# Public Housing Assessment System (PHAS) Amendments to the PHAS

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## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** January 11, 2000
- **Citation:** 65 FR 1712

## Text

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]]

--------------------------------------------------------------------------------------------------------------------------------------------------------
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 S

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A00-591. Public record. Not legal advice.