[Federal Register Volume 62, Number 175 (Wednesday, September 10, 1997)]
[Proposed Rules]
[Pages 47740-47743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23907]



[[Page 47739]]

_______________________________________________________________________

Part IV





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Part 968



Replacement Housing Factor in Modernization Funding; Proposed Rule

Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / 
Proposed Rules

[[Page 47740]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 968

[Docket No. FR-4125-P-01]
RIN 2577-AB71


Replacement Housing Factor in Modernization Funding

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

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This rule will revise HUD's regulations that govern the 
formula allocation of modernization funding under the Comprehensive 
Grant Program (CGP) to add to the formula a factor that will maintain, 
for five years, a portion of funding that otherwise would be lost by a 
CGP housing agency (HA) when the number of its public housing units are 
reduced as a result of demolition, disposition, or conversion. These 
added funds would be required to be used for approved replacement 
housing or for the accelerated renovation and reoccupancy of vacant but 
viable units. The rule would take effect in Federal Fiscal Year (FY) 
1998, based on formula characteristics reported as of September 30, 
1997.
    Such funding will support replacement of about twenty percent of 
the public housing units lost to demolition, disposition, or conversion 
and not otherwise replaced. The added funds are needed for construction 
of replacement units in cities with tight housing markets, to 
capitalize on opportunities in vacated sites, and to increase community 
acceptance of demolition. Other possible sources of funding for actual 
replacement housing units (modernization funding and HOPE VI program 
grants) will not be able to serve fully the HAs with replacement 
housing needs that cannot be served fully by vouchers.

DATES: Comment due date: December 9, 1997.

ADDRESSES: Interested persons are invited to submit comments regarding 
this proposed rule to the Rules Docket Clerk, Office of General 
Counsel, Room 10276, Department of Housing and Urban Development, 451 
Seventh Street, SW, Washington, DC 20410. Communications should refer 
to the above docket number and title. Facsimile (FAX) comments are not 
acceptable. A copy of each communication submitted will be available 
for public inspection and copying between 7:30 a.m. and 5:30 p.m. 
weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: William Flood, Director, Office of 
Capital Improvements, Office of Public Housing Investments, Room 4134, 
Department of Housing and Urban Development, 451 Seventh Street, SW, 
Washington, DC 20410, telephone number (202) 708-1640, extension 4185. 
(This telephone number is not toll-free.) For hearing- and speech-
impaired persons, this number may be accessed via text telephone by 
dialing the Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Statutory Basis

