Public and Indian Housing Performance Funding System: Incentives

SUMMARY: This interim rule amends HUD's regulations for the Performance

Funding System that governs payment of operating subsidy to Public

Housing Agencies and Indian Housing Authorities (collectively called

Housing Agencies or HAs). It makes four principal changes: it codifies

incentive adjustments that were made for Federal Fiscal Years 1996

through 1998 via a Notice to Housing Agencies; it adds a provision to

gradually phase down operating subsidies provided to Housing Agencies

when they obtain HUD approval to demolish units; it clarifies how

combining two efficiency units into a one-bedroom unit is to be treated

for operating subsidy eligibility; and it removes a limitation on the

time period that applies to an HA's eligibility to benefit from certain

utility savings efforts.

A rule is necessary because the incentives that were contained in

the referenced Notice were based on legislation that expires after

September 30, 1996. Without action by HUD to continue these incentives

beyond that date, HAs may be reluctant to adopt and implement

worthwhile practices based solely on the provisions of the Notice.

Since the Secretary has authority to regulate in this area,

promulgation of this interim rule will give HAs a regulatory basis for

adopting worthy changes. The change with respect to utility savings is

to conform the regulation to the statute, since a six-year limitation

was just removed from the authorizing statute.

DATES: Effective date: October 30, 1996, except that Secs. 950.725(b),

950.756, 950.757, 990.109(b), 990.114, and 990.116 shall not become

effective until the OMB approval of the information collections

contained in those sections are announced by a separate publication in

the Federal Register.

Comment due date: Comments must be submitted by November 29, 1996.

The deadline for comments on the information collection

requirements is November 29, 1996, although commenters are advised that

a comment is best assured of having its full effect if it is received

by the Office of Management and Budget (OMB) within 30 days of

publication. See the Public Reporting Burden heading under the Findings

and Certifications section of this preamble regarding the information

collection burden.

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 of the rule. Facsimile (FAX) comments are

not acceptable. 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.

Comments on the information collections contained in the rule,

which are described in detail in the section, Findings and

Certifications, must refer to the docket number and title of the rule

and be sent to:

Joseph F. Lackey, Jr., HUD Desk Officer, Office of Management and

Budget, New Executive Office Building, Washington, DC 20503

and

Reports Liaison Officer, Room 4238, Office of Public and Indian

Housing, Department of Housing and Urban Development, 451 Seventh

Street, SW, Washington, DC 20410-5000.

FOR FURTHER INFORMATION CONTACT: For the public housing program,

contact Joan DeWitt, Director, Finance and Budget Division, Office of

Public and Assisted Housing Operations, Department of Housing and Urban

Development, 451 Seventh Street, SW., Washington, DC 20410, telephone

(voice): (202) 708-1872, ext. 4035. (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. (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. Changes to Encourage HAs to Facilitate Resident Employment and

Undertake Entrepreneurial Initiatives

Congress enacted the Balanced Budget Downpayment Act I on January

26, 1996 (Pub. L. No. 104-99), effective only for Federal Fiscal Year

1996. This legislation permitted housing agencies to take actions to

attract and retain working families in occupancy such as the adoption

of ceiling rents, adoption of earned income adjustments that would make

work attractive to tenants, and adoption of local preferences. The

legislation also repealed Federal admissions preferences.

HUD issued a Notice to housing agencies (PIH 96-24) in the spring

of 1996, providing an incentive under the Performance Funding System

(PFS) for HAs that make significant efforts to utilize the new optional

earned income adjustments for existing residents or that undertake

entrepreneurial activities. The Notice made the incentive effective for

the shorter of the period of three Federal Fiscal Years (FFYs), 1996-

1998, or the period during which there is a shortfall in the

availability of funds to pay full operating subsidy eligibility to all

HAs. Specifically, the Notice permitted HAs that implement the optional

earned income exclusion for existing residents to offset performance

funding system (PFS) funding shortfalls by retaining increases in

dwelling rental income that result from increases in residents' earned

incomes. The Notice also provided an incentive related to other income

earned by the HAs through entrepreneurial activities. This rule adopts

similar changes.

