Public Housing Assessment System
Federal RegisterSep 1, 1998
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
24 CFR Parts 901 and 902
[Docket No. FR-4313-F-03]
RIN 2577-AB81
Public Housing Assessment System
AGENCY: Office of the Assistant Secretary for Public and Indian
Housing, HUD.
ACTION: Final rule.
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SUMMARY: This final rule implements a proposed rule published on June
30, 1998 to provide for the assessment of the physical condition,
financial health, management operations and resident services in public
housing. The rule also provides for a Troubled Agency Recovery Center
to improve poor performers, and an Enforcement Center and possible
receivership for agencies that fail to improve performance. Public
housing agencies that fail to post significant improvement within a
year will be automatically referred to the new HUD Enforcement Center,
which will institute proceedings for judicial receivership to remove
failed agency management. The purpose of the new Public Housing
Assessment System is to enhance public trust by creating a
comprehensive management tool that effectively and fairly measures a
PHA's performance based on standards that are objective, uniform and
verifiable, and provides real rewards for high performers and
consequences for poor performers. The final rule takes into
consideration public comment received on the June 30, 1998 proposed
rule.
EFFECTIVE DATE: October 1, 1998.
FOR FURTHER INFORMATION CONTACT: For further information contact the
Real Estate Assessment Center, Attention William Thorson, Director of
Physical Inspection Management, Real Estate Assessment Center,
Department of Housing and Urban Development, 4900 L'Enfant Plaza East,
SW, Room 8204, Washington, DC 20410; telephone (202) 755-0102 (this is
not a toll-free number). Persons with hearing or speech impairments may
access that number via TTY by calling the Federal Information Relay
Service at (800) 877-8339.
SUPPLEMENTARY INFORMATION:
I. The Proposed Rule
On June 30, 1998 (63 FR 35672), HUD published a proposed rule that
would establish a new system for the assessment of America's public
housing. The new Public Housing Assessment System (PHAS) is designed to
enhance public trust by creating a comprehensive oversight tool that
effectively and fairly measures a PHA based on standards that are
objective and uniform. The PHAS represents a major rethinking of public
housing management.
Under the PHAS as proposed on June 30, 1998, HUD evaluates a PHA
based on the following indicators: (1) the physical condition of the
PHA's public housing properties; (2) the PHA's financial condition; (3)
the PHA's management operations; and (4) residents' assessment (through
a resident survey) of the PHA's performance. The management indicator
of this new assessment system will incorporate the majority of the
existing statutory management assessment indicators (the remaining
statutory indicators will be part of the other PHAS indicators). Each
of these major indicators is comprised of components. To assess the
performance of a PHA on the basis of the first two indicators, the
Assessment Center will use comprehensive and standardized protocols to
conduct physical inspections of public housing properties and to assess
the financial condition of PHAs. For the Management Operations
Indicator and the Resident Service and Satisfaction Indicator, the
Assessment Center will gather and analyze data and information provided
by the PHA.
In order to determine a composite score for each PHA, the four
indicators of the PHAS will be individually scored and then combined to
present a composite score that reflects the overall performance of PHAs
for a total of 100 possible points. The 100 points are distributed as
follows:
30 total points for the physical condition;
30 total points for the financial condition;
30 total points for management operations; and
10 total points for resident service and satisfaction.
The PHAS, although applicable only to public housing, reflects
HUD's new approach, under HUD 2020 Management Reform, to all properties
assisted by HUD. HUD intends to assess all HUD-related properties in a
manner similar to that under the PHAS, using uniform financial and
physical indicators and resident feedback.
An accurate assessment of a PHA's performance is critical because
the consequences of that assessment can be significant. For PHAs
determined to be high performers, the consequences will be less
scrutiny and additional flexibility. For PHAs determined not to be
performing well, the consequences will be intensive technical
assistance, deadlines for improvement and possible punitive actions for
failure to improve during established periods. The approach provided by
the PHAS maximizes the best use of public funds by concentrating
resources on those PHAs in most need of attention and recognizing
outstanding performers. The system is fundamentally designed to provide
relevant and verifiable measures that directly relate to PHA
performance.
The June 30, 1998 proposed rule provided for the new PHAS to become
effective for PHAs with fiscal years ending September 1999 and later.
Financial reports due for PHAs' fiscal years ending in September 1999
and later must be prepared on a GAAP basis. The first scores under the
new PHAS will be issued not later than December, 1999 for PHAs with FYs
ending in September 1999. Thus, PHAs will have at least one year before
the new PHAS scores are issued. Until September 30, 1999, PHAs will
continue to be scored under the current PHMAP. During this one year
transition period, advisory scores for physical condition and financial
management may be issued to provide guidance to PHAs. The
implementation schedule for inspection of public housing properties and
reporting is as described in the following table:
[[Page 46597]]
Real Estate Assessment Center (REAC)
[Assessment Periods and Reporting Dates]
--------------------------------------------------------------------------------------------------------------------------------------------------------
REAC assessment results Financial Physical Management Resident survey
----------------------------------------------------------------------------------- reporting inspection operations ------------------
Period covered ---------------------------------------------------
Score issued fiscal year Inspection dates Submission due Survey dates (5)
end (1) Due date (2) (3) date (4)
--------------------------------------------------------------------------------------------------------------------------------------------------------
12/1999........................................................... 9-30-99 11-30-99 7/99-9/99 11-30-99 4/99-9/99
03/2000........................................................... 12-31-99 2-28-2000 10/99-12/99 2-28-2000 10/99-12/99
06/2000........................................................... 3-31-2000 5-31-2000 1/2000-3/2000 5-31-2000 1/2000-3/2000
09/2000........................................................... 6-30-2000 8-31-2000 4/2000-6/2000 8-31-2000 4/2000-6/2000
12/2000........................................................... 9-30-2000 11-30-2000 7/2000-9/2000 11-30-2000 7/2000-9/2000
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Notes:
1. The period covered for each indicator will be the PHA's entire fiscal year ending on dates shown above. Once the new PHAS is effective, a PHA cannot
change its fiscal year for a period of 3 years.
2. PHAs with fiscal years ending 9-30-99 and later must provide GAAP financial reports. These reports must be provided by electronic submission not
later than 60 days after the end of the PHA's FY. Audited GAAP reports (due 9 months after the close of the FY in accordance with the Single Audit Act
and OMB Circular A-133) will be used to update and confirm unaudited financial results. If significant differences are noted between unaudited and
audited results, scoring penalties will apply. For those PHAs that spend less than $300,000 of Federal funds, HUD cannot require or pay for an audit
in accordance with the Single Audit Act. HUD, however, can require and pay for an ``Agreed-Upon Procedures'' report that could be specifically
directed at verifying calculations.
3. Physical inspections will be scheduled to approximate the new PHAS calculation dates; i.e. within the final quarter of the PHA's fiscal year.
4. The certifications and supporting documentation required for the Management Operations Indicator will be due 60 days after the end of the PHA's
fiscal year.
5 Resident surveys will be required to be conducted during the course of a PHA's fiscal year and will be required to be submitted by a PHA at the time
that the PHA submits the certifications required under the Management Operations Indicator.
II. Changes Made to Proposed Rule at the Final Rule Stage
The initial due date for the receipt of public comments on the
proposed PHAS rule was July 30, 1998. In response to requests from
commenters for additional time to comment on this rule, HUD published a
notice on July 30, 1998 (63 FR 40682) extending the deadline for public
comments until August 13, 1998. HUD received 776 comments on the
proposed rule. The commenters included housing authorities, residents
of public housing (whose 670 form letters represented the great
majority of the comments), and organizations representing residents or
housing authorities. The form letters provided by the residents
addressed only the issue of the resident survey proposed in the PHAS
rule.
As a result of the public comments and HUD's further consideration
of certain issues, the following changes were made to the rule at the
final rule stage.
1. A new part 902 is established for the PHAS rule. Since PHAS will
not be implemented until October 1, 1999, PHAs will continue to comply
with the requirements of the Public Housing Management Assessment
Program (PHMAP), and therefore HUD needs to retain 24 CFR part 901
which contains the PHMAP regulations. After PHAS is fully implemented,
HUD will issue a final rule to remove 24 CFR part 901.
2. In Sec. 902.7 (Sec. 901.7 in the proposed rule), a definition of
``Alternative management entity (AME)'' has been added, and the
definition of ``deficiency'' has been clarified by including ``sub-
indicator'' within its scope.
3. Section 902.25(a) (Sec. 901.25(a) in the proposed rule) is
revised to clarify that the score is based on the relative importance
of the individual inspectable areas and the relative severity of the
deficiencies observed.
4. Section 902.25(b)(2)(ii) (Sec. 901.25(b)(2)(ii) in the proposed
rule) is clarified to indicate that a majority of the population that
resides in the census tracts or census block groups on all sides of the
development will be examined to determine if the neighborhood
environment adjustment applies.
5. Section 902.50(b) (Sec. 901.50(b) in the proposed rule) is
revised to state that the survey will be ``managed'' rather than
``administered'' by the PHA.
6. Section 902.53(a) (Sec. 901.53(a) in the proposed rule) is
revised in accordance with the preamble discussion at section III.F.7.
below, to indicate only the first two components of the survey
indicator are awarded points, with the third component being a
threshold requirement.
7. In Sec. 902.53(b) (Sec. 901.53(b) in the proposed rule), the
text is modified for clarity and to remove the words ``by the PHA''
following the phrase ``survey results are determined to be altered.''
8. Sections 902.67(b) and 902.71(d) (Secs. 901.67(b) and 901.71(d)
in the proposed rule), which address the HUB/Program Center's
discretion to subject a PHA to any requirement that would otherwise be
omitted under the specified relief, are removed.
9. The requirement in Sec. 902.71(a)(2) (Sec. 901.71(a)(2) of the
proposed rule) for public recognition is made consistent with the rest
of the PHAS rule by stating that at least 60 percent of the points
available under each of the four PHAS Indicators and an overall PHAS
score of 90 are necessary.
10. In Sec. 902.73(g) (Sec. 901.73(g)), this final rule adds
language to clarify that if the TARC determines that it is appropriate
to refer the PHA to the Enforcement Center, it will only do so after
the PHA has had one (1) year since the issuance of the PHAS score (or,
in the case of an RMC, notification of its score from a PHA) to correct
its deficiencies. This one-year period includes the 90 days or such
other period of time (if less than one year), as described in
Sec. 902.73(c)(1).
11. In Sec. 902.75(g) (Sec. 901.75(g) in the proposed rule), this
final rule adds language to clarify that a PHA cannot maintain its
troubled status indefinitely; the maximum period of time for remaining
in troubled status before being referred to the Enforcement Center is 2
years. This final rule also clarifies in Sec. 902.75(g) that the REAC
makes the determination of whether a PHA has made substantial
improvement toward a passing PHAS score.
12. Section 902.75(h) is a new subsection, added to clarify that,
to the extent feasible, while a PHA is under a referral to a TARC, all
services to residents will continue uninterrupted.
[[Page 46598]]
13. Section 902.77(b) is new subsection, added to clarify that, to
the extent feasible, while a PHA is under a referral to the Enforcement
Center, all services to residents will continue uninterrupted.
15. Language is added to Sec. 902.79(b) (Sec. 901.79(b) of the
proposed rule) to clarify the meaning of ``credible source'' for events
or conditions constituting a substantial breach or default.
