Replacement Housing Factor in Modernization Funding

SUMMARY: This rule will revise HUD's regulations that govern the

formula allocation of modernization funding under the Comprehensive

Grant Program (CGP) to add to the formula a factor that will maintain,

for five years, a portion of funding that otherwise would be lost by a

CGP housing agency (HA) when the number of its public housing units are

reduced as a result of demolition, disposition, or conversion. These

added funds would be required to be used for approved replacement

housing or for the accelerated renovation and reoccupancy of vacant but

viable units. The rule would take effect in Federal Fiscal Year (FY)

1998, based on formula characteristics reported as of September 30,

1997.

Such funding will support replacement of about twenty percent of

the public housing units lost to demolition, disposition, or conversion

and not otherwise replaced. The added funds are needed for construction

of replacement units in cities with tight housing markets, to

capitalize on opportunities in vacated sites, and to increase community

acceptance of demolition. Other possible sources of funding for actual

replacement housing units (modernization funding and HOPE VI program

grants) will not be able to serve fully the HAs with replacement

housing needs that cannot be served fully by vouchers.

DATES: Comment due date: December 9, 1997.

ADDRESSES: Interested persons are invited to submit comments regarding

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

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

Seventh Street, SW, Washington, DC 20410. Communications should refer

to the above docket number and title. Facsimile (FAX) comments are not

acceptable. A copy of each communication submitted will be available

for public inspection and copying between 7:30 a.m. and 5:30 p.m.

weekdays at the above address.

FOR FURTHER INFORMATION CONTACT: William Flood, Director, Office of

Capital Improvements, Office of Public Housing Investments, Room 4134,

Department of Housing and Urban Development, 451 Seventh Street, SW,

Washington, DC 20410, telephone number (202) 708-1640, extension 4185.

(This telephone number is not toll-free.) 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. Statutory Basis

The statutory foundation for modernization funding for the public

housing program is section 14 of the United States Housing Act of 1937

(42 U.S.C. 1437l, et seq.). Using the formula authorized in section

14(k)(2), HUD computes the formula share of modernization funding for

each HA eligible to participate in the CGP, i.e., an HA with 250 or

more units.

Section 14(k)(2) prescribes certain formula factors and provides

that the formula may be amended by the rulemaking process. Currently,

the formula factors do not include a factor for replacement housing,

which was not an eligible use of modernization funds when these factors

were written.

Formerly, each public housing unit that was demolished or disposed

of was required to be replaced with another unit. Recent amendments to

the Act included suspension of the one-for-one replacement requirement.

While this change is necessary, nationwide, by the end of FY 2000, an

estimated 100,000 public housing units (of which about 60,000 were

occupied as of FY 1996) are planned for demolition and disposition. In

some cities, the number of such units can amount to between twenty-five

and fifty percent of the city's annual total of vacant units available

to low income households.

Traditionally, HUD has received appropriations for public housing

development and HAs have used the development funds, in part, for

replacement housing. Since FY 1995, however, Congress has not approved

funding specifically for new public housing development. Currently, the

only available sources of funding for construction of replacement

housing are modernization funding and HOPE VI grants. Replacement

housing was first authorized as an eligible cost of modernization

funding in FY 1995. No change in the formula factors has taken place to

reflect this new use of modernization funding; HAs can take advantage

of this new flexibility only by diverting funds provided by the formula

for developments other than the developments to be demolished.

Similarly, HAs with a large backlog of vacant but viable units cannot

take advantage of any savings in modernization funding resulting from

demolition or disposition to bring additional vacant but viable units

into occupancy.

Some HAs will have great difficulty restructuring their inventory

and meeting local needs. Adding this replacement factor to the

modernization formula will provide a share of modernization funds that

is relatively constant that can be used for replacement of a portion of

the non-viable units being demolished or sold. The Department is

permitting either development of units (through construction or

acquisition) or accelerated restoration of vacant units with the

additional funding made available as a result of the replacement

housing factor to give HAs the maximum amount of flexibility to use the

means of replacing units given their own circumstances.

The number of replacement or restored vacant units that this

funding will be able to support is about twenty percent of the number

of units anticipated to be demolished, disposed of, or converted. Since

about one third of the units being removed from an HA's inventory are

typically vacant, the twenty percent replacement represents about

thirty percent of the HA's occupied units.

