Public Housing Assessment System (PHAS) Amendments to the PHAS

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 902

[Docket No. FR-4497-F-05]

RIN 2577-AC08

Public Housing Assessment System (PHAS) Amendments to the PHAS

AGENCY: Office of the Assistant Secretary for Public and Indian

Housing, and Office of the Director of the Real Estate Assessment

Center, HUD.

ACTION: Final rule.

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SUMMARY: This rule amends the Public Housing Assessment System (PHAS)

regulation at 24 CFR part 902 to provide additional information and

revise certain procedures and establish others for the assessment of

the physical condition, financial health, management operations and

resident services and satisfaction with PHA services in public housing,

including the technical review of physical inspection results and

resident survey results, and appeals of PHAS scores. The rule also

implements certain recently enacted statutory amendments. The rule

takes into consideration public comments received on the June 22, 1999,

proposed rule, as well as additional input HUD sought on this proposed

rule through informal meetings with representatives of PHAs and public

housing residents, and an analysis of PHAS advisory scores issued in

calendar years 1998 and 1999.

The purpose of the PHAS is to function as a management tool that

effectively and fairly measures a PHA's performance based on standards

that are objective, uniform and verifiable.

DATES: Effective Date: February 10, 2000.

FOR FURTHER INFORMATION CONTACT: For further information contact the

Real Estate Assessment Center (REAC), Attention: Wanda Funk, U.S.

Department of Housing and Urban Development, 1280 Maryland Avenue, SW,

Suite 800, Washington, DC 20024; telephone Technical Assistance Center

at (888) 245-4860 (this is a toll free number). Persons with hearing or

speech impairments may access that number via TTY by calling the

Federal Information Relay Service at (800) 877-8339. Additional

information is available from the REAC Internet Site, http://

www.hud.gov/reac.

SUPPLEMENTARY INFORMATION:

I. Background

HUD's Public Housing Assessment System (PHAS) provides a

significant oversight tool that effectively and fairly measures the

performance of a public housing agency (PHA) based on standards that

are objective and uniform. The final rule implementing the PHAS was

issued September 1, 1998 (63 FR 46596), and became effective October 1,

1998. Although the PHAS regulation became effective October 1, 1998,

the September 1, 1998, final rule provided a delayed implementation

date for the PHAS. The final rule took into consideration that time was

needed by PHAS to become familiar with and make the transition to this

new assessment system. The September 1, 1998, final rule provided that

the PHAS becomes effective for all PHAs with fiscal years ending on and

after September 30, 1999, and at that time, will replace the previous

assessment system, the Public Housing Management Assessment Program

(PHMAP). (As will be discussed later in this preamble, the schedule for

full implementation of PHAS for certain PHAS was revised by notice

published on October 21, 1999 (64 FR 56676).)

Under the PHAS, HUD evaluates a PHA based on the following four

indicators: (1) The physical condition of the PHA's public housing

properties; (2) the PHA's financial condition; (3) the PHA's management

operations; and (4) the residents' assessment (through a resident

survey) of the PHA's performance. HUD's Real Estate Assessment Center

(REAC) is charged with the responsibility for assessing and scoring the

performance of PHAs under the PHAS.

On June 22, 1999 (64 FR 33348), HUD published a rule that proposed

to amend the PHAS regulation, codified at 24 CFR part 902, to provide

additional information about the PHAS scoring systems, revise certain

procedures and establish others for the assessment of the physical

condition, financial health, management operations and resident service

and satisfaction in public housing, including the technical review of

physical inspection results and appeals of PHAS scores. The June 22,

1999, rule also proposed to implement certain recently enacted

statutory amendments. Although the June 22, 1999, rule only proposed to

implement certain provisions of the PHAS regulation, for the

convenience of the reader, HUD published the entire PHAS regulation.

On June 23, 1999, HUD published, in connection with the PHAS rule,

several notices that provide additional information on the scoring

process under the PHAS. These notices pertain to: (1) the Physical

Condition Scoring Process (64 FR 33650); (2) the Financial Condition

Scoring Process (64 FR 33700); (3) the Management Operations Scoring

Process (64 FR 33708); and the Resident Service and Satisfaction Survey

Scoring Process (64 FR 33712). The publication of these notices on June

23, 1999, was the second publication for each of these notices. All

four notices were previously published on May 13, 1999, at 64 FR 26166,

64 FR 26222, 64 FR 26232, and 64 FR 26236. At both the time of the May

1999 publication and the June 1999 publication, HUD solicited comments

on the scoring systems for each of the four PHAS Indicators. The issues

raised by the public commenters on the Notices are addressed in this

rule.

Sections II and III of the preamble to the June 22, 1999, proposed

rule provided a detailed discussion of the changes proposed to be made

to the PHAS regulations (see 64 FR 33348 at 33349-3351). The preamble

to this final rule does not repeat that discussion. HUD refers the

reader back to the June 22, 1999, proposed rule for the discussion of

proposed changes.

The public comment period on the PHAS proposed rule closed on

August 23, 1999. At the close of the public comment period, HUD had

received 29 comments. The commenters included housing authorities,

national organizations representing housing authorities, a law firm and

a national policy organization. All the comments were carefully

considered in the development of this final rule.

In addition to solicitation of public comments through the

rulemaking process, following the close of the public comment period on

the June 22, 1999 proposed rule, HUD held several meetings with PHAs

and their representatives to discuss the PHAS, implementation of the

PHAS, and to seek additional suggestions and recommendations on changes

and refinements. HUD also solicited additional input from residents,

and continued its analysis of the PHAS advisory scores that was started

during the one year transition period following the September 1, 1998

final rule. This additional consultation and continued analysis of the

PHAS was in keeping with HUD's commitment, made during the 1998

rulemaking process, to work closely with PHAs and residents and their

respective representatives in making the transition to the PHAS, to

make any necessary refinements to the PHAS as a result of testing PHAS

and consultation with PHAs and residents, and to make PHAS an effective

and efficient assessment system. This additional consultation and

analysis also satisfies direction provided to HUD

[[Page 1713]]

in the Conference Report to HUD's Fiscal Year 2000 Appropriations Act

(Pub. L. 106-74, 113 Stat 1047, approved October 20, 1999). The

conferees directed HUD to (1) delay implementation of the PHAS until,

in consultation with PHAs and their designated representatives, HUD

conducted a thorough analysis of all advisory PHAS assessments and

reviewed the GAO's analysis of the PHAS, and (2) publish a new

consensus-based PHAS final rule that incorporates any recommendations

resulting from this consultation and review process. Although GAO's

report on its analysis of the PHAS has not been issued in final form,

HUD has had ongoing discussions with GAO on its analysis of the PHAS to

date, and has considered this analysis in the development of the final

rule. This final rule published today reflects input from this

consultation and review process.

Section III of this preamble highlights the changes made at this

final rule stage. Section IV of this preamble addresses the significant

issues raised by the public commenters. Section V of this preamble

addresses the comments received on the scoring process notices

published on June 23, 1999. In the preamble to the June 22, 1999

proposed rule, HUD specifically solicited comments on certain issues.

The comments received on these issues are provided in Section VI of the

preamble to this final rule. Section VII addresses general comments

directed to this rulemaking.

HUD notes that some of the comments from housing authorities raised

issues very specific to their public housing developments or their

advisory scores, and were not issues directed to the regulatory

provisions in the proposed rule or the scoring systems described in the

notices. Accordingly, these comments are not addressed in this rule.

HUD, however, appreciates PHAs advising HUD of these specific concerns.

HUD has followed up with several PHAs and will continue to follow-up

with PHAs where there appear to be issues of discrepancies or problems

with their physical inspections, or with other aspects of the PHAS

particular to the PHA that commented.

Section II of this preamble, which immediately follows, provides a

brief overview of the public comments received on the proposed rule.

II. Overview of Public Comments on Proposed Rule

As noted earlier in this preamble, HUD received 29 comments on the

PHAS proposed rule published on June 22, 1999. The majority of the

commenters expressed their support for a uniform and objective system

to assess a PHA's performance. The majority of the commenters, however,

also believed that neither HUD nor PHAs were ready for full

implementation of the PHAS commencing October 1, 1999, as originally

scheduled. Many of the PHAs stated that they had only recently received

their PHAS advisory scores, and needed additional time to review and

comprehend these scores and prepare for implementation of PHAS. Other

PHAs stated that HUD needed additional time to prepare for PHAS because

PHAs were experiencing problems with electronic data submission to HUD,

as required by the PHAS regulation, and problems were encountered with

HUD systems. These commenters stated that neither HUD nor PHAs were

ready for implementation of PHAS, and requested that HUD delay

implementation of PHAS for another year. (Concerns about specific

components of PHAS are addressed in Section IV of this preamble.)

HUD recognizes that with the start-up of any new system, problems

will arise and aspects of the system will need to be fine-tuned. For

these reasons, HUD provided, in its PHAS final rule issued on September

1, 1998, that PHAS would be implemented for PHAs with fiscal years

ending on and after September 30, 1999. During the year of transition

that preceded the scheduled implementation of PHAS (September 1998 to

September 1999), HUD continued to examine its PHAS processes, tested

PHAS systems, obtained feedback about the PHAS from PHAs and public

housing residents, and, as a result, gained valuable information, which

HUD has used to refine various elements of the PHAS. During this

period, HUD also continued its PHAS education and training program for

PHAs both through HUD's internet site and through training conducted

across the nation. For these reasons, HUD does not believe delaying

implementation of the PHAS for all PHAs for another full year is

necessary. However, as HUD already has shown through publication of its

October 21, 1999 notice, HUD agrees that additional time is necessary

for certain PHAs, and additional time was provided to these PHAs.

HUD recognized that even with the one-year delayed implementation

of PHAS, those PHAs which, under the September 1, 1998 final rule, will

be the first PHAs to be issued PHAS scores (PHAs with fiscal years

ending September 30, 1999 and December 31, 1999), additional time and/

or additional assistance may be necessary to review advisory scores and

prepare for compliance with the requirements of the new assessment

system. For these PHAs, HUD already has advised that it will not issue

PHAS scores for fiscal years ending September 30, 1999 and December 31,

1999. For these PHAs, HUD will issue a PHAS advisory scores for all

four PHAS Indicators. For these PHAS, HUD also will issue an assessment

score based only on the management component of the PHAS (subpart D of

the part 902 regulation). Section III of this preamble discusses this

assistance in more detail.

An additional concern raised by many PHA commenters is that a PHA's

score under PHAS was very different from the score the PHA previously

received under PHMAP, and PHAs were concerned about the discrepancy

between the two scores. As HUD stated in the first PHAS proposed rule

published on June 30, 1998, the PHAS is a different system from PHMAP.

The PHAS was designed to assess more than the management operations of

PHAs. The PHAS provides for an assessment of a PHA's physical

condition, financial condition, management operations, and resident

services and satisfaction, and the PHAS provides for this assessment to

be done using, to the extent feasible, uniform and objective measures.

With this broader assessment, a PHA's overall PHAS score will be

different from the PHA's overall PHMAP score.

Another concern voiced by commenters is that the PHAS is not

consistent with the flexibility provided to PHAs by the Quality Housing

and Work Responsibility Act of 1998 (Pub. L. 105-276, approved October

21, 1998) (commonly referred to as the ``Public Housing Reform Act.'').

This statute which amended the U.S. Housing Act of 1937 (the 1937 Act)

made significant changes to HUD's public housing and Section 8

assistance programs. HUD agrees with the commenters that the Public

Housing Reform Act increased PHA flexibility with respect to management

and operations of their programs. The statute, however, did not relieve

HUD of the obligation to fulfill its public trust responsibilities,

which include the appropriate oversight of the entities receiving

taxpayers funds to administer HUD programs. To the contrary, HUD

believes that the Public Housing Reform Act strengthened HUD's

oversight authority with respect to assessment of the performance of

PHAs.

On the subject of improvement and refinement of the PHAS, HUD notes

that the number of comments and concerns raised about PHAS were

significantly less than those raised during the initial

[[Page 1714]]

rulemaking on the PHAS in 1998. HUD received 776 comments on the first

PHAS proposed rule, published on July 30, 1998. Although 670 of the 776

comments were form letters, in reviewing the comments raised on the

first PHAS proposed rule and this second proposed rule, HUD believes

that it has made significant progress in addressing initial concerns

about the PHAS, and both HUD and PHAs benefitted from the transition

period that followed the September 1, 1998, final rule.

HUD recognizes that there is anxiety about significant change, and

the PHAS represents a marked departure from the PHMAP. HUD believes,

however, that the PHAS represents not only a marked departure from, but

an improvement over, the PHMAP. HUD also acknowledges that the PHAS is

not a perfect system, but no system is perfect. HUD expects that in the

implementation of PHAS, problems will arise from time to time. Where

those problems result from HUD's systems, HUD will work to quickly

remedy the problems and correct any errors. Where the PHAS shows that

problems are with the PHA in the performance of one or more areas, HUD

will work with the PHA to remedy its problems, and, when necessary,

take appropriate actions to ensure that PHAs are in compliance with

applicable laws and regulations. At the foundation of PHAS is the goal

to have all PHAs perform as high performers, which means PHAs are

delivering decent, safe and affordable housing to their residents.

III. Changes Made to the PHAS at the Final Rule Stage

PHAS Scoring Notices

The scoring notices for the four PHAS Indicators were published on

June 23, 1999, and HUD solicited public comment on these notices. As a

result of public comment and further consultation with PHAs and

residents, several clarifying changes and improvements were made to the

notices. Each notice will describe the changes made since the previous

publication. These four notices published in conjunction with this

final rule, to be published soon, establish the scoring processes for

the four PHAS Indicators. These scoring notices will remain in place as

published. As provided in the rule, in the event HUD decides to make

any future substantive changes to these notices, they will be published

for comment before being issued in final form.

Two scoring notices will be published for the Management Operations

Indicator. As will be explained later in this preamble, this final rule

revises the sub-indicators of the Management Operations Indicator. One

Management Operations scoring notice establishes the scoring process

for the Management Operations Indicator, before it was revised by this

final rule, and the second notice establishes the scoring process for

the revised Management Operations Indicator.

PHAS Regulation

In this final rule, HUD has made the following changes to the

regulation:

Section 902.1 (Purpose and General Description), HUD

revised paragraph (e) that provided that a PHA may not change its

fiscal year for the first three full fiscal years following October 1,

1998. HUD added language to this section to provide that a PHA may not

change its fiscal year ``unless the change has been approved by HUD.''

The requirements under the new PHA Plan regulations, published as an

interim rule on February 18, 1999 (64 FR 8170), and as a final rule on

October 21, 1999 (64 FR 56844), may necessitate a change in fiscal

years for some PHAs in future years. This language will provide HUD and

the PHAs with the flexibility to address this matter if necessary.

Section 902.5 (Applicability) was reorganized to include

the discussion of the applicability of the PHAS regulation to Resident

Management Corporations (RMCs) and Alternative Management Entities

(AMEs) in one paragraph of this section, revised paragraph (a). Revised

paragraph (a) recognizes that RMCs may now be direct recipients of

certain HUD funds. Section 532 of the Public Housing Reform Act amended

section 20 of the 1937 Act to provide, among other things that the

Secretary shall directly provide assistance from the Operating and

Capital Funds to a RMC under certain conditions. If the Secretary

provides direct funding to RMCs (DF-RMCs) as provided by section 20,

section 20 provides that the PHA shall not be responsible for the

actions of the RMC.

Revised paragraph (a) provides that RMCs and DF-RMCs will be

assessed and issued their own numeric scores under the PHAS based on

the public housing developments or portions of public housing

developments that they manage and the responsibilities they assume

which can be scored under PHAS. Paragraph (a) provided that because the

PHA and not the RMC/AME is ultimately responsible to HUD under the

Annual Contributions Contract (ACC), the PHAS score of a PHA will be

based on all of the developments covered by the ACC, including those

with management operations assumed by an RMC or AME (including a court

ordered receivership agreement, if applicable). Revised paragraph (a)

includes this language but also provides that the PHAS score of a PHA

will not be based on developments managed by a DF-RMC. Again, a PHA is

not responsible for developments managed by a DF-RMC.

