54984 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

DEPARTMENT OF HOUSING AND 

URBAN DEVELOPMENT 

24 CFR Part 990 

[Docket No. FR–4874–F–08] 

RIN 2577–AC51 

Revisions to the Public Housing 

Operating Fund Program 

AGENCY: Office of the Assistant 

Secretary for Public and Indian 

Housing, HUD. 

ACTION: Final rule. 

SUMMARY: This rule amends the 

regulations of the Public Housing 

Operating Fund Program (Operating 

Fund Program) to provide a new 

formula for distributing operating 

subsidy to public housing agencies 

(PHAs) and to establish requirements for 

PHAs to convert to asset management. 

HUD developed the final rule with the 

active participation of PHAs, public 

housing residents, and other relevant 

parties using the procedures of the 

Negotiated Rulemaking Act of 1990. 

These regulatory changes improve and 

clarify the current regulations governing 

the Operating Fund Program and take 

into consideration the recommendations 

of the congressionally funded study by 

the Harvard University Graduate School 

of Design on the cost of operating wellrun public housing. The final rule 

follows publication of an April 14, 2005, 

proposed rule, and takes into 

consideration the public comments 

received. 

DATES: Effective Date: November 18, 

2005. 

FOR FURTHER INFORMATION CONTACT: 

Elizabeth Hanson, Public Housing 

Financial Management Division, Office 

of Public and Indian Housing, 

Department of Housing and Urban 

Development, 550 12th Street SW., 

Suite 100, Washington, DC 20410; 

telephone (202) 475–7949 (this 

telephone number is not toll-free). 

Individuals with speech or hearing 

impairments may access this number 

through TTY by calling the toll-free 

Federal Information Relay Service at 1– 

800–877–8339. 

SUPPLEMENTARY INFORMATION: 

I. Background 

Section 519 of the Quality Housing 

and Work Responsibility Act of 1998 

(Pub. L. 105–276, approved October 21, 

1998) amended section 9 of the United 

States Housing Act of 1937 (42 U.S.C. 

1437 et seq.) (1937 Act). As amended, 

section 9 of the 1937 Act established an 

Operating Fund to make assistance 

available to PHAs to operate and 

manage public housing. Section 9 of the 

1937 Act also required that the amount 

of the assistance to be made available to 

a PHA from that fund be determined 

using a formula developed through 

negotiated rulemaking procedures as 

provided in subchapter III of chapter 5 

of title 5, United States Code, commonly 

referred to as the Negotiated 

Rulemaking Act of 1990 (5 U.S.C. 561 et 

seq.). 

Negotiated rulemaking on the 

Operating Fund Program was initiated 

in March 1999, and the negotiated 

rulemaking committee consisted of 25 

members representing PHAs, tenant 

organizations, community-based 

organizations, and the three national 

organizations representing PHAs—the 

Public Housing Authorities Directors 

Association (PHADA), Council of Large 

Public Housing Authorities (CLPHA), 

and National Association of Housing 

and Redevelopment Officials (NAHRO). 

Based on the recommendations made by 

the negotiated rulemaking committee, 

HUD published a proposed rule on July 

10, 2000 (65 FR 42488), which was 

followed by an interim rule published 

on March 29, 2001 (66 FR 17276). The 

March 29, 2001, interim rule established 

the Operating Fund Program regulations 

that are currently in effect. These 

regulations are located in part 990 of 

HUD’s regulations in title 24 of the Code 

of Federal Regulations. 

During the negotiated rulemaking for 

the Operating Fund Formula, Congress 

directed that HUD contract with the 

Harvard University Graduate School of 

Design (Harvard GSD) to conduct a 

study on the costs incurred in operating 

well-run public housing (Cost Study). 

This congressional direction was 

contained in the Conference Report 

(H.R. Rep. No. 106–379 at 91 (1999)) 

accompanying HUD’s Fiscal Year (FY) 

2000 Appropriations Act (Pub. L. 106– 

74, approved October 20, 1999). 

Congress further directed that HUD 

make the results of the Cost Study 

available to the negotiated rulemaking 

committee and appropriate 

congressional committees. 

The Harvard GSD performed 

extensive research on the question of 

what the expense level of managing 

well-run public housing should be. 

HUD, consistent with congressional 

direction, made the results of the Cost 

Study available to the members of the 

negotiated rulemaking committee who 

developed the current Operating Fund 

Program regulations, and also invited 

the committee members to be active 

participants in the Harvard GSD’s 

research for and development of the 

Cost Study. The Harvard GSD also 

conducted several public meetings to 

allow for an exchange of views and 

expectations with the public housing 

industry, beyond those industry 

members who were part of the 

negotiated rulemaking committee. The 

Cost Study was completed and officially 

released in July 2003. 

II. The Negotiated Rulemaking 

Advisory Committee on the Operating 

Fund 

The FY 2004 Consolidated 

Appropriations Act (Pub. L. 108–199, 

approved January 23, 2004) required 

HUD to undertake further negotiated 

rulemaking to make changes to the 

Operating Fund formula. 

In response to this statutory language, 

HUD convened a negotiated rulemaking 

advisory committee (Committee) for the 

purposes of developing possible 

changes to the Operating Fund Program 

in response to the Cost Study. The 

Committee consisted of 28 members, 

including representatives of PHAs, 

public housing tenant organizations, 

public housing advocacy groups, the 

three national PHA organizations 

(CLPHA, NAHRO, and PHADA), the 

National Organization of African 

Americans in Housing (NOAAH), 

multifamily housing providers, and 

HUD. The Committee held four 

meetings. The meetings were held on 

March 30-April 1, 2004, in Washington, 

DC; April 13–15, 2004, also in 

Washington, DC; May 11–12, 2004, in 

Atlanta, Georgia; and June 8–9, 2004, in 

Potomac, Maryland. Committee sessions 

were announced in the Federal Register 

and were open to the public. Members 

of the public were permitted to make 

statements during the meetings at 

designated times and to file written 

statements with the Committee for its 

consideration. 

The Committee developed a report 

containing several recommendations for 

revising the current Operating Fund 

Program regulations (Committee 

Recommendations). HUD developed a 

draft proposed rule based on these 

recommendations. Consistent with 

HUD’s obligations under Executive 

Order 12866 (entitled ‘‘Regulatory 

Planning and Review’’) and other 

rulemaking authorities, the draft rule 

underwent further HUD and executive 

branch review prior to publication. 

On April 14, 2005 (70 FR 19858), 

HUD published its proposed rule to 

revise the Operating Fund Program in 

the Federal Register. As a result of the 

pre-publication review processes, ten 

substantive modifications were made to 

the Committee Recommendations. 

Specifically, the April 14, 2005, 

proposed rule did not include seven of 

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 54985 

the changes recommended by the 

Committee. In addition, the proposed 

rule contained three modifications to 

the Operating Fund Program that were 

not part of the Committee 

Recommendations. Additional 

information regarding the proposed 

regulatory changes to the Operating 

Fund Program, and the modifications 

made to the Committee 

Recommendations, can be found in the 

preamble to the April 14, 2005, 

proposed rule. 

III. Differences Between This Final Rule 

and the April 14, 2005, Proposed Rule 

This final rule follows publication of 

the April 14, 2005, proposed rule and 

takes into consideration the public 

comments received on the proposed 

rule. Sections IV, V, and VI of this 

preamble provide a summary of the 

significant issues raised by the public 

commenters on the proposed rule and 

HUD’s responses to the comments. After 

reviewing the public comments, HUD 

has made the following changes to the 

April 14, 2005, proposed rule. 

Adoption of Five Committee 

Recommendations 

HUD has adopted five of the seven 

Committee Recommendations that were 

omitted from the April 14, 2005, 

proposed rule. These are: 

1. The ten percent non-profit 

coefficient. 

2. The three percent vacancy 

allowance. 

3. The phase-in of operating subsidy 

gains over two years. 

4. The provision regarding the 

discontinuation of subsidy reduction 

through demonstration of successful 

conversion to asset management (i.e., 

‘‘stop-loss provision’’). 

5. The language requiring use of an 

advisory committee to review the 

Project Expense Level (PEL) 

methodology and utility benchmarking, 

convened in accordance with the 

Federal Advisory Committee Act 

(FACA). 

With respect to the remaining two 

Committee Recommendations not 

adopted in the April 14, 2005, proposed 

rule (i.e., the change in methodology for 

inflating PELs and the elimination of the 

$2 per unit per month public entity fee), 

the final rule remains unchanged. 

Removal of Provisions Not Contained in 

the Committee Recommendations 

Additionally, HUD has removed the 

three proposed rule provisions that were 

not part of the Committee 

Recommendations. These are: 

1. The adjustment in § 990.190(i) 

based on the Committee 

Recommendations for certain PHAs. 

2. The two-year limit on a higher 

subsidy for vacant units due to changing 

market conditions, and the related 

requirements that PHAs requesting such 

subsidy submit a plan for ending the 

higher subsidy within the two-year 

period. 

3. The provision authorizing 

sanctions on PHAs that fail to comply 

with the asset management 

requirements or that do not submit 

accurate and timely data. 

Energy Loan Amortization Expenses 

In response to comments, HUD has 

also added language relating to the 

eligible expenses that can be funded 

under the ‘‘add-on’’ for energy loan 

amortization. This language was 

included in the Committee 

Recommendations, but was 

inadvertently omitted in the April 14, 

2005, proposed rule. 

Technical Non-Substantive Changes 

In addition to the changes described 

above, HUD has also made several 

technical non-substantive corrections to 

the April 14, 2005, proposed rule, such 

as correcting cross-references and 

making other grammatical and editorial 

changes. 

IV. Public Comments Received on the 

April 14, 2005, Proposed Rule 

The public comment period for the 

proposed rule closed on June 13, 2005. 

The proposed rule was of significant 

interest to the public. HUD received 573 

public comments on the April 14, 2005, 

proposed rule. Comments were 

submitted by PHAs, PHA industry 

groups, resident organizations, 

advocates for low-income housing, 

housing experts, and other organizations 

and individuals. Many of the comments 

were part of a letter-writing campaign 

consisting of several form letters that 

were similar in substance. In some 

instances, individual commenters 

submitted multiple comments 

consisting of different form letters. In 

general, the comments objected to the 

modifications made to the Committee 

Recommendations and urged that HUD 

issue a rule adopting the 

recommendations. 

The next two sections of the preamble 

present a summary of the significant 

issues raised by the public comments, 

and HUD’s responses to the comments. 

Comments are organized in two 

categories. Section V of the preamble 

discusses the public comments 

regarding the changes to the Committee 

Recommendations. Section VI of the 

preamble discusses additional topics 

that were raised by the commenters. 

Within each category of comments, the 

headings present the issue or question, 

followed by a brief description of the 

comment and HUD’s response to the 

comment. 

V. Public Comments Regarding the 

Changes to Committee 

Recommendations 

General Comments 

Comment: Support for proposed rule. 

Four commenters supported 

implementation of the April 14, 2005, 

proposed rule. The commenters wrote 

that although the proposed rule 

contained changes to the Committee 

Recommendations and did not fulfill 

every resident’s and PHA’s needs, the 

rule maintained ‘‘some of the more 

prevailing themes of the negotiated 

rulemaking agreement,’’ such as the 

conversion to the PEL, which will ‘‘lead 

to more efficient property-based 

management.’’ The commenters wrote 

that with the resulting increase in 

subsidy, PHAs will be able to provide 

additional services to their residents 

and urged HUD to quickly implement 

the April 14, 2005, proposed rule. 

HUD Response. HUD agrees that this 

final rule will result in better-managed 

PHAs and improved services to 

residents. 

Comment: HUD should fully 

implement the Committee 

Recommendations. As noted above, the 

majority of the public commenters 

objected to the changes made to the 

Committee Recommendations and urged 

that HUD either fully implement the 

regulatory proposals developed during 

the negotiated rulemaking process or 

reconvene the Committee for new 

negotiations. Several of the commenters 

expressed concern that the ‘‘proposed 

rule modification of the funding 

methodology will have a long term 

negative impact on PHAs in order to 

achieve a short-term solution for this 

budget year’’ and that ‘‘budget 

constraints should more appropriately 

be handled by prorating the budget 

based on the level of congressional 

appropriations.’’

HUD Response. While it is true that 

the Committee Recommendations were 

developed as part of a formal process, 

the completion of the Committee’s work 

did not conclude the rulemaking 

process. HUD indicated throughout the 

negotiated rulemaking sessions that the 

Committee Recommendations, like all 

significant rulemakings, would undergo 

further HUD and Executive Order 12866 

review prior to publication and that the 

recommendations might be revised as a 

54986 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

result of those review processes. The 

changes made to the Committee 

Recommendations were designed to 

further the goals of the Operating Fund 

program and the Administration 

policies and budgetary priorities, while 

also advancing the goals of the 

Committee to implement an improved 

and more accurate Operating Fund 

formula. 

HUD recognizes that, as part of a 

negotiated rulemaking process, 

concessions were made by all parties to 

arrive at the proposed regulatory 

changes recommended by the 

Committee. In light of the issues raised 

by the public commenters, HUD has 

reconsidered the changes to the 

Committee Recommendations, and this 

final rule adopts all but two of the 

provisions recommended by the 

Committee. HUD believes that the final 

rule furthers the implementation of the 

recommendations of the Cost Study, the 

policy and budgetary goals of the 

Administration, and the consensus 

decisions reached during the negotiated 

rulemaking process. 

Comment: HUD should initiate new 

rulemaking on the Operating Fund. 

Several commenters wrote that HUD 

should discard both the April 14, 2005, 

proposed rule and the Committee 

Recommendations, and start the 

rulemaking process again to produce a 

rule that would be more reflective of the 

costs associated with well-managed 

public housing. The commenters wrote 

that the cuts recommended by the Cost 

Study would impair the ability of PHAs 

to carry out necessary functions to 

maintain decent, safe, and sanitary 

housing. 

HUD Response. While the Committee 

Recommendations and the April 14, 

2005, proposed rule may not meet with 

the complete satisfaction of all parties, 

both reflect the results of extensive 

deliberations based on the sound and 

thorough Cost Study. As HUD has 

previously indicated, it believes that the 

Cost Study’s methodology is an interim 

solution, with the ultimate goal to 

establish funding levels based on actual 

and reasonable cost data by property, 

which is to be achieved with the 

implementation of asset management. 

However, HUD has acknowledged that 

PHAs that face a reduction under the 

new formula will need some time to 

align their resources with the new 

funding. Accordingly, HUD has 

provided a 5-year transition period. 

Comments on Specific Regulatory 

Provisions 

Comment: The non-profit coefficient 

should be increased to ten percent. The 

Cost Study and the Committee had 

recommended a non-profit coefficient of 

ten percent based on estimated 

differences in operating costs between 

for-profit and non-profit entities 

according to the Federal Housing 

Administration (FHA) database of 

properties that was used for the Cost 

Study. The April 14, 2005, proposed 

rule reduced the non-profit coefficient 

from ten percent to four percent, 

reflecting the belief that the difference 

in costs between for-profit and nonprofit entities represented inefficiencies 

that should not be supported in the 

formula. 

Many comments objected to HUD’s 

reduction of the non-profit coefficient 

from ten to four percent on the grounds 

that it was contrary to the 

recommendations of both the 

Committee and the Cost Study, and that 

it would not provide PHAs with 

sufficient funding to support their 

specific non-profit operating functions. 

HUD Response. As noted above, HUD 

has adopted the suggestion made by the 

commenters and has adopted the nonprofit coefficient as contained in the 

Committee Recommendations. 

Comment: Support for a $2 Per Unit 

Per Month (PUM) Public Entity Fee. The 

Committee recommended that a public 

entity fee of $2 PUM be added to the 

initial PELs. The public entity fee was 

intended to reimburse PHAs for 

additional services (above and beyond 

the non-profit coefficient) that are 

unique to PHAs as public entities. The 

April 14, 2005, proposed rule did not 

adopt this additional fee. HUD’s 

position was that these expenses were 

addressed through other means in the 

proposed rule. 

Many commenters recommended 

adoption of the $2 PUM public entity 

fee. Several of the commenters asked 

where in the April 14, 2005, proposed 

rule such expenses were covered, 

especially given the fact that the nonprofit coefficient had been reduced. 

HUD Response. HUD has not revised 

the rule in response to these comments. 

The FHA portfolio, which was the basis 

for the new Project Expense Level (PEL) 

calculation, contains a high percentage 

of assisted properties, which are also 

subject to HUD regulations. Thus, the 

expenses associated with the public 

entity fee are reflected in the PEL’s 

percent-assisted coefficient and the nonprofit coefficient. Furthermore, the final 

rule adopts the Cost Study’s 

recommendation of a ten percent nonprofit coefficient, which HUD believes 

adequately covers the additional 

services unique to PHAs. 

Comment: Support for the three 

percent allowance for vacant units. 

Under the Committee 

Recommendations, PHAs would receive 

a subsidy for occupied dwelling units 

and dwelling units with an approved 

vacancy. PHAs would also receive an 

operating subsidy for a limited number 

of vacancies if the annualized rate is 

less than or equal to three percent, or for 

up to five units if the PHA has 100 or 

fewer units. The April 14, 2005, 

proposed rule did not adopt these 

recommendations. 

Many commenters recommended that 

HUD adopt the vacancy allowance, 

indicating that it would be unrealistic to 

expect any housing operator to maintain 

100 percent occupancy at all times. 

Several commenters mentioned that the 

three percent vacancy allowance is the 

industry standard and that the monthly 

rent charge in FHA’s multifamily 

housing program also reflects 

assumptions on occupancy loss. 

HUD Response. HUD has revised the 

rule in response to the suggestion made 

by the commenters. The final rule 

adopts the recommendation of the 

Committee with regard to vacancies. 

Hence, PHAs will receive an operating 

subsidy for a limited number of 

vacancies if the annualized rate is less 

than or equal to three percent, or for up 

to five units if the PHA has 100 or fewer 

units. 

Comment: Support for Committee 

recommendation regarding the PEL 

inflation factor. The annual inflation 

factors used to adjust the current 

Allowable Expense Level (AEL) are 

based on a 60 percent wage factor and 

a 40 percent non-wage factor. Under the 

Committee Recommendations, the 

weights would have remained the same, 

but the methodology for calculating the 

inflation factor would have changed. 

For the wage component, the factor 

would have been based on the 

Employment Cost Index (ECI) instead of 

the current formula’s Bureau of Labor 

Statistics (BLS) 202 Local Government 

Wage series. For the non-wage 

component, this factor would have been 

based on the Consumer Price Index 

(CPI) instead of the current formula’s 

Producer Price Index (PPI). The April 

14, 2005, proposed rule retained the 

current formula’s inflation factor 

methodology for adjusting annually the 

PEL. 

Many commenters urged that HUD 

adopt the methodology recommended 

by the Committee for calculating the 

PEL inflation factor. The commenters 

wrote that the recommended 

methodology is a more accurate measure 

of inflation. The commenters wrote that 

the current wage factor does not keep 

pace with health care costs, which was 

addressed by the Committee with the 

recommended use of the ECI. In 

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 54987 

addition, several commenters wrote that 

because PHAs are not producers, but, 

instead, purchasers of goods and 

services, the more appropriate index for 

non-wage inflation would be the CPI. 