III. Discussion of Public Comments
The public commenters on this rule overwhelmingly commended HUD for
its efforts to improve PHMAP, and there was considerable support among
the commenters for the new PHAS, as announced in the June 30, 1998
proposed rule. One commenter stated that the proposed PHAS is superior
in approach to PHMAP. Another commenter stated that PHAS logically
focuses on appropriate operational areas, with the primary emphasis on
physical and financial concerns. Several commenters, however, expressed
reservations about one more aspects of the new PHAS. The following
provides a more detailed discussion of the commenters' concerns as well
as a discussion of other issues raised by the public commenters on the
June 30, 1998 proposed rule.
A. General Comments
The Public Comment Period for the Rule Was Not Sufficient. Many
commenters stated that the 30-day public comment period provided by the
June 30, 1998 proposed rule was insufficient. These commenters remarked
that a rule of such importance and complexity merited a longer comment
period. Several commenters remarked that, rather than reducing the
customary 60-day comment period, the proposed rule should have provided
90 days for the submission of comments. Two of the commenters also
questioned the consultative process that HUD used to justify the
reduced comment period. One of the commenters remarked that ``HUD
consulted with a few authorities, but this is the first time more than
3,300 housing authorities have been able to comment'' on the PHAS.
Given the extensive consultative process in the development of the
rule, HUD believes that a 30-day public commenter period was sufficient
for this rule. Nevertheless, in response to commenters' request, HUD
did extend the public comment period through August 13, 1998, to allow
additional time for comment. HUD recognizes that although not every PHA
was involved in the extensive consultative process that preceded
publication of the proposed rule, there was substantial PHA
representation and participation in that process over a six month
period. HUD also reminds PHAs, residents and other interested parties
that although this rule takes effect 30 days after publication in the
Federal Register, PHAS is not implemented until October 1, 1999. This
first year is a transition year, which allows both HUD and PHAs the
opportunity to test the new PHAS, for PHAs to continue to offer input
and suggestions, and for HUD to consider and make any changes that may
be needed before PHAS becomes fully implemented.
In addition, HUD has provided, and will continue to provide,
documents and assistance by direct request and over the Internet, such
as the 24-hour on-line assistance on the GAAP Conversion Guide at HUD's
website (http://www.hud.gov/reac/reafin.html). As the discussion below
of the public comments on the individual indicators will demonstrate,
HUD will continue to make available all of the information and
assistance necessary for PHA compliance with the rule.
Rule is Vague; Lacks Necessary Details. A number of commenters
remarked that the proposed rule is too vague and uninformative. These
commenters wrote that the lack of specificity of the proposed rule made
the submission of meaningful comments almost impossible.
With respect to the details of all of the components of the PHAS,
specifically the physical and financial components, HUD notes that
traditionally HUD regulations, and indeed other agency regulations, do
not contain all the details and processes that are part of these
components. A great majority of these are technical or examples of
implementation processes. The regulation enunciates the policy,
provides the broader requirements (in this case, uniform, enforceable
baseline standards), and the details are left to supplemental
documents, such as handbooks and guidebooks. These documents allow for
a more detailed (and therefore more helpful) description and discussion
of the components to be addressed, and the procedures to be followed
and the information to be submitted, which include examples and model
reports, and which can be corrected and updated easily.
This is the practice that HUD has followed to date, and HUD will
continue to follow this practice with the PHAS. HUD already has
developed certain guidance in connection with implementation of the
PHAS, and has made this guidance available to PHAs for review and any
comments they may have. For example, HUD has developed the HUD-GAAP
Conversion Guide, which is available at HUD's internet web site at
http://www.hud.gov/reac/reafin.html, or by calling the HUD Real Estate
Assessment Center's Customer Service Center on 1-(888)-245-4860.
Several commenters requested additional information on the relative
weights/points of the four PHAS indicators. Although this information
will be contained in the supplementary guidance to be provided, HUD has
listed below the approximate relative weights/points of the four PHAS
indicators, sub-indicators, and components within the sub-indicators:
Approximate Relative Weights/Points
------------------------------------------------------------------------
Indc. Approx.
Indicator/Sub-Indicator/Component Pts. Pts.
------------------------------------------------------------------------
#1, Physical Condition........................... 30 ..........
Site (plus 1 pt. for physical condition and
neighborhood environment)................... ......... 4.5
Building Exterior (plus 1 pt. for physical
condition and neighborhood environment)..... ......... 4.5
Building Systems............................. ......... 6.0
Dwelling Units............................... ......... 10.5
Common Areas (plus 1 pt. for physical
condition and neighborhood environment)..... ......... 4.5
In addition, Health and Safety deficiencies
will result in reductions to the total
physical inspection score which takes into
account the five areas, above, with their
approximate relative weights/points.
#2, Financial Condition.......................... 30 ..........
Liquidity.................................... ......... 9.0
Net Asset Adequacy........................... ......... 9.0
Days Receivable Outstanding.................. ......... 4.5
[[Page 46599]]
Vacancy Loss................................. ......... 4.5
Net Income/Loss.............................. ......... 1.5
Expense Management........................... ......... 1.5
Flags:
No audit opinion (minus 30 pts.)........... ......... ..........
Going concern opinion (*).................. ......... ..........
Disclaimer of opinion (minus 30 pts.)...... ......... ..........
Material weakness/internal control (*)..... ......... ..........
Adverse opinion (minus 30 pts.)............ ......... ..........
Qualified opinion (*)...................... ......... ..........
Reportable conditions (*).................. ......... ..........
Findings of non-compliance and questioned
costs (*)................................. ......... ..........
Indicator outlier analyses (*)............. ......... ..........
(*) Points will be deducted to the extent
points remain after initial scoring for
the sub-indicator affected by the flag.
#3, Management Operations........................ 30 ..........
Vacancy Rate/Progress to Reduce.............. ......... 8.0
Vacancy Rate............................... ......... (4.0)
Unit Turnaround Time....................... ......... (4.0)
Modernization................................ ......... 6.0
Unexpended Funds........................... ......... (1.0)
Timeliness of Fund Obligation.............. ......... (1.5)
Contract Administration.................... ......... (1.0)
Quality of the Physical Work............... ......... (2.0)
Budget Controls............................ ......... (0.5)
Rents Uncollected............................ ......... 4.0
Work Orders.................................. ......... 4.0
Emergency Work Orders...................... ......... (2.0)
Non-Emergency Work Orders.................. ......... (2.0)
Inspection of Units and Systems.............. ......... 4.0
Inspection of Units........................ ......... (2.0)
Inspection of Systems...................... ......... (2.0)
Security..................................... ......... 4.0
Tracking/Reporting Crime-Related Problems.. ......... (1.0)
Screening of Applicants.................... ......... (1.0)
Lease Enforcement.......................... ......... (1.0)
Grant Program Goals........................ ......... (1.0)
#4, Resident Service and Satisfaction............ 10 ..........
Survey Results............................... ......... (5.0)
Level of Implementation/Follow-Up Action
Process..................................... ......... (5.0)
------------------------------------------------------------------------
Modification of PHAS Indicators Requires Rulemaking. Several
commenters objected to the statement in the preamble of the proposed
rule that ``HUD reserves the right to add new indicators or components
of indicators, or remove indicators or modify indicators of the new
PHAS.'' The commenters noted that the preamble to the proposed rule
also advised that ``PHAs and the public will be notified of any change
in indicators or components through issuance of the appropriate type of
notice.'' (See 63 FR 35680.) These commenters wrote that any
modifications to the indicators would involve substantive issues and
require the use of notice and comment rulemaking procedures.
As noted in the preamble to the proposed rule, HUD will provide
appropriate notice of any change or notification. Where notice and
comment rulemaking is determined necessary, HUD will undertake such
rulemaking.
Section 3 Requirements Should Be Part of PHAS. A few commenters
suggested that the requirements of section 3 of the Housing and Urban
Development Act of 1968 be incorporated in the PHAS. Section 3 requires
that economic opportunities generated by certain Federal financial
assistance, including public housing, shall be given, to the greatest
extent feasible, to low and very low income persons. Since public
housing is subject to the section 3 requirements, the commenters
suggest that PHA compliance with section 3 be included in the new
assessment system.
A PHA's responsibilities with respect to the Section 3 program are
specifically addressed in the extensive regulations at 24 CFR part 135.
The PHAS assessments are not focused on specific programmatic
requirements, but on the overall quality of a PHA's physical,
financial, and managerial well-being, and the residents' perception of
that quality. At this time, HUD will not include this additional
element in its assessment.
PHAS Would Not Represent the First-Ever Assessment of Public
Housing. A few commenters took exception to the statement in the
preamble to the June 30, 1998 proposed rule that PHAS would provide for
the ``first-ever assessment of the physical condition, financial health
and resident services in public housing'' (63 FR 35672). The commenters
wrote that PHAs regularly inspect the condition of their public housing
stock.
HUD agrees that while certain components of the new PHAS are not
new, the consolidation of these previously disparate elements into a
single assessment undertaken by HUD is new. HUD intends for this new
consolidation to result in the overall improvement of PHAs, which will
lead to the greater satisfaction of both PHA administrators and
residents.
[[Page 46600]]
Proposed Rule Would Establish Unfunded Financial Burdens. Two
commenters objected to the proposed rule due to the unavailability of
the additional funding they believe is necessary for the successful
implementation of the new assessment system.
Although the initial implementation of the new assessment system
may result in some increased costs, these are not expected to be
significant. Under PHAS Indicator # 1 (Physical Condition), HUD will
conduct the physical inspection. Therefore, this is neither an
administrative or financial burden on PHAs. With respect to reporting
in GAAP, HUD is allowing a full year for PHAs to convert to GAAP. Many
PHAs already have converted to GAAP, and for those that have not yet
converted, HUD already has provided guidance through the HUD-GAAP
Conversion Guide and will provide additional training and assistance
during the year of transition. HUD also is developing electronic
submission software, which will provide an easy to use submission
template at no cost to PHAs and other housing entities. HUD also will
consider alternative means of submission if electronic reporting is
determined to be excessively burdensome or costly. The management
components of the PHAS are familiar to PHAs, and will not be a new
burden. Additionally, HUD provides a full year of transition before
PHAS is implemented. For these reasons, and others discussed later in
this preamble, HUD believes that new PHAS will not present an undue
financial burden.
Proposed Rule May Exceed HUD's Statutory Authority under PHMAP. Two
commenters questioned whether the proposed rule is in violation of the
public housing assessment requirements of section 6(j)(1) of the United
States Housing Act of 1937 (the 1937 Act). These commenters noted that
all seven of the indicators listed in section 6(j)(1) are combined
within a single PHAS indicator that is weighted at ``only 30% of the
total maximum score allowable under PHAS.'' One commenter noted that
the Secretary's general rulemaking authority under section 7(d) of the
Department of HUD Act (42 U.S.C. 3535(d)) cannot be exercised in a
manner that is inconsistent with statutory law, and that the proposed
treatment of the statutory indicators may violate the statutory
assessment requirements established by the 1937 Act.
