[Federal Register Volume 73, Number 202 (Friday, October 17, 2008)]
[Proposed Rules]
[Pages 61757-61770]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-24572]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Part 570
[Docket No. FR-5181-P-01]
RIN 2506-AC22
State Community Development Block Grant Program: Administrative
Rule Changes
AGENCY: Office of the Assistant Secretary for Community Planning and
Development, HUD.
ACTION: Proposed rule.
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SUMMARY: This proposed rule would make changes to several sections of
the regulations for the Community
[[Page 61758]]
Development Block Grant (CDBG) program for states (State CDBG). This
proposed rule would streamline and update the regulations to reflect
statutory changes, clarify the program income requirements, provide
other clarifications to the State CDBG regulations, and make a
conforming change to the regulations applicable to the CDBG Entitlement
program. This proposed rule would also provide states additional
flexibility in their administration of the program.
DATES: Comment Due Date: December 16, 2008.
ADDRESSES: Interested persons are invited to submit comments regarding
this proposed rule to the Regulations Division, Office of General
Counsel, Department of Housing and Urban Development, 451 Seventh
Street, SW., Room 10276, Washington, DC 20410-0500. Communications must
refer to the above docket number and title. There are two methods for
submitting public comments. All submissions must refer to the above
docket number and title.
1. Submission of Comments by Mail. Comments may be submitted by
mail to the Regulations Division, Office of General Counsel, Department
of Housing and Urban Development, 451 Seventh Street, SW., Room 10276,
Washington, DC 20410-0500.
2. Electronic Submission of Comments. Interested persons may submit
comments electronically through the Federal eRulemaking Portal at
http://www.regulations.gov. HUD strongly encourages commenters to
submit comments electronically. Electronic submission of comments
allows the commenter maximum time to prepare and submit a comment,
ensures timely receipt by HUD, and enables HUD to make them immediately
available to the public. Comments submitted electronically through the
http://www.regulations.gov Web site can be viewed by other commenters
and interested members of the public. Commenters should follow the
instructions provided on that site to submit comments electronically.
Note: To receive consideration as public comments, comments must
be submitted through one of the two methods specified above. Again,
all submissions must refer to the docket number and title of the
rule.
No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
Public Inspection of Public Comments. All properly submitted
comments and communications submitted to HUD will be available for
public inspection and copying between 8 a.m. and 5 p.m. weekdays at the
above address. Due to security measures at the HUD Headquarters
building, an advance appointment to review the public comments must be
scheduled by calling the Regulations Division at 202-708-3055 (this is
not a toll-free number). Individuals with speech or hearing impairments
may access this number via TTY by calling the Federal Information Relay
Service at 800-877-8339. Copies of all comments submitted are available
for inspection and downloading at http://www.regulations.gov.
FOR FURTHER INFORMATION CONTACT: Steven Higginbotham, Community
Planning and Development Specialist, Office of Community Planning and
Development, Department of Housing and Urban Development, 451 Seventh
Street, SW., Room 7184, Washington, DC 20410; telephone number 202-708-
1322 (this 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 800-877-8339. FAX inquiries (but
not comments on this proposed rule) may be sent to Mr. Higginbotham at
202-401-2044 (this is not a toll-free number).
SUPPLEMENTARY INFORMATION:
I. Background
This proposed rule would revise the regulations for the CDBG
program for states (State CDBG) in 24 CFR part 570, subpart I, to
respond to issues HUD has identified in the program, to conform the
regulations to current statutory requirements concerning program
income, and to provide additional flexibility to states in implementing
their programs.
Specifically, this proposed rule would revise requirements related
to the following matters: (1) Interest on federal grant payments to
states; (2) program income, including the situations in which income
earned on grant funds must be remitted to the Department of the
Treasury; (3) flexibility for a state to use up to 3 percent of its
allocation, program income, and recaptured funds for state
administrative expenses and technical assistance; (4) revolving funds;
(5) the use of CDBG funds outside the jurisdiction of the recipient;
(6) states' administrative flexibility to impose additional
requirements on recipients; (7) allowability of costs incurred by
states prior to execution of a grant agreement; (8) audits; (9) states'
disbursement of grant funds to units of general local government only;
(10) applicability of cost principles and the requirement for prior
approval of certain costs by HUD; (11) fiscal controls and
administrative procedures; (12) exclusion from program income of
amounts generated by certain activities financed with section 108 loan
guarantees; and (13) reporting. HUD is also requesting public comments
on whether HUD should promulgate State CDBG regulations that mirror
existing CDBG Entitlement program regulations (24 CFR part 570, subpart
J) on lump-sum drawdowns and the use of escrow accounts for
rehabilitation of residential properties.
II. This Proposed Rule
Each of the proposed changes is described below.
A. Interest on Federal Grant Payments to States
Section 570.489(c) of the current regulations describes the
requirements concerning federal grant payments to states. Section
570.489(c)(1) provides that states and units of general local
government must minimize the elapsed time between receipt of federal
funds from the state's line of credit and their disbursement for grant
activities. Section 570.489(c)(2) provides that interest earned by
units of general local government on funds held pending disbursement is
not program income and must generally be returned to the Department of
the Treasury. It further provides that states generally do not have to
return interest earned during the time between receipt of funds and
disbursement to local governments. These provisions of the State CDBG
regulations were based in part on the Intergovernmental Cooperation Act
(31 U.S.C. 6503) and pre-1993 implementing regulations at 31 CFR part
205.
The Cash Management Improvement Act of 1990 (CMIA) (31 U.S.C. 3335,
6503), as amended in 1992, made several fundamental changes to the
manner in which payments between federal and state governments are
made. The Treasury Department's regulations implementing the CMIA are
located in 31 CFR part 205. Under the current regulations, states and
the Treasury Department enter into agreements covering all federal
programs over a certain funding level. Through these agreements, states
select payment techniques that are designed to prevent delays between
drawdown and disbursement of funds, and the agreements provide for the
calculation at stated interest rates of states' net interest
liabilities to the federal government. For programs whose funding
levels are below the applicable threshold or otherwise not subject to
an agreement, states and federal agencies
[[Page 61759]]
must comply with subpart B of 31 CFR part 205, which provides
requirements for minimizing the time between drawdown and disbursement
of funds.
The current requirements at 31 CFR part 205 render some aspects of
Sec. 570.489(c) obsolete. Therefore, rather than repeat the
requirements for states in the State CDBG regulations, this proposed
rule would revise Sec. 570.489(c) by cross-referencing the
requirements in 31 CFR part 205. This proposed rule would retain the
existing requirement that units of general local government minimize
the time between receipt of CDBG funds and their disbursement, and
would clarify that the state is required to ensure that units of local
government are in compliance with this requirement.
B. Program Income Requirements
The proposed changes to the program income provisions that are
described in this section respond to the amendments made by the Housing
and Community Development Act of 1992 (the 1992 Act) (Pub. L. 102-550,
approved October 28, 1992) and an opinion issued by the Comptroller
General of the United States.
1. Implementation of 1992 Statutory Amendments
The existing State CDBG regulations provide in Sec.
570.489(e)(3)(ii)(B) that program income received by a unit of general
local government after closeout of its grant from the state is
generally not subject to the program income requirements in Sec.
570.489(e). However, the 1992 Act amended section 104(j) (42 U.S.C.
5304(j)) of the Housing and Community Development Act of 1974 (the Act)
to provide that the use of program income is governed by CDBG program
requirements for as long as program income remains.
Several regulatory initiatives were reflected in the CDBG Program
Economic Development Guidelines final rule, published on January 5,
1995 (60 FR 1922). At that time, HUD noted that further regulatory
changes were forthcoming to implement fully the 1992 Act. However, HUD
recognized the need to provide guidance to grantees in the interim. On
October 27, 2004, HUD published CPD Notice 04-11, ``Program Income
Requirements in the State CDBG Program.'' The notice described the
changes that occurred in 1992 and provided guidance to states on how to
deal with their increased record-keeping responsibilities.
A major challenge that states face in implementing the 1992 Act is
that a unit of general local government may continue to generate and
use program income long after the originally funded activities are
completed and closed out. The statutory provision significantly
extended states' responsibilities to track program income. To provide
as much flexibility as possible within the constraints of the law, this
proposed rule would revise Sec. 570.489(e)(3)(ii)(B) by allowing
states to demonstrate compliance with this requirement in any of the
following ways:
(a) States may maintain contractual relationships with units of
general local government for as long as there is program income to be
tracked. Since, in some cases, receipts of program income by a local
government may be sporadic, a state could craft its contractual
agreements so that obligations would not be imposed once a local
government has exhausted its program income and would arise again only
upon receipt of new program income.