References in the PHAS regulation to PHAs include RMCs, unless

otherwise stated. References in the PHAS regulation to RMCs include DF-

RMCs, unless otherwise stated, and the PHAS regulation is applicable to

RMCs, including DF-RMCs, unless otherwise stated.

Revised paragraph (a) also clarifies that AMEs are not issued PHAS

scores. The performance of the AME contributes to the PHAS score of the

PHA or the PHAs for which they assumed management responsibilities.

In Sec. 902.5, as part of the reorganization of this

section, HUD amended paragraph (b) to reflect the following revised

implementation schedule of PHAS for PHAs with fiscal years ending

September 30, 1999, or December 31, 1999, that was published in the

Federal Register on October 21, 1999. Section 902.5 provides that for

PHAs with fiscal years ending September 30, 1999, or December 31, 1999,

HUD will not issue PHAS scores for the fiscal years ending on these

dates. For these PHAs, in lieu of a PHAS score, HUD will issue the

following:

(1) PHAS Advisory Score. A PHA with a fiscal year ending September

30, 1999, or December 31, 1999, will be issued a PHAS advisory score

for all four PHAS Indicators. The PHA must comply with the requirements

of this part so that HUD may issue the advisory score. Physical

inspections will be conducted using HUD uniform physical inspection

protocol. For these PHAs to successfully make the transition to PHAS,

they must comply with the requirements of PHAS and be assessed by HUD

under the PHAS, if only on an advisory basis.

(2) Management Assessment Score. A PHA with a fiscal year ending

September 30, 1999, or December 31, 1999, will receive an assessment

score on the basis of HUD's assessment of the PHA's management

operations in accordance with subpart D of part 902.

This section also provides that PHAs with fiscal years ending after

December 31, 1999, will be issued PHAS scores.

In Sec. 902.7 (Definitions), HUD added a definition of

``Act'' to refer to the U.S. Housing Act of 1937 (42 U.S.C. 1437 et

seq.), which is referenced throughout the rule.

[[Page 1715]]

In Sec. 902.7, HUD removed language from the definition of

``Alternative Management Entity (AME)'' which was duplicative of the

language in Sec. 902.5. HUD included in the definition of ``AME''

reference to an entity that has entered into a Regulatory and Operating

Agreement with a PHA to clarify that the units managed by an AME under

this agreement are covered by this rule.

In Sec. 902.7, in the definition of ``reduced actual

vacancy rate within the previous three years,'' HUD clarifies that this

rate only applies to PHAs with fiscal years ending September 30, 1999,

and December 31, 1999. As provided in the PHAS Transition Notice,

published on October 21, 1999, PHAs with fiscal years ending September

30, 1999, and December 31, 1999, will be assessed under requirements of

part 902, subpart D, as in effect before issuance of this final rule.

In Sec. 902.7, HUD added definitions for ``unit months

available'' and ``unit months leased.''

In Sec. 902.7, HUD removed the definition of ``vacancy

loss'' and replaced this definition with one for ``occupancy loss.''

In Sec. 902.20 (Physical Condition Assessment), HUD

clarifies that occupied units, which are the units subject to physical

inspection are subject to inspection but not as dwelling units; for

example, units used for daycare or for meetings (units used for such

purposes are inspected as common areas).

In Sec. 902.23 (Physical Condition Standards), HUD added

language to clarify that HUD's Uniform Physical Condition Standards are

concerned with acceptable basic living conditions, not the decor or

cosmetic appearance of the housing.

In Sec. 902.23, HUD added language to clarify that the

five major inspectable areas may include the components for each area

listed in this section, but need not, in each case, include all these

components, or may include other components, similar to those listed,

but unique to the housing being inspected, or referred to by another

name other than the term referenced in the rule.

In Sec. 902.24 (Physical Inspection of Properties), HUD

added language in the definition of ``score'' in paragraph (b) that

highlights that PHAs are notified of health and safety deficiencies at

the time of the physical inspection and the PHA is expected to promptly

address all health and safety deficiencies.

In Sec. 902.25 (Physical Condition Scoring and Thresholds)

HUD revised paragraph (b)(3)(i) to remove reference to outdated form

HUD 50072, and to provide that the certification required under this

paragraph shall be in the manner prescribed by HUD.

In Sec. 902.25, HUD added a new paragraph (c) that

provides for adjustment of the physical condition score based on

certain circumstances that include: (1) Inconsistencies between local

code requirements and HUD's inspection protocol, or conditions which

are permitted by variance or license, or which are preexisting physical

features; (2) deficiencies in the physical condition of the property,

the cause of which were beyond the control of the PHA (but the PHA is

responsible for correction); and (3) modernization work in progress in

a dwelling unit.

In Secs. 902.25, 902.35 (Financial Condition Scoring and

Thresholds) and 902.45 (Management Operations Scoring and Threshold),

HUD clarified that to receive a passing score under the Physical

Condition, Financial Condition and Management Operations Indicators, a

PHA must achieve a score of at least 18 points or 60 percent of the

available points under these indicators.

In Sec. 902.26 (Physical Inspection Report), HUD added new

subparagraphs to paragraph (a) to provide a process for correcting

exigent health and safety deficiencies identified during the physical

inspection and noted on the physical inspection report before the

physical inspection report becomes final.

In Sec. 902.33 (Financial Reporting Requirements), HUD

provides an extension of time to submit the required financial

information. For the following four quarters--September 30, 1999,

December 31, 1999, March 31, 2000 and June 30, 2000--PHAs will receive

an automatic one month extension for the submission of their required

financial information. For fiscal years ending after June 30, 2000, the

final rule provides PHAs with a 15-day ``grace'' period beyond the

submission due date. This same automatic one month extension is

provided for the information required to be submitted under PHAS

Indicator #3 (Management Operations) and Indicator #4 (Resident

Services and Satisfaction) (see discussion of Sec. 902.60 below).

In Sec. 902.33, HUD also revised paragraph (a) to add a

new paragraph (3). New paragraph (3) provides under the scoring process

for the Financial Condition Indicator, no points will be deducted under

the Current Ratio or Monthly Expendable Fund Balance components for a

PHA that has too high liquidity or reserves if the PHA has achieved at

least 90 percent of the points available under the Physical Condition

Indicator, and is not required to prepare a follow-up survey plan under

the Resident Service and Satisfaction Indicator. For a PHA that has too

high liquidity or reserves but does not meet the qualifications

described in paragraph (a)(3)(i), the PHA may appeal point deductions

under the Current Ratio or Monthly Expenditure Fund Balance components

based on mitigating circumstances if the PHA's physical condition score

is at least 60 percent of the total available points under the Physical

Condition Indicator. The appeal may be made without regard to change in

designation. The appeal process is similar to that provided for

adjustments of scores under the Physical Condition Indicator.

In Sec. 902.35 (Financial Condition Scoring and

Thresholds), HUD added a new paragraph (paragraph (a)(2)) to provide

that PHAs with fiscal years ending September 30, 1999, December 31,

1999, March 31, 2000, and June 30, 2000, will receive an advisory score

for HUD's financial assessment of the PHA's entity-wide operations. An

entity-wide assessment includes financial information on other HUD

funds, such as Section 8 or Community Development Block Grant funds

(received from the CDBG grantee), as well as funds from non-HUD

sources.

HUD's notice published on October 21, 1999, already notified PHAs

with fiscal years ending September 30, 1999 or December 31, 1999 that

they would receive a financial advisory score. Although the final rule

extends the entity-wide advisory score to PHAs with fiscal years ending

March 31, 2000, and June 30, 2000, the rule does not exempt these

latter PHAs from a PHAS financial score.

PHAs with fiscal years ending March 31, 2000, and June 30, 2000,

will receive a PHAS financial score based on their public housing

operating subsidies program. PHAs with fiscal years ending after June

30, 2000, will receive PHAS financial scores that are based on the

PHA's entity-wide operations. HUD has extended entity-wide advisory

scores to PHAs with fiscal years ending March 31, 2000, and June 30,

2000, as a result of HUD's consultation with the industry, and because

of the conversion from HUD accounting to GAAP. The chart that follows

provides an overview of the financial scoring process into the year

2000.

[[Page 1716]]

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Financial condition Management

Quarter ---------------------------------------------------------------------------------- Physical Resident

Public Housing Entity-wide Six Indicators Five Indicators

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

9/30/99......................... Advisory........... Advisory........... Score............. N/A............... Advisory.......... Advisory.

12/31/99........................ Advisory........... Advisory........... Score............. N/A............... Advisory.......... Advisory.

3/31/00......................... Score.............. Advisory........... N/A............... Score............. Score............. Score.

6/30/00......................... Score.............. Advisory........... N/A............... Score............. Score............. Score.

9/30/00 and beyond.............. N/A................ Score.............. N/A............... Score............. Score............. Score.

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

In Sec. 902.35, HUD reversed the order of Net Income or

Loss divided by the Expendable Fund Balance (Net Income) and Expense

Management/Utility Consumption (Expense Management). Expense Management

now precedes Net Income. The order was reversed to be consistent with

the previously published guidance on the PHAS Financial Condition

Indicator.

In Sec. 902.35, HUD revised the definitions of ``Number of

Months Expendable Fund Balance'' and ``Occupancy Loss.''

In Sec. 902.43 (Management Operations Performance

Standards), HUD removed Management sub-indicators #1 (Vacancy Rate and

Unit Turnaround Time) and #3 (Rents Uncollected). HUD agreed with

commenters that stated that these factors are assessed under the

Financial Condition Indicator through the ``Occupancy Loss'' and

``Tenant Receivable Outstanding'' (formerly Days Receivable

Outstanding) components, and the inclusion of these components under

both the Financial Condition Indicator and Management Operations

Indicator was duplicative.

HUD notes, however, that for PHAs with fiscal years ending

September 30, 1999, and December 31, 1999, which are being assessed

under 24 CFR part 902, subpart D (Management Operations) and only

receiving PHAS advisory scores, HUD's assessment will be based on the

requirements of subpart D as in effect before issuance of this final

rule. This means that the management assessment will be based on all

six sub-indicators of the Management Operations Indicator.

The amendment made to the sub-indicators in the Management

Operations Indicator by this final rule now provides for five sub-

indicators. Former sub-indicator #6--Security and Economic Self-

Sufficiency--are now two separate sub-indicators. Although the rule

does not reflect the points for each of the sub-indicators of the

Management Operations Indicator, these are provided in the Management

Operations scoring notice, the points for the six sub-indicators have

been redistributed proportionally among the current five sub-

indicators. As a result of this redistribution, economic self-

sufficiency sub-indicator is assigned greater weight than assigned at

the proposed rule stage. This redistribution of points will be

reflected in the new Management Operations scoring notice.

In Sec. 902.43, HUD removed language from paragraph (b)

that provided that a PHA in reporting under the Management Operations

Indicator which was unable to submit its information electronically,

should consider utilizing library or local government location to

access the internet. This paragraph also provided that in the event

local resources were not available, a PHA should go to the nearest HUD

Public and Indian Housing program office for assistance. This language

was informational only, and not appropriate for the regulatory text. If

a PHA does not have internet capability, the PHA should seek assistance

from local resources in submitting its information electronically to

HUD, and the HUD offices are willing to assist PHAs in meeting their

reporting requirements under the PHAS. This language was included in

the PHAS rule issued in 1998. HUD believes that as we approach the new

millennium the number of PHAs that needed this type of assistance in

1998 are dwindling quickly and it is HUD's intent, consistent with this

Administration's goal, that information is provided and exchanged

electronically.. [Note: HUD made this same change in Sec. 902.50(c) and

902.51(c)].

In Sec. 902.50 (Resident Service and Satisfaction), HUD

added language in paragraph (c) that advises that at the completion of

the resident survey process, a PHA will be audited as part of the

Independent Audit to ensure the resident survey process has been

managed as directed by HUD. HUD also added language to clarify that (1)

implementation plans are to be submitted to HUD via the internet; and

(2) any follow-up plans that a PHA may be required to submit are to be

submitted with the PHA's Annual Plan submission in accordance with 24

CFR part 903.

In Sec. 902.51 (Updating of Resident Information), HUD

added language in paragraph (c) to clarify that the electronic updating

of the public housing unit address list is to be done through the

internet. HUD also revised paragraph (c)(3) to provide that REAC will

respond to a PHA's request to update its list manually upon REAC's

receipt of the PHA request.

In Sec. 902.52 (Distribution of Survey to Residents), HUD

replaced the term ``residents'' with ``units'' in several places to

emphasize that the survey selection process is random and objective; it

is based on occupied units and not on particular information about the

residents in those units.

In Sec. 902.60 (Data Collection), HUD made the same

revision to paragraph (a) as HUD made to Sec. 902.1(e).

In Sec. 902.60, HUD added the extensions in filing

submission that it provided in Sec. 902.33, discussed above.

In Sec. 902.63 (PHAS Scoring), HUD clarified in paragraph

(c) when a PHA's overall PHAS score becomes its final PHAS score. HUD

also reorganized the paragraphs in this section to present a more

logical order. HUD also added a new paragraph (d) to provide that REAC

will perform an audit review of a PHA whose audit has been found

deficient.

In Sec. 902.67 (Score and Designation status), HUD revised

the definition of ``standard performer'' in paragraph (a) to clarify

that to be designated a standard performer a PHA must receive a passing

score in PHAS Indicators #1 (Physical), #2 (Financial), and #3

(Management Operations).

In Sec. 902.67, HUD added language in paragraph (b) that

notes, in accordance with new section 5A(j) of the 1937 Act (42 U.S.C.

1437c-1), that a PHA that achieves a total score of less than 70

percent but not less than 60 percent is at risk of being designated

troubled. New section 5A(j) provides generally that HUD may require,

for each PHA that is at risk of being designated as troubled under

section 6(j)(2) of the 1937 Act, that the public housing agency plan

for such PHA include any additional information that the

[[Page 1717]]

determines to be appropriate. The proposed rule did not clearly

indicate PHAs that are at risk of being troubled.

In Sec. 902.67(c)(2), HUD included language that was in

the previous PHAS rule issued on September 1, 1998, but inadvertently

omitted in the June 22, 1999, proposed rule. This language pertains to

troubled with respect to modernization and was in the previous PHAS

rule at Sec. 902.67(c). The language reinserted, however, is revised

from the September 1, 1998 final rule, to reflect that the Capital Fund

Program is replacing the Comprehensive Improvement Assistance Program

and the Comprehensive Grant Program.

In Sec. 902.67, HUD provides that a PHA whose designation

as a standard or high performer has been withheld or rescinded, as a

result of a PHA's involvement in any of the circumstances described in

Sec. 902.67(d) (e.g., involved in litigation bearing directly upon the

physical, financial or management performance of a PHA, operating under

a court order) may request the Assistant Secretary for Public and

Indian Housing to reinstate the designation and provide the basis for

the reinstatement. HUD clarifies that a designation assigned or

withheld under Sec. 902.67, and any reinstatement determined

appropriate by the Assistant Secretary, does not result in a change in

the PHA's PHAS score.

In Sec. 902.68 (Technical Review of Results of PHAS

Indicators #1 and 4), HUD revised the paragraph concerning ``unit

error'' to clarify that only a PHA's public housing units are

considered in the scoring.