HUD Response. HUD has not revised 

the rule in response to these public 

comments. During negotiated 

rulemaking, HUD sought to devise a 

more accurate and transparent inflation 

factor methodology than the one used 

under the current regulations, one that 

PHAs could calculate by accessing the 

BLS Web site. After further review, HUD 

believes that the inflation factors 

recommended by the Committee are less 

accurate and no more transparent than 

the current methodology. Specifically, 

for the wage component, the current 

BLS–202 local government wage series 

is more accurate than the BLS—

Employment Cost Index (ECI) 

contemplated by the Committee for the 

following reasons: 

1. The current methodology measures 

wages of local government employees, 

which are more similar to PHAs, 

whereas the ECI data includes State and 

local government employees. 

2. The current methodology includes 

data that is available at the county level, 

summed to either state metropolitan and 

nonmetropolitan level, whereas the 

methodology recommended by the 

Committee (i.e., ECI) is available at only 

a national level and, for private sector 

wages, at the regional level. Local wage 

patterns can vary significantly from 

national averages. 

For the non-wage component, the 

current methodology uses the Producer 

Price Index (PPI), which excludes the 

cost of food and energy and measures 

national average cost changes in 

finished goods used by businesses. The 

Committee recommended using the 

overall CPI, which primarily measures 

changes in the costs of food, housing, 

apparel, recreation, transportation, 

medical expenses, utilities, and other 

services. HUD believes the PPI is a more 

appropriate measure of the type of 

goods and services purchased by PHAs, 

and that the overall CPI has little 

relevance to the costs of PHA purchases. 

In addition, utility costs are covered in 

the Operating Fund formula under a 

separate component than the PEL and 

should be excluded from the PEL 

inflation factor. 

All factors considered, the current 

methodology for the inflation factor is 

considerably more appropriate than the 

methodology recommended by the 

Committee. 

Comment: Support for two-year 

phase-in of operating subsidy gains. 

Under the Committee 

Recommendations, PHAs that 

experience a gain in their operating 

subsidy would have those gains phased 

in over a two-year period. The April 14, 

2005, proposed rule would have phased 

in those gains over a four-year period to 

more closely align the gains with the 

five-year phase-in period for those PHAs 

that would have their subsidy 

decreased. 

Many commenters objected to the 

change in phase-in for PHAs gaining 

operating subsidy. The commenters 

indicated that the four-year phase-in 

period would be too long and that, for 

PHAs that have been historically 

underfunded, increases in subsidy 

should be distributed expeditiously. 

HUD Response. HUD has adopted the 

suggestion of the commenters to adopt 

the language of the Committee 

Recommendations so that gains in 

subsidy will be phased in over two 

years. 

Comment: Support for adoption of 

‘‘stop-loss’’ provision. The Committee 

Recommendations allowed PHAs to 

discontinue their subsidy reduction 

(stop-loss) by demonstrating successful 

conversion to asset management. The 

April 14, 2005, proposed rule did not 

adopt this stop-loss provision on the 

grounds that the Cost Study’s results 

should be equally applied to all PHAs 

and that this stop-loss would weaken 

the implementation of the Cost Study. 

Further, PHAs that feel that their 

formula is not correctly calculated have 

remedies under the appeals provision. 

Many commenters supported 

adoption of the stop-loss provision. The 

commenters indicated that such a 

provision is necessary to prevent PHAs 

from experiencing reductions in their 

subsidy amounts that impact their 

staffing and PHA services. In addition, 

commenters wrote that the stop-loss 

provision would provide PHAs with an 

incentive to convert to asset 

management in order to limit their 

decrease in subsidy. 

HUD Response. HUD has revised the 

rule in response to these comments. The 

final rule adopts the stop-loss provision 

recommended by the Committee, which 

allows PHAs to discontinue their 

subsidy reduction by demonstrating 

successful conversion to asset 

management. 

Comment: Opposition to the 

adjustment for certain PHAs. The April 

14, 2005, proposed rule would have 

established an ‘‘add on’’ for certain 

PHAs that would have gained subsidy 

under the Committee 

Recommendations, but would have had 

their subsidy decreased under the 

proposed rule. These PHAs would 

receive additional funding at the 

formula amount recommended by the 

Committee. 

Many of the public commenters 

objected to this special add-on. Most 

believed that this adjustment created a 

special class of agencies and essentially 

a two-tier, inequitable funding system. 

HUD Response. HUD agrees with the 

public commenters and has removed the 

adjustment for certain PHAs. All PHAs 

will be funded under the same 

Operating Fund formula and provisions. 

Comment: Opposition to the two-year 

time limit and plan requirements on 

subsidies for vacant units due to 

changing market conditions. The April 

14, 2005, proposed rule included a 

provision that would have required 

PHAs that appeal to receive subsidy on 

vacant units due to changing market 

conditions. The provision would have 

required such PHAs to submit, along 

with their appeal, a plan to lease the 

units within two years, and imposed a 

two-year limit on receipt of such 

subsidy. The Committee 

Recommendations did not include a 

similar provision for a plan or a twoyear time limit. 

Many commenters objected to the 

two-year time limit on subsidies for 

units vacant due to changing market 

conditions and the related requirement 

for submission of a plan for leasing 

those units within that time period. 

Many commenters also noted that 

HUD’s regulations governing the 

mandatory and voluntary conversion of 

public housing developments to tenantbased voucher assistance (see 24 CFR 

part 972) already provide PHAs with 

guidelines for addressing vacancies 

based on market conditions. 

HUD Response. HUD has adopted the 

suggestion of the commenters and has 

removed both the two-year limit on 

receipt of subsidy and the related plan 

requirement. 

Comment: Opposition to sanctions for 

failure to convert to asset management 

and to submit accurate and timely data. 

The April 14, 2005, proposed rule 

included two provisions authorizing 

sanctions, as deemed necessary and 

otherwise provided by law, for those 

PHAs not in compliance with asset 

management by FY 2011 and that fail to 

submit accurate and timely data as 

required by the regulations. These 

sanctions might include the imposition 

of a daily monetary fine until the PHA 

converted to asset management. 

Many commenters objected to the 

new sanction provisions. The 

commenters wrote that the provisions 

are unnecessary, since HUD already has 

numerous remedies if PHAs are not in 

compliance with applicable 

requirements. In addition, the 

54988 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

commenters wrote that the imposition 

of a daily monetary fine is inappropriate 

and will harm the people the program 

is designed to assist. Some commenters 

also wrote that the conversion to asset 

management is a complex task and that, 

even with good faith and best efforts, a 

PHA could be subject to fines for 

noncompliance. 

HUD Response. HUD has adopted the 

suggestion of the commenters and 

removed the sanction language that was 

found in proposed §§ 990.200(d) and 

990.290(e). HUD agrees with the 

commenters that it already has the 

authority to impose a broad range of 

sanctions for non-compliance with 

program rules. 

Comment: The 2009 review of PEL 

methodology should be conducted in 

accordance with the procedures of the 

Federal Advisory Committee Act 

(FACA). The Committee 

Recommendations provided that in 

2009, HUD will convene a meeting with 

representatives of appropriate 

stakeholders to review the methodology 

to evaluate the PEL based on actual cost 

data and to establish utility 

benchmarking for the PEL. The 

provision stated that the meetings shall 

be convened in accordance with FACA 

procedures. The April 14, 2005, 

proposed rule modified that language to 

state that the meetings would be 

convened in accordance with ‘‘FACA or 

such other authority or protocol 

determined appropriate.’’

Several commenters objected to the 

new FACA language included in the 

proposed rule. The commenters wrote 

that the issues to address in 2009 as part 

of the discussions of the PEL 

methodology and utility benchmarking 

are inherently complex and that the 

April 14, 2005, proposed rule language 

does not provide sufficient assurances 

that interested stakeholders will have an 

official role in the 2009 discussions. 

HUD Response. As noted above, HUD 

has adopted the language recommended 

by the Committee. Specifically, this 

final rule provides that HUD will 

convene a FACA committee to review 

the methodology to evaluate the PEL 

based on actual cost data and establish 

utility benchmarking. 

VI. Discussion of Additional Public 

Comments Received on the April 14, 

2005, Proposed Rule 

General Comments 

This section of the preamble discusses 

general comments received on the April 

14, 2005, proposed rule not related to a 

specific regulatory provision. 

Comment: HUD should provide 

updated calculations by property and by 

PHA so that the impact of the rule can 

be understood. One commenter wrote 

that, in response to a request during the 

negotiations, HUD did not provide 

updated calculations modeling the 

impact of the rule on individual PHAs. 

Another commenter wrote that the April 

14, 2005, proposed rule does not 

provide sufficient information for each 

PHA to determine the extent of the gains 

or losses under the formula and that 

HUD should provide this information in 

an easy to understand way that shows 

the percent of change and the dollar 

amount of the change. 

HUD Response. HUD agrees that all 

PHAs should understand the formula 

for calculating operating subsidy under 

the final rule. Data was presented to the 

Committee and later made available to 

the public housing community on the 

projected impact of the rule based on 

the Committee Recommendations. 

Similarly, HUD provided data modeling 

on the projected impact of the April 14, 

2005, proposed rule on individual 

PHAs. This data was shared with 

representatives of the public housing 

industry groups and other stakeholders. 

Finally, HUD has posted a complete 

report showing the operating subsidy 

amounts for all PHAs and the 

methodology documents on the HUD 

Web site at http://www.hud.gov. 

Comment: HUD should clarify what 

the rule means when it refers to ‘‘fiscal 

year.’’ Several commenters suggested 

that HUD clarify in the rule whether 

references to ‘‘fiscal year’’ mean a PHA’s 

fiscal year or the federal fiscal year. 

HUD Response. HUD has revised 

references to the term ‘‘fiscal year’’ in 

the regulatory text of this final rule to 

clarify whether the terms refer to a 

federal or PHA fiscal year. 

Comment: HUD should make 

permanent Moving to Work Agreements. 

One commenter suggested that HUD 

give PHAs participating in the Moving 

to Work program the option of making 

their current agreement permanent. 

HUD Response. The suggestion made 

by the commenter is outside the scope 

of this rulemaking, which is concerned 

with implementation of the new 

Operating Fund formula. 

Comment: Concerns regarding 

implementation of future deregulatory 

changes. One commenter expressed 

concern about the language in the 

preamble indicating that HUD and its 

negotiating partners on the Committee 

may contemplate additional 

organizational and regulatory changes 

beyond those included in the Operating 

Fund in order to implement asset 

management. The commenter wrote that 

this language appears to indicate that 

HUD seeks deregulation, which is 

beyond the mandate of the Committee, 

and that HUD may try to implement 

significant policy changes by 

circumventing the normal regulatory 

process. Another commenter cautioned 

that HUD should concentrate first on 

implementing the new formula and, 

once implemented, then turn to these 

other regulatory items. 

HUD Response. Deregulation was part 

of the Cost Study’s recommendations 

and, although the subject of 

deregulation was not directly before the 

Committee, it is an important aspect of 

the implementation of asset 

management. Therefore, the Committee 

discussed deregulation during the 

negotiated rulemaking sessions. 

However, any changes to other HUD 

regulations would be completed through 

the appropriate regulatory or 

administrative processes, which would 

provide opportunities for public 

comments, as appropriate. Additionally, 

HUD is sensitive to the timing of the 

related changes and will take that into 

consideration as it proceeds on these 

other elements. 

Comment: Concerns regarding 

reduced funding for the Operating Fund 

program. Several commenters wrote that 

the Operating Fund should be fully 

funded in order for PHAs that have 

historically been underfunded to realize 

the full gains under the new formula. 

Several commenters wrote that, with the 

expected decrease in funding for this 

program in 2006, PHAs would have to 

cut critical services to residents 

including anti-crime and job training 

activities. 

HUD Response. The suggestion made 

by the commenters addresses the annual 

federal budget process and is outside 

the scope of this rulemaking, which is 

concerned with the implementation of 

the new Operating Fund formula. 

Comment: Rule should consider the 

needs of small PHAs. One commenter 

wrote that the final rule should consider 

the needs and issues facing small PHAs. 

HUD Response. HUD agrees that there 

are special considerations for smaller 

PHAs. The final rule authorizes small 

PHAs (those with under 250 units) to 

treat all of their units as one project. 

Small PHAs are provided the flexibility 

of either maintaining their current 

management practices or converting to 

asset management. 

Comment: HUD should provide 

additional funding for PHAs to 

transition to asset management if 

additional regulatory relief is not 

achieved. One commenter referred to 

language in § 990.255(b) that provides 

that ‘‘HUD recognizes that appropriate 

changes in its regulatory and monitoring 

programs will be needed to support 

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 54989 

PHAs’’ to undertake asset management. 

The commenter recommended that a 

provision be added to the rule that 

would provide additional funding to 

transition to asset management systems 

should HUD fail to timely implement 

needed regulatory and monitoring 

changes. The commenter also 

recommended that this transition 

funding be based on actual costs data 

presented through the appeal process 

for higher project cost data under 

§ 990.245(e). 

HUD Response. HUD has not adopted 

the suggestion made by the commenter. 

Transition costs were discussed by the 

Committee, but were not part of the 

Committee Recommendations. The 

phase-in provisions, as well as the 

current level of PHA reserves, factored 

heavily in the decision not to include 

special transition funding. 

Comment: PHA data requirements. 

One commenter asked what additional 

data PHAs will be required to maintain, 

other than the current data, at a property 

level instead of at a PHA-level. 

HUD Response. In general, PHAs will 

be asked to submit additional data to 

HUD with respect to asset management 

and utility data as referenced under 

§ 990.170(f). Further information on the 

data submission requirements will be 

provided in subsequent HUD guidance. 

Comment: The rule imposes an 

unfunded mandate on PHAs. Two 

commenters wrote that the April 14, 

2005, proposed rule does not meet the 

requirements of the Unfunded Mandates 

Reform Act of 1995 because it fails to 

take into consideration the significant 

budgetary impact on PHAs to meet the 

requirements of the regulation. 

HUD Response. HUD, in the 

development of the proposed rule, 

reviewed the regulatory proposals for 

compliance with all legal rulemaking 

requirements, including the 

requirements contained in title II of the 

Unfunded Mandates Reform Act of 1995 

(2 U.S.C. 1531–1538) (UMRA). The 

UMRA establishes specific thresholds 

and other requirements for determining 

whether a rule would impose an 

unfunded federal mandate. Neither the 

April 14, 2005, proposed rule, nor this 

final rule, impose any federal mandates 

on any State, local, or tribal government, 

nor on the private sector, within the 

meaning of the UMRA. 

Comments Regarding Subpart A—

Purpose, Applicability, Formula, and 

Definitions 

Comment: Disagrees with HUD 

issuing non-codified guidance. One 

commenter objected to the language in 

§ 990.110(c), which provides that, for 

certain secondary elements that will be 

used in the formula, HUD will provide 

information in various forms of noncodified guidance HUD deems 

appropriate. The commenter wrote that, 

without notice and comment 

procedures, errors in the guidance 

cannot be challenged and adjusted 

except through appeals, which may not 

fit the appeal categories. The commenter 

suggested that HUD implement 

secondary formula elements by interim 

rulemaking, thereby allowing comments 

and requests for modification. 

HUD Response. HUD has not revised 

the rule in response to this comment. 

HUD will use notice and comment 

rulemaking procedures when such 

procedures are appropriate or necessary 

(for example, when a policy change 

would require the revision of regulatory 

language codified by this final rule). In 

other instances, where rulemaking is 

neither appropriate nor required, but 

where HUD has determined that 

clarification of existing regulatory 

requirements is needed, HUD will issue 

such guidance through non-regulatory 

means. Rulemaking can be a timeconsuming process and use of such 

procedures where not required might 

unnecessarily delay the issuance of 

needed guidance. Non-regulatory 

guidance can be amended or updated in 

a more expeditious manner. In addition, 

non-codified guidance provides greater 

flexibility to make changes, if necessary, 

in a more expeditious manner. As 

appropriate, HUD will consult with 

stakeholders and other interested parties 

in the development of non-regulatory 

guidance on the Operating Fund. 

Comment: HUD should establish a 

definition for the term ‘‘asset 

repositioning fee.’’ One commenter 

made this suggestion. 

HUD Response. HUD has not added a 

definition for the term ‘‘asset 

repositioning fee.’’ During the 

negotiated rulemaking it was agreed that 

the definitions would be limited to 

essential terms. Because the assetrepositioning fee is described in detail 

in § 990.190(h), it has not been added to 

the definitions section at § 990.115. The 

asset repositioning fee established in 

this final rule is the counterpart to the 

phase-down funding fee in the current 

part 990 regulations and, in accordance 

with the provisions in § 990.190, will be 

paid to PHAs that transition projects or 

buildings out of their inventory. 

Comment: The definition of ‘‘rolling 

base consumption level’’ should state 

that the 36-month period ends on June 

30th. One commenter made this 

suggestion. 

HUD Response. HUD agrees with this 

suggestion and has revised the rule 

accordingly. 

Comments Regarding Subpart B—

Eligibility for Operating Subsidy 

Subpart B of the rule describes the 

requirements and procedures governing 

the computation of eligible unit months. 

A public housing unit may receive 

operating subsidy for each unit month 

that it qualifies as an occupied dwelling 

unit or a dwelling unit with an 

approved vacancy. The total number of 

eligible unit months for each PHA will 

be calculated from July 1st to June 30th 

prior to the first day of the applicable 

funding period and will consist of 

eligible units as defined in this rule. The 

rule reserves to HUD the right to 

determine the status of any public 

housing units based on information in 

HUD’s information systems. In addition, 

the rule provides for a change in a 

PHA’s formula within each one-year 

funding period based on the addition 

and deletion of units in a PHA’s 

inventory. 

Comment: HUD should provide 

operating subsidy for new units. One 

commenter, citing § 990.150, asked how 

HUD expects PHAs to operate new units 

without operating subsidy funds. The 

commenter wrote that the rule requires 

PHAs to report new units periodically, 

but does not provide funding until the 

next funding cycle. 

HUD Response. The commenter has 

misinterpreted § 990.150, which 

requires that PHAs report the addition 

of new units and deletion of units on a 

quarterly basis. This section goes on to 

state that once the PHA has reported 

that the new unit is online, HUD will 

assume that the unit is fully occupied 

for the balance of the funding period, 

and HUD will provide funds from the 

current funding cycle. However, in the 

following year, once actual data is 

available, HUD will make an adjustment 

to the PHA’s funding amount that 

would take into account the actual 

occupancy of the new unit(s). 

Comment: HUD should clarify the 

definition of ‘‘occupied unit.’’ One 

commenter, citing § 990.140, requested 

that HUD clarify when a unit is 

considered occupied. Two examples 

provided were: (1) When a tenant is 

hospitalized and (2) When a PHA 

refuses to renew a lease for failure to 

comply with the community service 

requirements. The commenter suggested 

that HUD define ‘‘occupied’’ as a unit 

with an occupant or where the occupant 

is paying rent. 

HUD Response. Consistent with 

§ 990.140 of this final rule, a unit that 

is under lease to a public housingeligible family is considered to be 

occupied. 

54990 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

Comment: Units with approved 

vacancies under the current regulations 

should be included in the final rule. 

Several commenters requested that all of 

the units for which PHAs may receive 

subsidy under the current part 990 

regulations be included in this final 

rule, stating that changes would result 

in decreases in their operating subsidy 

eligibility. One commenter asked for 

subsidy for units vacant due to federal 

and state laws and regulations and 

another asked for subsidy for units 

vacant due to HUD approved 

desegregation plans. 

