40008 Federal Register / Vol. 65, No. 125 / Wednesday, June 28, 2000 / Notices

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

[Docket No. FR–4509–N–13]

Public Housing Assessment System

Financial Condition Scoring Process

AGENCY: Office of the Director of the

Real Estate Assessment Center, HUD.

ACTION: Notice.

SUMMARY: This Notice provides

additional information to public

housing agencies and members of the

public about HUD’s process for issuing

scores under the Financial Condition

Indicator of the Public Housing

Assessment System (PHAS), including

GAAP-based threshold values and

associated scores for each Financial

Condition Indicator component and

peer group based on the data pool as of

June 30, 1999.

This notice is an update of the

Financial Condition Scoring Process

notice on scoring that was published on

June 23, 1999. This notice takes into

consideration public comment received

on the June 23, 1999 notice and reflects

the changes made to the PHAS

regulations published on January 11,

2000, with certain corrections published

on June 6, 2000. The changes made to

this notice are discussed in the

Supplementary Information section of

this notice.

FOR FURTHER INFORMATION CONTACT: For

further information contact Wanda

Funk, the Real Estate Assessment

Center, Department of Housing and

Urban Development, 1280 Maryland

Avenue, SW, Suite 800, Washington, DC

20024; telephone Technical Assistance

Center, 1–888–245–4860 (this is a toll

free number). Persons with hearing or

speech impairments may access that

number via TTY by calling the Federal

Information Relay Service at (800) 877–

8339. Additional information is

available from the REAC Internet Site

http://www.hud.gov/reac.

SUPPLEMENTAL INFORMATION

Background

HUD published the first Public

Housing Assessment System; Financial

Condition Scoring Process Notice in the

Federal Register (64 FR 26222) on May

13, 1999. On June 23, 1999, HUD

republished the Notice (64 FR 33700) to

coincide with the June 22, 1999,

publication of the Public Housing

Assessment System proposed rule. In

the June 23, 1999, Notice, HUD stated

that any changes to the scoring process

and any modifications to the thresholds

will be communicated through a

subsequent Federal Notice. Accordingly,

this Notice updates the June 23, 1999

Notice, and provides detailed

information on the changes to the

Financial Condition Scoring Process

Notice. By this Notice, HUD is:

• Adding an extra-large size PHA category

for the entity-wide assessment only

• Revising the scoring methodology for the

Expense Management component, including

the addition of regional peer groups and a

weighted average scoring approach.

• Changing the calculation of Unit Months

Available for the Occupancy Loss component

to allow for additional exemptions.

• Modifying the scoring penalty for PHAs

with too high reserves and/or liquidity.

• Changing the Net Income component

threshold level.

• Scoring Low Rent-only program for first

year of scoring, with Entity-Wide scoring

thereafter.

• Changing financial submission

deadlines.

• Eliminating the ‘‘marginal’’ PHA

designation level in order to be consistent

with the PHAS Rule.

• Changing the schedule for reevaluation

of thresholds.

These changes have been made based

on the industry comments HUD

received on the June 22, 1999, Public

Housing Assessment System proposed

rule, and on the input from the industry

obtained during discussions by and

among representatives from HUD, the

PHAs, and industry groups.

More specifically, the changes

identified above are as follows:

Extra Large Size Category

Each PHA is awarded points

according to its performance relative to

its peers. Peer groupings are established

based on the number of units operated

by the PHA. Since the publication of the

June 23, 1999, Financial Condition

Scoring Process Notice, the REAC has

determined that there is a statistically

significant difference between those

PHAs administering between 1,250 and

9,999 units and those PHAs

administering 10,000 or more units.

Based on these statistical analyses,

including the running of the WaldWolfowitz and Kolmogorov-Smirnov

tests, the REAC has concluded that there

is sufficient statistical validity to

support adding an extra-large size

category for those PHAs administering

more than 10,000 units. The REAC has

left unchanged the other five size peer

groupings. This only applies to the

entity-wide assessment because there

are not sufficient statistical observations

for low-rent only scoring to differentiate

an extra-large size category.