In Sec. 902.69 (PHA Right of Petition and Appeal), HUD

revised paragraph (c) to clarify the procedures that govern appeal of

troubled designation and refusal to remove trouble designation. These

procedures were present in the September 1, 1998 final rule but became

merged, in some aspects inappropriately, with the procedures that

govern appeal of a PHAS score. In paragraphs (d) and (e) of this

section, HUD also clarified how final decisions are reached by the

Board of Review. The Board of Review reaches a decision on the appeal

and the PHA is notified of the final decision by the Assistant

Secretary for Public and Indian Housing.

In Sec. 902.71 (Incentives for High Performers), a new

paragraph (a)(4) is added to reference the performance reward available

to high performing PHAs under the regulations of the Capital Fund

Formula. (See Sec. 905.10(j) of the proposed rule published on

September 14, 1999. A performance reward factor is expected to be part

of this formula and part of the final rule on the Capital Fund Formula

to be published in the near future.)

In Sec. 902.71, HUD clarifies that the bonus points

available to high performers in HUD's funding competitions, where

permissible by statute and regulation, will be provided in HUD's

notices of funding availability.

In Sec. 902.73 (Referral to an Area HUB/Program Center),

HUD removed language in paragraph (b) that described the contents of

the Improvement Plan because this language was duplicative of that in

paragraph (d) of this section.

In Sec. 902.75 (Referral to a Troubled Agency Recovery

Center (TARC)), HUD revised paragraph (a) to include PHAs designated

troubled under the PHMAP regulations in 24 CFR part 901. Since PHAS is

a fairly new system, this revision recognizes that some PHAs were

designated as troubled (and remain under such designation) under the

PHMAP regulations. PHAs designated troubled under PHMAP are subject to

the provisions of Secs. 902.75 through 902.85.

In Sec. 902.75(a), HUD clarifies that the referral by the

TARC of a troubled PHA to a HUB/Program Center is for the purpose of

having the HUB/Program Center assist with the oversight and monitoring

of the PHA's planned recovery. In Sec. 902.75, HUD is also removing the

requirement of a Recovery Plan. On further consideration, HUD believes

that the Memorandum of Agreement (MOA) is the only required document

necessary to address the plan for recovery of a troubled PHA.

In Sec. 902.75, HUD also clarifies in paragraph (b)(2)

that performance targets may be annual, quarterly, or monthly.

In Sec. 902.75(d), HUD clarifies that the PHA must improve

its performance and achieve an overall PHAS score of at least 60

percent, and achieve a score of at least 60 percent of the total points

available under each of PHAS Indicators #1 (Physical Condition), #2

(Financial Condition) and #3 (Management Operations).

In Sec. 902.75(e)(4), HUD clarifies that the Board of

Commissioners will be a party to the MOA unless exempted by the TARC

(not the HUB/Program Center as the rule previously provided). HUD also

revised the example provided in paragraph (g) of this section to be

more helpful to the reader.

In Sec. 902.75, HUD adds a new paragraph (h) to address

the audit review of a PHA designated as troubled. This new provision is

based on practice under the PHMAP regulations.

Under the PHMAP regulations, a troubled PHA with more than 100

units was required to undergo a confirmatory review by HUD before the

PHA's troubled designation was removed. This review is conducted by a

team appointed by the Office of Public and Indian Housing. For large

troubled PHAs, the team is comprised of housing specialists and

financial analysts from throughout the country (as opposed to staff

from HUD's Field Office with jurisdiction over the PHA). This process

provides for an accurate and objective assessment of the PHA and

appropriately removes these duties from the Field Office that provides

the technical assistance to the PHA.

As revised by this final rule, the PHAS will provide a similar

process for PHAS, but only in relation to the PHAS Financial Indicator.

REAC may, at its discretion, select an audit firm that will perform the

audit of PHAs identified as troubled under PHAS, and its predecessor

PHMAP, and REAC will serve as the audit committee for the audit in

question. At its discretion, REAC will either select the auditor from

the existing request for proposals of audit work issued by the PHA, or

REAC will conduct its own request for proposals and will conduct the

selection process. If REAC conduct its own request for proposals and

conducts the selection process, the audit engagement may be paid from

funds assigned to the PHA by HUD for such purposes, as provided by law.

In Sec. 902.77 (Referral to the Departmental Enforcement Center),

HUD clarifies that the Assistant Secretary for Public and Indian

Housing makes the determination that a troubled PHA shall be declared

in substantial default.

In addition to these changes, HUD has made editorial and technical

changes throughout the rule for purposes of clarity.

IV. Discussion of Public Comments

This section presents HUD responses to the significant issues

raised by the public commenters. The organization of the public

comments generally follows the organization of the proposed rule. The

heading ``Comment'' states the comment or comments made by the

commenter or commenters, and the heading ``Response'' presents HUD's

response to the issue or issues raised by the commenters. With respect

to comments about the scoring processes of the PHAS Indicators, the

majority of these comments are discussed in Section V of this preamble,

but there may be some overlap in discussion of the processes between

this Section IV and Section V.

[[Page 1718]]

Subpart A--General Provisions

Section 902.1 Purpose and General Description

Comment. The PHAS fails to consider differences related in the

overall mission and goals of PHAs nationally. The PHAS assessment does

not take relative size, mission, condition, geographic, and other local

variances into consideration. The effect of a ``one-size-fits-all''

construct is in direct opposition to the intent of the Quality Housing

and Work Responsibility Act of 1998, which promotes and encourages

local flexibility. Additionally, PHAs that serve the elderly or persons

with disabilities should not be compared to PHAs that predominantly

serve low-income families.

Response. PHAS, like PHMAP, was never intended to be an all

encompassing assessment tool. There are many aspects of PHA management

that PHMAP did not assess and the PHAS does not assess. Instead, key

indicators of performance, that are common to all PHAs, are identified

for review. In determining how best to structure the PHAS, HUD's

approach was to strike a balance on many issues, including those raised

by this comment. HUD decided that uniform, standardized, and objective

criteria among its programs are essential to effective management. A

standard of decent, safe and sanitary for housing should not be

dependent upon the location of a PHA's public housing or the residents

that it serves. Similarly, the PHA's financial condition or the ability

to manage its operations in accordance with certain standards should

not be dependent upon geography, or residents served. HUD notes that

where local variances should be taken into consideration, they will be,

as provided in the changes made in this final rule.

With respect to flexibility, HUD regulations governing individual

public housing programs provide PHAs with the needed flexibility to

tailor the operation of their programs and to manage their properties

in a manner that is sensible given their particular circumstances. HUD

believes that the PHAS significantly improves upon the PHMAP.

Section 902.5 Applicability

Comment. Private owners or owner entities that operate mixed-income

developments that contain public housing units do not appear to fit the

definition of ``Alternative Management Entity'' (AME) and therefore

should be addressed separately. Additionally, there are concerns about

several aspects of the PHAS to AMEs. All PHAS indicators are not

applicable to mixed-finance owner entities or public housing units

owned and operated by such entities. PHAS Indicator #1 (Physical

Condition) and some but not all of the components of PHAS Indicator #3

(Management Operations) are applicable to these entities but not PHAS

Indicator #2 (Financial Condition) and not PHAS Indicator #4 (Resident

Service and Satisfaction Indicator). These entities should be exempt

from assessment under Indicators #2 and #4.

Response. Entities that manage mixed-income, and/or mixed-finance

developments fall under the definition of an AME. An AME is defined as

``a receiver, private contractor, private manager, or any other entity

that is under contract with a PHA, or that is duly appointed or

contracted (for example, by court order or agency action) to manage all

or part of a PHA's operations'' (24 CFR 902.7). An owner entity

managing a mixed-income, mixed-finance development has a contractual

relationship with the PHA, usually through a Regulatory and Operating

Agreement, to operate the public housing units that are covered by the

PHA's Annual Contributions Contract (ACC) contract with HUD. Therefore,

for the purpose of PHAS, private owners or entities operating mixed-

income developments that include public housing units are treated as

AMEs.

HUD disagrees with the comment that all PHAS Indicators are not

applicable to entities that manage mixed-finance developments.

Components of PHMAP measured the financial condition of these entities

and resident services. Accordingly, HUD does not believe there is a

basis for exempting these entities from the assessments performed under

PHAS Indicators #2 and #4.

Subpart B--PHAS Indicator #1: Physical Condition

Certain comments specifically addressed to the PHAS Notice on the

Physical Condition Scoring Process may be applicable to the regulations

in Subpart B and vice versa. Please see Section V of this preamble.

Section 902.23 Physical Condition Standards for Public Housing--

Decent, Safe, and Sanitary Housing in Good Repair (DSS/GR)

Comment. The definition for ``good repair'' is not defined in the

rule. This term needs to be defined in the rule.

Response. The term ``good repair,'' like the terms ``decent, safe,

and sanitary,'' is defined in Sec. 902.23, and in Sec. 5.703 of HUD's

Uniform Physical Condition Standards rule, published in final on

September 1, 1998 (63 FR 46566). For each of the major inspectable

areas that are inspected as part of a physical condition inspection,

these terms are defined through descriptions such as ``proper operating

condition,'' and ``structurally sound'' of the items that make up the

inspectable areas. These terms were elaborated upon in the PHAS Notice

on the Physical Condition Scoring Process, and in the preamble to both

the June 30, 1998, PHAS proposed rule, and the June 30, 1998, Uniform

Physical Condition Standards proposed rule. As noted in both preambles,

the statutory physical condition standard for public housing required

by the 1937 Act was expressed in terms of ``decent, safe and

sanitary.'' (However, the physical condition standard presently

required under section 2 of the 1937 Act is referred to as ``decent and

safe'' which HUD does not consider a substantive change to the previous

statutory standard.) For FHA-related properties, the statutory standard

is expressed in terms of ``good repair and condition.'' In adopting

physical standards that are applicable to both public housing and FHA-

related properties, HUD uses the descriptive term--``decent, safe,

sanitary and in good repair.''

Comment. The physical condition standards are not clearly defined.

The standards by which PHAs are judged must be defined.

Response. The preceding response addresses this issue to some

extent. Additionally, HUD addressed this issue in its proposed rule on

Uniform Physical Condition Standards, published on June 30, 1998. In

the preamble to that proposed rule, HUD stated that the standards are

intentionally broad and are defined with terms such as in ``proper

operating condition,'' ``adequately functional,'' and ``free of health

and safety hazards.'' Given the differences in design of HUD housing,

and the different types of electrical and utility systems that will be

encountered, a rule cannot define or describe proper operating

condition for every type of system, or every type of element. This

information is rightly placed in supplementary documents, which have

been made available to PHAs directly, through HUD's website, since

1998. This information also was made available through notices

published in the Federal Register in May 1999 and June 1999, as

discussed earlier in this preamble.

[[Page 1719]]

Section 902.24 Physical Inspection of PHA Properties.

Comment. The majority of the commenters commended HUD for removing

vacant units from the physical inspection process. Several commenters,

however, stated that the rule also should exclude from inspection units

that are in the process of being modernized. As an example, commenters

noted that deficiency ratings should not be assigned to units or

buildings to be replaced as part of HOPE VI revitalization. This

information can be obtained by HUD's review of the PHA's on-going

modernization projects and Physical Needs Assessment.

Response. HUD believes that many of the concerns raised by the

commenters with respect to modernization result from advisory

inspections that occurred before HUD issued its proposed rule on June

22, 1999. HUD addressed concerns regarding modernization issues in the

June 22, 1999, proposed rule. The June 22, 1999, proposed rule advised

that it would add to the PHAS rule (and this final rule includes this

amendment), three categories of exemptions which assist PHAs by

providing flexibility in scoring for reasonable unforeseen

circumstances in conducting physical inspections. The exemptions

consist of the following categories of units that are not under lease:

(1) units undergoing vacant unit turnaround--vacant units that are in

the routine process of turn over, i.e., the period between which one

resident has vacated a unit and a new lease takes effect; (2) units

undergoing rehabilitation--vacant units that have substantial

rehabilitation needs already identified, and there is an approved

implementation plan to address the identified rehabilitation needs and

the plan is fully funded; and (3) off-line units--vacant units that

have repair requirements such that the units cannot be occupied in a

normal period of time (considered to be between five to seven days) and

which are not included under any approved rehabilitation plan.

HUD declines to exempt occupied units that are undergoing

modernization from physical inspections. If a unit is occupied it must

be decent, safe, sanitary and in good repair. However, the final rule

provides that HUD may determine occupied dwelling units undergoing

modernization work in progress require an adjustment to the physical

condition score and will consider such adjustment as provided in

Sec. 902.25(c)(3) of this final rule.

Comment. PHAs should be given credit for items needing repair or

modernization and for which repair or modernization is pending but not

yet begun because of lack of funding due to Federal budget decisions.

PHAs should not be penalized for circumstances (such as funding) beyond

their control. Rather than a ``point in time'' physical inspection,

PHAs should be given points for doing their jobs well under difficult

circumstances.

Response. The 1937 Act and the ACC place the responsibility for

maintaining public housing in the hands of the PHA. HUD understands

budgetary constraints, but part of good management is maintaining

housing in a decent, safe and sanitary condition even when funding

sources are limited. Maintaining housing in acceptable living condition

is not just a regulatory standard but also a statutory standard. HUD's

Uniform Physical Condition Standards and the PHAS rule assess the

extent to which PHAs are maintaining public housing in accordance with

the statutory standard.

Of necessity, the inspection of the public housing inventory is an

inspection at ``a point in time.'' HUD believes it would be misleading

to report a condition of public housing other than the actual condition

of the housing. If a PHA maintains its housing in a condition that is

decent, safe, and sanitary despite limited funding, the PHA is

fulfilling its statutory mandate and will receive a passing score under

PHAS Indicator #1.

With respect to modernization needs, HUD notes that the final rule

provides an adjustment to the physical condition score for

modernization work in progress. (Please see earlier discussion on

Sec. 902.25(c)(3).)

Comment. The rule needs to clarify how units are selected for

physical inspection. Rating a PHA only on a certain percentage of the

units inspected is unfair.

Response. To ensure accuracy in the physical condition standards

and inspection requirements, units are chosen for physical inspections

by a statistically valid random sample determined by the size of the

property. The sample does not distinguish between the type of

property(s) (i.e., elderly or family) or units (i.e., one bedroom, two

bedroom, three bedroom, etc.) that are involved. The system generated

sample will evenly distribute the buildings and units to be inspected

among the different types if more than one building type is contained

in a particular property.

In developing the PHAS rule, HUD considered the extent to which it

needed to inspect all units or some lesser number. HUD concluded that

it should not inspect all units because that would be costly and PHAs

are already required to inspect 100% of their units and systems under

PHAS Indicator #3, Management Operations. HUD decided to use a

statistically valid random sample methodology. This methodology is

accepted throughout the scientific and business communities for making

assessments regarding large universes.

Comment. PHAs should not receive deficiency ratings for items that

are outside of a PHA's control, e.g., city or town sidewalks, or roads

near public housing developments.

Response. The physical condition standards and inspection

requirements under the PHAS rule do not hold PHAs accountable for site

areas which are not within their control. The rule only applies to

aspects of the housing that are within the ownership of the PHA. For

instance, a PHA owner is not responsible for maintaining a road,

sidewalk, etc., if the PHA does not own the site area; however, the PHA

will be responsible for maintaining all areas which are legally part of

the property. In instances involving items scored but that are not

within a PHA's control, the PHA may request an adjustment in accordance

with new paragraph (c) of Sec. 902.25.

Comment. The final rule needs to resolve possible conflict with

fair housing issues and issues of reasonable accommodation under

section 504 of the Rehabilitation Act of 1973. A PHA received a

deficiency rating because a unit was not painted, but the unit was not

painted at the request of a tenant who claimed disability on the basis

of allergic reaction. This type of situation needs to be addressed in

the final rule.

