Optional Earned Income Exclusions

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 5 and 950

[Docket No. FR-4080-F-02]

RIN 2577-AB66

Optional Earned Income Exclusions

AGENCY: Office of the Secretary, HUD.

ACTION: Final rule.

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SUMMARY: This rule adopts as final the amendments to HUD's regulations

for

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the definition of ``annual income'' applicable to Public Housing

Agencies and Indian Housing Authorities in the operation of public

housing and Indian housing programs that were issued as an interim rule

in August 1996. 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.

EFFECTIVE DATE: June 4, 1997.

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, 1999 Broadway,

Suite 3390, Box 90, Denver, CO 80202, telephone (voice): (303) 675-

1600, extension 3300. (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. The August 30, 1996 Interim Rule

An interim rule was published on August 30, 1996 (61 FR 46344),

amending regulations for the public housing and Indian housing programs

to permit Public Housing Agencies and Indian Housing Authorities

(collectively Housing Agencies, or ``HAs'') to adopt an exclusion for

earned income. The rule was based on the authority of the Secretary to

define ``income'' (section 3(b)(4) of the United States Housing Act of

1937, 42 U.S.C. 1437a(b)(4)), and it was related to a 1996 statutory

enactment that specifically authorized housing agencies to allow earned

income adjustments, as long as HUD's operating subsidy obligation was

not affected.

That rule added to the definitions of ``annual income'' in the

regulations governing the public housing and Indian housing programs an

option for HAs to adopt additional exclusions for earned income

pursuant to an established written policy. Eleven types of exclusions

were stated, and HAs were to choose from among those types and

variations of those types if they adopted an earned income exclusion.

The rule stated that if an HA experienced a loss in rental income as a

result of adopting such an exclusion, it would have to absorb the loss

since there is no provision for an adjustment to its operating subsidy

from HUD under the Performance Funding System. Similarly, an HA that

receives greater rental income as a result of adoption of such an

exclusion does not suffer any reduction in income as a result of the

rule.

II. Changes to the Interim Rule

The Department is making no substantive changes to the rule. The

public comments received are discussed in greater detail in section IV

of this preamble. The primary concerns expressed dealt with a desire

for increases in operating subsidy to offset HA losses in rental income

from adopting earned income exclusions and with administrative burden

associated with calculating rental income both with and without the

earned income exclusion. HUD is not in a position to provide additional

operating subsidy, because of Congressional funding constraints, and

the administrative burden is not actually as great as feared by the HAs

who submitted comments.

III. Background

A. Statutory

The 1996 statutory enactment that dealt with earned income

adjustments was the Balanced Budget Downpayment Act I, enacted on

January 26, 1996 (Pub. L. No. 104-99), which was also known as the

Continuing Resolution or ``CR''. The CR 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

deductions that would ease the impact on working tenants. The Act also

repealed Federal admissions preferences, permitting HAs to use

preferences for working families to greater advantage.

The CR was enacted by Congress for effect during Federal Fiscal

Year 1996. Now its provisions have been extended to be effective for

Federal Fiscal Year 1997, as well, by the Departments of Veterans

Affairs and Housing and Urban Development, and Independent Agencies

Appropriations Act, 1997 (Pub. L. 104-204, September 26, 1996, 110

Stat. 2882). Unlike the CR provisions that allow a deduction from a

family's income for earned income, this rule provides for an exclusion

from a family's initial determination of income. (See the preamble to

the interim rule for a more detailed discussion of this subject.) This

rule is intended to promote the same objectives, however, as the CR.

B. Regulatory

When the interim rule was published, on August 30, 1996, the

amendments were made to 24 CFR parts 913 and 950, which were the

regulatory provisions then in effect with respect to income definitions

for the public housing and Indian housing programs. Since that time,

the definition of ``annual income'' governing the public housing

program was moved from 24 CFR part 913 to 24 CFR 5.609 by a final rule

published on October 18, 1996 (61 FR 54492). That rule incorporated in

Sec. 5.609(d) (at 61 FR 54502), the provisions stated in

Sec. 913.106(d) of the August 1996 interim rule, making a minor

modification to add a title limiting its applicability to the public

housing program. (Unlike part 913, part 5 applies to programs other

than public housing, so the title was needed to limit the effect of the

provision to public housing.) That rule noted in the preamble, 61 FR

54497, that the provision included at Sec. 5.609(d) was still an

interim provision on which public comments were welcome through October

29, 1996. Part 950 was left unchanged by that rule.

IV. Response to Public Comments

A. General

The Department received public comments from three public housing

agencies. Generally, the comments expressed support for the concept of

a flexible, optional exclusion for earned income. The comments did

express concern, however, about the fiscal impact of the proposed rule

and about administrative burdens associated with providing HUD with

comparative figures for actual rental income and rental income that

would have been received without the adoption of an earned income

exclusion.