(b) States may require, as a condition of closeout, that local
governments agree to obtain advance state approval of a local plan to
expend program income, or of individual expenditures of program income,
in the absence of a continuing contractual relationship. This
arrangement may be beneficial to states that presently use a
``conditional closeout'' process, in which a grant recipient has
program income on hand at the time of grant closeout or receives
program income after closeout of the grant that generated the program
income.
(c) States may require, as a condition of closeout, that the unit
of general local government agree to notify the state when new program
income is received by the unit of general local government. This option
may be especially useful when dealing with local revolving loan funds,
or when states and units of local governments are not able to project
future needs to be addressed with activities funded by program income.
(d) States may seek HUD approval of an alternative method for
demonstrating compliance. HUD intends that field offices, not
Headquarters, would grant such approval.
States may select different approaches for different types of grant
recipients. For example, a state that distributes some of its funds on
a formula basis and some on a competitive basis might select option
(a), above, for those units of general local government that receive
funding every year, and option (c) for other grant recipients. A state
might also blend the first two options by requiring a plan for the use
of program income by local governments as part of its contractual
agreement with units of general local government.
Program income is a significant resource in the State CDBG, and it
constitutes a major multiplier of the benefits that the CDBG program
provides to citizens and beneficiaries. For example, in Fiscal Year
(FY) 2007, states cumulatively receipted $37.3 million in program
income. The $37.3 million represents only that portion of program
income that was returned to the states by units of general local
government. Although HUD has issued guidance in the past on how to
report on program income retained at the local level, many states have
not complied with all of HUD's recommendations. This proposed rule
would revise Sec. 570.490(a)(3) to require reporting of data that will
include program income retained at the local level. Also, consistent
with the 1992 Act's requirement to account for program income as long
as the program income remains, this proposed rule would revise Sec.
570.489(e)(4) to require the annual Performance and Evaluation Reports
(PERs) of states to include the use of program income retained by local
governments.
2. Uniform Treatment of Program Income
Over the years, there has been a succession of regulatory changes
to the State CDBG program income requirements. Program income received
from grants made prior to December 9, 1992, was subject to the
requirements in a final rule published in the Federal Register on
November 9, 1992 (57 FR 53397). Program income generated from grants
made by states with FY 1993 and later funds is subject to the
requirements of the 1992 Act as well as the requirements of the
November 9, 1992, final rule. Finally, the January 5, 1995, CDBG
Program Economic Development Guidelines final rule included an expanded
list of revenues that are not considered program income.
States have reported that tracking different requirements as they
apply to different funding years is complicated and time-consuming,
especially for program income retained at the local level. Repayments
of loans made from one grant to a given community may be subject to
different requirements than repayments of loans made from a subsequent
year's grant to the same community. This results in an increased
record-keeping burden on both the state and local governments. The
complexity and burden are compounded when program income is used to
make additional loans, which, in turn, generate more program income.
Some states have expressed confusion about whether program income is
subject to
[[Page 61760]]
the requirements in effect at the time the state awarded the initial
grant to the locality, or to the requirements in effect when the
program income is received.
This proposed rule would revise Sec. 570.489(e)(1) to apply the
tracking requirements to all program income received and retained by
localities, regardless of the fiscal year in which the state grant
funds that generate the program income were appropriated. HUD does not
believe that significant amounts of program income are likely to be
generated by funds appropriated before FY 1993, since in most cases the
funded activities ended years ago. Furthermore, this proposed rule
would also clarify in Sec. 570.489(e)(2)(v) that proceeds received
from the sale of real property acquired or improved in whole or part
with CDBG funds would not be considered program income if the proceeds
are received more than 5 years after expiration of the grant agreement.
For these reasons, making all program income subject to post-FY 1992
requirements should have little effect on grantees. However, HUD
specifically requests comment from grantees that might be adversely
affected.
It is noted that for the purpose of determining the administrative
expense, technical assistance, and public service caps, program income
is counted in the year that it is received by the unit of general local
government, or by the unit of general local government's subgrantee.
3. Miscellaneous Improvements and Updates
States have requested several clarifications of the program income
requirements, and HUD has discovered other requirements that call for
clarification. In substantially updating the program income
requirements contained in Sec. 570.489(e), this proposed rule would
incorporate the following changes:
(a) Selling Off Loan Portfolios in Order To Expedite the Receipt of
Program Income
In order to maximize available financial resources, communities are
increasingly selling portfolios of loans on the secondary market or
selling obligations secured by loan portfolios. Several communities
have requested HUD's approval to ``net out'' of the proceeds from such
sales the various legal and other costs that are incurred when a
grantee sells or securitizes a portfolio. Exclusion of such costs from
program income would be analogous to the current provision under which
costs incidental to the generation of program income from the rental or
use of CDBG-assisted real or personal property may be netted out of the
gross income received. Therefore, this proposed rule would amend Sec.
570.489(e)(1)(vi) and (vii) to allow legal and other costs associated
with the sale or securitization of CDBG-funded loans to be netted out
before the amount of program income is determined. This provision does
not allow to be netted out those costs that are eligible as general
administrative costs of either the state or the unit of general local
government.
(b) Annual Threshold for Program Income
Section 104(j) of the Act allows HUD to promulgate regulations
excluding from the program income requirements amounts that are so
small that tracking them would pose an unreasonable administrative
burden on the unit of general local government. In the CDBG Program
Economic Development Guidelines final rule published on January 5,
1995, HUD raised the threshold in Sec. 570.489(e)(2)(i) from $10,000
to $25,000 per year per unit of general local government. Income that
would otherwise be considered program income, but which totals less
than the current $25,000 threshold, is excluded from the definition of
program income and is therefore not subject to CDBG requirements. If
the total income that would otherwise be considered program income
exceeds the threshold, then none of it is excluded from CDBG
requirements. In order to account for inflation, this proposed rule
would raise the threshold to $35,000 per year per unit of general local
government.
In addition, this proposed rule would revise Sec. 570.489(e)(2)(i)
to match the language found in the Entitlement CDBG regulations at
Sec. 570.500(a)(4)(i). The Entitlement CDBG regulations exclude income
that ``does not exceed'' the applicable threshold, while the State CDBG
regulations exempt income ``which is less than'' the applicable
threshold. This proposed rule would revise the State CDBG regulations
so that total income that ``does not exceed'' the applicable threshold
would be excluded from the definition of program income. The
Entitlement threshold of $25,000 is not being proposed for change at
this time.
This proposed rule would also revise Sec. 570.489(e)(2)(i) to
clarify that the exclusion of total income that does not exceed the
threshold applies only to program income retained by a unit of general
local government and its subgrantees, and that the threshold applies
separately to each unit of general local government. As with the
current regulation, the exclusion would not apply to program income
that a unit of general local government earns but returns to the state.
It is HUD's policy, communicated to states in the past, that the
exclusion does not apply to program income received into local
revolving loan funds (RLFs). The proposed rule would codify this
policy. Income received into an RLF is always included in program
income and subject to CDBG requirements.
This proposed rule would also codify HUD's policy that income
received into an RLF is not added to ``regular'' program income
received by the local government in applying the threshold, which this
proposed rule would increase to $35,000. For example, assume that the
proposed threshold increase becomes effective, and a unit of general
local government maintains an RLF that receives $10,000 in one program
year. In that same program year, it receives $30,000 in non-RLF income
that, if not for the exclusion in Sec. 570.489(e)(2)(i), would be
considered program income. In this example, the $30,000 in non-RLF
income would be excluded from program income (and, as a result, CDBG
requirements would not apply to it), even though the total amount of
program income under control by the local government is $40,000. The
$10,000 that the RLF received would be considered program income. In
another example, the unit of general local government maintains the
same $10,000 in its RLF, but receives $35,001 in non-RLF program
income. In this example, neither the RLF nor non-RLF program income
would be exempted from CDBG requirements.
(c) Remission of Interest
This proposed rule would add Sec. 570.489(e)(2)(iv), listing three
types of interest income that are not considered program income and
must be remitted to the Treasury Department. The first type, which
would be defined in Sec. 570.489(e)(2)(iv)(A), would respond to an
opinion of the Comptroller General of the United States that income
generated by an ineligible CDBG-assisted activity must be remitted to
the U.S. Treasury. According to the Comptroller General opinion,
eligibility includes meeting a national objective. Therefore, interest
generated from CDBG-funded loans could be kept by the grantee only when
the assisted activities meet the national objective requirements.
A second type of interest that is excluded from program income
would be defined at Sec. 570.489(e)(2)(iv)(B). Interest income on
funds reimbursed to a state's CDBG program account prior to the state's
disbursement of the funds for
[[Page 61761]]
eligible purposes would have to be returned to the Treasury Department.