Response. Section 902.24 (Physical Inspection of PHA Properties),

introduced by the June 22, 1999 proposed rule, addresses the issue of

compliance with civil rights and accessibility requirements. This

section provides that HUD will review certain elements during the

physical inspection to determine possible indications of noncompliance

with the Fair Housing Act and section 504 of the Rehabilitation Act of

1973, but a PHA will not be scored on those elements. Any indication of

possible noncompliance will be referred to HUD's Office of Fair Housing

and Equal Opportunity.

Comment. The final rule should provide for separate inspection

protocols for high rise buildings and scattered site projects. The

current inspection protocol apparently was designed for both high rise

and townhouse developments, so its treatment of common areas is

somewhat uneven and unreliable. The inspection protocol is even less

accurate when

[[Page 1720]]

applied to scattered sites. Some scattered site ``clusters'' have

communal sites and common areas, but truly scattered single family

homes and duplexes do not.

Response. When HUD introduced its Uniform Physical Condition

Standards in the proposed rule, by the same name, published on June 30,

1998, and in the first PHAS proposed rule, also published on June 30,

1998, HUD specifically advised that one of the objectives in

formulating these standards and in designing a new inspection protocol

was to move away from the different physical condition standards and

inspection procedures that were applicable to housing administered by

HUD programs. The PHAS takes into account all housing types, including

high rise housing (4 stories or more) and other building types, and

proportionately allocates the sample of units between those two types

of buildings. The scoring system only assesses elements that are

present. In cases where there are no common areas, for example, the

scoring system redistributes the available points to the other

inspectable areas.

Comment. PHAs should not receive deficiency ratings for recent

tenant damage or unreported repair needs. Deficiency ratings occurred

even when tenants acknowledged that they had not reported damage or

need for repairs to the PHA. The inspection process should require HUD

to review work order files to determine if the resident has reported

the noted deficiency. The PHA should only be responsible for those

items left unrepaired following proper notification.

Response. HUD's physical inspection system is objective and does

not distinguish those defects that are the fault of the resident, nor

does the system in itself recognize good faith efforts of the owner.

The system is simply a tool for observing and transmitting data

regarding the physical condition of the property at the time of the

inspection. An owner of HUD assisted or insured housing is statutorily

and contractually responsible for maintaining the physical condition of

the property. HUD anticipates that such owners, like all landlords,

would rely on lease provisions regarding the resident maintenance or

destruction of the units, and HUD would encourage them to do so in

furtherance of compliance with the physical condition standards. Good

property management, which includes regular housekeeping and

preventative maintenance inspections throughout the year, coupled with

strict lease enforcement, will result in well-maintained housing that

meets the standard.

Comment. The rule needs to address further the inspection

notification process. The scheduling of the inspection appears to be

kept a secret until the last moment. In one PHA's development, although

some tenants did not want their units inspected, the inspector advised

that the tenants would have to confirm that to the inspector in person.

Advance notice of the inspection needs to be provided and tenant rights

need to be considered and respected by the inspector.

Response. The rule provides the timing of the inspections.

Specifically, PHAs are to be assessed annually. Physical inspections

are to take place in the three months immediately preceding the end of

the PHA's fiscal year. In addition, HUD's ACC does not afford tenants

the right of refusal to have a unit inspected. In accordance with the

ACC, PHA's are required to provide HUD or its representative with full

and free access to all facilities (units and appurtenances) contained

in the project in order to permit physical inspections. In the event

that a PHA fails to provide access as required by HUD or its

representative, the PHA will be given ``0'' points for the project(s)

involved which will be reflected in the physical condition and overall

PHAS score. With respect to notification of the physical inspection,

HUD provides written notification to the PHA that its properties will

be inspected within the next 30 to 90 days. The HUD contract inspector

will schedule the inspection, providing a minimum 10 days notification,

which is confirmed with the PHA in writing by the contractor. HUD's

notification of inspection requires the PHAs to provide proper

notification to tenants. The contractor's confirmation letter also

reminds PHAs of the tenant notification requirement.

Comment. HUD's authority to access tenant dwelling units as

provided in Sec. 902.24(d) is questionable. Section 902.24(d) states

that ``PHAs are required by the Annual Contributions Contract (ACC) to

provide the government with full and free access to all facilities

contained in the project.'' However, the degree of access envisioned by

Section 15 of the ACC is circumscribed by the auditing function, and is

not meant to authorize unbridled access to tenant dwelling units.

Additionally, portions of the public housing program regulation at 24

CFR 966.4(j) do not give HUD full and free access to tenant dwelling

units. The PHAS rule does not justify entry by HUD of a tenant dwelling

unit without notification which specifies a date and time of

inspection, or entry by the HUD without notice because a physical

inspection would not be considered an ``emergency'' within the

regulation.

Response. HUD has the requisite statutory and regulatory authority

to inspect tenant dwelling units. Notification of inspection is

provided to the PHA who is required to provide proper notification to

tenants. However, HUD notes that Sec. 966.4(j) of its regulations does

not require a specific time or date, only reasonable advance

notification, that inspections will be performed during reasonable

hours.

Comment. The PHAS inspections establish unfunded financial burdens

and constitute an unfunded mandate. Although HUD outsources the

inspections, PHAs are required to accompany contractors during

inspections, resulting in added maintenance and managerial costs. When

coordinating inspections for scattered site public housing units, a lot

of time is wasted inspecting units in one part of the city and then

going to an entirely different section of the city on the same day. HUD

should schedule scattered site inspections with regards to geographical

considerations such as zip codes to maximize routing efficiencies and

to keep the already excessive administrative costs of this process to a

minimum.

Response. HUD has a statutory obligation to assess the performance

of PHAs, including the physical condition of their properties.

Additionally, the ACC has always provided that PHAs must provide HUD

with full and free access to their developments. HUD has conducted on-

site reviews of PHAs either through PHMAP confirmatory reviews or other

management reviews for at least two decades. Therefore, Federal

oversight of the physical inspection of public housing units is not new

for PHAs. It is an inherent part of receiving Federal financial

assistance and is customary in most, if not all Federal grant programs,

regardless of the administering agency. HUD believes that there should

be little or no difference in the way a physical inspection should be

conducted between Federal programs. HUD believes that it is important

to have a consistent standard across programs and geographical regions.

In this way, all properties and property owners are treated fairly and

equally.

With respect to inspection of units at scattered sites and the

additional time involved, it is HUD's intent to reduce the

administrative burden to the PHAs to the extent possible. HUD will

examine inspection schedules and make every effort to schedule

inspections that

[[Page 1721]]

minimize the use of resources on the part of the PHA.

Comment. The HUD contract inspectors are poorly organized,

inadequately skilled and highly inefficient, and PHAS physical

inspection quality controls are inadequate. Inspectors did not keep the

inspection schedules as promised, and did not perform the inspection

process as required. Inspectors did not inform PHA staff of inspection

schedules as required. The rule needs to ensure consistency in

inspection. Inspectors in one area may be more lenient, whereas

inspectors in another area may be more stringent in interpreting

inspection standards. Inspection standards should be clarified in the

new rule and independent contractors should communicate their

interpretation of the standards to PHAs before the inspection is

conducted.

Response. HUD contract inspectors, contracted under the national

inspection contract (NIC), successfully conducted approximately 24,000

inspections nationally during the first year. Other contract inspectors

under the baseline inspection contract (BIC) will inspect approximately

16,000 properties by the end of this calendar year. These contract

inspectors were trained using a new and unique protocol, and

successfully scheduled and completed the required inspections. All of

this required a tremendous amount of organization and logistics.

All HUD contract inspectors must meet certain basic qualifications

involving knowledge, experience and/or education in the building trades

or conducting inspections. In addition, these inspectors completed a 5

day training course in the new inspection software and were required to

pass proficiency tests in the use of the software. Since these

inspections started for the first time in October 1, 1998, the initial

start-up involved some refining as one would expect given the size and

magnitude of this effort. In certain cases, problems were encountered

and HUD responded to those problems. HUD believes that the process,

overall, is running smoothly. HUD is striving to constantly improve and

refine the process and will continue to do so in the future. In this

regard, HUD also provides for required periodic retraining of the

inspectors, to ensure that the inspectors are up-to-date and familiar

with any changes made to the PHAS regulation, physical condition

protocols and the physical condition inspection software.

HUD acknowledges that even with qualification and training

requirements imposed on inspectors, some inspectors, as is the case in

any profession, perform better than others. For this reason, HUD has

developed a four tiered quality control/assurance process.

First, each contractor is required to have a quality control

program to ensure that the HUD protocol is being followed. Second, REAC

has its own quality assurance staff, who are employees of the Federal

government. Their sole job is to review the performance of the contract

inspectors to ensure that the inspection protocol is being followed.

Third, REAC also has a Technical Assistance Center and a toll free

telephone number (1-888-245-4860) for program participants to call when

experiencing problems like the inspector failing to show up for

scheduled inspections. In many cases, failure to show up for

inspections is the result of unexpected delays (e.g., weather, more

difficult and complex inspections than anticipated, etc.). Fourth, HUD

has provided a technical review procedure to address material errors in

an inspection. This review procedure was first announced in a notice

published in the Federal Register on May 13, 1999, and was part of the

PHAS proposed rule published on June 22, 1999.

Comment. The sheer volume of inspectable items makes the inspection

even more vulnerable to differences in interpretation and error.

Response. HUD does not believe that the number of inspectable items

is either excessive or makes the inspection vulnerable to different

interpretations. The number of inspectable items is similar to those

contained in the Section 8 Housing Quality Standards (HQS) inspection.

While there is a considerable number of deficiency definitions, all

elements of the inspection protocol, including the definitions, are

contained in the inspection software and are easily retrievable by the

inspector, and are designed to preclude subjective interpretations on

the part of the contract inspectors. The more experience that the

contract inspectors have with the protocol the easier the inspection

process becomes. HUD does not believe that the inspection protocol is

beyond the capabilities of the inspection profession.

With respect to deficiency definitions, HUD has revised a

considerable number of definitions for purposes of clarity and

simplification. The revised Dictionary or Deficiency Definitions is

currently available for review on HUD's website.

Comments. The rule should allow for PHAs to correct minor

deficiencies while an inspector is on site, to avoid potential problems

related to the inspection.

Response. New paragraph (b) in Sec. 902.26 allows for PHAs to

correct deficiencies before HUD issues its final physical inspection

report to the PHA.

Comment. Certain elements of the inspection are equivalent to an

appearance-oriented inspection that is like a military ``white glove''

test and is beyond determining whether the property is decent, safe,

sanitary and good repair, or the property components work and function

properly. The PHAS physical inspection should not be an assessment of

the tenant's housekeeping.

Response. HUD disagrees that elements of the inspection go beyond

the statutory mandate regarding the physical condition of the property.

The PHAS physical inspection is not an appearance-oriented assessment

or an assessment of a resident's housekeeping. The focus of the

inspection is whether the housing is in a condition of decent, safe,

sanitary and in good repair. The inspection assesses the condition of

the PHA's property, including occupied units. HUD has revised the

physical inspection report and the revised report is more user friendly

and clarifies for the PHA the exact nature of the deficiency.

Comment. HUD inspectors should skip the relatively few units with

``problem'' tenants, such as those who are mentally ill and hostile, or

currently bringing legal actions against the PHA.

Response. HUD understands the challenges that PHAs face. HUD,

however, has a statutory obligation to determine the condition of the

PHA's property. Resident evictions and related actions are a normal

part of residential management. Given HUD's statutory obligation, HUD

cannot forgo inspection of occupied units because certain tenants are

considered ``problem'' tenants.

Comment. Tenant-owned appliances and smoke detectors should not be

scored in the physical inspection of a property. One PHAS inspector

cited a defunct battery operated smoke detector which a tenant had

installed, even though the PHA-provided hard-wired smoke detector that

worked. PHAs should not receive deductions for items that are not the

property of the PHA.

Response. Any deductions that may be made for resident-owned

property such as that described in the comment can be accommodated by a

PHA's request for an adjustment in accordance with new paragraph (c) of

Sec. 902.25.

Comment. There should be no deficiency ratings for elements or

items of the public housing development that

[[Page 1722]]

pass local code requirements, and no deductions should be made for

items that are not present and are not required by national codes or

HUD mandates. PHAs should be protected from negative consequences for

meeting local code requirements. Additionally, while objectivity is a

sound principle for inspection, under the PHAS advisory inspection

process, it all too often translated into rigidity.

Response. As noted earlier in Section III of this preamble, HUD has

added a new paragraph (c) to Sec. 902.25 that takes into consideration

local code requirements that may be inconsistent with HUD's physical

inspection protocols, or other conditions, including preexisting

physical features of a building, that are permitted by local variance

or license.

Comment. The PHAS standard for lead-based paint ``owner

certification'' is not clear. Different PHAS inspectors interpret this

standard different ways. This factor should be treated like smoke

detectors, with a separate code appended to the numerical score to

indicate the possible presence of lead-based paint in units, or the

absence of certifications that all units are lead-free.

Response. The certification section, which includes the lead-based

paint certification, is not scored; the certification is only recorded

as submitted. Accordingly, the Lead-Based Paint certification is

currently being treated like smoke detectors, only a separate

identifier is not used.

Comment. Smoke detectors should not be required in unfinished

basements which are not living areas. This is the standard for some

local codes. The PHAS physical inspection protocol is not clear on this

issue.

Response. The PHAS regulation requires smoke detectors on ``each

level of the dwelling unit.'' The basement, whether or not it is a

living area, must have a smoke detector if it is part of the dwelling

unit.

Section 902.25 Physical Condition Scoring and Thresholds

Comment. This section provides that the PHA may claim an adjustment

on its physical property score due to age and neighborhood environment

by certifying to the adjustment on form HUD-50072. The form, as is

currently available on HUD's website, is still the PHMAP certification

form. The section of the form pertaining to this adjustment does not

permit the PHA to specify which developments are qualified to receive

the adjustment.

Response. The new Management Operations Certification Form is now

available on REAC's website, as well as an instruction guidebook for

completing the form. The certification for the physical condition and/

or neighborhood environment includes project number, project name, and

the three areas where the adjustment applies. The PHA is to indicate

for each project which area(s) apply.

Section 902.26 Physical Inspection Report

Comment. The physical inspection reports are difficult to

understand. The report lacks the necessary detail for staff to

understand the nature of the deficiency so that the PHA may take the

appropriate corrective action required.

Response. HUD appreciates the comment and as noted earlier in this

preamble, HUD has revised the physical inspection report so that PHAs

may better understand the nature and location of deficiencies cited for

their properties.

Comment. The final physical inspection report should be supplied to

PHAs within 15 to 30 days after the inspection is completed.

Response. As provided in the rule, the PHA's property

representative will receive the list of every observed exigent/fire

safety, health and safety deficiency that calls for immediate attention

or remedy before the inspector leaves the site. HUD will endeavor to

provide complete inspection results as soon as possible after

inspections are completed. HUD will provide inspection results on its

website as soon as all inspections are completed, rather than waiting

until all data needed to issue a PHAS score is received.

Comment. There should be an exit conference with the inspector to

review the inspection for accuracy in what was inspected. Additionally,

no information about PHAS should be released without the approval of

the PHA. Response. This issue was raised in response to HUD's June 30,

1998, proposed rule on the PHAS (the first PHAS proposed rule). For the

same reasons stated in the preamble to the PHAS final rule (published

September 1, 1998) that addressed this issue, HUD declines to adopt the

suggestion. PHAs are required to designate a representative to

accompany the inspector during the entire inspection. As a result, the

PHA representative will be aware of the inspection and be able to

provide any clarifications that may be required during the inspection.

(See Federal Register of September 1, 1998, at 63 FR 46603.)

Additionally, as noted in the preceding comment, PHAs will be notified

of every exigent/fire safety, health and safety deficiency on the same

day of the inspection, before the inspector leaves the site. Further,

HUD has added a new paragraph to Sec. 902.26 that allows PHAs to

correct deficiencies identified during the inspection process, and

noted on the report, before the final physical inspection report is

issued.

