Office of the Assistant Secretary for Public and Indian Housing; Optional Earned Income Exclusions

SUMMARY: This rule amends HUD's regulations for the definition of

``annual income'' applicable to Public Housing Agencies and Indian

Housing Authorities (collectively called Housing Agencies or HAs) in

the operation of public housing and Indian housing programs. The change

is not applicable to the Section 8 Housing Assistance Payments program.

The rule is necessary to encourage HAs to take action to further the

efforts of applicants and tenants to seek employment and to increase

their earned income. The intended effect is to permit HAs to adopt an

exclusion for earned income, tailored to their own circumstances, to

support the efforts of working families.

DATES: Effective date: September 30, 1996.

Comment due date: October 29, 1996.

ADDRESSES: Interested persons are invited to submit comments regarding

this rule to the Office of the General Counsel, Rules Docket Clerk,

Room 10276, Department of Housing and Urban Development, 451 Seventh

Street, SW., Washington, DC 20410-0500. Comments should refer to the

above docket number and title. A copy of each communication submitted

will be available for public inspection and copying during regular

business hours (weekdays 7:30 a.m. to 5:30 p.m. Eastern time) at the

above address. Facsimile (FAX) comments are not acceptable.

FOR FURTHER INFORMATION CONTACT: For the public housing program,

contact Linda Campbell, Director, Marketing and Leasing Management

Division, Office of Public and Assisted Housing Operations, Department

of Housing and Urban Development, 451 Seventh Street, SW., Washington,

DC 20410, telephone (voice): (202) 708-0744, extension 4020. (This is

not a toll-free number.) For hearing- and speech-impaired persons, this

number may be accessed via text telephone by dialing the Federal

Information Relay Service at 1-800-877-8339.

For the Indian housing programs, contact Deborah Lalancette,

Director, Housing Management Division, Office of Native American

Programs, Department of Housing and Urban Development, Room B-133, 451

Seventh Street, SW., Washington, DC 20410, telephone (voice): (202)

755-0088, extension 122. (This is not a toll-free number.) For hearing-

and speech-impaired persons, this number may be accessed via text

telephone by dialing the Federal Information Relay Service at 1-800-

877-8339.

SUPPLEMENTARY INFORMATION:

I. General

This rule amends HUD's regulations for the public housing and

Indian housing programs that govern the definition of annual income,

which the Secretary is authorized to define. Since income eligibility

for the public and Indian housing programs is determined based on this

term, and rents are based on annual income, as modified by statutorily

prescribed adjustments, changes in this definition influence who lives

in these types of housing and how much they are required to pay. (The

change is not applicable to the Section 8 Housing Assistance Payments

program.)

The rule is necessary to encourage public housing agencies and

Indian Housing Authorities (collectively called housing authorities or

HAs) to take action to further the efforts of applicants and tenants to

seek employment and to increase their earned income. The intended

effect is to permit HAs to adopt an exclusion for earned income,

tailored to their own circumstances, to support the efforts of working

families.

The Department believes that, in light of the shortfall in funding

full HA eligibility for the Performance Funding System (PFS) expected

over the next two years and the possibility that an HA can develop a

higher income base by use of this type of exclusion, it is in the best

interests of the program to encourage occupancy in these programs by

working families.

II. The Nature of Special Treatment for Earned Income

The Balanced Budget Downpayment Act I, enacted on January 26, 1996

(Pub. L. No. 104-99), also known as the Continuing Resolution or

``CR'', specifically authorized housing agencies to allow earned income

adjustments, as long as HUD's operating subsidy obligation was not

affected. That provision and others were implemented by HUD by issuance

of a Notice to HAs (PIH 96-6) on February 13, 1996, which expires on

September 30, 1996, based on the expiration of the CR on that date.

The CR enacted by Congress, effective for Federal Fiscal Year 1996,

permitted housing agencies to take actions to attract and retain

working families in occupancy such as the adoption of ceiling rents and

the adoption of earned income adjustments that would ease the impact on

working tenants. The Act also repealed Federal admissions preferences,

permitting HAs to use working preferences to greater advantage. This

rule codifies for Federal Fiscal Years 1997 and 1998 a provision

permitting housing agencies to provide for special treatment of earned

income.

