management, there should be a phase-in approach. One commenter 
suggested that that phase in be based on PHA size.
    HUD Response. HUD has not adopted the suggestion of the commenter. 
The implementation dates in the rule were considered and adopted by the 
Committee. Different phase-in dates would not only treat different 
classes of PHAs in a disparate manner, but would also create an 
administrative burden on HUD and its systems.
    Comment: Central office cost centers are unnecessary. Many 
commenters wrote that the establishment of a central office cost center 
is an unneeded level of accounting. Several commenters wrote that PHAs 
should be allowed to develop alternative methods of allocating central 
office costs, consistent with OMB Circular A-87. One commenter proposed 
distributing the actual costs between the projects based on size or 
utility consumption or any other method. Another commenter wrote that 
the fee-for-service system may work for some functions like centralized 
maintenance, but it may not work for others where it is difficult to 
determine a fee. Thus, PHAs should be allowed in some instances to 
allocate their costs, which will result in less cumbersome 
recordkeeping systems.
    HUD Response. HUD has not revised the rule in response to these 
comments. The use of a fee-for-service approach for the treatment of 
overhead and centrally provided services will ensure that such costs 
are reasonable and that projects are charged only for services 
received. These procedures are standard in the multifamily housing 
industry. As necessary, HUD will provide guidance on the use of a fee-
for-service approach consistent with the accounting and management 
practices of the multifamily housing industry.
    Comment: The requirement to apportion assets, liabilities, and 
equity is unrealistic. One commenter wrote that because accounting has 
previously been maintained only at the ``program'' level and not at the 
``property'' level, PHAs do not now segregate assets,

[[Page 54995]]

liabilities, and equity by project. Hence, efforts to break out these 
amounts by project will be prone to error. HUD should require only the 
preparation of project operating statements and therefore not require 
project balance sheets.
    HUD Response. HUD has not revised the rule in response to the 
commenter. However, HUD recognizes that the transition to a project-
based accounting system will raise questions and pose certain 
challenges for PHAs. To assist PHAs in making the transition, HUD will 
issue guidance, as necessary, on the apportionment of assets, 
liabilities, and equity. HUD believes that balance sheets will provide 
important information on each project's financial position, increase 
PHAs' access to debt financing, and improve monitoring of property 
performance.
    Comment: The 2007 deadline for implementation of project-based 
budgeting and accounting should be delayed. Commenters were 
particularly concerned that guidance has not been provided for PHAs to 
move forward with the changes they will need to make to their systems 
as well as other organizational arrangements. One commenter suggested 
that HUD provide PHAs with a minimum of 24 months to implement project-
based systems after the requirement takes effect.
    HUD Response. HUD has not revised the rule in response to these 
comments. HUD believes that the change to project-based accounting is 
feasible within the FY 2007 time frame. HUD plans to make the changes 
to project-based accounting through the current Financial Assessment 
Subsystem (FASS-PH), where PHAs already have had experience submitting 
PHA-level financial data to HUD. As noted above, HUD intends to issue 
guidance that will assist PHAs in making the transition to project-
based budgeting within the targeted time frames.
    Comment: PHAs require financial assistance to implement the new 
accounting, budgeting, and management changes. Many commenters wrote 
that HUD should provide PHAs with special transition funds to address 
the costly changes in technology and other areas required by the rule.
    HUD Response. The Committee discussed, but did not adopt in the 
Committee Recommendations, special transition funds. The final rule 
contains two operating subsidy add-ons that can be used by PHAs toward 
converting to and maintaining technology to facilitate asset 
management. The first is the asset management fee described in Sec.  
990.190(f) that provides an additional $4 PUM to PHAs with 250 or more 
units and a $2 PUM to PHAs with less than 250 units that choose to 
convert (PHAs can charge an even higher asset management fee, provided 
that the fee is ``reasonable'' and if the project generates excess cash 
flow). The second is the information technology fee described in Sec.  
990.190(g) that provides an additional $2 PUM to all PHAs.
    Comment: HUD should consult PHAs when establishing guidance. HUD 
should establish guidance on converting to asset management in an open 
manner and consult with PHAs in doing so.
    HUD Response. As indicated in previous responses to the commenters, 
HUD will be issuing a variety of guidance and, where appropriate, 
intends to consult with its constituents in the development of the 
guidance.
    Comment: HUD should provide training on these new asset management 
requirements. One commenter asked about the type and quality of 
training that HUD plans to provide for PHAs, auditors, and field staff 
to transition to asset management.
    HUD Response. HUD intends to conduct training shortly following 
publication of this final rule. This training, in addition to the 
guidance that will be issued, should assist PHAs, auditors, and field 
staff in this transition.
    Comment: Although other regulatory changes (outside of the 
Operating Fund Program) are required to complete the conversion to 
asset management, HUD should take care not to abandon the segment of 
the population public housing serves. One commenter wrote that, if 
asset management is to take advantage of cost savings in the private 
market, then certain regulations unique to public housing should be 
removed that restrict PHA movement in that direction. However, these 
changes should not cause PHAs to abandon the segment of the population 
that public housing is intended to serve.
    HUD Response. The Cost Study showed that, while generally similar, 
there were certain statutory and regulatory requirements that, if 
modified, would align public housing more closely to the regulatory 
environment of other multifamily-assisted housing programs. As stated 
in the preamble to the April 14, 2005, proposed rule, the Committee 
recognized that, with the conversion to asset management, other changes 
were necessary. These changes, including deregulation efforts to 
continue to lessen burdens on PHAs, will be implemented separately and 
HUD will provide opportunity for input by stakeholders, as appropriate.
    Comment: In some cases, centralized services are more efficient. 
Several commenters wrote that asset management was not a cost-effective 
way to run public housing, especially for PHAs that have small to 
moderate-sized projects for whom centralized or quasi project-based 
management is superior. Forcing PHAs to decentralize will increase 
costs, duplicate efforts, and decrease ability to respond to resident 
needs.
    HUD Response. Section 990.275 expressly provides that PHAs can 
continue to maintain centralized property management services. However, 
consistent with practices in multifamily housing, this section further 
provides that services must be arranged in accordance with the best 
interests of the property and that the cost for any centralized service 
must be reasonable.
    Comment: PHAs already run more efficiently than FHA properties and, 
therefore, asset management is unnecessary. Several commenters wrote 
that there was no compelling reason for PHAs to convert to asset 
management since there is no evidence that conversion will improve 
efficiency and effectiveness. The Cost Study recommended an increase in 
subsidy to PHAs based on a comparison between AELs and the FHA 
benchmark, thereby showing that PHAs administer their properties more 
efficiently than FHA.
    HUD Response. The fact that the Cost Study recommended increased 
funding levels, based on costs in other federally subsidized housing, 
does not necessarily mean that PHAs operate efficiently. Indeed, the 
Cost Study's recommendations to move to asset management were related 
to concerns that program effectiveness could be greatly improved.
    Comment: Other institutions similar to PHAs do not perform asset 
management. One commenter wrote that, although project-based management 
is the norm for the multifamily housing industry, it is not the norm 
for other institutions that are similar to PHAs. Universities, 
municipal governments, school systems, and hospitals manage multiple 
properties and do so more similarly to PHAs than the multifamily 
housing industry.
    HUD Response. HUD believes that the appropriate peer group in this 
situation is, indeed, the multifamily housing industry and not entities 
such as universities, schools, or hospitals. In the multifamily housing 
industry, project-based budgeting, accounting, and management is the 
norm.
    Comment: HUD should require PHAs to distribute reports to resident 
organizations and other entities with

[[Page 54996]]

oversight and monitoring responsibilities. Several commenters suggested 
that HUD add language to Sec.  990.285(b) and Sec.  990.315(a) 
requiring that PHAs provide project-based budgets, year-end statements, 
and operating budgets to resident organizations and other entities.
    HUD Response. HUD has not adopted the suggestion of the commenters. 
While HUD does encourage PHAs to discuss these documents with resident 
organizations and other entities, HUD believes that this decision 
should be left to individual PHAs and their PHA Board of Commissioners.
    Comment: HUD should include responsibilities to resident 
organizations in the responsibilities of asset management. One 
commenter suggested that Sec.  990.270 be amended to include language 
regarding a PHA's responsibility to resident organizations. The 
commenter suggested that ``responding to and supporting independent 
resident organizations, consulting with residents and the Resident 
Advisory Board (RAB) in the development of and any amendments to the 
PHA's annual and five year plans'' be added to the sentence at the end 
of the section.
    HUD Response. HUD has not adopted this suggestion. The requirement 
regarding PHA annual and five-year plans are codified in 24 CFR part 
903, including all of the requirements for resident participation and 
meetings.

