[Federal Register Volume 77, Number 78 (Monday, April 23, 2012)]
[Rules and Regulations]
[Pages 24139-24146]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-9693]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 570

[Docket No. FR-5181-F-02]
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: Final rule.

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SUMMARY: This final rule makes changes to several sections of the 
regulations for the Community Development Block Grant (CDBG) program 
for states (State CDBG program). This final rule streamlines and 
updates the regulations to reflect statutory changes, clarifies the 
program income requirements, provides other clarifications to the State 
CDBG program regulations, and makes a conforming change to the 
regulations applicable to the CDBG Entitlement program. This final rule 
also provides additional flexibility to states in their administration 
of the program. The final rule follows publication of an October 17, 
2008, proposed rule and takes into consideration the public comments 
received on the proposed rule.

DATES: Effective Date: May 23, 2012.

FOR FURTHER INFORMATION CONTACT: Eva C. Fontheim, Community Planning 
and Development Specialist, Office of Community Planning and 
Development, Department of Housing and Urban Development, 451 Seventh 
Street SW., Room 7182, 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 Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION: 

I. Background

    On October 17, 2008, at 73 FR 61757, HUD published for public 
comment a proposed rule that would revise HUD's regulations for the 
State CDBG program in 24 CFR part 570, subpart I, in order to conform 
the regulations to current statutory requirements concerning program 
income, and to provide additional flexibility to states in implementing 
their programs. Title I of the Housing and Community Development Act of 
1974 (42 U.S.C. 5301-5320) (HCDA) established the statutory framework 
for the CDBG program. The primary statutory objective of the CDBG 
program is to develop viable communities, by providing decent housing 
and a suitable living environment and by expanding economic 
opportunities, principally for persons of low- and moderate-income. 
HUD's regulations implementing the CDBG program are located in 24 CFR 
part 570 (entitled ``Community Development Block Grants'').
    Under the State CDBG program, states have the opportunity to 
administer CDBG funds for nonentitlement areas. Nonentitlement areas 
include those units of general local government that do not receive 
CDBG funds directly. States participating in the State CDBG program 
award grants only to units of general local government that carry out 
development activities. Annually, each state develops funding 
priorities and criteria for selecting projects. HUD's role under the 
State CDBG program is to ensure state compliance with federal laws, 
regulations, and policies. The regulations for the State CDBG program 
are codified in subpart I of the part 570 regulations.
    The proposed regulatory amendments described in the October 17, 
2008, proposed rule were designed to clarify how HUD will administer 
the State CDBG program. HUD proposed to streamline and update the 
regulations to reflect statutory changes, clarify the program income 
requirements, and provide other clarifications to the State CDBG 
regulations that will provide states with additional flexibility in 
their administration of the program. Interested readers should refer to 
the preamble to the October 17, 2008, proposed rule for additional 
information on the proposed regulatory changes to the State CDBG 
program.

II. This Final Rule; Changes to the October 17, 2008, Proposed Rule

    This final rule follows publication of the October 17, 2008, 
proposed rule and takes into consideration the public comments received 
on the proposed rule. The public comment period on the proposed rule 
closed on December 16, 2008. HUD received eight responses. Commenters 
included one public interest group and seven units of local government. 
Most of the public comments pertained to the provisions of the proposed 
rule concerning program income requirements.
    After careful consideration of the issues raised by the commenters, 
HUD has decided to adopt an amended version of the proposed rule. 
Specifically, HUD has made the following changes to the October 17, 
2008, proposed rule:
    1. Administrative Expense Cap Time Period. The final rule 
clarifies, at Sec.  570.489(a)(1), that the program income included in 
the calculation determining the amount of allowable administrative and 
technical assistance per program year is all of the program income 
received in the program year, regardless of the fiscal year in which 
the state grant funds were appropriated that generated the program 
income.
    2. Identifies Parties in the Grant Agreement for Calculating 
Program Income. Section 570.489(e)(2)(v) of the final rule specifies 
that the grant agreement referred to in this section is between the 
state and the unit of general local government.
    3. Entitlement Jurisdictions Receive Only an Incidental Benefit 
From State CDBG Program Expenditures. The final rule, at Sec.  
570.486(c), no longer mandates

[[Page 24140]]

that entitlement jurisdictions receive only an incidental benefit from 
State CDBG program expenditures. Instead, if State CDBG program funds 
are expended on activities located in entitlement jurisdictions, the 
activities must significantly benefit residents of the state grant 
recipient, must meet the nonentitlement jurisdiction's needs, and the 
entitlement jurisdiction must make a meaningful contribution to the 
project.
    4. State Action Plans Including a Return of Program Income 
Requirement on Local Governments. The final rule clarifies, at Sec.  
570.489(e)(3)(ii)(A), that states that intend to require units of 
general local government to return program income to the state, after 
the action plan is already submitted and approved by HUD, may submit a 
substantial amendment.