HUD Response. HUD has not made 

any changes to the rule in response to 

these comments. The provisions on 

subsidy eligibility for vacant units, 

which were discussed extensively 

during the negotiated rulemaking 

sessions, have been clarified and 

streamlined. Under § 990.145, units 

undergoing modernization and units 

used for special uses, such as resident 

services or anticrime activities, are 

eligible for subsidy. On a project-byproject basis, units that are vacant due 

to litigation (which includes units 

vacant due to desegregation plans), 

disasters, and casualties are eligible for 

subsidy. PHAs may appeal to HUD to 

receive operating subsidy for units that 

are vacant due to changing market 

conditions. While the final rule no 

longer expressly provides subsidy 

eligibility for units vacant due to laws 

(Federal or State laws of general 

applicability, or their implementing 

regulations), the final rule does provide 

subsidy eligibility for units if they are 

undergoing modernization, including 

those undergoing modernization in 

order to meet construction or 

habitability standards. 

Comment: Add community and 

management spaces to approved 

vacancies. One commenter wrote that 

the final rule should include a vacancy 

allowance for units converted to 

community and management spaces and 

for units that are reconfigured to comply 

with litigation and legal requirements. 

HUD Response. As noted above in 

this preamble, this final rule has 

adopted the Committee 

Recommendation under which PHAs 

are eligible to receive subsidy for three 

percent of their vacancies, or up to five 

units if the PHA has less than 100 units. 

PHAs also are eligible to receive subsidy 

for special use units, which are 

described in § 990.145(b) as units 

approved and used for resident services, 

resident organization offices, and 

related activities such as self sufficiency 

and anti-crime activities. With regard to 

unit reconfiguration due to litigation or 

a legal requirement, if a unit has to be 

vacant during this reconfiguration, then 

the unit may be eligible for subsidy 

under § 990.145(c), which provides 

subsidy eligibility for units vacant due 

to litigation. 

Comments Regarding Subpart C—PEL 

Subpart C describes how formula 

expenses will be calculated under the 

revised Operating Fund formula. 

Specifically, the rule provides a detailed 

description with respect to the 

computation of the PEL. The PEL is 

calculated in terms of PUM costs and 

represents the costs associated with the 

project except for utilities and add-ons. 

HUD will calculate the PEL using the 

ten variables from the Cost Study and 

their associated coefficients (i.e., values 

that are expressed in percentage terms). 

Comment: HUD should make further 

adjustments to the Cost Study 

methodology for calculating the PEL. 

Several commenters suggested changes 

in the Cost Study’s methodology for 

developing the PEL. Suggestions 

provided by the commenters included: 

(1) Eliminating ceilings; (2) providing 

additional funding to take into account 

costs associated with older properties; 

(3) removing the four percent reduction 

for PELs greater than $325; and (4) 

modifying statistical techniques. 

HUD Response. HUD has not adopted 

the suggestions made by the 

commenters for changes in the Cost 

Study methodology for calculating the 

PEL. All of the suggested changes to the 

PEL methodology were discussed by the 

Committee during the negotiated 

rulemaking sessions. HUD believes that 

the Cost Study methodology is sound 

and should be preserved. The final rule 

provides certain add-ons that went 

beyond the Cost Study’s 

recommendations (for example, the 

information technology (IT) fee) and 

provides additional financial incentives 

(for example, the freezing of rental 

income for three years). 

Comment: HUD should clarify 

application of the rule to mixed-finance 

projects. Referring to § 990.165(g), 

which grandfathers existing mixedfinance agreements for purposes of 

funding, one commenter raised 

technical and implementation issues 

regarding the applicability of the rule 

and, in particular, the asset management 

provisions, including project-based 

budgeting and accounting, and the 

calculation of operating subsidy for 

mixed-finance developments. The 

commenter asked about the treatment of 

the development-wide replacement 

reserves in the determination of the PEL 

for mixed-finance developments and the 

use of the non-profit coefficient when 

determining the PEL for mixed-finance 

developments. The commenter also 

inquired about the requirements for 

project-based budgeting and accounting, 

as well as about determination of 

compliance with asset management for 

mixed-finance developments that are 

owned and managed by entities other 

than PHAs and for which the owner and 

manager handle all management and 

provide information and financial 

reports to PHAs for review and 

monitoring. 

HUD Response. HUD views all public 

housing units under an Annual 

Contributions Contract (ACC) as public 

housing assets, regardless of where they 

are located or whether they are part of 

a mixed-finance development or a 

public housing development. As such, 

the non-profit coefficient will be 

applied to the PEL for public housing 

units in mixed-finance developments. 

However, there will be no separate addon to cover the cost of replacement 

reserves that are established in mixedfinance developments, which are not 

operating costs, per se. With regard to 

how the requirements for project-based 

budgeting and accounting and how the 

determination of compliance with asset 

management will apply to mixedfinance developments, HUD will issue 

this information in future guidance on 

these matters. 

Comment: Mixed-finance 

developments should not receive 

different subsidy amounts. One 

commenter wrote that § 990.165(g) 

allows PHAs with certain mixed 

developments to receive a higher PEL 

immediately, rather than requiring the 

higher PEL to be phased in, and that this 

is contradictory to the provisions of 

§ 990.235. 

HUD Response. The provision in 

§ 990.165(g) regarding the level of 

funding that PHAs would receive for 

certain mixed-finance projects was 

included in the regulation for the 

express purpose of honoring the 

structure of those mixed-finance 

agreements. Because the financing and 

approval in mixed-finance agreements is 

tied to a specific level of funding, the 

Committee agreed that future funding 

should continue at that level, subject to 

appropriations. 

Comments Regarding Subpart C—

Utilities 

Subpart C describes the Utilities 

Expense Level (UEL) component of the 

Operating Fund formula. The UEL 

includes the computation of the current 

consumption level and the rolling base 

consumption level. In addition, a PHA 

that undertakes energy conservation 

measures financed by an entity other 

than HUD may qualify under this rule 

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 54991 

for financial incentives with HUD 

approval. 

Comment: HUD should clarify that 

‘‘other direct costs’’ are also eligible for 

additional operating subsidy as part of 

an energy conservation contract and 

define what constitutes ‘‘direct costs.’’

Several commenters wrote that 

proposed § 990.185(a)(3) inadvertently 

omitted language agreed to by the 

Committee which provided that the 

PHA is eligible for additional operating 

subsidy for the cost of amortizing the 

loan and ‘‘other direct costs related to 

the energy project under the contract.’’

In addition, the commenter suggested 

that HUD define the type of costs that 

are eligible for additional operating 

subsidy. 

HUD Response. The language 

regarding the ‘‘other direct costs’’ was 

inadvertently omitted from the April 14, 

2005, proposed rule. As noted above in 

this preamble, HUD has adopted the 

suggestion of the commenters and has 

inserted the suggested language in 

§ 990.185(a)(3) of this final rule. HUD 

will provide additional clarification in 

subsequent guidance as to the types of 

direct costs that will be eligible for the 

additional operating subsidy. 

Comment: HUD should modify the 

definition of ‘‘utility rate’’ from ‘‘actual 

average rate’’ to ‘‘actual weighted 

average.’’ The April 14, 2005, proposed 

rule at § 990.115 defined ‘‘utility rate’’

as ‘‘the actual average rate for any given 

utility for the most recent 12-month 

period that ended the June 30th prior to 

the beginning of the applicable funding 

period.’’ One commenter requested that 

the definition be modified to provide for 

an ‘‘actual weighted average’’ rather 

than an ‘‘actual average weight.’’ The 

commenter wrote that a simple average 

may understate the true utility rate 

because natural gas and heating oil 

prices tend to be higher during winter 

when usage is higher, and lower in the 

summer when usage is reduced. 

Conversely, electricity prices will tend 

to be lower in winter and higher in 

summer. Thus, in order to capture the 

true rate over a 12-month period, a 

weighted average would more 

accurately take into account seasonal 

usage and rates in use at that time. 

HUD Response. HUD has not adopted 

the suggestion made by the commenters. 

The Committee discussed various ways 

to calculate the UEL and it was 

determined that an actual average rate, 

not a weighted average, was the most 

appropriate means to capture utility 

rates for the past year. The final rule 

states that funding for utility expenses 

will be based on the most recent 12- 

month period, which includes both a 

heating and cooling season and will 

include an inflation/deflation factor. 

Furthermore, by shifting the funding to 

a calendar cycle and standardizing the 

rolling base to a July 1st to June 30th 

cycle, all PHAs will be funded for 

utilities on the same cycle. 

Comment: HUD should not prorate 

the incentives for energy conservation 

improvements. One commenter wrote 

that PHAs may be reluctant to undertake 

energy conservation measures because 

the incentives are subject to proration, 

and PHAs will be unable to realize the 

full amount of the subsidy associated 

with the incentives. The commenter 

suggested that the incentives for energy 

conservation improvements not be 

subject to proration. 

HUD Response. HUD has not adopted 

the suggestion made by the commenters. 

The Department believes that it would 

be inequitable to the approximately 

3,200 PHAs nationwide to provide 

special treatment for any one 

component of the formula. Because 

HUD regards all components of the 

Operating Fund formula to be of equal 

importance, HUD believes that it is 

more equitable when there is a proration 

to uniformly prorate operating subsidy 

eligibility based on all components. 

Comment: HUD should allow PHAs to 

substitute ‘‘future approved rates’’ as 

the basis for calculating a PHA’s utility 

subsidy. One commenter wrote that 

basing utility subsidy on the ‘‘most 

recent 12-month period that ended the 

June 30th prior to the beginning of the 

applicable funding period’’ may not 

adequately address near-term changes in 

utility costs. Specifically, the 

commenter wrote that rates used in the 

utility subsidy calculation may be at 

least nine months old at the time of 

calculation and over 12 months old at 

the beginning of the new fiscal year. The 

commenter suggested that language 

applicable to the current Operating 

Fund formula be added. The current 

formula language allows ‘‘future 

approved rates’’ to be used as the basis 

for utility subsidy calculation when 

these rate changes have been approved 

and published prior to the due date of 

the operating subsidy eligibility 

calculation to HUD. 

HUD Response. HUD has not adopted 

the suggestion made by the commenter. 

During the negotiated rulemaking 

sessions, the Committee recognized that 

the utility subsidy calculation time 

frame as specified in the rule might not 

adequately address near-term changes in 

utility rates. To address this concern, 

the Committee provided for the 

inclusion of an inflation/deflation factor 

in each PHA utility calculation. 

Comment: HUD should provide for 

large utility rate increases. One 

commenter requested that the PHAs that 

experience large utility rate increases 

that are greater than the inflation factor 

be given consideration in the 

calculation of the utility subsidy. 

HUD Response. In the negotiations, 

the Committee acknowledged and 

discussed that utility rate spikes above 

the rate of inflation have occurred in 

past fiscal years and could occur again. 

However, the Committee agreed that 

since year-end adjustments to the utility 

funding could no longer be processed 

due to congressional appropriation 

language, the new system of funding 

utilities under this final rule (based on 

the actual average rate from the last 

twelve months that ended on June 30 of 

the year prior to the funding year to be 

adjusted by an inflation/deflation factor) 

was the most reasonable and consistent 

way to fund utilities for all PHAs. If 

utility rates spike during the course of 

a PHA’s fiscal year, that increase will be 

picked up in the calculation of the UEL 

during the next fiscal year. 

Comment: Increases in utility costs 

lower rental income to PHAs with 

resident-paid utilities. One commenter 

wrote that when utility costs increase, 

PHAs with resident-paid utilities must 

increase utility allowances, thus 

lowering rental income to the PHA. The 

commenter wrote that since formula 

income will be frozen at the 2004 level, 

the PHA will have no recourse but to 

request a waiver for an adjustment to 

rental income. 

HUD Response. Section 990.170(e) 

addresses this issue in providing that, 

with regard to resident-paid utilities, 

increases/decreases in tenant utility 

allowances shall result in a 

commensurate increase/decrease in 

operating subsidy. HUD will issue 

guidance regarding the implementation 

of this language. 

Comment: HUD should provide 

incentives for PHAs that achieve energy 

efficiency programs. One commenter 

made this suggestion. 

HUD Response: HUD has retained the 

current incentives for energy efficiency 

programs, which are contained in 

§ 990.185. 

Comments Regarding Subpart C—Addons 

Comment: HUD should clarify which 

‘‘coordinators’’ are funded under the 

self-sufficiency add-on. Several 

commenters asked for clarification as to 

which program coordinators are 

included under § 990.190(a) and also 

whether additional coordinators could 

be funded. 

HUD Response. Section 990.190(a) 

provides that the self-sufficiency add-on 

will be ‘‘in accordance with HUD’s selfVerDate Aug<31>2005 16:24 Sep 16, 2005 Jkt 205001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\19SER2.SGM 19SER2
54992 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

sufficiency program regulations and 

notices.’’ HUD has issued guidance 

indicating that the Operating Fund will 

provide subsidy for elderly and disabled 

service coordinators for those PHAs that 

previously received funding under the 

Resident Opportunities and Self 

Sufficiency (ROSS) program, and at the 

levels they received funding under the 

ROSS program. This guidance may 

change to reflect program objectives; 

however, at present, there is no 

additional funding for these activities. 

Comment: HUD should provide PHAs 

with additional operating subsidy for 

Family Self-Sufficiency (FSS) 

coordinators. One commenter wrote that 

in FY 2004, HUD began to fund the cost 

of the FSS Coordinator program from 

the ROSS program, which led to the loss 

of FSS funding for many PHAs because 

ROSS is a competitive grant program. 

To compensate for this loss, the 

commenter recommended that every 

PHA with at least 25 public housing 

FSS slots approved in its FSS action 

plan receive operating subsidy for the 

full cost of one coordinator. Costs for 

other coordinators would fall outside 

the Operating Fund Program. 

HUD Response. At this time, in 

accordance with recent HUD guidance, 

funding for FSS coordinators is 

available only through the ROSS 

program. However, funding selfsufficiency coordinators is an eligible 

activity under the Operating Fund and, 

although no additional funds will be 

provided, PHAs can spend their 

operating subsidy on this type of 

activity. 

Comment: HUD should exclude FSS 

escrow deposits from calculation of 

formula income. One commenter wrote 

that under HUD’s current procedures, a 

PHA excludes FSS escrow deposits from 

the tenant income that are reported to 

HUD. The commenter expressed 

concern that under the new formula, 

which would freeze tenant income 

based on data from the audited financial 

statements for the purposes of 

determining operating subsidy, that FSS 

escrow deposits would no longer 

continue to be excluded from the 

formula income calculation. 

HUD Response. The rental income 

amount collected on PHA’s financial 

statements already excludes amounts 

from FSS escrow deposits. Thus, HUD 

will continue to exclude FSS escrow 

deposits when calculating the formula 

income component. 

Comment: HUD should provide PHAs 

with operating subsidy for contributions 

to FSS escrow accounts. One commenter 

wrote that the cost of contributions to 

the FSS escrow accounts should be 

included as an add-on to operating 

subsidy. The commenter indicated that 

HUD had in the past paid for the costs 

of the FSS escrow accounts by allowing 

PHAs to deduct contributions to the FSS 

escrow account from the rent roll 

reported to HUD for calculating 

operating subsidy. 

HUD Response. HUD has not adopted 

the suggestion made by the commenter 

to provide an add-on for PHA 

contributions to the FSS escrow 

account. HUD does not believe that a 

separate add-on is needed. As stated 

above, HUD will continue to exclude 

the FSS escrow deposits in the 

calculation of the formula income 

component. 

Comment: Other HUD grant programs 

for self-sufficiency activities should not 

be eliminated. One commenter asked if, 

with implementation of this final rule, 

other grant programs will be eliminated 

and whether PHAs will have to request 

and fund program coordinators through 

the use of operating subsidy. 

HUD Response. This final rule applies 

only to the Operating Fund Program. 

The final rule does not establish a new 

requirement, or remove or alter any 

existing requirement for the ROSS 

Program. 

Comment: HUD should provide 

additional funding through the 

Operating Fund formula to wellmanaged PHAs for resident services. 

One commenter made this suggestion. 

HUD Response. HUD has not adopted 

the suggestion of the commenter. While 

operating subsidy may be used to 

provide resident services (i.e., that is an 

eligible use of funds), HUD disagrees 

that additional funding should be 

provided outside the add-ons that 

already exist for self-sufficiency, as 

described in § 990.190(a), and resident 

participation, as described in 

§ 990.190(e). 

Comment: HUD should clarify 

whether PHAs will receive the add-on 

for payment in lieu of taxes (PILOT) in 

circumstances when the PILOT payment 

to the local municipality is waived. One 

commenter posed this question 

regarding the PILOT add-on described 

in § 990.190(i). 

HUD Response. The final rule 

provides that the add-on is based on a 

PHA’s ‘‘cooperation agreement or latest 

actual PILOT payment.’’ Providing that 

a cooperation agreement is in place, 

HUD will provide funding for PILOT 

regardless of whether the local 

government waives payment. 

Comment: HUD should clarify which 

activities can be funded with the add-on 

for resident participation. One 

commenter posed this question 

regarding the add-on described in 

§ 990.190(e). 

HUD Response. The final rule 

provides that the add-on is for the 

funding of ‘‘resident participation 

activities, including but not limited to 

those described in 24 CFR part 964.’’

The intent of this language was to allow 

resident participation funds to be used 

for a broader range of activities than 

outlined in 24 CFR part 964, including 

resident services. 

Comment: There may be an error in 

the example on the repositioning fee in 

§ 990.190(h)(4). One commenter 

submitted this observation. 

HUD Response. The language in 

§ 990.190(h)(4) should have referenced a 

PHA with a 1,000 unit inventory, not a 

1,000 EUM inventory. The language in 

this rule has been changed accordingly, 

and the calculation is now correct. 

Comment: HUD should provide an 

add-on to cover the cost of employee 

benefits. Several commenters wrote that 

because their PHA is part of the state 

retirement system and because much of 

their work force is unionized, the costs 

associated with employee benefits 

including retirement, health, and dental 

benefits have increased dramatically. 

The commenters wrote that these costs 

are not reflected in the FHA cost 

structure or in other PHAs. The 

commenters suggested that HUD 

provide an add-on to cover the costs 

associated with employee benefits. 

HUD Response. HUD has not adopted 

the suggestion made by the commenters. 

As the commenters acknowledged, their 

PHAs may be somewhat unique in that 

they belong to a state pension system, 

which is not the case for most PHAs. To 

provide such an add-on would be unfair 

to other PHAs. The new Operating Fund 

formula takes a ‘‘benchmark’’ approach. 

It represents what essentially other nonprofit operators would spend on 

housing in the same market with similar 

characteristics. The model does not 

attempt to reimburse PHAs for 

requirements imposed uniquely on 

them by state or local governments. 

Rather, the formula represents a 

reasonable amount that other housing 

operators would incur to run the 

properties. 

Comment: HUD should use interim 

rulemaking to issue procedures for 

changes in subsidy due to changes in 

laws, regulations, or the economy. 

Section 990.190(i) provides that in the 

event that HUD determines that 

enactment of a Federal law or revision 

in HUD or other Federal regulations has 

caused or will cause a significant 

change in expenditures of a continuing 

nature above the PEL and UEL, HUD 

may, at its sole discretion, decide to 

prescribe a procedure under which the 

PHA may apply for or may receive an 

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 54993 

adjustment in operating subsidy. One 

commenter suggested that HUD should 

use interim rulemaking to establish such 

procedures. The commenter wrote that 

this would ensure that the relevant 

factors have been considered and that 

adequate procedures are provided. 