The Secretary has authority under section 3 of the United States

Housing Act of 1937, 42 U.S.C. 1437a, to define the term ``income,'' as

it used for purposes of determining eligibility and rental payment in

the public and Indian housing programs. Although the Appropriations Act

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 HAs to adopt an exclusion for earned income can have longer

lasting effect. The Secretary is exercising this authority in another

pending rulemaking, but this rule specifies the impact of adoption of

such an exclusion by an HA.

[[Page 51179]]

Under this new policy, HAs have the authority to establish their

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

more tenants with earned income. PFS subsidies, however, 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. 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.

To permit proper determination of operating subsidy eligibility, in

accordance with the principle stated above, a housing agency that

adopts an earned income exclusion will have to calculate and document

the following:

(1) Per unit rental income from resident earned income in the April

1, 1996 rent roll;

(2) A future month's per unit rental income from resident earned

income (see Secs. 950.757(b) and 990.116(b)); and

(3) A future month's rent roll adjusted so that it does not reflect

decreases resulting from the HA's implementation of an optional earned

income exclusion (see Secs. 950.725(b)(1)(ii) and 990.109(b)(1)(ii)).

In addition to the change with respect to an earned income

adjustment, the Department's recent Notice suspended a three percent

change factor applied to project an HA's dwelling rental income. In

recent years this assumption of an increase in the dwelling rental

income has not been realized. In order to ensure that all HAs receive a

level of funding that most nearly reflects their final eligibility

based on actual experience, without requiring them to request a year

end adjustment, the Department suspended use of the change factor for

the same period of time as applies to the earned income exclusion. This

rule codifies that change, as well.

The rationale for incorporating these changes in the PFS regulation

is to ensure some degree of continuity in Departmental policy on which

HAs may rely. The Department believes that these measures can

significantly improve the stability of HAs by permitting HAs to improve

the income mix in their developments, and thus increase dwelling rental

income. The retention by HAs of additional rental income--and other

income--above that permitted under the current PFS formula, up to 100

percent of their PFS eligibility, will directly allow these HAs to

provide better housing services in their communities.

There is statutory authority for these changes under section 9 of

the United States Housing Act of 1937, 42 U.S.C. 1437g. That provision

authorizes HUD to base operating subsidy to housing agencies on a

performance funding system that is substantially based on the system

defined in regulations and in effect on February 5, 1988. These changes

to the PFS are not substantial changes. They deal only with the matter

of how to cope with a subsidy shortfall during the three-year period of

FY 1996 through FY 1998, but they do not apply during any FFY during

which there is not an overall PFS shortfall.

II. Transition Funding for Units Approved for Demolition

This rule also contains a change to the PFS regulations to provide

a short transition period of funding for HAs that have received

approval to demolish HA-owned public or Indian housing units. The

purpose of the change is to encourage and support efforts by an HA to

reduce its overhead costs in a planned and orderly manner when its

inventory of units is reduced by demolition.

Under the current PFS regulations, units are no longer eligible for

operating subsidy when the Department approves the unit for

deprogramming (including approval to demolish the unit) and the unit is

vacant. The only funding provided after that point is funding for

direct costs relating to preserving and protecting the unit pending

actual demolition or disposition.

This abrupt cut-off in subsidy does not provide an opportunity for

affected HAs to reduce their overhead costs in a planned and orderly

way. An HA that undertakes a significant reduction to its inventory

will need to rethink and possibly restructure the way it does business.

This is especially true if the units are not going to be replaced or if

some different type of development management is contemplated. Some HAs

are contemplating the demolition of up to 20% of their inventory.

Faced with the prospect of a sudden and sharp decrease in subsidy

funding, some HAs may decide to postpone the decision to seek HUD

approval to demolish units that clearly meet the criteria for such an

action, especially where the units are not being replaced by tenant-

based subsidy, such as Section 8 Certificates or Vouchers. By retaining

these units in its inventory, an HA continues to receive some level of

operating subsidy support.