Expense Management/Utility

Consumption Component

The Expense Management/Utility

Consumption (EM/UC) component

measures the ability of a PHA to

maintain its expense ratios at a

reasonable level relative to its peers.

Two changes have been made to this

component. REAC’s statistical analysis

has shown that certain expenses vary

substantially depending upon the region

of the country in which the PHA

resides. Therefore, in order to have a

more equitable assessment of a PHA’s

expenses relative to its peers, REAC has

developed new regional peer groupings

for the EM/UC component, to

supplement the size-based peer groups.

Thus, a PHA will now be scored on EM/

UC against a threshold that is calculated

from all expense data in that PHA’s

similar size group and region. The

regions have been based on the first

number of the PHA’s zip code.

The second change that has been

made to the EM/UC component is in the

scoring approach. Previously, PHAs that

were beyond the threshold on any one

of the expense categories that comprised

the EM/UC component received zero

points for EM/UC. The revised scoring

methodology instead uses a weighted

average of all the expenses that

comprise the EM/UC component and

assigns points based on this summed

amount. Thus, a PHA may have high

expenses in one category, but may still

receive 1.5 points if its other expenses

are reasonable relative to its peers. The

weighted averages chart shown below is

reproduced in Appendix 1.

Expense category Weight

Administrative ................................. .34

General Expenses .......................... .33

Ordinary Maintenance .................... .10

Protective Services ......................... .10

Tenant Services .............................. .10

Utilities ............................................ .03

Total ......................................... 1.00

Occupancy Loss Component

The Occupancy Loss component of

the Financial Condition Indicator

measures the unit months leased as a

percentage of total unit months

available. In order to obtain a fully

verifiable measure of this component,

REAC originally allowed no exemptions

to be taken for units held off-line by the

PHA, as it was difficult to ensure the

validity of the number of units or their

intended use. However, following

discussions with the industry, it is

believed that allowing no exemptions

may discourage PHAs from making

decisions that improve their housing

projects, such as modernizing units or

providing resident services, such as day

care facilities. Therefore, PHAs, when

reporting their occupancy information

Federal Register / Vol. 65, No. 125 / Wednesday, June 28, 2000 / Notices 40009

on the FDS for Unit Months Available,

may exclude vacant units approved by

HUD to be taken off-line for demolition,

conversion, on-going modernization,

and non-dwelling units.

The change to the Occupancy Loss

Component is set forth in Appendix 1.

Modification to Current Ratio and

Months Expendable Fund Balance

Scoring

The scoring methodologies for the

Current Ratio (CR) and Months

Expendable Fund Balance (MEFB)

components of the Financial Condition

Indicator award slightly less points to

PHAs whose ratios indicate that their

liquidity and/or expendable fund

balance are too high. These PHAs fall

beyond the 80th percentile of the peer

group distribution of CR and/or MEFB

values respectively. These PHAs can

lose up to 1.5 points out of the 9

possible points for each of the two

indicators. This system was established

because HUD believes that PHAs with

too high expendable fund balance and

liquidity could be better utilizing their

resources to improve the quality of

housing or services to their residents.

However, in recognition of PHAs who

are performing well in their quality of

housing and resident services, HUD has

modified this scoring methodology.

REAC will restore any points lost by

PHAs for falling beyond the 80th

percentile if:

—The PHA is a high performer under

the Physical Assessment Subsystem,

and

—The PHA is not required to submit a

follow-up plan under the Resident

Satisfaction Assessment Subsystem.

The points restored will be added to

the total PHAS score.

The modification of the scoring

penalty has been incorporated into

Appendix 1.

Change to Net Income Component

Threshold Level

The Net Income (NI) component

previously had a threshold of ¥10%;

i.e. a PHA with a net loss for the year

and positive expendable fund balance

(EFB), and whose net loss was greater

than 10% of its reserve (EFB) level

would receive zero points. HUD

recognizes that at times it is necessary

for a PHA to draw down from its

reserves (EFB) to take measures to

improve its financial position. This

action would, however, result in a less

favorable NI ratio. Therefore, in order to

provide more flexibility to PHAs in

these measures, HUD has changed the

NI threshold to ¥20%; i.e. a PHA with

a net loss for the year and positive EFB

is allowed to have loss up to 20% of its

EFB levels before any point deductions

are made to the NI component.