With respect to the confidentiality of PHAS scores, HUD notes that

release of official documents are subject to certain statutes such as

the Freedom of Information Act, the Privacy Act., etc.) HUD is

therefore further examining this issue in an effort to maintain the

confidentiality of the PHAS scores until these scores become final and

are required to be posted by the PHA in an appropriate location and

published by HUD in the Federal Register in accordance with the PHAS

regulations. As noted earlier in this preamble, Sec. 902.63 has been

revised to clarify when a PHA's PHAS score becomes the PHA's final PHAS

score (e.g., any adjustments that needed to be made have been made, and

any technical review or appeal issues have been decided).

Subpart C--PHAS Indicator #2: Financial Condition

Certain comments specifically addressed to the PHAS Notice on the

Financial Condition Scoring Process may be applicable to the

regulations in Subpart C and vice versa. Please see Section V of this

preamble.

Section 902.30 Financial Condition Assessment

Comment. HUD should reconsider its plan to measure the financial

condition of a PHA on an entity-wide basis by comparing a housing

authority to other housing authorities administering a similar number

of units. Additionally, comparison should be limited to public housing

funds only (Operating Fund, Capital Fund, DEG, EDSS, etc.). The

inclusion of other funds (Section 8, CDBG, local development, etc.)

simply distorts any meaningful comparison. The comparison becomes more

distorted if one housing authority administers CDBG and HOME funds.

Response. HUD has considered whether PHAs should be financially

assessed on an entity-wide basis, and has decided that they should. As

discussed in Section III of this preamble, HUD has, however, provided

additional time for PHAs to adjust to financial assessment on an

entity-wide basis. The final rule provides that PHAs with fiscal years

ending September 30, 1999, December 31, 1999, March 31, 2000, and June

30, 2000, will receive an advisory score for HUD's assessment of the

PHA's entity-wide operations. Again, PHAs with fiscal years ending

[[Page 1723]]

September 30, 1999, and December 31, 1999, were already notified

through HUD's notice published on October 21, 1999, that their

financial scores would be advisory. Although PHAs with fiscal years

ending March 31, 2000, and June 30, 2000, will receive advisory scores

on the financial assessment of their entity-wide operations, they are

not exempt under the rule from a PHAS financial score. PHAs with fiscal

years ending March 31, 2000, and June 30, 2000, will receive a PHAS

financial score based on their public housing operating subsidies

program. PHAs with fiscal years ending after June 30, 2000, will

receive PHAS financial scores that are based on the PHA's entity-wide

operations.

HUD believes that there is a valid basis for conducting the

assessment on a PHA's entity-wide operations. In addition to overseeing

its individual grant and subsidy programs, HUD is concerned with the

overall financial condition of entities managing public housing without

regard to additional sources of funding. The focus of the PHAS

Financial Condition Indicator is on the long term viability and

financial performance of PHAs.

In addition, HUD has the authority to assess any factors it

determines appropriate as provided by section 6(j)(1)(K) of the 1937

Act, and the Single Audit Act and OMB Circular A-133 require entity-

wide audits of the financial statements of PHAs receiving federal

funds. To the extent that PHAs enter into non-Federal activities that

contribute to their financial health, these PHAs should receive higher

scores than those PHAs that have entered into arrangements that

negatively affect the financial health of the PHA (e.g. commitments,

contingencies). Generally Accepted Accounting Principles (GASB 14)

requires that an entity include in its financial statement all

operations for which it is financially accountable. The issuance of

entity-wide financial advisory scores for the first four quarters of

PHAS scoring is an accommodation HUD was willing to make based on

consultation with the industry and HUD's recognition of the newness of

the GAAP conversion process for some PHAs.

Comment. Peer groups should not be based on unit counts alone.

Response. With respect to financial assessment, HUD has and

continues to research the possibility of establishing peer groups based

on other common PHA characteristics such as tenant composition (elderly

vs. family), building type (high rise vs. garden style) and location.

Tenant composition and building type have not been incorporated into

the scoring process at this time because PHAs have different mixes of

tenants and building types and such data is not as accurately tracked

as unit count. HUD's research to date shows no clear statistical

differences in PHA financial performance based on the type of tenant or

building. This may change in the future as additional data becomes

available.

Peer groupings based on location, on the other hand, have been

established to evaluate expenses in addition to unit count because

information on PHA location is readily available and accurate. As

additional data becomes available and statistical analysis demonstrates

that peer groupings based on additional factors will improve the

accuracy of scoring, these factors will be taken into consideration.

Comment. The peer group sizes are insufficient for measurement of

financial condition. The PHAS final rule should provide for two

additional PHA size categories: one size category for those PHAs

administering 1,250 to 5,000 units; and a second size category for

extra large PHAs defined as those PHAs administering more than 10,000

units.

Response. HUD has addressed some of these concerns by adding an

extra-large size category of PHAs. The extra-large size category

includes those PHAs administering more than 10,000 units based on

statistical analyses demonstrating that there is a statistical

difference between those PHAs administering between 1,250 and 9,999

units. The addition of an extra-large size category is reflected in the

PHAS Notice on the Financial Condition Scoring Process, which will be

updated and published in the near future. At this time, the PHAS

financial scoring process leaves the other five peer groupings

unchanged. In the future, the PHAS scoring process for the Financial

Condition Indicator may be revised to include additional peer group

sizes should a statistical validity be proven.

Section 902.33 Financial Reporting Requirements

Comment. The requirement for electronic transmission of data using

GAAP principles is of concern because experience in general with data

transmitted to and from HUD has resulted in problems. The experience

has been one of difficulty in getting into HUD systems both in terms of

timeliness and access. Response. HUD continues to improve its ability

to receive and process the electronic submission of data. With any new

system, there is a learning period that must take place. The electronic

submission system has been in development for over a year and has

undergone a series of tests both internally and externally at selected

PHA locations. HUD's Financial Assessment Subsystem (FASS) Release 3.01

has been streamlined to improve performance and will be tested at over

12 pilot locations nationwide. To the extent PHAs have trouble

submitting data as a result of HUD servers or communication problems,

PHAs can enter the reason for late submissions on the FASS template and

REAC will have the ability to waive late submission penalties. Further

guidance will be provided in an upcoming Notice. Additionally, although

the FASS does not allow anyone other than the PHA to enter and/or

change data in the PHA's financial submission, the system provides a

PHA with the ability to review its financial information after the

information has been submitted to HUD if the PHA wishes to verify the

accuracy of the submission.

Comment. The requirement to submit financial reports electronically

via the Financial Data Schedule (FDS) within two months of the PHA's

fiscal year end is unrealistic for the first year of submission. The

conversion to GAAP is complex, particularly for large PHAs

administering many programs, and thus, PHAs need more time to make

certain that all GAAP conversion items are properly recorded in the

initial FDS submission.

Response. HUD understands that conversion to GAAP may not be easy

for some PHAs and may take some time, which is why HUD allowed a year

for PHAs to make the conversion to GAAP. PHAs were informed of the

conversion to GAAP with the issuance of the first PHAs proposed rule on

June 30, 1998, and the PHAs final rule published on September 1, 1998.

With respect to submission of financial reports, as discussed in the

preambles to both of those earlier rules, PHAs were already obligated

to submit, under other program requirements, similar financial

information to HUD within 45 days after the PHA's fiscal year end.

Under PHAs, PHAs are required to submit their financial information

within two months after the PHA's fiscal year end. However, since this

is the first year reporting under GAAP, HUD has provided for an

automatic 30 day extension for PHAs to submit their year-end financial

information. This automatic extension is for the first year of

reporting only.

Comment. REAC should assign a reporting model (Enterprise vs.

Government) for HUD-based programs, and issue guidebooks.

[[Page 1724]]

Response. HUD no longer sets accounting standards and thus cannot

prescribe which accounting model to use. The National Council on

Government Accounting, Statement 1 (NCGA1) entitled ``Governmental

Accounting Reporting Principles'' provides guidance as to which method

best represents the reporting entity business. GAAP Flyer #1, which is

available on REAC's financial website (http://www.hud.gov/reac/

reafin.html), indicates that HUD prefers the Enterprise method for most

PHAs based on our interpretation of NCGA1. In addition, Government

Accounting Standards Board (GASB) Statement #34 provides that all

government entities will be required to report entity wide operations

using full accrual accounting. This reinforces HUD's interpretation

that PHAs should use the enterprise model to report operations.

Section 902.35 Financial Condition Scoring and Thresholds

Comment. The PHAS rule measures operating budget and expenditure

performance through such indicators as net income/loss, number of days

expendable balance, and expense management which is not necessarily

appropriate. PHAs budget and manage funds for a host of programs, both

federal and non-federal, which are not reflected in these indicators. A

more clear measurement is whether a PHA has a sound cost allocation

plan and is adhering to it.

Response. The PHAS measures the overall financial condition of PHAs

without regard to the source of funding. This is referred to as an

entity-wide assessment. See HUD's response to the first comment under

Sec. 902.30 of this preamble. In addition, cost allocation coverage is

obtained through audit procedures in accordance with OMB Circular A-133

(Audits of States, Local Governments and Non-Profit Organizations).

Comment. The PHAS Financial Condition Indicator inappropriately

compares a PHA's management responsibilities to those of private real

estate entities. Without taking into account the unique operating and

related service requirements of the PHA, the comparison to private

sector management is difficult to make on an individual or group basis

for PHAs.

Response. The assessment provided under the PHAS Financial

Condition Indicator does not compare PHA management to management in

the private real estate market. Instead, the PHAS performs a financial

assessment of PHAs based on a peer comparison within the public housing

industry. The private real estate market has capital reserve

requirements for the long-term upkeep of its properties and operates

for-profit. On the other hand, the private real estate market does not

provide the extensive services provided by PHAs to its residents.

The PHAS uses appropriate financial benchmarks used by many

industries to assess the financial condition of their operations. For

example, Current Ratio, Net Income, and Expense Management are

indicators widely used in many industries. Two other indicators,

Occupancy Loss and Tenant Receivable Outstanding, are revised versions

of the previous PHMAP Management indicators modified to better assess

financial condition (and as noted earlier in this preamble, they have

been dropped from the Management Operations Indicator; they are now

only part of the Financial Condition Indicator).

Comment. The PHAS Occupancy Loss component includes vacancy days

that (1) result from units being taken off-line or held for demolition

or major redevelopment, and (2) are counted as income loss if part of

the PHA's Unit Months Available (UMA). Given the capital funding

process for PHAs and the requirements for demolition and disposition,

HUD's inclusion of these types of units in an income loss calculation

is inappropriate and further, is not a fair or rational basis for

comparison to private real estate providers.

Response. During the advisory score process, all units were counted

in the UMA calculation. However, after consultation with several

housing authority representatives and HUD program staff, HUD has

revised its UMA calculation to exclude units approved for demolition/

disposition, including units approved for mandatory conversions, since

these units are also excluded from the Performance Funding System (PFS)

calculations and can be verified through form HUD-52723. In addition,

vacant units approved by HUD to be taken off-line for on-going

modernization or conversion will be excluded from the calculation.

Comment. The PHAS Financial Condition Indicator relies too heavily

on Occupancy Loss, Net Income/Loss, Expense Management, etc., and does

not rely sufficiently on sound financial management. While the PHAS

rule indicates that it will include points for certain items relating

to financial management, these items are secondary. The issue of an

unqualified audit opinion, no material internal control weaknesses and

no material adjusting entries seems to be the most appropriate basis

for measuring financial management coupled with maintaining adequate

working capital which is easily measured by the expendable fund balance

and a sound and adhered to cost allocation plan.

Response. The components of the PHAS Financial Condition Indicator

measure the financial condition of PHAs and are reflective of sound

financial management practices. A PHA can have a clean audit opinion

and good internal controls yet be in poor financial condition due to

many circumstances including unsound management decisions. The rule

states that points will be subtracted, not added, as a result of audit

findings.

Comment. The Expense Management component of the PHAS Financial

Condition Indicator includes utility expenses. HUD needs to examine and

take into consideration regional differences in utility costs. Regional

utility costs will materially impact on comparisons between PHAs.

Therefore, adjustments need to be made if PHAs are to be compared

fairly.

Response. These comments were addressed by adding regional peer

groupings to the Expense Management component to take into account the

impact on PHA expenses because of regional differences. These changes

to the Expense Management component are reflected in the PHAS Notice on

the Financial Condition Scoring Process, which will be updated and

published in the near future.

Comment. Days Receivable Outstanding is also included in the

Management Operations Indicator. This component should be included in

just one PHAS indicator.

Response. HUD agrees with the commenters and this component

(identified in the final rule as Tenant Receivable Outstanding) is now

only part of the Financial Condition Indicator.

Comment. Is occupancy loss expressed in terms of dollars lost?

Response. This measure is not expressed in dollars. Because

different amounts of rent are paid for like units, the financial

indicator measures occupancy loss as a percentage of total units.

Comment. The use of a two year average of accounts when calculating

Days Receivable Outstanding (DRO) will prevent PHAs from immediately

seeing an increase in score if the management has made some significant

improvements.

Response. In calculating non-GAAP advisory scores a two year

average of accounts receivable was used to calculate Tenant Receivable

[[Page 1725]]

Outstanding (formerly titled DRO) because, if a PHA is experiencing an

unusually difficult year in collecting outstanding receivables, the PHA

would be penalized. This method of calculating this component while

preventing some PHAs from immediately seeing a decrease in score also

prevents PHAs from seeing a dramatic increase in score as a result of

significant management improvements such as enforcing evictions. For

purposes of reporting under GAAP, Tenant Receivable Outstanding is

calculated using the accounts receivable balance at a PHA's fiscal year

end.

Comment. HUD should take into consideration differences between

PHAs in tenant-paid utilities versus nontenant-paid utilities when

making the calculation under the Expense Management component.

Response. Differences in PHA costs for those with tenant-paid

utilities versus nontenant-paid utilities have not been incorporated

into the Expense Management component because no accurate data is

available as to an individual PHA's composition of tenant-paid versus

nontenant-paid utilities. As a result, of the six expense categories

that comprises the Expense Management component, the utilities expense

category is worth 3 percent of the overall 1.5 points available under

Expense Management. In short, 95 percent of all PHAs will pass the

utility expense category under the Expense Management component with

only outliers failing.

Subpart D--PHAS Indicator #3: Management Operations

Certain comments specifically addressed to the PHAS Notice on the

Management Operations Scoring Process may be applicable to the

regulations in Subpart D and vice versa. Please see Section V of this

preamble.

Section 902.43 Management Operations Performance Standards

Comment. The rule is not clear concerning the extent to which the

old PHMAP regulation will survive and the extent to which the

management indicators have been modified by the new PHAS rule. The

method of assigning PHMAP letter grades, with their associated

numerical formula value, is not clearly defined in the amendments. This

is critical and substantive information that belongs in the rule.

Response. HUD's PHMAP regulation in 24 CFR part 901 is being

removed by this rule, effective March 31, 2000. Those sections of the

PHMAP regulation that HUD needs to retain have become part of the

Management Operations Scoring Notice. The PHAS Notice on the Management

Operations Scoring Process is referenced in Sec. 902.45 of the PHAS

rule.

Comment. PHAs should not be required to report to the local law

enforcement agency every activity which is investigated by the PHA's

Security Department.

Response. The PHAS does not require PHAs to report every activity

which is investigated by the PHA Security Department to the local law

enforcement agency. The PHAS management sub-indicator #6, which relates

to Security and Economic Self-Sufficiency, recognizes policies adopted

by the PHA Board and the procedures implemented by the PHA which assist

a PHA in accomplishing the following: track crime and crime-related

problems in at least 90 percent of the PHA's developments; have a

cooperative system for tracking and reporting incidents of crime to

local police authorities; and coordinates with local government

officials and residents to implement anticrime strategies. HUD's

expectation is that PHAs will follow their own policies and procedures

for tracking and reporting crime related activities. HUD respects all

good-faith efforts of PHAs to partner with local authorities to address

these important issues.