The PHMAP statutory indicators, which are intended to assess the
management performance of PHAs, comprise the entirety of the PHAS
Management Indicator. As such, they continue to serve the statutory
purpose for which they were established. A good score on the statutory
PHMAP management indicators, in which assessment is based on PHA self-
certification, is expected to carry over and be reflected in the scores
for the physical and financial examinations, which are based on HUD-
reviewed data, and in the resident survey, in which the residents'
perception of the PHA is manifested. The new PHAS indicators thus serve
as a check on the self-certified PHMAP indicators, and amplify, through
consistency, the accuracy of the certifications, or, through
discrepancy, the certifications' shortcomings, thereby establishing a
more solid basis for confidence or intervention. The Department has
determined that, rather than undercut the statutory scheme, PHAS will
serve to reinforce the accuracy and reliability of (what formerly was
called) PHMAP.
Proposed Rule Should Provide for Greater Resident Participation.
Three commenters wrote that all major components of the PHAS should
reflect the principle and practice of resident participation. One of
the commenters suggested that the rule be amended to enforce and
protect the right of residents to voluntarily participate in the
overall assessment process, and that residents be afforded the
opportunity to participate in the assessment process through employment
and training created in connection with the assessment work. Other
commenters suggested that residents should be permitted to participate
in the physical inspection process.
Residents are an integral part of the PHAS assessments. An entire
PHAS indicator is devoted to a survey of the residents' level of PHA
satisfaction. This survey serves as a valuable check on the other PHAS
indicators. Residents will also participate in the physical inspection
process, which requires the HUD inspectors to visit and inspect
individual PHA units.
HUD State Offices Should be Included in Assessment Process. A few
commenters wrote that local HUD offices should be provided a role in
the PHAS. According to the commenters, such a policy would help to
ensure that the HUD officials most knowledgeable about local housing
conditions participate in the assessment process.
Local HUD Offices, through the participation of program staff and
Community Builders, will work closely with the REAC, TARC, and
Enforcement Center in ensuring the reliability and accuracy of the PHAS
effort.
The Same Standards Should Not Be Applied To Public Housing and FHA
Insured Properties. A few commenters noted a PHA does not have the
ability to increase rents and generate more income from its property,
and an FHA property has higher total development cost limits, typically
resulting in better construction quality. One commenter stated that it
is unfair to hold public housing to a standard that it was not designed
nor funded to compete with.
The PHAS is not intended to measure competing housing amenities,
but to measure and promote a basic level of housing that is decent,
safe, sanitary, and in good repair; financially sound; well managed;
and which thereby manifests a general level of resident satisfaction.
The Department knows that many PHAs, even given their modest resources,
can meet and, in fact, exceed this basic level. The unfairness lies in
falling below this basic level.
Role of the Assistant Secretary for Public and Indian Housing. Two
commenters raised the issue of the involvement of the Assistant
Secretary for Public and Indian Housing (PIH) in the PHAS. One
commenter stated the PHAS marginalizes the role of the Assistant
Secretary, and that it appears that the Assistant Secretary will have
no authority with respect to the activities of the REAC or the TARC.
Another commenter noted that although the REAC will have the most
significant role of the various HUD components in PHAS, the REAC will
not be under the jurisdiction of the Assistant Secretary for PIH, or
any other Presidential-appointee level official, other than the
Secretary, and questioned the accountability of REAC. The commenter
also expressed concerns that such arrangement may create internal wars
and standoffs over PHA operations within the Department.
First, as with all HUD offices and officials, REAC and the Director
of REAC are under the jurisdiction of the Secretary of HUD. Second, HUD
expects that its new approach of consolidating discrete, cross-cutting
functions such as assessment and enforcement into separate centers will
permit HUD's program offices to concentrate on providing better program
service. No longer will program staff wear the multiple hats of
assistance provider, monitor, and enforcer. The wearing of multiple
hats has been one of the major deficiencies of the HUD workforce
addressed by the HUD 2020 Management Reform Plan (issued June 26,
1997). For too many years, the HUD workforce has been given
schizophrenic mandates. On the one hand, HUD employees were asked to
provide
[[Page 46601]]
assistance to communities and HUD's housing partners to help them meet
their needs. On the other hand, these same employees were asked to
police the actions of those same communities and housing partners. The
PHAS allows REAC and the Enforcement Center to handle the enforcement
obligations of program monitoring, and allows the Office of Public and
Indian Housing to target its energies and resources on providing
services to the 3,400 housing authorities and 1.4 million families they
house. Having said this, HUD is nevertheless aware of the need to keep
lines of communication and cooperation open among all of its functions
and responsibilities, and expects to do so.
B. Comments on Subpart A--General Provisions
PHAS Components Should Reflect PHA Differences. Several commenters
objected to the uniformity of the components that would be established
under the PHAS. The commenters stated that the PHAS should factor the
geographic, cultural, and other differences between housing
authorities. One of the commenters wrote that while a uniform set of
standards may be desirable, components should be developed to reflect
local variances. Another commenter remarked that there may be great
difficulty in comparing the management of PHAs that manage only housing
for the elderly or persons with disabilities, to those that manage
family developments or both.
As stated earlier in this preamble, the PHAS is intended to measure
and promote a basic level of housing. HUD believes the PHAS achieves a
basic level on a national basis that will be satisfactory to tenants
without making unrealistic demands upon PHAs.
C. Comments on Subpart B--PHAS Indicator #1: Physical Condition
Relationship Between PHAS and HQS is Unclear. Several commenters
expressed uncertainty regarding the relationship between the PHAS
Physical Condition Indicator and the Housing Quality Standards (HQS).
Other commenters asked how differences between the HQS inspection and
the REAC inspection would be resolved. One of the commenters wrote that
the proposed rule does not clearly define a connection between the new
uniform physical condition standards, HQS, and the newly developed HUD
computerized inspection protocol software that will assign physical
condition scores.
Under PHAS, a new uniform physical condition standard is
established in subpart B. This is the standard that HUD will use in
assessing the physical condition of a PHA's housing stock.
The previous requirement in PHMAP that PHAs inspect to local codes
or the HQS, whichever is more stringent, has been eliminated. Instead,
Indicator 3 (Sec. 902.43(a)(5) of this final rule) requires PHAs to
inspect to the same standard as does HUD in Indicator #1. As a result,
HQS will no longer be used as the standard for PHAs to inspect public
housing units under PHAS. Therefore, there will be no differences
between the two standards to reconcile. The new software developed by
HUD will reflect all of the inspectable areas and inspectable items
reflected in the new standard and capture deficiencies associated with
those items.
PHAS Indicators #1 and #3 Should be Consolidated. Two commenters
suggested that, since both PHAS Indicators #1 and #3 (Management
Operations) require inspection of PHA units, the two indicators should
be consolidated. According to one commenter this consolidation would
permit the PHA to submit one less certification under the Management
Operations indicator. The other commenter remarked that since HUD will
conduct its own independent inspection to determine the quality of a
PHA's maintenance effort, it appears duplicative to have another score
relating to the PHA's own inspection which presumably also is intended
to determine the quality of the maintenance effort.
HUD does not agree that Indicators #1 and #3 should be combined or
that they are duplicative. While Indicators #1 and #3 both require
physical inspections, they do not serve the same purpose. The HUD
inspection under Indicator #1 is to determine the basic physical
condition of the PHA's portfolio. This will be determined by inspecting
a statistically valid sample of the units in the PHA's stock. The PHA
will be notified of the deficiencies found in this limited assessment.
Alternatively, the PHA inspection under Indicator #3 is a measure of
PHA management performance. The inspection is intended to be more
comprehensive and will assess each unit to determine the immediate
maintenance and modernization and correct identified deficiencies.
There is no intent in this rule for HUD to replace the PHA's inherent
responsibility as the property owner to maintain decent, safe and
sanitary housing, through the inspection of each of its units and the
timely correction of deficiencies found.
Notice of Defects. Several commenters remarked that PHAs cannot be
expected to cure problems caused by willful resident damage or neglect
of which the PHA does not have notice. As one of the commenters wrote:
``A PHA cannot control a resident's housekeeping habits or abilities to
correct `other observable deficiencies'.''
PHAs are required by law and contract to maintain decent, safe and
sanitary housing. Nothing in the law or contract exempts the PHA from
this responsibility due to resident caused damage. If a PHA is properly
managing its properties, including regular annual unit and house
keeping inspections, and enforcing lease provisions, the effect of
resident caused damage on the overall assessment of the condition of
the properties will be minimal.
More Time Required for Implementation. A few commenters requested
that PHAs be provided with additional time before implementation of the
PHAS Physical Condition Indicator. One commenter wrote that PHAs need
the additional time to ensure that they comply with the new standards.
This commenter also wrote that a one year test ``of the proposed
sampling methodology and survey design will provide needed estimates of
the adequacy of the PHAS inspection system.''
Section 902.60(b) of the final rule provides that ``Information
necessary to conduct the physical condition assessment under subpart B
of this part will be obtained from HUD inspectors during the fiscal
year being scored through electronic transmission of the data.'' In
accordance with the implementation timetable published in the preamble
of the June 30, 1998 proposed rule (63 FR 35679), physical inspections
for PHAS scores to be issued by December 1999 will be conducted during
the period July 1999 through September 1999. Before implementation of
PHAS, HUD may conduct inspections and issue advisory scores to PHAs.
This would enable PHAs to see how they will be assessed under the new
rule and make necessary adjustments before HUD conducts inspections
which will be reflected in the new PHAS score.
Questions Regarding Statistically Valid Sampling. Several
commenters asked what constitutes a ``statistically valid sample'' for
purposes of the PHAS physical condition inspection; what methods would
be used to select PHA units; and whether HUD would also use samples of
areas other than units, or would instead inspect all such areas. One
commenter wrote that the inspected sample should reflect the
differences in a PHA's housing stock, which may contain both high rise
and garden style developments. One of the
[[Page 46602]]
commenters supported the random selection of samples from all
developments within each PHA jurisdiction. This commenter wrote that
physical condition and resident attitudes vary between developments;
and that sampling a subset of a PHA's development would not be truly
representative of housing conditions and resident attitudes.
The statistically valid sample will be based on inspecting the
number of units necessary for estimating the physical inspection score
for a property within two percentage points at a 95% confidence level.
Units that will actually be inspected will be selected at the time an
inspector arrives on site. The new software will contain a ``random
unit generator'' that will be used to select units. The inspector will
inspect the randomly selected units along with all other components in
their associated buildings (e.g., building exterior, building systems,
common areas, etc). The inspector will inspect the entire site of the
project being inspected.
The sampling methodology does differentiate between those buildings
with four or more floors and all other buildings. While it is true that
there are differences among developments in physical condition of the
units and attitude of the residents, HUD believes that use of the
statistically valid sample will result in an accurate assessment of the
units in a PHA's stock.
Questions Regarding the Timing of Inspections. Several commenters
raised questions regarding the timing of PHAS physical condition
inspections. Two commenters wrote that the timing of inspections will
have an impact on the outcomes in many climates, and inspections should
be adjusted to take into account climate impact on outcomes. Two other
commenters noted that under most leases, a PHA must provide notice to
its tenants of any inspections, and recommended that HUD take tenant
notification into account in scheduling inspections. One commenter
asked whether HUD would provide a PHA with ample time to reschedule any
postponed inspections or simply use a smaller sample size.