A third type of interest that is excluded from program income and
must be remitted to the U.S. Treasury would be defined at Sec.
570.489(e)(2)(iv)(C). All interest in excess of $100 earned by units of
general local government on grant advances prior to disbursement of the
funds for activities must be returned to the Treasury Department under
the current provision at Sec. 570.489(c)(2). Consistent with the
proposed revision of Sec. 570.489(c), described above, this proposed
rule would move the requirement to Sec. 570.489(e)(2)(iv), in order to
complete the listing of what is not program income.
HUD issued comparable provisions in a final rule for the
Entitlement CDBG program, published on November 9, 1995 (60 FR 56892).
In responding to public comments in that rulemaking, HUD provided
guidance on the extent and applicability of those provisions. Readers
with a particular interest in those provisions may wish to read the
preamble to the November 9, 1995, final rule (60 FR 56892).
(d) Program Income Generated by Loans to State Grant Recipients
This proposed rule would add a provision in Sec.
570.489(e)(2)(iii) to prevent double-counting of program income
received by a subgrantee and subsequently used to make payments on a
loan from a unit of general local government. To the extent that the
funds used by a subgrantee to make principal or interest payments on a
CDBG loan it received from a unit of general local government consist
solely of program income received by the subgrantee, no amount of those
payments represents ``new income'' to the unit of general local
government's CDBG program as a whole. Since revenue is already counted
as program income at the time it is received by the subgrantee, this
provision would prevent double-counting of program income. To the
extent, however, that the subgrantee uses non-CDBG funds to make the
principal or interest payments, those payments to the local government
are new program income to the CDBG program. This proposed rule would
not affect the treatment of such payments under existing practice. HUD
added a similar provision to the Entitlement program regulations in the
November 9, 1995, final rule (60 FR 56893).
For example, if Apple Borough provided funds to the Apple
Development Authority as a subgrantee to run its economic development
loan program, and the Apple Development Authority provided a $50,000
loan to Apple Dairies for a business expansion, Apple Dairies'
repayment of the $50,000 to the Apple Development Authority would be
program income. The Apple Development Authority's repayment of the
$50,000 to Apple Borough would not be program income, since it would be
the same $50,000 transferred from Apple Dairies to the Apple
Development Authority and such program income should not be counted
twice.
(e) Program Income Retained at the Local Level
Section 104(j) of the Act allows a state to require that a unit of
general local government return any program income that it collects to
the state, to be used by the state to fund additional eligible
community development activities. However, the state must waive this
requirement ``to the extent such income is applied to continue the
activity from which such income was derived.''
HUD gives states flexibility to determine whether program income
received by a unit of general local government is being ``applied to
continue the activity from which such income was derived.'' HUD is
aware of situations in which states found that a unit of general local
government failed to use program income in accordance with other
program requirements or was not making sufficient efforts to expend its
program income to continue the activity. HUD does not believe that the
statutory language prohibits states from requiring a unit of general
local government to return program income if it is expending the
program income in violation of other CDBG requirements or delays
expenditure for an unreasonable period of time. Inasmuch as local
retention of program income is required only ``to the extent such
income is applied to continue the activity from which such income was
derived,'' HUD believes the statute necessarily contemplates that the
funds will be used for eligible activities in a timely manner and in
compliance with applicable requirements. This proposed rule would
revise Sec. 570.489(e)(3)(ii)(A) to provide that a state's
determination of whether program income is being ``applied to continue
the activity from which such income was derived'' can include
consideration of whether the program income is not being used (or is
unlikely to be used) within a reasonable time and in accordance with
program requirements to continue the activity.
In some situations, a state may determine that a unit of general
local government will apply program income to continue the activity
from which the income is derived, but that the amount of program income
on hand exceeds projected cash needs for the reasonably near future.
For example, a community has a demand for two housing rehabilitation
loans per month, but has enough program income on hand to fund 25
loans. A state could require the unit of general local government to
return some or all of the program income to the state's CDBG program
income account until such time as it is needed by the unit of general
local government. The state could disburse these funds to other units
of general local government in the meantime rather than drawing funds
from its line of credit. When the local government needs its program
income, the state could disburse the funds from the program income
account or, as necessary, draw an equivalent amount from the state's
line of credit for disbursement to the local government.
In other situations, a state may determine that a unit of local
government is not likely to apply any significant amount of program
income to continue the activity within any reasonable amount of time,
or that it will not apply the program income in accordance with
applicable requirements. In such cases, a state could require the unit
of general local government to return all of the program income to the
state's CDBG program income account for disbursement to other units of
local government.
This proposed rule would increase the effective ``buying power'' of
a state's CDBG funds, by making otherwise idle CDBG funds available to
support current needs elsewhere in the state. Reduced interest costs to
the Treasury Department from prematurely drawn funds would be another
benefit, because states would need to draw funds from their line of
credit somewhat less frequently. States would have the flexibility to
define the time period over which cash needs for program income would
be projected and the appropriate level of program income that could be
retained in the local government's own program account. If a state
plans to manage program income in this manner, its approach must be
described in the state's action plan submitted in accordance with Sec.
91.320 of this title.
(f) New Entitlement Grantees
This rule would clarify requirements for new Entitlement grantees
that possess program income that they received when they were
participating in the State CDBG program. Any such program income would
continue to be treated as State CDBG program income, unless the state
approves the transfer of
[[Page 61762]]
the program income to the Entitlement program. States and units of
local government may prefer to transfer such State CDBG program income
to the Entitlement program, since doing so would reduce states'
monitoring burdens and require new Entitlement grantees to comply with
only one set of program income requirements.
Conversely, on rare occasions a state may be faced with the return
to the State CDBG program of a grantee that has recently lost or
relinquished its Entitlement status. This proposed rule would provide
that, in such a case, the unit of general local government may elect to
transfer the program income to the State CDBG program. Program income
that is not transferred would continue to be subject to Entitlement
program requirements, and closeout of the community's Entitlement
grants with HUD could be delayed. While guidance has been given to
individual grantees on these issues in the past, HUD recognizes the
need to provide for these options through regulations.
This proposed rule would add at Sec. 570.489(e)(3)(iii) a list of
conditions that must be met by a new Entitlement grantee before the
state may approve the transfer of the State CDBG grant-generated
program income to the locality's new Entitlement program. The grantee
would have to elect to participate in the Entitlement program, agree to
use the program in accordance with Entitlement program requirements,
set up access to HUD's Integrated Disbursement and Information System
(IDIS), and agree to enter the transferred program income into IDIS.
The proposed rule would also add at Sec. 570.489(e)(3)(iv) the options
for a former Entitlement community's handling of program income when
joining the State CDBG program. The proposed rule would also make a
conforming change to the Entitlement program regulations by adding the
same language at Sec. 570.504(e).
(g) Administering the State CDBG Program
Section 106(d)(2)(A) of the Act (42 U.S.C. 5306(d)(2)(A)) provides
that a state may elect to distribute State CDBG funds to its non-
entitlement areas and also provides that any such election is permanent
and final. Forty-nine states and the Commonwealth of Puerto Rico have
elected to administer the State CDBG program, and only Hawaii's non-
entitlement program is administered by HUD. The proposed rule would
revise Sec. 570.480(a) to clarify that, consistent with the Act, the
requirements of subpart I of part 570 are applicable to states that
have permanently elected to distribute funds to their non-entitlement
areas. Revised Sec. 570.480(a) would also cross-reference requirements
outside of part 570, subpart I, that apply to the State CDBG program.
C. Flexibility for States To Allocate Funds for Administrative Expenses
and Technical Assistance
This proposed rule would revise Sec. 570.489(a)(1) to reflect a
statutory amendment that provides states flexibility to allocate an
increased portion of CDBG funds between state administrative expenses
and costs of providing technical assistance to units of local
governments and nonprofit program recipients. The 2004 Consolidated
Appropriations Act amended section 106(d) of the Act to allow states to
use up to 3 percent of their allocations on administrative expenses,
technical assistance, or a combination thereof, in addition to the
$100,000 base amount that states may use for administrative expenses. A
maximum of 50 percent of administrative expenses in excess of $100,000
may be paid for with CDBG funds, and the remainder must be paid for
with states' own funds. Prior to the amendment, states could allocate
up to 2 percent of CDBG funds (in addition to the $100,000 base amount)
for state administrative expenses, and up to one percent for technical
assistance. This proposed rule would revise the corresponding
regulation to reflect states' increased flexibility to allocate up to 3
percent of CDBG funds between administrative expenses and technical
assistance according to the states' preferences.