    The statutory foundation for modernization funding for the public 
housing program is section 14 of the United States Housing Act of 1937 
(42 U.S.C. 1437l, et seq.). Using the formula authorized in section 
14(k)(2), HUD computes the formula share of modernization funding for 
each HA eligible to participate in the CGP, i.e., an HA with 250 or 
more units.
    Section 14(k)(2) prescribes certain formula factors and provides 
that the formula may be amended by the rulemaking process. Currently, 
the formula factors do not include a factor for replacement housing, 
which was not an eligible use of modernization funds when these factors 
were written.
    Formerly, each public housing unit that was demolished or disposed 
of was required to be replaced with another unit. Recent amendments to 
the Act included suspension of the one-for-one replacement requirement. 
While this change is necessary, nationwide, by the end of FY 2000, an 
estimated 100,000 public housing units (of which about 60,000 were 
occupied as of FY 1996) are planned for demolition and disposition. In 
some cities, the number of such units can amount to between twenty-five 
and fifty percent of the city's annual total of vacant units available 
to low income households.
    Traditionally, HUD has received appropriations for public housing 
development and HAs have used the development funds, in part, for 
replacement housing. Since FY 1995, however, Congress has not approved 
funding specifically for new public housing development. Currently, the 
only available sources of funding for construction of replacement 
housing are modernization funding and HOPE VI grants. Replacement 
housing was first authorized as an eligible cost of modernization 
funding in FY 1995. No change in the formula factors has taken place to 
reflect this new use of modernization funding; HAs can take advantage 
of this new flexibility only by diverting funds provided by the formula 
for developments other than the developments to be demolished. 
Similarly, HAs with a large backlog of vacant but viable units cannot 
take advantage of any savings in modernization funding resulting from 
demolition or disposition to bring additional vacant but viable units 
into occupancy.
    Some HAs will have great difficulty restructuring their inventory 
and meeting local needs. Adding this replacement factor to the 
modernization formula will provide a share of modernization funds that 
is relatively constant that can be used for replacement of a portion of 
the non-viable units being demolished or sold. The Department is 
permitting either development of units (through construction or 
acquisition) or accelerated restoration of vacant units with the 
additional funding made available as a result of the replacement 
housing factor to give HAs the maximum amount of flexibility to use the 
means of replacing units given their own circumstances.
    The number of replacement or restored vacant units that this 
funding will be able to support is about twenty percent of the number 
of units anticipated to be demolished, disposed of, or converted. Since 
about one third of the units being removed from an HA's inventory are 
typically vacant, the twenty percent replacement represents about 
thirty percent of the HA's occupied units.
    Thus far, the Department has been able to provide either vouchers 
or newly acquired or constructed units, where appropriate, to replace 
roughly all units demolished or disposed of. However, replacement 
vouchers do not meet some local needs as well as hard replacement units 
do.
    The Department believes that CGP HAs will be better able to 
restructure their inventories and more likely to take the needed steps 
to do so if they have available some funding for construction or 
acquisition of public housing replacement units irrespective of the 
HOPE VI process. Therefore, the Department has decided to exercise its 
authority (under 42 U.S.C. 1437l(2)(A)) to modify the formula for CGP 
funding, through notice and comment rulemaking, to take into account 
the need for some replacement units.

II. Need for Change in the Formula

    As recently as FY 1994, the public housing stock lost only two 
thousand units per year from demolition, disposition, and conversions. 
But from

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FY 1997 to FY 2000, the Department estimates a reduction of about 
twenty thousand units per year from demolition, disposition, and 
conversions. This large reduction in units is expected to be 
concentrated among about forty HAs, almost all of which are large HAs, 
with 1250 or more units and with one or more developments with a high 
percentage of long-term vacancies. Fewer than ten (or one-quarter) of 
these forty HAs are expected to have over three-quarters of the 
reduction in units as a result of demolition, disposition, and 
conversion. Unless action is taken, the affected communities will not 
be able to capitalize on opportunities to rebuild at lower densities 
and in mixed-income settings on current sites. By allowing an HA with 
reduced public housing units to temporarily stabilize its funding if it 
uses the funding for replacement housing generated by the modernization 
replacement housing factor, the proposed rule will remedy these 
problems (at least in part) and make more acceptable the reduction of 
units resulting from the demolition, disposition, or conversion of non-
viable units.
    This proposed revision retains all aspects of the current CGP 
formula, including the phased-in reduction in units covered by the 
Annual Contributions Contract that is specifically stated in the 
statute and is implemented by Sec. 968.103(k)(3). By adding a 
replacement housing factor to reflect the need for replacement housing 
following unit reduction, the revision mitigates the adverse impact of 
the phased-in reduction in units, because it amends the way the 
underlying formula is calculated and restores some of the formula 
funding share HAs would have received had no unit reduction occurred 
after October 1, 1996. Under the proposed revision, an HA cannot 
receive more than its pre-unit reduction funding share as a result of 
the replacement housing factor.