Thus far, the Department has been able to provide either vouchers

or newly acquired or constructed units, where appropriate, to replace

roughly all units demolished or disposed of. However, replacement

vouchers do not meet some local needs as well as hard replacement units

do.

The Department believes that CGP HAs will be better able to

restructure their inventories and more likely to take the needed steps

to do so if they have available some funding for construction or

acquisition of public housing replacement units irrespective of the

HOPE VI process. Therefore, the Department has decided to exercise its

authority (under 42 U.S.C. 1437l(2)(A)) to modify the formula for CGP

funding, through notice and comment rulemaking, to take into account

the need for some replacement units.

II. Need for Change in the Formula

As recently as FY 1994, the public housing stock lost only two

thousand units per year from demolition, disposition, and conversions.

But from

[[Page 47741]]

FY 1997 to FY 2000, the Department estimates a reduction of about

twenty thousand units per year from demolition, disposition, and

conversions. This large reduction in units is expected to be

concentrated among about forty HAs, almost all of which are large HAs,

with 1250 or more units and with one or more developments with a high

percentage of long-term vacancies. Fewer than ten (or one-quarter) of

these forty HAs are expected to have over three-quarters of the

reduction in units as a result of demolition, disposition, and

conversion. Unless action is taken, the affected communities will not

be able to capitalize on opportunities to rebuild at lower densities

and in mixed-income settings on current sites. By allowing an HA with

reduced public housing units to temporarily stabilize its funding if it

uses the funding for replacement housing generated by the modernization

replacement housing factor, the proposed rule will remedy these

problems (at least in part) and make more acceptable the reduction of

units resulting from the demolition, disposition, or conversion of non-

viable units.

This proposed revision retains all aspects of the current CGP

formula, including the phased-in reduction in units covered by the

Annual Contributions Contract that is specifically stated in the

statute and is implemented by Sec. 968.103(k)(3). By adding a

replacement housing factor to reflect the need for replacement housing

following unit reduction, the revision mitigates the adverse impact of

the phased-in reduction in units, because it amends the way the

underlying formula is calculated and restores some of the formula

funding share HAs would have received had no unit reduction occurred

after October 1, 1996. Under the proposed revision, an HA cannot

receive more than its pre-unit reduction funding share as a result of

the replacement housing factor.

III. Description of Replacement Housing Factor

A replacement housing factor is being added to both the backlog and

accrual components of the formula for funding modernization activities

under the CGP. The current formula provides, in accordance with the

statute, that half of the formula is related to backlog needs, and the

other half of the formula is related to accrual needs. Subject to the

condition that an HA cannot receive more than its funding share before

the application of the replacement housing factor, the five year

adjustments for backlog and accrual need are calibrated so that an HA

with units lost to demolition, disposition, or conversion will be able

to fund about twenty percent of the public housing units (and about

thirty percent of the occupied units) that will be lost. This

percentage represents a significant amount of replacement housing but

is low enough to ensure that funds will continue to be directed to

pressing replacement housing needs.

The backlog and accrual need elements of the formula are now found

at 24 CFR 968.103(e) and 968.103(f). This change is made to offset some

of the loss of formula share in capital funding that would result from

the described reduction of units that takes place after October 1,

1996. (As part of its CGP formula computations, HUD would compute the

share and level of HA funding before the impact of the rule and the

share and level of HA funding as a result of the rule that must be used

for replacement housing.)

This rule adjusts the backlog need by adding 50 percent of the

Total Development Cost (TDC) for a two-bedroom unit in a walk-up

structure for the number of units to be demolished, disposed of, or

converted, for the first five years after demolition, disposition, or

conversion occurs. The rule adjusts the accrual need by adding two

percent of the TDC for this type of unit for the number of units to be

demolished, disposed of, or converted, for the first five years after

demolition, disposition, or conversion. These modifications apply only

if the reduced units are not otherwise receiving funding for

replacement housing or vacancy renovation and if the funds attributable

to this factor are used for approved replacement housing or vacancy

renovation. Other modernization funds also may be used for replacement

housing, in accordance with HUD Notice PIH 96-56 (HA). It is likely,

however, that very few HAs would use modernization funding for this

purpose if it would mean depriving other developments of modernization.