This proposed rule strikes a balance between the need to eliminate

disincentives and the need to achieve a reduction in operating subsidy

as a result of demolition activity. Subsidy funding will be continued

to units approved by HUD for demolition under the following conditions:

(1) Units replaced with Section 8 Certificates or Vouchers will not

be eligible for phase-down subsidy;

(2) Units that have been continuously vacant for the twelve-month

period immediately preceding HUD approval for the demolition will be

eligible for subsidy funding based on 20% of the Allowable Expense

Level (AEL) for 12 months beginning with the month that the demolition

request was approved by HUD; and

(3) For units that have not been continuously vacant for twelve

months, the rule phases out the subsidy over a three-year period,

starting with the month in which the unit is approved for demolition

and is vacant. For the initial 12-month period, the unit will be

eligible for subsidy funding based on 100% of AEL. For the next 12-

month period, the unit will be eligible for subsidy funding based on

66% of the AEL. For the third 12-month period, the unit will be

eligible for funding based on 33% of the AEL.

(4) Units that are approved for demolition and are replaced with

conventional public or Indian housing units will not be eligible for

phase-down subsidy when the replacement units become eligible for

subsidy.

(5) Units that are removed from the inventory as a result of being

combined with other units are not considered to be demolished units for

this purpose.

The intent of this change is to maintain the momentum that has been

achieved to demolish the worst parts of the public housing inventory.

The Department is concerned that if it does not address the legitimate

transitional funding need problems of HAs undergoing inventory and

funding reductions, this momentum will be lost.

This change to the PFS regulations falls within the authority of

the Secretary to define the PFS for payment of operating subsidy. The

change merely removes some of the obstacles to demolishing seriously

deteriorated or obsolete housing stock, while coping with an operating

subsidy shortfall.

One limitation on the Department's ability to issue rules on the

subject of PFS is the statutory requirement that ``any proposed

regulation providing for amendment, alteration, adjustment, or other

change in the performance funding system relating to vacant units shall

be issued pursuant to a negotiated rule making procedure * * *.''

This rule will provide additional operating subsidy to certain HAs

that had or will have (vacant) units approved

[[Page 51180]]

for demolition in 1995 or later. The additional costs to the PFS are

estimated as follows: $17.6 million in FY 1997 (including $1.3 million

for FY 1995, $6 million for FY 1996, and $10.3 million for FY 1997);

$19.6 million in FY 1998; and $25.5 million in FY 1999. The

corresponding savings for the PFS resulting from the demolitions are as

follows: $4.9 million in FY 1996; $10.8 million in FY 1997; $44.1

million in FY 1998; and $81.9 million in FY 1999. When the savings are

compared with the cost, the results are a net cost of $1.9 million for

FYs 1995 through 1997, but a net savings of $24.5 million and $56.4

million, respectively, for FYs 1998 and 1999. Thus, the net effect of

this rule on PFS during the period is a savings in total operating

subsidy eligibility amount.

Moreover, compared to the magnitude of the PFS in its entirety,

this phase-down funding is minimal in scale. The $1,900,000 of net cost

in FYs 1996 and 1997 can be contrasted with the amount provided in the

FY 1997 HUD appropriations bill as passed by the House of

$2,850,000,000. In addition, it should be noted that most HAs that are

demolishing public or Indian housing units are receiving certificates

as replacement for those lost units. Those HAs are not eligible for

phase-down of subsidy under this rule, and so are not affected by this

provision.

The purpose to be served by a negotiated rulemaking is to assure

that all interested parties have an opportunity to advance their

interests during the development of a proposal that will affect them.

Since the phase-down of subsidy for units approved for demolition

produces an overall savings to the PFS and is minimal in effect when

compared with the overall level of PFS funding, the impact on HAs and

tenants of this rule does not rise to the level to necessitate

participation in a negotiated rulemaking. Therefore, the Department has

determined that the phase-down provision does not constitute the type

of change in PFS relating to vacant units for which a negotiated

rulemaking is required.