III. Discussion of Public Comments on the October 17, 2008, Proposed 
Rule

    The following section presents a summary of the significant issues 
raised by the public comments in response to the October 17, 2008 
proposed rule, and HUD's responses to those issues.
    The summary of public comments is organized by category: section 
III.A. discusses the administrative cap, section III.B. discusses 
program-income requirements, section III.C. discusses spending funds 
outside a jurisdiction of the recipient, and section III.D. discusses 
audits.

A. Comments on the Administrative Expense Cap

    Comments: Several commenters posed the following questions: ``What 
is the time period used to calculate the amount of program income 
received by the units of local government? Is it the amount received 
from the preceding year? The preceding 2 years? If the state is able to 
add additional program income to the current allocation to increase the 
administrative costs, where does the program income come from--the 
annual allocation to the state or the program income funds that come 
back to the local grantees?''
    HUD Response. To determine the program income portion of the 
administrative expense cap, program income is counted in the program 
year that it is received by the unit of general local government, or by 
the unit of general local government's subgrantee. As noted above, HUD 
has revised Sec.  570.489 to clarify that the program income included 
in the calculation determining the amount of allowable administrative 
and technical assistance per program year is all of the program income 
received in the program year, regardless of the fiscal year in which 
the state grant funds were appropriated that generated the program 
income. For example, if the state is determining the administrative cap 
for program year 2011, then the program income received by the unit of 
general local government in 2011 is used in the calculation. The 
program income that is used as part of the calculation to determine the 
administrative cap is the program income that is received by the unit 
of general local government during each program year regardless of 
which year's allocation of funds generated the program income. The 
administrative cap is based on the state's grant, program income, and 
reallocated funds received by the state in the program year. This sets 
the maximum State CDBG program funds that the state may expend on 
administration.
    Comment: Increase the administrative cap. Two commenters suggested 
that HUD support an increase to the administrative cap.
    HUD Response. The administrative cap is a statutory requirement. 
Accordingly, because the change requested by the commenters is outside 
HUD's authority, no change has been made to the proposed rule in 
response to those comments.

B. Comments on Program Income Requirements

    Comment: The program income threshold should be raised from $35,000 
to $50,000. Three commenters expressed appreciation that the program 
income threshold was increased from $25,000 to $35,000; however, they 
felt that by increasing it further to $50,000, the states would be 
further relieved of administrative requirements for program income.
    HUD Response. HUD has not revised the proposed rule in response to 
these comments. As noted in the preamble to the proposed rule, HUD's 
proposal to increase the annual threshold to $35,000 was to account for 
inflation that occurred since the program income threshold was 
increased to $25,000 in 1995. As a result, any CDBG income below 
$35,000 would not be considered program income and would therefore not 
be subject to CDBG requirements, including tracking and reporting of 
program income. The higher amount requested by the commenters would 
exceed the adjustment required for inflation.
    Comment: Concerning the Requirements That States Include the Use of 
Program Income Retained by Local Governments in Their Annual 
Performance and Evaluation Reports (PERs). Six commenters wrote that 
the changes to the program income requirements would create an 
administrative burden that would be duplicative of reports already 
submitted by states. One commenter questioned if the state would need 
to amend its PER if a unit of local government were late reporting its 
program income. Another commenter suggested that program income 
tracking should discontinue 5 years after closeout of the grant between 
the state and the unit of general local government to be consistent 
with the 5-year continued use requirements. Another commenter thought 
the language in the proposed rule was confusing regarding the 
``proceeds from the sale of real property purchased or improved with 
CDBG funds, if the proceeds are received more than 5 years after the 
expiration of the grant agreement.'' The commenter suggested that the 
final rule should identify whether the grant agreement is between HUD 
and the state or the unit of general local government and the state.
    HUD Response. HUD is responsible to taxpayers for ensuring that all 
CDBG program funds are spent in compliance with CDBG program 
requirements and regulations. In order to fulfill this responsibility, 
it is necessary that states report to HUD on all program income whether 
retained by units of general local government or paid to the state, to 
ensure that all program income is accounted for and is used for 
eligible activities. States, in turn, need to require that local 
governments report on program income. It is the state's responsibility 
to collect program income data from their units of general local 
government in a timely manner so that the data can be included in the 
annual PER. States should make findings against units of general local 
government that do not report program income in a timely manner. If a 
state receives program income data after the PER due date, the data 
must be included in the PER the following year with an explanation.
    The requirement for states to track program income indefinitely is 
governed by section 104(j)(2) of the HCDA (42 U.S.C. 104(j)(2)), which 
mandates that program income is indefinite and subject to all the CDBG 
requirements even after the grant is closed out between the state and 
the unit of general local government. However, HUD recognizes the 
potential administrative burdens imposed on states by the reporting 
requirement and has made two modifications to the proposed rule in 
response to the suggestions raised by the commenters. First, the final 
rule revises Sec.  570.489(e)(2)(v), by clarifying that proceeds 
received from the sale of real