This change to the Net Income

component threshold level is

incorporated in the indicator

discussions in Appendix 1.

Low Rent-Only Assessment Versus

Entity-Wide Assessment

As a result of discussions among

representatives from HUD, PHAs and

industry groups, REAC has modified the

first four quarters of scores to produce

both low rent and entity-wide financial

assessments. The Non-GAAP Advisory

Scores that have been produced for

PHAs from 9/30/98 through 6/30/99

have been based on financial

information for PHAs’ Low Rent

Program only. The GAAP-based scoring

of PHAS is intended to capture an

assessment of the financial condition of

a PHA as a whole, which would

incorporate all program activities, i.e. an

entity-wide assessment. However, in

order to provide a parallel basis for

comparison, the REAC has modified the

assessment for the first year of scores.

The first four quarters of scores (9/30/

99 fiscal year ends through 6/30/00

fiscal year ends) will be based on GAAP

Low Rent-only information. For the first

three quarters, these scores will be

advisory; for the last quarter, this score

will be enforceable. GAAP-based Entitywide scores will also be produced, but

used for advisory purposes only during

the first four quarters. Thereafter, all

scores will be based on an entity-wide

assessment.

There are two primary differences

between the low rent only and the entity

wide assessments. First, each

assessment uses a different unit count

for a PHA (low rent only units v. all

program units), which may result in a

PHA falling into different size peer

groups depending on the level of its

other program activity. Second, the low

rent only assessment includes interprogram due from and due to line items

as part of current assets and current

liabilities. However, for the entity-wide

assessment, these line items net to zero

and thus are not included in neither the

assets nor the liabilities for purposes of

the overall assessment.

Financial Submission Deadlines

PHAs with fiscal years ending

September 30, 1999, and later, are

required to submit their unaudited

financial data electronically using the

Financial Data Schedule (FDS) within

two months of their fiscal year end.

Because of the conversion to GAAP

reporting, HUD will provide additional

time for submission of the FDS for PHAs

to ensure the most accurate GAAP

reporting possible. For the first four

quarters of reporting (9/30/99, 12/31/99,

3/31/00, and 6/30/00), every PHA will

receive an automatic one month

extension for submission of the FDS.

Following the first four quarters, PHAs

must submit within two months of their

fiscal year end, with a 15 day grace

period.

Removal of Marginal Designation Level

The previous performance

designation levels included a marginal

designation for PHAs that received

between 18 and 21 points out of the

total 30 points attainable for the

Financial Condition Indicator. This

designation has been removed from the

PHAS rule. The new performance

designations are as follows:

Points received Designation

Less than 18 .......................... Troubled.

18 to 27 .................................. Standard.

27 or more ............................. High.

The performance designations are set

forth in § 902.67 of the PHAS rule,

published in the Federal Register on

January 11, 2000.

Threshold Reevaluation Schedule

The June 23, 1999 Financial

Condition Scoring Process Notice

indicated that thresholds would be

reassessed on a quarterly basis. This

schedule has been modified. See

Appendices 2 and 3 for the thresholds.

The thresholds listed in this Notice,

which are based on a sample of PHAs

reporting under GAAP prior to 9/30/99,

will be used for all unaudited and

audited financial submissions through

June 30, 2000. At that point the

thresholds will be reevaluated based on

the full year’s worth of unaudited and

available audited GAAP data.

Thereafter, REAC plans to keep the

reevaluated thresholds constant for a

three year period, unless there is a need

for revisions.

The chart below shows the six

components that constitute the

Financial Condition Indicator and their

assigned points.