Four key features of the replacement housing factor should be

noted. First, it does not support the continued operation of non-viable

housing, because it is premised on non-viable units being reduced and

the funding generated by the modernization replacement housing factor

being used for replacement housing. Second, the affected HAs do not

receive an additional funding share over their current share and might

receive somewhat less, because the formula replacement factor cannot

create shares of relative backlog need or relative accrual need that

are greater than the relative shares before the removal of the units.

Third, the offset is not a permanent hold harmless amount. After five

years, the affected HAs will receive a share of funding based upon

their reduced shares of backlog and accrual need without any

replacement factor. Moreover, those units demolished, disposed of, or

converted with replacement housing funds, such as public housing

development, Major Rehabilitation of Obsolete Public Housing, or HOPE

VI implementation grants, will not benefit from the replacement housing

factor. (A demolished development with only partial replacement funding

from a HOPE VI grant would get partial help from the modernization

replacement housing factor.) Fourth, the replacement housing factor is

expected to support replacement and accelerated renovation of vacant

units of only a fraction of the original units.

In order to receive funding under the replacement housing factor,

an HA must first request such funding when it updates its annual

formula characteristics report for the formula run. Only units that are

identified on the formula characteristics report as demolished,

disposed of, or converted and that lower the number of HA formula units

will be units eligible for the replacement factor. In its formula

computations, HUD will determine the share and level of Comprehensive

Grant formula funding that an HA will receive from the replacement

factor. The HA will then budget the funds provided by the replacement

factor as a major work category, including an implementation schedule,

on the CGP Annual Statement. If the funding generated by the

replacement factor is not used for replacement housing in a reasonable

time, in accordance with already existing requirements (Secs. 968.125

and 968.335(a)(3)), the affected HA will face appropriate corrective

action, which ultimately may include recapture of the funds.

The following example shows how the factor would work.

Example for the Formula Replacement Factor

An HA that has 2,000 units is planning to demolish one of its

developments. The development to be demolished has 200 units, and the

demolition is not being funded by a grant that has a replacement

component. The 1800 units that the HA is not going to demolish average

a formula backlog need of $20,000 per unit and a formula accrual need

of $1250 per unit--values that would have resulted from applying the

unit-weighted characteristics of the

[[Page 47742]]

developments to the backlog and accrual formulas set out in the

Comprehensive Grant program. The 200 units to be demolished have, in

this hypothetical example, a formula backlog need of $40,000 per unit

and a formula accrual need of $1500 per unit. Finally, the HA had total

CIAP funding from 1984 to 1991 of $10 million, and the TDC of a two-

bedroom walkup in its area is $64,000 per unit.

Before demolition, the HA's unfunded formula backlog need is $34.0

million, or $10 million of CIAP funding deducted from $44.0 million of

backlog need (1800 units at $20,000 per unit plus 200 units at $40,000

per unit), and its total formula accrual need is $2.55 million (1800

units at $1250 per unit plus 200 units at $1500 per unit). Without a

replacement factor, in accordance with the phased-in reduction of units

provision of Sec. 968.103(k)(3), its total formula backlog need within

three years would fall to $26 million, or $10 million of CIAP funding

deducted from $36.0 million of backlog need (1800 units at $20,000 per

unit), and its formula accrual need would fall to $2.25 million (1800

units at $1250 per unit). In short, within three years, its formula

backlog need would decline about 23.5 percent and its formula accrual

need would decline about 11.8 percent. If it is assumed that the

formula characteristics for all other HAs remain unchanged, then by the

third year after the approved demolition, its formula share would

decline about 17.7 percent relative to the starting point before

demolition (the average of 23.5 percent and 11.8 percent).

In this example, a replacement factor for five years would value

the demolished units at $32,000 per unit (half of the TDC of $64,000)

in the backlog formula and at $1280 per unit (two percent of the TDC of

$64,000) in the accrual formula. By the third year of the five year

period, the uncapped formula backlog need of the HA with demolition

would be $32.4 million, or the $10 million of CIAP funding deducted

from $42.4 million of backlog need (1800 units times $20,000 per unit

plus 200 units times $32,000 per unit). If the formula backlog need of

all other HAs remains the same and if the backlog need falls below the

original level (as in this example), the adjusted backlog need does not

have to be capped in order that the HA with the demolished units not

increase its share of formula backlog as a result of the replacement

factor for demolition. By the third year of the five year period, the

accrual need of the HA with demolition would be $2.506 million, or less

than its amount and share before demolition. No capping for the accrual

replacement factor is required in this example. With a replacement

factor, the formula share of the HA for the aggregate five years would

be somewhat less than its share before demolition. Still, its formula

share for five years would be more than what the HA would have received

had a replacement factor not been in place for the demolished units.

