[Federal Register Volume 75, Number 215 (Monday, November 8, 2010)]
[Notices]
[Pages 68616-68618]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-28170]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5456-N-01]


Notice of Certain Operating Cost Adjustment Factors for 2011

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Notice.

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SUMMARY: This notice establishes, for 2011, operating cost adjustment 
factors (OCAFs). OCAFs are annual factors used to adjust Section 8 
rents renewed under section 524 of the Multifamily Assisted Housing 
Reform and Affordability Act of 1997 (MAHRA).

DATES: Effective Date: February 11, 2011.

FOR FURTHER INFORMATION CONTACT: Stan Houle, Housing Program Manager, 
Office of Housing Assistance and Grant Administration, Department of 
Housing and Urban Development, 451 7th Street, SW., Washington, DC 
20410; telephone number 202-402-2572 (this is not a toll-free number). 
Hearing- or speech-impaired individuals may access this number through 
TTY by calling the toll-free Federal Information Relay Service at 800-
877-8339.

SUPPLEMENTARY INFORMATION: 

I. OCAFs

    Section 514(e)(2) of MAHRA requires HUD to establish guidelines for 
rent adjustments based on an OCAF. The statute requiring HUD to 
establish OCAFs for LIHPRHA projects and projects with contract 
renewals or adjustments under section 524 of MAHRA is similar in 
wording and intent. HUD has therefore developed a single factor to be 
applied uniformly to all projects utilizing OCAFs as the method by 
which renewal rents are established or adjusted.
    LIHPRHA projects are low-income housing projects insured by the 
Federal Housing Administration (FHA). LIHPRHA projects are primarily 
low-income housing projects insured under section 221(d)(3) below-
market interest rate (BMIR) and section 236 of the National Housing 
Act, respectively. Both categories of projects have low-income use 
restrictions that have been extended beyond the 20-year period 
specified in the original documents, and both categories of projects 
also receive assistance under section 8 of the U.S. Housing Act of 1937 
to support the continued low-income use.
    Additionally, MAHRA gives HUD broad discretion in setting OCAFs--
referring, for example, in sections 524(a)(4)(C)(i), 524(b)(1)(A), 
524(b)(3)(A) and 524(c)(1) simply to ``an operating cost adjustment 
factor established by the Secretary.'' The sole limitation to this 
grant of authority is a specific requirement in each of the foregoing 
provisions that application of an OCAF ``shall not result in a negative 
adjustment.'' Contract rents are adjusted by applying the OCAF to that 
portion of the rent attributable to operating expenses exclusive of 
debt service.
    OCAFs for FY2008, FY2009, and FY2010 were calculated as average 
percentage changes in OCAF-covered operating costs using FHA Annual 
Financial Statement (AFS) data. Unit-weighted, project-level operating 
cost percentage changes were calculated at the State level using the 
most recent two years of data available. Three years of experience with 
this method have revealed the following weaknesses:
    <bullet> The relatively common practice of expensing major repairs 
and improvements in a single year produces large percentage changes in 
project operating costs when compared with the previous or subsequent 
years. These projects have a disproportionate impact on the OCAFs 
calculated, which occurs even when what would normally be considered a 
large percentage of the highest and lowest changes are excluded.
    <bullet> Because there are variations in projects that submit AFS 
from year to year, a different set of projects is used to calculate 
OCAFs for each of the past three years. It has been found that the 
multiplicative sum of annual estimates calculated in this manner 
differs significantly from results based on changes for the same group 
of projects over a given time interval.
    <bullet> The project-weighted percentage change method has been 
found to have an upward bias. This normally occurs because one-time 
large expense increases followed by a similar dollar decrease are not 
off-setting when calculated as percentages.
    Because of these problems, for FY2011 HUD is reverting to the pre-
FY2008 methodology with limited changes that are subsequently noted. 
The Department continues to be interested in using actual FHA data for 
cost component categories, and it may make additional adjustments in 
the coming years based on further analysis.
    FY 2011 OCAFs are calculated as the sum of weighted average cost 
changes for wages, employee benefits, property taxes, insurance, 
supplies and equipment, fuel oil, electricity, natural gas, and water/
sewer/trash using publicly available indices. The weights used in the 
pre-FY2008 OCAF calculations for each of the nine cost component 
groupings have been updated using current percentages attributable to 
each of the nine expense categories. Average expense proportions were 
calculated using the most recent three years of audited Annual 
Financial Statements from projects covered by OCAFs. The expenditure 
percentages for these nine categories have been found to be very stable 
over time, but using three years of data increases their stability. The 
nine cost component weights were calculated at the state level, which 
is the lowest level of geographical aggregation at which there is 
enough projects to permit statistical analysis. No data were available 
for the Western Pacific Islands,