40010 Federal Register / Vol. 65, No. 125 / Wednesday, June 28, 2000 / Notices

FINANCIAL CONDITION INDICATOR

Scoring components Measurement Points

Current Ratio (CR) ............................................................ Liquidity .......................................................................................................... 9.0

Number of Months Expendable Fund Balance (MEFB) ... Adequacy of Reserves .................................................................................. 9.0

Tenant Receivables Outstanding (TRO) ........................... Ability to collect payments of tenant receivables .......................................... 4.5

Occupancy Loss (OL) ....................................................... Ability to maximize rental income .................................................................. 4.5

Expense Management (EM)/ Utility Consumption ............ Ability to maintain expense ratios at a reasonable level relative to peers

(adjusted for size and region).

1.5

Net Income or Loss as a percentage of Expendable

Fund Balance (NI).

Profitability measured against the current year’s operations ........................ 1.5

The values of the six components of

the Financial Condition Indicator

calculated from the financial data

comprise the overall financial

assessment of the PHA. The components

and their relative importance to the total

financial score are the result of studies

of PHA financial performance and of

industry portfolio management

techniques to identify the most

appropriate financial measures to gauge

a PHA’s financial position. These

components represent measures that are

appropriate benchmarks in any

residential real estate environment. The

score assigned to each component is

based on the distributions of that

component’s values and the relative

relationship between the components

and the PHA’s overall financial

performance.

Under the PHAS, the components that

make up the Financial Condition

Indicator are approached in the same

manner for GAAP as they were for nonGAAP financial information although

the thresholds may change as a result of

the conversion to GAAP. For example,

a good Current Ratio under the current

basis of accounting (non-GAAP) for a

small PHA may be 6 to 1 and receive the

maximum 9 points. In contrast, under

GAAP a good Current Ratio may be 5 to

1 and also get the maximum 9 points.

Thus, to the extent that a PHA’s

performance relative to its peers does

not change, its score will not be

significantly affected by the conversion

to GAAP. The GAAP conversion

schedule by a PHA’s fiscal year end,

shown below, is reprinted from the

PHAS final rule published on

September 1, 1998.

GAAP CONVERSION SCHEDULE

Fiscal year end

dates for PHAs

Unaudited

GAAP financial data to

HUD by—

Audit reports due to

HUD by—

9/30/99 .............. 11/30/99 6/30/00

12/31/99 ............ 2/28/00 9/30/00

3/31/00 .............. 5/31/00 12/31/00

6/30/00 .............. 8/31/00 3/31/01

Reporting Method

PHAs with fiscal years ending

September 30, 1999, and later, must

submit their unaudited financial data

electronically using the Financial Data

Schedule (FDS), within two months of

their fiscal year end. For the first four

quarters of reporting (9/30/99, 12/31/99,

3/31/00, and 6/30/00), each PHA has an

automatic one month extension to

submit the FDS. Following the first four

quarters, PHAs must submit the FDS

within two months of their fiscal year

end, with a 15 day grace period. All

submissions will be reviewed by REAC

for completeness and reasonableness.

To the extent that an audit is required

for a PHA under OMB Circular A–133,

or the PHA elects to have a financial

statement audit pursuant to 24 CFR part

902, a PHA will submit its audited data

using the FDS within nine months of

the fiscal year end.

Program Funds

The PHAS financial assessment is

intended to be based on the entity-wide

operations of a PHA, which includes

financial information on Section 8,

Community Development Block Grants,

and other HUD funding in its

calculations, as well as funds from nonHUD sources. However, in order to

provide a parallel basis for comparison

with the non-GAAP advisory scores

produced during FY 1999, which have

been based on PHAs’ Low Rent program

only, for the first four quarters of scores

(9/30/99 fiscal year ends through 6/30/

00 fiscal year ends), REAC will produce

scores based on GAAP Low Rent

information only.

For the first three quarters, these

scores will be advisory; for the last

quarter, this score will be enforceable.

GAAP-based entity-wide scores will

also be produced over all four quarters,

but used for advisory purposes only

during this time. Thereafter, all scores

will be enforceable and will be based on

an entity-wide assessment only. This

assessment schedule is summarized

below:

Quarter

Financial condition

Low-rent Entity-wide

9/30/99 ......... Advisory ....... Advisory.

12/31/99 ....... Advisory ....... Advisory.

3/31/00 ......... Advisory ....... Advisory.

6/30/00 ......... Score ........... Advisory.