VII. Findings and Certifications

Information Collection Requirements

    The revised information collection requirements contained in this 
final rule have been submitted to the Office of Management and Budget 
(OMB) for review under the Paperwork Reduction Act of 1995 (44 U.S.C. 
3501-3520). In accordance with the Paperwork Reduction Act, an agency 
may not conduct or sponsor, and a person is not required to respond to, 
a collection of information unless the collection displays a valid 
control number. The information collection requirements for the 
Operating Fund program have been approved by OMB and assigned OMB 
Control Number 2577-0029. The revised public reporting burden for this 
collection of information is estimated to include the time for 
reviewing the instructions, searching existing data sources, gathering 
and maintaining the data needed, and completing and reviewing the 
collection of information. Information on the revised estimated public 
reporting burden is provided in the following table:

----------------------------------------------------------------------------------------------------------------
                                     Number of     Responses per   Total annual      Hours per
         HUD form number            respondents     respondents      responses       response       Total hours
----------------------------------------------------------------------------------------------------------------
HUD-52722.......................           3,141               1               1             .75        2,355.75
HUD-52723.......................           3,141               1               1             .75        2,355.75
HUD-53087.......................              24               1               1             .75           18.00
                                 -----------------
    Total.......................  ..............  ..............  ..............  ..............        4,729.50
----------------------------------------------------------------------------------------------------------------

Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
for this rule was made at the proposed rule stage in accordance with 
HUD regulations at 24 CFR part 50, which implement section 102(2)(C) of 
the National Environmental Policy Act of 1969 (42 U.S.C. 4321 et seq.). 
The Finding of No Significant Impact remains applicable to this final 
rule and is available for public inspection between 8 a.m. and 5 p.m. 
weekdays in the Regulations Division, Office of the General Counsel, 
Department of Housing and Urban Development, 451 Seventh Street, SW., 
Room 10276, Washington, DC 20410-5000.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
The entities that would be subject to this rule are public housing 
agencies that administer public housing. Under the definition of 
``small governmental jurisdiction'' in section 601(5) of the RFA, the 
provisions of the RFA are applicable only to those public housing 
agencies that are part of a political jurisdiction with a population of 
under 50,000 persons. The number of entities potentially affected by 
this rule is therefore not substantial. Further, the proposed 
regulatory changes were developed using negotiated rulemaking 
procedures and with the active participation of PHAs that will be 
affected by the revised Operating Fund requirements. The membership of 
the negotiated rulemaking committee included representatives of smaller 
PHAs, which expressed the views and concerns of these PHAs during 
development of the proposed regulatory changes.
    Accordingly, the undersigned certifies that this rule will not have 
a significant economic impact on a substantial number of small 
entities.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either imposes substantial direct compliance costs on state and local 
governments and is not required by statute, or the rule preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the executive order. This rule does not have federalism 
implications and will not impose substantial direct compliance costs on 
State and local governments nor preempt State law within the meaning of 
the executive order.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for Federal agencies to 
assess the effects of their regulatory actions on State, local, and 
tribal governments, and on the private sector. This rule does not 
impose any Federal mandates on any State, local, or tribal government, 
nor on the private sector, within the meaning of UMRA.

Executive Order 12866, Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866 (``entitled Regulatory Planning and Review''). 
This rule was determined to be economically significant under E.O. 
12866. The docket file is available for public inspection in the 
Regulations Division, Office of General Counsel, Department of Housing 
and Urban Development, 451 Seventh Street, SW., Room 10276, Washington, 
DC 20410-0500. Due to

[[Page 54997]]

security measures at the HUD Headquarters building, please schedule an 
appointment to review the docket file by calling the Regulations 
Division at (202) 708-3055 (this is not a toll-free number). The 
Economic Analysis prepared for this rule is also available for public 
inspection at the same location and on HUD's Web site at http://
www.hud.gov.

Congressional Review of Major Proposed Rules

    This rule is a ``major rule'' as defined in Chapter 8 of 5 U.S.C. 
The final rule has been submitted for congressional review in 
accordance with this chapter.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance (CFDA) program number is 
14.850.

List of Subjects in 24 CFR Part 990

    Accounting, Grant programs-housing and community development, 
Public housing, Reporting and recordkeeping requirements.

0
Accordingly, for the reasons described in the preamble, HUD revises 24 
CFR part 990 to read as follows:

PART 990--THE PUBLIC HOUSING OPERATING FUND PROGRAM

Subpart A--Purpose, Applicability, Formula, and Definitions
Sec.
990.100 Purpose.
990.105 Applicability.
990.110 Operating fund formula.
990.115 Definitions.
990.116 Environmental review requirements.
Subpart B--Eligibility for Operating Subsidy; Computation of Eligible 
Unit Months
990.120 Unit months.
990.125 Eligible units.
990.130 Ineligible units.
990.135 Eligible unit months (EUMs).
990.140 Occupied dwelling units.
990.145 Dwelling units with approved vacancies.
990.150 Limited vacancies.
990.155 Addition and deletion of units.
Subpart C--Calculating Formula Expenses
990.160 Overview of calculating formula expenses.
990.165 Computation of project expense level (PEL).
990.170 Computation of utilities expense level (UEL): Overview.
990.175 Utilities expense level: Computation of the current 
consumption level.
990.180 Utilities expense level: Computation of the rolling base 
consumption level.
990.185 Utilities expense level: Incentives for energy conservation/
rate reduction.
990.190 Other formula expenses (add-ons).
Subpart D--Calculating Formula Income
990.195 Calculation of formula income.
Subpart E--Determination and Payment of Operating Subsidy
990.200 Determination of formula amount.
990.205 Fungibility of operating subsidy between projects.
990.210 Payment of operating subsidy.
990.215 Payments of operating subsidy conditioned upon reexamination 
of income of families in occupancy.
Subpart F--Transition Policy and Transition Funding
990.220 Purpose.
990.225 Transition determination.
990.230 PHAs that will experience a subsidy reduction.
990.235 PHAs that will experience a subsidy increase.
Subpart G--Appeals
990.240 General.
990.245 Types of appeals.
990.250 Requirements for certain appeals.
Subpart H--Asset Management
990.255 Overview.
990.260 Applicability.
990.265 Identification of projects.
990.270 Asset management.
990.275 Project-based management (PBM).
990.280 Project-based budgeting and accounting.
990.285 Records and reports.
990.290 Compliance with asset management requirements.
Subpart I--Operating Subsidy for Properties Managed by Resident 
Management Corporations (RMCs)
990.295 Resident Management Corporation operating subsidy.
990.300 Preparation of operating budget.
990.305 Retention of excess revenues.
Subpart J--Financial Management Systems, Monitoring, and Reporting
990.310 Purpose--General policy on financial management, monitoring, 
and reporting.
990.315 Submission and approval of operating budgets.
990.320 Audits.
990.325 Record retention requirements.

    Authority: 42 U.S.C. 1437g; 42 U.S.C. 3535(d).

Subpart A--Purpose, Applicability, Formula, and Definitions


Sec.  990.100  Purpose.

    This part implements section 9(f) of the United States Housing Act 
of 1937 (1937 Act), (42 U.S.C. 1437g). Section 9(f) establishes an 
Operating Fund for the purposes of making assistance available to 
public housing agencies (PHAs) for the operation and management of 
public housing. In the case of unsubsidized housing, the total expenses 
of operating rental housing should be covered by the operating income, 
which primarily consists of rental income and, to some degree, 
investment and non-rental income. In the case of public housing, the 
Operating Fund provides operating subsidy to assist PHAs to serve low, 
very low, and extremely low-income families. This part describes the 
policies and procedures for Operating Fund formula calculations and 
management under the Operating Fund Program.


Sec.  990.105  Applicability.

    (a) Applicability of this part. (1) With the exception of subpart I 
of this part, this part is applicable to all PHA rental units under an 
Annual Contributions Contract (ACC). This includes PHAs that have not 
received operating subsidy previously, but are eligible for operating 
subsidy under the Operating Fund Formula.
    (2) This part is applicable to all rental units managed by a 
resident management corporation (RMC), including a direct-funded RMC.
    (b) Inapplicability of this part. (1) This part is not applicable 
to Indian Housing, section 5(h) and section 32 homeownership projects, 
the Housing Choice Voucher Program, the section 23 Leased Housing 
Program, or the section 8 Housing Assistance Payments Programs.
    (2) With the exception of subpart J of this part, this part is not 
applicable to the Mutual Help Program or the Turnkey III Homeownership 
Opportunity Program.


Sec.  990.110  Operating fund formula.

    (a) General formula. (1) The amount of annual contributions 
(operating subsidy) each PHA is eligible to receive under this part 
shall be determined by a formula.
    (2) In general, operating subsidy shall be the difference between 
formula expense and formula income. If a PHA's formula expense is 
greater than its formula income, then the PHA is eligible for an 
operating subsidy.
    (3) Formula expense is an estimate of a PHA's operating expense and 
is determined by the following three components: Project Expense Level 
(PEL), Utility Expense Level (UEL), and other formula expenses (add-
ons). Formula expense and its three components are further described in 
subpart C of this part. Formula income is an estimate for a PHA's non-
operating subsidy revenue and is further described in subpart D of this 
part.
    (4) Certain portions of the operating fund formula (e.g., PEL) are 
calculated in terms of per unit per month (PUM) amounts and are 
converted into whole

[[Page 54998]]

dollars by multiplying the PUM amount by the number of eligible unit 
months (EUMs). EUMs are further described in subpart B of this part.
    (b) Specific formula. (1) A PHA's formula amount shall be the sum 
of the three formula expense components calculated as follows: {[(PEL 
multiplied by EUM) plus (UEL multiplied by EUM) plus add-ons] minus 
(formula income multiplied by EUM){time} .
    (2) A PHA whose formula amount is equal to or less than zero is 
still eligible to receive operating subsidy equal to its most recent 
actual audit cost for its Operating Fund Program.
    (3) Operating subsidy payments will be limited to the availability 
of funds as described in Sec.  990.210(c).
    (c) Non-codified formula elements. This part defines the major 
components of the Operating Fund Formula and describes the 
relationships of these various components. However, this part does not 
codify certain secondary elements that will be used in the revised 
Operating Fund Formula. HUD will more appropriately provide this 
information in non-codified guidance, such as a Handbook, Federal 
Register notice, or other non-regulatory means that HUD determines 
appropriate.


Sec.  990.115  Definitions.