III. Description of Replacement Housing Factor

    A replacement housing factor is being added to both the backlog and 
accrual components of the formula for funding modernization activities 
under the CGP. The current formula provides, in accordance with the 
statute, that half of the formula is related to backlog needs, and the 
other half of the formula is related to accrual needs. Subject to the 
condition that an HA cannot receive more than its funding share before 
the application of the replacement housing factor, the five year 
adjustments for backlog and accrual need are calibrated so that an HA 
with units lost to demolition, disposition, or conversion will be able 
to fund about twenty percent of the public housing units (and about 
thirty percent of the occupied units) that will be lost. This 
percentage represents a significant amount of replacement housing but 
is low enough to ensure that funds will continue to be directed to 
pressing replacement housing needs.
    The backlog and accrual need elements of the formula are now found 
at 24 CFR 968.103(e) and 968.103(f). This change is made to offset some 
of the loss of formula share in capital funding that would result from 
the described reduction of units that takes place after October 1, 
1996. (As part of its CGP formula computations, HUD would compute the 
share and level of HA funding before the impact of the rule and the 
share and level of HA funding as a result of the rule that must be used 
for replacement housing.)
    This rule adjusts the backlog need by adding 50 percent of the 
Total Development Cost (TDC) for a two-bedroom unit in a walk-up 
structure for the number of units to be demolished, disposed of, or 
converted, for the first five years after demolition, disposition, or 
conversion occurs. The rule adjusts the accrual need by adding two 
percent of the TDC for this type of unit for the number of units to be 
demolished, disposed of, or converted, for the first five years after 
demolition, disposition, or conversion. These modifications apply only 
if the reduced units are not otherwise receiving funding for 
replacement housing or vacancy renovation and if the funds attributable 
to this factor are used for approved replacement housing or vacancy 
renovation. Other modernization funds also may be used for replacement 
housing, in accordance with HUD Notice PIH 96-56 (HA). It is likely, 
however, that very few HAs would use modernization funding for this 
purpose if it would mean depriving other developments of modernization.
    Four key features of the replacement housing factor should be 
noted. First, it does not support the continued operation of non-viable 
housing, because it is premised on non-viable units being reduced and 
the funding generated by the modernization replacement housing factor 
being used for replacement housing. Second, the affected HAs do not 
receive an additional funding share over their current share and might 
receive somewhat less, because the formula replacement factor cannot 
create shares of relative backlog need or relative accrual need that 
are greater than the relative shares before the removal of the units. 
Third, the offset is not a permanent hold harmless amount. After five 
years, the affected HAs will receive a share of funding based upon 
their reduced shares of backlog and accrual need without any 
replacement factor. Moreover, those units demolished, disposed of, or 
converted with replacement housing funds, such as public housing 
development, Major Rehabilitation of Obsolete Public Housing, or HOPE 
VI implementation grants, will not benefit from the replacement housing 
factor. (A demolished development with only partial replacement funding 
from a HOPE VI grant would get partial help from the modernization 
replacement housing factor.) Fourth, the replacement housing factor is 
expected to support replacement and accelerated renovation of vacant 
units of only a fraction of the original units.
    In order to receive funding under the replacement housing factor, 
an HA must first request such funding when it updates its annual 
formula characteristics report for the formula run. Only units that are 
identified on the formula characteristics report as demolished, 
disposed of, or converted and that lower the number of HA formula units 
will be units eligible for the replacement factor. In its formula 
computations, HUD will determine the share and level of Comprehensive 
Grant formula funding that an HA will receive from the replacement 
factor. The HA will then budget the funds provided by the replacement 
factor as a major work category, including an implementation schedule, 
on the CGP Annual Statement. If the funding generated by the 
replacement factor is not used for replacement housing in a reasonable 
time, in accordance with already existing requirements (Secs. 968.125 
and 968.335(a)(3)), the affected HA will face appropriate corrective 
action, which ultimately may include recapture of the funds.
    The following example shows how the factor would work.