9/30/00 and

beyond.

N/A ............... Score.

While the two assessments remain

primarily the same, the assessment of

the low rent program only requires a

different treatment of inter-program

transfers of funds. In the entity wide

assessment, inter-program transfers are

not a factor because any ‘‘due to’’

amounts are balanced out by equal

amounts ‘‘due from’’ other programs. In

the assessment of the low rent program

only, though, any funds borrowed from

or lent to other programs must be taken

into account as either a current asset or

current liability for the low rent

program. These line items are therefore

included in the calculation of the

Current Ratio, Months Expendable Fund

Balance, and Net Income indicators in

the low rent only scoring.

Scoring Approach

Under PHAS, the components of the

PHAS Financial Indicator were

developed to both fairly and accurately

assess a PHA’s financial performance

and financial management. As part of

the development, the components were

tested to establish the correlation

between PHA performance under each

component and the fiscal health of a

PHA. PHAs were evaluated and

assigned scores based on a PHA’s

performance relative to its peers. In

other words, all PHAs as a group

determine the mean score and each PHA

is then ranked accordingly. This peer

assessment approach, which was

formulated following extensive

economic and financial analysis,

examination of well-accepted business

principles, and discussions with PHA

industry representatives and PHA staff,

provides an equitable means of

measuring the financial performance of

PHAs.

Federal Register / Vol. 65, No. 125 / Wednesday, June 28, 2000 / Notices 40011

Comparable Scoring Systems

The HUD Peer Assessment system is

not unique to REAC. Companies in the

mortgage housing and securities

industry, and federal agencies utilize

similar systems in assessing their

constituents. In the mortgage housing

and securities industries, Fannie Mae,

the mortgage housing industry leader,

developed an assessment system with

financial indicators similar to those

contained in HUD’s financial

assessment of PHAs. These indicators

include vacancy, reserve balances, and

net income. Like HUD, Fannie Mae uses

these indicators to rank properties and

identify those which require further

attention. In the securities area,

Standard & Poor’s conducts peer

assessment of a company’s operational

capabilities and cash flows relative to

their peers. Among federal agencies, the

Department of Health and Human

Services (HHS) contracts with state and

local entities to perform financial audits

of nursing homes and hospitals

participating in the federal Medicare

program.

Based on these financial audits, HHS

determines the continued eligibility of

these health service providers in the

Medicare program.

GAAP Scoring Processes

GAAP-based scores are produced

using data contained in the Financial

Data Schedule (FDS). The GAAP-based

financial data are first used to calculate

the six financial components that

measure various aspects of financial

health, such as short term liquidity,

expense management/utility

consumption, and collection of tenant

receivables. Each PHA is awarded

points for each component according to

its performance relative to its peers.

Peer groupings are established

according to the size of the PHA, based

on the total number of units operated by

the PHA, and for the expense

management component, the geographic

region in which it falls.

Since the June 23, 1999 publication of

the Federal Register Notice on the

Public Housing Assessment System

Financial Condition Scoring Process,

the REAC has determined that there is

a statistically significant difference

between those PHAs administering

between 1,250 and 9,999 units and

those PHAs administering 10,000 or

more units. Thus, a new PHA size

category has been added. The new size

peer groupings are as follows:

Very Small (0–49 units)

Small (50–249 units)

Low Medium (250–499 units)

High Medium (500–1,249 units)

Large (1,250–9,999 units)

Extra-Large (10,000+ units)

The size group in which a PHA falls

may vary between the entity wide and

the low rent scoring approaches. The

entity wide assessment uses all units to

designate a PHA’s size category,

whereas the low rent assessment counts

only low rent units in the designation of

size category. Thus, depending on each

PHA’s activity level in programs besides

low rent, it may stay in the same size

group or fall to a smaller size group for

the purposes of the low rent assessment.

In addition, because of this change in

size category designation for a number

of the PHAs, there was no longer a

statistical distinction between the extra

large and large size groups. Therefore,

for the purposes of low rent only

scoring, large and extra-large PHAs are

scored using the same thresholds.