B. Loss in Subsidy

Comment: The HAs expressed concern that losses in HA income as a

result of implementing an earned income exclusion would not be offset

by increases in PFS subsidy eligibility. They indicated an expectation

that families first moving to work would not produce incomes sufficient

to raise rental payments if an earned income exclusion were

implemented. With a

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nationwide move of welfare families to employment, as a result of

welfare reform legislation, they indicated that the decrease in rental

income from families who are employed under an earned income exclusion

would cause extreme hardship on housing agencies if HUD does not offer

any compensating subsidy.

Response: 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. Congress has shown no interest in

increasing HA subsidy under the PFS to offset any loss to HAs resulting

from implementation of this type of adjustment, so HUD does not have

funding to furnish HAs to make up any such shortfall.

Comment: One HA recommended that HUD allow HAs a two-year

evaluation period during which they would not absorb any loss in rental

income that results from adoption of earned income exclusions.

Response: A two-year period during which an HA would not be

penalized is unacceptable because it provides no restraints on the

amount of the exclusions that an HA would provide. Since the amount of

PFS funding is fixed by Congress, giving more operating subsidy to the

HAs that provided large earned income exclusions for its tenants would

result in a loss of operating subsidy by other HAs that chose not to

have an earned income exclusion.

Comment: One HA indicated that the limit of the rule's

applicability through Federal Fiscal Year 1998 limits a HA's ability to

anticipate reaping benefits from residents' eventual higher incomes and

increased rental income.

Response: Although the HUD Notice implementing the CR was limited

in the length of its applicability, this rule is not so limited since

it is based not on the CR but on the authority of the Secretary to

define ``income.''

C. Administrative Burden

Comment: Two of the HAs indicated that they were concerned that the

rule would require them to maintain two rent rolls--one for the rental

income that would be received without the adoption of an earned income

exclusion and one for the rental income actually realized implementing

the exclusion.

Response: The Department agrees that there is somewhat more work

for HAs, since an HA must know how much of the rent they are collecting

comes from earnings--something they have not done--and they must

calculate the rental payments both with and without an earned income

exclusion. The comparison of what is received in rental income and what

would have been received in the absence of an earned income exclusion

only would need to be done once a year. It would not require the HA to

maintain two sets of books throughout the year. (The procedure is

specified in HUD Notice PIH 96-87 (HA), which was issued November 20,

1996, to implement the deductions permitted under the CR as well as the

exclusions permitted under the interim rule.)

The HA uses the rent from a base month, such as April 1996 (or a

later month) and then, once a year compares the rent roll from the base

month with the rent roll of the month being used for the annual

analysis, such as April 1997. The HA then does two things. It adds back

to the base month amount in the later year the amount ``given up'' in

earned income exclusions. It uses that amount to calculate the PFS

subsidy eligibility amount. Secondly, it compares, on a per unit basis,

the amount of rent from earnings versus other income for the base month

of the earlier year with the amount of earnings versus other income for

the base month of the later year. That gives the HA an opportunity to

offset some of the loss, or actually make a gain. The mechanism is not

two rent rolls maintained throughout the year but a comparison done

once a year.

For example, an HA that has 100 units might receive a total of

$50,000 in rent in April 1996, of which $20,000 represented earned

income and $30,000 represented other income. Without adoption of an

earned income exclusion, its rental income the following year might be

$55,000, of which $35,000 represented earned income and $20,000

represented other income. If it adopted an earned income exclusion that

disregarded $10,000 of the earned income, its rental income in April

1997 would be $45,000. The $15,000 difference between the rental income

from earned income in April 1997 ($35,000) and in April 1996 ($20,000)

would be used to offset the $10,000 in earned income exclusions. This

HA would have an additional $5,000 to keep, up to 100% of its PFS

funding.

Findings and Certifications

Impact on the Environment

A Finding of No Significant Impact with respect to the environment

was 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, S.W., Washington, D.C. 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.

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 5

Administrative practice and procedure, Aged, Claims, Drug abuse,

Drug traffic control, Grant programs--housing and community

development, Grant programs--Indians, Grant programs--low and moderate

income housing, Indians, Individuals with disabilities,

Intergovernmental relations, Loan programs--housing and

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community development, Low and moderate income housing, Mortgage

insurance, Penalties, Pets, Public housing, Rent subsidies, Reporting

and recordkeeping requirements, Social Security, Unemployment

compensation, Wages.

24 CFR Part 950

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

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

income housing, Public housing, Reporting and recordkeeping

requirements.

Accordingly, the amendments to the definitions of ``Annual income''

codified at 24 CFR 950.102, as published on August 30, 1996 (61 FR

46346), is adopted as final, without change, and 24 CFR 5.609(d),

published on October 18, 1996 (61 FR 54502), is reaffirmed as final.

Dated: April 23, 1997.

Andrew Cuomo,

Secretary.

[FR Doc. 97-11534 Filed 5-2-97; 8:45 am]

BILLING CODE 4210-32-P