HUD acknowledges that the timing of the inspection could impact the
inspection results of certain items (e.g., inspecting heating systems
in the summer). It is HUD's intent to schedule inspections to coincide
with the end of the PHA's fiscal year so as to provide consistency
between the timing of the various components of the assessment.
Seasonal problems as described by the commenters are unavoidable. In
these cases, HUD would not, for example, expect the PHAs to start the
heating plant in the middle of the summer. The inspector would only
make visual observations for deficiencies and examine any certificates
that the PHA may have obtained under a maintenance contract or city
inspection.
HUD anticipates that PHAs will have at least five calendar days
advance notice prior to the time of inspection to provide notification
to residents. If there are scheduling conflicts, the PHAs and
contractors are expected to work together to arrange a mutually
agreeable date within the general time frame of the originally
scheduled date. HUD does not expect that extended delays in
rescheduling (e.g., weeks or months) will be permitted.
Questions Regarding the Cost of Inspections. Several commenters
raised questions regarding the cost of the physical condition
inspections. Three commenters wrote that if PHAs incur significant new
expenses connected with the inspection process, they should be
reimbursed in operating expenses. Another commenter wrote in opposition
to the requirement that all PHA properties be inspected by an
independent HUD inspector. The commenter stated the cost of paying for
these private inspections could be better utilized by local housing
authorities.
Under PHMAP, PHAs are required to conduct inspections of 100% of
the units in their inventory, and no additional operating subsidies are
provided as a result of the PHMAP rule. The PHAS rule requires PHAs to
use the new physical inspection standard as the minimum physical
quality standard in lieu of HQS. PHAs are not required to use the new
HUD software. PHAs may continue to inspect using whatever means they
are currently using (e.g., their own staff contract inspectors, etc.).
As a result, PHAs should not incur significant new costs as a result of
the new rule.
With respect to HUD's independent inspection of public housing, HUD
has an obligation to ensure that all PHAs are complying with the law
and contracts in the provision of decent, safe and sanitary housing.
The methodology used by HUD in the past, where only a limited number of
PHAs were visited by HUD, was the subject of considerable criticism
from Congress, the General Accounting Office, and the HUD Inspector
General. The new methodology is intended to address those criticisms
and provide credibility to HUD's method of assessing PHA performance.
Questions Regarding Inspector Qualifications. Several commenters
raised questions regarding the qualifications of the independent
inspectors contracted to perform the physical condition inspections.
One commenter noted that PHAs must comply with State and local laws,
and asked whether the inspectors will be trained in building and
maintenance codes for each State and locality. Another commenter asked
how HUD would exercise quality control over the contracted private
inspection firms. The commenter also questioned whether PHAs would be
provided an opportunity to review and comment on the quality control
standards. One of the commenters wrote that the inspectors will need to
be able to distinguish between day-to-day maintenance items and
deferred maintenance items.
Contractor qualifications include, at minimum, the following: high
school education or equivalent; specific technical knowledge in major
building trades used in residential construction, including
foundations, structures, framing, roofing, plumbing, heating, air
conditioning, interiors, insulation and ventilation; general personal
computer (laptop) skills including familiarity using Windows 95 (or
later versions) software or equivalent environment; and experience,
within the past three years, demonstrating sufficient knowledge of
multifamily housing and public housing properties. The qualifications
also may include experience as a construction inspector of multifamily
real estate properties for determining compliance with construction
requirements and/or a superintendent of construction for a builder of
multifamily properties, or a record of performing acceptable
multifamily property inspections.
The new physical inspection standard, as was the case with the HQS,
is not intended to be a local code inspection. Instead, the inspection
is only intended to determine compliance with the Federal physical
standards. It would be impractical to expect the inspector to determine
compliance with local codes.
HUD will use its own staff in the REAC to perform Quality Assurance
(QA) inspections of work performed by private contractors. The HUD QA
inspectors will follow behind contract inspectors within a period of
approximately 48 hours and inspect the same properties and units
inspected by the contract inspector. HUD will then compare the results
of the QA inspector and the contract inspector to determine if the
contractor is inspecting using the HUD inspection protocol and software
properly. HUD will take appropriate action where it finds problems with
the quality of the contract inspector's work.
[[Page 46603]]
There will not be a need to distinguish between day-to-day
maintenance and deferred maintenance. The condition of the property at
the time of the inspection will be recorded regardless of why the
condition exists or any plans for correction.
Rating Criteria are Vague. Several commenters wrote that the
proposed rule was unclear regarding how the physical condition
component would be scored and weighted. These commenters asked that HUD
provide a definition of the term ``good repair.''
PHAs will be judged on how well they maintain their properties in
the context of the specific inspectable areas and inspectable items
identified in the new physical inspection standard. It will be the
responsibility of the PHA to maintain all components of each property.
HUD does not intend to provide the details of the scoring algorithms at
this time. HUD is providing the approximate relative weights/points of
the five inspectable areas to give PHAs a general indication of
importance of those areas and the direction of how the scores will be
derived. HUD plans to constantly analyze the scores and make
adjustments to ensure validity. In addition, the relative weights/
points may change with some properties because, for example, they do
not have common areas. In these cases, the available points will be
redistributed among the remaining inspectable areas. PHAs that maintain
their properties in decent, safe and sanitary condition will not be
significantly adversely affected by HUD's approach.
Approximate Relative Weights/Points
------------------------------------------------------------------------
Approx.
Inspectable area points
------------------------------------------------------------------------
Site (plus 1 pt. for physical condition and
neighborhood environment)..................................... 4.5
Building Exterior (plus 1 pt. for physical condition
and neighborhood environment)................................. 4.5
Building Systems...................................... 6.0
Dwelling Units........................................ 10.5
Common Areas (plus 1 pt. for physical condition and
neighborhood environment)..................................... 4.5
------------------------------------------------------------------------
In addition, health and safety deficiencies will result in
reductions to the total physical inspection score which takes into
account the five areas, above, with their approximate relative weights.
Negative Effect on Resident Surveys. A few commenters expressed
concern about the potential negative impact of the physical condition
inspections on resident satisfaction surveys. One commenter wrote that
the PHAS inspection would cause resident disruption that could be
reflected in the resident survey. Another commenter asked whether HUD
had considered the effect multiple inspections will have on some
residents of public housing.
HUD's independent physical inspection of public housing will not
have a direct effect on the resident survey score. The physical
inspection score will be derived based on the results of the
observations recorded during the physical inspection. The comments
obtained by the PHA during its survey of the residents are intended to
be used by the PHA management to assist it in assessing its operations
and determine where improvements are needed.
HUD considered the effect of multiple inspections on residents, but
concluded, as advised by PHAs, that residents are already subject to
multiple inspections (e.g., annual unit inspections, housekeeping,
preventative maintenance, etc.). Since the purpose of the HUD
inspection is to ensure that the resident is living in decent, safe and
sanitary housing, it should not pose a major problem for the residents.
Inspection ``Snapshot'' Might be Inaccurate. Two commenters wrote
that HUD's inspection would only provide a ``snapshot'' of the
property's physical condition. The commenters expressed concern that
this one-time snapshot might be misleading. One of the commenters
recommended that PHAS allow for any deficiency to be abated or
corrected and for the unit to then be reinspected. According to the
commenter, this is the current practice under HQS. The commenter also
wrote that if uniform physical condition inspections do not allow for
such corrections, they might have a significant negative impact on a
PHA's score.
All inspections are ``snapshots'' in time. That is the nature of
inspections and is no different than any other inspection previously
performed by HUD, the PHA or the residential inspection industry at
large. As a result, HUD does not agree that the HUD inspection would be
misleading. HUD's independent inspection should accurately represent
the condition of the property at the time of the inspection.
Conversely, HUD believes that it would be misleading to conduct the
inspection, allow correction of deficiencies, and then conduct a
reinspection of the unit with a resulting higher score as suggested in
the comment. PHAs will be provided with the results of the inspection,
and it will be the responsibility of PHAs to take any necessary
corrective actions at that time. HUD Field Offices will work with PHAs
to ensure that corrections are made in a timely manner.
Need for Exit Conferences. A few commenters recommended that HUD
conduct post-inspection conferences with PHAs. One commenter stated
that these exit conferences would eliminate unnecessary appeals by
allowing local authorities to review the results with the inspecting
group/auditor.
HUD appreciates the recommendation, but notes that PHAs are
required to designate a representative to accompany the inspector
during the entire inspection. As a result, the PHA representative will
be aware of the inspection and be able to provide any clarifications
that may be required during the inspection. The PHA representative will
be provided with a notice of life-threatening health and safety
deficiencies observed during the inspection. Shortly after the
inspection, the PHA should be able to obtain the detailed results of
the inspection directly from the HUD web page. The PHAS provides for no
appeals of the inspection results. Instead, a PHA may, as provided in
the statute, appeal its overall score if the score results in a
troubled designation. As a result, HUD does not plan to require formal
``exit conferences.''
Accounting for Lack of Modernization Funding. Several commenters
asked HUD to specify how the lack of modernization funding would be
taken into account by PHAS. The commenters were particularly concerned
about smaller agencies that, according to the commenters, often only
succeed in getting emergency items funded.
The purpose of the physical inspection is to determine the
condition of the PHA's housing stock. HUD provides an adjustment, as
required by statute, for physical condition and neighborhood
environment. HUD did not adjust for the lack of past or present funding
under PHMAP and does not intend to do so under PHAS as it would
misrepresent the assessment of the condition of the PHA's portfolio.
HUD Should Rely on Certain Professional Inspection Certifications.
Two commenters wrote that some mechanical and electrical systems could
not be satisfactorily inspected visually. The commenters suggested that
HUD's contract inspectors should rely on the PHA's records of
inspections by appropriate professionals or other qualified inspectors
not employed by the PHA. Another commenter wrote that local inspections
and certifications
[[Page 46604]]
should be sufficient for many of the health and safety systems.
HUD agrees with the commenters, and the inspection software permits
the acceptance of certifications from appropriate professionals for
such items as elevators, boilers, fire extinguishing equipment, etc.
Need for Comp Grant Waiver. One commenter recommended that HUD
grant a waiver of conditions observed in a unit or project element
scheduled to be corrected pursuant to an approved Comprehensive Grant
(Comp Grant) 5-year plan or otherwise identified in the needs
assessment.
HUD believes that adopting this comment would result in a
misleading score with respect to the current condition of the property.
If the PHA has identified an item(s) for correction in its Comp Grant
5-year plan or a needs assessment, there will be little or no
corrective action to be taken by the PHA until such time as the
deficiencies are corrected. Once the deficiencies have been corrected
and the property is inspected, the resulting score should properly
reflect the then current condition of the property.
Comments Regarding Adjustment for Older Housing. Several commenters
raised concerns regarding the PHAS adjustment for physical condition
and neighborhood environment. These comments included: statements that
the three point physical condition adjustment for older housing stock
was vague; questions about the kind of documentation that will be
necessary to demonstrate eligibility for the three points; concerns
that the three-point adjustment that would be provided under the PHAS
rule might violate the statutory PHMAP requirements; concerns that
giving bonus points for authorities with older units in a state of ill
repair penalizes authorities that strive to keep their property in good
repair; recommendations that the adjustment should not be limited to
three points under the physical condition indicator, but should
continue to apply as under PHMAP; and recommendations that HUD should
limit the adjustment to those PHAs that have a financially feasible
plan for the renovation of the project.