In order to have a more equitable

assessment of a PHA’s expenses relative

to its peers, REAC has developed new

regional peer groupings for the expense

management/utility consumption

component, to supplement the sizebased peer groups already in place.

Thus, a PHA will now be scored on EM/

UC against a threshold that is calculated

from all expense data in that PHA’s

similar size group and region.

The regions have been based on the

first number of the PHA’s zip code, and

are divided as follows:

Region States

0 ....... CT, MA, ME, NH, NJ, RI, VT

1 ....... DE, NY, PA

2 ....... DC, MD, NC, SC, VA, WV

3 ....... AL, FL, GA, MS, TN, RQ (including

Virgin Islands)

4 ....... IN, KY, MI, OH

5 ....... IA, MN, MT, ND, SD, WI

6 ....... IL, KS, MO, NE

7 ....... AR, LA, OK, TX

8 ....... AZ, CO, ID, NM, NV, UT, WY

9 ....... AK, CA, HI, OR, WA, GQ

Thresholds

A PHA is assigned a score for each of

the six components of the Financial

Indicator based on its component value

relative to its peers. The minimum

number of points (zero) and the

maximum number of points can each be

achieved over a range of values. For

example, on the current ratio, large

PHAs receive zero points for a ratio that

is less than one, while they receive nine

points for a ratio between 2.3 and 3.6.

Therefore, PHAs can target one range of

values that they want to avoid and target

one range that they should strive to

achieve. Aside from these ranges, points

are assigned to component values along

a continuous line. This means that each

component value will receive a different

number of points.

This system (‘‘continuous scoring’’)

ensures that points are awarded

equitably to PHAs along the distribution

of component values because, in most

cases, small differences in component

values result in only small differences

in the scores of the individual

components. Therefore, two PHAs of a

similar size whose values for their

financial condition components are in

close proximity will receive only

slightly different scores to capture their

performance relative to each other. For

example, a large PHA with a current

ratio of 1.1 would receive 4.4 points,

while a PHA of the same size with a

ratio of 1.2 would receive 4.8 points.

The number of points assigned to

each component value or range of

values is based on where the thresholds

for that component are set. The

thresholds separate distinct ranges of

scores along the distribution of

component values. The thresholds and

their associated scores are estimated

based on well-accepted business

principles and statistical distributions of

values within the peer groupings of the

PHAs.

Business Principles

Scoring of certain of the components

follows generally recognized business

principles. These principles indicate

that there are certain absolute

thresholds below which component

values are clearly financially

unacceptable and component values

below that point should result in a score

of zero. These principles are used in

scoring the Current Ratio and Number of

Months Expendable Fund Balance

components. For both of these

components, a value of less than one is

financially unacceptable, regardless of

PHA size, and therefore merits a score

of zero.

Statistical Distributions

The thresholds are estimated by

examining the distributions of

component values by peer group. For

the four most significant components

(Current Ratio, Number of Months

Expendable Fund Balance, Days

Receivable Outstanding, and Occupancy

Loss), thresholds are set such that

approximately 50 percent of the

distribution receives the maximum

number of points, as long as 50 percent

of the distribution have acceptable

values for the component. Thus, the

highest number of points is awarded to

the PHAs whose financial measures are

most reasonable both relative to their

peers and in an absolute business sense.

The specific percentiles that make up

40012 Federal Register / Vol. 65, No. 125 / Wednesday, June 28, 2000 / Notices

this 50 percent of PHAs are established

by identifying natural breakpoints along

the distributions. For example, for the

Current Ratio and Number of Months

Expendable Fund Balance, these

breakpoints fall at approximately the

30th and 80th percentiles. The

remaining two components (Expense

Management and Net Income as a

Percentage of Fund Balance) assign zero

points to PHAs that fall only in the

extreme outer ranges of the distribution

of values, and award 1.5 points to the

remaining PHAs. The scoring functions

and thresholds derived from these

distributions can be found in

Appendices 1, 2, and 3.

Audit Adjustments

There are two types of adjustments

related to financial audit information.