Comment. PHAs should not be held accountable for rent uncollected

after a resident vacates the unit if the PHA can document activity to

collect the outstanding charges. Such activity can include notifying

the resident by letter at the resident's last known address; detailing

the amount of resident owes and demanding payment; contacting the

credit bureau for slow or no payment; attaching a lien on the

resident's property (if State law allows; and securing the services of

a third party collection agency).

Response. This component is no longer part of the assessment

conducted under the Management Operations Indicator. Rents uncollected

component is now addressed only under ``Tenant Receivable Outstanding''

under the Financial Condition Indicator.

Subpart E--PHAS Indicator #4: Resident Service and Satisfaction

Assessment

Certain comments specifically addressed to the PHAS Notice on the

Resident Service and Satisfaction Survey Scoring Process may be

applicable to the regulations in Subpart E and vice versa. Please see

Section V of this preamble.

Section 902.50 Resident Service and Satisfaction Assessment

Comment. The survey is a tool that residents will use to get back

at managers who enforce regulations and housing standards. As a result,

managers will be less effective in being objective in managing their

properties. There are other ways of measuring the effectiveness of

property management instead of asking residents, who may be subjective

based on their impressions of the manager instead of the facts. HUD

should retain the measurements utilized under PHMAP to assess resident

services and satisfaction.

Response. Based on the results of the pilot test of the resident

service and satisfaction assessment, HUD has been presented no evidence

to support this claim. In developing its resident survey, HUD adhered

to sound principles of survey development in order to minimize

responses that may simply be retaliatory on the part of residents as

suggested by the comment. These survey principles also include that if

the majority of those surveyed identify the same problem, the problem

is assumed to be true, unless found to be otherwise. The PHAS makes

clear that the PHAS score issued to a PHA is not based solely on the

residents assessment of the PHA. The PHAS score represents a

compilation of scores for all four PHAS indicators. HUD strongly

believes, however, that the opinions of residents are important and

that the survey is an effective tool to gauge these opinions. Similar

surveys are recognized in the commercial property sector as effective

management tools. Furthermore, answers to some questions will be used

for informational purposes only and not calculated into the score for

the PHA. Only questions with a statutory and/or regulatory basis (e.g.,

questions that address services which a PHA is legally responsible to

provide) will be ``scored.'' HUD believes that its survey process is a

more effective measurement than the measurements utilized in PHMAP.

Comment. This indicator appears to be the subject of greater

substantive change from the September 1, 1998, final rule than any of

the other indicators. The PHA is removed from the survey process

itself. Surveys will be distributed by ``a third party organization

designated by HUD'' to a ``statistically valid number of residents''

chosen randomly by the third-party organization to participate in the

survey. Aggregate results will be transmitted by the third party

organization to HUD for ``analysis and scoring.'' The scores will be

reported to PHAs as single scores for

[[Page 1726]]

five ``survey sections.'' Because the survey results will not be broken

down by development either to HUD or to the PHA, there will be no

ability to attribute particular survey results to any development

operated by a mixed-finance owner entity (or by an RMC or an AME such

as a private management contractor) as distinguished from the PHA

itself, or for that matter to any particular PHA-managed project as

opposed to another. While this process presumably will preclude

attribution of any particular grade to a mixed-finance project, it also

appears to put in question the ability of the PHA to develop any

reasonably targeted ``Survey Follow-Up Plan.''

It also appears that scoring under this indicator will not be based

on resident satisfaction. Review of the survey form does not reveal

readily which questions can be regarded as ``directly related to

compliance with the regulations or statutes applicable to the

management of public housing.'' An anonymous and unverifiable survey

form appears a dubious basis for compliance assessment in any event.

The pre-survey implementation process and the survey itself are

ill-suited, if not destructive, to a mixed finance project. Separate

treatment or classification of the public housing residents vs. the

non-public housing residents in a mixed-finance project should be

avoided. It is destructive of the cohesiveness of the mixed-income

community.

Response. HUD disagrees that the PHA is removed from the survey

process. The PHA will have an instrumental role in the survey process

by providing unit addresses and marketing the survey to residents using

promotional materials provided by HUD. PHAs also will develop a follow-

up plan, if appropriate, to address any issues surfaced by aggregated

survey results. The third party organization will not select the sample

of residents. Rather, HUD selects the sample and sends it to the third

party organization.

At this time, HUD will not provide responses at the development

level in an effort to protect respondent confidentiality. HUD, however,

will provide survey section scores at the PHA level. HUD does not agree

that this will prevent PHAs from developing a follow-up plan. At this

initial implementation of PHAS, the survey is not intended to identify

individual problems, but rather to identify those at the PHA level. HUD

intends, however, that in the future the survey will provide for

responses at the developmental level, and HUD is proceeding to work

toward that goal. HUD recognizes the benefits that can be achieved by

surveys conducted at the developmental level.

The survey results will account for five out of the ten possible

points for this indicator. Only those survey questions that are based

on statutory and/or regulatory requirements will be ``scored.'' A copy

of the survey instrument and the associated weights for the ``scored''

questions are attached as an appendix to the PHAS Notice on the

Resident Service and Satisfaction Survey Scoring Process, which will be

updated and published in the near future.

HUD also disagrees that the survey process is ill-suited to a mixed

finance project. HUD believes that it is important to assess the

services provided to the residents' satisfaction with these services

for all residents in public housing, including those in public housing

units in mixed-income developments. Therefore, public housing units in

mixed finance projects will not be excluded from the survey. Residents

are selected at random to participate, so no one income group would be

singled out in any given year.

Section 902.51 Updating of Resident Information

Comment. The updating of resident information can be a time

consuming process. Under the pilot testing, a PHA received notification

to appoint a staff person to access the Resident Satisfaction and

Services Assessment System (RASS), review list of addresses from HUD

which are supposed to represent all of a PHA's property and unit

addresses, edit and enter correct information. Staff expended long

hours to correct address information.

Response. HUD recognizes that as a new system, there is some

additional time involved at the outset by both HUD and a PHA to compile

the information and data necessary to perform the assessments required

by the PHAS. Once this information is compiled, however, any revisions

necessary should be considerably less time consuming. For the first

year of implementation, HUD intends to enhance direct communication

with all PHAs to assist PHAs with the updating of resident information.

Also, HUD will assist on an individual basis those PHAs that are

experiencing technical problems or need assistance with entering a

large volume of unit address data in RASS.

Comment. Reliance on the form HUD-50058 for the requisite updating

of units and addresses may pose a problem for PHAs. Industry groups

have met with HUD to discuss ways to improve MTCS reporting, but little

has been accomplished to make reporting easier and accurate. There is a

concern that PHAs will receive incomplete files from HUD and will

require more than 30 days to update and clean their data files. This

process has not been tested under the advisory period and there is no

way of knowing where the problems may lie. PHAs should have 60 days to

update the files. HUD should be more realistic about the limited role

MTCS should play in all its programs--it is not ready to be universally

adopted by all programs.

Response. HUD is aware that the MTCS reporting process needs

improvement. Therefore, for the first year of implementation, HUD

intends to assist on an individual basis those PHAs that are

experiencing technical problems or need assistance with entering a

large volume of unit address data in RASS. Due to limited data reported

in MTCS, HUD must rely on PHAs to validate unit addresses to ensure

survey mailing accuracy. PHAs should make additions, deletions and/or

corrections to unit addresses under their jurisdiction. Any incorrect

or obsolete address information will impact the survey results if the

unit address information is incorrect or incomplete. REAC will be

unable to select a statistically valid number of residents to

participate in the survey. Under those conditions, a survey cannot be

conducted at the PHA site and the PHA would not receive any points for

PHAS Indicator #4. At this time, PHAs have a two month period to

complete unit address certification.

Comment. PHAs were advised to register for IDs to verify unit

addresses via the RASS but given very little time to register. Because

this process of permitting PHAs to verify unit addresses for purposes

of the resident satisfaction survey is crucial for the RASS and

physical inspection, it is essential that HUD improves its

communication with the industry and provide ample lead-time to

implement the RASS. HUD should increase its server capacity for

agencies to adequately transmit data to RASS.

Response. HUD agrees that it is HUD's responsibility to ensure that

PHAs have adequate notice and sufficient time to take the steps and

complete the processes required by this Indicator. To improve

communications between PHAs and HUD on this Indicator, HUD intends to

have regular meetings with industry representatives to discuss the

survey process and continue providing technical assistance to PHA

personnel. HUD is also working to improve its

[[Page 1727]]

server capacity for easier transmission of data to RASS.

Section 902.52 Distribution of Survey to Residents

Comment. A PHA must spend a considerable amount of staff time to

market the survey. The time period set for this process does not appear

to allow adequate time to respond or provide meaningful follow-up.

Response. HUD has allotted 30 days for PHAs at the beginning of the

survey process to market the survey. At the conclusion of the survey

period, the survey results will be posted and the PHA will have 30 days

to access the results via the Resident Assessment Subsystem. Based on

the survey results, PHAs will be required to develop a follow-up plan

to address and resolve performance weaknesses. The follow-up plan must

be available as a supporting document for the PHA's Annual Plan in

accordance with 24 CFR 903.23(d).

Comment. The draft resident survey should have been published as

part of the proposed rule. Publishing the document separately was not

helpful.

Response. In retrospect, HUD recognizes that it would have been

helpful to have published the survey at the time of publication of the

June 22, 1999, proposed rule. HUD, however, had posted the survey, both

in draft and final form on the HUD REAC website for an extensive period

of time, and at this website, the PHAS Notice on the Resident Service

and Satisfaction Survey Scoring Process is also posted. The survey was

also widely distributed to PHAs beginning in February 1999. HUD has

included the survey as an appendix to the PHAS Notice on the Resident

Service and Satisfaction Survey Scoring Process.

Comment. HUD must ensure that the language regarding media

outreach, posting flyers, and using newsletters to notify tenants about

the resident survey on the RASS website is corrected so that it is

consistent with the PHAS Scoring Notice on the Resident Service and

Satisfaction Indicator which does not mandate the use of newsletters.

Response. HUD's website on the RASS and the PHAS Scoring Notice on

the RASS have been made consistent.

Subpart F--PHAS Scoring

Section 902.60 Data Collection

Comment. The rules pertaining to which certifications are needed

and where they must be located should be reasonable and in conformance

with standard industry practice and HUD regulations. These requirements

then must be communicated to PHAs before physical inspections are

conducted and performance judgments made.

Response. HUD has provided copies of the HUD physical inspection

training manuals on REAC's website at www.hud.gov/reac since 1998. The

training manuals, along with the software, which is also on REAC's

website, provides the procedures used by the HUD inspectors including

the need for certifications and where they must be located. These are

available to PHAs at no cost and may be accessed directly from HUD's

website.

Section 902.67 Score and Designation Status

Comment. One commenter praised HUD for adding to the designation of

``troubled,'' the subdesignation of ``substandard.'' The commenter

advised that this subdesignation helped to distinguish among those PHAs

troubled in a particular area (and identify which area a PHA was

experiencing problems) and PHAs that are troubled overall. Two other

commenters, however, stated that the proposed rule added a new

classification, ``sub-standard,'' without explanation of its meaning or

justification for its use. HUD should clearly define the term and

explain its value.

Response. The preamble to the June 22, 1999, proposed rule

explained HUD's addition of term ``substandard'' to the PHAS

regulation. Section II.D. of the preamble (64 FR 33350) stated that the

purpose of introducing the term ``substandard'' in connection with

troubled PHAs was to identify the particular area in which a PHA

received a below passing or standard rating in the three major PHAS

Indicators--Physical Condition, Financial Condition, and Management

Operations--and to distinguish PHAs with a single problem area from

those that have widespread issues. For example, if a PHA received less

than 60 percent of the available points for the Physical Condition

Indicator, but above 60 percent of the available points for the

Financial Condition and Management Operations Indicators, the PHA is

designated troubled (the PHA is troubled in one area), but for purposes

of clarifying how the PHA is troubled, the PHA is categorized as

substandard because it is substandard with respect to the physical

condition of its properties.

HUD believes that the introduction of the term ``substandard'' to

the PHAS regulation is consistent with Congressional directive in the

Public Housing Reform Act. In amending section 6(j) of the 1937 Act (42

U.S.C. 1437d(j)), the Congress directed HUD to establish procedures for

designating troubled PHAs and the procedures are to include

identification of serious and substantial failure to perform as

measured by the performance indicators specified under paragraph (1) of

section 6(j) and such other factors as HUD may determine appropriate.

The substandard categorization helps to identify the area in which the

PHA is troubled, and to distinguish a PHA that is troubled in one area

from a PHA that is overall troubled (that is, troubled in more than one

area or with an overall PHAS score of less than 60 percent).

Comment. HUD should temporarily abandon the thresholds to determine

troubled designation for the first two years of implementation of the

PHAS.

Response. It would be a breach of the public's trust in HUD, and a

breach of HUD's statutory obligation, to abandon the thresholds, and in

essence abandon the designation of troubled for PHAs that are

substandard (and therefore troubled) physically, financially, or with

respect to their management operations. HUD determined that 60% (or 18

points) was the passing mark for the Physical Condition, Financial

Condition and Management Operations Indicators. This was part of the

first PHAS proposed rule published on June 30, 1998, and on which HUD

solicited public comment. HUD will not disregard these thresholds even

for a temporary period. HUD believes that the recent amendments made to

section 6(j) of the 1937 Act support that there should be no halt to

HUD's assessment of PHAs.

Section 902.68 Technical Review of Results of PHAS Indicators #1 or #4

Comments. Fifteen (15) days to request a technical review and 30

days to request an appeal are not enough time for a small PHA with

limited staff resources. The rule provides no limit on the amount of

time REAC has to respond to a request for a technical review or appeal.

The rule should provide for REAC to respond within 30 days of receipt

of the appeal. The 30 day appeal process should follow not only the

issuance of the PHAS score but also any final determination of a

request for a technical review. Another comment suggests that the

period to request a technical review should be extended from 15 days to

60 days.

Response. HUD believes that 15 days, or approximately two weeks, is

sufficient time to review the physical inspection report and request a

technical review, and in the case of an appeal, 30 days is sufficient.

HUD notes that the final rule now provides PHAs with the opportunity to

review the physical inspection report, correct

[[Page 1728]]

exigent health and safety deficiencies identified in the report and

request a reinspection before the physical inspection report is to be

final (see Sec. 902.26(b) of the final rule).

With respect to the physical inspection of properties, the PHA is

present on a site during the inspection, and as a result is aware of

the parameters of the inspection. Further, on the day of inspection,

the PHA's property representative receives a list of every health and

safety deficiency before the inspector leaves the site.

In order to give appropriate consideration to requests for appeals

and technical reviews, HUD is not going to set a time limit but will

make every effort to respond to the request within a 30 day time

period. HUD notes that until it responds to the technical review

request or appeal, the PHAS score is not considered final.

Additionally, HUD notes that under PHMAP, the time for appeal was

15 days. The 30-day period for appeals under the PHAS represents a

substantial increase in time over the PHMAP appeal, and the technical

review was not a procedure provided by PHMAP.

Comment. Technical review should be expanded to include the

erroneous financial scoring results that easily occur in the

transmission of information to HUD over the internet. Another comment

suggests that all four PHAS indicators should be afforded the technical

review process, at least in the first 2 to 4 years of PHAS

implementation. The technical review process is burdensome and the

proposed rule acknowledges this burden by limiting appeals to a narrow

category of areas eligible for technical review. Given the investment

of time and resources being made by the PHA, and given that PHAs must

provide photos and other objective evidence to support a review, it is

difficult to understand why HUD will not revisit the severity of the

deficiency as part of the technical review.