Example for the Formula Replacement Factor

    An HA that has 2,000 units is planning to demolish one of its 
developments. The development to be demolished has 200 units, and the 
demolition is not being funded by a grant that has a replacement 
component. The 1800 units that the HA is not going to demolish average 
a formula backlog need of $20,000 per unit and a formula accrual need 
of $1250 per unit--values that would have resulted from applying the 
unit-weighted characteristics of the

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developments to the backlog and accrual formulas set out in the 
Comprehensive Grant program. The 200 units to be demolished have, in 
this hypothetical example, a formula backlog need of $40,000 per unit 
and a formula accrual need of $1500 per unit. Finally, the HA had total 
CIAP funding from 1984 to 1991 of $10 million, and the TDC of a two-
bedroom walkup in its area is $64,000 per unit.
    Before demolition, the HA's unfunded formula backlog need is $34.0 
million, or $10 million of CIAP funding deducted from $44.0 million of 
backlog need (1800 units at $20,000 per unit plus 200 units at $40,000 
per unit), and its total formula accrual need is $2.55 million (1800 
units at $1250 per unit plus 200 units at $1500 per unit). Without a 
replacement factor, in accordance with the phased-in reduction of units 
provision of Sec. 968.103(k)(3), its total formula backlog need within 
three years would fall to $26 million, or $10 million of CIAP funding 
deducted from $36.0 million of backlog need (1800 units at $20,000 per 
unit), and its formula accrual need would fall to $2.25 million (1800 
units at $1250 per unit). In short, within three years, its formula 
backlog need would decline about 23.5 percent and its formula accrual 
need would decline about 11.8 percent. If it is assumed that the 
formula characteristics for all other HAs remain unchanged, then by the 
third year after the approved demolition, its formula share would 
decline about 17.7 percent relative to the starting point before 
demolition (the average of 23.5 percent and 11.8 percent).
    In this example, a replacement factor for five years would value 
the demolished units at $32,000 per unit (half of the TDC of $64,000) 
in the backlog formula and at $1280 per unit (two percent of the TDC of 
$64,000) in the accrual formula. By the third year of the five year 
period, the uncapped formula backlog need of the HA with demolition 
would be $32.4 million, or the $10 million of CIAP funding deducted 
from $42.4 million of backlog need (1800 units times $20,000 per unit 
plus 200 units times $32,000 per unit). If the formula backlog need of 
all other HAs remains the same and if the backlog need falls below the 
original level (as in this example), the adjusted backlog need does not 
have to be capped in order that the HA with the demolished units not 
increase its share of formula backlog as a result of the replacement 
factor for demolition. By the third year of the five year period, the 
accrual need of the HA with demolition would be $2.506 million, or less 
than its amount and share before demolition. No capping for the accrual 
replacement factor is required in this example. With a replacement 
factor, the formula share of the HA for the aggregate five years would 
be somewhat less than its share before demolition. Still, its formula 
share for five years would be more than what the HA would have received 
had a replacement factor not been in place for the demolished units.
    In the above example, the HA's formula share without a replacement 
factor for its demolished units would have been reduced 5.9 percent in 
the first year that the demolition took effect for CGP funding, 11.8 
percent in the second year, and 17.7 percent the third through fifth 
years (and afterward). With a replacement factor, the HA's share would 
be reduced 1.1 percent the first year, 2.2 percent the second year, and 
3.3 percent the third through fifth years, and then 17.7 percent 
thereafter. Suppose that the HA had received $6 million in CGP funds if 
no demolitions had occurred during the first through the fifth years. 
As a result of the replacement factor maintaining some of its share, 
the funds maintained for replacement housing would be $288,000 in the 
first year, $576,000 in the second year, and $864,000 in the third 
through fifth years--for a five-year total of $3,456,000.

IV. Nationwide Impact

    The Department estimates that the impact of this rule in the first 
year will be to maintain for eligible HAs about $20 million in funding 
for replacement housing that would otherwise be reallocated to other 
CGP HAs as a result of reduction in the number of the HA's units as a 
result of demolition, disposition, and conversion of non-viable units. 
Over the next five years, the impact might average $60 million per 
year. Of course, if there were no such incentive for HAs with non-
viable units to demolish, dispose of, or convert and replace these 
units, they might not take such action, in which case their 
modernization funding shares might not have been reduced in the first 
place. Therefore, the true impact of the rule might be less than the 
above estimates.