The first type deals with the audit flags

and reports that result from the audit

itself. Reportable conditions and

material weaknesses are considered to

be audit flags, alerting REAC to an

internal control weakness or an instance

of noncompliance with Federal laws

and regulations. The second adjustment

deals with material differences between

the unaudited and audited financial

information reported to HUD.

Audit Opinion and Flags

As part of the analysis of the financial

health of a PHA including assessment of

the potential or actual waste, fraud or

abuse at a PHA, HUD will look to the

Audit Report to provide an additional

basis for accepting or adjusting financial

component scores. (See 63 FR 46607,

September 1, 1998) The information

collected from the annual audit report

pertains to the type of audit opinion,

details of the audit opinion, and the

presence of reportable conditions and

material weaknesses.

If the auditor’s opinion is anything

other than unqualified, points will be

deducted from the financial components

to determine the PHA’s financial score.

The points to be deducted have been

established by REAC using a system that

considers the seriousness of the audit

qualification and limits the deducted

points to a reasonable portion of the

PHA’s available score.

REAC will review audit flags to

determine their significance as it

directly pertains to the assessment of

the PHA’s financial condition. If the flag

has no effect on the financial

components or the overall financial

condition of the PHA as it relates to the

PHAS assessment, the score will not be

adjusted. However, if the flags have an

impact on the PHAS assessment, the

PHA’s financial component score will

be adjusted, in accordance with the

seriousness of the reported finding.

These flags are collected by using the

OMB A–133 Data Collection Form. The

PHA completes this form for both the

unaudited and audited submissions. At

the time of the unaudited submission

the form is used as a self-assessment

tool and should reflect the PHA’s

knowledge of their financial and

internal control condition and should

acknowledge their understanding of

what the auditor will report. In the

PHAS final rule, published September

1, 1998, HUD discussed the review of

audit and internal control flags as

follows, and also included the following

chart. (See 63 FR 46607, September 1,

1998).

Type of flag

PHAS

points deducted

Unqualified Opinion .................. 0

No audit opinion ....................... 30

Adverse opinion ........................ 30

Disclaimer of opinion ................ 30

Qualified opinion ....................... (*)

Going concern opinion ............. 30

Material weakness in internal

control ................................... (*)

Reportable condition ................. (*)

Findings of non-compliance

and/or questioned costs ........ (*)

Indicator outlier analyses .......... (*)

* Note: See table titled ‘‘Audit Flags and Tier

Classification’’ for PHAS points to be deducted

If the OMB A–133 Data Collection

Form indicates that the auditor’s

opinion will be anything other than

unqualified, PHAS will automatically

deduct the appropriate points based on

the above table. The points have been

established by REAC using a three-tier

system. The tiers are meant to give

consideration to the seriousness of the

audit qualification and to limit the

deducted points to a reasonable portion

of the PHA’s total, actual score. The

tiers, as established by REAC, are also

defined below.

AUDIT FLAG TIERS

Tier PHAS points deducted

Tier 1 ........ Maximum reduction: Lesser of

30 points or 100 percent of

the PHA’s total unadjusted

PHAS score.

Tier 2 ........ Maximum reduction: Lesser of 3

points or 10 percent of the

PHA’s total unadjusted PHAS

score.

AUDIT FLAG TIERS—Continued

Tier PHAS points deducted

Tier 3 ........ Maximum reduction: Lesser of

1.5 points or 5 percent of the

PHA’s total unadjusted PHAS

score. This maximum is cumulative and not to be assessed for each audit or internal control flag.

Review of Audited Versus Unaudited

Submission

The purpose of a comparison of the

ratios and scores resulting from the

current year’s unaudited Financial Data

Schedule submission to the ratios and

scores resulting from the current year’s

audited submission is to:

Identify material changes in ratio

calculation results and/or scores from

the unaudited submission to the audited

submission;

Identify PHA’s that consistently

provide materially different data from

their unaudited submission to their

audited submission;

Assess or alleviate penalties

associated with the inability to provide

reasonably accurate unaudited data

within the required time period.

This review process will only be

performed for the audited submission.

Materiality and Penalty Assessment

REAC views the transmission of

materially inaccurate unaudited

financial data as a serious condition.

