47740 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Proposed Rules

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 nonviable 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
Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Proposed Rules 47741

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 § 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 twobedroom 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 (§§ 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
47742 Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Proposed Rules

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

§ 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 nonviable 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
Federal Register / Vol. 62, No. 175 / Wednesday, September 10, 1997 / Proposed Rules 47743

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:

§ 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 § 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 § 968.125, and make

reasonable progress on such use of the

funding, in accordance with

§ 968.335(a)(3), HUD may require

appropriate corrective action under

§ 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 § 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 § 968.125,

and make reasonable progress on such

use of the funding, in accordance with

§ 968.335(a)(3), HUD may require

appropriate corrective action under

§ 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]

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