The comments on this adjustment factor reflect that the industry
has differing views regarding the statutorily mandated adjustment. HUD
believes that it has taken a reasonable approach to implementing this
requirement. HUD disagrees that this provision is vague. This PHAS
provision is similar in nature to that which was required under PHMAP
and will require similar documentation. Since the requirement is
statutory, HUD is obligated to permit the adjustment and, therefore,
cannot accede to those who object to the adjustment.
HUD has determined that this provision does not violate the
statutory requirement. In addition, HUD has limited the adjustment to
the physical condition of the property because that is the most
appropriate place where the PHA has limited control over ``physical
condition and neighborhood environment.'' PHAs have direct control over
other areas of the PHAS assessment and the scores in those areas should
not be adjusted for ``physical condition and neighborhood
environment.''
D. Comments on Subpart C--PHAS Indicator #2: Financial Condition
This Indicator Lacks Necessary Details About the Requirements and
the Change to GAAP Will Be Significant for the Vast Majority of PHAs In
Terms of Time and Cost, and the Implementation Date Is Not Realistic. A
number of commenters raised various concerns about this indicator.
Comments on this indicator included statements that: this PHAs
indicator provides little more than a conceptual framework with little
attention to details; no information has been provided to explain what
electronic transmission of financial data means or how this is to be
done; the change to GAAP would be significant, burdensome, costly,
time-consuming and the implementation date in the rule is not
realistic; GAAP will require the education of PHA staff and fee
accountants, and the conversion of most PHA accounting software
applications; even though the rule states PHAs will not be scored under
PHAS until September 30, 1999, giving the appearance of a one year
period, the actual implementation for some PHAs will be October 1,
1998, the beginning of the period to be assessed, and this is not a
realistic and logical date for implementation; conversion to GAAP
should not be required until January 1, 2000, or later.
The GAAP conversion process entails only year-end adjustments to
convert the PHA's record-keeping so information may be reported under
GAAP. It does not require the wholesale conversion of PHA accounting
software in order to meet the mandated schedule. The reporting under
GAAP is being required for all PHAs with fiscal years beginning October
1, 1998 and thereafter. Therefore, the first unaudited financial
statement information that must be submitted to HUD under a GAAP basis
is not due until November 30, 1999. HUD strongly believes that the time
frame is sufficient and realistic for all PHAs to be able to convert to
GAAP and accordingly report their results. PHAs are not required to
change their current accounting and record keeping systems. They are
only required to do is to report their information using GAAP as the
accounting basis.
As stated in the proposed rule, PHA and industry representatives
preferred GAAP accounting as more meaningful and widely accepted.
Reporting results under GAAP offers the following benefits: allows for
financial consistency among PHAs; provides a common mechanism for HUD
to fairly and accurately assess the financial condition of each PHA as
compared to its peers; and presents a more accurate picture of PHA
financial condition by accounting and accruing for all liabilities that
may exist. With respect to costs, additional GAAP-related audit costs
will be covered by the PFS.
To facilitate and help each PHA in its conversion, HUD has
developed a detailed GAAP Conversion Guidebook that is available on the
Internet. It can be accessed at: (http://www.hud.gov/reac/reafin.html).
In addition, a help desk (The REAC Service Center) is available to
answer any GAAP related questions. A toll free number is provided (1-
(888) 245-4860).
The Benefits of GAAP Are Not Clear for PHAs. Other commenters
stated that the benefits of converting to GAAP for PHAS are not clear.
Comments and questions included the following: allowance for
depreciation schedules, required under GAAP accounting, have no value
to PHAs and should not be required; guidance relative to the
depreciation of assets (including those purchased in prior years) is
needed; GAAP may create liabilities against reserves that were not
previously considered under HUD's chart of accounts; how will bad debts
be uniformly quantified; what will be the impact of conversion on first
year expenses for depreciation, vacation and sick leave accruals; must
PHAs quantify the present value of a guaranteed ACC; and how will first
year paper conversion costs affect PHAs. Commenters also stated that
neither PHAs nor HUD can know the effect of conversion to GAAP; that
the effect will vary depending on the policies of each authority in the
areas of sick leave, annual leave, collection of bad debts, etc. Other
commenters asked HUD to explain how it will maintain consistency among
PHAs in accounting and financial reporting under governmental
accounting.
With respect to depreciation, GASB-GAAP requires depreciation under
the Enterprise Method and permits the
[[Page 46605]]
recording of depreciation under the Governmental Method. HUD strongly
prefers that under both the Governmental and Enterprise methods, each
PHA depreciate its fixed assets over their useful lives. HUD prefers
that each PHA record depreciation because of the benefits associated
with recognizing depreciation. Recording of depreciation provides each
PHA with a systematic allocation method of showing the cost of an asset
over its useful life. The recording of depreciation permits each PHA to
show the directly related consumption of the asset over the periods in
which the asset is used. Financial indicators are designed so as not to
be impacted by the PHAs decision whether to record depreciation or not
to record depreciation. Examples of depreciation of assets is as
follows:
National Council on Governmental Accounting Statement (NCGAS) 1,
Governmental Accounting and Financial Reporting Principles, states that
while depreciation expense cannot be recorded in a governmental fund,
accumulated depreciation may be reported in the General Fixed Assets
Account Group. Reporting accumulated depreciation in the account group
is not mandatory. If the governmental unit decides to report
accumulated depreciation, follow the conventional accounting standards
with respect to acceptable depreciation methods, economic life, and
estimated salvage value.
Under NCGAS 1, all depreciable property of an enterprise fund must
be depreciated in accordance with GAAP as applied by a commercial
enterprise. Depreciation on fixed assets of a proprietary fund must be
shown as an expense on its operating statements, with appropriate
disclosures in the financial statements.
Depreciation including suggested entries and conversion guidance is
explained in depth in the HUD-GAAP Conversion Guide. The GAAP
conversion guide also discusses composite depreciation. For practical
purposes, property items frequently are grouped and an average life
applied to determine depreciation. Groupings may be by year of
acquisition, by type (all cars), by classification (all equipment), by
location, or by a combination of these ways. Depreciation based on
groups that include items with varying lives is referred to as
composite depreciation. No gains/losses should be recognized on normal
dispositions when this technique is used.
With respect to the chart of accounts, the Chart of Accounts has
been revised to reflect additional accounts that may be needed by each
PHA. The use of the revised accounts permits each PHA to present a more
accurate picture of its financial condition using GAAP.
On the question of bad debts, both the Governmental Method and the
Enterprise Method required the development of an allowance for
uncollectible accounts receivable. For the Governmental Method, NCGA
Statement No. 1, Governmental Accounting and Financial Reporting
Principles, requires that an allowance for uncollectible accounts be
established for potentially uncollectible amounts. For the Enterprise
Method, SFAS No. 5, Accounting for Contingencies, guides the
establishment of the allowance for uncollectible accounts for
potentially uncollectible amounts.
To provide for all reasonably anticipated losses inherent in the
receivable balances that will not be collected, a PHA must ``establish
an allowance for uncollectible (or doubtful) accounts.'' When
calculating the size of the reserve, each PHA should consider such
factors as the current accounts receivable aging and the historical
collection experience. The following provides an example of a
calculation methodology:
1. Group the receivables into these categories:
Current receivables
Receivables less than 90 days outstanding, but not current.
Receivables 90--180 days outstanding.
Receivables over 180 days outstanding.
2. Identify all receivables that are known to be uncollectible or
that the probability of collection is very low.
3. For those receivables identified in item 2, establish a reserve
for the estimated amount that will not be collected.
4. Based on the receivables in the groups shown above in item 1
that were not specifically identified in item 2, establish an overall
additional reserve for each category.
Again, this is just an example. The method used by each PHA could
change based on its specific circumstances.
With respect to vacation and sick leave accruals, GAAP provides as
follows:
Vacation Leave and Other Compensated Absences with Similar
Characteristics. Accrue these types of compensated absences as a
liability because employees earn these benefits by meeting both of
these conditions: (1) The employees' rights to receive compensation are
attributable to services already rendered; and (2) it is probable that
the employer will compensate employees for the benefits through paid
time off OR some other means, such as cash payments at termination or
retirements.
Sick Leave and Other Compensated Absences with Similar
Characteristics. If paid time off is contingent on a specific event
outside the control of the employer and employee (jury duty, for
example), other compensated absences have characteristics similar to
sick leave. If it is probable that the employer will compensate
employees for the benefits through cash payments conditioned on the
employees' termination or retirement, accrue a liability as the
benefits are earned by the employees
First year experience regarding the impact of converting to GAAP
reporting will vary. The recording of GAAP accounts will have an impact
on the financial indicator results under GAAP versus PHMAP. This
recording of new liabilities and contra assets amounts will be
reflected in the first year financial indicator results and the overall
score given to each PHA.
With respect to the PHA's ACC, the conversion to GAAP will have an
impact on the ACC when the PHA converts to accrual accounting since you
accrue receivables and defer revenue in anticipation of the actual
receipt of the revenue.
On the matters of the effect of the conversion to GAAP and
maintaining consistency in reporting under GAAP, HUD points out that
GAAP permits choices among acceptable options for certain accounting
transactions. Because the purpose of converting to GAAP is to achieve
uniform and consistent financial data from all PHAs, HUD has selected
preferred options for those transactions where GAAP allows a PHA to
choose from more than one method. For these transactions, HUD strongly
encourages PHAs to choose the HUD-preferred option.
PHAs can project in large measure how their financial position will
be affected by the major GAAP provisions. HUD has taken into
consideration the anticipated effects of converting to GAAP and the
reporting of results using GAAP. The scoring mechanism will reflect the
adjustment to GAAP.
Clarification of Certain Aspects of GAAP Are Necessary. Other
commenters asked specific questions about certain aspects of GAAP or
asked for clarification of certain points. The commenters stated that
HUD should clarify its position as to what constitutes GAAP because in
the proposed rule for Uniform Financial Reporting Standards, HUD refers
to GAAP as being prescribed by GASB and FASB but these are two
different standard setting bodies with
[[Page 46606]]
differing jurisdictions. Another commenter requested that HUD permit
the use of Enterprise GAAP. Other commenters stated that GAAP will
require PHAs to keep two sets of books.
HUD's rule on Uniform Financial Reporting Standards covered private
entities as well as PHAs, and under GAAP, the accounting principles and
financial reporting standards are established by the Governmental
Accounting Standards Board (GASB) for governmental entities, and by the
Financial Accounting Standards Board (FASB) for nongovernmental
entities. Since the PHAS rule is only applicable to PHAs, HUD uses the
term ``GASB/GAAP'' in this final rule. GASB permits two types of
reporting mechanisms, the Governmental Method and the Enterprise
Method. The use of either method is acceptable to HUD. In fact, HUD is
not requiring one method over the other. Each PHA has the discretion to
determine its own method. The guiding criteria should be the type of
activities performed by the PHA. That determination will drive which
method most accurately provides the reader of the financial statements
with a clear understanding of the PHA's operations and financial
results.
With respect to bookkeeping, PHAs will not be required to keep two
sets of books to comply with GAAP. HUD does not require a change to
recordkeeping as part of the GAAP provision. In addition, HUD is
revising financial reporting requirements to eliminate obsolete forms
and requirements.
HUD Must Clarify the Compensation of the Costs of the Conversion.