In the above example, the HA's formula share without a replacement

factor for its demolished units would have been reduced 5.9 percent in

the first year that the demolition took effect for CGP funding, 11.8

percent in the second year, and 17.7 percent the third through fifth

years (and afterward). With a replacement factor, the HA's share would

be reduced 1.1 percent the first year, 2.2 percent the second year, and

3.3 percent the third through fifth years, and then 17.7 percent

thereafter. Suppose that the HA had received $6 million in CGP funds if

no demolitions had occurred during the first through the fifth years.

As a result of the replacement factor maintaining some of its share,

the funds maintained for replacement housing would be $288,000 in the

first year, $576,000 in the second year, and $864,000 in the third

through fifth years--for a five-year total of $3,456,000.

IV. Nationwide Impact

The Department estimates that the impact of this rule in the first

year will be to maintain for eligible HAs about $20 million in funding

for replacement housing that would otherwise be reallocated to other

CGP HAs as a result of reduction in the number of the HA's units as a

result of demolition, disposition, and conversion of non-viable units.

Over the next five years, the impact might average $60 million per

year. Of course, if there were no such incentive for HAs with non-

viable units to demolish, dispose of, or convert and replace these

units, they might not take such action, in which case their

modernization funding shares might not have been reduced in the first

place. Therefore, the true impact of the rule might be less than the

above estimates.

V. Findings and Certifications

A. Public Reporting Burden

This proposed rule contains no new information collection

requirements that would require review by the Office of Management and

Budget under the Paperwork Reduction Act of 1995 (42 U.S.C. 3501-3520).

B. Impact on Small Entities

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

U.S.C. 605(b)), has reviewed and approved this proposed rule, and in so

doing certifies that this proposed rule will not have a significant

economic impact on a substantial number of small entities. This

proposed rule only affects HAs with 250 or more units, eligible for

formula funding under the CGP and primarily affects larger HAs, which

have experienced the greatest unit reduction.

C. Environmental Impact

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.

D. 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 proposed rule do not have significant impact on

States or their political subdivisions, or the relationship between the

Federal Government and State and local governments, or on the

distribution of power and responsibilities among the various levels of

government. As a result, the proposed rule is not subject to review

under the Order. The rule merely preserves funding that would otherwise

be lost to local housing agencies that have experienced significant

loss of units.

E. Unfunded Mandates Reform Act

The Secretary, in accordance with the Unfunded Mandates Reform Act

of 1995, 2 U.S.C. 1532, has reviewed this proposed rule before

publication and by approving it certifies that this proposed 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.

F. Regulatory Review

This proposed rule was reviewed by the Office of Management and

Budget under Executive Order 12866, not on the basis of impact in

excess of $100 million but on the basis of its importance. Any changes

made in this rule as a result of that review are clearly

[[Page 47743]]

identified in the docket file for this 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.

Catalog

The Catalog of Federal Domestic Assistance number for the program

affected by this proposed rule is 14.850.

List of Subjects in 24 CFR Part 968

Grant programs--housing and community development, Indians, Loan

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

and recordkeeping requirements.

Accordingly, part 968 of title 24 of the Code of Federal

Regulations is proposed to be amended as follows:

PART 968--PUBLIC HOUSING MODERNIZATION

1. The authority citation for part 968 continues to read as

follows:

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

2. Section 968.103 is amended as follows:

a. Paragraphs (e)(3) and (e)(4) are redesignated as paragraphs

(e)(4) and (e)(5), respectively;

b. New paragraphs (e)(3) and (f)(4) are added; and

c. Paragraph (k)(1) is revised, to read as follows:

Sec. 968.103 Allocation of funds under section 14.