HUD Response. HUD has not revised 

the rule in response to this comment. 

The language referred to by the 

commenter, which was agreed to by the 

Committee, grants HUD the necessary 

authority to determine the process 

under which PHAs may apply for 

subsidy adjustments. Where 

appropriate, HUD will issue an interim 

rule to establish these procedures. 

However, interim rulemaking may not 

be the best choice in all circumstances, 

and HUD does not believe it would be 

appropriate to limit the available 

options as suggested by the commenter. 

Comments Regarding Subpart D—

Formula Income 

Comment: HUD should provide for 

regulatory review in determining 

changes to the formula income 

component after FY 2008. Several 

commenters objected to the preamble 

language of the April 14, 2005, proposed 

rule indicating that HUD, after FY 2008, 

will determine how PHA income is to 

be treated through non-regulatory 

means. The commenter suggested that 

HUD clarify that the determination of 

changes to PHA income post-FY 2008 be 

accomplished through regulatory means 

so that the public can comment. 

HUD Response. HUD has not revised 

the rule in response to these comments. 

However, HUD does agree that 

residents, organizations representing 

residents, and other interested parties 

should have an opportunity to submit 

comments. To that end, the preamble to 

the April 14, 2005, proposed rule 

explicitly stated that the public will 

have an opportunity to comment before 

HUD makes the post-2008 policy 

determination on the income 

component of the formula (see 70 FR 

19858 at 19862, first column). 

Comments Regarding Subpart E—

Determination and Payment of 

Operating Subsidy 

Comment: Clarify the phrase ‘‘two 

funding levels.’’ One commenter wrote 

that it is not clear what is meant by the 

phrase ‘‘two funding levels’’ in 

§ 990.230(a). The commenter wrote that 

neither funding level is explained 

clearly or referenced. 

HUD Response. The phrase ‘‘two 

funding levels’’ refers to the funding 

level under the current formula and the 

funding level under the new formula 

established by this final rule, as 

explained in § 990.225, which describes 

how HUD will determine the amount of 

a PHA’s increase or decrease in subsidy. 

Comment: The application of the 

inflation factor each year will result in 

a higher PEL during the phase-in of 

subsidy reductions. One commenter 

wrote that the application of the 

inflation factor each year will result in 

an increase in the PEL, thereby changing 

the dollar amounts of the subsidy 

reductions that will occur each year 

during the five-year phase-in of 

reductions. 

HUD Response. As provided in 

§ 990.225, HUD will calculate the 

amount of a PHA’s reduction or gain in 

operating subsidy only one time after 

the effective date of the final rule. The 

calculation will be made in terms of 

2004 dollars. The resulting dollar 

amount of the loss or gain is the amount 

that all reductions or gains will be built 

on during the respective phase-in 

periods. Thus, the inflation factor will 

not impact the calculation of the PEL 

each year for purposes of the amount of 

loss or gain. 

Comment: Objection to calendar 

funding when PHAs have different fiscal 

year ends. One commenter wrote that 

HUD should consider the impact that 

calendar year funding will have on 

PHAs whose fiscal years are not 

calendar years. The commenter wrote 

that, when PHAs receive subsidy from 

two different federal fiscal years, they 

would experience operating budget and 

reporting issues that HUD should 

address. 

HUD Response. Congress directed 

HUD to change from funding the 

operating subsidy on a fiscal year basis 

to funding it on a calendar year basis in 

HUD’s 2005 appropriations. HUD has 

implemented this change without 

requiring PHAs to change their fiscal 

year ends and will issue guidance to 

assist PHAs in this change in the 

funding cycle. When completing 

operating budgets and financial reports, 

PHAs will use procedures similar to 

those that they currently use for capital 

fund, ROSS, and Section 8, which HUD 

does not fund on a PHA fiscal year 

basis. 

Comments Regarding Subpart F—

Transition Policy and Transition 

Funding 

Comment: When calculating 

transition funding, HUD should take 

into account changes in a PHA’s 

inventory. One commenter wrote that 

the rule does not address how transition 

funding is calculated if a PHA’s 

property inventory changes during the 

transition period, which would result in 

a different subsidy calculation. The 

commenter suggested that this section 

be rewritten to take into account 

changes in a PHA’s property inventory 

during the transition period. 

HUD Response. HUD has not adopted 

the suggestion made by the commenter. 

The Committee addressed this matter 

during the negotiated rulemaking 

sessions. The Committee decided that, 

overall, it would be unnecessarily 

complicated and administratively 

burdensome to recalculate the five-year 

transition funding for ‘‘decliners’’ and 

two-year transition funding for 

‘‘gainers’’ on an annual basis. Instead, 

the rule provides that the transition 

funding will be calculated in the first 

year based on FY 2004 data and is 

unchanged during the transition 

funding period. That said, the 

commenter’s suggestion is addressed 

through the PEL calculation, which 

provides that as properties leave or 

enter the PHA’s inventory, these 

changes will be reflected in the annual 

PEL calculation. 

Comment: The reductions in subsidy 

should be phased in differently. One 

commenter recommended that the 

reductions in subsidy be phased in 

differently, with more of the reductions 

occurring in the later years. Rather than 

phasing in reductions over five years at 

24 percent the first year, 43 percent the 

second year, 62 percent the third year, 

81 percent the fourth year, and with the 

full amount of the reduction being 

realized in the fifth year, the commenter 

suggested that the reduction would be 

managed more prudently by PHAs over 

five years at 18 percent the first year, 37 

percent the second year, 56 percent the 

third year, 76 percent the fourth year, 

and with the full amount of the 

reduction being realized in the fifth 

year. 

HUD Response. HUD has not adopted 

this approach to phasing in the 

reductions to subsidy. The final rule at 

§ 990.230 retains the five-year phase in 

schedule that was set forth in the April 

14, 2005, proposed rule and agreed to by 

the Committee. The Committee 

discussed the phase in of reductions at 

length and agreed on this schedule as 

reasonable. 

Comments Regarding Subpart G—

Appeals 

Comment: The Operating Fund 

formula does not provide adequate 

funding. A number of commenters 

wrote that the Operating Fund formula 

did not provide PHAs with sufficient 

funding to maintain well-run public 

housing. 

HUD Response. HUD has not revised 

the rule in response to these comments. 

Subpart G of the final rule provides five 

54994 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

types of appeals for PHAs that feel that 

their formula amount is inadequate. 

Comment: HUD should allow for 

appeals of individual property PELs. 

Two commenters inquired about the 

permissibility of PHAs appealing on an 

individual property PEL rather than on 

a portfolio basis. 

HUD Response. HUD has not adopted 

the suggestion of the commenters. As 

discussed by the Committee during 

negotiations, § 990.240(b) provides that 

appeals must cover an entire portfolio, 

not single projects, with the exception 

that the Assistant Secretary for Public 

and Indian Housing may accept appeals 

for less than an entire portfolio for PHAs 

with more than 5,000 public housing 

units. 

Comment: For appeals under 

§ 990.245(e), HUD should accept 

information other than actual expenses. 

One commenter stated that other 

information beyond actual expenses 

should be accepted as part of an appeal, 

because actual expenses are constrained 

by actual funding and, therefore, the 

costs of a PHA that has been 

underfunded will be understated. 

HUD Response. HUD has not revised 

the rule in response to this comment. 

However, HUD will provide subsequent 

guidance to clarify the type of data that 

is indicative of actual project costs and 

that will be accepted as part of an 

appeal. 

Comment: PEL calculation does not 

reflect the unique circumstances of 

certain PHAs. Several commenters 

wrote that the PEL calculations for their 

PHAs are incorrect. Several commenters 

wrote that the geographic coefficient 

applied to their PHA does not take into 

account the unique geographical 

location of the PHA and the location of 

its properties. Higher transportation 

costs, therefore, translate into higher 

costs for goods and services. 

HUD Response. During the negotiated 

rulemaking sessions, the Committee 

recognized that it was important that 

accurate data be used in the new 

formula calculations. As a result, the 

Committee determined that it would be 

appropriate to provide PHAs with the 

opportunity to appeal subsidy amounts 

under five different categories. 

Therefore, PHAs that believe that an 

Operating Fund formula component has 

a ‘‘blatant and objective flaw’’ and/or 

that the model’s predictions are not 

accurate because of ‘‘specific local 

conditions’’ can appeal their operating 

subsidy amount. 

Comment: A PHA cannot determine 

whether there is variance of ten percent 

or greater without knowing the factors 

or variables that can vary or be 

challenged. One commenter requested 

clarification on the sentence in 

§ 990.245(c) that reads: ‘‘To be eligible, 

the affected PHA must demonstrate a 

variance of ten percent or greater in its 

PEL.’’ The commenter wrote that a PHA 

cannot know if there is a variance of ten 

percent or more in order to appeal 

without knowing the factors or variable 

that can vary or be challenged. 

HUD Response. This ground of appeal 

covers the appeals of specific variables 

in the formula model that are not 

reliable for a particular PHA. Thus, any 

of the ten variables in the PEL 

calculation may be challenged. While 

HUD will be issuing more guidance on 

appeals, an example of an appeal under 

this paragraph would be when a PHA is 

physically located in a non-city central 

metropolitan area, but actually has all of 

the characteristics of a location in a city 

central metropolitan area. 

Comment: The independent assessors 

should be familiar with PHAs. One 

commenter urged that the professional 

who will conduct the independent 

assessments for appeals and 

determinations of compliance with asset 

management be familiar with PHAs, 

their mission, and how HUD 

requirements affect their structure and 

operations. 

HUD Response. The primary purpose 

of the appeals is to determine if the cost 

estimate produced by the formula is 

valid. Because the Harvard Cost Study 

was based on a benchmark model, so 

too will the appeals be based on what 

other non-profit operators of federally 

subsidized housing would spend to run 

the subject properties. Similarly, the 

asset management assessments would 

be based on basic principles of asset 

management for owners of subsidized 

housing. 

Comments Regarding Subpart H—Asset 

Management 

Comment: HUD should reconsider the 

requirement that PHAs with 250 units or 

more implement project-based 

budgeting and accounting. A number of 

commenters submitted comments on the 

requirement for project-based 

accounting and project-based 

accounting. Some of the commenters 

wrote that the requirement is 

unnecessary and a financial and 

administrative burden, particularly on 

smaller PHAs. Others commenters 

proposed different thresholds for 

applicability of the asset management 

requirements, such as 500 units and 

1,249 units. Another commenter wrote 

that, based on the number of units in its 

portfolio and their locations, it would be 

impossible to be an asset manager. 

HUD Response. HUD has not adopted 

the suggestion of the commenters. PHAs 

with less than 250 units can treat their 

entire public housing portfolio as one 

‘‘project.’’ Implementation of projectbased budgeting and accounting, as well 

as project-based management, were 

fundamental elements of both the Cost 

Study and the Committee 

Recommendations. HUD remains 

committed to their implementation. 

Comment: HUD should phase in the 

implementation of asset management. A 

number of commenters suggested that, 

because of the organizational and other 

changes required of a PHA to move to 

asset management, there should be a 

phase-in approach. One commenter 

suggested that that phase in be based on 

PHA size. 

HUD Response. HUD has not adopted 

the suggestion of the commenter. The 

implementation dates in the rule were 

considered and adopted by the 

Committee. Different phase-in dates 

would not only treat different classes of 

PHAs in a disparate manner, but would 

also create an administrative burden on 

HUD and its systems. 

Comment: Central office cost centers 

are unnecessary. Many commenters 

wrote that the establishment of a central 

office cost center is an unneeded level 

of accounting. Several commenters 

wrote that PHAs should be allowed to 

develop alternative methods of 

allocating central office costs, consistent 

with OMB Circular A–87. One 

commenter proposed distributing the 

actual costs between the projects based 

on size or utility consumption or any 

other method. Another commenter 

wrote that the fee-for-service system 

may work for some functions like 

centralized maintenance, but it may not 

work for others where it is difficult to 

determine a fee. Thus, PHAs should be 

allowed in some instances to allocate 

their costs, which will result in less 

cumbersome recordkeeping systems. 

HUD Response. HUD has not revised 

the rule in response to these comments. 

The use of a fee-for-service approach for 

the treatment of overhead and centrally 

provided services will ensure that such 

costs are reasonable and that projects 

are charged only for services received. 

These procedures are standard in the 

multifamily housing industry. As 

necessary, HUD will provide guidance 

on the use of a fee-for-service approach 

consistent with the accounting and 

management practices of the 

multifamily housing industry. 

Comment: The requirement to 

apportion assets, liabilities, and equity 

is unrealistic. One commenter wrote 

that because accounting has previously 

been maintained only at the ‘‘program’’

level and not at the ‘‘property’’ level, 

PHAs do not now segregate assets, 

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 54995 

liabilities, and equity by project. Hence, 

efforts to break out these amounts by 

project will be prone to error. HUD 

should require only the preparation of 

project operating statements and 

therefore not require project balance 

sheets. 

HUD Response. HUD has not revised 

the rule in response to the commenter. 

However, HUD recognizes that the 

transition to a project-based accounting 

system will raise questions and pose 

certain challenges for PHAs. To assist 

PHAs in making the transition, HUD 

will issue guidance, as necessary, on the 

apportionment of assets, liabilities, and 

equity. HUD believes that balance sheets 

will provide important information on 

each project’s financial position, 

increase PHAs’ access to debt financing, 

and improve monitoring of property 

performance. 

Comment: The 2007 deadline for 

implementation of project-based 

budgeting and accounting should be 

delayed. Commenters were particularly 

concerned that guidance has not been 

provided for PHAs to move forward 

with the changes they will need to make 

to their systems as well as other 

organizational arrangements. One 

commenter suggested that HUD provide 

PHAs with a minimum of 24 months to 

implement project-based systems after 

the requirement takes effect. 

HUD Response. HUD has not revised 

the rule in response to these comments. 

HUD believes that the change to projectbased accounting is feasible within the 

FY 2007 time frame. HUD plans to make 

the changes to project-based accounting 

through the current Financial 

Assessment Subsystem (FASS–PH), 

where PHAs already have had 

experience submitting PHA-level 

financial data to HUD. As noted above, 

HUD intends to issue guidance that will 

assist PHAs in making the transition to 

project-based budgeting within the 

targeted time frames. 

Comment: PHAs require financial 

assistance to implement the new 

accounting, budgeting, and 

management changes. Many 

commenters wrote that HUD should 

provide PHAs with special transition 

funds to address the costly changes in 

technology and other areas required by 

the rule. 

HUD Response. The Committee 

discussed, but did not adopt in the 

Committee Recommendations, special 

transition funds. The final rule contains 

two operating subsidy add-ons that can 

be used by PHAs toward converting to 

and maintaining technology to facilitate 

asset management. The first is the asset 

management fee described in 

§ 990.190(f) that provides an additional 

$4 PUM to PHAs with 250 or more units 

and a $2 PUM to PHAs with less than 

250 units that choose to convert (PHAs 

can charge an even higher asset 

management fee, provided that the fee is 

‘‘reasonable’’ and if the project generates 

excess cash flow). The second is the 

information technology fee described in 

§ 990.190(g) that provides an additional 

$2 PUM to all PHAs. 

Comment: HUD should consult PHAs 

when establishing guidance. HUD 

should establish guidance on converting 

to asset management in an open manner 

and consult with PHAs in doing so. 

HUD Response. As indicated in 

previous responses to the commenters, 

HUD will be issuing a variety of 

guidance and, where appropriate, 

intends to consult with its constituents 

in the development of the guidance. 

Comment: HUD should provide 

training on these new asset management 

requirements. One commenter asked 

about the type and quality of training 

that HUD plans to provide for PHAs, 

auditors, and field staff to transition to 

asset management. 

HUD Response. HUD intends to 

conduct training shortly following 

publication of this final rule. This 

training, in addition to the guidance that 

will be issued, should assist PHAs, 

auditors, and field staff in this 

transition. 

Comment: Although other regulatory 

changes (outside of the Operating Fund 

Program) are required to complete the 

conversion to asset management, HUD 

should take care not to abandon the 

segment of the population public 

housing serves. One commenter wrote 

that, if asset management is to take 

advantage of cost savings in the private 

market, then certain regulations unique 

to public housing should be removed 

that restrict PHA movement in that 

direction. However, these changes 

should not cause PHAs to abandon the 

segment of the population that public 

housing is intended to serve. 

HUD Response. The Cost Study 

showed that, while generally similar, 

there were certain statutory and 

regulatory requirements that, if 

modified, would align public housing 

more closely to the regulatory 

environment of other multifamilyassisted housing programs. As stated in 

the preamble to the April 14, 2005, 

proposed rule, the Committee 

recognized that, with the conversion to 

asset management, other changes were 

necessary. These changes, including 

deregulation efforts to continue to 

lessen burdens on PHAs, will be 

implemented separately and HUD will 

provide opportunity for input by 

stakeholders, as appropriate. 

Comment: In some cases, centralized 

services are more efficient. Several 

commenters wrote that asset 

management was not a cost-effective 

way to run public housing, especially 

for PHAs that have small to moderatesized projects for whom centralized or 

quasi project-based management is 

superior. Forcing PHAs to decentralize 

will increase costs, duplicate efforts, 

and decrease ability to respond to 

resident needs. 

HUD Response. Section 990.275 

expressly provides that PHAs can 

continue to maintain centralized 

property management services. 

However, consistent with practices in 

multifamily housing, this section further 

provides that services must be arranged 

in accordance with the best interests of 

the property and that the cost for any 

centralized service must be reasonable. 

Comment: PHAs already run more 

efficiently than FHA properties and, 

therefore, asset management is 

unnecessary. Several commenters wrote 

that there was no compelling reason for 

PHAs to convert to asset management 

since there is no evidence that 

conversion will improve efficiency and 

effectiveness. The Cost Study 

recommended an increase in subsidy to 

PHAs based on a comparison between 

AELs and the FHA benchmark, thereby 

showing that PHAs administer their 

properties more efficiently than FHA. 

HUD Response. The fact that the Cost 

Study recommended increased funding 

levels, based on costs in other federally 

subsidized housing, does not 

necessarily mean that PHAs operate 

efficiently. Indeed, the Cost Study’s 

recommendations to move to asset 

management were related to concerns 

that program effectiveness could be 

greatly improved. 

Comment: Other institutions similar 

to PHAs do not perform asset 

management. One commenter wrote 

that, although project-based 

management is the norm for the 

multifamily housing industry, it is not 

the norm for other institutions that are 

similar to PHAs. Universities, municipal 

governments, school systems, and 

hospitals manage multiple properties 

and do so more similarly to PHAs than 

the multifamily housing industry. 

HUD Response. HUD believes that the 

appropriate peer group in this situation 

is, indeed, the multifamily housing 

industry and not entities such as 

universities, schools, or hospitals. In the 

multifamily housing industry, projectbased budgeting, accounting, and 

management is the norm. 

Comment: HUD should require PHAs 

to distribute reports to resident 

organizations and other entities with 

54996 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

oversight and monitoring 

responsibilities. Several commenters 

suggested that HUD add language to 

§ 990.285(b) and § 990.315(a) requiring 

that PHAs provide project-based 

budgets, year-end statements, and 

operating budgets to resident 

organizations and other entities. 