Response. HUD disagrees with these recommendations. While HUD has

acknowledged that the technical review process is a burden on HUD if it

was permitted for all PHAS Indicators, it is a burden HUD would readily

assume if there was a substantial benefit to this process for PHAs for

all four PHAS Indicators. The technical review process was established

as a mechanism to correct unintentional errors caused by a third party.

There is no third party involved in the reporting of financial

information or in the PHA's provision of the management indicator

information as there is in the physical inspection process and the

resident survey. While the technical review process is not available

for the reporting of financial information or in the reporting of

management operations information, this final rule, as already

discussed in this preamble, provides procedures by which PHAs can

notify HUD of errors and seek correction or adjustments to the score

without regard to designation status.

Comment. HUD should permit a technical review where there has been

an inspection of a unit which, as a result of the proposed PHAS

amendments, is now exempt from inspection. Additionally, a technical

review should be permitted where the inspector has failed to adhere to

REAC instructions regarding the conduct of inspections.

Response. Several commenters expressed concern about inspection of

vacant units that are now exempt under the new PHAS regulation. The

inspection of vacant units conducted before issuance of this final rule

were advisory in nature, and will not affect a PHA's PHAS designation.

HUD has exempted vacant units from the physical inspection process for

fiscal years ending September 30, 1999, and thereafter. No official

physical inspection score will be based on an inspection of any unit,

not under lease, that meets one of the three categories of units exempt

from physical inspection as provided in this final rule.

If the HUD contractor fails to adhere to REAC instructions, the PHA

should notify REAC. As noted earlier in this preamble, REAC has its own

quality assurance staff, who are employees of the Federal government.

Their sole job is to review the performance of the contract inspectors

to ensure that the inspection protocol is being followed. REAC also has

a Technical Assistance Center and a toll free telephone number (1-888-

245-4860) and program participants are encouraged to call REAC if they

experience problems with the inspectors. If a contractor's failure to

adhere to REAC requirements results in the type of error, the technical

review process is designed to address, then this process is available

to the PHA.

Comment. HUD also should clarify its intent to permit appeals where

a PHA has been declared ``substandard'' in one major indicator (per

Sec. 902.67(c)(2)), and has been denied ``high-performer'' status due

to withdrawal of designation (per Sec. 902.67(d)), or has been denied

such status pursuant to 902.67(a), due to deficient grade on the

Resident Service and Satisfaction indicator.

Response. ``Substandard'' is a subdesignation under the designation

of ``troubled'' and therefore, appealable. The PHAS rule provides that

a PHA may appeal any of its individual PHAS scores as a result of an

error which the PHA believes, if corrected, would result in a

significant change in the PHA's PHAS score and its designation. A PHA

whose high performer or standard designation has been withheld or

rescinded under the provisions of Sec. 902.67 may request that the

Assistant Secretary of Public and Indian Housing reinstate the

designation as provided in Sec. 902.67(d)(3).

Comment. The rule provides that technical review will not be

granted for challenges to the inspector's findings, or disagreement

with the inspector's obligations. Knowing full well human error will

affect some authorities, PHAs should be allowed to challenge error.

Response. The purpose of this statement is to avoid challenges that

are simply based on a PHA's disagreement with the inspectors findings.

For example, the inspector cites a deficiency as major, but the PHA

believes it is minor. In performing the inspection, the inspector is

guided by HUD's physical inspection software which is to eliminate

subjective findings on the part of inspectors. The purpose of the

inspection protocol is to promote consistency and fairness in the

inspection process. Therefore, a PHA's statement that a deficiency

cited by an inspector as major is really minor is not a sufficient

basis to request a technical review.

Section 902.69 PHA Right of Petition and Appeal

Comment. The present abbreviated appeal process provided by the

rule does not allow for review of the scoring process itself, nor does

it allow for discussion or explanation of items beyond the control of

the local housing authority. A better appeal system would be one that

allows for local, or at least regional, review of PHAS scores and

processing. Additionally, the appeal process should not be limited to

status changes and the appeal process should be extended from 30 to 60

days.

Response. The appeal of a PHAS score, as provided in Sec. 902.69,

necessarily involves the review of the scoring process. The appeal

process is coordinated by REAC because scores are issued by REAC, and

not by HUD's local or regional offices. Additionally, the appeal

process provided in Sec. 902.69 is not an abbreviated process, but

rather requires considerable time and effort. For this reason, the

appeal process is not appropriate for errors that do not result in a

significant change in a PHA's PHAS score and its designation. (HUD,

however, has introduced several procedures in this final rule that

address

[[Page 1729]]

errors of the types raised by the commenters. Please see Section III of

the preamble.)

Through the PHAS appeal process, a PHA may request an appeal of its

PHAS score in writing to the Director of the Real Estate Assessment

Center (REAC) within 30 calendar days following the issuance of the

PHAS score. The appeal must be accompanied by the PHA's reasonable

evidence that an objectively verifiable and material error has

occurred, which if corrected, will result in a significant change in

the PHA's PHAS score. Those errors may be the result of items beyond

the control of the PHA, and the PHA should submit this evidence with

its appeal.

Upon receipt of the appeal, REAC will convene a Board of Review to

evaluate the appeal and its merits for the purpose of determining

whether a reassessment of the PHA is warranted. The Board of Review

will include representation from REAC, the Office of Public and Indian

Housing, and such other office or representative as the Secretary may

designate. HUD will make a final decision on appeals within 30 days of

receipt of an appeal, and may extend this period an additional 30 days

if further inquiry is necessary.

HUD addressed earlier in this preamble the appeal period of 30

days. HUD believes that 30 days is sufficient, and again, notes that it

is an increase in the amount of time provided for the PHMAP appeal

process.

Comment. The Board of Review should be eliminated and the Office of

Public and Indian Housing (PIH) should act on all appeals.

Response. HUD disagrees with this comment. HUD believes that the

Board composition, as provided in the rule (a representative from REAC,

PIH, and other office as the Secretary may designate, excluding the

TARC) ensures fairness and equity in the appeal process.

Comment. A representative of public housing agencies should be

included as a member of the Board of Review discussed in

Sec. 902.69(b)(3).

Response. HUD declines to make this change at the final rule stage,

but is taking this recommendation under advisement.

Subpart G--PHAS Incentives and Remedies

Section 902.71 Incentives for High Performers

Comment. The incentives for becoming a high performer under

Sec. 902.71 are ambiguous. The section does not list what specific HUD

requirements a high performer would be relieved from, as well as how

bonus points for HUD funding competitions would be utilized.

Response. This regulatory section describes the incentives for high

performers broadly to allow HUD the flexibility to create incentives

for high performers as HUD reviews the statutory framework and

regulatory requirements of new and existing programs and initiatives

and identifies appropriate and permissible incentives. For example,

HUD's proposed rule on the ``Allocation of Funds under the Capital

Fund; Capital Fund Formula,'' published on September 14, 1999 (64 FR

49924) provides for a performance reward for high performers in

Sec. 905.10(j) (see 64 FR at 49929). HUD is reviewing aspects of other

programs to determine appropriate and permissible incentives to reward

high performers, and is considering various incentive alternatives. HUD

will notify PHAs of additional incentives when they have been

determined.

With respect to relief from requirements, Sec. 902.71 provides a

few examples of the requirements that high performers would receive

relief from. The rule does not list all requirements because the

requirements from which PHAs may be granted relief may change from time

to time. Bonus points for high performing PHAs may be provided under

future HUD NOFAs.

Comment. The rule should provide as an added incentive for high

performers relief from reporting on financial indicator requirements

such as operating budgets, supporting schedules to include, all

position salaries, and non-routine expenditures and administrative

expense other than salaries. An additional incentive to include in the

rule would be to provide an automatic extension for submission of year-

end financial statements and audit reports, as well as streamlined

budget submissions and year-end financial reports.

Response. There is no longer a requirement for submitting

information of this type, unless a PHA is designated as troubled.

Therefore, to adopt this recommendation would not provide any added

incentive for high performers. PHAS offers other incentive for high

performance, such as public recognition for achievement and bonus

points in funding competitions, where such bonus points are not

restricted by statute or regulation. If by this comment, the

recommendation is to exempt a PHA from submission of the year-end

financial information required under PHAS, HUD will not adopt this

recommendation. The timely submission of year-end financial statements

and audit reports is a principle of good management and, therefore not

an appropriate incentive.

Comments. As incentive for good performance, HUD should reduce

physical inspection to every 3 years for PHAs that score 80% on the

PHAS physical condition assessment. Another comment suggest that high

performers be rewarded with physical inspection reduced to every 3

years.

Response. For the initial implementation of PHAS, HUD believes that

a physical inspection every two years of a property that scored at

least 90 percent on the PHAS Physical Condition Indicator is an

appropriate incentive. As official and full implementation of PHAS gets

underway, HUD will continue its review of all aspects of PHAS, all

aspects of its public housing programs, and determine whether the

incentives provided in this final rule should be revised.

Section 902.73 Referral to an Area HUB/Program Center

Comment. The scoring function of the PHAS under Sec. 902.73 does

not provide guidelines to determine when HUD may request ``other

standard performers'' to submit an Improvement Plan to HUD. Requiring

Improvement Plans for PHAs with scores between 60 and 70 seems clear.

However, for standard performers scoring above 70, the reasons are not

clear. Without guidelines, HUD could require the submission of an

Improvement Plan from a PHA with the highest level (89) of a standard

performer. The rule's discretion to HUD to require Improvement Plans of

PHAs scoring above 70 should be removed.

Response. Public Housing HUBs are required to monitor the PHAs

within their jurisdiction. If a PHA has deficiencies in its performance

regardless of its PHAS score, the PHA must correct those deficiencies.

An Improvement Plan is both a strategic device and a monitoring tool.

The Improvement Plan provides goals and direction to the PHA to correct

its deficiencies. Additionally, the Improvement Plan allows the Public

Housing HUB to ensure that progress is being made in the correction of

the deficiencies.

Comment. The rule needs to clarify the relationship of a troubled

designation to the requirement for submission of Improvement Plans to

the HUB/Program Center and the TARC.

Response. If the confusion arises because of reference in

Sec. 902.75 (Referral to a Troubled Agency Recovery Center (TARC)) to

the HUB/Program Center, this reference is included because there may be

cases in which the

[[Page 1730]]

TARC will refer a troubled PHA to a HUB/Program Center for assistance

in oversight and monitoring. A troubled PHA, however, is not required

to submit both an Improvement Plan and enter into an MOA, nor is a

troubled PHA subject to the provisions of Sec. 902.73 and Sec. 902.75.

PHAs that are categorized as troubled in one area do not submit

Improvement Plans to either the HUB/Program Center or the TARC. PHAs

that are categorized as troubled in one area are required to enter into

a Memorandum of Agreement (MOA), as statutorily required of all

troubled PHAs in accordance with the provisions of Sec. 902.75. A PHA

designated as troubled and that is referred to the HUB/Program Center

will be subject to the actions provided in Sec. 902.75, the same as

those PHAs that remain under the jurisdiction of the TARC. For certain

troubled PHAs, the TARC may determine that the HUB/Program Center is

better suited to work with and monitor the troubled PHA. In an effort

to clarify an ambiguity, HUD has added language to Sec. 902.75 that

states that the referral to the HUB/Program Center is for purposes of

oversight and monitoring.

Section 902.75 Referral to a Troubled Agency Recovery Center (TARC)

Comment. HUD must ensure that the Department has the capacity to

provide constructive technical assistance to PHAs that are classified

as troubled or substandard performer for individual components or the

overall PHAS assessment.

Response. HUD, by adding TARCs to its organizational structure,

made provisions to ensure that it has the requisite capacity.

V. PHAS Scoring Notices

1. Physical Condition Scoring Notice

Comment. The physical condition rating process needs to be refined.

PHAs receive the same deficiency rating whether there are two missing

shingles on a roof or 20, or if there is 1 inch of paint peel or 1 foot

of paint peel. No discretion appears to be built into the process to

determine whether the deficiency is large or small. The same rating for

this type of discrepancy needs to be addressed.

Response. In developing the PHAS, one of the objectives was to

establish, to the extent possible and permissible under law, a uniform

and objective means of assessing the physical condition of properties.

Hence, the physical condition standard defines the inspectable areas

and inspectable items that are required to be examined. The physical

inspection protocol further defines the deficiencies to be identified

and the severity levels that distinguish between the varying levels of

deficiencies for the same item. The levels of severity are level 1

(minor), level 2 (major) and level 3 (severe). This achieves the

objective of the comment to distinguish between large/small

deficiencies of the same nature. It is important to define these

differences to remove subjective judgements in favor of objective

assessments. The inspection protocol only records deficiencies based on

the specific inspectable areas, inspectable items and severity

definitions. It does not record a defect if a defect is not present. As

noted above, however, the protocol does differentiate between the

severity levels for a given deficiency. This differentiation is

important in order to provide scalable scores which represent the

overall condition of the property. HUD, however, is constantly

reviewing and refining the deficiency definitions, and HUD will take

this comment under advisement.

Comment. The physical condition scoring process is overly

complicated. Although the scoring notices detail the item weights and

criticality levels for each inspectable area, it is difficult to

determine the effect of individual deficiencies on the overall score.

The issue is important to PHAs because they will not be granted a

technical review unless it is determined that contractor error resulted

in a significant change in the property score and the PHAS designation

assigned to the PHA. HUD should revise the system to indicate that an

appeal will be considered on the basis of errors in other areas,

including the inspector's judgment of the severity of deficiencies, and

to permit appeals regardless of any change in the performance

designation.

Response. HUD has made considerable effort to simplify and make

more understandable the physical inspection scoring process, and

believes that the Notice on the PHAS Physical Condition Scoring Process

reflects HUD's success in this effort. With respect to appeals, the

final rule provides for additional ways for PHAs to appeal or request

review items in the assessment process that they believe are in error

or inaccurate.

Comment. The PHAS inspection process inspects too many elements.

HQS and local codes should be the standards by which PHA properties are

physically assessed. HUD should revisit the physical inspection

protocols. PHAs are being unfairly penalized in the physical condition

inspection process for items that meet local building codes but do not

meet HUD's physical condition standards.

Response. Before development of HUD's Uniform Physical Condition

Standards and physical inspection protocols, HUD has had a number of

inspections systems in its various programs. Part of HUD's 2020

Management Reform Plan was to develop standardized, uniform and

objective protocols, and HUD sought and obtained industry input in the

development of its standards and inspection protocol. The product of

this effort is HUD's Uniform Physical Condition Standards, which was

the subject of a final rule issued on September 1, 1998, and also was

part of the PHAS final rule published on September 1, 1998. These

standards are also applicable to HUD's multifamily insured, Section 8

project based, Section 202, and multifamily properties with HUD held

mortgages in addition to public housing owned properties. HUD believes

that this consistency is crucial to the effective management of the

properties that receive assistance from the Federal government. PHAs

are still required to meet any applicable local codes or ordinances.

HUD's Uniform Physical Condition Standards notes that the standards do

not supersede or preempt State and local building and maintenance codes

to which HUD program participants must comply (see 24 CFR 5.703(g) and

24 CFR 902.20(d).) Complying with local and Federal standards is not

new. This is the case in developing new public housing, modernizing

public housing as well as maintaining public housing. In any case where

there is conflict, the general rule is that the more stringent standard

is applicable. Accordingly, HUD will maintain the uniform physical

condition standards. In cases where the HUD standard conflicts with

local code, this final rule provides for an adjustment under the

procedures described in Sec. 902.25(c).

Comment. The PHAS physical inspection scoring process allows for

multiple deductions for the existence of only one deficiency. A single

item with a cited deficiency can be included in two inspectable areas.