V. Findings and Certifications

A. Public Reporting Burden

    This proposed rule contains no new information collection 
requirements that would require review by the Office of Management and 
Budget under the Paperwork Reduction Act of 1995 (42 U.S.C. 3501-3520).

B. Impact on Small Entities

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this proposed rule, and in so 
doing certifies that this proposed rule will not have a significant 
economic impact on a substantial number of small entities. This 
proposed rule only affects HAs with 250 or more units, eligible for 
formula funding under the CGP and primarily affects larger HAs, which 
have experienced the greatest unit reduction.

C. Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969 (42 U.S.C. 4332). The Finding of No Significant Impact is 
available for public inspection and copying during regular business 
hours (7:30 a.m. to 5:30 p.m.) in the Office of the Rules Docket Clerk, 
Room 10276, 451 Seventh Street, SW, Washington, DC 20410-0500.

D. Federalism Impact

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that the policies 
contained in this proposed rule do not have significant impact on 
States or their political subdivisions, or the relationship between the 
Federal Government and State and local governments, or on the 
distribution of power and responsibilities among the various levels of 
government. As a result, the proposed rule is not subject to review 
under the Order. The rule merely preserves funding that would otherwise 
be lost to local housing agencies that have experienced significant 
loss of units.

E. Unfunded Mandates Reform Act

    The Secretary, in accordance with the Unfunded Mandates Reform Act 
of 1995, 2 U.S.C. 1532, has reviewed this proposed rule before 
publication and by approving it certifies that this proposed rule does 
not impose a Federal mandate that will result in the expenditure by 
State, local, and tribal governments, in the aggregate, or by the 
private sector, of $100 million or more in any one year.

F. Regulatory Review

    This proposed rule was reviewed by the Office of Management and 
Budget under Executive Order 12866, not on the basis of impact in 
excess of $100 million but on the basis of its importance. Any changes 
made in this rule as a result of that review are clearly

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identified in the docket file for this rule, which is available for 
public inspection in the HUD's Office of the Rules Docket Clerk, Room 
10276, 451 Seventh Street, SW., Washington, DC 20410-0500.

Catalog

    The Catalog of Federal Domestic Assistance number for the program 
affected by this proposed rule is 14.850.

List of Subjects in 24 CFR Part 968

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

    Accordingly, part 968 of title 24 of the Code of Federal 
Regulations is proposed to be amended as follows:

PART 968--PUBLIC HOUSING MODERNIZATION

    1. The authority citation for part 968 continues to read as 
follows:

    Authority: 42 U.S.C. 1437d, 1437l, and 3535(d).

    2. Section 968.103 is amended as follows:
    a. Paragraphs (e)(3) and (e)(4) are redesignated as paragraphs 
(e)(4) and (e)(5), respectively;
    b. New paragraphs (e)(3) and (f)(4) are added; and
    c. Paragraph (k)(1) is revised, to read as follows:


Sec. 968.103  Allocation of funds under section 14.