III. Treatment of Combination of Two Efficiency Units Into a One

Bedroom Unit

In recognition of the marketing problem HAs have regarding

efficiency apartments and the resulting high vacancy rates in these

units, the Department wants to support HAs which make the decision to

convert efficiency units into one bedroom units. This rule amends

Secs. 990.108(d) and 950.720(e), Costs resulting from combination of

two or more units, to treat the conversion of two efficiency units into

a one-bedroom unit as eligible for funding under this section.

IV. Changes to Utility Savings Retention Period

In enacting the 1996 Omnibus Appropriations Act, Congress removed

the statutory restriction of six years imposed after the first year of

utility rate savings that an HA is permitted to share. Therefore, this

rule removes the language from the rule that enforced that time limit.

Now, the utility rate savings can continue to be shared for as long as

the actions of the HA continue to be cost-effective.

This change is being made not only for public housing but also for

Indian housing. Section 201(b)(2) of the United States Housing Act of

1937 (42 U.S.C. 1437aa(b)(2), ``the 1937 Act'') provides that

amendments to provisions found in title II of the 1937 Act do not apply

to Indian housing unless the amendment so states. Nevertheless, when

the statutory authority to extend the period of permitted rate savings

sharing from one year to seven years was implemented, the extension was

made applicable to Indian housing despite the absence of specific

mention of Indian housing in the statutory amendment. The preamble of

the rule implementing the extension stated (at 59 FR 33653) that, ``Not

to do so would frustrate the goals of providing incentives to undertake

energy conservation activities.'' That policy still governs, and

therefore this change to extend the period during which utility rate

savings can continue is being applied to Indian housing, as well.

V. Findings and Certifications

A. 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 statutory 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 who are now excluding earned income

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

re-institute it later. Therefore, the Department has determined that

good cause exists to omit prior public procedure for this final 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 and to assure that

other changes made are well-tailored to HA operations, 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.

B. Impact on the Environment

In accordance with 40 CFR 1508.4 of the regulations of the Council

on Environmental Quality and 24 CFR 50.20(o) of the HUD regulations,

the policies and procedures contained in this interim rule relate only

to operating costs that do not affect a physical structure or property

and, therefore, are categorically excluded from the requirements of the

National Environmental Policy Act (42 U.S.C. 4332).

C. 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, or the relationship between the Federal

government and the States, or on the distribution of power and

responsibilities among the various levels of government. As a result,

the rule is not subject to review under the Order. The rule adds some

incentives to the formula under which operating subsidies are paid on

HUD-assisted housing owned and operated by HAs, but will not interfere

with State or local government functions.

[[Page 51181]]

D. 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. No significant change in existing HUD policies or programs

results from promulgation of this rule, as those policies and programs

relate to family concerns. The rule merely involves the amount of

funding that a HA should receive under a refinement of an existing

procedure.

E. 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. This rule will permit

some modest increase in subsidy eligibility for HAs that take advantage

of the incentives. The rule would be unlikely to have any significant

impact on small HAs.

F. Unfunded Mandates Reform Act

The Secretary has reviewed this rule before publication and by

approving it certifies, in accordance with the Unfunded Mandates Reform

Act of 1995 (2 U.S.C. 1532), that this rule does not impose a Federal

mandate that will result in the expenditure by State, local, and tribal

governments, in the aggregate, or by the private sector, of $100

million or more in any one year.

G. Regulatory Review

This interim rule was reviewed by the Office of Management and

Budget under Executive Order 12866. Any changes made in this interim

rule as a result of that review are clearly identified in the docket

file for this interim rule, which is available for public inspection in

the HUD's Office of the Rules Docket Clerk, Room 10276, 451 Seventh

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

H. Public Reporting Burden

The information collection requirements contained in this rule, as

described in Secs. 950.725(b), 950.756, 950.757, 990.109(b), 990.114,

and 990.116 have been submitted to the Office of Management and Budget

for review under the Paperwork Reduction Act of 1995 (42 U.S.C. 3501-

3520).