There were several comments on whether HUD would pay for the software
and upgrading of PHA computers for the electronic submission, and the
costs of converting their accounting systems to GAAP, or if additional
operating subsidy to cover these costs would be provided through PFS
``add-ons.''
Additional GAAP-related audit costs will be covered by the PFS.
The New Financial Reporting Requirements Constitute an Unfunded
Mandate. Related to the issue of compensation costs are comments that
stated the conversion to GAAP or the requirement to submit financial
reports electronically constitute an unfunded mandate.
Additional audit costs, if any, associated with GAAP related
audits, will be covered by HUD as a PFS add-on. These additional audit
costs, if any, are anticipated to be minimal.
Significant Training, Assistance and Guidance Will Be Necessary to
Make the Conversion Work. Commenters asked HUD to clarify what training
and assistance HUD would make available to assist with the conversion
to GAAP and electronic submission, and when such technical assistance
would be available.
The HUD-GAAP Conversion Guide for PHAs, now on the Internet,
provides an in depth discussion of GAAP conversion including suggested
accounting entries. The Guide includes sample journal entries and
suggested GAAP conversion procedures. PHAs that have specific questions
not addressed in this Guide, contact the REAC Service Center Help Desk
(1-(888)-245-4860) and answers will be provided. HUD is providing 24-
hour on-line assistance on the GAAP Conversion Guide at our Web site
(http://www.hud.gov/reac/reafin.html). Additionally, industry
specialists have developed and prepared a schedule of a comprehensive
training program designed to explain how a PHA should convert its
records and reporting to GAAP. HUD will supplement this training with
its own training program.
Small PHAs Are Largely Not Automated and Will Have Difficulties
Complying with the New Reporting Requirements. A few commenters
expressed the concern about the impact of this Indicator on small PHAs
that may have difficulty complying with the electronic reporting. The
commenters asked who will supply and pay for software necessary for
electronic submission.
HUD disagrees with the commenters that small PHAs will be adversely
affected by PHAs Indicator #2. First, PHAs have a year before reporting
in GAAP is required. Second, HUD notes that the Single Audit Act
Amendments of 1996 raised significantly the monetary threshold for when
an entity that receives Federal assistance is required to have an
audit. The threshold was raised from $25,000 to $300,000. This change
significantly reduces reporting costs for small entities. Therefore,
although small entities must continue to submit an annual financial
report to HUD, an audited report is not required. Third, although HUD
has clearly expressed a preference for internet submission of financial
reports, the rule provides that HUD will approve transmission of
financial data by tape or diskette if HUD determined that the cost of
electronic internet transmission would be excessive. Additionally, to
further ease any administrative burden on small PHAs, and all PHAs, HUD
will provide submission software, supplemental guidance, training and
other technical assistance.
What Protections Will Be in Place to Protect the Standardized
Electronic Format from Viruses, Corruption. Some commenters expressed
concern with the use of any standardized electronic format due to the
potential of viruses or corruption.
To ensure security against computer viruses, HUD systems scan
incoming data for viruses. Similarly, PHAs should ensure that data
being transmitted is free of viruses.
Final Rule Should Provide for HUD Confirmation of Receipt of
Electronic Report. Other commenters requested that HUD confirm that it
has received the electronically transmitted data, and that the data are
readable, correct, and accurate. The commenters stated that
confirmation should be done quickly so that any transmission problems
can be corrected without consequence.
HUD will give PHAs read-only systems access to view their submitted
data via the Internet. It is planned that PHAs will receive a written
report on HUD's financial assessment within a reasonable period of
time.
The Final Rule Should Address PHA Access to the Electronic Report.
A few commenters suggested that once a PHA has input adjustments, it
should be provided read-only access to the HUD system in order to make
the data most useful to it. Access to system data is not addressed in
the proposed rule.
A PHA will have read-only access once the data is accepted in the
system.
The 60-Day Turnaround Time to Submit Unaudited Statements Is
Inadequate. Some commenters stated that the 60-day turnaround time to
submit unaudited financial statements after the PHA's fiscal year may
not be enough time to prepare a thorough submittal, especially for
those PHAs that are converting to GAAP. They stated that PHAs should be
given 100 days to submit their unaudited financial statements.
HUD strongly believes that 60 days following the fiscal year-end is
sufficient for the preparation and submission of unaudited financial
statements. Audited results need not be submitted until 9 months
following the close of the PHA's fiscal year-end. HUD encourages each
PHA to work with its IPA to develop procedures designed to calculate
GAAP entries which will facilitate closing procedures. In addition, HUD
suggests that each PHA work with its respective IPA firms developing
the specific closing procedures each must use so the required
information will be available 60 days following the fiscal year-end
close. HUD recommends that this planning process occur early during the
fiscal year to facilitate the data gathering and financial reporting
methods.
[[Page 46607]]
The Financial Standards Should Be Applied to all Programs
Administered by PHAs. A few commenters stated that the financial
standards should be applied to the public housing entity as a whole,
not just certain federal programs. The financial standards should be
applied to all programs managed by the PHA, including public housing.
HUD agrees that financial assessment and the resulting financial
indicators will be applied to the entity as a whole and not just to
each respective Public Housing program. The Supplemental Financial Data
Schedule provides a summary of each HUD program and other Federal,
State, local or private funding sources.
Final Rule Should Make Clear That a PHA's Financial Reporting Is
Limited to Public Housing Programs. Other commenters stated that the
final rule should make clear that a housing authority's financial
reporting on liquidity and viability will be limited to public housing
program operations and will not include the housing authority's non-
public housing operations or the Authority's capital programs.
HUD believes that the financial health of the PHA can only be
accurately determined by assessing all aspects of the PHA, including
non-public housing and capital programs.
How Will the Six Major Components of This Indicator Be Scored?
Several commenters asked how each of the six major components of this
indicator will be scored, and what weights will each of them have.
To evaluate the financial health of the nation's PHAs, REAC will
assess and analyze the GAAP-based financial statements submitted each
year. REAC will analyze this information using a specific set of
financial indicators that focus on: (1) Liquidity measurement--evidence
of the PHA's ability to cover its near term obligations; (2) Viability
measurement--evidence of the PHA's ability to operate using its fund
balance without relying on additional funding; (3) Days receivable
outstanding--measures the PHA's ability to collect its tenant
receivables in a timely fashion; (4) Vacancy loss analysis--measures
the extent to which the PHA is maximizing its revenue from operations;
(5) Expense management per unit--provides a measure of the PHA's
ability to maintain its expense ratios at a reasonable level relative
to its peers (adjusted for size and region); and (6) Net income
(loss)--provides a measure of how the year's operations have affected
the PHA's viability.
Financial scores will be determined as follows: (1) Liquidity
measurement--Adjusted Current Ratio with a maximum score of 9; (2)
Viability measurement--Number of months operating expenditures in
Expendable Fund Balance with a maximum score of 9; (3) Days receivable
outstanding--Days Receivables Outstanding with a maximum score of 4.5;
(4) Vacancy loss analysis--Total vacant potential revenue to gross
available revenue with a maximum score of 4.5; (5) Expense management
per unit--Expenses by category divided by total number of units with a
maximum score of 1.5; and (6) Net income (loss)--Net income (loss) for
the year compared to Expendable Fund Balance with a maximum score of
1.5.
Therefore, the maximum score a PHA may receive for its Financial
Condition is 30 points. In order to receive a passing score, on the
Financial Condition Indicator, a PHA must receive a score of at least
60 percent (60%), or 18 points of the 30 points available.
Why Did HUD Not Adopt a Risk Management Approach Using Two
Threshold Indicators on Cash Reserves and Assets Plus an Audit? Two
commenters asked why HUD did not rely on a risk management approach
using two threshold indicators on cash reserves and assets plus an
audit.
HUD believes that additional indicators were needed to ensure a
full and fair assessment of PHAs' financial condition and provide a
basis to compare each PHA to its peer group. While the two-tiered
approach will not be used, point availability is weighted toward the
first two indicators since Liquidity and Viability are significant
predictors of the overall financial health of a PHA. The remaining four
financial indicators provide additional assessment capability when
determining the total financial health of a PHA. If a PHA receives high
scores on the first two indicators, it is likely that it will receive
high marks on the remaining four.
What Additional Components Will Be Used To Identify Waste, Fraud or
Abuse. Commenters asked what ``flags'' HUD will use to determine when
the ``possibility'' of waste, fraud, or abuse exists, and what types of
additional components may be used.
As part of the analysis of the financial health of a PHA including
an assessment of the potential or actual waste, fraud or abuse at a
PHA, HUD will look to the Audit Opinion to provide an additional basis
for accepting or adjusting financial indicator scores. The following is
a summary of the types of audit opinions and the number of total
financial points that will be deducted if a PHA receives such an audit
opinion from its IPA:
------------------------------------------------------------------------
Type of flag Score
-------------------------------------------------------------------\1\--
Clean opinion................................................. 0
No audit opinion.............................................. 30
Adverse opinion............................................... 30
Disclaimer of opinion......................................... 30
Qualified opinion............................................. (\2\)
Going concern opinion......................................... (\2\)
Material weakness in internal control......................... (\2\)
Reportable condition.......................................... (\2\)
Findings of non-compliance and/or questioned costs............ (\2\)
Indicator outlier analyses.................................... (\2\)
------------------------------------------------------------------------
\1\ Financial Condition points that will be deducted from the PHA's
overall financial score.
\2\ If points remain, further deductions can be made dependent upon the
specific nature of the information reported under this flag.
Final Rule Should Clarify That if PHA Scores Very High on Liquidity
Measure, It Will Not Be Assessed on Remaining Components. A few
commenters suggested that if a PHA scores very high on the liquidity
measure [Current Ratio and Number of Months Expendable Fund Balance],
the PHA should not have to be assessed on the remaining [components of
PHAS Indicator #2].
HUD, the industry and those PHAs who participated in the
development of this proposed rule strongly preferred the use of all six
financial indicators. HUD strongly believes each PHA must be scored on
all financial indicators to ensure a full and fair assessment of PHAs'
financial condition and provide a basis to compare each PHA to its peer
group.
To Calculate Current Ratio, HUD Needs to Better Define Current
Assets and Liabilities. Other commenters stated that to calculate the
current ratio, HUD will need to better define current assets and
current liabilities. They noted that the current HUD chart of accounts
does not define these terms nor does it provide the framework to
categorize assets or liabilities as current or long term.
The adjusted current ratio is designed to show available
unrestricted and unreserved current assets divided by the unrestricted
current liabilities. The HUD Chart of Accounts has been revised to
reflect new accounts that will help PHA to account for the information
needed to perform this calculation. The Financial Data Schedule has
also been revised so this information will be reported to HUD through
electronic submission.
It Is Not Clear What HUD Means by Expendable Fund Balance; and How
Does HUD Propose to Calculate ``Expendable'' Fund Balance in an
Enterprise Fund. A few commenters stated that it is not clear if this
fund
[[Page 46608]]
balance would be equivalent to cash reserve (just cash and liquid
investments) or Operating reserve (i.e., working capital). Other
commenter noted that the terminology ``expendable'' fund balance
generally refers to the undesignated portion of unreserved fund balance
in governmental funds such as the general fund or special revenue
funds. They stated that under GAAP, most PHAs would likely classify
their public housing programs as enterprise funds where fund balance or
fund equity is generally comprised of retained earnings and contributed
capital. They asked how HUD proposes to calculate the ``expendable''
fund balance in an enterprise fund.