For instance, a state could increase the percentage of CDBG funds
for state administrative expenses to $100,000, plus 2.5 percent of its
total allocation, in which case it would have only 0.5 percent
available to use for technical assistance activities. Or the state
could spend 2 percent of its allocation on technical assistance
activities, leaving only $100,000 plus one percent of its total
allocation to spend on state administrative expenses. In either case,
the state will still have to match, dollar-for-dollar, any CDBG funds
used for administrative expenses in excess of $100,000.
Under the current regulations, a state is allowed to add amounts
reallocated by HUD to the state, as well as program income received by
units of general local government, to the amount of the state's annual
grant in calculating its state administrative expense cap. This
proposed rule would provide in Sec. 570.489(a)(1)(ii) that a state may
make the same additions to the amount of the state's annual grant in
calculating the technical assistance cap. This proposed rule would also
add clarifying provisions at Sec. 570.489(a)(1)(iv) to reflect that
increased amounts of CDBG funds for state administrative costs are
available only for periods following the enactment of the statutory
amendment.
D. Determining Compliance With Administrative Expense Cap
This proposed rule would revise Sec. 570.489(a)(1)(v)(A), which
describes the cumulative accounting method to determine compliance with
the administrative expense cap. The revisions would ensure that terms
are used in a manner consistent with section 106(d) of the Act, as
amended, and with Sec. 570.489(a)(1)(v). This rule would also correct
the description of the matching requirement to clarify that the amount
the state must contribute is logically a minimum, rather than a
maximum, amount. This proposed rule would also clarify that if a grant
for any year during the Consolidated Planning period considered has
been closed out, then aggregate amounts will be reduced by amounts
attributable to the closed-out grant in order to make the required
comparisons.
This proposed rule would also revise Sec. 570.489(a)(1)(v)(B) to
clarify the year-to-year accounting method for determining compliance
with the administrative expense cap, which is an alternative to the
cumulative approach for determining compliance. The current regulation
refers to ``an accounting process developed and implemented by the
state which provides sufficient information to demonstrate that the
requirements of this subsection are met.'' This proposed rule would
replace the current provision with a defined alternative to the
cumulative approach. It would specifically describe the process for
tracking administrative costs on a yearly basis, and permit a state to
draw down funds for administrative expenses (after the expenditure of
the initial $100,000 for state administrative expenses) only upon
expending an equal or greater amount of its own funds for
administrative expenses. HUD does not anticipate that this change will
have any material effect on state CDBG grantees.
E. State Revolving Funds
Revolving funds are typically established and administered in the
following manner: A loan is made by a unit of general local government
with CDBG funds (e.g., to a business to expand). Payments on the loan
(i.e., principal, interest, or both) are accounted for as CDBG program
income
[[Page 61763]]
on the local government's books and held in a separate account
independent of other program accounts. The program income in that
account, including interest earned on the funds while on deposit
pending their reuse, becomes the source of financing for additional
loans of the same type. Hence, the term ``revolving fund'' has been
used to describe such a fund. Revolving funds are used most frequently
in connection with housing rehabilitation and economic development
projects that involve loans.
A number of states have found regional revolving loan funds to be
an efficient means of collecting and redistributing program income held
at the local level. Such loan funds are often operated by a non- or
quasi-governmental organization that administers programs as a
subgrantee of several units of general local government to which the
state awarded the grants. (Since these subgrantees are usually not
units of general local government, they may not directly receive CDBG
funding.) Any program income the subgrantee administers belongs to the
unit of general local government whose grant generated the program
income, and successive reuses of program income must be traceable back
to an individual locality's grant. This presents an obstacle for
regional loan fund operators that wish to use program income to fund
activities anywhere in their service area, regardless of which
community the program income belongs to. While a unit of general local
government may use CDBG funds for activities outside its jurisdictional
boundaries, it must first determine that doing so will meet its
community development needs. It may be difficult for community A to
reasonably conclude that its citizens benefit by having its program
income used for an activity in community B, 60 miles away.
To address these obstacles, HUD supports efforts to establish
regional state revolving funds (SRFs). Economies of scale can often be
achieved in the administration of such programs. Regional economic
development efforts may be more cognizant of the regional nature of
rural economies and be better positioned to act accordingly. Assessing
the benefits of individual economic development projects may also make
sense from a regional perspective, because employees of businesses in
rural communities frequently commute from residences in other
communities that are a significant distance away from their jobs.
To provide administrative flexibility, the Act and current State
CDBG regulations in Sec. 570.489(f) offer three options regarding
revolving funds. First, section 106(d)(4) of the Act provides that
states may make awards to combinations of governments. Under such an
arrangement, program income can be reused within the jurisdiction of
any of the participating local governments. Second, if both the
activities and the regional entity that carries out the activities
qualify under section 105(a)(15) of the Act (42 U.S.C. 5305(a)(15))
(assistance to a neighborhood-based nonprofit organization), repayments
generated from these activities are not within the definition of
``program income'' at Sec. 570.489(e)(2)(ii) and thus are not subject
to program requirements. Third, a state may operate a statewide
revolving fund to redistribute program income returned to the state, in
the form of grants to units of general local government, as provided at
570.489(f)(2).
This proposed rule would expand upon this third option by
clarifying in Sec. 570.489(f)(2) that a state may operate one or more
revolving funds on a regional or statewide basis. Provided that the
state determines that the program income will not be used to continue
the activity that generated it, section 104(j) permits a state to
require program income generated from grant-funded activities to be
returned to the state, regardless of whether the amount falls below the
$25,000 threshold (which this proposed rule would increase to $35,000).
With the proposed change, a state could designate a regional revolving
fund as an SRF and require units of general local government to pay
their program income directly to it. The state could then contract with
a regional entity to administer the fund (including the distribution of
program income to local governments) on behalf of the state. Because
the program income belongs to the state, the regional entity could
distribute it to any other eligible unit of general local government
covered by the regional SRF on behalf of the state and in accordance
with the state's method of distribution. The community whose initial
grant generated the program income would have no further responsibility
for the program income, once the program income is paid into the
regional SRF. Payments of program income to the regional SRF would
belong to the state, rather than to a unit of general local government,
and the regional SRF entity could award the funds, on behalf of the
state, to units of general local government anywhere within the region.
While this arrangement is similar to a revolving loan fund, it is
important to note that the regional entity administering the SRF, as an
agent of the state, could make grants only to units of general local
government. Any state choosing this approach would be required to
describe its process in the method of distribution contained in its
action plan.
F. Spending Funds Outside the Jurisdiction of the Recipient
This proposed rule would revise Sec. 570.486(b) and add a new
Sec. 570.486(c) to place conditions on CDBG-funded projects that
benefit residents outside the recipient's jurisdiction. Under the
existing regulations, CDBG-funded activities may serve beneficiaries
living outside the jurisdiction of the unit of general local government
that receives the grant, so long as the jurisdiction determines that
the activity meets its community's needs, in accordance with section
106(d)(2)(D) of the Act. HUD has identified two emerging trends that
require further regulation. In both situations, funds do not always
benefit the community that received the grant.
First, states and units of general local government are
increasingly using regional organizations to administer revolving loan
funds on behalf of local governments. These regional entities, which
may administer grants from multiple localities, often seek the
flexibility to use program income generated from these grants anywhere
within their service area, regardless of which community's grant
generated the program income. As discussed above in section II.E, this
presents a challenge for units of general local government, which are
responsible for ensuring that program income generated from their grant
is used to meet the community's needs. HUD has concluded that the
current regulations should be revised to clarify the extent to which
funded activities must benefit residents of the jurisdiction whose
grant generated the program income.
Second, HUD is aware of a number of situations in which states
awarded a grant to one community, but the benefits of the activities
occurred in a different community or throughout a much larger area. In
some cases, one small community would receive a grant for an activity
that would be carried out on a regional or even statewide basis. In
other cases, suburban communities would receive funding for projects
that principally benefitted a nearby Entitlement community. HUD does
not believe it is appropriate for one community to serve as a primary
grant recipient when the funded activity will not provide a significant
benefit to
[[Page 61764]]
residents of that jurisdiction. In such situations, the more
appropriate approach is for a state to make a grant to a ``combination
of governments,'' as is specifically provided for in the Act.
This proposed rule would add to Sec. 570.486(b) the requirement
that all State CDBG-funded activities must significantly benefit
residents of the grant recipient's jurisdiction. HUD is aware that some
projects (e.g., one that provides assistance to a business that will
provide 200 jobs in a locality with a population of 500) will provide
benefits to residents of surrounding jurisdictions. Because the project
significantly benefits residents of the grant recipient's jurisdiction,
the project would meet this proposed requirement of the proposed rule.