1. In accordance with 5 CFR 1320.5(a)(1)(iv), the Department is

setting forth the following concerning the proposed collection of

information:

(a) Title of the information collection proposal: Performance

Funding System Incentives.

(b) Summary of the collection of information: The information

collected is alternate information about rental income that would have

been collected if the HA had not adopted an earned income exclusion,

information about vacant units that have been approved for demolition

and would not otherwise be eligible for operating subsidy, and

identifying increases in earned income so as to exclude some of that

income.

(c) Description of the need for the information and its proposed

use: The information is needed to permit calculation of operating

subsidy eligibility for HAs that want to take advantage of incentives

to facilitate resident employment and to encourage demolition of

seriously deteriorated vacant units.

(d) Description of the likely respondents, including the estimated

number of likely respondents, and proposed frequency of response to the

collection of information: The likely respondents are the approximately

700 HAs that are estimated to take advantage of the incentives.

(e) Estimate of the total reporting and recordkeeping burden that

will result from the collection of information: The total number of

burden hours for this collection of information is estimated to be

16,120 hours, including the time for reviewing instructions, gathering

and maintaining the data, and calculating and requesting the incentive

adjustment. The information will be collected as part of the annual

calculation of eligibility for operating subsidy. The 700 HAs will

determine the effect of the incentives, at a cost of about $15 per

hour, for a total cost of $241,800. This amount is expected to be more

than offset by the resulting increase in operating subsidy payments.

These estimates were developed by consulting with eight housing

agencies.

Reporting Burden:

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

Proposed section Est. ave.

Type of collection of 24 CFR Number of Frequency of response time Annual burden

affected respondents response (hrs.) (hrs.)

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

Addition to PFS rent roll of 950.725& 990.109 700 1 3 2,100

Earned Income Exclusions. (b)(1)(ii).

Phase-down for demolished 950.756, 990.114 20 1 1 20

units.

Incentive for increases in 950.757, 990.116 700 1 20 14,000

earned income.

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

Total Burden............ ................ .............. .............. .............. 16,120

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

2. In accordance with 5 CFR 1320.8(b)(3), the Department makes the

following statement:

The reason for collecting the information is to give HUD the basis

for approving a request for a PFS incentive adjustment in operating

subsidy. The information will be used by HUD to approve an adjustment

based on the adoption of an earned income exclusion and/or based on a

phase-down of operating subsidy in connection with demolition of units.

The information collected is public information and does not lend

itself to confidentiality. In accordance with the Paperwork Reduction

Act, HUD may not conduct or sponsor, and a person is not required to

respond to, a collection of information unless the collection displays

a currently valid OMB control number.

3. In accordance with 5 CFR 1320.8(d)(1), the Department is

soliciting comments from members of the public and affected agencies

(see DATES and ADDRESSES sections above) concerning the proposed

collection of information to:

(a) Evaluate whether the proposed collection of information is

necessary for the proper performance of the functions of the agency,

including whether the information will have practical utility;

(b) Evaluate the accuracy of the agency's estimate of the burden of

the proposed collection of information;

(c) Enhance the quality, utility, and clarity of the information to

be collected; and

(d) Minimize the burden of the collection of information on those

who

[[Page 51182]]

are to respond; including through the use of appropriate automated

collection techniques or other forms of information technology, e.g.,

permitting electronic submission of responses.

Catalog

The Catalog of Federal Domestic Assistance number for the

programs affected by this rule is 14.850.

List of Subjects

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.

24 CFR Part 990

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

Reporting and recordkeeping requirements.

Accordingly, parts 950 and 990 of title 24 of the Code of Federal

Regulations are amended as follows:

PART 950--INDIAN HOUSING PROGRAMS

1. 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).

2. In Sec. 950.705, a new paragraph (c) is added, to read as

follows:

Sec. 950.705 Determination of amount of operating subsidy under PFS.

* * * * *

(c) A special phase-down of subsidy to IHAs is applicable when

demolition of units is approved by HUD in Federal Fiscal Year 1995 and

later. See Sec. 950.756.