The expendable fund balance is the unreserved and undesignated
portion of fund balance (or retained earnings) representing expendable
available financial resources. Under both the Governmental Method and
the Enterprise Method of reporting, the expendable fund balance
(expendable retained earnings for the Enterprise Method) simplistically
refers to funds that are unrestricted and unreserved. Expendable fund
balance is what is left after subtracting all other fund balances that
are either reserved or restricted.
The expendable fund balance is the unreserved and undesignated
portion of the fund balance (or retained earnings) representing
expendable available financial resources. Under both the Governmental
Method and the Enterprise Method of reporting, the expendable fund
balance (expendable retained earnings for the Enterprise Method)
simplistically refers to funds that are undesignated and unreserved.
Expendable fund balance is what is left after subtracting all other
fund balances that are either reserved or restricted.
What Does HUD Mean by Liquidity Measurement and Range of Liquidity.
A few commenters asked what is meant by the liquidity measurement and
noted that there was no mention of a range in regard to liquidity in
the proposed rule.
Liquidity measurement refers to a PHAs ability to cover its near
term obligations. It will be measured by using the adjusted current
ratio that is designed to show available unrestricted and unreserved
current assets divided by the unrestricted current liabilities. The HUD
Chart of Accounts has been revised to reflect new accounts that will
help PHAs to account for the information needed to perform this
calculation. The Financial Data Schedule has also been revised so this
information will be reported to HUD through electronic submission. The
range is not a single amount or score, but a tolerance between
acceptable scores as grouped among peers (i.e., PHAs located within the
same geographical region having similar characteristics).
The Days Receivable Outstanding Component Is Not a Good Indicator
of Financial Health--Does It Take Into Account Notice and Grievance
Rights. Some commenters stated that this component [Days Receivable
Outstanding] will require extensive tracking and is not a good
indicator of financial health. They stated that outstanding receivables
are a result of various factors, some of which an agency cannot
control, and that adding this factor creates another area where
justification for bad results can affect the score. The commenter
stated that if an organization is in good financial health, other
indicators will clearly and easily point this out, and therefore this
indicator should not be included. Another commenter asked whether this
component takes into account the regulatory requirements for notice
provisions, grievance rights of residents, and the judicial process?
HUD left ``rents uncollected'' due to statutory requirements.
However, the old measure is not objectively measurable. It was left to
allow PHAs to be measured on a basis each was familiar with. The ``days
receivable outstanding'' ratio measures the PHA's ability to collect
its tenant receivables in a timely fashion. It is HUD's strong belief
that this information is already available to each PHA (or at the
minimum, should be available). Since the calculation is done ``Gross''
each PHA should have the ability to control the days receivable
outstanding. Any tenant receivable that ages beyond a certain number of
days past its due date has to be questioned as to its collectibility.
Discard Tenants Receivable Component; What Is Wrong With Existing
Receivables Measures. Some commenters suggested that HUD discard the
``tenants receivables'' component because it would reinstate the
objectionable ``Tenant Account Receivables (TARS)'' indicator from the
original PHMAP rule. They said that in order to comply with the current
PHMAP requirements, PHAs had to rewrite computer software that would
distinguish between the different types of receivables (rents,
maintenance charges, other charges, etc.). The commenters asked what
was wrong with the existing measure?
Under GAAP, the collectible portion of each component within A/R
must be determined. Each PHA should develop an allowance that will
permit that entity to reflect only the collectible portion of A/R.
Tracking days under GAAP is an important measurement tool to estimate
the collectible portion of the A/R that should be reported.
Certain State Laws Concerning Tenant Rents May Penalize PHAs under
Financial Indicators. One commenter stated that housing authorities in
North Carolina are required by State law to apply tenant payments to
any rent balance before applying them to other charges that may be
older; this leaves old balances on the tenant's accounts; and would
penalize such a PHA when other authorities do not have the same legal
requirements. The commenter stated that it is likely other States have
other restrictions that would affect the PHAs in those areas.
If PHAs in North Carolina are required by State law to apply tenant
payments to any rent balance before applying them to other charges that
may be older thereby leaving old balances on the tenant's accounts,
those PHAs may not be accounting for the tenant payments in conformity
with GAAP. HUD suggests that those PHAs check with their IPA for
additional guidance.
There Are Several Problems With Vacancy Loss Component. Several
commenters stated there were problems with the vacancy loss component.
Their comments included the following: it is impossible to define
potential rent or compute vacancy loss; vacancy loss has questionable
usefulness in public housing--given PHAs' reliance on operating
subsidies which continue through normal vacant unit turnover, ``lost
rental income'' or ``vacancy loss'' are not useful measures of an
agency's financial health; how is potential rent calculated in a system
where rent payable is a function of income and not based on unit size,
location, condition or other typical market factors; vacancy loss
should be eliminated, because rent is unknown until calculated for a
specific unit with a specific tenant; PHAs that encourage families to
become self-sufficient and move up to private housing may suffer
multiple deductions to their PHAS score under two indicators [vacancy
loss at Sec. 902.35 (formerly Sec. 901.35) and vacancy rate and
turnaround time at Sec. 902.43 (formerly Sec. 901.43)]; the inclusion
of the vacancy loss component under financial condition appears
redundant--vacancy statistics are already measured under ``management
operations,'' and should remain there; and the vacancy loss indicator
represents the loss of potential rent due to vacancy, but the proposed
rule does not indicate how potential rent loss will be calculated. With
respect to this last comment, the
[[Page 46609]]
commenter stated that vacancy losses are commonly used in rental
projects using contract rents where the amount of loss revenue can be
easily calculated. Public housing projects do not use contract rents
because rents are based on tenant incomes.
With respect to these comments, HUD points out that the vacancy
statistics measured under ``Management Operations'' will look at a
formula to assess the reduction in the number of units that are vacant.
The unit turnaround time measures the annual average of the total
number of turnaround days between the move-out date and the date a new
lease takes effect. Vacancy loss measures the loss of potential rental
income due to vacancy. The calculation for this indicator is potential
rent divided by gross potential rent. The gross potential rent is
estimated using the projected average rent contribution that is
currently used to calculate operating subsidy through the Performance
Funding System. HUD believes that is important to measure whether the
PHA is both meeting its mission to house low income families while
maximizing revenue obtained from rent.
Comments on Expense Management Component. There were also several
comments and questions on the expense management component. Comments
included: the proposed rule does not elaborate as to what key expenses
will be analyzed or what standard they will be compared to such as
budget, prior years or an industry standard; if an organization manages
its finances well, the financial statements (which produce the first
two indicators) will show this, and therefore how the funds are spent
and classified should be left to the organization. With respect to the
last comment, the commenter stated that money spent wisely will show in
the financial statements and the physical condition of the property;
therefore, this indicator should not be included.
HUD believes the use of expense ratios benchmarked against peers of
similar size and programs is a valuable measure of efficiency. It
permits HUD and PHAs to analyze information. The goal is to determine
how efficient a PHA is, expense category by expense category.
The calculation is made by assessing the dollars spent per each
unit for certain expense categories. The actual expense categories that
will be measured are: administrative salaries; auditing fees; outside
management fees; compensated absences; employee benefit contribution;
tenant services; water; electricity; gas; fuel; utility labor and
other; ordinary maintenance and operations; protective services;
insurance; bad debt; extraordinary maintenance; other operating
expenditures; HAP payments; and fraud loss.
Comments on Energy Consumption Component. There were also several
comments on the energy consumption component and these included the
following: the energy consumption component should be measured only if
a PHA fails a reserve-related component; what are the details of this
component; and there is a point of diminishing returns below which it
is not cost effective to do additional conservation measures--if all
possible cost-effective measures have already been implemented, the PHA
should receive a high rating for this component.
PHAs that have taken the initiative to complete cost effective
energy conservation measures should compare favorably to their peers of
similar size and region when measured by expense ratios.
Comments on Net Income or Loss Divided by the Expendable Fund
Balance Component. Comments on this component included the following:
the proposed rule states that the net income/loss divided by expendable
fund balance indicator measures how the year's operations have affected
the PHA's viability, however, it fails to adequately describe why or
how this ratio hopes to accomplish that stated goal; exclude capital
and nonroutine expenditures from this component; and the proposed
factor of ``Net Income or Loss divided by the Expendable Fund Balance''
is not a valid or useful measure of a PHA's viability and should be
eliminated--there are very valid long term planning implications
relative to the fluctuations in expendable fund balance, such as
accumulating dollars for a major capital activity over several years
and then the single year when the event occurs, a major reduction of
expendable fund balance shows up. The commenter of this last comment
stated that if this ratio is to be used, it should be modified to
reflect the results of each of the most recent three years.
Net income (loss) provides a measure of how the year's operations
have affected the PHA's viability. It is intended to show how well the
PHA has performed this year compared to its peers. The calculation will
be made against the Expendable Fund Balance (or retained earnings)
which is the unrestricted and unreserved portion of the total fund
balance.
Comments on Additional Components That May Be Added to Indicator. A
few commenters stated that they were concerned about the authorization
to REAC to create additional components and new components should be
added after opportunity for notice and public comment. Other commenters
asked what determines when additional criteria will come into
consideration. Their comments are as follows: any further component, as
well as any revisions to components should only be added following
appropriate public notice and opportunity for comment; is there a set
criterion for additional fraud detection components or will it be
customized to the PHA; what determines when the additional criteria
will come into consideration; and additional components may be used to
detect fraud and may be used to provide a PHA with benchmark
information to allow the PHA to measure its own performance against its
peers but how are peers determined--by size, type of housing stock, age
of the buildings?
HUD understands the concerns about additional components. As part
of the analysis of the financial health of a PHA including an
assessment of the potential or actual waste, fraud or abuse at a PHA,
HUD will look to the Audit Opinion to provide an additional basis for
accepting or adjusting financial indicator scores. Please see the
discussion concerning what additional components will be used to
identify waste, fraud or abuse, above, for a summary of the types of
audit opinions and the number of total financial points that will be
deducted if a PHA receives such an audit opinion from its IPA. The
determination of PHA peers is done by comparing those PHAs with like
programs that are similar in size (number of units).
E. Comments on Subpart D--PHAS Indicator #3: Management Operations
HUD Should Allow PHAs to Develop Own Management Performance
Standards. A few commenters stated that HUD should allow PHAs to
develop their own performance standards, based on local market
conditions that can be documented, verifiable, and subject to HUD
audit.
Section 6(j) of the U.S. Housing Act of 1937 establishes a method
that uniformly assesses the management performance of PHAs. Not only
does the PHAS assess a PHA's management performance that will be
verified as part of the independent auditor's audit, it also provides
for an independent third party assessment of the physical condition of
a PHA's housing stock, independent third party assessment of financial
operations, and a resident service and satisfaction assessment. REAC
was created to effectively and fairly measure a PHA's performance
[[Page 46610]]
based on standards that are objective, uniform and verifiable.
Standards based on local market conditions would not provide standards
that are as uniform as possible.