[[Page 68617]]

so data for Hawaii were used as the best available indicator of OCAFs 
for these areas.
    The best current price data sources for the nine cost categories 
were used in calculating annual change factors. State-level data for 
fuel oil, electricity, and natural gas from Department of Energy 
surveys are relatively current and continue to be used. Data on changes 
in employee benefits, insurance, property taxes, and water/sewer/trash 
costs are only available at the national level and also remain 
unchanged from the pre-2008 methodology. Although State level data on 
wages is available through BLS's Quarterly Covered Employment and Wage 
survey (QCEW), it is not used here because of the lag in availability 
and because QCEW wage changes include both the change in wages and the 
change in job classifications. Instead, HUD continues to use national 
Employment Cost Index (ECI) data on wage changes. Consumer Price Index 
data on goods and equipment have replaced a similar Producer Price 
Index (PPI) measure, because the PPI excluded the large percentage of 
such items that were not domestically produced. The data sources for 
the nine cost indicators selected used were as follows:
    <bullet> Labor Costs--First quarter, 2010 Bureau of Labor 
Statistics (BLS) ECI, Private Industry Wages and Salaries, All Workers 
(Series ID CIU2030000000000I) at the National Level.
    <bullet> Property Taxes--2008-2009 Census Quarterly Summary of 
State and Local Government Tax Revenue--Table 1. Annual taxes are 
computed as the total of four quarters of tax receipts. Total annual 
taxes are then divided by number of households to arrive at average 
annual tax per household. Number of households is taken from the 
estimates program at the Bureau of the Census. http://www.census.gov/popest/housing/HU-EST2009.html
    <bullet> Goods, Supplies, Equipment: April 2009 to April 2010 
Bureau of Labor Statistics (BLS) Consumer Price Index, All Items Less 
Food, Energy and shelter (Series ID CUUR0000SA0L12E) at the national 
level.
    <bullet> Insurance: April 2009 to April 2010 Bureau of Labor 
Statistic (BLS) Consumer Price Index, Tenants and Household Insurance 
Index (Series ID CUUR0000SEHD) at the national level.
    <bullet> Fuel Oil: Energy Information Agency, 2008 to 2009 Retail 
Price of No. 2 Fuel Oil to Residential Consumers cents per gallon 
excluding taxes. Department of Energy multi-state fuel oil grouping 
averages used for the States with insufficient fuel oil consumption to 
have separate estimates. http://www.eia.gov/dnav/pet/pet_sum_mkt_a_EPD2_PRT_cpgal_a.htm.
    <bullet> Electricity: Energy Information Agency, March 2010 
``Electric Power Monthly'' report, Table 5.6.B. http://www.eia.doe.gov/cneaf/electricity/epm/epm_sum.html.
    <bullet> Natural Gas: Energy Information Agency, Natural Gas, 
Residential Energy Price, 2008-2009 annual prices in dollars per 1,000 
cubic feet at the state level. http://www.eia.doe.gov/dnav/ng/ng_pri_sum_a_EPG0_PRS_DMcf_a.htm.
    <bullet> Water and Sewer: April 2009 to April 2010 Consumer Price 
Index, All Urban Consumers, Water and Sewer and Trash Collection 
Services (Series ID CUUR0000SEHG) at the national level.
    The sum of the nine cost component percentage weights equals 100 
percent of operating costs for purposes of OCAF calculations. To 
calculate the OCAFs, state-level cost component weights developed from 
AFS data are multiplied by the selected inflation factors. For 
instance, if wages in Virginia comprised 50 percent of total operating 
cost expenses and increased by 4 percent from 2008 to 2009, the wage 
increase component of the Virginia OCAF for 2011 would be 2.0 percent 
(50% * 4%). This 2.0 percent would then be added to the increases for 
the other eight expense categories to calculate the 2006 OCAF for 
Virginia. FY 2011 OCAFs are included as an Appendix to this Notice.