    The following definitions apply to the Operating Fund program:
    1937 Act means the United States Housing Act of 1937 (42 U.S.C. 
1437 et seq.).
    Annual contributions contract (ACC) is a contract prescribed by HUD 
for loans and contributions, which may be in the form of operating 
subsidy, whereby HUD agrees to provide financial assistance and the PHA 
agrees to comply with HUD requirements for the development and 
operation of its public housing projects.
    Asset management is a management model that emphasizes project-
based management, as well as long-term and strategic planning.
    Current consumption level is the amount of each utility consumed at 
a project during the 12-month period that ended the June 30th prior to 
the beginning of the applicable funding period.
    Eligible unit months (EUM) are the actual number of PHA units in 
eligible categories expressed in months for a specified time frame and 
for which a PHA receives operating subsidy.
    Formula amount is the amount of operating subsidy a PHA is eligible 
to receive, expressed in whole dollars, as determined by the Operating 
Fund Formula.
    Formula expense is an estimate of a PHA's operating expense used in 
the Operating Fund Formula.
    Formula income is an estimate of a PHA's non-operating subsidy 
revenue used in the Operating Fund Formula.
    Funding period is the calendar year for which HUD will distribute 
operating subsidy according to the Operating Fund Formula.
    Operating Fund is the account/program authorized by section 9 of 
the 1937 Act for making operating subsidy available to PHAs for the 
operation and management of public housing.
    Operating Fund Formula (or Formula) means the data and calculations 
used under this part to determine a PHA's amount of operating subsidy 
for a given period.
    Operating subsidy is the amount of annual contributions for 
operations a PHA receives each funding period under section 9 of the 
1937 Act as determined by the Operating Fund Formula in this part.
    Other operating costs (add-ons) means PHA expenses that are 
recognized as formula expenses but are not included either in the 
project expense level or in the utility expense level.
    Payable consumption level is the amount for all utilities consumed 
at a project that the Formula recognizes in the computation of a PHA's 
utility expense level at that project.
    Per unit per month (PUM) describes a dollar amount on a monthly 
basis per unit, such as Project Expense Level, Utility Expense Level, 
and formula income.
    Project means each PHA project under an ACC to which the Operating 
Fund Formula is applicable. However, for purposes of asset management, 
as described in subpart H of this part, projects may be as identified 
under the ACC or may be a reasonable grouping of projects or portions 
of a project or projects under the ACC.
    Project-based management is the provision of property management 
services that is tailored to the unique needs of each property, given 
the resources available to that property.
    Project expense level (PEL) is the amount of estimated expenses for 
each project (excluding utilities and add-ons) expressed as a PUM cost.
    Project units means all dwelling units in all of a PHA's projects 
under an ACC.
    Rolling base consumption level (RBCL) is the average of the yearly 
consumption levels for the 36-month period ending on the June 30th that 
is 18 months prior to the beginning of the applicable funding period.
    Transition funding is the timing and amount by which a PHA will 
realize increases and reductions in operating subsidy based on the new 
funding levels of the Operating Fund Formula.
    Unit months are the total number of project units in a PHA's 
inventory expressed in months for a specified time frame.
    Utilities means electricity, gas, heating fuel, water, and sewerage 
service.
    Utilities expense level (UEL) is a product of the utility rate 
multiplied by the payable consumption level multiplied by the utilities 
inflation factor expressed as a PUM dollar amount.
    Utility rate (rate) means the actual average rate for any given 
utility for the most recent 12-month period that ended the June 30th 
prior to the beginning of the applicable funding period.
    Yearly consumption level is the actual amount of each utility 
consumed at a project during a 12-month period ending June 30th.


Sec.  990.116  Environmental review requirements.

    The environmental review procedures of the National Environmental 
Policy Act of 1969 (42 U.S.C. 4332(2)(C)) and the implementing 
regulations at 24 CFR parts 50 and 58 are applicable to the Operating 
Fund Program.

Subpart B--Eligibility for Operating Subsidy; Computation of 
Eligible Unit Months


Sec.  990.120  Unit months.

    (a) Some of the components of HUD's Operating Fund Formula are 
based on a measure known as unit months. Unit months represent a PHA's 
public housing inventory during a specified period of time. The unit 
months eligible for operating subsidy in a 12-month period are equal to 
the number of months that the units are in an operating subsidy-
eligible category, adjusted for changes in inventory (e.g., units added 
or removed), as described below.
    (b) A PHA is eligible to receive operating subsidy for a unit on 
the date it is both placed under the ACC and occupied. The date a unit 
is eligible for operating subsidy does not change the Date of Full 
Availability (DOFA) or the date of the End of Initial Operating Period 
(EIOP), nor does this provision place a project into management status.


Sec.  990.125  Eligible units.

    A PHA is eligible to receive operating subsidy for public housing 
units under an ACC for:

[[Page 54999]]

    (a) Occupied dwelling units as defined in Sec.  990.140;
    (b) A dwelling unit with an approved vacancy (as defined in Sec.  
990.145); and
    (c) A limited number of vacancies (as defined in Sec.  990.150).


Sec.  990.130  Ineligible units.

    (a) Vacant units that do not fall within the definition of Sec.  
990.145 or Sec.  990.150 are not eligible for operating subsidy under 
this part.
    (b) Units that are eligible to receive an asset-repositioning fee, 
as described in Sec.  990.190(h), are not eligible to receive operating 
subsidy under this subpart.


Sec.  990.135  Eligible unit months (EUMs).

    (a) A PHA's total number of EUMs will be calculated for the 12-
month period from July 1st to June 30th that is prior to the first day 
of the applicable funding period, and will consist of eligible units as 
defined in Sec.  990.140, Sec.  990.145, or Sec.  990.150.
    (b)(1) The determination of whether a public housing unit satisfies 
the requirements of Sec.  990.140, Sec.  990.145, or Sec.  990.150 for 
any unit month shall be based on the unit's status as of either the 
first or last day of the month, as determined by the PHA.
    (2) HUD reserves the right to determine the status of any and all 
public housing units based on information in its information systems.
    (c) The PHA shall maintain and, at HUD's request, shall make 
available to HUD, specific documentation of the status of all units, 
including, but not limited to, a listing of the units, street addresses 
or physical address, and project/management control numbers.
    (d) Any unit months that do not meet the requirements of this 
subpart are not eligible for operating subsidy, and will not be 
subsidized by the Operating Fund.


Sec.  990.140  Occupied dwelling units.

    A PHA is eligible to receive operating subsidy for public housing 
units for each unit month that those units are under an ACC and 
occupied by a public housing-eligible family under lease.


Sec.  990.145  Dwelling units with approved vacancies.

    (a) A PHA is eligible to receive operating subsidy for vacant 
public housing units for each unit month the units are under an ACC and 
meet one of the following HUD-approved vacancies:
    (1) Units undergoing modernization. Vacancies resulting from 
project modernization or unit modernization (such as work necessary to 
reoccupy vacant units) provided that one of the following conditions is 
met:
    (i) The unit is undergoing modernization (i.e., the modernization 
contract has been awarded or force account work has started) and must 
be vacant to perform the work, and the construction is on schedule 
according to a HUD-approved PHA Annual Plan; or
    (ii) The unit must be vacant to perform the work and the treatment 
of the vacant unit is included in a HUD-approved PHA Annual Plan, but 
the time period for placing the vacant unit under construction has not 
yet expired. The PHA shall place the vacant unit under construction 
within two federal fiscal years (FFYs) after the FFY in which the 
capital funds are approved.
    (2) Special use units. Units approved and used for resident 
services, resident organization offices, and related activities, such 
as self-sufficiency and anti-crime initiatives.
    (b) On a project-by-project basis, subject to prior HUD approval 
and for the time period agreed to by HUD, a PHA shall receive operating 
subsidy for the units affected by the following events that are outside 
the control of the PHA:
    (1) Litigation. Units that are vacant due to litigation, such as a 
court order or settlement agreement that is legally enforceable; units 
that are vacant in order to meet regulatory and statutory requirements 
to avoid potential litigation (as covered in a HUD-approved PHA Annual 
Plan); and units under voluntary compliance agreements with HUD or 
other voluntary compliance agreements acceptable to HUD (e.g., units 
that are being held vacant as part of a court-order, HUD-approved 
desegregation plan, or voluntary compliance agreement requiring 
modifications to the units to make them accessible pursuant to 24 CFR 
part 8).
    (2) Disasters. Units that are vacant due to a federally declared, 
state-declared, or other declared disaster.
    (3) Casualty losses. Damaged units that remain vacant due to delays 
in settling insurance claims.
    (c) A PHA may appeal to HUD to receive operating subsidy for units 
that are vacant due to changing market conditions (see subpart G of 
this part--Appeals).


Sec.  990.150  Limited vacancies.

    (a) Operating subsidy for a limited number of vacancies. HUD shall 
pay operating subsidy for a limited number of vacant units under an ACC 
if the annualized vacancy rate is less than or equal to:
    (1) Three percent of the PHA's total unit inventory (not to exceed 
100 percent of the unit months under an ACC) for the period July 1, 
2004, to June 30, 2005, and
    (2) Three percent of the total units on a project-by-project basis 
based on the definition of a project under subpart H of this part, 
beginning July 1, 2005.
    (b) Exception for PHAs with 100 or fewer units. Notwithstanding 
paragraph (a) of this section, a PHA with 100 or fewer units will be 
paid operating subsidy for up to five vacant units not to exceed 100 
percent of the unit months under an ACC. For example, a PHA with an 
inventory of 100 units and four vacancies during its fiscal year will 
be eligible for operating subsidy for all 100 units. A PHA with an 
inventory of 50 units with seven vacancies during its fiscal year will 
be eligible for operating subsidy for 48 units.


Sec.  990.155  Addition and deletion of units.

    (a) Changes in public housing unit inventory. To generate a change 
to its formula amount within each one-year funding period, PHAs shall 
periodically (e.g., quarterly) report the following information to HUD, 
during the funding period:
    (1) New units that were added to the ACC, and occupied by a public 
housing-eligible family during the prior reporting period for the one-
year funding period, but have not been included in the previous EUMs' 
data; and
    (2) Projects, or entire buildings in a project, that are eligible 
to receive an asset repositioning fee in accordance with the provisions 
in Sec.  990.190(h).
    (b) Revised EUM calculation. (1) For new units, the revised 
calculation shall assume that all such units will be fully occupied for 
the balance of that funding period. The actual occupancy/vacancy status 
of these units will be included to calculate the PHA's operating 
subsidy in the subsequent funding period after these units have one 
full year of a reporting cycle.
    (2) Projects, or entire buildings in a project, that are eligible 
to receive an asset repositioning fee in accordance with Sec.  
990.190(h) are not to be included in the calculation of EUMs. Funding 
for these units is provided under the conditions described in Sec.  
990.190(h).

Subpart C--Calculating Formula Expenses


Sec.  990.160  Overview of calculating formula expenses.