(Another proposed requirement, described below in this section, would
permit the expenditure of CDBG funds in this example only if it
provides no more than an incidental benefit to any surrounding
Entitlement jurisdictions.)
In making a determination that a project will ``significantly
benefit'' residents of the recipient's jurisdiction, the community must
determine that the benefits to its residents will be sufficient to
justify the amount of CDBG funds it will expend on the project. HUD
would not challenge the determination (or the state's acceptance
thereof) unless it is clearly unreasonable. This proposed rule would
not limit the amount or percentage of funds that may assist an activity
in non-entitlement jurisdictions, so long as the magnitude of the
benefit to recipient jurisdiction residents is not unreasonably
outweighed by the recipient jurisdiction's expenditure of CDBG funds.
HUD does not anticipate that this proposed rule would inhibit joint
efforts by cities and counties to benefit their residents.
This proposed rule would also add a new requirement at Sec.
570.486(c) that residents of Entitlement jurisdictions may not receive
more than an incidental benefit from the state grantee's expenditure of
funds. In situations involving activities located in or benefiting
residents of Entitlement communities, HUD believes it is appropriate
for Entitlement communities to participate in funding such projects at
levels commensurate with the benefits their citizens receive, since
Entitlement communities receive a separate source of funding. HUD
realizes that addressing the community development and housing needs of
nonentitlement area residents may necessarily involve serving residents
of Entitlement communities. In some cases, the most feasible or
practical location for an activity may be within the boundaries of an
Entitlement community (such as for reasons of public transportation
accessibility, maximizing accessibility to the greatest number of
beneficiaries, operational cost-effectiveness, land/building
availability, or engineering considerations). Also, state or local law
may prohibit a nonentitlement county from limiting the benefits of an
activity to residents of the nonentitlement area of the county. In such
cases, the prohibition against using State CDBG funds to provide more
than an incidental benefit to Entitlement area residents would apply.
However, if the Entitlement community is participating financially in
proportion to the share of expected benefits its residents will
receive, it would be appropriate for the state to conclude that the
Entitlement community residents are receiving no benefit, or only an
incidental benefit, from the State CDBG funds contributed to the
activity. The recipient would be responsible for determining the
magnitude of the benefits in such cases and the appropriate financial
contribution by the entitlement community. Comparable language is
contained in the CDBG Entitlement program regulations at Sec. 570.309.
G. Program Income Exclusion for Activities Financed by Section 108 Loan
Guarantees in Areas That Meet Empowerment Zone Eligibility Requirements
This proposed rule would remove Sec. 570.489(e)(2)(iii). This
paragraph excludes from the definition of program income revenue
generated from Section 108 loan guarantees that meet one or more of the
public benefit standards of Sec. 570.482(f)(3)(v) or that are
implemented in conjunction with an Economic Development Initiative
grant under Section 108(q) of the 1974 Act, as amended, and which are
located in an area that meets the Empowerment Zone eligibility
requirement from the definition of program income. It is HUD's belief
that this paragraph has been of limited use by grantees.
H. State Authority To Impose Additional Provisions
This proposed rule would add a new provision at Sec. 570.480(f) to
expand states' administrative flexibility. This new provision would
authorize states to impose on participating units of general local
government additional requirements or requirements that are more
restrictive than those established by HUD. Such authority is implied in
the states' authority to administer the CDBG program, but HUD has never
expressly provided for it in the regulations. States would not be
authorized to impose requirements that would be inconsistent with the
Act or with other statutory or regulatory provisions that apply to the
State CDBG program. HUD proposes this provision to clarify states'
responsibilities and authorities.
I. Pre-Agreement Costs
This proposed rule would revise Sec. 570.489(b) to clarify that
states may charge to the grant certain pre-agreement costs that they
incur, to the extent that the activities that generate the costs are
eligible. Such activities would have to be in conformance with the
environmental review provisions of part 58 and the citizen
participation requirements of part 91, as is the case for other costs
incurred by a state. The current regulation provides that states may
permit units of general local government to charge certain pre-
agreement costs to the grant, but does not expressly state that states
may also charge to the grant certain pre-agreement costs that they
incur. As discussed below in section L, this proposed rule would also
require states and their recipients of CDBG funds to comply with
applicable cost principles. However, it would permit certain costs,
including pre-agreement costs, to be charged to the grant without the
prior approval by HUD that would otherwise be required under Appendix B
of 2 CFR part 225.
J. Audits
This proposed rule would correct an outdated regulatory citation
within Sec. 570.489(m). Currently, the paragraph states that audits of
the state and units of general local government must be conducted in
accordance with 24 CFR part 44, which used to implement the Single
Audit Act. However, the Single Audit Act requirements applicable to
states and local governments are now at Sec. 85.26. Although part 85
as a whole only applies to states that adopt it, this proposed rule
would require states to adhere to one specific provision within that
part. This proposed rule would revise Sec. 570.489(m) to require that
audits be conducted in accordance with Sec. 85.26(a), which in turn
incorporates by reference the provisions of OMB Circular A-133.
K. Grant-Making
This proposed rule would add a new paragraph at Sec. 570.480(g) to
clarify the long-standing statutory requirement, found at section
106(d)(2)(A) of the Act, that states must distribute CDBG funds in the
form of grants only to units of general local government. Another
[[Page 61765]]
statutory provision, found at section 106(d)(3)(A) and (6) of the Act,
permits states to deduct and expend limited amounts of CDBG funds for
administrative expenses and technical assistance to local governments
and nonprofit program recipients. States may find it necessary to
procure such administrative services and technical assistance from
third parties and, accordingly, to make payments to them. This proposed
rule would clarify that the requirement for a state to disburse CDBG
funds to units of general local government does not prohibit it from
making payments to other entities to procure goods and services to
support the state's administrative and technical assistance activities.
L. Cost Principles and Prior Approval of Certain Costs by HUD
This proposed rule would add a new paragraph (n)(1) to Sec.
570.489 to require that State CDBG funds must be expended in compliance
with applicable cost principles that are now codified in title 2 of the
CFR. (Prior to codification, these cost principles were referred to by
the name of the OMB circular through which they were issued.) The cost
principles that apply depend on whether a given cost is incurred by a
government entity, nonprofit organization, or educational institution.
Application of the cost principles to expenditures would ensure that
HUD bears its fair share of costs in a consistent manner across all
states, thereby ensuring a level playing field.
The cost principles that apply to state, local, and Indian tribal
governments are codified at 2 CFR part 225. Appendix B of part 225
provides that a number of cost items are allowable only if approved by
the cognizant federal agency. For example, section 31 of Appendix B of
part 225 requires prior approval of pre-agreement costs, which are
further discussed in section I of this preamble. HUD's regulations for
the Entitlement program provide at Sec. 570.200(a)(5) that HUD's prior
approval is not required to the extent that cost items otherwise comply
with the cost principles and other requirements. This proposed rule
would add a similar provision at Sec. 570.489(n)(2) for the State CDBG
program. Cost items that require federal agency approval under Appendix
B of part 225 would be allowable without HUD's prior approval, so long
as they otherwise comply with 2 CFR part 225 and subpart I of 24 CFR
570. Approval on a case-by-case basis would still be required under
cost principles that are applicable to educational institutions and
nonprofit organizations.
M. Fiscal Controls and Administrative Procedures
This proposed rule would also provide clarification at Sec.
570.489(d)(2)(iii) for states that opt to apply part 85 in order to
comply with the requirement at 570.489(d)(1) for fiscal controls and
administrative procedures. Such states would be required to comply with
all of the provisions of part 85, and would also be required to ensure
that recipients of their State CDBG funds comply with part 84,
``Uniform Administrative Requirements for Grants and Agreements with
Institutions of Higher Education, Hospitals, and Other Non-profit
Organizations,'' as applicable. This requirement would ensure that
there will be no inconsistencies or accountability gaps between the
practices of those states that adopt HUD's administrative standards and
the practices of their recipients.
N. Reporting
This proposed rule would add a new paragraph at Sec. 570.490(a)(3)
that would require states to make entries into the Integrated
Disbursement Information System (IDIS) in a form prescribed by HUD, to
accurately capture the state's accomplishment and funding data during
each program year. It is recommended that the data be entered on a
quarterly basis, and states would be required to enter the data at
least annually. This change would better enable HUD and grantees to
report accomplishments to community development stakeholders.
III. Request for Public Comments on Whether Other Changes Are Needed
HUD requests public comments on whether regulations are needed on
the matters described below. Any such regulations would be published
under a separate proposed rule.