II. MAHRA and LIHPRHA OCAF Procedures

    MAHRA, as amended, created the Mark-to-Market Program to reduce the 
cost of federal housing assistance, enhance HUD's administration of 
such assistance, and ensure the continued affordability of units in 
certain multifamily housing projects. Section 524 of MAHRA authorizes 
renewal of Section 8 project-based assistance contracts for projects 
without restructuring plans under the Mark-to-Market Program, including 
projects that are not eligible for a restructuring plan and those for 
which the owner does not request such a plan. Renewals must be at rents 
not exceeding comparable market rents except for certain projects. As 
an example, for Section 8 Moderate Rehabilitation projects, other than 
single room occupancy projects (SROs) under the McKinney-Vento Homeless 
Assistance Act (42 U.S.C. 11301 et seq.), that are eligible for renewal 
under section 524(b)(3) of MAHRA, the renewal rents are required to be 
set at the lesser of: (1) The existing rents under the expiring 
contract, as adjusted by the OCAF; (2) fair market rents (less any 
amounts allowed for tenant-purchased utilities); or (3) comparable 
market rents for the market area.
    LIHPRHA (see, in particular, section 222(a)(2)(G)(i), 12 U.S.C. 
4112(a)(2)(G) and the regulations at 24 CFR. 248.145(a)(9)) requires 
that future rent adjustments for LIHPRHA projects be made by applying 
an annual factor, to be determined by HUD to the portion of project 
rent attributable to operating expenses for the project and, where the 
owner is a priority purchaser, to the portion of project rent 
attributable to project oversight costs.

III. Findings and Certifications

Environmental Impact

    This issuance sets forth rate determinations and related external 
administrative requirements and procedures that do not constitute a 
development decision affecting the physical condition of specific 
project areas or building sites. Accordingly, under 24 CFR 50.19(c)(6), 
this notice is categorically excluded from environmental review under 
the National Environmental Policy Act of 1969 (42 U.S.C. 4321).

Catalog of Federal Domestic Assistance Number

    The Catalog of Federal Domestic Assistance Number for this program 
is 14.187.

    Dated: November 2, 2010.
David H. Stevens,
Assistant Secretary for Housing-Federal Housing Commissioner.

Appendix

Operating Cost Adjustment Factors for 2011

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Alabama.........................................................     2.4
Alaska..........................................................     1.1
Arizona.........................................................     2.6
Arkansas........................................................     2.1
California......................................................     1.8
Colorado........................................................     1.7
Connecticut.....................................................     0.1
Delaware........................................................     1.5
District of Columbia............................................     1.7
Florida.........................................................     2.7
Georgia.........................................................     2.2
Hawaii..........................................................     0.0
Idaho...........................................................     3.0
Illinois........................................................     0.1
Indiana.........................................................     2.0
Iowa............................................................     1.7
Kansas..........................................................     2.2
Kentucky........................................................     2.2
Louisiana.......................................................     0.8
Maine...........................................................     0.0
Maryland........................................................     2.2
Massachusetts...................................................     1.6
Michigan........................................................     2.2
Minnesota.......................................................     1.1
Mississippi.....................................................     2.1
Missouri........................................................     1.9
Montana.........................................................     0.4
Nebraska........................................................     1.8

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Nevada..........................................................     2.8
New Hampshire...................................................     1.3
New Jersey......................................................     1.8
New Mexico......................................................     1.1
New York........................................................     0.3
North Carolina..................................................     2.4
North Dakota....................................................     1.3
Ohio............................................................     2.1
Oklahoma........................................................     1.4
Oregon..........................................................     2.6
Pacific Islands.................................................     0.0
Pennsylvania....................................................     2.0
Puerto Rico.....................................................     2.1
Rhode Island....................................................     1.1
South Carolina..................................................     2.5
South Dakota....................................................     0.5
Tennessee.......................................................     2.5
Texas...........................................................     1.9
Utah............................................................     2.4
Vermont.........................................................     0.6
Virgin Islands..................................................     3.0
Virginia........................................................     2.4
Washington......................................................     2.7
West Virginia...................................................     3.2
Wisconsin.......................................................     1.7
Wyoming.........................................................     1.9
U.S. Average....................................................     1.7
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[FR Doc. 2010-28170 Filed 11-5-10; 8:45 am]
BILLING CODE 4210-67-P