    (a) General. Formula expenses represent the costs of services and 
materials needed by a well-run PHA to sustain the project. These costs 
include items such as administration, maintenance, and utilities. HUD 
also

[[Page 55000]]

determines a PHA's formula expenses at a project level. HUD uses the 
following three factors to determine the overall formula expense level 
for each project:
    (1)The project expense level (PEL) (calculated in accordance with 
Sec.  990.165);
    (2) The utilities expense level (UEL) (calculated in accordance 
with Sec. Sec.  990.170, 990.175, 990.180, and 990.185); and
    (3)Other formula expenses (add-ons) (calculated in accordance with 
Sec.  990.190).
    (b) PEL, UEL, and Add-ons. Each project of a PHA has a unique PEL 
and UEL. The PEL for each project is based on ten characteristics and 
certain adjustments described in Sec.  990.165. The PEL represents the 
normal expenses of operating public housing projects, such as 
maintenance and administration costs. The UEL for each project 
represents utility expenses. Utility expense levels are based on an 
incentive system aimed at reducing utility expenses. Both the PEL and 
UEL are expressed in PUM costs. The expenses not included in these 
expense levels and which are unique to PHAs are titled ``other formula 
expenses (add-ons)'' and are expressed in a dollar amount.
    (c) Calculating project formula expense. The formula expense of any 
one project is the sum of the project's PEL and the UEL, multiplied by 
the total EUMs specific to the project, plus the add-ons.


Sec.  990.165  Computation of project expense level (PEL).

    (a) Computation of PEL. The PEL is calculated in terms of PUM cost 
and represents the costs associated with the project, except for 
utility and add-on costs. Costs associated with the PEL are 
administration, management fees, maintenance, protective services, 
leasing, occupancy, staffing, and other expenses, such as project 
insurance. HUD will calculate the PEL using regression analysis and 
benchmarking for the actual costs of Federal Housing Administration 
(FHA) projects to estimate costs for public housing projects. HUD will 
use the ten variables described in paragraph (b) of this section and 
their associated coefficient (i.e., values that are expressed in 
percentage terms) to produce a PEL.
    (b) Variables. The ten variables are:
    (1) Size of project (number of units);
    (2) Age of property (Date of Full Availability (DOFA));
    (3) Bedroom mix;
    (4) Building type;
    (5) Occupancy type (family or senior);
    (6) Location (an indicator of the type of community in which a 
property is located; location types include rural, city central 
metropolitan, and non-city central metropolitan (suburban) areas);
    (7) Neighborhood poverty rate;
    (8) Percent of households assisted;
    (9) Ownership type (profit, non-profit, or limited dividend); and
    (10) Geographic.
    (c) Cost adjustments. HUD will apply four adjustments to the PEL. 
The adjustments are:
    (1) Application of a $200 PUM floor for any senior property and a 
$215 PUM floor for any family property;
    (2) Application of a $420 PUM ceiling for any property except for 
New York City Housing Authority projects, which have a $480 PUM 
ceiling;
    (3) Application of a four percent reduction for any PEL calculated 
over $325 PUM, with the reduction limited so that a PEL will not be 
reduced to less than $325; and
    (4) The reduction of audit costs as reported for FFY 2003 in a PUM 
amount.
    (d) Annual inflation factor. The PEL for each project shall be 
adjusted annually, beginning in 2005, by the local inflation factor. 
The local inflation factor shall be the HUD-determined weighted average 
percentage increase in local government wages and salaries for the area 
in which the PHA is located, and non-wage expenses.
    (e) Calculating a PEL. To calculate a specific PEL for a given 
property, the sum of the coefficients for nine variables (all variables 
except ownership type) shall be added to a formula constant. The 
exponent of that sum shall be multiplied by a percentage to reflect the 
non-profit ownership type, which will produce an unadjusted PEL. For 
the calculation of the initial PEL, the cost adjustments described in 
paragraphs (c)(1), (c)(2), and (c)(3) of this section will be applied. 
After these initial adjustments are applied, the audit adjustment 
described in paragraph (c)(4) of this section will be applied to arrive 
at the PEL in year 2000 dollars. After the PEL in year 2000 dollars is 
created, the annual inflation factor as described in paragraph (d) of 
this section will be applied cumulatively to this number through 2004 
to yield an initial PEL in terms of current dollars.
    (f) Calculation of the PEL for Moving to Work PHAs. PHAs 
participating in the Moving to Work (MTW) Demonstration authorized 
under section 204 of the Omnibus Consolidated Rescissions and 
Appropriations Act of 1996 (Pub. L. 104-134, approved April 26, 1996) 
shall receive an operating subsidy as provided in Attachment A of their 
MTW Agreements executed prior to November 18, 2005. PHAs with an MTW 
Agreement will continue to have the right to request extensions of or 
modifications to their MTW Agreements.
    (g) Calculation of the PELs for mixed-finance developments. If, 
prior to November 18, 2005, a PHA has either a mixed-finance 
arrangement that has closed or has filed documents in accordance with 
24 CFR 941.606 for a mixed-finance transaction, then the project 
covered by the mixed-finance transaction will receive funding based on 
the higher of its former Allowable Expense Level or the new computed 
PEL.
    (h) Calculation of PELs when data are inadequate or unavailable. 
When sufficient data are unavailable for the calculation of a PEL, HUD 
may calculate a PEL using an alternative methodology. The 
characteristics may be used from similarly situated properties.
    (i) Review of PEL methodology by advisory committee. In 2009, HUD 
will convene a meeting with representation of appropriate stakeholders, 
to review the methodology to evaluate the PEL based on actual cost 
data. The meeting shall be convened in accordance with the Federal 
Advisory Committee Act (5 U.S.C. Appendix) (FACA). HUD may determine 
appropriate funding levels for each project to be effective in FY 2011 
after following appropriate rulemaking procedures.


Sec.  990.170  Computation of utilities expense level (UEL): Overview.

    (a) General. The UEL for each PHA is based on its consumption for 
each utility, the applicable rates for each utility, and an applicable 
inflation factor. The UEL for a given funding period is the product of 
the utility rate multiplied by the payable consumption level multiplied 
by the inflation factor. The UEL is expressed in terms of PUM costs.
    (b) Utility rate. The utility rate for each type of utility will be 
the actual average rate from the most recent 12-month period that ended 
June 30th prior to the beginning of the applicable funding period. The 
rate will be calculated by dividing the actual utility cost by the 
actual utility consumption, with consideration for pass-through costs 
(e.g., state and local utility taxes, tariffs) for the time period 
specified in this paragraph.
    (c) Payable consumption level. The payable consumption level is 
based on the current consumption level adjusted by a utility 
consumption incentive. The incentive shall be computed by comparing 
current consumption levels of each utility to the rolling base 
consumption level. If the comparison

[[Page 55001]]

reflects a decrease in the consumption of a utility, the PHA shall 
retain 75 percent of this decrease. Alternately, if the comparison 
reflects an increase in the consumption of a utility, the PHA shall 
absorb 75 percent of this increase.
    (d) Inflation factor for utilities. The UEL shall be adjusted 
annually by an inflation/deflation factor based upon the fuels and 
utilities component of the United States Department of Labor, Bureau of 
Labor Statistics (BLS) Consumer Price Index for All Urban Consumers 
(CPI-U). The annual adjustment to the UEL shall reflect the most 
recently published and localized data available from BLS at the time 
the annual adjustment is calculated.
    (e) Increases in tenant utility allowances. Increases in tenant 
utility allowances, as a component of the formula income, as described 
in Sec.  990.195, shall result in a commensurate increase of operating 
subsidy. Decreases in such utility allowances shall result in a 
commensurate decrease in operating subsidy.
    (f) Records and reporting. (1) Appropriate utility records, 
satisfactory to HUD, shall be developed and maintained, so that 
consumption and rate data can be determined.
    (2) All records shall be kept by utility and by project for each 
12-month period ending June 30th.
    (3) HUD will notify each PHA when HUD has the automated systems 
capacity to receive such information. Each PHA then will be obligated 
to provide consumption and cost data to HUD for all utilities for each 
project.
    (4) If a PHA has not maintained or cannot recapture utility data 
from its records for a particular utility, the PHA shall compute the 
UEL by:
    (i) Using actual consumption data for the last complete year(s) of 
available data or data of comparable project(s) that have comparable 
utility delivery systems and occupancy, in accordance with a method 
prescribed by HUD; or
    (ii) Requesting field office approval to use actual PUM utility 
expenses for its UEL in accordance with a method prescribed by HUD when 
the PHA cannot obtain necessary data to calculate the UEL in accordance 
with paragraph (f)(4)(i) of this section.


Sec.  990.175  Utilities expense level: Computation of the current 
consumption level.

    The current consumption level shall be the actual amount of each 
utility consumed during the 12-month period ending June 30th that is 6 
months prior to the first day of the applicable funding period.


Sec.  990.180  Utilities expense level: Computation of the rolling base 
consumption level.

    (a) General. (1) The rolling base consumption level (RBCL) shall be 
equal to the average of yearly consumption levels for the 36-month 
period ending on the June 30th that is 18 months prior to the first day 
of the applicable funding period.
    (2) The yearly consumption level is the actual amount of each 
utility consumed during a 12-month period ending June 30th. For 
example, for the funding period January 1, 2006, through December 31, 
2006, the RBCL will be the average of the following yearly consumption 
levels:
    (i) Year 1 = July 1, 2001, through June 30, 2002.
    (ii) Year 2 = July 1, 2002, through June 30, 2003.
    (iii) Year 3 = July 1, 2003, through June 30, 2004.


    Note to paragraph (a)(2): In this example, the current year's 
consumption level will be July 1, 2004, through June 30, 2005.


    (b) Distortions to rolling base consumption level. The PHA shall 
have its RBCL determined so as not to distort the rolling base period 
in accordance with a method prescribed by HUD if:
    (1) A project has not been in operation during at least 12 months 
of the rolling base period;
    (2) A project enters or exits management after the rolling base 
period and prior to the end of the applicable funding period; or
    (3) A project has experienced a conversion from one energy source 
to another, switched from PHA-supplied to resident-purchased utilities 
during or after the rolling base period, or for any other reason that 
would cause the RBCL not to be comparable to the current year's 
consumption level.
    (c) Financial incentives. The three-year rolling base for all 
relevant utilities will be adjusted to reflect any financial incentives 
to the PHA to reduce consumption as described in Sec.  990.185.