A. Lump Sum Drawdowns
Section 104(h) of the Act allows units of general local government
to make lump-sum drawdowns of CDBG funds to establish revolving loan
funds for property rehabilitation activities. It also provides for HUD
to establish standards governing lump-sum drawdowns. Such standards
exist in the CDBG Entitlement program regulations in Sec. 570.513, but
HUD has not promulgated comparable regulations for the State CDBG
program. HUD is inviting public comments on whether separate
regulations are needed to address situations not covered by the
Entitlement regulations.
B. Use of Escrow Accounts for Rehabilitation
Section 570.511 of the Entitlement program regulations allows
Entitlement communities to establish escrow accounts for funding loans
and grants for the rehabilitation of privately owned residential
property. HUD has never created comparable regulations for the State
CDBG program. HUD is inviting public comments on whether separate
regulations are needed to address situations not covered by the
Entitlement regulations.
IV. Findings and Certifications
Paperwork Reduction Act
The information collection requirements contained in this proposed
rule have been submitted to the Office of Management and Budget (OMB)
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 currently valid OMB
control number.
The burden of the information collections in this proposed rule is
estimated as follows:
Reporting and Recordkeeping Burden:
----------------------------------------------------------------------------------------------------------------
Estimated
average time Estimated
Section reference Number of Number of responses per for annual burden
respondents respondent requirement (in hours)
(in hours)
----------------------------------------------------------------------------------------------------------------
Sec. 570.489(e)(4)................. 550 Ongoing.................. 27 15,000
Sec. 570.490(a)(3)................. 50 10....................... 2 1,000
--------------------------------------------------------------------------
Totals........................... 600 NA....................... 29 16,000
----------------------------------------------------------------------------------------------------------------
[[Page 61766]]
In accordance with 5 CFR 1320.8(d)(1), HUD is soliciting comments
from members of the public and affected agencies concerning this
collection of information to:
(1) Evaluate whether the proposed collection of information is
necessary for the proper performance of the functions of the agency,
including whether the information will have practical utility;
(2) Evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information;
(3) Enhance the quality, utility, and clarity of the information to
be collected; and
(4) Minimize the burden of the collection of information on those
who are to respond, including through the use of appropriate automated
collection techniques or other forms of information technology, e.g.,
permitting electronic submission of responses.
Interested persons are invited to submit comments regarding the
information collection requirements in this rule. Comments must refer
to the proposal by name and docket number (FR-5181-P-01) and must be
sent to:
HUD Desk Officer, Office of Management and Budget, New Executive Office
Building, Washington, DC 20503, Fax number: (202) 395-6947; and
Laruth Harper, Reports Liaison Officer, Office of Community Planning
and Development, Department of Housing and Urban Development, 451
Seventh Street, SW., Room 7233, Washington, DC 20410.
Environmental Impact
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations in 24 CFR part 50 that
implement section 102(2)(C) of the National Environmental Policy Act of
1969 (42 U.S.C. 4332(2)(C)). The Finding is available for public
inspection during regular business hours 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
security measures at the HUD Headquarters building, please schedule an
appointment to review the Finding by calling the Regulations Division
at 202-402-3055 (this is not a toll-free number). Individuals with
speech or hearing impairments may access this number via TTY by calling
the Federal Information Relay Service at 800-877-8339.
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 Order. This proposed rule does not have federalism
implications and would not impose substantial direct compliance costs
on state and local governments nor preempt state law within the meaning
of the Order.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 establishes
requirements for federal agencies to assess the effects of their
regulatory actions on state, local, and tribal governments and the
private sector. This final rule does not impose a federal mandate on
any state, local, or tribal government, or the private sector within
the meaning of the Unfunded Mandates Reform Act of 1995.
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.
This rule would revise certain requirements that apply to the
management of CDBG funds, program income, and other administrative
matters by state governments. In many instances, the changes would
codify existing HUD policy, update obsolete provisions, or revise
regulations to reflect statutory language. Therefore, the undersigned
certifies that this rule will not have a significant impact on a
substantial number of small entities.
Notwithstanding HUD's view that this rule will not have a
significant effect on a substantial number of small entities, HUD
specifically invites comments regarding any less burdensome
alternatives to this rule that will meet HUD's objectives, as described
in this preamble.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance (CFDA) program number
for the State CDBG program is 14.228 and the CFDA program number for
the Entitlement program is 14.218.
List of Subjects in 24 CFR Part 570
Administrative practice and procedure, American Samoa, Community
Development Block Grants, Grant programs--education, Grant programs--
housing and community development, Guam, Indians, Loan programs--
housing and community development, Low and moderate income housing,
Northern Mariana Islands, Pacific Islands Trust Territory, Puerto Rico,
Reporting and recordkeeping requirements, Student aid, Virgin Islands.
Accordingly, for the reasons described in the preamble, HUD
proposes to amend 24 CFR part 570 as follows:
PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS
1. The authority citation for 24 part 570 continues to read as
follows:
Authority: 42 U.S.C. 5300-5320.
2. In Sec. 570.480, revise paragraph (a) and add paragraphs (f)
and (g), to read as follows:
Sec. 570.480 General.
(a) This subpart describes policies and procedures applicable to
states that have permanently elected to receive Community Development
Block Grant funds for distribution to units of general local government
in the state's nonentitlement areas under the Housing and Community
Development Act of 1974, as amended (the Act). Other subparts of part
570 are not applicable to the State CDBG program, except as expressly
provided otherwise. Regulations of part 570 outside of this subpart
that apply to the State CDBG program include Sec. Sec. 570.200(j) and
570.606.
* * * * *
(f) In administering the CDBG program, a state may impose
additional or more restrictive provisions on units of general local
government participating in the state's program, provided that such
provisions are not inconsistent with the Act or other statutory or
regulatory provisions that are applicable to the State CDBG program.
(g) States shall make CDBG grants only to units of general local
government. This restriction does not limit a state's authority to make
payments to other parties for state administrative expenses and
technical assistance activities authorized in section 106(d) of the
Act.
3. In Sec. 570.486, revise paragraph (b) and add paragraph (c), to
read as follows:
[[Page 61767]]
Sec. 570.486 Local government requirements.
* * * * *
(b) Activities serving beneficiaries outside the jurisdiction of
the unit of general local government. Any activity carried out by a
recipient of State CDBG funds must significantly benefit residents of
the jurisdiction of the grant recipient, and the unit of general local
government must determine that the activity is meeting its needs in
accordance with section 106(d)(2)(D) of the Act. For an activity to
significantly benefit residents of the recipient jurisdiction, the CDBG
funds expended by the unit of general local government must not be
unreasonably disproportionate to the benefits to its residents.
(c) Activities located in Entitlement jurisdictions. State grant
recipients may not expend State CDBG funds for activities located in or
serving Entitlement jurisdictions, unless Entitlement residents receive
only an incidental benefit from State CDBG expenditures for the
activity.
4. Amend Sec. 570.489 as follows:
a. Revise paragraphs (a)(1), (b), (c), (e)(1), (2), and (3)(i) and
(ii), and (m);
b. Add paragraphs (d)(2)(iii)(A) and (B), (e)(3)(iii), (iv), and
(4), and (n); and
c. Revise the first sentence of paragraph (f)(2), to read as
follows:
Sec. 570.489 Program administrative requirements.
(a) Administrative and planning costs--(1) State administrative and
technical assistance costs. (i) The state is responsible for the
administration of all CDBG funds. The state shall pay from its own
resources all administrative expenses incurred by the state in carrying
out its responsibilities under this subpart, except as provided in this
paragraph (a)(1)(i) of this section, which is subject to the time
limitations in paragraph (a)(1)(iv) of this section. To pay
administrative expenses, the state may use CDBG funds not to exceed
$100,000, plus 50 percent of administrative expenses incurred in excess
of $100,000. Amounts of CDBG funds used to pay administrative expenses
in excess of $100,000 shall not, subject to paragraph (a)(1)(iii) of
this section, exceed 3 percent of the sum of the state's annual grant,
program income received by units of general local government during
each program year (whether retained by units of general local
government or paid to the state), and of funds reallocated by HUD to
the state.
(ii) To pay the costs of providing technical assistance to local
governments and nonprofit program recipients, a state may, subject to
paragraph (a)(1)(iii) of this section, use CDBG funds received on or
after January 23, 2004, in an amount not to exceed 3 percent of the sum
of its annual grant, program income received by units of general local
government during each program year (whether retained by units of
general local government or paid to the state), and funds reallocated
by HUD to the state during each program year.