Therefore, PHAs are encouraged to

assure financial data is as reliable as

possible at the 2 month submission.

A materiality penalty will be assessed

for material differences between the

unaudited and audited submissions. A

material change is considered to be an

overall FASS score decrease of three or

more points from the unaudited to

audited submission. The PHAS system

automatically deducts the applicable

points and this reduction triggers the

REAC analyst’s review.

REAC may waive the materiality

penalty if the PHA provides reasonable

documentation of the material

difference in its submission.

A materiality penalty is considered a

Tier 3 audit flag, and will result in a

reduction of points as associated with

all other Tier 3 audit flags.

The table below summarizes the audit

flags and associated tier classifications.

Federal Register / Vol. 65, No. 125 / Wednesday, June 28, 2000 / Notices 40013

AUDIT FLAGS AND TIER CLASSIFICATIONS

Audit flag Tier

classification

Unqualified opinion ................................................................................................................................................................................. None.

No audit opinion ..................................................................................................................................................................................... Tier 1.

Adverse opinion ..................................................................................................................................................................................... Tier 1.

Disclaimer of opinion .............................................................................................................................................................................. Tier 1.

Qualified opinion:

1. GAAP qualifications:.

• Change in accounting principle ............................................................................................................................................ Tier 3.

• Change in accounting estimate ........................................................................................................................................... Tier 3.

• Change in accounting method ............................................................................................................................................. Tier 3.

• Departures from GAAP ........................................................................................................................................................ Tier 2.

Financial statements using basis other than GAAP ........................................................................................................ Tier 1.

Exclusion of alternate accounting for an account or group of accounts ......................................................................... Tier 2.

Inconsistently applied GAAP ............................................................................................................................................ Tier 2.

Omissions/Inadequate Disclosure .................................................................................................................................... Tier 2.

2. GASS—Scope Limitations ......................................................................................................................................................... Tier 2.

• Imposed by management .................................................................................................................................................... Tier 2.

• Imposed by circumstance .................................................................................................................................................... Tier 3.

• Year 2000 (add back) .......................................................................................................................................................... Tier 3.

3. Report on major program compliance ....................................................................................................................................... Tier 3.

4. Report on internal control .......................................................................................................................................................... Tier 3.

Accounting principles used caused the financial statements to be materially misstated ..................................................................... Tier 2.

Inadequate records ................................................................................................................................................................................ Tier 2.

Going concern ........................................................................................................................................................................................ Tier 1.

Material noncompliance disclosed ......................................................................................................................................................... Tier 2.

• Internal control weakness ........................................................................................................................................................... Tier 3.

• Compliance ................................................................................................................................................................................. Tier 3.

• Opinion on Supplemental schedules .......................................................................................................................................... Tier 3.

Reportable condition:

• Internal control ............................................................................................................................................................................ Tier 3.

• Compliance ................................................................................................................................................................................. Tier 3.

Appendices

The graphs shown in Appendix 1

depict the approximate GAAP-based

scoring functions used for each of the

six components of the Financial

Indicator. Appendices 2 and 3 provide

revised GAAP-based threshold values

and associated scores for each

component and peer group, based on

the GAAP data pool as of June 30, 1999.

Appendix 2 provides the GAAP-based

thresholds that will be used for Low

Rent-only scoring. Appendix 3 provides

the GAAP-based thresholds that will be

used for the entity-wide scoring.

These thresholds, which are based on

a sample of PHAs reporting under

GAAP prior to 09/30/99 will remain in

effect for all unaudited and audited

PHA financial submissions for PHAs

through fiscal years ending June 30,

2000. At that time, the thresholds will

be reevaluated based on a full year of

unaudited GAAP data and available

audited data to ensure their statistical

validity. Any revisions will be

communicated through a Notice.

Thereafter, REAC plans to keep the

reevaluated thresholds constant for a

three year period, unless it finds a need

for revisions, at which time REAC will

again make the revisions known by way

of a Notice.

Dated: June 20, 2000.

Donald J. LaVoy,

Director, Real Estate Assessment Center.

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[FR Doc. 00–16154 Filed 6–27–00; 8:45 am]

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