HUD Response. HUD has not adopted 

the suggestion of the commenters. While 

HUD does encourage PHAs to discuss 

these documents with resident 

organizations and other entities, HUD 

believes that this decision should be left 

to individual PHAs and their PHA 

Board of Commissioners. 

Comment: HUD should include 

responsibilities to resident organizations 

in the responsibilities of asset 

management. One commenter suggested 

that § 990.270 be amended to include 

language regarding a PHA’s 

responsibility to resident organizations. 

The commenter suggested that 

‘‘responding to and supporting 

independent resident organizations, 

consulting with residents and the 

Resident Advisory Board (RAB) in the 

development of and any amendments to 

the PHA’s annual and five year plans’’

be added to the sentence at the end of 

the section. 

HUD Response. HUD has not adopted 

this suggestion. The requirement 

regarding PHA annual and five-year 

plans are codified in 24 CFR part 903, 

including all of the requirements for 

resident participation and meetings. 

VII. Findings and Certifications 

Information Collection Requirements 

The revised information collection 

requirements contained in this final rule 

have been submitted to the Office of 

Management and Budget (OMB) for 

review under the Paperwork Reduction 

Act of 1995 (44 U.S.C. 3501–3520). In 

accordance with the Paperwork 

Reduction Act, an agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless the collection 

displays a valid control number. The 

information collection requirements for 

the Operating Fund program have been 

approved by OMB and assigned OMB 

Control Number 2577–0029. The revised 

public reporting burden for this 

collection of information is estimated to 

include the time for reviewing the 

instructions, searching existing data 

sources, gathering and maintaining the 

data needed, and completing and 

reviewing the collection of information. 

Information on the revised estimated 

public reporting burden is provided in 

the following table: 

HUD form number Number of 

respondents 

Responses 

per 

respondents 

Total annual 

responses 

Hours per 

response Total hours 

HUD–52722 ......................................................................... 3,141 1 1 .75 2,355.75 

HUD–52723 ......................................................................... 3,141 1 1 .75 2,355.75 

HUD–53087 ......................................................................... 24 1 1 .75 18.00 

Total .............................................................................. ........................ ........................ ........................ ........................ 4,729.50 

Environmental Impact 

A Finding of No Significant Impact 

with respect to the environment for this 

rule was made at the proposed rule 

stage in accordance with HUD 

regulations at 24 CFR part 50, which 

implement section 102(2)(C) of the 

National Environmental Policy Act of 

1969 (42 U.S.C. 4321 et seq.). The 

Finding of No Significant Impact 

remains applicable to this final rule and 

is available for public inspection 

between 8 a.m. and 5 p.m. weekdays in 

the Regulations Division, Office of the 

General Counsel, Department of 

Housing and Urban Development, 451 

Seventh Street, SW., Room 10276, 

Washington, DC 20410–5000. 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

(5 U.S.C. 601 et seq.), generally requires 

an agency to conduct a regulatory 

flexibility analysis of any rule subject to 

notice and comment rulemaking 

requirements unless the agency certifies 

that the rule will not have a significant 

economic impact on a substantial 

number of small entities. The entities 

that would be subject to this rule are 

public housing agencies that administer 

public housing. Under the definition of 

‘‘small governmental jurisdiction’’ in 

section 601(5) of the RFA, the 

provisions of the RFA are applicable 

only to those public housing agencies 

that are part of a political jurisdiction 

with a population of under 50,000 

persons. The number of entities 

potentially affected by this rule is 

therefore not substantial. Further, the 

proposed regulatory changes were 

developed using negotiated rulemaking 

procedures and with the active 

participation of PHAs that will be 

affected by the revised Operating Fund 

requirements. The membership of the 

negotiated rulemaking committee 

included representatives of smaller 

PHAs, which expressed the views and 

concerns of these PHAs during 

development of the proposed regulatory 

changes. 

Accordingly, the undersigned certifies 

that this rule will not have a significant 

economic impact on a substantial 

number of small entities. 

Executive Order 13132, Federalism 

Executive Order 13132 (entitled 

‘‘Federalism’’) prohibits an agency from 

publishing any rule that has federalism 

implications if the rule either imposes 

substantial direct compliance costs on 

state and local governments and is not 

required by statute, or the rule preempts 

state law, unless the agency meets the 

consultation and funding requirements 

of section 6 of the executive order. This 

rule does not have federalism 

implications and will not impose 

substantial direct compliance costs on 

State and local governments nor 

preempt State law within the meaning 

of the executive order. 

Unfunded Mandates Reform Act 

Title II of the Unfunded Mandates 

Reform Act of 1995 (2 U.S.C. 1531–

1538) (UMRA) establishes requirements 

for Federal agencies to assess the effects 

of their regulatory actions on State, 

local, and tribal governments, and on 

the private sector. This rule does not 

impose any Federal mandates on any 

State, local, or tribal government, nor on 

the private sector, within the meaning of 

UMRA. 

Executive Order 12866, Regulatory 

Planning and Review 

The Office of Management and Budget 

(OMB) reviewed this rule under 

Executive Order 12866 (‘‘entitled 

Regulatory Planning and Review’’). This 

rule was determined to be economically 

significant under E.O. 12866. The 

docket file is available for public 

inspection in the Regulations Division, 

Office of General Counsel, Department 

of Housing and Urban Development, 

451 Seventh Street, SW., Room 10276, 

Washington, DC 20410–0500. Due to 

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 54997 

security measures at the HUD 

Headquarters building, please schedule 

an appointment to review the docket file 

by calling the Regulations Division at 

(202) 708–3055 (this is not a toll-free 

number). The Economic Analysis 

prepared for this rule is also available 

for public inspection at the same 

location and on HUD’s Web site at 

http://www.hud.gov. 

Congressional Review of Major Proposed 

Rules 

This rule is a ‘‘major rule’’ as defined 

in Chapter 8 of 5 U.S.C. The final rule 

has been submitted for congressional 

review in accordance with this chapter. 

Catalog of Federal Domestic Assistance 

The Catalog of Federal Domestic 

Assistance (CFDA) program number is 

14.850. 

List of Subjects in 24 CFR Part 990 

Accounting, Grant programs-housing 

and community development, Public 

housing, Reporting and recordkeeping 

requirements. 

■ Accordingly, for the reasons described 

in the preamble, HUD revises 24 CFR 

part 990 to read as follows: 

PART 990—THE PUBLIC HOUSING 

OPERATING FUND PROGRAM 

Subpart A—Purpose, Applicability, 

Formula, and Definitions 

Sec. 

990.100 Purpose. 

990.105 Applicability. 

990.110 Operating fund formula. 

990.115 Definitions. 

990.116 Environmental review 

requirements. 

Subpart B—Eligibility for Operating 

Subsidy; Computation of Eligible Unit 

Months 

990.120 Unit months. 

990.125 Eligible units. 

990.130 Ineligible units. 

990.135 Eligible unit months (EUMs). 

990.140 Occupied dwelling units. 

990.145 Dwelling units with approved 

vacancies. 

990.150 Limited vacancies. 

990.155 Addition and deletion of units. 

Subpart C—Calculating Formula Expenses 

990.160 Overview of calculating formula 

expenses. 

990.165 Computation of project expense 

level (PEL). 

990.170 Computation of utilities expense 

level (UEL): Overview. 

990.175 Utilities expense level: 

Computation of the current consumption 

level. 

990.180 Utilities expense level: 

Computation of the rolling base 

consumption level. 

990.185 Utilities expense level: Incentives 

for energy conservation/rate reduction. 

990.190 Other formula expenses (add-ons). 

Subpart D—Calculating Formula Income 

990.195 Calculation of formula income. 

Subpart E—Determination and Payment of 

Operating Subsidy 

990.200 Determination of formula amount. 

990.205 Fungibility of operating subsidy 

between projects. 

990.210 Payment of operating subsidy. 

990.215 Payments of operating subsidy 

conditioned upon reexamination of 

income of families in occupancy. 

Subpart F—Transition Policy and Transition 

Funding 

990.220 Purpose. 

990.225 Transition determination. 

990.230 PHAs that will experience a 

subsidy reduction. 

990.235 PHAs that will experience a 

subsidy increase. 

Subpart G—Appeals 

990.240 General. 

990.245 Types of appeals. 

990.250 Requirements for certain appeals. 

Subpart H—Asset Management 

990.255 Overview. 

990.260 Applicability. 

990.265 Identification of projects. 

990.270 Asset management. 

990.275 Project-based management (PBM). 

990.280 Project-based budgeting and 

accounting. 

990.285 Records and reports. 

990.290 Compliance with asset 

management requirements. 

Subpart I—Operating Subsidy for 

Properties Managed by Resident 

Management Corporations (RMCs) 

990.295 Resident Management Corporation 

operating subsidy. 

990.300 Preparation of operating budget. 

990.305 Retention of excess revenues. 

Subpart J—Financial Management Systems, 

Monitoring, and Reporting 

990.310 Purpose—General policy on 

financial management, monitoring, and 

reporting. 

990.315 Submission and approval of 

operating budgets. 

990.320 Audits. 

990.325 Record retention requirements. 

Authority: 42 U.S.C. 1437g; 42 U.S.C. 

3535(d). 

Subpart A—Purpose, Applicability, 

Formula, and Definitions 

§ 990.100 Purpose. 

This part implements section 9(f) of 

the United States Housing Act of 1937 

(1937 Act), (42 U.S.C. 1437g). Section 

9(f) establishes an Operating Fund for 

the purposes of making assistance 

available to public housing agencies 

(PHAs) for the operation and 

management of public housing. In the 

case of unsubsidized housing, the total 

expenses of operating rental housing 

should be covered by the operating 

income, which primarily consists of 

rental income and, to some degree, 

investment and non-rental income. In 

the case of public housing, the 

Operating Fund provides operating 

subsidy to assist PHAs to serve low, 

very low, and extremely low-income 

families. This part describes the policies 

and procedures for Operating Fund 

formula calculations and management 

under the Operating Fund Program. 

§ 990.105 Applicability. 

(a) Applicability of this part. (1) With 

the exception of subpart I of this part, 

this part is applicable to all PHA rental 

units under an Annual Contributions 

Contract (ACC). This includes PHAs 

that have not received operating subsidy 

previously, but are eligible for operating 

subsidy under the Operating Fund 

Formula. 

(2) This part is applicable to all rental 

units managed by a resident 

management corporation (RMC), 

including a direct-funded RMC. 

(b) Inapplicability of this part. (1) This 

part is not applicable to Indian Housing, 

section 5(h) and section 32 

homeownership projects, the Housing 

Choice Voucher Program, the section 23 

Leased Housing Program, or the section 

8 Housing Assistance Payments 

Programs. 

(2) With the exception of subpart J of 

this part, this part is not applicable to 

the Mutual Help Program or the 

Turnkey III Homeownership 

Opportunity Program. 

§ 990.110 Operating fund formula. 

(a) General formula. (1) The amount 

of annual contributions (operating 

subsidy) each PHA is eligible to receive 

under this part shall be determined by 

a formula. 

(2) In general, operating subsidy shall 

be the difference between formula 

expense and formula income. If a PHA’s 

formula expense is greater than its 

formula income, then the PHA is 

eligible for an operating subsidy. 

(3) Formula expense is an estimate of 

a PHA’s operating expense and is 

determined by the following three 

components: Project Expense Level 

(PEL), Utility Expense Level (UEL), and 

other formula expenses (add-ons). 

Formula expense and its three 

components are further described in 

subpart C of this part. Formula income 

is an estimate for a PHA’s non-operating 

subsidy revenue and is further 

described in subpart D of this part. 

(4) Certain portions of the operating 

fund formula (e.g., PEL) are calculated 

in terms of per unit per month (PUM) 

amounts and are converted into whole 

54998 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

dollars by multiplying the PUM amount 

by the number of eligible unit months 

(EUMs). EUMs are further described in 

subpart B of this part. 

(b) Specific formula. (1) A PHA’s 

formula amount shall be the sum of the 

three formula expense components 

calculated as follows: {[(PEL multiplied 

by EUM) plus (UEL multiplied by EUM) 

plus add-ons] minus (formula income 

multiplied by EUM)}. 

(2) A PHA whose formula amount is 

equal to or less than zero is still eligible 

to receive operating subsidy equal to its 

most recent actual audit cost for its 

Operating Fund Program. 

(3) Operating subsidy payments will 

be limited to the availability of funds as 

described in § 990.210(c). 

(c) Non-codified formula elements. 

This part defines the major components 

of the Operating Fund Formula and 

describes the relationships of these 

various components. However, this part 

does not codify certain secondary 

elements that will be used in the revised 

Operating Fund Formula. HUD will 

more appropriately provide this 

information in non-codified guidance, 

such as a Handbook, Federal Register 

notice, or other non-regulatory means 

that HUD determines appropriate. 

§ 990.115 Definitions. 

The following definitions apply to the 

Operating Fund program: 

1937 Act means the United States 

Housing Act of 1937 (42 U.S.C. 1437 et 

seq.). 

Annual contributions contract (ACC) 

is a contract prescribed by HUD for 

loans and contributions, which may be 

in the form of operating subsidy, 

whereby HUD agrees to provide 

financial assistance and the PHA agrees 

to comply with HUD requirements for 

the development and operation of its 

public housing projects. 

Asset management is a management 

model that emphasizes project-based 

management, as well as long-term and 

strategic planning. 

Current consumption level is the 

amount of each utility consumed at a 

project during the 12-month period that 

ended the June 30th prior to the 

beginning of the applicable funding 

period. 

Eligible unit months (EUM) are the 

actual number of PHA units in eligible 

categories expressed in months for a 

specified time frame and for which a 

PHA receives operating subsidy. 

Formula amount is the amount of 

operating subsidy a PHA is eligible to 

receive, expressed in whole dollars, as 

determined by the Operating Fund 

Formula. 

Formula expense is an estimate of a 

PHA’s operating expense used in the 

Operating Fund Formula. 

Formula income is an estimate of a 

PHA’s non-operating subsidy revenue 

used in the Operating Fund Formula. 

Funding period is the calendar year 

for which HUD will distribute operating 

subsidy according to the Operating 

Fund Formula. 

Operating Fund is the account/ 

program authorized by section 9 of the 

1937 Act for making operating subsidy 

available to PHAs for the operation and 

management of public housing. 

Operating Fund Formula (or Formula) 

means the data and calculations used 

under this part to determine a PHA’s 

amount of operating subsidy for a given 

period. 

Operating subsidy is the amount of 

annual contributions for operations a 

PHA receives each funding period 

under section 9 of the 1937 Act as 

determined by the Operating Fund 

Formula in this part. 

Other operating costs (add-ons) 

means PHA expenses that are 

recognized as formula expenses but are 

not included either in the project 

expense level or in the utility expense 

level. 

Payable consumption level is the 

amount for all utilities consumed at a 

project that the Formula recognizes in 

the computation of a PHA’s utility 

expense level at that project. 

Per unit per month (PUM) describes a 

dollar amount on a monthly basis per 

unit, such as Project Expense Level, 

Utility Expense Level, and formula 

income. 

Project means each PHA project under 

an ACC to which the Operating Fund 

Formula is applicable. However, for 

purposes of asset management, as 

described in subpart H of this part, 

projects may be as identified under the 

ACC or may be a reasonable grouping of 

projects or portions of a project or 

projects under the ACC. 

Project-based management is the 

provision of property management 

services that is tailored to the unique 

needs of each property, given the 

resources available to that property. 

Project expense level (PEL) is the 

amount of estimated expenses for each 

project (excluding utilities and add-ons) 

expressed as a PUM cost. 

Project units means all dwelling units 

in all of a PHA’s projects under an ACC. 

Rolling base consumption level 

(RBCL) is the average of the yearly 

consumption levels for the 36-month 

period ending on the June 30th that is 

18 months prior to the beginning of the 

applicable funding period. 

Transition funding is the timing and 

amount by which a PHA will realize 

increases and reductions in operating 

subsidy based on the new funding levels 

of the Operating Fund Formula. 

Unit months are the total number of 

project units in a PHA’s inventory 

expressed in months for a specified time 

frame. 

Utilities means electricity, gas, 

heating fuel, water, and sewerage 

service. 

Utilities expense level (UEL) is a 

product of the utility rate multiplied by 

the payable consumption level 

multiplied by the utilities inflation 

factor expressed as a PUM dollar 

amount. 

Utility rate (rate) means the actual 

average rate for any given utility for the 

most recent 12-month period that ended 

the June 30th prior to the beginning of 

the applicable funding period. 

Yearly consumption level is the actual 

amount of each utility consumed at a 

project during a 12-month period 

ending June 30th. 

§ 990.116 Environmental review 

requirements. 

The environmental review procedures 

of the National Environmental Policy 

Act of 1969 (42 U.S.C. 4332(2)(C)) and 

the implementing regulations at 24 CFR 

parts 50 and 58 are applicable to the 

Operating Fund Program. 

Subpart B—Eligibility for Operating 

Subsidy; Computation of Eligible Unit 

Months 

§ 990.120 Unit months. 

(a) Some of the components of HUD’s 

Operating Fund Formula are based on a 

measure known as unit months. Unit 

months represent a PHA’s public 

housing inventory during a specified 

period of time. The unit months eligible 

for operating subsidy in a 12-month 

period are equal to the number of 

months that the units are in an 

operating subsidy-eligible category, 

adjusted for changes in inventory (e.g., 

units added or removed), as described 

below. 

(b) A PHA is eligible to receive 

operating subsidy for a unit on the date 

it is both placed under the ACC and 

occupied. The date a unit is eligible for 

operating subsidy does not change the 

Date of Full Availability (DOFA) or the 

date of the End of Initial Operating 

Period (EIOP), nor does this provision 

place a project into management status. 

§ 990.125 Eligible units. 

A PHA is eligible to receive operating 

subsidy for public housing units under 

an ACC for: 

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 54999 

(a) Occupied dwelling units as 

defined in § 990.140; 

(b) A dwelling unit with an approved 

vacancy (as defined in § 990.145); and 

(c) A limited number of vacancies (as 

defined in § 990.150). 

§ 990.130 Ineligible units. 

(a) Vacant units that do not fall within 

the definition of § 990.145 or § 990.150 

are not eligible for operating subsidy 

under this part. 

(b) Units that are eligible to receive an 

asset-repositioning fee, as described in 

§ 990.190(h), are not eligible to receive 

operating subsidy under this subpart. 

§ 990.135 Eligible unit months (EUMs). 

(a) A PHA’s total number of EUMs 

will be calculated for the 12-month 

period from July 1st to June 30th that is 

prior to the first day of the applicable 

funding period, and will consist of 

eligible units as defined in § 990.140, 

§ 990.145, or § 990.150. 

(b)(1) The determination of whether a 

public housing unit satisfies the 

requirements of § 990.140, § 990.145, or 

§ 990.150 for any unit month shall be 

based on the unit’s status as of either the 

first or last day of the month, as 

determined by the PHA. 

(2) HUD reserves the right to 

determine the status of any and all 

public housing units based on 

information in its information systems. 

(c) The PHA shall maintain and, at 

HUD’s request, shall make available to 

HUD, specific documentation of the 

status of all units, including, but not 

limited to, a listing of the units, street 

addresses or physical address, and 

project/management control numbers. 

(d) Any unit months that do not meet 

the requirements of this subpart are not 

eligible for operating subsidy, and will 

not be subsidized by the Operating 

Fund. 