Sec. 950.715 [Amended]

3. In Sec. 950.715, paragraph (b)(2) is amended by removing the

phrase ``for an additional period not to exceed six years''.

4. In Sec. 950.720, paragraph (e) is amended by redesignating the

text as paragraph (e)(1), and by adding a new paragraph (e)(2), to read

as follows:

Sec. 950.720 Other costs.

* * * * *

(e) * * *

(2) An exception to paragraph (e)(1) of this section is made when

an IHA combines two efficiency units into a one-bedroom unit. In these

cases, the AEL for the requested year shall be multiplied by the number

of unit months not included in the requested year's unit months

available as a result of these combinations that have occurred since

the Base Year.

* * * * *

5. In Sec. 950.725, paragraph (b) is amended by redesignating

paragraph (b)(1) as paragraph (b)(1)(i), by adding a new paragraph

(b)(1)(ii), and by revising paragraph (b)(2), to read as follows:

Sec. 950.725 Projected operating income level.

* * * * *

(b) * * *

(1) * * *

(ii) The Rent Roll used for calculating the projected operating

income level will not reflect decreases resulting from the IHA's

implementation of an optional earned income exclusion authorized by the

definition of ``annual income'' in Sec. 950.102. But see Sec. 950.757

for the earned income incentive adjustment.

(2) Three percent increase. The average monthly dwelling rental

charge per unit, computed under paragraph (b)(1) of this section, is

increased by 3 percent to obtain the projected average monthly dwelling

rental charge per unit of the IHA for the Requested Budget Year, except

that for the shorter of Federal Fiscal Years 1996 through 1998 or the

period during which HUD has an operating subsidy shortfall, no increase

factor will be used.

* * * * *

Sec. 950.730 [Amended]

6. In Sec. 950.730, paragraph (c)(1)(i) is amended by removing the

phrase, ``up to an additional six years,''.

7. A new Sec. 950.756 is added to read as follows:

Sec. 950.756 Phase-down of subsidy for units approved for demolition.

(a) General. Units that have both been approved by HUD for

demolition and been vacated in FFY 1995 and after will be excluded from

an IHA's determination of Unit Months Available when vacated, but they

will remain eligible for subsidy in the following way:

(1) For the first twelve months beginning with the month that a

unit meets both conditions of being approved for demolition and vacant,

the full AEL will be allowed for the unit.

(2) During the second twelve-month period after meeting both

conditions, 66 percent of the AEL will be allowed for the unit.

(3) During the third twelve-month period after meeting both

conditions, 33 percent of the AEL will be allowed for the unit.

(b) Special case for long-term vacant units. Units that have been

vacant for longer than 12 months when they are approved for demolition

are eligible for funding equal to 20% of the AEL for a 12-month period.

(c) Treatment of units replaced with Section 8 Certificates or

Vouchers. Units that are replaced with Section 8 Certificates or

Vouchers are not subject to the provisions of this section.

(d) Treatment of units replaced with Indian housing units. When

replacement conventional Indian housing units become eligible for

operating subsidy, the demolished unit is no longer eligible for any

funding under this section.

(e) Determination of what units are ``replaced.'' For purposes of

this section, replacements are applied first against units that

otherwise would fall in paragraph (a) of this section; any remaining

replacements should be used to reduce the number of units qualifying

under paragraph (b) of this section.

(f) Treatment of units combined with other units. Units that are

removed from the inventory as a result of being combined with other

units are not considered to be demolished units for this purpose.

(g) Retroactive effect. This section is to be applied retroactively

for units approved for demolition during Federal Fiscal Years 1995 and

1996. IHAs affected by this provision may submit a revised calculation

of operating subsidy eligibility for the subject fiscal year(s).

8. A new Sec. 950.757 is added to read as follows:

Sec. 950.757 Three-year incentive adjustments.

(a) Applicability. For the period of Federal Fiscal Year 1996

through Federal Fiscal Year 1998, the provisions of this section apply

to permit IHAs to retain certain sources of income that would otherwise

be offset by a reduction of subsidy. The combined amount retained in

accordance with the provisions of this section may not exceed the

amount of the PFS subsidy shortfall applicable to an IHA in the subject

fiscal year.