(iii) The amount of CDBG funds used to pay the sum of
administrative costs in excess of $100,000 paid pursuant to paragraph
(a)(1)(i) of this section and technical assistance costs paid pursuant
to paragraph (a)(1)(ii) of this section must not exceed 3 percent of
the sum of a state's annual grant, program income received by units of
general local government during each program year (whether retained by
the unit of general local government or paid to the state), and funds
reallocated by HUD to the state.
(iv) In calculating the amount of CDBG funds that may be used to
pay state administrative expenses prior to January 23, 2004, the state
may include in the calculation the following elements only to the
extent they are within the following time limitations:
(A) $100,000 per annual grant beginning with FY 1984 allocations;
(B) Two percent of the sum of a state's annual grant and funds
reallocated by HUD to the state within a program year, without
limitation based on when such amounts were received;
(C) Two percent of program income returned by units of general
local government to states after August 21, 1985; and
(D) Two percent of program income received and retained by units of
general local government after February 11, 1991.
(v) In regard to its administrative costs, the state has the option
of selecting its approach for demonstrating compliance with the
requirements of this paragraph (a)(1) of this section. Any state whose
matching costs contributions toward state administrative expense
matching requirements are in arrears must bring matching cost
contributions up to the level of CDBG funds expended for such costs. A
state grant may not be closed out if the state's matching cost
contribution is not at least equal to the amount of CDBG funds in
excess of $100,000 expended for administration. Funds from any year's
grant may be used to pay administrative costs associated with any other
year's grant. The two approaches for demonstrating compliance with this
paragraph (a)(1) of this section are:
(A) Cumulative accounting of administrative costs incurred by the
state since its assumption of the CDBG program. Under this approach,
the state will identify, for each grant it has received, the CDBG funds
eligible to be used for state administrative expenses, as well as the
minimum amount of matching funds that the state is required to
contribute. The amounts will then be aggregated for all grants
received. The state must keep records demonstrating the actual amount
of CDBG funds from each grant received that were used for state
administrative expenses, as well as matching amounts that were
contributed by the state. The state will be considered to be in
compliance with the applicable requirements if the aggregate of actual
amounts of CDBG funds spent on state administrative expenses does not
exceed the aggregate maximum allowable amount and if the aggregate
amount of matching funds that the state has expended is equal to or
greater than the aggregate amount of CDBG funds in excess of $100,000
(for each annual grant within the subject period) spent on
administrative expenses during its 3-to 5-year Consolidated Planning
period. If the state grant for any grant year within the 3-to 5-year
period has been closed out, the aggregate amount of CDBG funds spent on
state administrative expenses, the aggregate maximum allowable amount,
the aggregate matching funds expended, and the aggregate amount of CDBG
funds in excess of $100,000 (for each annual grant within the subject
period) will be reduced by amounts attributable to the grant year for
which the state grant has been closed out.
(B) Year-to-year tracking and limitation on drawdown of funds. For
each grant year, the state will calculate the maximum allowable amount
of CDBG funds that may be used for state administrative expenses, and
will draw down amounts of those funds only upon its own expenditure of
an equal or greater amount of matching funds from its own resources
after the expenditure of the initial $100,000 for state administrative
expenses. The state will be considered to be in compliance with the
applicable requirements if the actual amount of CDBG funds spent on
state administrative expenses does not exceed the maximum allowable
amount, and if the amount of matching funds that the state has expended
for that grant year is equal to or greater than the amount of CDBG
funds in excess of $100,000 spent during that same grant year. Under
this approach, the state must demonstrate that it has paid from its own
funds at least 50 percent of its
[[Page 61768]]
administrative expenses in excess of $100,000 by the end of each grant
year.
(b) Reimbursement of pre-agreement costs. The state may permit, in
accordance with such procedures as the state may establish, a unit of
general local government to incur costs for CDBG activities before the
establishment of a formal grant relationship between the state and the
unit of general local government and to charge these pre-agreement
costs to the grant, provided that the activities are eligible and
undertaken in accordance with the requirements of this part and 24 CFR
part 58. A state may incur costs prior to entering into a grant
agreement with HUD and charge those pre-agreement costs to the grant,
provided that the activities are eligible and are undertaken in
accordance with the requirements of this part, part 58 of this title,
and the citizen participation requirements of part 91 of this title.
(c) Federal grant payments. The state's requests for payment, and
the Federal Government's payments upon such requests, must comply with
31 CFR part 205. The state must use procedures to minimize the time
elapsing between the transfer of grant funds and disbursement of funds
by the state to units of general local government. States must also
have procedures in place and units of general local government must use
these procedures to minimize the time elapsing between the transfer of
funds by the state and disbursement for CDBG activities.
(d) * * *
(2) * * *
(iii) * * *
(A) A state that opts to satisfy this requirement for fiscal
controls and administrative procedures by applying the provisions of
part 85 must comply with the requirements therein.
(B) A state that opts to satisfy this requirement for fiscal
controls and administrative procedures by applying the provisions of
part 85 of this title must also ensure that recipients of the state's
CDBG funds comply with part 84 of this title, ``Uniform Administrative
Requirements for Grants and Agreements with Institutions of Higher
Education, Hospitals, and Other Non-Profit Organizations,'' as
applicable.
(e) Program income. (1) For the purposes of this subpart, ``program
income'' is defined as gross income received by a state, a unit of
general local government, or subgrantee of the unit of general local
government that was generated from the use of CDBG funds, regardless of
when the CDBG funds were appropriated and whether the activity has been
closed out, except as provided in paragraph (e)(2) of this section.
When income is generated by an activity that is only partially assisted
with CDBG funds, the income must be prorated to reflect the percentage
of CDBG funds used (e.g., a single loan supported by CDBG funds and
other funds; a single parcel of land purchased with CDBG funds and
other funds). Program income includes, but is not limited to, the
following:
(i) Proceeds from the disposition by sale or long-term lease of
real property purchased or improved with CDBG funds, except as provided
in paragraph (e)(2)(v) of this section;
(ii) Proceeds from the disposition of equipment purchased with CDBG
funds;
(iii) Gross income from the use or rental of real or personal
property acquired by the unit of general local government or subgrantee
of the unit of general local government with CDBG funds, less the costs
incidental to the generation of the income;
(iv) Gross income from the use or rental of real property, owned by
the unit of general local government or other entity carrying out a
CDBG activity that was constructed or improved with CDBG funds, less
the costs incidental to the generation of the income;
(v) Payments of principal and interest on loans made using CDBG
funds, except as provided in paragraph (e)(2)(iii) of this section;
(vi) Proceeds from the sale of loans made with CDBG funds, less
reasonable legal and other costs incurred in the course of such sale
that are not otherwise eligible costs under sections 105(a)(13) or
106(d)(3)(A) of the Act;
(vii) Proceeds from the sale of obligations secured by loans made
with CDBG funds, less reasonable legal and other costs incurred in the
course of such sale that are not otherwise eligible costs under
sections 105(a)(13) or 106(d)(3)(A) of the Act;
(viii) Interest earned on funds held in a revolving fund account;
(ix) Interest earned on program income pending disposition of the
income;
(x) Funds collected through special assessments made against non-
residential properties and properties owned and occupied by households
not of low and moderate income, if the special assessments are used to
recover all or part of the CDBG portion of a public improvement; and
(xi) Gross income paid to a unit of general local government or
subgrantee of the unit of general local government from the ownership
interest in a for-profit entity acquired in return for the provision of
CDBG assistance.
(2) ``Program income'' does not include the following:
(i) The total amount of funds, which does not exceed $35,000
received in a single year from activities, other than revolving loan
funds that is retained by a unit of general local government and its
subgrantees (all funds received from revolving loan funds are
considered program income, regardless of amount);
(ii) Amounts generated by activities eligible under section
105(a)(15) of the Act and carried out by an entity under the authority
of section 105(a)(15) of the Act;
(iii) Payments of principal and interest made by a subgrantee
carrying out a CDBG activity for a unit of general local government,
toward a loan from the local government to the subgrantee, to the
extent that program income received by the subgrantee is used for such
payments;
(iv) The following classes of interest, which must be remitted to
HUD for transmittal to the Department of the Treasury, and will not be
reallocated under section 106(c) or (d) of the Act:
(A) Interest income from loans or other forms of assistance
provided with CDBG funds that are used for activities determined by HUD
to be not eligible under Sec. 570.482 or section 105(a) of the Act, to
fail to meet a national objective in accordance with the requirements
of Sec. 570.483, or to fail substantially to meet any other
requirement of this subpart or the Act;
(B) Interest income from deposits of amounts reimbursed to a
state's CDBG program account prior to the state's disbursement of the
reimbursed funds for eligible purposes; and
(C) Interest income received by units of general local government
on deposits of grant funds before disbursement of the funds for
activities, except that the unit of general local government may keep
interest payments of up to $100 per year for administrative expenses
otherwise permitted to be paid with CDBG funds.