[[Page 24141]]

property acquired or improved in whole or part with CDBG funds will not 
be considered program income if the proceeds are received more than 5 
years after expiration of the grant agreement and are, therefore, 
exempt from being tracked. Further, HUD has adopted the suggestion to 
identify the parties to the grant agreement. The final rule specifies 
that the grant agreement is ``between the state and the unit of general 
local government.''
    Comments: Concerning the Requirement To Add Program Income Data for 
Local Governments Into the Integrated Disbursement and Information 
System (IDIS). Six commenters wrote that the IDIS reporting requirement 
is an additional burden on the already heavy CDBG administrative 
workload. Another commenter suggested that the reporting requirements 
should be reduced to annually instead of quarterly. Two commenters 
requested additional time to phase in compliance because many local 
partners are small organizations that do not have the administrative 
capacity to comply immediately. One commenter wrote that it is 
burdensome to include loan receipts in both IDIS and the paper PER. One 
commenter requested that HUD be more specific about what data are to be 
collected and in what format.
    HUD Response. HUD has not revised the proposed rule in response to 
these comments. HUD is cognizant of the potential administrative 
burdens that may be imposed by the reporting requirements and has 
attempted to craft a regulation that fulfills HUD's oversight 
responsibilities while minimizing such burdens. As an initial matter, 
HUD notes that the revised regulations recommend, but do not mandate 
quarterly reporting on IDIS. The final rule establishes an annual IDIS 
reporting requirement. HUD encourages states to enter IDIS data 
quarterly as a way to keep the data and reporting current and spread 
out the states' workload during the year. Quarterly entry of data would 
better enable both grantees and HUD to report accomplishments to 
community development stakeholders. Moreover, HUD also notes that the 
PER reporting is now automated in IDIS, making reporting less 
burdensome to states and more user-friendly. HUD has also provided 
guidance for reporting in the Notice: CPD-11-03, ``Reporting 
Requirements for the State Performance and Evaluation Report,'' which 
can be accessed at the following link: http://portal.hud.gov/hudportal/HUD?src=/program_offices/administration/hudclips/notices/cpd. 
    Comments: Regarding Program Income Retained at the Local Level. Two 
commenters objected to the provision of the proposed rule stating that 
if program income on hand 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 local government. The commenters 
questioned why a state would want to require local governments to 
return program income to it until the local government is able to spend 
it. The commenters wrote that the proposed regulatory provision would 
create accounting difficulties for states and local governments, and 
risk the prospect of state accounts having insufficient funds when the 
local government is ready to spend its program income. The commenters 
advocated that the final rule provide greater flexibility to states in 
addressing program income.
    HUD Response. With the exception of a clarifying change, HUD has 
not revised the proposed rule in response to these comments. HUD 
already provides the state with maximum feasible deference to decide 
whether to require a unit of general local government to return all or 
a portion of program income to the state in cases where the local 
government's program income exceeds projected cash needs for that same 
activity in the near future. A state that requires local governments to 
return program income in this instance must return the program income 
to the local government when it is needed to carry out the same 
activity from which it was derived. The advantage to the states 
utilizing this option is to keep the program income liquid and 
available to other local governments that are in need of immediate 
funding. Although HUD is leaving it up to the states to determine 
whether to allow units of general local government to retain their 
program income, states must have a method to ensure that funds are 
available to those units of general local government that are looking 
to receive their funds back to continue the same project activity. 
Further, each state is permitted to define ``continuing the same 
project activity.''
    HUD also provides flexibility for states to choose whether to allow 
units of local government to retain the program income to implement 
another eligible CDBG activity under 24 CFR 570.489(e)(3)(ii)(A). If 
the state finds the unit of general local government is funding a 
different CDBG activity from which the program income was originally 
derived, the state may request that the locality return the program 
income entirely or when the income generated meets a specific 
threshold. States can employ one or more methods to ensure that local 
governments comply with applicable program income requirements. In 
addition, with HUD Field Office approval, the state can design its own 
method that will ensure compliance with the program income requirements 
by units of general local government. As noted, HUD has made a 
clarifying change to the following provision of the proposed rule. 
Proposed Sec.  570.489(e)(3)(ii)(A) would have required states to 
indicate in their action plans their intent to require units of general 
local government to return program income. This final rule clarifies 
that a state may also indicate such intent in a substantial amendment 
to the plan in the event that the action plan has already been 
submitted and approved by HUD.