The rationale for making this provision effective via a rule is to

ensure some degree of consistency in Departmental policy, on which HAs

can rely. The Department believes that this measure can contribute to

improving the stability of HAs by permitting them to improve the income

mix in their developments, thus increasing dwelling rental income.

There is a difference between the special treatment of earned

income specifically authorized by the CR and that authorized by this

rule. There are two defined terms related to income under the United

States Housing Act of 1937: ``annual income'' and ``adjusted income.''

The former is a gross income amount, which is used to determine the

eligibility of a family for participation in the program based on

whether that amount is less that 50% or 80% of median income for the

area (adjusted by family size). The latter is a net amount after

adjustments are made to the gross income, which is used to determine

the amount of rent a family pays under the affected programs because

rent is generally based on a percentage of ``adjusted income.'' The CR

authorized an ``adjustment'' to income affecting the amount of

``adjusted income'', while this rule authorizes an ``exclusion'' from

income, which affects income at an earlier stage--the definition of

``annual income.''

The reason that this rule authorizes an exclusion rather than an

adjustment is that the scope of the Department's authority does not

clearly include authorizing ``adjustments'' without specific

Congressional action. The statute prescribes the definition of

``adjusted income'' but leaves to the Secretary of HUD the authority

(under section 3 of the United States Housing Act of 1937, 42 U.S.C.

1437a) to define the term ``income,'' as it is used for purposes of

determining eligibility and rental payment in the public and Indian

housing programs. The term HUD uses

[[Page 46345]]

that corresponds to this statutory term is ``annual income.''

Although the CR provision expires at the end of the current fiscal

year (September 30, 1996), a change made by the Secretary in the

definition of income permitting an exclusion for earned income can have

longer lasting effect. The Secretary is exercising this authority in

this rule.

Under this rule, HAs have the authority to establish their own

earned income exclusion, as a means of attracting and retaining more

tenants with earned income. The ``exclusion'' an HA adopts may be

similar or identical to the ``adjustment'' it had adopted under the CR.

The adoption of an earned income exclusion under this rule will

have the same effect on an HA's operating subsidy as the adoption of an

earned income adjustment under the previously issued HUD Notice. (See

discussion below.) In general, HAs that opt to adopt earned income

exclusions will increase their total income if they are successful in

obtaining more and/or higher income working tenants but will lose

income if their policies do not produce a net increase in rent

revenues.

III. Specific Changes in Existing Rules

For the public housing program, this change to permit a new

exclusion is accomplished by adding a new paragraph (d) to

Sec. 913.106, which states the definition of ``annual income.'' The

change to the Indian housing program occurs in Sec. 950.102, in the

definition of ``annual income,'' where a new paragraph (3) is added.

The new paragraphs authorize an HA to adopt a written earned income

exclusion, after considering certain enumerated possibilities. No HUD

approval is required for adoption of such an exclusion. However, if the

HA experiences a decrease in dwelling rental income as a result, it

will have to absorb the cost.

IV. Effect on Operating Subsidy

In addition to the HUD Notice to housing agencies described above,

HUD issued a second Notice (PIH 96-24) in the spring of 1996,

implementing the CR with respect to its impact on the Performance

Funding System of determining operating subsidy eligibility.

Specifically, that Notice permitted HAs to offset PFS funding

shortfalls by retaining increases in dwelling rental income that result

from increases in residents' earned incomes and non-dwelling rental

income earned by the HAs through entrepreneurial activities. That

Notice made the changes effective for the shorter period through

Federal Fiscal Year 1998 or the time by which HUD no longer has a

shortfall in the availability of funds to pay full operating subsidy

eligibility to all HAs.

Under this rule, as under that Notice, the special treatment given

earned income by an HA will not affect its PFS subsidy eligibility.

That eligibility will be calculated without respect to either decreases

in rental income resulting from the exclusion, or increases resulting

from higher rents received from households with earned income. Another

pending rulemaking (FR-4072) codifies those changes.

V. Scope of rule

The CR authorized the earned income adjustment only for the public

and Indian housing programs and only based on the premise that

operating subsidy obligations of the Department would not be affected.

This rule follows those limits on the scope of the optional special

treatment of earned income. Therefore, the change is not applied to

other programs usually governed by the same definition of ``annual

income,'' such as the Section 8, Section 236, and Rent Supplement

programs.