Sec.  990.185  Utilities expense level: Incentives for energy 
conservation/rate reduction.

    (a) General/consumption reduction. If a PHA undertakes energy 
conservation measures that are financed by an entity other than HUD, 
the PHA may qualify for the incentives available under this section. 
For a PHA to qualify for these incentives, the PHA must obtain HUD 
approval. Approval shall be based on a determination that payments 
under the contract can be funded from the reasonably anticipated energy 
cost savings. The contract period shall not exceed 12 years. The energy 
conservation measures may include, but are not limited to: Physical 
improvements financed by a loan from a bank, utility, or governmental 
entity; management of costs under a performance contract; or a shared 
savings agreement with a private energy service company.
    (1) Frozen rolling base. (i) If a PHA undertakes energy 
conservation measures that are approved by HUD, the RBCL for the 
project and the utilities involved may be frozen during the contract 
period. Before the RBCL is frozen, it must be adjusted to reflect any 
energy savings resulting from the use of any HUD funding. The RBCL also 
may be adjusted to reflect systems repaired to meet applicable building 
and safety codes as well as to reflect adjustments for occupancy rates 
increased by rehabilitation. The RBCL shall be frozen at the level 
calculated for the year during which the conservation measures 
initially shall be implemented.
    (ii) The PHA operating subsidy eligibility shall reflect the 
retention of 100 percent of the savings from decreased consumption 
until the term of the financing agreement is complete. The PHA must use 
at least 75 percent of the cost savings to pay off the debt, e.g., pay 
off the contractor or bank loan. If less than 75 percent of the cost 
savings is used for debt payment, however, HUD shall retain the 
difference between the actual percentage of cost savings used to pay 
off the debt and 75 percent of the cost savings. If at least 75 percent 
of the cost savings is paid to the contractor or bank, the PHA may use 
the full amount of the remaining cost savings for any eligible 
operating expense.
    (iii) The annual three-year rolling base procedures for computing 
the RBCL shall be reactivated after the PHA satisfies the conditions of 
the contract. The three years of consumption data to be used in 
calculating the RBCL after the end of the contract period shall be the 
yearly consumption levels for the final three years of the contract.
    (2) PHAs undertaking energy conservation measures that are financed 
by an entity other than HUD may include resident-paid utilities under 
the consumption reduction incentive, using the following methodology:
    (i) The PHA reviews and updates all utility allowances to ascertain 
that residents are receiving the proper allowances before energy 
savings measures are begun;
    (ii) The PHA makes future calculations of rental income for 
purposes of the calculation of operating subsidy eligibility based on 
these

[[Page 55002]]

baseline allowances. In effect, HUD will freeze the baseline allowances 
for the duration of the contract;
    (iii) After implementation of the energy conservation measures, the 
PHA updates the utility allowances in accordance with provisions in 24 
CFR part 965, subpart E. The new allowance should be lower than 
baseline allowances;
    (iv) The PHA uses at least 75 percent of the savings for paying the 
cost of the improvement (the PHA will be permitted to retain 100 
percent of the difference between the baseline allowances and revised 
allowances);
    (v) After the completion of the contract period, the PHA begins 
using the revised allowances in calculating its operating subsidy 
eligibility; and
    (vi) The PHA may exclude from its calculation of rental income the 
increased rental income due to the difference between the baseline 
allowances and the revised allowances of the projects involved, for the 
duration of the contract period.
    (3) Subsidy add-on. (i) If a PHA qualifies for this incentive 
(i.e., the subsidy add-on, in accordance with the provisions of 
paragraph (a) of this section), then the PHA is eligible for additional 
operating subsidy each year of the contract to amortize the cost of the 
loan for the energy conservation measures and other direct costs 
related to the energy project under the contract during the term of the 
contract subject to the provisions of this paragraph (a)(3) of this 
section. The PHA's operating subsidy for the current funding year will 
continue to be calculated in accordance with paragraphs (a), (b), and 
(c) of Sec.  990.170 (i.e., the rolling base is not frozen). The PHA 
will be able to retain part of the cost savings in accordance with 
Sec.  990.170(c).
    (ii) The actual cost of energy (of the type affected by the energy 
conservation measure) after implementation of the energy conservation 
measure will be subtracted from the expected energy cost, to produce 
the energy cost savings for the year.
    (iii) If the cost savings for any year during the contract period 
are less than the amount of operating subsidy to be made available 
under this paragraph to pay for the energy conservation measure in that 
year, the deficiency will be offset against the PHA's operating subsidy 
eligibility for the PHA's next fiscal year.
    (iv) If energy cost savings are less than the amount necessary to 
meet amortization payments specified in a contract, the contract term 
may be extended (up to the 12-year limit) if HUD determines that the 
shortfall is the result of changed circumstances rather than a 
miscalculation or misrepresentation of projected energy savings by the 
contractor or PHA. The contract term may be extended only to 
accommodate payment to the contractor and associated direct costs.
    (b) Rate reduction. If a PHA takes action beyond normal public 
participation in rate-making proceedings, such as well-head purchase of 
natural gas, administrative appeals, or legal action to reduce the rate 
it pays for utilities, then the PHA will be permitted to retain one-
half the annual savings realized from these actions.
    (c) Utility benchmarking. HUD will pursue benchmarking utility 
consumption at the project level as part of the transition to asset 
management. HUD intends to establish benchmarks by collecting utility 
consumption and cost information on a project-by-project basis. In 
2009, after conducting a feasibility study, HUD will convene a meeting 
with representation of appropriate stakeholders to review utility 
benchmarking options so that HUD may determine whether or how to 
implement utility benchmarking to be effective in FY 2011. The meeting 
shall be convened in accordance with the Federal Advisory Committee Act 
(5 U.S.C. Appendix) (FACA). The HUD study shall take into account 
typical levels of utilities consumption at public housing developments 
based upon factors such as building and unit type and size, temperature 
zones, age and construction of building, and other relevant factors.


Sec.  990.190  Other formula expenses (add-ons).

    In addition to calculating operating subsidy based on the PEL and 
UEL, a PHA's eligible formula expenses shall be increased by add-ons. 
The allowed add-ons are:
    (a) Self-sufficiency. A PHA may request operating subsidy for the 
reasonable cost of program coordinator(s) and associated costs in 
accordance with HUD's self-sufficiency program regulations and notices.
    (b) Energy loan amortization. A PHA may qualify for operating 
subsidy for payments of principal and interest cost for energy 
conservation measures described in Sec.  990.185(a)(3).
    (c) Payments in lieu of taxes (PILOT). Each PHA will receive an 
amount for PILOT in accordance with section 6(d) of the 1937 Act, based 
on its cooperation agreement or its latest actual PILOT payment.
    (d) Cost of independent audits. A PHA is eligible to receive 
operating subsidy equal to its most recent actual audit costs for the 
Operating Fund Program when an audit is required by the Single Audit 
Act (31 U.S.C. 7501-7507) (see 24 CFR part 85) or when a PHA elects to 
prepare and submit such an audit to HUD. For the purpose of this rule, 
the most recent actual audit costs include the associated costs of an 
audit for the Operating Fund Program only. A PHA whose operating 
subsidy is determined to be zero based on the formula is still eligible 
to receive operating subsidy equal to its most recent actual audit 
costs. The most recent actual audit costs are used as a proxy to cover 
the cost of the next audit. If a PHA does not have a recent actual 
audit cost, the PHA working with HUD may establish an audit cost. A PHA 
that requests funding for an audit shall complete an audit. The results 
of the audit shall be transmitted in a time and manner prescribed by 
HUD.
    (e) Funding for resident participation activities. Each PHA's 
operating subsidy calculation shall include $25 per occupied unit per 
year for resident participation activities, including, but not limited 
to, those described in 24 CFR part 964. For purposes of this section, a 
unit is eligible to receive resident participation funding if it is 
occupied by a public housing resident or it is occupied by a PHA 
employee, or a police officer or other security personnel who is not 
otherwise eligible for public housing. In any fiscal year, if 
appropriations are not sufficient to meet all funding requirements 
under this part, then the resident participation component of the 
formula will be adjusted accordingly.
    (f) Asset management fee. Each PHA with at least 250 units shall 
receive a $4 PUM asset management fee. PHAs with fewer than 250 units 
that elect to transition to asset management shall receive an asset 
management fee of $2 PUM. PHAs with fewer than 250 units that elect to 
have their entire portfolio treated and considered as a single project 
as described in Sec.  990.260(b) or PHAs with only one project will not 
be eligible for an asset management fee. For all PHAs eligible to 
receive the asset management fee, the fee will be based on the total 
number of ACC units. PHAs that are not in compliance with asset 
management as described in subpart H of this part by FY 2011 will 
forfeit this fee.
    (g) Information technology fee. Each PHA's operating subsidy 
calculation shall include $2 PUM for costs attributable to information 
technology. For all PHAs, this fee will be based on the total number of 
ACC units.
    (h) Asset repositioning fee. (1) A PHA that transitions projects or 
entire