* * * * *

(e) * * *

(3) Replacement factor to reflect backlog need for developments

with demolition, disposition, or conversion occurring on or after

October 1, 1996. (i) For PHAs that have a reduction in units

attributable to demolition, disposition, or conversion of units

occurring on or after October 1, 1996, and such reduction lowers the

formula unit count for the Comprehensive Grant formula calculations, a

factor will be added for the first five years after such reduction that

consists of 50 percent of the published Total Development Cost for the

period April 3, 1996 through April 30, 1997, for a two-bedroom unit in

a walkup type structure, times the number of units to be demolished or

disposed of. The total relative backlog need of the PHA resulting from

application of this replacement factor cannot exceed the share it would

have had if the demolition, disposition, or conversion had not taken

place.

(ii) A PHA is eligible for application of this factor only if the

PHA satisfies the following criteria:

(A) The PHA is not receiving funding for replacement housing for

the reduced number of units under the public housing development, Major

Reconstruction of Obsolete Public Housing, or HOPE VI programs; and

(B) The restored funding that results from the use of the

replacement factor is used to provide replacement housing or

accelerated renovation of vacant but viable units, in accordance with

the HA's five-year action plan, approved by HUD (see Sec. 968.315).

(iii) If the PHA does not use the restored funding that results

from the use of the replacement factor to provide replacement housing

or renovated vacant units in a timely fashion, in accordance with

Sec. 968.125, and make reasonable progress on such use of the funding,

in accordance with Sec. 968.335(a)(3), HUD may require appropriate

corrective action under Sec. 968.335 or may recapture and reallocate

the funds.

* * * * *

(f) * * *

(4) Replacement factor to reflect accrual need for developments

with demolition, disposition, or conversion occurring on or after

October 1, 1996. (i) For PHAs that have a reduction in units

attributable to demolition or disposition, disposition, or conversion

of units occurring on or after October 1, 1996, and such reduction

lowers the formula unit count for the Comprehensive Grant formula

calculations, a factor will be added for the first five years after

such reduction that consists of two percent of the published Total

Development Cost for the period April 3, 1996-April 30, 1997, for a

two-bedroom unit in a walkup type structure times the number of units

to be demolished, disposed of, or converted. The total relative accrual

need of the PHA resulting from application of this replacement factor

cannot exceed the share it would have had if the demolition,

disposition, or conversion had not taken place.

(ii) A PHA is eligible for application of this factor only if the

PHA satisfies the following criteria:

(A) The PHA is not receiving funding for replacement housing for

the reduced number of units under the public housing development, Major

Reconstruction of Obsolete Public Housing, or HOPE VI programs; and

(B) The restored funding that results from the use of the

replacement factor is used to provide replacement housing or

accelerated renovation of vacant but viable units, in accordance with

the HA's five-year action plan, approved by HUD (see Sec. 968.315).

(iii) If the PHA does not use the restored funding that results

from the use of the replacement factor to provide replacement housing

in a timely fashion, in accordance with Sec. 968.125, and make

reasonable progress on such use of the funding, in accordance with

Sec. 968.335(a)(3), HUD may require appropriate corrective action under

Sec. 968.335 or recapture and reallocate the funds.

* * * * *

(k) Demolition, disposition and conversion of units. (1) General--

(i) One percent limit. Where an existing unit under an ACC is

demolished, disposed of, or converted into a larger or smaller unit,

including the substantial rehabilitation of a Mutual Help or Turnkey

III unit, HUD shall not adjust the amount the PHA or IHA receives under

the formula, unless more than one percent of the units are affected on

a cumulative basis. Where more than one percent of the existing units

are demolished, disposed of, or converted, HUD shall reduce the formula

amount for the PHA or IHA over a 3-year period to reflect removal of

the units from the ACC.

(ii) When a change in number of units is triggered. A change in the

number of units under ACC is counted when one of the following occurs:

(A) Completion of approved work to convert units to different

sizes, resulting in an increase or decrease in the number of units;

(B) Execution of a sales contract for a disposition;

(C) Start of approved work for a demolition; or

(D) Conveyance of a Mutual Help, Turnkey III, or rental unit.

* * * * *

Dated: September 4, 1997.

Kevin Emanuel Marchman,

Acting Assistant Secretary for Public and Indian Housing.

[FR Doc. 97-23907 Filed 9-9-97; 8:45 am]

BILLING CODE 4210-33-P