§ 990.140 Occupied dwelling units. 

A PHA is eligible to receive operating 

subsidy for public housing units for 

each unit month that those units are 

under an ACC and occupied by a public 

housing-eligible family under lease. 

§ 990.145 Dwelling units with approved 

vacancies. 

(a) A PHA is eligible to receive 

operating subsidy for vacant public 

housing units for each unit month the 

units are under an ACC and meet one 

of the following HUD-approved 

vacancies: 

(1) Units undergoing modernization. 

Vacancies resulting from project 

modernization or unit modernization 

(such as work necessary to reoccupy 

vacant units) provided that one of the 

following conditions is met: 

(i) The unit is undergoing 

modernization (i.e., the modernization 

contract has been awarded or force 

account work has started) and must be 

vacant to perform the work, and the 

construction is on schedule according to 

a HUD-approved PHA Annual Plan; or 

(ii) The unit must be vacant to 

perform the work and the treatment of 

the vacant unit is included in a HUDapproved PHA Annual Plan, but the 

time period for placing the vacant unit 

under construction has not yet expired. 

The PHA shall place the vacant unit 

under construction within two federal 

fiscal years (FFYs) after the FFY in 

which the capital funds are approved. 

(2) Special use units. Units approved 

and used for resident services, resident 

organization offices, and related 

activities, such as self-sufficiency and 

anti-crime initiatives. 

(b) On a project-by-project basis, 

subject to prior HUD approval and for 

the time period agreed to by HUD, a 

PHA shall receive operating subsidy for 

the units affected by the following 

events that are outside the control of the 

PHA: 

(1) Litigation. Units that are vacant 

due to litigation, such as a court order 

or settlement agreement that is legally 

enforceable; units that are vacant in 

order to meet regulatory and statutory 

requirements to avoid potential 

litigation (as covered in a HUDapproved PHA Annual Plan); and units 

under voluntary compliance agreements 

with HUD or other voluntary 

compliance agreements acceptable to 

HUD (e.g., units that are being held 

vacant as part of a court-order, HUDapproved desegregation plan, or 

voluntary compliance agreement 

requiring modifications to the units to 

make them accessible pursuant to 24 

CFR part 8). 

(2) Disasters. Units that are vacant due 

to a federally declared, state-declared, or 

other declared disaster. 

(3) Casualty losses. Damaged units 

that remain vacant due to delays in 

settling insurance claims. 

(c) A PHA may appeal to HUD to 

receive operating subsidy for units that 

are vacant due to changing market 

conditions (see subpart G of this part—

Appeals). 

§ 990.150 Limited vacancies. 

(a) Operating subsidy for a limited 

number of vacancies. HUD shall pay 

operating subsidy for a limited number 

of vacant units under an ACC if the 

annualized vacancy rate is less than or 

equal to: 

(1) Three percent of the PHA’s total 

unit inventory (not to exceed 100 

percent of the unit months under an 

ACC) for the period July 1, 2004, to June 

30, 2005, and 

(2) Three percent of the total units on 

a project-by-project basis based on the 

definition of a project under subpart H 

of this part, beginning July 1, 2005. 

(b) Exception for PHAs with 100 or 

fewer units. Notwithstanding paragraph 

(a) of this section, a PHA with 100 or 

fewer units will be paid operating 

subsidy for up to five vacant units not 

to exceed 100 percent of the unit 

months under an ACC. For example, a 

PHA with an inventory of 100 units and 

four vacancies during its fiscal year will 

be eligible for operating subsidy for all 

100 units. A PHA with an inventory of 

50 units with seven vacancies during its 

fiscal year will be eligible for operating 

subsidy for 48 units. 

§ 990.155 Addition and deletion of units. 

(a) Changes in public housing unit 

inventory. To generate a change to its 

formula amount within each one-year 

funding period, PHAs shall periodically 

(e.g., quarterly) report the following 

information to HUD, during the funding 

period: 

(1) New units that were added to the 

ACC, and occupied by a public housingeligible family during the prior 

reporting period for the one-year 

funding period, but have not been 

included in the previous EUMs’ data; 

and 

(2) Projects, or entire buildings in a 

project, that are eligible to receive an 

asset repositioning fee in accordance 

with the provisions in § 990.190(h). 

(b) Revised EUM calculation. (1) For 

new units, the revised calculation shall 

assume that all such units will be fully 

occupied for the balance of that funding 

period. The actual occupancy/vacancy 

status of these units will be included to 

calculate the PHA’s operating subsidy in 

the subsequent funding period after 

these units have one full year of a 

reporting cycle. 

(2) Projects, or entire buildings in a 

project, that are eligible to receive an 

asset repositioning fee in accordance 

with § 990.190(h) are not to be included 

in the calculation of EUMs. Funding for 

these units is provided under the 

conditions described in § 990.190(h). 

Subpart C—Calculating Formula 

Expenses 

§ 990.160 Overview of calculating formula 

expenses. 

(a) General. Formula expenses 

represent the costs of services and 

materials needed by a well-run PHA to 

sustain the project. These costs include 

items such as administration, 

maintenance, and utilities. HUD also 

55000 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

determines a PHA’s formula expenses at 

a project level. HUD uses the following 

three factors to determine the overall 

formula expense level for each project: 

(1)The project expense level (PEL) 

(calculated in accordance with 

§ 990.165); 

(2) The utilities expense level (UEL) 

(calculated in accordance with 

§§ 990.170, 990.175, 990.180, and 

990.185); and 

(3)Other formula expenses (add-ons) 

(calculated in accordance with 

§ 990.190). 

(b) PEL, UEL, and Add-ons. Each 

project of a PHA has a unique PEL and 

UEL. The PEL for each project is based 

on ten characteristics and certain 

adjustments described in § 990.165. The 

PEL represents the normal expenses of 

operating public housing projects, such 

as maintenance and administration 

costs. The UEL for each project 

represents utility expenses. Utility 

expense levels are based on an incentive 

system aimed at reducing utility 

expenses. Both the PEL and UEL are 

expressed in PUM costs. The expenses 

not included in these expense levels 

and which are unique to PHAs are titled 

‘‘other formula expenses (add-ons)’’ and 

are expressed in a dollar amount. 

(c) Calculating project formula 

expense. The formula expense of any 

one project is the sum of the project’s 

PEL and the UEL, multiplied by the 

total EUMs specific to the project, plus 

the add-ons. 

§ 990.165 Computation of project expense 

level (PEL). 

(a) Computation of PEL. The PEL is 

calculated in terms of PUM cost and 

represents the costs associated with the 

project, except for utility and add-on 

costs. Costs associated with the PEL are 

administration, management fees, 

maintenance, protective services, 

leasing, occupancy, staffing, and other 

expenses, such as project insurance. 

HUD will calculate the PEL using 

regression analysis and benchmarking 

for the actual costs of Federal Housing 

Administration (FHA) projects to 

estimate costs for public housing 

projects. HUD will use the ten variables 

described in paragraph (b) of this 

section and their associated coefficient 

(i.e., values that are expressed in 

percentage terms) to produce a PEL. 

(b) Variables. The ten variables are: 

(1) Size of project (number of units); 

(2) Age of property (Date of Full 

Availability (DOFA)); 

(3) Bedroom mix; 

(4) Building type; 

(5) Occupancy type (family or senior); 

(6) Location (an indicator of the type 

of community in which a property is 

located; location types include rural, 

city central metropolitan, and non-city 

central metropolitan (suburban) areas); 

(7) Neighborhood poverty rate; 

(8) Percent of households assisted; 

(9) Ownership type (profit, non-profit, 

or limited dividend); and 

(10) Geographic. 

(c) Cost adjustments. HUD will apply 

four adjustments to the PEL. The 

adjustments are: 

(1) Application of a $200 PUM floor 

for any senior property and a $215 PUM 

floor for any family property; 

(2) Application of a $420 PUM ceiling 

for any property except for New York 

City Housing Authority projects, which 

have a $480 PUM ceiling; 

(3) Application of a four percent 

reduction for any PEL calculated over 

$325 PUM, with the reduction limited 

so that a PEL will not be reduced to less 

than $325; and 

(4) The reduction of audit costs as 

reported for FFY 2003 in a PUM 

amount. 

(d) Annual inflation factor. The PEL 

for each project shall be adjusted 

annually, beginning in 2005, by the 

local inflation factor. The local inflation 

factor shall be the HUD-determined 

weighted average percentage increase in 

local government wages and salaries for 

the area in which the PHA is located, 

and non-wage expenses. 

(e) Calculating a PEL. To calculate a 

specific PEL for a given property, the 

sum of the coefficients for nine variables 

(all variables except ownership type) 

shall be added to a formula constant. 

The exponent of that sum shall be 

multiplied by a percentage to reflect the 

non-profit ownership type, which will 

produce an unadjusted PEL. For the 

calculation of the initial PEL, the cost 

adjustments described in paragraphs 

(c)(1), (c)(2), and (c)(3) of this section 

will be applied. After these initial 

adjustments are applied, the audit 

adjustment described in paragraph (c)(4) 

of this section will be applied to arrive 

at the PEL in year 2000 dollars. After the 

PEL in year 2000 dollars is created, the 

annual inflation factor as described in 

paragraph (d) of this section will be 

applied cumulatively to this number 

through 2004 to yield an initial PEL in 

terms of current dollars. 

(f) Calculation of the PEL for Moving 

to Work PHAs. PHAs participating in 

the Moving to Work (MTW) 

Demonstration authorized under section 

204 of the Omnibus Consolidated 

Rescissions and Appropriations Act of 

1996 (Pub. L. 104–134, approved April 

26, 1996) shall receive an operating 

subsidy as provided in Attachment A of 

their MTW Agreements executed prior 

to November 18, 2005. PHAs with an 

MTW Agreement will continue to have 

the right to request extensions of or 

modifications to their MTW 

Agreements. 

(g) Calculation of the PELs for mixedfinance developments. If, prior to 

November 18, 2005, a PHA has either a 

mixed-finance arrangement that has 

closed or has filed documents in 

accordance with 24 CFR 941.606 for a 

mixed-finance transaction, then the 

project covered by the mixed-finance 

transaction will receive funding based 

on the higher of its former Allowable 

Expense Level or the new computed 

PEL. 

(h) Calculation of PELs when data are 

inadequate or unavailable. When 

sufficient data are unavailable for the 

calculation of a PEL, HUD may calculate 

a PEL using an alternative methodology. 

The characteristics may be used from 

similarly situated properties. 

(i) Review of PEL methodology by 

advisory committee. In 2009, HUD will 

convene a meeting with representation 

of appropriate stakeholders, to review 

the methodology to evaluate the PEL 

based on actual cost data. The meeting 

shall be convened in accordance with 

the Federal Advisory Committee Act (5 

U.S.C. Appendix) (FACA). HUD may 

determine appropriate funding levels for 

each project to be effective in FY 2011 

after following appropriate rulemaking 

procedures. 

§ 990.170 Computation of utilities expense 

level (UEL): Overview. 

(a) General. The UEL for each PHA is 

based on its consumption for each 

utility, the applicable rates for each 

utility, and an applicable inflation 

factor. The UEL for a given funding 

period is the product of the utility rate 

multiplied by the payable consumption 

level multiplied by the inflation factor. 

The UEL is expressed in terms of PUM 

costs. 

(b) Utility rate. The utility rate for 

each type of utility will be the actual 

average rate from the most recent 12- 

month period that ended June 30th prior 

to the beginning of the applicable 

funding period. The rate will be 

calculated by dividing the actual utility 

cost by the actual utility consumption, 

with consideration for pass-through 

costs (e.g., state and local utility taxes, 

tariffs) for the time period specified in 

this paragraph. 

(c) Payable consumption level. The 

payable consumption level is based on 

the current consumption level adjusted 

by a utility consumption incentive. The 

incentive shall be computed by 

comparing current consumption levels 

of each utility to the rolling base 

consumption level. If the comparison 

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 55001 

reflects a decrease in the consumption 

of a utility, the PHA shall retain 75 

percent of this decrease. Alternately, if 

the comparison reflects an increase in 

the consumption of a utility, the PHA 

shall absorb 75 percent of this increase. 

(d) Inflation factor for utilities. The 

UEL shall be adjusted annually by an 

inflation/deflation factor based upon the 

fuels and utilities component of the 

United States Department of Labor, 

Bureau of Labor Statistics (BLS) 

Consumer Price Index for All Urban 

Consumers (CPI–U). The annual 

adjustment to the UEL shall reflect the 

most recently published and localized 

data available from BLS at the time the 

annual adjustment is calculated. 

(e) Increases in tenant utility 

allowances. Increases in tenant utility 

allowances, as a component of the 

formula income, as described in 

§ 990.195, shall result in a 

commensurate increase of operating 

subsidy. Decreases in such utility 

allowances shall result in a 

commensurate decrease in operating 

subsidy. 

(f) Records and reporting. (1) 

Appropriate utility records, satisfactory 

to HUD, shall be developed and 

maintained, so that consumption and 

rate data can be determined. 

(2) All records shall be kept by utility 

and by project for each 12-month period 

ending June 30th. 

(3) HUD will notify each PHA when 

HUD has the automated systems 

capacity to receive such information. 

Each PHA then will be obligated to 

provide consumption and cost data to 

HUD for all utilities for each project. 

(4) If a PHA has not maintained or 

cannot recapture utility data from its 

records for a particular utility, the PHA 

shall compute the UEL by: 

(i) Using actual consumption data for 

the last complete year(s) of available 

data or data of comparable project(s) 

that have comparable utility delivery 

systems and occupancy, in accordance 

with a method prescribed by HUD; or 

(ii) Requesting field office approval to 

use actual PUM utility expenses for its 

UEL in accordance with a method 

prescribed by HUD when the PHA 

cannot obtain necessary data to 

calculate the UEL in accordance with 

paragraph (f)(4)(i) of this section. 

§ 990.175 Utilities expense level: 

Computation of the current consumption 

level. 

The current consumption level shall 

be the actual amount of each utility 

consumed during the 12-month period 

ending June 30th that is 6 months prior 

to the first day of the applicable funding 

period. 

§ 990.180 Utilities expense level: 

Computation of the rolling base 

consumption level. 

(a) General. (1) The rolling base 

consumption level (RBCL) shall be 

equal to the average of yearly 

consumption levels for the 36-month 

period ending on the June 30th that is 

18 months prior to the first day of the 

applicable funding period. 

(2) The yearly consumption level is 

the actual amount of each utility 

consumed during a 12-month period 

ending June 30th. For example, for the 

funding period January 1, 2006, through 

December 31, 2006, the RBCL will be 

the average of the following yearly 

consumption levels: 

(i) Year 1 = July 1, 2001, through June 

30, 2002. 

(ii) Year 2 = July 1, 2002, through June 

30, 2003. 

(iii) Year 3 = July 1, 2003, through 

June 30, 2004. 

Note to paragraph (a)(2): In this example, 

the current year’s consumption level will be 

July 1, 2004, through June 30, 2005. 

(b) Distortions to rolling base 

consumption level. The PHA shall have 

its RBCL determined so as not to distort 

the rolling base period in accordance 

with a method prescribed by HUD if: 

(1) A project has not been in operation 

during at least 12 months of the rolling 

base period; 

(2) A project enters or exits 

management after the rolling base 

period and prior to the end of the 

applicable funding period; or 

(3) A project has experienced a 

conversion from one energy source to 

another, switched from PHA-supplied to 

resident-purchased utilities during or 

after the rolling base period, or for any 

other reason that would cause the RBCL 

not to be comparable to the current 

year’s consumption level. 

(c) Financial incentives. The threeyear rolling base for all relevant utilities 

will be adjusted to reflect any financial 

incentives to the PHA to reduce 

consumption as described in § 990.185. 

§ 990.185 Utilities expense level: 

Incentives for energy conservation/rate 

reduction. 

(a) General/consumption reduction. If 

a PHA undertakes energy conservation 

measures that are financed by an entity 

other than HUD, the PHA may qualify 

for the incentives available under this 

section. For a PHA to qualify for these 

incentives, the PHA must obtain HUD 

approval. Approval shall be based on a 

determination that payments under the 

contract can be funded from the 

reasonably anticipated energy cost 

savings. The contract period shall not 

exceed 12 years. The energy 

conservation measures may include, but 

are not limited to: Physical 

improvements financed by a loan from 

a bank, utility, or governmental entity; 

management of costs under a 

performance contract; or a shared 

savings agreement with a private energy 

service company. 

(1) Frozen rolling base. (i) If a PHA 

undertakes energy conservation 

measures that are approved by HUD, the 

RBCL for the project and the utilities 

involved may be frozen during the 

contract period. Before the RBCL is 

frozen, it must be adjusted to reflect any 

energy savings resulting from the use of 

any HUD funding. The RBCL also may 

be adjusted to reflect systems repaired 

to meet applicable building and safety 

codes as well as to reflect adjustments 

for occupancy rates increased by 

rehabilitation. The RBCL shall be frozen 

at the level calculated for the year 

during which the conservation measures 

initially shall be implemented. 

(ii) The PHA operating subsidy 

eligibility shall reflect the retention of 

100 percent of the savings from 

decreased consumption until the term of 

the financing agreement is complete. 

The PHA must use at least 75 percent 

of the cost savings to pay off the debt, 

e.g., pay off the contractor or bank loan. 

If less than 75 percent of the cost 

savings is used for debt payment, 

however, HUD shall retain the 

difference between the actual 

percentage of cost savings used to pay 

off the debt and 75 percent of the cost 

savings. If at least 75 percent of the cost 

savings is paid to the contractor or bank, 

the PHA may use the full amount of the 

remaining cost savings for any eligible 

operating expense. 

(iii) The annual three-year rolling base 

procedures for computing the RBCL 

shall be reactivated after the PHA 

satisfies the conditions of the contract. 

The three years of consumption data to 

be used in calculating the RBCL after 

the end of the contract period shall be 

the yearly consumption levels for the 

final three years of the contract. 

(2) PHAs undertaking energy 

conservation measures that are financed 

by an entity other than HUD may 

include resident-paid utilities under the 

consumption reduction incentive, using 

the following methodology: 

(i) The PHA reviews and updates all 

utility allowances to ascertain that 

residents are receiving the proper 

allowances before energy savings 

measures are begun; 

(ii) The PHA makes future 

calculations of rental income for 

purposes of the calculation of operating 

subsidy eligibility based on these 

55002 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

baseline allowances. In effect, HUD will 

freeze the baseline allowances for the 

duration of the contract; 

(iii) After implementation of the 

energy conservation measures, the PHA 

updates the utility allowances in 

accordance with provisions in 24 CFR 

part 965, subpart E. The new allowance 

should be lower than baseline 

allowances; 

(iv) The PHA uses at least 75 percent 

of the savings for paying the cost of the 

improvement (the PHA will be 

permitted to retain 100 percent of the 

difference between the baseline 

allowances and revised allowances); 

(v) After the completion of the 

contract period, the PHA begins using 

the revised allowances in calculating its 

operating subsidy eligibility; and 

(vi) The PHA may exclude from its 

calculation of rental income the 

increased rental income due to the 

difference between the baseline 

allowances and the revised allowances 

of the projects involved, for the duration 

of the contract period. 