C. Comments on Spending Funds Outside the Jurisdiction of the Recipient

    Comment: Definitions needed.
    Two comments were made that the term ``significantly benefit,'' as 
used in the following phrase, ``State CDBG-funded activities must 
significantly benefit residents of the grant recipient's 
jurisdiction,'' needs to be defined. A definition for ``incidental 
benefit,'' as used in the sentence ``residents of Entitlement 
jurisdiction may not receive more than an incidental benefit from the 
state grantee's expenditure of funds,'' was also requested. 
Additionally, a comment was made that states should be given more 
flexibility to partner and share resources and solutions in a more 
regional approach that encourages smart growth and sustainable 
development.
    HUD Response. Section 106(d)(1) of the HCDA (42 U.S.C. 106(d)(1)), 
allocates 30 percent of CDBG program funds to states for use in 
nonentitlement areas. The intent of this section of the HCDA is for the 
funds to significantly benefit nonentitlement areas. Allocation amounts 
for states are based on the demographics of each state's nonentitlement 
communities and are intended for use in nonentitlement areas. 
Entitlement grantees receive their own CDBG allocation based on the 
demographics of their jurisdictions. If it is more practical and 
feasible for an activity to be located within the boundaries of an 
entitlement community to benefit nonentitlement residents, the 
entitlement community is expected to provide a reasonable share of the 
CDBG program funds if the entitlement community benefits from the 
activity as well. An example would be locating a senior center in an 
entitlement city that is served by public transportation from outlying 
areas of the

[[Page 24142]]

city. HUD has decided not to define ``significant benefit'' at this 
time but will provide maximum feasible deference to each state's 
interpretation of this term.
    HUD has taken into consideration the comment concerning the use of 
a more regional approach that would allow projects to benefit 
jurisdictions within nonentitlement and entitlement areas. HUD has 
modified the rule to be less restrictive, at the same time emphasizing 
that the funding must significantly benefit the state grantee's 
residents. Additionally, there have been more proposals recently that 
have involved funding projects in entitlement jurisdictions, and HUD 
has decided to modify the proposed rule in 24 CFR 570.486(c), to remove 
the requirement that entitlement jurisdictions receive only an 
incidental benefit from State CDBG program expenditures. State CDBG 
program funds still must be used to significantly benefit the residents 
of the unit of general local government receiving the grant and cannot 
be used to provide significant benefit to an entitlement jurisdiction 
unless the entitlement grantee provides a meaningful contribution to 
the project. The new regulatory requirement at 570.486(c) supersedes 
HUD's policy memo to all State CDBG program grantees on ``State CDBG 
Activities benefiting Entitlement Community Residents,'' dated May 26, 
2006.