[[Page 55003]]

buildings of a project out of its inventory is eligible for an asset-
repositioning fee. This fee supplements the costs associated with 
administration and management of demolition or disposition, tenant 
relocation, and minimum protection and service associated with such 
efforts. The asset-repositioning fee is not intended for individual 
units within a multi-unit building undergoing similar activities.
    (2) Projects covered by applications approved for demolition or 
disposition shall be eligible for an asset repositioning fee on the 
first day of the next quarter six months after the date the first unit 
becomes vacant after the relocation date included in the approved 
relocation plan. When this condition is met, the project and all 
associated units are no longer considered an EUM as described in Sec.  
990.155. Each PHA is responsible for accurately applying and 
maintaining supporting documentation on the start date of this 
transition period or is subject to forfeiture of this add-on.
    (3) Units categorized for demolition and which are eligible for an 
asset repositioning fee are eligible for operating subsidy at the rate 
of 75 percent PEL per unit for the first twelve months, 50 percent PEL 
per unit for the next twelve months, and 25 percent PEL per unit for 
the next twelve months.
    (4) Units categorized for disposition and which are eligible for an 
asset repositioning fee are eligible for operating subsidy at the rate 
of 75 percent PEL per unit for the first twelve months and 50 percent 
PEL per unit for the next twelve months.
    (5) The following is an example of how eligibility for an asset-
repositioning fee is determined:
    (i) A PHA has HUD's approval to demolish (or dispose of) a 100-unit 
project from its 1,000 unit inventory. On January 12th, in conjunction 
with the PHA's approved Relocation Plan, a unit in that project becomes 
vacant. Accordingly, the demolition/disposition-approved project is 
eligible for an asset-repositioning fee on October 1st. (This date is 
calculated as follows: January 12th + six months = July 12th. The first 
day of the next quarter is October 1st.)
    (ii) Although payment of the asset-repositioning fee will not begin 
until October 1st, the PHA will receive its full operating subsidy 
based on the 1,000 units through September 30th. On October 1st the PHA 
will begin to receive the 36-month asset-repositioning fee in 
accordance with paragraph (h)(3) of this section for the 100 units 
approved for demolition. (Asset repositioning fee requirements for 
projects approved for disposition are found in paragraph (h)(4) of this 
section.) On October 1st, the PHA's units will be 900.
    (i) Costs attributable to changes in Federal law, regulation, or 
economy. In the event that HUD determines that enactment of a Federal 
law or revision in HUD or other Federal regulations has caused or will 
cause a significant change in expenditures of a continuing nature above 
the PEL and UEL, HUD may, at HUD's sole discretion, decide to prescribe 
a procedure under which the PHA may apply for or may receive an 
adjustment in operating subsidy.

Subpart D--Calculating Formula Income


Sec.  990.195  Calculation of formula income.

    (a) General. For the purpose of the formula, formula income is 
equal to the amount of rent charged to tenants divided by the 
respective unit months leased, and is therefore expressed as a PUM. 
Formula income will be derived from a PHA's year-end financial 
information. The financial information used in the formula income 
computation will be the audited information provided by the PHA through 
HUD's information systems. The information will be calculated using the 
following PHA fiscal year-end information:
    (1) April 1, 2003, through March 31, 2004;
    (2) July 1, 2003, through June 30, 2004;
    (3) October 1, 2003, through September 30, 2004; and
    (4) January 1, 2004, through December 31, 2004.
    (b) Calculation of formula income. To calculate formula income in 
whole dollars, the PUM amount will be multiplied by the EUMs as 
described in subpart B of this part.
    (c) Frozen at 2004 level. After a PHA's formula income is 
calculated as described in paragraph (a) of this section, it will not 
be recalculated or inflated for fiscal years 2006 through 2008, unless 
a PHA can show a severe local economic hardship that is impacting the 
PHA's ability to maintain some semblance of its formula income (see 
subpart G of this part--Appeals). A PHA's formula income may be 
recalculated if the PHA appeals to HUD for an adjustment in its 
formula.
    (d) Calculation of formula income when data are inadequate or 
unavailable. When audited data are unavailable in HUD's information 
systems for the calculation of formula income, HUD may use an 
alternative methodology, including, but not limited to, certifications, 
hard copy reports, and communications with the respective PHAs.
    (e) Inapplicability of 24 CFR 85.25. Formula income is not subject 
to the provisions regarding program income in 24 CFR 85.25.

Subpart E--Determination and Payment of Operating Subsidy


Sec.  990.200  Determination of formula amount.

    (a) General. The amount of operating subsidy that a PHA is eligible 
for is the difference between its formula expenses (as calculated under 
subpart C of this part) and its formula income (as calculated under 
subpart D of this part).
    (b) Use of HUD databases to calculate formula amount. HUD shall 
utilize its databases to make the formula calculations. HUD's databases 
are intended to be employed to provide information on all primary 
factors in determining the operating subsidy amount. Each PHA is 
responsible for supplying accurate information on the status of each of 
its units in HUD's databases.
    (c) PHA responsibility to submit timely data. PHAs shall submit 
data used in the formula on a regular and timely basis to ensure 
accurate calculation under the formula. If a PHA fails to provide 
accurate data, HUD will make a determination as to the PHA's inventory, 
occupancy, and financial information using available or verified data, 
which may result in a lower operating subsidy. HUD has the right to 
adjust any or all formula amounts based on clerical, mathematical, and 
information system errors that affect any of the data elements used in 
the calculation of the formula.


Sec.  990.205  Fungibility of operating subsidy between projects.

    (a) General. Operating subsidy shall remain fully fungible between 
ACC projects until operating subsidy is calculated by HUD at a project 
level. After subsidy is calculated at a project level, operating 
subsidy can be transferred as the PHA determines during the PHA's 
fiscal year to another ACC project(s) if a project's financial 
information, as described more fully in Sec.  990.280, produces excess 
cash flow, and only in the amount up to those excess cash flows.
    (b) Notwithstanding the provisions of paragraph (a) of this section 
and subject to all of the other provisions of this part, the New York 
City Housing Authority's Development Grant Project Amendment Number 
180, dated July 13, 1995, to Consolidated Annual Contributions Contract 
NY-333, remains in effect.

[[Page 55004]]

Sec.  990.210  Payment of operating subsidy.

    (a) Payments of operating subsidy under the formula. HUD shall make 
monthly payments equal to \1/12\ of a PHA's total annual operating 
subsidy under the formula by electronic funds transfers through HUD's 
automated disbursement system. HUD shall establish thresholds that 
permit PHAs to request monthly installments. Requests by PHAs that 
exceed these thresholds will be subject to HUD review. HUD approvals of 
requests that exceed these thresholds are limited to PHAs that have an 
unanticipated and immediate need for disbursement.
    (b) Payments procedure. In the event that the amount of operating 
subsidy has not been determined by HUD as of the beginning of the 
funding period, operating subsidy shall be provided monthly, quarterly, 
or annually based on the amount of the PHA's previous year's formula or 
another amount that HUD may determine to be appropriate.
    (c) Availability of funds. In 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.


Sec.  990.215  Payments of operating subsidy conditioned upon 
reexamination of income of families in occupancy.

    (a) General. Each PHA is required to reexamine the income of each 
family in accordance with the provisions of the ACC, the 1937 Act, and 
HUD regulations. Income reexaminations shall be performed annually, 
except as provided in the 1937 Act, in HUD regulations, or in the MTW 
agreements. A PHA must be in compliance with all reexamination 
requirements in order to be eligible to receive full operating subsidy. 
A PHA's calculations of rent and utility allowances shall be accurate 
and timely.
    (b) A PHA in compliance. A PHA shall submit a certification that 
states that the PHA is in compliance with the annual income 
reexamination requirements and its rent and utility allowance 
calculations have been or will be adjusted in accordance with current 
HUD requirements and regulations.
    (c) A PHA not in compliance. Any PHA not in compliance with annual 
income reexamination requirements at the time of the submission of the 
calculation of operating subsidy shall furnish to the responsible HUD 
field office a copy of the procedures it is using to achieve compliance 
and a statement of the number of families that have undergone 
reexamination during the 12 months preceding the current funding cycle. 
If, on the basis of this submission or any other information, HUD 
determines that the PHA is not substantially in compliance with all of 
the annual income reexamination requirements, HUD shall withhold 
payments to which the PHA may be entitled under this part. Payment may 
be withheld in an amount equal to HUD's estimate of the loss of rental 
income to the PHA resulting from its failure to comply with the 
requirements.

Subpart F--Transition Policy and Transition Funding


Sec.  990.220  Purpose.

    This policy is aimed at assisting all PHAs in transitioning to the 
new funding levels as determined by the formula set forth in this rule. 
PHAs will be subject to a transition funding policy that will either 
increase or reduce their total operating subsidy for a given year.


Sec.  990.225  Transition determination.

    The determination of the amount and period of the transition 
funding shall be based on the difference in subsidy levels between the 
formula set forth in this part and the formula in effect prior to 
November 18, 2005. The difference in subsidy levels will be calculated 
using FY 2004 data. When actual data are not available for one of the 
formula components needed to calculate the formula of this part for FY 
2004, HUD will use alternate data as a substitute (e.g., unit months 
available for eligible unit months, etc.) If the difference between 
these formulas indicates that a PHA shall have its operating subsidy 
reduced as a result of this formula, the PHA will be subject to a 
transition policy as indicated in Sec.  990.230. If the difference 
between these formulas indicates that a PHA will have its operating 
subsidy increased as a result of this formula, the PHA will be subject 
to the transition policy as indicated in Sec.  990.235.


Sec.  990.230  PHAs that will experience a subsidy reduction.

    (a) For PHAs that will experience a reduction in their operating 
subsidy, as determined in Sec.  990.225, such reductions will have a 
limit of:
    (1) 24 percent of the difference between the two funding levels in 
the first year following November 18, 2005;
    (2) 43 percent of the difference between the two funding levels in 
the second year following November 18, 2005;
    (3) 62 percent of the difference between the two levels in the 
third year following November 18, 2005; and
    (4) 81 percent of the difference between the two levels in the 
fourth year following November 18, 2005.
    (b) The full amount of the reduction in the operating subsidy level 
shall be realized in the fifth year following November 18, 2005.
    (c) For example, a PHA has a subsidy reduction from $1 million 
under the formula in effect prior to November 18, 2005 to $900,000 
under the formula used for calculating operating subsidy under this 
part using FY 2004 data. The difference would be calculated at $100,000 
($1 million-$900,000 = $100,000). In the first year, the subsidy 
reduction would be limited to $24,000 (24 percent of the difference). 
Thus, the PHA will receive an operating subsidy amount of this rule 
plus a transition-funding amount of $76,000 (the $100,000 difference 
between the two subsidy amounts minus the $24,000 reduction limit).
    (d) If a PHA can demonstrate a successful conversion to the asset 
management requirements of subpart H of this part, as determined under 
paragraph (f) of this section, HUD will discontinue the reduction at 
the PHA's next subsidy calculation following such demonstration, as 
reflected in the schedule in paragraph (e) of this section, 
notwithstanding Sec.  990.290(c).
    (e) The schedule of reductions for a PHA that will experience a 
reduction in subsidy is reflected in the table below.