(b) Increases in earned income. IHAs are permitted to retain any

increase in dwelling rental income realized after April 1, 1996 as a

result of increased resident earned income, where the governing body of

the IHA has certified that the IHA is making significant efforts to

increase the earned income of existing residents by adopting the

optional earned income exclusion and not just taking actions regarding

new admissions. To implement this paragraph (b), the IHA will compare

the rental income per occupied unit from earned income from April 1,

1996 to the

[[Page 51183]]

rental income per occupied unit from earned income on the date of the

rent roll used for PFS calculation. If an IHA does not have the April

1, 1996 data available, HUD may approve the use of data from a later

month.

(c) Increases in other income. IHAs are permitted to retain any

increase in ``other income'' based on using the definition provided in

this section, as compared with using the definition found in

Sec. 950.102. For purposes of this section, the amount of ``other

income'' is limited to the following three sources:

(1) Excess Utilities: charges to tenants for excess utility

consumption for IHA-supplied utilities.

(2) Nondwelling Rental Income: Rent billed to lessees of dwelling

units rented for nondwelling purposes. Rent billed to lessees of

nondwelling facilities will not be included except for rent billed to

other HUD programs (e.g.; Section 8, congregate housing, family

investment centers).

(3) Other Income: Only charges to other HUD programs (e.g.; Section

8, congregate housing, family investment centers) for use of community

space, central office management and maintenance space will be taken

into consideration. IHAs will calculate the amount of ``other income''

to be retained in a manner prescribed by HUD.

PART 990--ANNUAL CONTRIBUTIONS FOR OPERATING SUBSIDY

9. The authority citation for part 990 continues to read as

follows:

Authority: 42 U.S.C. 1437(g) and 3535(g).

10. In Sec. 990.104, a new paragraph (c) is added, to read as

follows:

Sec. 990.104 Determination of amount of operating subsidy under PFS.

* * * * *

(c) A special phase-down of subsidy to HAs is applicable when

demolition of units is approved by HUD in Federal Fiscal Year 1995 and

later. See Sec. 990.114.

Sec. 990.107 [Amended]

11. In Sec. 990.107, paragraph (b)(2) is amended by removing the

phrase ``for an additional period not to exceed six years''.

12. In Sec. 990.108, paragraph (d) is amended by redesignating the

text as paragraph (d)(1), and by adding a new paragraph (d)(2), to read

as follows:

Sec. 990.108 Other costs.

* * * * *

(d) * * *

(2) An exception to paragraph (d)(1) of this section is made when

an HA combines two efficiency units into a one-bedroom unit. In these

cases, the AEL for the requested year shall be multiplied by the number

of unit months not included in the requested year's unit months

available as a result of these combinations that have occurred since

the Base Year.

* * * * *

13. In Sec. 990.109, paragraph (b) is amended by redesignating

paragraph (b)(1) as paragraph (b)(1)(i), by adding a new paragraph

(b)(1)(ii), and by revising paragraph (b)(2), to read as follows:

Sec. 990.109 Projected operating income level.

* * * * *

(b) * * *

(1) * * *

(ii) The Rent Roll used for calculating the projected operating

income level will not reflect decreases resulting from the HA's

implementation of an optional earned income exclusion authorized by the

definition of ``annual income'' in 24 CFR 913.106(d). But see

Sec. 990.116 for the earned income incentive adjustment.

(2) Three percent increase. The average monthly dwelling rental

charge per unit, computed under paragraph (b)(1) of this section, is

increased by 3 percent to obtain the projected average monthly dwelling

rental charge per unit of the HA for the Requested Budget Year, except

that for the shorter of Federal Fiscal Years 1996 through 1998 or the

period during which HUD has an operating subsidy shortfall, no increase

factor will be used.

* * * * *

Sec. 990.110 [Amended]

14. In Sec. 990.110, paragraph (c)(1) is amended by removing the

phrase, ``up to an additional six years,''.