(3) Subsidy add-on. (i) If a PHA 

qualifies for this incentive (i.e., the 

subsidy add-on, in accordance with the 

provisions of paragraph (a) of this 

section), then the PHA is eligible for 

additional operating subsidy each year 

of the contract to amortize the cost of 

the loan for the energy conservation 

measures and other direct costs related 

to the energy project under the contract 

during the term of the contract subject 

to the provisions of this paragraph (a)(3) 

of this section. The PHA’s operating 

subsidy for the current funding year will 

continue to be calculated in accordance 

with paragraphs (a), (b), and (c) of 

§ 990.170 (i.e., the rolling base is not 

frozen). The PHA will be able to retain 

part of the cost savings in accordance 

with § 990.170(c). 

(ii) The actual cost of energy (of the 

type affected by the energy conservation 

measure) after implementation of the 

energy conservation measure will be 

subtracted from the expected energy 

cost, to produce the energy cost savings 

for the year. 

(iii) If the cost savings for any year 

during the contract period are less than 

the amount of operating subsidy to be 

made available under this paragraph to 

pay for the energy conservation measure 

in that year, the deficiency will be offset 

against the PHA’s operating subsidy 

eligibility for the PHA’s next fiscal year. 

(iv) If energy cost savings are less than 

the amount necessary to meet 

amortization payments specified in a 

contract, the contract term may be 

extended (up to the 12-year limit) if 

HUD determines that the shortfall is the 

result of changed circumstances rather 

than a miscalculation or 

misrepresentation of projected energy 

savings by the contractor or PHA. The 

contract term may be extended only to 

accommodate payment to the contractor 

and associated direct costs. 

(b) Rate reduction. If a PHA takes 

action beyond normal public 

participation in rate-making 

proceedings, such as well-head 

purchase of natural gas, administrative 

appeals, or legal action to reduce the 

rate it pays for utilities, then the PHA 

will be permitted to retain one-half the 

annual savings realized from these 

actions. 

(c) Utility benchmarking. HUD will 

pursue benchmarking utility 

consumption at the project level as part 

of the transition to asset management. 

HUD intends to establish benchmarks 

by collecting utility consumption and 

cost information on a project-by-project 

basis. In 2009, after conducting a 

feasibility study, HUD will convene a 

meeting with representation of 

appropriate stakeholders to review 

utility benchmarking options so that 

HUD may determine whether or how to 

implement utility benchmarking to be 

effective in FY 2011. The meeting shall 

be convened in accordance with the 

Federal Advisory Committee Act (5 

U.S.C. Appendix) (FACA). The HUD 

study shall take into account typical 

levels of utilities consumption at public 

housing developments based upon 

factors such as building and unit type 

and size, temperature zones, age and 

construction of building, and other 

relevant factors. 

§ 990.190 Other formula expenses (addons). 

In addition to calculating operating 

subsidy based on the PEL and UEL, a 

PHA’s eligible formula expenses shall 

be increased by add-ons. The allowed 

add-ons are: 

(a) Self-sufficiency. A PHA may 

request operating subsidy for the 

reasonable cost of program 

coordinator(s) and associated costs in 

accordance with HUD’s self-sufficiency 

program regulations and notices. 

(b) Energy loan amortization. A PHA 

may qualify for operating subsidy for 

payments of principal and interest cost 

for energy conservation measures 

described in § 990.185(a)(3). 

(c) Payments in lieu of taxes (PILOT). 

Each PHA will receive an amount for 

PILOT in accordance with section 6(d) 

of the 1937 Act, based on its 

cooperation agreement or its latest 

actual PILOT payment. 

(d) Cost of independent audits. A 

PHA is eligible to receive operating 

subsidy equal to its most recent actual 

audit costs for the Operating Fund 

Program when an audit is required by 

the Single Audit Act (31 U.S.C. 7501–

7507) (see 24 CFR part 85) or when a 

PHA elects to prepare and submit such 

an audit to HUD. For the purpose of this 

rule, the most recent actual audit costs 

include the associated costs of an audit 

for the Operating Fund Program only. A 

PHA whose operating subsidy is 

determined to be zero based on the 

formula is still eligible to receive 

operating subsidy equal to its most 

recent actual audit costs. The most 

recent actual audit costs are used as a 

proxy to cover the cost of the next audit. 

If a PHA does not have a recent actual 

audit cost, the PHA working with HUD 

may establish an audit cost. A PHA that 

requests funding for an audit shall 

complete an audit. The results of the 

audit shall be transmitted in a time and 

manner prescribed by HUD. 

(e) Funding for resident participation 

activities. Each PHA’s operating subsidy 

calculation shall include $25 per 

occupied unit per year for resident 

participation activities, including, but 

not limited to, those described in 24 

CFR part 964. For purposes of this 

section, a unit is eligible to receive 

resident participation funding if it is 

occupied by a public housing resident 

or it is occupied by a PHA employee, or 

a police officer or other security 

personnel who is not otherwise eligible 

for public housing. In any fiscal year, if 

appropriations are not sufficient to meet 

all funding requirements under this 

part, then the resident participation 

component of the formula will be 

adjusted accordingly. 

(f) Asset management fee. Each PHA 

with at least 250 units shall receive a $4 

PUM asset management fee. PHAs with 

fewer than 250 units that elect to 

transition to asset management shall 

receive an asset management fee of $2 

PUM. PHAs with fewer than 250 units 

that elect to have their entire portfolio 

treated and considered as a single 

project as described in § 990.260(b) or 

PHAs with only one project will not be 

eligible for an asset management fee. For 

all PHAs eligible to receive the asset 

management fee, the fee will be based 

on the total number of ACC units. PHAs 

that are not in compliance with asset 

management as described in subpart H 

of this part by FY 2011 will forfeit this 

fee. 

(g) Information technology fee. Each 

PHA’s operating subsidy calculation 

shall include $2 PUM for costs 

attributable to information technology. 

For all PHAs, this fee will be based on 

the total number of ACC units. 

(h) Asset repositioning fee. (1) A PHA 

that transitions projects or entire 

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 55003 

buildings of a project out of its 

inventory is eligible for an assetrepositioning fee. This fee supplements 

the costs associated with administration 

and management of demolition or 

disposition, tenant relocation, and 

minimum protection and service 

associated with such efforts. The assetrepositioning fee is not intended for 

individual units within a multi-unit 

building undergoing similar activities. 

(2) Projects covered by applications 

approved for demolition or disposition 

shall be eligible for an asset 

repositioning fee on the first day of the 

next quarter six months after the date 

the first unit becomes vacant after the 

relocation date included in the 

approved relocation plan. When this 

condition is met, the project and all 

associated units are no longer 

considered an EUM as described in 

§ 990.155. Each PHA is responsible for 

accurately applying and maintaining 

supporting documentation on the start 

date of this transition period or is 

subject to forfeiture of this add-on. 

(3) Units categorized for demolition 

and which are eligible for an asset 

repositioning fee are eligible for 

operating subsidy at the rate of 75 

percent PEL per unit for the first twelve 

months, 50 percent PEL per unit for the 

next twelve months, and 25 percent PEL 

per unit for the next twelve months. 

(4) Units categorized for disposition 

and which are eligible for an asset 

repositioning fee are eligible for 

operating subsidy at the rate of 75 

percent PEL per unit for the first twelve 

months and 50 percent PEL per unit for 

the next twelve months. 

(5) The following is an example of 

how eligibility for an asset-repositioning 

fee is determined: 

(i) A PHA has HUD’s approval to 

demolish (or dispose of) a 100-unit 

project from its 1,000 unit inventory. On 

January 12th, in conjunction with the 

PHA’s approved Relocation Plan, a unit 

in that project becomes vacant. 

Accordingly, the demolition/ 

disposition-approved project is eligible 

for an asset-repositioning fee on October 

1st. (This date is calculated as follows: 

January 12th + six months = July 12th. 

The first day of the next quarter is 

October 1st.) 

(ii) Although payment of the assetrepositioning fee will not begin until 

October 1st, the PHA will receive its full 

operating subsidy based on the 1,000 

units through September 30th. On 

October 1st the PHA will begin to 

receive the 36-month asset-repositioning 

fee in accordance with paragraph (h)(3) 

of this section for the 100 units 

approved for demolition. (Asset 

repositioning fee requirements for 

projects approved for disposition are 

found in paragraph (h)(4) of this 

section.) On October 1st, the PHA’s 

units will be 900. 

(i) Costs attributable to changes in 

Federal law, regulation, or economy. In 

the event that HUD determines that 

enactment of a Federal law or revision 

in HUD or other Federal regulations has 

caused or will cause a significant 

change in expenditures of a continuing 

nature above the PEL and UEL, HUD 

may, at HUD’s sole discretion, decide to 

prescribe a procedure under which the 

PHA may apply for or may receive an 

adjustment in operating subsidy. 

Subpart D—Calculating Formula 

Income 

§ 990.195 Calculation of formula income. 

(a) General. For the purpose of the 

formula, formula income is equal to the 

amount of rent charged to tenants 

divided by the respective unit months 

leased, and is therefore expressed as a 

PUM. Formula income will be derived 

from a PHA’s year-end financial 

information. The financial information 

used in the formula income 

computation will be the audited 

information provided by the PHA 

through HUD’s information systems. 

The information will be calculated 

using the following PHA fiscal year-end 

information: 

(1) April 1, 2003, through March 31, 

2004; 

(2) July 1, 2003, through June 30, 

2004; 

(3) October 1, 2003, through 

September 30, 2004; and 

(4) January 1, 2004, through December 

31, 2004. 

(b) Calculation of formula income. To 

calculate formula income in whole 

dollars, the PUM amount will be 

multiplied by the EUMs as described in 

subpart B of this part. 

(c) Frozen at 2004 level. After a PHA’s 

formula income is calculated as 

described in paragraph (a) of this 

section, it will not be recalculated or 

inflated for fiscal years 2006 through 

2008, unless a PHA can show a severe 

local economic hardship that is 

impacting the PHA’s ability to maintain 

some semblance of its formula income 

(see subpart G of this part—Appeals). A 

PHA’s formula income may be 

recalculated if the PHA appeals to HUD 

for an adjustment in its formula. 

(d) Calculation of formula income 

when data are inadequate or 

unavailable. When audited data are 

unavailable in HUD’s information 

systems for the calculation of formula 

income, HUD may use an alternative 

methodology, including, but not limited 

to, certifications, hard copy reports, and 

communications with the respective 

PHAs. 

(e) Inapplicability of 24 CFR 85.25. 

Formula income is not subject to the 

provisions regarding program income in 

24 CFR 85.25. 

Subpart E—Determination and 

Payment of Operating Subsidy 

§ 990.200 Determination of formula 

amount. 

(a) General. The amount of operating 

subsidy that a PHA is eligible for is the 

difference between its formula expenses 

(as calculated under subpart C of this 

part) and its formula income (as 

calculated under subpart D of this part). 

(b) Use of HUD databases to calculate 

formula amount. HUD shall utilize its 

databases to make the formula 

calculations. HUD’s databases are 

intended to be employed to provide 

information on all primary factors in 

determining the operating subsidy 

amount. Each PHA is responsible for 

supplying accurate information on the 

status of each of its units in HUD’s 

databases. 

(c) PHA responsibility to submit 

timely data. PHAs shall submit data 

used in the formula on a regular and 

timely basis to ensure accurate 

calculation under the formula. If a PHA 

fails to provide accurate data, HUD will 

make a determination as to the PHA’s 

inventory, occupancy, and financial 

information using available or verified 

data, which may result in a lower 

operating subsidy. HUD has the right to 

adjust any or all formula amounts based 

on clerical, mathematical, and 

information system errors that affect any 

of the data elements used in the 

calculation of the formula. 

§ 990.205 Fungibility of operating subsidy 

between projects. 

(a) General. Operating subsidy shall 

remain fully fungible between ACC 

projects until operating subsidy is 

calculated by HUD at a project level. 

After subsidy is calculated at a project 

level, operating subsidy can be 

transferred as the PHA determines 

during the PHA’s fiscal year to another 

ACC project(s) if a project’s financial 

information, as described more fully in 

§ 990.280, produces excess cash flow, 

and only in the amount up to those 

excess cash flows. 

(b) Notwithstanding the provisions of 

paragraph (a) of this section and subject 

to all of the other provisions of this part, 

the New York City Housing Authority’s 

Development Grant Project Amendment 

Number 180, dated July 13, 1995, to 

Consolidated Annual Contributions 

Contract NY–333, remains in effect. 

55004 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

§ 990.210 Payment of operating subsidy. 

(a) Payments of operating subsidy 

under the formula. HUD shall make 

monthly payments equal to 1⁄12 of a 

PHA’s total annual operating subsidy 

under the formula by electronic funds 

transfers through HUD’s automated 

disbursement system. HUD shall 

establish thresholds that permit PHAs to 

request monthly installments. Requests 

by PHAs that exceed these thresholds 

will be subject to HUD review. HUD 

approvals of requests that exceed these 

thresholds are limited to PHAs that have 

an unanticipated and immediate need 

for disbursement. 

(b) Payments procedure. In the event 

that the amount of operating subsidy 

has not been determined by HUD as of 

the beginning of the funding period, 

operating subsidy shall be provided 

monthly, quarterly, or annually based 

on the amount of the PHA’s previous 

year’s formula or another amount that 

HUD may determine to be appropriate. 

(c) Availability of funds. In the event 

that insufficient funds are available, 

HUD shall have discretion to revise, on 

a pro rata basis, the amounts of 

operating subsidy to be paid to PHAs. 

§ 990.215 Payments of operating subsidy 

conditioned upon reexamination of income 

of families in occupancy. 

(a) General. Each PHA is required to 

reexamine the income of each family in 

accordance with the provisions of the 

ACC, the 1937 Act, and HUD 

regulations. Income reexaminations 

shall be performed annually, except as 

provided in the 1937 Act, in HUD 

regulations, or in the MTW agreements. 

A PHA must be in compliance with all 

reexamination requirements in order to 

be eligible to receive full operating 

subsidy. A PHA’s calculations of rent 

and utility allowances shall be accurate 

and timely. 

(b) A PHA in compliance. A PHA 

shall submit a certification that states 

that the PHA is in compliance with the 

annual income reexamination 

requirements and its rent and utility 

allowance calculations have been or 

will be adjusted in accordance with 

current HUD requirements and 

regulations. 

(c) A PHA not in compliance. Any 

PHA not in compliance with annual 

income reexamination requirements at 

the time of the submission of the 

calculation of operating subsidy shall 

furnish to the responsible HUD field 

office a copy of the procedures it is 

using to achieve compliance and a 

statement of the number of families that 

have undergone reexamination during 

the 12 months preceding the current 

funding cycle. If, on the basis of this 

submission or any other information, 

HUD determines that the PHA is not 

substantially in compliance with all of 

the annual income reexamination 

requirements, HUD shall withhold 

payments to which the PHA may be 

entitled under this part. Payment may 

be withheld in an amount equal to 

HUD’s estimate of the loss of rental 

income to the PHA resulting from its 

failure to comply with the requirements. 

Subpart F—Transition Policy and 

Transition Funding 

§ 990.220 Purpose. 

This policy is aimed at assisting all 

PHAs in transitioning to the new 

funding levels as determined by the 

formula set forth in this rule. PHAs will 

be subject to a transition funding policy 

that will either increase or reduce their 

total operating subsidy for a given year. 

§ 990.225 Transition determination. 

The determination of the amount and 

period of the transition funding shall be 

based on the difference in subsidy levels 

between the formula set forth in this 

part and the formula in effect prior to 

November 18, 2005. The difference in 

subsidy levels will be calculated using 

FY 2004 data. When actual data are not 

available for one of the formula 

components needed to calculate the 

formula of this part for FY 2004, HUD 

will use alternate data as a substitute 

(e.g., unit months available for eligible 

unit months, etc.) If the difference 

between these formulas indicates that a 

PHA shall have its operating subsidy 

reduced as a result of this formula, the 

PHA will be subject to a transition 

policy as indicated in § 990.230. If the 

difference between these formulas 

indicates that a PHA will have its 

operating subsidy increased as a result 

of this formula, the PHA will be subject 

to the transition policy as indicated in 

§ 990.235. 

§ 990.230 PHAs that will experience a 

subsidy reduction. 

(a) For PHAs that will experience a 

reduction in their operating subsidy, as 

determined in § 990.225, such 

reductions will have a limit of: 

(1) 24 percent of the difference 

between the two funding levels in the 

first year following November 18, 2005; 

(2) 43 percent of the difference 

between the two funding levels in the 

second year following November 18, 

2005; 

(3) 62 percent of the difference 

between the two levels in the third year 

following November 18, 2005; and 

(4) 81 percent of the difference 

between the two levels in the fourth 

year following November 18, 2005. 

(b) The full amount of the reduction 

in the operating subsidy level shall be 

realized in the fifth year following 

November 18, 2005. 

(c) For example, a PHA has a subsidy 

reduction from $1 million under the 

formula in effect prior to November 18, 

2005 to $900,000 under the formula 

used for calculating operating subsidy 

under this part using FY 2004 data. The 

difference would be calculated at 

$100,000 ($1 million¥$900,000 = 

$100,000). In the first year, the subsidy 

reduction would be limited to $24,000 

(24 percent of the difference). Thus, the 

PHA will receive an operating subsidy 

amount of this rule plus a transitionfunding amount of $76,000 (the 

$100,000 difference between the two 

subsidy amounts minus the $24,000 

reduction limit). 

(d) If a PHA can demonstrate a 

successful conversion to the asset 

management requirements of subpart H 

of this part, as determined under 

paragraph (f) of this section, HUD will 

discontinue the reduction at the PHA’s 

next subsidy calculation following such 

demonstration, as reflected in the 

schedule in paragraph (e) of this section, 

notwithstanding § 990.290(c). 

(e) The schedule of reductions for a 

PHA that will experience a reduction in 

subsidy is reflected in the table below. 

Funding period Demonstration date 

by Reduction limited to 

Prior to year 1 .................................................................... October 1, 2005 ............... 5 percent of the difference between the two funding levels. 

Year 1 ................................................................................ October 1, 2006 ............... 24 percent of the difference. 

Year 2 ................................................................................ October 1, 2007 ............... 43 percent of the difference. 

Year 3 ................................................................................ October 1, 2008 ............... 62 percent of the difference. 

Year 4 ................................................................................ October 1, 2009 ............... 81 percent of the difference. 

Year 5 ................................................................................ October 1, 2010 ............... Full reduction reached. 

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 55005 

(f)(1) For purposes of this section, 

compliance with the asset management 

requirements of subpart H of this part 

will be based on an independent 

assessment conducted by a HUDapproved professional familiar with 

property management practices in the 

region or state in which the PHA is 

located. 

(2) A PHA must select from a list of 

HUD-approved professionals to conduct 

the independent assessment. The 

professional review and 

recommendation will then be forwarded 

to the Assistant Secretary for Public and 

Indian Housing (or designee) for final 

determination of compliance with the 

asset management requirements of 

subpart H of this part. 

(3) Upon completion of the 

independent assessment, the assessor 

shall conduct an exit conference with 

the PHA. In response to the exit 

conference, the PHA may submit a 

management response and other 

pertinent information (including, but 

not limited to, an additional assessment 

procured at the PHAs’ own expense) 

within ten working days of the exit 

conference to be included in the report 

submitted to HUD. 

(4) In the event that HUD is unable to 

produce a list of independent assessors 

on a timely basis, the PHA may submit 

its own demonstration of a successful 

conversion to asset management directly 

to HUD for determination of 

compliance. 