----------------------------------------------------------------------------------------------------------------
            Funding period                        Demonstration date  by                Reduction limited to
----------------------------------------------------------------------------------------------------------------
Prior to year 1.......................  October 1, 2005..........................  5 percent of the difference
                                                                                    between the two funding
                                                                                    levels.
Year 1................................  October 1, 2006..........................  24 percent of the difference.
Year 2................................  October 1, 2007..........................  43 percent of the difference.
Year 3................................  October 1, 2008..........................  62 percent of the difference.
Year 4................................  October 1, 2009..........................  81 percent of the difference.
Year 5................................  October 1, 2010..........................  Full reduction reached.
----------------------------------------------------------------------------------------------------------------


[[Page 55005]]

    (f)(1) For purposes of this section, compliance with the asset 
management requirements of subpart H of this part will be based on an 
independent assessment conducted by a HUD-approved professional 
familiar with property management practices in the region or state in 
which the PHA is located.
    (2) A PHA must select from a list of HUD-approved professionals to 
conduct the independent assessment. The professional review and 
recommendation will then be forwarded to the Assistant Secretary for 
Public and Indian Housing (or designee) for final determination of 
compliance with the asset management requirements of subpart H of this 
part.
    (3) Upon completion of the independent assessment, the assessor 
shall conduct an exit conference with the PHA. In response to the exit 
conference, the PHA may submit a management response and other 
pertinent information (including, but not limited to, an additional 
assessment procured at the PHAs' own expense) within ten working days 
of the exit conference to be included in the report submitted to HUD.
    (4) In the event that HUD is unable to produce a list of 
independent assessors on a timely basis, the PHA may submit its own 
demonstration of a successful conversion to asset management directly 
to HUD for determination of compliance.
    (5) The Assistant Secretary for Public and Indian Housing (or 
designee) shall consider all information submitted and respond with a 
final determination of compliance within 60 days of the independent 
assessor's report being submitted to HUD.


Sec.  990.235  PHAs that will experience a subsidy increase.

    (a) For PHAs that will experience a gain in their operating 
subsidy, as determined in Sec.  990.225, such increases will have a 
limit of 50 percent of the difference between the two funding levels in 
the first year following November 18, 2005.
    (b) The full amount of the increase in the operating subsidy level 
shall be realized in the second year following November 18, 2005.
    (c) For example, a PHA's subsidy increased from $900,000 under the 
formula in effect prior to November 18, 2005 to $1 million under the 
formula used to calculate operating subsidy under this part using FY 
2004 data. The difference would be calculated at $100,000 ($1 million -
$900,000 = $100,000). In the first year, the subsidy increase would be 
limited to $50,000 (50 percent of the difference). Thus, in this 
example the PHA will receive the operating subsidy amount of this rule 
minus a transition-funding amount of $50,000 (the $100,000 difference 
between the two subsidy amounts minus the $50,000 transition amount).
    (d) The schedule for a PHA whose subsidy would be increased is 
reflected in the table below.

------------------------------------------------------------------------
        Funding  period                    Increase limited to
------------------------------------------------------------------------
Year 1........................  50 percent of the difference.
Year 2........................  Full increase reached.
------------------------------------------------------------------------

Subpart G--Appeals


Sec.  990.240  General.

    (a) PHAs will be provided opportunities for appeals. HUD will 
provide up to a two percent hold-back of the Operating Fund 
appropriation for FY 2006 and FY 2007. HUD will use the hold-back 
amount to fund appeals that are filed during each of these fiscal 
years. Hold-back funds not utilized will be added back to the formula 
within each of the affected fiscal years.
    (b) Appeals are voluntary and must cover an entire portfolio, not 
single projects. However, the Assistant Secretary for Public and Indian 
Housing (or designee) has the discretion to accept appeals of less than 
an entire portfolio for PHAs with greater than 5,000 public housing 
units.


Sec.  990.245  Types of appeals.

    (a) Streamlined appeal. This appeal would demonstrate that the 
application of a specific Operating Fund formula component has a 
blatant and objective flaw.
    (b) Appeal of formula income for economic hardship. After a PHA's 
formula income has been frozen, the PHA can appeal to have its formula 
income adjusted to reflect a severe local economic hardship that is 
impacting the PHA's ability to maintain rental and other revenue.
    (c) Appeal for specific local conditions. This appeal would be 
based on demonstrations that the model's predictions are not reliable 
because of specific local conditions. To be eligible, the affected PHA 
must demonstrate a variance of ten percent or greater in its PEL.
    (d) Appeal for changing market conditions. A PHA may appeal to 
receive operating subsidy for vacant units due to changing market 
conditions, after a PHA has taken aggressive marketing and outreach 
measures to rent these units. For example, a PHA could appeal if it is 
located in an area experiencing population loss or economic 
dislocations that faces a lack of demand for housing in the foreseeable 
future.
    (e) Appeal to substitute actual project cost data. A PHA may appeal 
its PEL if it can produce actual project cost data derived from actual 
asset management, as outlined in subpart H of this part, for a period 
of at least two years.


Sec.  990.250  Requirements for certain appeals.

    (a) Appeals under Sec.  990.245 (a) and (c) must be submitted once 
annually. Appeals under Sec.  990.245 (a) and (c) must be submitted for 
new projects entering a PHA's inventory within one year of the 
applicable Date of Full Availability (DOFA).
    (b) Appeals under Sec.  990.245 (c) and (e) are subject to the 
following requirements:
    (1) The PHA is required to acquire an independent cost assessment 
of its projects;
    (2) The cost of services for the independent cost assessment is to 
be paid by the appellant PHA;
    (3) The assessment is to be reviewed by a professional familiar 
with property management practices and costs in the region or state in 
which the appealing PHA is located. This professional is to be procured 
by HUD. The professional review and recommendation will then be 
forwarded to the Assistant Secretary for Public and Indian Housing (or 
designee) for final determination; and
    (4) If the appeal is granted, the PHA agrees to be bound to the 
independent cost assessment regardless of new funding levels.

Subpart H--Asset Management


Sec.  990.255  Overview.

    (a) PHAs shall manage their properties according to an asset 
management model, consistent with the management norms in the broader 
multi-family management industry. PHAs shall also implement project-
based management, project-based budgeting, and project-based 
accounting, which are essential components of asset management. The 
goals of asset management are to:
    (1) Improve the operational efficiency and effectiveness of 
managing public housing assets;
    (2) Better preserve and protect each asset;
    (3) Provide appropriate mechanisms for monitoring performance at 
the property level; and
    (4) Facilitate future investment and reinvestment in public housing 
by public and private sector entities.

[[Page 55006]]

    (b) HUD recognizes that appropriate changes in its regulatory and 
monitoring programs may be needed to support PHAs to undertake the 
goals identified in paragraph (a) of this section.


Sec.  990.260  Applicability.

    (a) PHAs that own and operate 250 or more dwelling rental units 
under title I of the 1937 Act, including units managed by a third-party 
entity (for example, a resident management corporation) but excluding 
section 8 units, are required to operate using an asset management 
model consistent with this subpart.
    (b) PHAs that own and operate fewer than 250 dwelling rental units 
may treat their entire portfolio as a single project. However, if a PHA 
selects this option, it will not receive the add-on for the asset 
management fee described in Sec.  990.190(f).


Sec.  990.265  Identification of projects.

    For purposes of this subpart, project means a public housing 
building or set of buildings grouped for the purpose of management. A 
project may be as identified under the ACC or may be a reasonable 
grouping of projects or portions of a project under the ACC. HUD shall 
retain the right to disapprove of a PHA's designation of a project. 
PHAs may group up to 250 scattered-site dwelling rental units into a 
single project.


Sec.  990.270  Asset management.

    As owners, PHAs have asset management responsibilities that are 
above and beyond property management activities. These responsibilities 
include decision-making on topics such as long-term capital planning 
and allocation, the setting of ceiling or flat rents, review of 
financial information and physical stock, property management 
performance, long-term viability of properties, property repositioning 
and replacement strategies, risk management responsibilities pertaining 
to regulatory compliance, and those decisions otherwise consistent with 
the PHA's ACC responsibilities, as appropriate.


Sec.  990.275  Project-based management (PBM).

    PBM is the provision of property-based management services that is 
tailored to the unique needs of each property, given the resources 
available to that property. These property management services include, 
but are not limited to, marketing, leasing, resident services, routine 
and preventive maintenance, lease enforcement, protective services, and 
other tasks associated with the day-to-day operation of rental housing 
at the project level. Under PBM, these property management services are 
arranged, coordinated, or overseen by management personnel who have 
been assigned responsibility for the day-to-day operation of that 
property and who are charged with direct oversight of operations of 
that property. Property management services may be arranged or provided 
centrally; however, in those cases in which property management 
services are arranged or provided centrally, the arrangement or 
provision of these services must be done in the best interests of the 
property, considering such factors as cost and responsiveness.


Sec.  990.280  Project-based budgeting and accounting.