* * * * *
    (e) * * *
    (3) Replacement factor to reflect backlog need for developments 
with demolition, disposition, or conversion occurring on or after 
October 1, 1996. (i) For PHAs that have a reduction in units 
attributable to demolition, disposition, or conversion of units 
occurring on or after October 1, 1996, and such reduction lowers the 
formula unit count for the Comprehensive Grant formula calculations, a 
factor will be added for the first five years after such reduction that 
consists of 50 percent of the published Total Development Cost for the 
period April 3, 1996 through April 30, 1997, for a two-bedroom unit in 
a walkup type structure, times the number of units to be demolished or 
disposed of. The total relative backlog need of the PHA resulting from 
application of this replacement factor cannot exceed the share it would 
have had if the demolition, disposition, or conversion had not taken 
place.
    (ii) A PHA is eligible for application of this factor only if the 
PHA satisfies the following criteria:
    (A) The PHA is not receiving funding for replacement housing for 
the reduced number of units under the public housing development, Major 
Reconstruction of Obsolete Public Housing, or HOPE VI programs; and
    (B) The restored funding that results from the use of the 
replacement factor is used to provide replacement housing or 
accelerated renovation of vacant but viable units, in accordance with 
the HA's five-year action plan, approved by HUD (see Sec. 968.315).
    (iii) If the PHA does not use the restored funding that results 
from the use of the replacement factor to provide replacement housing 
or renovated vacant units in a timely fashion, in accordance with 
Sec. 968.125, and make reasonable progress on such use of the funding, 
in accordance with Sec. 968.335(a)(3), HUD may require appropriate 
corrective action under Sec. 968.335 or may recapture and reallocate 
the funds.
* * * * *
    (f) * * *
    (4) Replacement factor to reflect accrual need for developments 
with demolition, disposition, or conversion occurring on or after 
October 1, 1996. (i) For PHAs that have a reduction in units 
attributable to demolition or disposition, disposition, or conversion 
of units occurring on or after October 1, 1996, and such reduction 
lowers the formula unit count for the Comprehensive Grant formula 
calculations, a factor will be added for the first five years after 
such reduction that consists of two percent of the published Total 
Development Cost for the period April 3, 1996-April 30, 1997, for a 
two-bedroom unit in a walkup type structure times the number of units 
to be demolished, disposed of, or converted. The total relative accrual 
need of the PHA resulting from application of this replacement factor 
cannot exceed the share it would have had if the demolition, 
disposition, or conversion had not taken place.
    (ii) A PHA is eligible for application of this factor only if the 
PHA satisfies the following criteria:
    (A) The PHA is not receiving funding for replacement housing for 
the reduced number of units under the public housing development, Major 
Reconstruction of Obsolete Public Housing, or HOPE VI programs; and
    (B) The restored funding that results from the use of the 
replacement factor is used to provide replacement housing or 
accelerated renovation of vacant but viable units, in accordance with 
the HA's five-year action plan, approved by HUD (see Sec. 968.315).
    (iii) If the PHA does not use the restored funding that results 
from the use of the replacement factor to provide replacement housing 
in a timely fashion, in accordance with Sec. 968.125, and make 
reasonable progress on such use of the funding, in accordance with 
Sec. 968.335(a)(3), HUD may require appropriate corrective action under 
Sec. 968.335 or recapture and reallocate the funds.
* * * * *
    (k) Demolition, disposition and conversion of units. (1) General-- 
(i) One percent limit. Where an existing unit under an ACC is 
demolished, disposed of, or converted into a larger or smaller unit, 
including the substantial rehabilitation of a Mutual Help or Turnkey 
III unit, HUD shall not adjust the amount the PHA or IHA receives under 
the formula, unless more than one percent of the units are affected on 
a cumulative basis. Where more than one percent of the existing units 
are demolished, disposed of, or converted, HUD shall reduce the formula 
amount for the PHA or IHA over a 3-year period to reflect removal of 
the units from the ACC.
    (ii) When a change in number of units is triggered. A change in the 
number of units under ACC is counted when one of the following occurs:
    (A) Completion of approved work to convert units to different 
sizes, resulting in an increase or decrease in the number of units;
    (B) Execution of a sales contract for a disposition;
    (C) Start of approved work for a demolition; or
    (D) Conveyance of a Mutual Help, Turnkey III, or rental unit.
* * * * *
    Dated: September 4, 1997.
Kevin Emanuel Marchman,
Acting Assistant Secretary for Public and Indian Housing.
[FR Doc. 97-23907 Filed 9-9-97; 8:45 am]
BILLING CODE 4210-33-P