The scoring system does not include adjustments based on physical

condition of the site, common areas, and building exterior for

properties over 10 years old. The impact of cosmetic deficiencies

should be reduced by exclusion or adjustment in item weight,

criticality or severity values. Restrict the assessment to only the

standards relevant to ``adequately functional and free of health and

safety standards.'' The scoring process is inconsistent within

properties and the

[[Page 1731]]

objective of determining whether a PHA is meeting the standard of

decent, safe, sanitary and in good repair.

Response. One of the unique features of the new uniform physical

condition standard inspection is that it produces a scalable score to

enable PHAs and HUD to better manage the properties. HUD believes that

this is a significant improvement over inspections that produce only a

pass or fail rating. Oftentimes the pass or fail rating is based only

on a single element. This does not give HUD or the PHA an accurate

picture of the overall condition of the property.

In developing a scalable score, HUD believes it is prudent to

distinguish in the scoring between more important elements such as the

heating system and less important elements such as lawns and plantings.

HUD has provided PHAs with an itemized list of each inspectable item

and its criticality level (from 1 to 5, with 5 being the most

critical). This list is found on REAC website at www.hud.gov/reac.

Similarly, it is also important when developing a scalable score to

differentiate between the severity levels of individual deficiencies.

It is also important to note that the scoring process does not deduct

for cosmetic deficiencies. As discussed earlier in this preamble, the

physical condition protocol is concerned with physical condition

deficiencies not cosmetic appearance, but HUD recognizes that several

commenters expressed concern about deductions for cosmetic appearance.

Following consultation with industry, HUD re-examined the Dictionary of

Deficiency Definitions, to assure that cosmetic deficiencies are not

included. The revised Dictionary of Deficiency Definitions is posted on

HUD's website.

Comment. No deductions should be applied to items that were not

present in the design, construction and/or rehabilitation of projects

when they have been maintained substantially the same as at the time of

their acceptance. No deductions also should be made for items that are

not present and that are not required by National Codes or HUD

mandates.

Response. HUD has received comments similar to this one on the

earlier PHAS rulemaking in 1998. While HUD believes that good design

practice calls for the provision of window screens, gutters and down

spouts, HUD recognizes that not all properties were built with these

elements. Similarly, HUD believes that residents should be afforded

privacy in bedrooms and bathrooms through the use of door locks, but

again recognizes that not all properties were built with these

features. Based on these concerns, HUD has modified its protocol to

only assess elements that are present at the time of the inspection.

Comment. The PHAS physical condition scoring process should be

corrected so that excessive point deduction for relatively few

deficiencies do not occur. The system must return reasonable score

results in order to be a valid measure of the physical condition found.

Response. If the deficiencies are severe, then even if they are a

few deficiencies the point deduction will appropriately represent the

severity of the deficiencies. HUD disagrees that the PHAS physical

inspection scoring methodology results in excessive point deduction for

an important element in the scoring system is the concept that not all

inspectable items are of equal importance. Some elements like roofs,

heating systems, etc., are more important than other elements such as

lawns or plantings. Because of that, if a few high criticality level

deficiencies are assessed as severe, and also have relatively high item

weights, the score will be significantly reduced. Given the high item

weights, criticality level and severity, however, the deductions are

appropriate. The weights and levels assigned to the deficiencies are

appropriate given their relative importance in terms of maintaining a

condition that is decent, safe, sanitary and in good repair.

Comment. The contract inspector should share each observed

deficiency noted with the PHA representative accompanying the inspector

so the PHA will have a better understanding of the observed deficiency

location and can ask questions and seek clarification where needed.

Response. HUD has developed an electronic system of capturing and

providing inspection results. HUD believes that it is appropriate to

review the results before conveying them the PHA. Again, however, HUD

points out that the inspector shares the health and safety deficiencies

with the PHA's representative on the day of inspection before the

inspector leaves the site, and HUD, at this final rule stage, provides

for the PHA to review and comment on the physical inspection report

before it is issued in final. Additionally, as noted earlier, HUD has

revised the physical inspection report to make it easier to identify

the deficiencies noted.

Comments. HUD should consider a mechanism for making allowances for

unavoidable downtime conditions resulting from scheduled repairs or

unanticipated equipment problems. Such allowances should reflect a

PHA's actions to minimize inconveniences to building residents. Another

comment suggests that vacant or occupied buildings and units with

substandard conditions that HUD has approved for mandatory conversion,

HOPE VI redevelopment, demolition or disposition, or a comprehensive

modernization plan should be exempt from the PHAS physical inspection.

Response. This final rule amends the inspection protocol to exempt

vacant units from the physical inspection requirement. This accounts

for repairs that are ongoing while the units are not occupied. Occupied

units, however, are subject to inspection (although occupied units

undergoing modernization may be eligible for scoring adjustment, as

provided in Sec. 902.25) HUD must ensure that residents are living in

housing that is decent, safe, sanitary, and in good repair.

Comment. Deductions for ponding should be restricted where it is

evident that standing water is causing visible damage to the roof

surface or underlying materials. HUD should consider accepting ponding

as a natural consequence of flat roof design while it is raining, and

that flat roofs are an acceptable design standard for high-rise

buildings.

Response. Any ponding or standing water on a roof can compromise

the structural integrity if left too long. It is impossible to tell at

the time of the inspection how long or to what extent damage may have

been caused. For these reasons, HUD declines to adopt the suggestion,

but HUD also recognizes the complexity of this issue, and HUD's

inspection protocols now provide that if a measurable precipitation

event has occurred within the previous 48 hours, consideration will be

given to the impact on the extent of ponding.

Comment. Mold and mildew can be a serious problem, but often is not

a result of a PHA's performance. The physical condition scoring process

must allow for judgment to be exercised by the inspector to determine

if the presence of mold/mildew is a result of resident behavior or poor

property management.

Response. While HUD appreciates that not all conditions are the

result of the PHA's performance, the PHA is ultimately responsible for

the condition of the properties. The protocol is designed to determine

the condition of the property, for which the PHA is responsible.

Comment. HUD should explain why maintenance areas are considered

common areas when residents are not allowed in maintenance work area,

boiler rooms, and elevator equipment rooms.

[[Page 1732]]

Response. The physical condition standards of decent, safe,

sanitary and in good repair applies to the total property, not just

areas where residents are allowed. These areas may not permit tenant

access, but there is access to PHA maintenance staff.

In developing the Uniform Physical Condition Standards, HUD

identified the major components of a property (i.e., site, building

exterior, building systems and units). In attempting to not overly

complicate the structure of the standard, HUD classified the remaining

elements under common areas. This is not unlike the system used by HUD

public housing Field Office staff under Handbook 7460.1 REV-1, the

public housing ``Project Engineering Survey'' (Form HUD-52414)--``Other

Items.'' Similarly, the Section 8 Housing Quality Standards Inspection

form (Form HUD-52580), deals with these items under All Secondary Rooms

Not Used for Living. HUD believes that its classification is

reasonable.

Comment. HUD advised that algorithms, which would provide a

methodology to compare vastly different types of housing across the

country, would be included in the Physical Condition Scoring Notice,

but they were not. If the algorithms are not to be used, the Assistant

Secretary for PIH should therefore make a determination of a reasonable

basis for scoring these properties, to take in the differences across

the country.

Response. As HUD has stated frequently, the objective of its

Uniform Physical Condition Standards and its uniform physical condition

inspection protocols is to provide basic standards that are applicable

to all types of housing, located in all types of areas. To the extent

that adjustments to the physical condition inspection and score may be

needed because of unique local building codes, or physical features of

a housing that are unique to a geographic area and not contemplated by

HUD's standards and inspection protocols, the final rule provides the

flexibility to make such adjustments.

Comment. HUD should reconsider the current weights in the PHAS. In

some areas, for example, the common area, which is only 15% of the

entire building score, includes so many items, such as laundry rooms,

lobbies, offices, community space that the deficiencies add up to over

70% of all the deficiencies in the entire inspection.

Response. As noted in this preamble, the weighting system for

physical inspection scoring was the subject of industry and

professional consultations. HUD believes that the current weights

represent reasonable values to attribute to those property components.

Regardless of the number of inspectable items in an inspectable area,

the maximum value of the area is limited to the relative value of the

area.

Comment. Properties should not be downgraded for penetrating

vegetation that are attractive vines on fences and walls. HUD should

not penalize PHAs for features which are considered amenities in the

private market. In some cases, a neighbor would be justifiably upset if

the PHA removed a vine owned by this neighbor from the PHA's fence.

Response. Penetrating vegetation can affect the livability and

structural integrity of the property. HUD believes that the deficiency

is justified.

Comment. The PHAS is still not clear how health and safety

deficiencies affect a PHA's numerical score. The version of this notice

accompanying the final rule needs to provide explicit examples of how

these deficiencies figure into the numerical grade.

Response. Health and safety deductions are treated like all other

deductions in the scoring algorithm, and take into account the assigned

item weights and criticality values. The PHAS physical inspection

protocol emphasizes health and safety because of its crucial importance

to the well-being of residents. All health and safety deductions are

therefore categorized as level 3 (severe).

2. Financial Condition Scoring Notice

Comment. There are contradictory explanations of the scoring of

Expense Management and Net Income under the Financial Condition

Indicator. In Appendix 1 of the PHAS Notice on the Financial Condition

Scoring Process, HUD states that these would be scored based on

deviations from a statistical mean. Those either above or below the

allowable deviation would score 0 and all others would score 1.5. In

Appendix 2 of this Notice, HUD states that these components would be

scored only in one direction. HUD needs to state which of the two

methods will be used.

Response. As specified in Appendix 1 to the PHAS Notice on the

Financial Condition Scoring Process, the deviation from a statistical

mean only applies to the first two indicators: Current Ratio and Months

Expendable Fund Balance. For the remaining indicators the methodology

is clearly delineated. Appendix 2 of this Notice is simply a set of

tables providing the threshold values for each indicator by PHA size

category consistent with the methodology described in Appendix 1.

Comment. Four categories within the expense management indicator:

administrative, utilities, ordinary maintenance, and general expense

are too detailed and unnecessary. Moreover, the cost categories are

more detailed than high performing PHAs are currently required to

report on their budget and subsidy requests. The Financial Condition

Indicator should confine its review to overall routine costs and permit

the PHA to have the discretion of distributing their expenses across

those categories according to its needs and the goals and mandate of

the Public Housing Reform Act.

Response. Six categories are measured under the Expense Management

indicator: administrative, general, tenant service, protective service,

maintenance and operation, and utilities expense. The six expense

categories were modeled after the Statement of Operating Receipts and

Expenditures form (HUD-52599). HUD already has requested this

information annually from PHAs that are using this form. HUD believes

that a review of overall routine costs is insufficient because a PHA's

allocation of its resources has a significant impact on the quality of

housing and services provided to its residents. Thus, in addition to

the above described changes to the Expense Management Indicator to

account for regional differences among PHAs, REAC has revised the

calculation for the expense management component to assign weights to

the six expense categories mentioned above. Weights have been assigned

to non-tenant related expense categories to encourage PHAs to allocate

resources to tenant-related activities.

Comment. PHAs should not be scored on the Expense Management

indicator if they are performing well on other indicators.

Response. HUD believes that a PHA's allocation of resources is a

valuable measure of efficiency and thus, all PHAs should be assessed on

this measure. A PHA whose circumstances show a reasonable business

reason will be able to appeal this indicator.

Comment. Under the scoring process for the Quick Ratio and Months

Expendable Funds Balance, HUD proposes to utilize statistical

distributions as the basis for its scoring. Specifically, HUD proposes

to award the maximum number of points to PHA's with liquidity and

operating values falling between the 30th and 80th percentiles. HUD,

however, will give incrementally fewer points to PHAs with liquidity

and operating reserves, values above the upper level of this range. In

other words, PHAs with very high short term liquidity and very high

operating reserves will be penalized through the loss of points. In

effect, too

[[Page 1733]]

high of reserves and liquidity has now become a bad practice. This type

of scoring does not make sense. PHAs with high liquidity or reserve

values which place them above the 80th percentile range should be given

the full number of points when these PHAs also score high under the

PHAS management practices and physical inspection indicators.

Response. HUD believes that its scoring methodology with respect to

reserves is appropriate but has made accommodations to recognize

circumstances unique to a PHA.

Scoring Methodology. The scoring methodology for indicators 1 and 2

(Current Ratio and Months Expendable Fund Balance) take into account

the difference between for-profit and not-for-profit entities. The

focus of for-profit entities is profit maximization (i.e., high-

retained earnings and liquidity), whereas the focus of not-for-profit

entities, such as PHAs, is to maximize the use of scarce resources to

the benefit of their residents. Thus, HUD believes that PHAs with too

high liquidity or reserves could be better utilizing their resources to

improve the quality of housing or services to their residents.

HUD recognizes there is a much higher risk to HUD associated with

PHAs exhibiting substandard levels of reserves as reflected in a score

that reaches zero for those indicators. Those PHAs with too high

reserves and liquidity, on the other hand, only stand to lose a maximum

of 1.5 points out of 9 possible points for each of the two indicators.

Recognition of Unique Circumstances. The Notice on the PHAS

Financial Condition Scoring Process that will be published in the

Federal Register will provide that a PHA will not lose points under

current ratio or monthly expenditure fund balance if the PHA has too

high liquidity or reserves if the PHA has achieved at least 90 percent

of the points available under the Physical Condition Indicator and is

not required to prepare a follow-up plan under the PHAS Indicator #4

(Resident Service and Satisfaction). Additionally, this final rule

provides that a PHA may appeal on the basis of mitigating circumstances

any point deduction on the basis of too high liquidity or reserves,

without regard to change of designation if the PHA receives a score of

at least 60 percent in the Physical Condition Indicator.

Comment. The use of percentile scoring in the financial condition

scoring process and the fact that the standards are not fixed are of

concern to PHAs. The use of the Bell Curve for scoring PHAs appears to

be inequitable. The use of relational scoring should be discontinued

for all components.

Response. The concern that there is not an absolute value or

standard toward which PHAs may strive is a valid one that has been and

continues to be raised. Based on extensive economic and financial

analysis, it has been concluded that it would be unfair to PHAs for HUD

to identify a single value as the optimum performance measure among

PHAs. Such number or standard would be debatable as it is really

impossible to have a basis for selecting a single value as the optimum

measure for a PHA of a certain size or location. Even PHAs that bear

similar characteristics such as size and location operate differently

due to a number of unique circumstances. It would be difficult to

justify to PHAs that a certain amount of administrative expense or

utility cost is the number to which they should strive because no two

PHAs are the same.

The peer assessment approach is an equitable means of measuring

financial performance because it rewards PHAs in the middle to upper

range of performance with the highest number of points. For example,

PHAs who have a current ratio in the 30th to 80th percentile receive

all of the 9 points allocated to this indicator. Another example is

expense management where only the PHAs in the top 95th percentile do

not receive the full 1.5 points.

Comment. The PHAS financial scoring process may penalize PHAs under

the current ratio component, for making capital improvements with local

operating reserve funds. The PHAS also appears to include a penalty

under the Physical Condition Indicator if PHAs do not make the capital

improvements.

Response. The Current Ratio indicator measures the cash liquidity

of a PHA compared to its peers by dividing current assets by current

liabilities. This is done irrespective of the PHA's operating reserves.

The numerator includes all cash and current assets of the PHA whether

or not reserved for capital activities. The denominator includes all

current liabilities of the PHA. PHAs are not penalized for either

capital or operating expenses under the Current Ratio indicator. This

indicator simply predicts whether or not the PHA can meet its current

obligations as compared to the rest of the PHAs of the same size.

Comment. HUD should remove Payment In Lieu of Taxes (PILOT) when

computing a PHA's General Expenses component. PILOT is a computation

which involves utility costs and thus is subject to regional costs

differences. PILOT's computation also involves input of a local

property tax rate. Additi

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