    (a) All PHAs covered by this subpart shall develop and maintain a 
system of budgeting and accounting for each project in a manner that 
allows for analysis of the actual revenues and expenses associated with 
each property. Project-based budgeting and accounting will be applied 
to all programs and revenue sources that support projects under an ACC 
(e.g., the Operating Fund, the Capital Fund, etc.).
    (b)(1) Financial information to be budgeted and accounted for at a 
project level shall include all data needed to complete project-based 
financial statements in accordance with Accounting Principles Generally 
Accepted in the United States of America (GAAP), including revenues, 
expenses, assets, liabilities, and equity data. The PHA shall also 
maintain all records to support those financial transactions. At the 
time of conversion to project-based accounting, a PHA shall apportion 
its assets, liabilities, and equity to its respective projects and HUD-
accepted central office cost centers.
    (2) Provided that the PHA complies with GAAP and other associated 
laws and regulations pertaining to financial management (e.g., OMB 
Circulars), it shall have the maximum amount of responsibility and 
flexibility in implementing project-based accounting.
    (3) Project-specific operating income shall include, but is not 
limited to, such items as project-specific operating subsidy, dwelling 
and non-dwelling rental income, excess utilities income, and other PHA 
or HUD-identified income that is project-specific for management 
purposes.
    (4) Project-specific operating expenses shall include, but are not 
limited to, direct administrative costs, utilities costs, maintenance 
costs, tenant services, protective services, general expenses, non-
routine or capital expenses, and other PHA or HUD-identified costs 
which are project-specific for management purposes. Project-specific 
operating costs also shall include a property management fee charged to 
each project that is used to fund operations of the central office. 
Amounts that can be charged to each project for the property management 
fee must be reasonable. If the PHA contracts with a private management 
company to manage a project, the PHA may use the difference between the 
property management fee paid to the private management company and the 
fee that is reasonable to fund operations of the central office and 
other eligible purposes.
    (5) If the project has excess cash flow available after meeting all 
reasonable operating needs of the property, the PHA may use this excess 
cash flow for the following purposes:
    (i) Fungibility between projects as provided for in Sec.  990.205.
    (ii) Charging each project a reasonable asset management fee that 
may also be used to fund operations of the central office. However, 
this asset management fee may be charged only if the PHA performs all 
asset management activities described in this subpart (including 
project-based management, budgeting, and accounting). Asset management 
fees are considered a direct expense.
    (iii) Other eligible purposes.
    (c) In addition to project-specific records, PHAs may establish 
central office cost centers to account for non-project specific costs 
(e.g., human resources, Executive Director's office, etc.). These costs 
shall be funded from the property-management fees received from each 
property, and from the asset management fees to the extent these are 
available.
    (d) In the case where a PHA chooses to centralize functions that 
directly support a project (e.g., central maintenance), it must charge 
each project using a fee-for-service approach. Each project shall be 
charged for the actual services received and only to the extent that 
such amounts are reasonable.


Sec.  990.285  Records and reports.

    (a) Each PHA shall maintain project-based budgets and fiscal year-
end financial statements prepared in accordance with GAAP and shall 
make these budgets and financial statements available for review upon 
request by interested members of the public.
    (b) Each PHA shall distribute the project-based budgets and year-
end financial statements to the Chairman and to each member of the PHA 
Board of Commissioners, and to such other

[[Page 55007]]

state and local public officials as HUD may specify.
    (c) Some or all of the project-based budgets and financial 
statements and information shall be required to be submitted to HUD in 
a manner and time prescribed by HUD.


Sec.  990.290  Compliance with asset management requirements.

    (a) A PHA is considered in compliance with asset management 
requirements if it can demonstrate substantially, as described in 
paragraph (b) of this section, that it is managing according to this 
subpart.
    (b) Demonstration of compliance with asset management will be based 
on an independent assessment.
    (1) The assessment is to be conducted by a professional familiar 
with property management practices and costs in the region or state in 
which the PHA is located. This professional is to be procured by HUD.
    (2) The professional review and recommendation will then be 
forwarded to the Assistant Secretary for Public and Indian Housing (or 
designee) for final determination of compliance to asset management.
    (c) Upon HUD's determination of successful compliance with asset 
management, PHAs will then be funded based on this information pursuant 
to Sec.  990.165(i).
    (d) PHAs must be in compliance with the project-based accounting 
and budgeting requirements in this subpart by FY 2007. PHAs must be in 
compliance with the remainder of the components of asset management by 
FY 2011.

Subpart I--Operating Subsidy for Properties Managed by Resident 
Management Corporations (RMCs)


Sec.  990.295  Resident Management Corporation operating subsidy.

    (a) General. This part applies to all projects managed by a 
Resident Management Corporation (RMC), including a direct funded RMC.
    (b) Operating subsidy. Subject to paragraphs (c) and (d) of this 
section, the amount of operating subsidy that a PHA or HUD provides a 
project managed by an RMC shall not be reduced during the three-year 
period beginning on the date the RMC first assumes management 
responsibility for the project.
    (c) Change factors. The operating subsidy for an RMC-managed 
project shall reflect changes in inflation, utility rates, and 
consumption, as well as changes in the number of units in the resident 
managed project.
    (d) Exclusion of increased income. Any increased income directly 
generated by activities by the RMC or facilities operated by the RMC 
shall be excluded from the calculation of the operating subsidy.
    (e) Exclusion of technical assistance. Any technical assistance the 
PHA provides to the RMC will not be included for purposes of 
determining the amount of funds provided to a project under paragraph 
(b) of this section.
    (f) The following conditions may not affect the amounts to be 
provided under this part to a project managed by an RMC:
    (1) Income reduction. Any reduction in the subsidy or total income 
of a PHA that occurs as a result of fraud, waste, or mismanagement by 
the PHA; and
    (2) Change in total income. Any change in the total income of a PHA 
that occurs as a result of project-specific characteristics when these 
characteristics are not shared by the project managed by the RMC.
    (g) Other project income. In addition to the operating subsidy 
calculated in accordance with this part and the amount of income 
derived from the project (from sources such as rents and charges), the 
management contract between the PHA and the RMC may specify that income 
be provided to the project from other legally available sources of PHA 
income.


Sec.  990.300  Preparation of operating budget.

    (a) The RMC and the PHA must submit operating budgets and 
calculations of operating subsidy to HUD for approval in accordance 
with Sec.  990.200. The budget will reflect all project expenditures 
and will identify the expenditures related to the responsibilities of 
the RMC and the expenditures that are related to the functions that the 
PHA will continue to perform.
    (b) For each project or part of a project that is operating in 
accordance with the ACC amendment relating to this subpart and in 
accordance with a contract vesting maintenance responsibilities in the 
RMC, the PHA will transfer into a sub-account of the operating reserve 
of the PHA an operating reserve for the RMC project. When all 
maintenance responsibilities for a resident-managed project are the 
responsibility of the RMC, the amount of the reserve made available to 
a project under this subpart will be the per-unit cost amount available 
to the PHA operating reserve, excluding all inventories, prepaids, and 
receivables at the end of the PHA fiscal year preceding implementation, 
multiplied by the number of units in the project operated. When some, 
but not all, maintenance responsibilities are vested in the RMC, the 
management contract between the PHA and RMC may provide for an 
appropriately reduced portion of the operating reserve to be 
transferred into the RMC's sub-account.
    (c) The RMC's use of the operating reserve is subject to all 
administrative procedures applicable to the conventionally owned public 
housing program. Any expenditure of funds from the reserve must be for 
eligible expenditures that are incorporated into an operating budget 
subject to approval by HUD.
    (d) Investment of funds held in the reserve will be in accordance 
with HUD regulations and guidance.


Sec.  990.305  Retention of excess revenues.

    (a) Any income generated by an RMC that exceeds the income 
estimated for the income categories specified in the RMC's management 
contract must be excluded in subsequent years in calculating:
    (1) The operating subsidy provided to a PHA under this part; and
    (2) The funds the PHA provides to the RMC.
    (b) The RMC's management contract must specify the amount of income 
that is expected to be derived from the project (from sources such as 
rents and charges) and the amount of income to be provided to the 
project from the other sources of income of the PHA (such as operating 
subsidy under this part, interest income, administrative fees, and 
rents). These income estimates must be calculated consistent with HUD's 
administrative instructions. Income estimates may provide for 
adjustment of anticipated project income between the RMC and the PHA, 
based upon the management and other project-associated responsibilities 
(if any) that are to be retained by the PHA under the management 
contract.
    (c) Any revenues retained by an RMC under this section may be used 
only for purposes of improving the maintenance and operation of the 
project, establishing business enterprises that employ residents of 
public housing, or acquiring additional dwelling units for lower income 
families. Units acquired by the RMC will not be eligible for payment of 
operating subsidy.

Subpart J--Financial Management Systems, Monitoring, and Reporting


Sec.  990.310  Purpose--General policy on financial management, 
monitoring and reporting.

    All PHA financial management systems, reporting, and monitoring of

[[Page 55008]]

program performance and financial reporting shall be in compliance with 
the requirements of 24 CFR 85.20, 85.40, and 85.41. Certain HUD 
requirements provide exceptions for additional specialized procedures 
that are determined by HUD to be necessary for the proper management of 
the program in accordance with the requirements of the 1937 Act and the 
ACC between each PHA and HUD.


Sec.  990.315  Submission and approval of operating budgets.

    (a) Required documentation:
    (1) Prior to the beginning of its fiscal year, a PHA shall prepare 
an operating budget in a manner prescribed by HUD. The PHA's Board of 
Commissioners shall review and approve the budget by resolution. Each 
fiscal year, the PHA shall submit to HUD, in a time and manner 
prescribed by HUD, the approved Board resolution.
    (2) HUD may direct the PHA to submit its complete operating budget 
with detailed supporting information and the Board resolution if the 
PHA has breached the ACC contract, or for other reasons, which, in 
HUD's determination, threaten the PHA's future serviceability, 
efficiency, economy, or stability. When the PHA no longer is operating 
in a manner that threatens the future serviceability, efficiency, 
economy, or stability of the housing it operates, HUD will notify the 
PHA that it no longer is required to submit a complete operating budget 
with detailed supporting information to HUD for review and approval.
    (b) If HUD finds that an operating budget is incomplete, 
inaccurate, includes illegal or ineligible expenditures, contains 
mathematical errors or errors in the application of accounting 
procedures, or is otherwise unacceptable, HUD may, at any time, require 
the PHA to submit additional or revised information regarding the 
budget or revised budget.


Sec.  990.320  Audits.

    All PHAs that receive financial assistance under this part shall 
submit an acceptable audit and comply with the audit requirements in 24 
CFR 85.26.


Sec.  990.325  Record retention requirements.

    The PHA shall retain all documents related to all financial 
management and activities funded under the Operating Fund for a period 
of five fiscal years after the fiscal year in which the funds were 
received.

    Dated: September 12, 2005.
Paula O. Blunt,
General Deputy Assistant Secretary for Public and Indian Housing.
[FR Doc. 05-18624 Filed 9-16-05; 8:45 am]
BILLING CODE 4210-33-P