15. A new Sec. 990.114 is added to read as follows:

Sec. 990.114 Phase-down of subsidy for units approved for demolition.

(a) General. Units that have both been approved by HUD for

demolition and been vacated in FFY 1995 and after will be excluded from

an HA's determination of Unit Months Available when vacated, but they

will remain eligible for subsidy in the following way:

(1) For the first twelve months beginning with the month that a

unit meets both conditions of being approved for demolition and vacant,

the full AEL will be allowed for the unit.

(2) During the second twelve-month period after meeting both

conditions, 66 percent of the AEL will be allowed for the unit.

(3) During the third twelve-month period after meeting both

conditions, 33 percent of the AEL will be allowed for the unit.

(b) Special case for long-term vacant units. Units that have been

vacant for longer than 12 months when they are approved for demolition

are eligible for funding equal to 20% of the AEL for a 12-month period.

(c) Treatment of units replaced with Section 8 Certificates or

Vouchers. Units that are replaced with Section 8 Certificates or

Vouchers are not subject to the provisions of this section.

(d) Treatment of units replaced with public housing units. When

replacement conventional public housing units become eligible for

operating subsidy, the demolished unit is no longer eligible for any

funding under this section.

(e) Determination of what units are ``replaced.'' For purposes of

this section, replacements are applied first against units that

otherwise would fall in paragraph (a) of this section; any remaining

replacements should be used to reduce the number of units qualifying

under paragraph (b) of this section.

(f) Treatment of units combined with other units. Units that are

removed from the inventory as a result of being combined with other

units are not considered to be demolished units for this purpose.

(g) Retroactive effect. This section is to be applied retroactively

for units approved for demolition during Federal Fiscal Years 1995 and

1996. HAs affected by this provision may submit a revised calculation

of operating subsidy eligibility for the subject fiscal year(s).

16. A new Sec. 990.116 is added to read as follows:

Sec. 990.116 Three-year incentive adjustments.

(a) Applicability. For the period of Federal Fiscal Year 1996

through Federal Fiscal Year 1998, the provisions of this section apply

to permit HAs to retain certain sources of income that would otherwise

be offset by a reduction of subsidy. The combined amount retained in

accordance with the provisions of this section may not exceed the

amount of the PFS subsidy shortfall applicable to an HA in the subject

fiscal year.

(b) Increases in earned income. HAs are permitted to retain any

increase in dwelling rental income realized after April 1, 1996 as a

result of increased resident earned income, where the Board of

Commissioners of the HA has certified that the HA is making significant

efforts to increase the earned income of existing residents by adopting

the optional earned income exclusion and not just taking actions

regarding new admissions. To implement this

[[Page 51184]]

paragraph (b), the HA will compare the rental income per occupied unit

resulting from earned income from April 1, 1996 to the rental income

per occupied unit resulting from earned income on the date of the rent

roll used for PFS calculation. If an HA does not have the April 1, 1996

data available, HUD may approve the use of data from a later month.

(c) Increases in other income. HAs are permitted to retain any

increase in ``other income'' based on using the definition provided in

this section, as compared with using the definition found in

Sec. 990.102. For purposes of this section, the amount of ``other

income'' is limited to the following three sources:

(1) Excess Utilities: charges to tenants for excess utility

consumption for HA supplied utilities.

(2) Nondwelling Rental Income: rent billed to lessees of dwelling

units rented for nondwelling purposes. Rent billed to lessees of

nondwelling facilities will not be included except for rent billed to

other HUD programs (e.g.; Section 8, congregate housing, family

investment centers).

(3) Other Income: Only charges to other HUD programs (e.g.; Section

8, congregate housing, family investment centers) for use of community

space, central office management and maintenance space will be taken

into consideration. HAs will calculate the amount of ``other income''

to be retained in a manner prescribed by HUD.

Dated: July 29, 1996.

Christopher Hornig,

Acting Assistant Secretary for Public and Indian Housing.

[FR Doc. 96-24874 Filed 9-27-96; 8:45 am]

BILLING CODE 4210-33-P