Findings and Certifications

Justification for Interim Rule

The Department generally publishes a rule for public comment before

issuing a rule for effect, in accordance with its regulations on

rulemaking in 24 CFR part 10. However, part 10 provides that prior

public procedure will be omitted if HUD determines that it is

``impracticable, unnecessary, or contrary to the public interest'' (24

CFR 10.1).

The change made by this interim rule merely adds an optional

exclusion to the definition of income used by Housing Agencies, which

supports the policy of obtaining a broad range of income levels in

public housing and Indian housing developments and the Secretary's

policy of encouraging HAs to increase the number of working families

residing in these developments. As noted earlier, the Department has

already authorized the use of such income exclusions for a limited

period of time, based on the Balanced Budget Downpayment Act I, in a

Notice. Authorization of such an optional exclusion in this rule is

expected to increase the number of HAs using it, helping to encourage

the participation of working families in these programs.

Implementation of the rule's provisions is needed as soon as

possible to facilitate the adoption of this type of exclusion to

realize the benefits of increasing the incentives for working families

to participate and to prevent HAs that are now deducting earned income

from having to change their policy starting on October 1, 1996, only to

institute earned income exclusions later. Therefore, the Department has

determined that good cause exists to omit prior public procedure for

this interim rule because such delay would be contrary to the public

interest and unnecessary.

In the interest of obtaining the fullest participation possible in

determining the factors that should be considered in an HA's

determination to adopt an earned income exclusion, the Department does

invite public comment on the rule. The comments received within the 60-

day comment period will be considered during development of a final

rule that will supersede this interim rule.

Impact on the Environment

A Finding of No Significant Impact with respect to the environment

has been made in accordance with HUD regulations at 24 CFR part 50 that

implement section 102(2)(C) of the National Environmental Policy Act of

1969, 42 U.S.C. 4332. The Finding of No Significant Impact is available

for public inspection and copying during regular business hours (7:30

a.m. to 5:30 p.m.) in the Office of the Rules Docket Clerk, Room 10276,

451 Seventh Street, SW., Washington, DC 20410-0500.

Federalism Impact

The General Counsel, as the Designated Official under section 6(a)

of Executive Order 12612, Federalism, has determined that the policies

contained in this rule do not have significant impact on States or

their political subdivisions since the provisions of this interim rule

simply add an option for housing agencies to adopt. To the extent there

is an impact, it is advantageous to the HAs, which are creatures of

State or local government.

Impact on the Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this rule does not have

potential for significant impact on family formation, maintenance, and

general well-being. Therefore, the rule is not subject to review under

the Order. The rule merely broadens the options for housing agencies in

managing their public housing or Indian housing programs to encourage

families to obtain employment and to increase their earnings.

[[Page 46346]]

Impact on Small Entities

The Secretary, in accordance with the Regulatory Flexibility Act (5

U.S.C. 605(b)), has reviewed this rule before publication and by

approving it certifies that this rule will not have a significant

impact on a substantial number of small entities, because it makes

available additional options for housing agencies but does not impose

mandatory obligations.

Catalog

The Catalog of Federal Domestic Assistance number for the

programs affected by this rule is 14.850.

List of Subjects

24 CFR Part 913

Grant programs--housing and community development, Public housing,

Reporting and recordkeeping requirements.

24 CFR Part 950

Aged, Grant programs--housing and community development, Grant

programs--Indians, Indians, Individuals with disabilities, Low and

moderate income housing, Public housing, Reporting and recordkeeping

requirements.

Accordingly, parts 913 and 950 of title 24 of the Code of Federal

Regulations are amended as follows:

PART 913--DEFINITION OF INCOME, INCOME LIMITS, RENT AND

REEXAMINATION OF FAMILY INCOME FOR THE PUBLIC HOUSING PROGRAM

1. The authority citation for part 913 continues to read as

follows:

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

2. In Sec. 913.106, paragraphs (d) and (e) are redesignated as

paragraphs (e) and (f), and a new paragraph (d) is added, to read as

follows:

Sec. 913.106 Annual income.

* * * * *

(d) In addition to the exclusions from annual income covered in

paragraph (c) of this section, a housing agency may adopt additional

exclusions for earned income pursuant to an established written policy.