D. Comment on Audits

    Comment: The commenter is concerned that states will be held 
responsible for guaranteeing their grantees' compliance with the Single 
Audit Act rather than ensuring that CDBG grants are awarded only to 
localities that can provide professional certification from an auditor 
that demonstrates compliance.
    HUD Response. The rule revises 24 CFR 570.489(m), by including 
language that audits be conducted in accordance with 24 CFR 85.26(a), 
which incorporates compliance with the Single Audit Act and the 
provisions of the Office of Management and Budget (OMB) Circular A-133 
(62 FR 35278). This is not an additional requirement of Sec.  
570.489(m), but an update to replace the citation to 24 CFR part 44 
with section 85.26(a). It is a statutory requirement that states must 
comply with the requirements of the Single Audit Act and OMB Circular 
A-133; therefore, states are responsible to ensure that their funded 
localities are in compliance.

IV. Findings and Certifications

Public Reporting Burden

    The information collection requirements contained in this rule have 
been approved by OMB under the Paperwork Reduction Act of 1995 (44 
U.S.C. 3501-3520) and assigned OMB control number 2506-0085. 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.

 Environmental Impact

    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)), a Finding of No Significant Impact with respect to 
the environment was made at the proposed rule stage and remains 
applicable to this final rule. 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 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 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 (UMRA) 
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 UMRA.

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. The changes will not impose new economic 
burdens on states and local governments participating in the State CDBG 
program. Rather, as detailed in the preamble to this final rule, the 
regulatory amendments will 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.

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 amends 
24 CFR part 570, as follows:

PART 570--COMMUNITY DEVELOPMENT BLOCK GRANTS

0
1. The authority citation for part 570 continues to read as follows:

    Authority:  42 U.S.C. 5300-5320.

0
2. In Sec.  570.480, revise paragraph (a) and add paragraphs (f) and 
(g), to read as follows:

[[Page 24143]]

Sec.  570.480  General.

    (a) This subpart describes policies and procedures applicable to 
states that have permanently elected to receive Community Development 
Block Grant (CDBG) 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 program 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.

0
3. In Sec.  570.486, revise paragraph (b) and add paragraph (c), to 
read as follows:


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 program 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. Any activity 
carried out by a recipient of State CDBG program funds in entitlement 
jurisdictions must significantly benefit residents of the jurisdiction 
of the grant recipient, and the State CDBG recipient 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. In addition, the 
grant cannot be used to provide a significant benefit to the 
entitlement jurisdiction unless the entitlement grantee provides a 
meaningful contribution to the project.

0
4. Amend Sec.  570.489 as follows:
0
a. Revise paragraphs (a)(1), (b), and (c);
0
b. Add paragraphs (d)(2)(iii)(A) and (d)(2)(iii)(B);
0
c. Revise paragraphs (e)(1), (e)(2), (e)(3)(i), and (e)(3)(ii);
0
d. Add paragraphs (e)(3)(iii), (e)(3)(iv), and (e)(4);
0
e. Revise the first sentence of paragraph (f)(2);
0
f. Revise paragraph (m); and
0
g. Add paragraph (n) 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, regardless of the fiscal year in which the state 
grant funds that generate the program income were appropriated (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, regardless of the fiscal year in 
which the state grant funds that generate the program income were 
appropriated (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, regardless of the 
fiscal year in which the state grant funds generate the program income 
were appropriated (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 that 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 cost 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

[[Page 24144]]

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 the 
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 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 a 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; or 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 
nonresidential 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-

[[Page 24145]]

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 between the state and the unit of 
general local government.
    (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 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 if the program income will be used to 
continue the activity from which it was derived. A state will determine 
when an activity will be considered to be continued, 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 or in a substantial amendment if the state intends 
to implement this option after the action plan is submitted to and 
approved by HUD.
    (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

[[Page 24146]]

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 that 
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) * * *
    (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 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 that 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, of the cognizant federal agency.
    (ii) Fines and penalties (including punitive damages) are 
unallowable costs to the CDBG program.

0
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.
* * * * *

0
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 that 
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; and
    (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:
    (i) Retain the program income generated under Entitlement grants 
and continue to comply with Entitlement program requirements for 
program income; or
    (ii) 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: April 16, 2012.
Mercedes M. M[aacute]rquez,
Assistant Secretary for Community Planning and Development.
[FR Doc. 2012-9693 Filed 4-20-12; 8:45 am]
BILLING CODE 4210-67-P