(v) Proceeds from the sale of real property purchased or improved
with CDBG funds, if the proceeds are received more than 5 years after
expiration of the grant agreement.
(3) * * *
(i) Program income paid to the state. Except as described in
paragraph (e)(3)(ii)(A) of this section, the state may require the unit
of general local government that receives or will receive program
income to return the program income to the state. Program income that
is paid to the state is treated as additional CDBG funds subject to the
requirements of this subpart. Except for program income retained and
used by
[[Page 61769]]
the state for administrative costs or technical assistance under
paragraph (a) of this section, program income paid to the state must be
distributed to units of general local government in accordance with the
method of distribution in the action plan under Sec. 91.320(k)(1)(i)
of this title that is in effect at the time the program income is
distributed. To the maximum extent feasible, the state must distribute
program income before it makes additional withdrawals from the
Department of the Treasury, except as provided in paragraph (f) of this
section.
(ii) Program income retained by a unit of general local government.
A state may permit a unit of general local government that receives or
will receive program income to retain the program income.
Alternatively, subject to the exception in paragraph (e)(3)(ii)(A) of
this section, a state may require that the unit of general local
government pay any such income to the state.
(A) A state must permit the unit of general local government to
retain the program income to the extent that the program income is
applied to continue the activity from which it was derived. A state
will determine whether a unit of general local government is likely to
apply funds to continue the activity from which the funds were derived,
and HUD will give maximum feasible deference to a state's
determination, in accordance with Sec. 570.480(c). In making such a
determination, a state may consider whether the unit of general local
government is or will be unable to comply with the requirements of
paragraph (e)(3)(ii)(B) of this section or other requirements of this
part, and the extent to which the program income is unlikely to be
applied to continue the activity within the reasonably near future.
When a state determines that the program income will be applied to
continue the activity from which it was derived, but that the amount of
program income held by the unit of general local government exceeds
projected cash needs for the reasonably near future, the state may
require the local government to return all or part of the program
income to the state until such time as the program income is needed by
the unit of general local government. When a state determines that a
unit of local government is not likely to apply any significant amount
of program income to continue the activity within a reasonable amount
of time, or that it will not likely apply the program income in
accordance with applicable requirements, the state may require the unit
of general local government to return all of the program income to the
state for disbursement to other units of local government. A state that
intends to require units of general local government to return program
income in accordance with this paragraph (e)(3)(ii)(A) of this section
must describe its approach in the state's action plan required under
Sec. 91.320 of this title.
(B) Program income that is received and retained by the unit of
general local government is treated as additional CDBG funds and is
subject to all applicable requirements of this subpart, regardless of
whether the activity that generated the program income has been closed
out. If the grant that generated the program income is still open when
the program income is generated, program income permitted to be
retained will be considered part of the unit of general local
government's grant that generated the program income. If the grant is
closed, program income permitted to be retained will be considered to
be part of the unit of general local government's most recently awarded
open grant. If the unit of general local government has no open grants,
the program income retained by the unit of general local government
will be counted as part of the state's grant year in which the program
income was generated. A state must employ one or more of the following
methods to ensure that units of general local government comply with
applicable program income requirements:
(1) Maintaining contractual relationships with units of general
local government for the duration of the existence of the program
income;
(2) Closing out the underlying activity, but requiring as a
condition of closeout that the unit of general local government obtain
advance state approval of either a unit of general local government's
plan for the use of program income, or of each use of program income by
grant recipients via regularly occurring reports and requests for
approval;
(3) Closing out the underlying activity, but requiring as a
condition of closeout that the unit of general local government notify
the state when new program income is received; or
(4) With prior HUD approval, other approaches that demonstrate that
the state will ensure compliance with the requirements of this subpart
by units of general local government.
(C) The state must require units of general local government, to
the maximum extent feasible, to disburse program income that is subject
to the requirements of this subpart before requesting additional funds
from the state for activities, except as provided in paragraph (f) of
this section.
(iii) Transfer of program income to Entitlement program. A unit of
general local government that becomes eligible to be an Entitlement
grantee may request the state's approval to transfer State CDBG grant-
generated program income to the unit of general local government's
Entitlement program. A state may approve the transfer, provided the
unit of general local government:
(A) Has officially elected to participate in the Entitlement grant
program;
(B) Agrees to use such program income in accordance with
Entitlement program requirements; and
(C) Has set up Integrated Disbursement Information System (IDIS)
access and agrees to enter receipt of program income into IDIS.
(iv) Transfer of program income of grantees losing Entitlement
status. Upon entry into the State CDBG program, a unit of general local
government that has lost or relinquished its Entitlement status must,
with respect to program income that a unit of general local government
would otherwise be permitted to retain, either:
(A) Retain program income generated under Entitlement grants and
continue to comply with Entitlement program requirements for program
income; or
(B) Retain the program income and transfer it to the State CDBG
program, in which case the unit of general local government must comply
with the state's rules for program income and the requirements of this
paragraph (e).
(4) The state must report on the receipt and use of all program
income (whether retained by units of general local government or paid
to the state) in its annual performance and evaluation report.
(f) * * *
(1) * * *
(2) The state may establish one or more state revolving funds to
distribute grants to units of general local government throughout a
state or a region of the state to carry out specific, identified
activities. * * *
* * * * *
(m) Audits. Notwithstanding any other provision of this title,
audits of a state and units of general local government shall be
conducted in accordance with Sec. 85.26 of this title, which
implements the Single Audit Act (31 U.S.C. 7501-07) and incorporates
OMB Circular A-133. States shall develop and administer an audits
management system to ensure that audits of units of general local
government are conducted in accordance with OMB Circular A-133, if
applicable.
(n) Cost principles and prior approval. (1) A state must ensure
that costs
[[Page 61770]]
incurred by the state and by its recipients are in conformance with the
following cost principles, as applicable:
(i) ``Cost Principles for State, Local, and Indian Tribal
Governments (OMB Circular A-87),'' which is codified at 2 CFR part 225;
(ii) ``Cost Principles for Non-Profit Organizations (OMB Circular
A-122),'' which is codified at 2 CFR part 230; and
(iii) ``Cost Principles for Educational Institutions (OMB Circular
A-21),'' which is codified at 2 CFR part 220.
(2) All cost items described in Appendix B of 2 CFR part 225 that
require federal agency approval are allowable without prior approval of
HUD to the extent they otherwise comply with the requirements of 2 CFR
part 225 and are otherwise eligible under this subpart I, except for
the following:
(i) Depreciation methods for fixed assets shall not be changed
without the express approval of HUD or, if charged through a cost
allocation plan, the cognizant federal agency.
(ii) Fines and penalties (including punitive damages) are
unallowable costs to the CDBG program.
5. Add Sec. 570.490(a)(3) to read as follows:
Sec. 570.490 Recordkeeping requirements.
(a) * * *
(3) Integrated Disbursement and Information System (IDIS). The
state shall make entries into IDIS in a form prescribed by HUD to
accurately capture the state's accomplishment and funding data,
including program income, for each program year. It is recommended that
the state enter IDIS data on a quarterly basis and it is required to be
entered annually.
* * * * *
6. Add Sec. 570.504(e) to read as follows:
Sec. 570.504 Program income.
* * * * *
(e)(1) Transfer of program income to Entitlement program. A unit of
general local government that becomes eligible to be an Entitlement
grantee may request the state's approval to transfer State CDBG grant-
generated program income to the unit of general local government's
Entitlement program. A state may approve the transfer, provided the
unit of general local government:
(i) Has officially elected to participate in the Entitlement grant
program;
(ii) Agrees to use such program income in accordance with
Entitlement program requirements;
(iii) Has set up Integrated Disbursement and Information System
(IDIS) access and agrees to enter receipt of program income into IDIS.
(2) Transfer of program income of grantees losing Entitlement
status. Upon entry into the State CDBG program, a unit of general local
government that has lost or relinquished its Entitlement status must,
with respect to program income that a unit of general local government
would otherwise be permitted to retain, either:
(1) Retain the program income generated under Entitlement grants
and continue to comply with Entitlement program requirements for
program income; or
(2) Retain the program income and transfer it to the State CDBG
program, in which case the unit of general local government must comply
with the state's rules for program income and the requirements of Sec.
570.489(e).
Dated: September 23, 2008.
Susan D. Peppler,
Assistant Secretary for Community Planning and Development.
[FR Doc. E8-24572 Filed 10-16-08; 8:45 am]
BILLING CODE 4210-67-P