(1) In establishing such a policy, a housing agency must adopt one

or more of the following types of earned income exclusions, including

variations thereof:

(i) Exclude all or part of the family's earned income;

(ii) Apply the exclusion only to new sources of earned income or

only to increases in earned income;

(iii) Apply the exclusion to the earned income of the head, the

spouse, or any other family member age 18 or older;

(iv) Apply the exclusion only to the earned income of persons other

than the primary earner;

(v) Apply the exclusion to applicants, newly admitted families,

existing tenants, or persons joining the family;

(vi) Make the exclusion temporary or permanent, for the HA, the

family, or the affected family member;

(vii) Make the exclusion graduated, so that more earned income is

excluded at first and less earned income is excluded after a period of

time;

(viii) Exclude any or all of the costs that are incurred in order

to go to work but are not compensated, such as the cost of special

tools, equipment, or clothing;

(ix) Exclude any or all of the costs that result from earning

income, such as social security taxes or other items that are withheld

in payroll deductions;

(x) Exclude any portion of the earned income that is not available

to meet the family's own needs, such as amounts that are paid to

someone outside the family for alimony or child support; and

(xi) Exclude any portion of the earned income that is necessary to

replace benefits lost because a family member becomes employed, such as

amounts that the family pays for medical costs or to obtain medical

insurance.

(2) Any amounts that are excluded from annual income under this

paragraph (d) may not also be deducted in determining adjusted income,

as defined in Sec. 913.102.

(3) Housing agencies do not need HUD approval to adopt optional

earned income exclusions.

(4) In the calculation of Performance Funding System operating

subsidy eligibility, housing agencies will have to absorb any loss in

rental income that results from the adoption of any of the optional

earned income exclusions discussed in paragraph (d)(1) of this section,

including any variations of the listed options.

PART 950--INDIAN HOUSING PROGRAMS

3. The authority citation for part 950 continues to read as

follows:

Authority: 25 U.S.C. 450e(b); 42 U.S.C. 1437aa-1437ee and

3535(d).

4. In the definition of ``Annual income'' in Sec. 950.102,

paragraphs (3) and (4) are redesignated as paragraphs (4) and (5), and

a new paragraph (3) is added, to read as follows:

Sec. 950.102 Definitions.

* * * * *

Annual income. * * *

(3) In addition to the exclusions from annual income covered in

paragraph (2) of this definition, an IHA may adopt additional

exclusions for earned income pursuant to an established written policy.

(i) In establishing such a policy, an IHA must adopt one or more of

the following types of earned income exclusions, including variations

thereof:

(A) Exclude all or part of the family's earned income;

(B) Apply the exclusion only to new sources of earned income or

only to increases in earned income;

(C) Apply the exclusion to the earned income of the head, the

spouse, or any other family member age 18 or older;

(D) Apply the exclusion only to the earned income of persons other

than the primary earner;

(E) Apply the exclusion to applicants, newly admitted families,

existing residents, or persons joining the family;

(F) Make the exclusion temporary or permanent, for the IHA, the

family, or the affected family member;

(G) Make the exclusion graduated, so that more earned income is

excluded at first and less earned income is excluded after a period of

time;

(H) Exclude any or all of the costs that are incurred in order to

go to work but are not compensated, such as the cost of special tools,

equipment, or clothing;

(I) Exclude any or all of the costs that result from earning

income, such as social security taxes or other items that are withheld

in payroll deductions;

(J) Exclude any portion of the earned income that is not available

to meet the family's own needs, such as amounts that are paid to

someone outside the family for alimony or child support; and

(K) Exclude any portion of the earned income that is necessary to

replace benefits lost because a family member becomes employed, such as

amounts that the family pays for medical costs or to obtain medical

insurance.

(ii) Any amounts that are excluded from annual income under

paragraph (3) of this definition may not also be deducted in

determining adjusted income, as defined in this section.

(iii) IHAs do not need HUD approval to adopt optional earned income

exclusions.

(iv) In the calculation of Performance Funding System operating

subsidy eligibility, IHAs will have to absorb any loss in rental income

that results from the adoption of any of the optional earned income

exclusions discussed in paragraph (3)(i) of this definition, including

any variations of the listed options.

* * * * *

[[Page 46347]]

Dated: August 6, 1996.

Kevin Emanuel Marchman,

Acting Assistant Secretary for Public and Indian Housing.

[FR Doc. 96-22214 Filed 8-29-96; 8:45 am]

BILLING CODE 4210-33-P