(5) The Assistant Secretary for Public 

and Indian Housing (or designee) shall 

consider all information submitted and 

respond with a final determination of 

compliance within 60 days of the 

independent assessor’s report being 

submitted to HUD. 

§ 990.235 PHAs that will experience a 

subsidy increase. 

(a) For PHAs that will experience a 

gain in their operating subsidy, as 

determined in § 990.225, such increases 

will have a limit of 50 percent of the 

difference between the two funding 

levels in the first year following 

November 18, 2005. 

(b) The full amount of the increase in 

the operating subsidy level shall be 

realized in the second year following 

November 18, 2005. 

(c) For example, a PHA’s subsidy 

increased from $900,000 under the 

formula in effect prior to November 18, 

2005 to $1 million under the formula 

used to calculate operating subsidy 

under this part using FY 2004 data. The 

difference would be calculated at 

$100,000 ($1 million ¥$900,000 = 

$100,000). In the first year, the subsidy 

increase would be limited to $50,000 

(50 percent of the difference). Thus, in 

this example the PHA will receive the 

operating subsidy amount of this rule 

minus a transition-funding amount of 

$50,000 (the $100,000 difference 

between the two subsidy amounts 

minus the $50,000 transition amount). 

(d) The schedule for a PHA whose 

subsidy would be increased is reflected 

in the table below. 

Funding 

period Increase limited to 

Year 1 ....... 50 percent of the difference. 

Year 2 ....... Full increase reached. 

Subpart G—Appeals 

§ 990.240 General. 

(a) PHAs will be provided 

opportunities for appeals. HUD will 

provide up to a two percent hold-back 

of the Operating Fund appropriation for 

FY 2006 and FY 2007. HUD will use the 

hold-back amount to fund appeals that 

are filed during each of these fiscal 

years. Hold-back funds not utilized will 

be added back to the formula within 

each of the affected fiscal years. 

(b) Appeals are voluntary and must 

cover an entire portfolio, not single 

projects. However, the Assistant 

Secretary for Public and Indian Housing 

(or designee) has the discretion to 

accept appeals of less than an entire 

portfolio for PHAs with greater than 

5,000 public housing units. 

§ 990.245 Types of appeals. 

(a) Streamlined appeal. This appeal 

would demonstrate that the application 

of a specific Operating Fund formula 

component has a blatant and objective 

flaw. 

(b) Appeal of formula income for 

economic hardship. After a PHA’s 

formula income has been frozen, the 

PHA can appeal to have its formula 

income adjusted to reflect a severe local 

economic hardship that is impacting the 

PHA’s ability to maintain rental and 

other revenue. 

(c) Appeal for specific local 

conditions. This appeal would be based 

on demonstrations that the model’s 

predictions are not reliable because of 

specific local conditions. To be eligible, 

the affected PHA must demonstrate a 

variance of ten percent or greater in its 

PEL. 

(d) Appeal for changing market 

conditions. A PHA may appeal to 

receive operating subsidy for vacant 

units due to changing market 

conditions, after a PHA has taken 

aggressive marketing and outreach 

measures to rent these units. For 

example, a PHA could appeal if it is 

located in an area experiencing 

population loss or economic 

dislocations that faces a lack of demand 

for housing in the foreseeable future. 

(e) Appeal to substitute actual project 

cost data. A PHA may appeal its PEL if 

it can produce actual project cost data 

derived from actual asset management, 

as outlined in subpart H of this part, for 

a period of at least two years. 

§ 990.250 Requirements for certain 

appeals. 

(a) Appeals under § 990.245 (a) and 

(c) must be submitted once annually. 

Appeals under § 990.245 (a) and (c) 

must be submitted for new projects 

entering a PHA’s inventory within one 

year of the applicable Date of Full 

Availability (DOFA). 

(b) Appeals under § 990.245 (c) and 

(e) are subject to the following 

requirements: 

(1) The PHA is required to acquire an 

independent cost assessment of its 

projects; 

(2) The cost of services for the 

independent cost assessment is to be 

paid by the appellant PHA; 

(3) The assessment is to be reviewed 

by a professional familiar with property 

management practices and costs in the 

region or state in which the appealing 

PHA is located. This professional is to 

be procured by HUD. The professional 

review and recommendation will then 

be forwarded to the Assistant Secretary 

for Public and Indian Housing (or 

designee) for final determination; and 

(4) If the appeal is granted, the PHA 

agrees to be bound to the independent 

cost assessment regardless of new 

funding levels. 

Subpart H—Asset Management 

§ 990.255 Overview. 

(a) PHAs shall manage their 

properties according to an asset 

management model, consistent with the 

management norms in the broader 

multi-family management industry. 

PHAs shall also implement projectbased management, project-based 

budgeting, and project-based 

accounting, which are essential 

components of asset management. The 

goals of asset management are to: 

(1) Improve the operational efficiency 

and effectiveness of managing public 

housing assets; 

(2) Better preserve and protect each 

asset; 

(3) Provide appropriate mechanisms 

for monitoring performance at the 

property level; and 

(4) Facilitate future investment and 

reinvestment in public housing by 

public and private sector entities. 

55006 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

(b) HUD recognizes that appropriate 

changes in its regulatory and monitoring 

programs may be needed to support 

PHAs to undertake the goals identified 

in paragraph (a) of this section. 

§ 990.260 Applicability. 

(a) PHAs that own and operate 250 or 

more dwelling rental units under title I 

of the 1937 Act, including units 

managed by a third-party entity (for 

example, a resident management 

corporation) but excluding section 8 

units, are required to operate using an 

asset management model consistent 

with this subpart. 

(b) PHAs that own and operate fewer 

than 250 dwelling rental units may treat 

their entire portfolio as a single project. 

However, if a PHA selects this option, 

it will not receive the add-on for the 

asset management fee described in 

§ 990.190(f). 

§ 990.265 Identification of projects. 

For purposes of this subpart, project 

means a public housing building or set 

of buildings grouped for the purpose of 

management. A project may be as 

identified under the ACC or may be a 

reasonable grouping of projects or 

portions of a project under the ACC. 

HUD shall retain the right to disapprove 

of a PHA’s designation of a project. 

PHAs may group up to 250 scatteredsite dwelling rental units into a single 

project. 

§ 990.270 Asset management. 

As owners, PHAs have asset 

management responsibilities that are 

above and beyond property management 

activities. These responsibilities include 

decision-making on topics such as longterm capital planning and allocation, 

the setting of ceiling or flat rents, review 

of financial information and physical 

stock, property management 

performance, long-term viability of 

properties, property repositioning and 

replacement strategies, risk management 

responsibilities pertaining to regulatory 

compliance, and those decisions 

otherwise consistent with the PHA’s 

ACC responsibilities, as appropriate. 

§ 990.275 Project-based management 

(PBM). 

PBM is the provision of propertybased management services that is 

tailored to the unique needs of each 

property, given the resources available 

to that property. These property 

management services include, but are 

not limited to, marketing, leasing, 

resident services, routine and 

preventive maintenance, lease 

enforcement, protective services, and 

other tasks associated with the day-today operation of rental housing at the 

project level. Under PBM, these 

property management services are 

arranged, coordinated, or overseen by 

management personnel who have been 

assigned responsibility for the day-today operation of that property and who 

are charged with direct oversight of 

operations of that property. Property 

management services may be arranged 

or provided centrally; however, in those 

cases in which property management 

services are arranged or provided 

centrally, the arrangement or provision 

of these services must be done in the 

best interests of the property, 

considering such factors as cost and 

responsiveness. 

§ 990.280 Project-based budgeting and 

accounting. 

(a) All PHAs covered by this subpart 

shall develop and maintain a system of 

budgeting and accounting for each 

project in a manner that allows for 

analysis of the actual revenues and 

expenses associated with each property. 

Project-based budgeting and accounting 

will be applied to all programs and 

revenue sources that support projects 

under an ACC (e.g., the Operating Fund, 

the Capital Fund, etc.). 

(b)(1) Financial information to be 

budgeted and accounted for at a project 

level shall include all data needed to 

complete project-based financial 

statements in accordance with 

Accounting Principles Generally 

Accepted in the United States of 

America (GAAP), including revenues, 

expenses, assets, liabilities, and equity 

data. The PHA shall also maintain all 

records to support those financial 

transactions. At the time of conversion 

to project-based accounting, a PHA shall 

apportion its assets, liabilities, and 

equity to its respective projects and 

HUD-accepted central office cost 

centers. 

(2) Provided that the PHA complies 

with GAAP and other associated laws 

and regulations pertaining to financial 

management (e.g., OMB Circulars), it 

shall have the maximum amount of 

responsibility and flexibility in 

implementing project-based accounting. 

(3) Project-specific operating income 

shall include, but is not limited to, such 

items as project-specific operating 

subsidy, dwelling and non-dwelling 

rental income, excess utilities income, 

and other PHA or HUD-identified 

income that is project-specific for 

management purposes. 

(4) Project-specific operating expenses 

shall include, but are not limited to, 

direct administrative costs, utilities 

costs, maintenance costs, tenant 

services, protective services, general 

expenses, non-routine or capital 

expenses, and other PHA or HUDidentified costs which are projectspecific for management purposes. 

Project-specific operating costs also 

shall include a property management 

fee charged to each project that is used 

to fund operations of the central office. 

Amounts that can be charged to each 

project for the property management fee 

must be reasonable. If the PHA contracts 

with a private management company to 

manage a project, the PHA may use the 

difference between the property 

management fee paid to the private 

management company and the fee that 

is reasonable to fund operations of the 

central office and other eligible 

purposes. 

(5) If the project has excess cash flow 

available after meeting all reasonable 

operating needs of the property, the 

PHA may use this excess cash flow for 

the following purposes: 

(i) Fungibility between projects as 

provided for in § 990.205. 

(ii) Charging each project a reasonable 

asset management fee that may also be 

used to fund operations of the central 

office. However, this asset management 

fee may be charged only if the PHA 

performs all asset management activities 

described in this subpart (including 

project-based management, budgeting, 

and accounting). Asset management fees 

are considered a direct expense. 

(iii) Other eligible purposes. 

(c) In addition to project-specific 

records, PHAs may establish central 

office cost centers to account for nonproject specific costs (e.g., human 

resources, Executive Director’s office, 

etc.). These costs shall be funded from 

the property-management fees received 

from each property, and from the asset 

management fees to the extent these are 

available. 

(d) In the case where a PHA chooses 

to centralize functions that directly 

support a project (e.g., central 

maintenance), it must charge each 

project using a fee-for-service approach. 

Each project shall be charged for the 

actual services received and only to the 

extent that such amounts are reasonable. 

§ 990.285 Records and reports. 

(a) Each PHA shall maintain projectbased budgets and fiscal year-end 

financial statements prepared in 

accordance with GAAP and shall make 

these budgets and financial statements 

available for review upon request by 

interested members of the public. 

(b) Each PHA shall distribute the 

project-based budgets and year-end 

financial statements to the Chairman 

and to each member of the PHA Board 

of Commissioners, and to such other 

Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 55007 

state and local public officials as HUD 

may specify. 

(c) Some or all of the project-based 

budgets and financial statements and 

information shall be required to be 

submitted to HUD in a manner and time 

prescribed by HUD. 

§ 990.290 Compliance with asset 

management requirements. 

(a) A PHA is considered in 

compliance with asset management 

requirements if it can demonstrate 

substantially, as described in paragraph 

(b) of this section, that it is managing 

according to this subpart. 

(b) Demonstration of compliance with 

asset management will be based on an 

independent assessment. 

(1) The assessment is to be conducted 

by a professional familiar with property 

management practices and costs in the 

region or state in which the PHA is 

located. This professional is to be 

procured by HUD. 

(2) The professional review and 

recommendation will then be forwarded 

to the Assistant Secretary for Public and 

Indian Housing (or designee) for final 

determination of compliance to asset 

management. 

(c) Upon HUD’s determination of 

successful compliance with asset 

management, PHAs will then be funded 

based on this information pursuant to 

§ 990.165(i). 

(d) PHAs must be in compliance with 

the project-based accounting and 

budgeting requirements in this subpart 

by FY 2007. PHAs must be in 

compliance with the remainder of the 

components of asset management by FY 

2011. 

Subpart I—Operating Subsidy for 

Properties Managed by Resident 

Management Corporations (RMCs) 

§ 990.295 Resident Management 

Corporation operating subsidy. 

(a) General. This part applies to all 

projects managed by a Resident 

Management Corporation (RMC), 

including a direct funded RMC. 

(b) Operating subsidy. Subject to 

paragraphs (c) and (d) of this section, 

the amount of operating subsidy that a 

PHA or HUD provides a project 

managed by an RMC shall not be 

reduced during the three-year period 

beginning on the date the RMC first 

assumes management responsibility for 

the project. 

(c) Change factors. The operating 

subsidy for an RMC-managed project 

shall reflect changes in inflation, utility 

rates, and consumption, as well as 

changes in the number of units in the 

resident managed project. 

(d) Exclusion of increased income. 

Any increased income directly 

generated by activities by the RMC or 

facilities operated by the RMC shall be 

excluded from the calculation of the 

operating subsidy. 

(e) Exclusion of technical assistance. 

Any technical assistance the PHA 

provides to the RMC will not be 

included for purposes of determining 

the amount of funds provided to a 

project under paragraph (b) of this 

section. 

(f) The following conditions may not 

affect the amounts to be provided under 

this part to a project managed by an 

RMC: 

(1) Income reduction. Any reduction 

in the subsidy or total income of a PHA 

that occurs as a result of fraud, waste, 

or mismanagement by the PHA; and 

(2) Change in total income. Any 

change in the total income of a PHA that 

occurs as a result of project-specific 

characteristics when these 

characteristics are not shared by the 

project managed by the RMC. 

(g) Other project income. In addition 

to the operating subsidy calculated in 

accordance with this part and the 

amount of income derived from the 

project (from sources such as rents and 

charges), the management contract 

between the PHA and the RMC may 

specify that income be provided to the 

project from other legally available 

sources of PHA income. 

§ 990.300 Preparation of operating budget. 

(a) The RMC and the PHA must 

submit operating budgets and 

calculations of operating subsidy to 

HUD for approval in accordance with 

§ 990.200. The budget will reflect all 

project expenditures and will identify 

the expenditures related to the 

responsibilities of the RMC and the 

expenditures that are related to the 

functions that the PHA will continue to 

perform. 

(b) For each project or part of a project 

that is operating in accordance with the 

ACC amendment relating to this subpart 

and in accordance with a contract 

vesting maintenance responsibilities in 

the RMC, the PHA will transfer into a 

sub-account of the operating reserve of 

the PHA an operating reserve for the 

RMC project. When all maintenance 

responsibilities for a resident-managed 

project are the responsibility of the 

RMC, the amount of the reserve made 

available to a project under this subpart 

will be the per-unit cost amount 

available to the PHA operating reserve, 

excluding all inventories, prepaids, and 

receivables at the end of the PHA fiscal 

year preceding implementation, 

multiplied by the number of units in the 

project operated. When some, but not 

all, maintenance responsibilities are 

vested in the RMC, the management 

contract between the PHA and RMC 

may provide for an appropriately 

reduced portion of the operating reserve 

to be transferred into the RMC’s subaccount. 

(c) The RMC’s use of the operating 

reserve is subject to all administrative 

procedures applicable to the 

conventionally owned public housing 

program. Any expenditure of funds from 

the reserve must be for eligible 

expenditures that are incorporated into 

an operating budget subject to approval 

by HUD. 

(d) Investment of funds held in the 

reserve will be in accordance with HUD 

regulations and guidance. 

§ 990.305 Retention of excess revenues. 

(a) Any income generated by an RMC 

that exceeds the income estimated for 

the income categories specified in the 

RMC’s management contract must be 

excluded in subsequent years in 

calculating: 

(1) The operating subsidy provided to 

a PHA under this part; and 

(2) The funds the PHA provides to the 

RMC. 

(b) The RMC’s management contract 

must specify the amount of income that 

is expected to be derived from the 

project (from sources such as rents and 

charges) and the amount of income to be 

provided to the project from the other 

sources of income of the PHA (such as 

operating subsidy under this part, 

interest income, administrative fees, and 

rents). These income estimates must be 

calculated consistent with HUD’s 

administrative instructions. Income 

estimates may provide for adjustment of 

anticipated project income between the 

RMC and the PHA, based upon the 

management and other projectassociated responsibilities (if any) that 

are to be retained by the PHA under the 

management contract. 

(c) Any revenues retained by an RMC 

under this section may be used only for 

purposes of improving the maintenance 

and operation of the project, 

establishing business enterprises that 

employ residents of public housing, or 

acquiring additional dwelling units for 

lower income families. Units acquired 

by the RMC will not be eligible for 

payment of operating subsidy. 

Subpart J—Financial Management 

Systems, Monitoring, and Reporting 

§ 990.310 Purpose—General policy on 

financial management, monitoring and 

reporting. 

All PHA financial management 

systems, reporting, and monitoring of 

55008 Federal Register / Vol. 79, No. 180 / Monday, September 19, 2005 / Rules and Regulations 

program performance and financial 

reporting shall be in compliance with 

the requirements of 24 CFR 85.20, 85.40, 

and 85.41. Certain HUD requirements 

provide exceptions for additional 

specialized procedures that are 

determined by HUD to be necessary for 

the proper management of the program 

in accordance with the requirements of 

the 1937 Act and the ACC between each 

PHA and HUD. 

§ 990.315 Submission and approval of 

operating budgets. 

(a) Required documentation: 

(1) Prior to the beginning of its fiscal 

year, a PHA shall prepare an operating 

budget in a manner prescribed by HUD. 

The PHA’s Board of Commissioners 

shall review and approve the budget by 

resolution. Each fiscal year, the PHA 

shall submit to HUD, in a time and 

manner prescribed by HUD, the 

approved Board resolution. 

(2) HUD may direct the PHA to 

submit its complete operating budget 

with detailed supporting information 

and the Board resolution if the PHA has 

breached the ACC contract, or for other 

reasons, which, in HUD’s 

determination, threaten the PHA’s 

future serviceability, efficiency, 

economy, or stability. When the PHA no 

longer is operating in a manner that 

threatens the future serviceability, 

efficiency, economy, or stability of the 

housing it operates, HUD will notify the 

PHA that it no longer is required to 

submit a complete operating budget 

with detailed supporting information to 

HUD for review and approval. 

(b) If HUD finds that an operating 

budget is incomplete, inaccurate, 

includes illegal or ineligible 

expenditures, contains mathematical 

errors or errors in the application of 

accounting procedures, or is otherwise 

unacceptable, HUD may, at any time, 

require the PHA to submit additional or 

revised information regarding the 

budget or revised budget. 

§ 990.320 Audits. 

All PHAs that receive financial 

assistance under this part shall submit 

an acceptable audit and comply with 

the audit requirements in 24 CFR 85.26. 

§ 990.325 Record retention requirements. 

The PHA shall retain all documents 

related to all financial management and 

activities funded under the Operating 

Fund for a period of five fiscal years 

after the fiscal year in which the funds 

were received. 

Dated: September 12, 2005. 

Paula O. Blunt, 

General Deputy Assistant Secretary for Public 

and Indian Housing. 

[FR Doc. 05–18624 Filed 9–16–05; 8:45 am] 

BILLING CODE 4210–33–P