How Will Management Operations Performance Standards be Weighted
and Scored? Several commenters asked how each management indicator be
weighted and scored? The commenters also asked for further information
about the management indicators and suggested that the final rule
should state that the PHMAP methodology, to the extent consistent with
PHAS, will be preserved. Another commenter asked whether the
definitions, exclusions and exemptions based on the existing PHMAP rule
carryover into the new rule for this or any other PHAS indicator.
HUD notes that a listing of the approximate weights/points for each
indicator, sub-indicator and component was provided earlier in this
preamble. The approximate relative weights/points for the PHAS
management operations indicator are listed below. Of the total 100
points available for a PHAS score, a PHA may receive up to 30 points
based on Indicator #3, Management Operations.
Approximate Relative Weights/Points
------------------------------------------------------------------------
Approx.
Sub-Indicator/Component Points
------------------------------------------------------------------------
Vacancy Rate/Progress to Reduce............................. 8.0
Vacancy Rate............................................ (4.0)
Unit Turnaround Time.................................... (4.0)
Modernization............................................... 6.0
Unexpended Funds........................................ (1.0)
Timeliness of Fund Obligation........................... (1.5.)
Contract Administration................................. (1.0)
Quality of the Physical Work............................ (2.0)
Budget Controls......................................... (0.5)
Rents Uncollected........................................... 4.0
Work Orders................................................. 4.0
Emergency Work Orders................................... (2.0)
Non-Emergency Work Orders............................... (2.0)
Inspection of Units and Systems............................. 4.0
Inspection of Units..................................... (2.0)
Inspection of Systems................................... (2.0)
Security.................................................... 4.0
Tracking/Rpt. Crime-Related Problems.................... (1.0)
Screening of Applicants................................. (1.0)
Lease Enforcement....................................... (1.0)
Grant Program Goals..................................... (1.0)
------------------------------------------------------------------------
The PHMAP methodology, to the extent consistent with PHAS, will be
preserved. The definitions and exemptions in the current PHMAP rule
will also apply to the PHAS. The need for modifications and exclusions
has been significantly diminished in the PHAS because all of the PHAS
indicators, sub-indicators and components will be independently
verified by the third party independent auditor. Therefore,
modifications and exclusions have been eliminated from the PHAS rule. A
PHA's certification will be transmitted electronically to the REAC via
the internet.
What Does ``Independent Verification'' Mean? A few commenters asked
what is meant by the reference to ``independent verification'' and if
the reference is to an auditor, what are the guidelines.
The independent auditor will verify all of the sub-indicators and
components under the PHAS Indicator #3. The audit guidelines are as
published in the OMB A-133 Compliance Supplement, dated May 1998. The
PIH compliance supplement is in the process of being revised to reflect
the PHAS.
Comments on ``Vacancy Rate/Unit Turn-around'' Component. There were
several comments on the vacancy component of the Management Operations
Indicator. One commenter stated that unit turn-around should be removed
from PHAS. Another commenter stated that because vacancies are included
in both Indicator #2, Financial Condition, and Indicator #3, Management
Operations, this creates a level of confusion. The commenter asked
whether vacancies is a financial concern or a management concern?
Another commenter stated that the definition of vacancy rate needs to
make clear that units off line are excluded. Other commenters stated
that the rule does not state how vacancy/unit turnaround will be
calculated. They noted that vacancy/unit turn-around varies with each
tenant, and this hurts a PHA's score particularly if the previous
tenant did serious damage to the unit. A couple of commenters remarked
that the vacancy and unit turn-around indicators conflict with the
lease enforcement and ``get rid of the criminals'' policies. They
stated that PHAs should have at least one year from the date of
eviction to reoccupy the unit without being penalized. Another
commenter stated that there should be a management indicator for lease
enforcement, and one questioned whether adjustments would be made for
the ``One Strike and You're Out'' provisions that are currently in the
PHMAP.
With respect to these comments, HUD notes that because unit
turnaround time is a statutory factor, the Department cannot
arbitrarily drop the assessment of this factor. In order for unit
turnaround time to be eliminated, a change would have to be made to the
1937 Act at section 6(j). On the issue of possible duplicativeness of
this component, HUD points out that PHAS Indicator #2, Financial
Condition, analyzes vacancy loss, e.g., the amount of income lost due
to units being vacant. Indicator #3, Management Operations, measures
the rate of vacancies over the entire year being assessed. The
definition of vacancy rate is the same as in the current PHMAP rule,
e.g., the total actual vacancy days divided by the total days available
for occupancy. The exemptions that apply to the current PHMAP will also
apply to the PHAS. Vacancy rate and unit turnaround will be calculated
the same as in the current PHMAP rule. A PHA will be required to
certify to unit turnaround time, but it will not be scored on unit
turnaround time unless it has less than a grade of C as stated in the
current PHMAP rule.
Although unit turnaround time may vary with each resident, a PHA
should be able to establish an average unit turnaround time that does
not exceed 30 calendar days, which is the norm. Over the fiscal year
being assessed, the cases of severe resident damage to a unit should be
minimized through the provision of resident orientation, ongoing
housekeeping education, prompt eviction due to lease violations and
annual inspection of units. In addition, unit turnaround time is the
average time it took for all units turned around during the fiscal year
being assessed.
On the matter of lease enforcement, HUD believes that one year from
the date of eviction to reoccupy a unit is an unreasonable amount of
time. The current unit turnaround time component provides for an
average of 30 calendar days between the time when a unit is vacated and
a new lease takes effect for a grade of C. A PHA should be able to turn
a vacant unit around, have a sufficient waiting list of applicants, and
sufficient screening and intake procedures to enable it to lease a unit
within 30 calendar days.
A management sub-indicator for lease enforcement will be considered
as part of possible future changes to the PHAS. In order to make the
transition from the PHMAP to the PHAS, it was determined to make as few
changes as possible between the current PHMAP and the management
operations indicator under the PHAS, but this is a valid comment, and
HUD will consider this issue.
Comments on ``Modernization'' Component. Comments on this component
are as follows. A few commenters stated that in assessing
modernization, quality of physical work should be linked to the broad
physical inspection conducted under the
[[Page 46611]]
physical condition indicator, and contract administration should be
measured during the independent audit. They asked will the ``quality of
physical work'' in modernization be done through the physical
inspection. Other commenters stated that the physical condition of
sites, rather than timeliness of expending modernization funds, should
be the measure used to assess success of modernization. A few
commenters objected to this indicator if HUD intends to expand the
application of the modernization sub-indicator to the HOPE VI and
Vacancy Reduction programs. The commenters stated that these programs
are not universal but targeted to individual PHA needs and situations;
and that the HOPE VI assistance program is a major program, distinct
and separate from both the Comprehensive Grant Program and
Comprehensive Improvement Assistance Program, which should be reviewed
and rated separately under its own indicator.
HUD's response to these questions and concerns is as follows. The
quality of the physical work will be examined as part of the annual
modernization review of PHAs performed by the HUB/Program Center, with
reports issued in accordance with the current PHMAP modernization
indicator. PHAs will certify to responses that encompass all five
modernization components, and a PHA's certification will be verified by
the independent auditor's audit.
All five of the components under sub-indicator #2, modernization,
are statutory; therefore, PHAs will be required to certify to this
indicator under the PHAS. Sub-indicator #2, modernization, will examine
the HOPE VI and Vacancy Reduction Program under components #3, #4 and
#5 as in the current PHMAP program.
Comments on ``Rents Uncollected'' Component. Comments on this
component are as follows. A few commenters stated that ``rents
uncollected'' should be addressed in the Financial Indicator and moved
from the Management Indicator. Other commenters stated that suspense
accounts (accounts pending write off) should be deducted from rents
uncollected. Some commenters stated the standard allowance for bad
debts among many industries collecting money from a wide cross-section
of incomes is 2%, and it does not seem reasonable to expect the same
standard from PHAs that are working with the nation's poorest
population as one would expect from institutions that are working with
a cross-section of income levels.
Rents uncollected is one of the three basic components of
management operations; the other two are vacancies and the condition of
the units. Since Indicator #3 examines management operations, it is
appropriate that rents uncollected be examined under this indicator.
Rents uncollected will be calculated the same as in the current PHMAP
rule. In order to make the transition from the PHMAP to the PHAS, it
was determined to make as few changes as possible between the current
PHMAP and the management operations indicator under the PHAS. HUD
believes that PHAs are in the business of providing housing, keeping
the units in good repair, and collecting rents due. Although PHAs are
working with the nation's poorest population, the rent due by residents
is based on a percentage of the resident's adjusted income. The fact
that a resident's rent is based on a percentage of the adjusted income
total housing cost in and of itself does consider the public housing
population.
Comments on ``Work Orders'' Component. There were comments on this
component. One commenter stated that evaluation of nonemergency work
orders should be dropped. Another commenter stated that the time
allowed to complete non-emergency work orders is far too lax. The
commenter noted that the current PHMAP allows for up to 25 days to
qualify for an ``A'' and this standard should be less than 5 days in
order to receive an ``A.''
HUD believes that the response time to non-emergency work orders
should be measured under the PHAS, and calculated in the same way as it
is measured under the current PHMAP. HUD will consider changes to this
sub-indicator as possible future changes to the PHAS. In order to make
the transition from the PHMAP to the PHAS, it was determined to make as
few changes as possible between the current PHMAP and the management
operations indicator under the PHAS.
Comments on ``Annual Inspection of Units'' Component. Comments on
this component included the following. A few commenters stated that the
new physical condition standards conflict with the traditional annual
inspection requirement. They stated that HUD requires PHAs to use HUD's
proposed new uniform physical condition standards in performing annual
inspections of units and systems, but this is a deviation from HUD's
statements in the preamble to the proposed rule on Uniform Physical
Condition Standards that the new physical inspection standards would
not pre-empt the existing PHA inspection procedures nor the investment
PHAs may have made in computer hardware and software to carry out those
procedures. HUD should permit PHAS to use their existing inspection
systems. Another commenter stated that the inspection indicator should
be dropped because this indicator will be measured under the PHAS
Indicator #1, Physical Condition. Another commenter asked whether the
management inspection was a physical inspection, or HQS inspection?
HUD has no objection if a PHA determines that use of the HUD
software for its own purposes is in its best interests. HUD encourages
PHAs to use its inspection software when conducting their own annual
inspections in order to promote uniformity in inspections, but HUD is
not proposing at this time to require PHAs to use HUD's inspection
software for two reasons: (1) PHAs may, as a part of their operating
procedures, combine other inspections (e.g., housekeeping, preventive
maintenance, etc.) with their annual inspection of units; and (2) PHAs
may have existing software for operations that may be incompatible with
the HUD software. It would be uneconomical and unreasonable to require
PHAs to change their existing systems. The REAC will inspect using the
HUD software, and PHAS indicator #3 requires a PHA's inspection to
utilize the HUD uniform physical inspection standards set forth in
subpart B of this part.
HUD believes that the inclusion of this sub-indicator in the PHAS
is very important because the PHAS indicator #1 will inspect a
statistically valid sample of units and systems, whereas this sub-
indicator requires PHAs to inspect and initiate repairs on all occupied
units and all systems on an annual basis. This inspection is a
management assessment of a PHA's ability to determine the maintenance
and modernization needs of its developments. This sub-indicator is
assessed by measuring the extent to which a PHA performed a physical
inspection of 100% of the units and systems within each development. A
PHA must use the HUD uniform physical inspection standards set forth in
subpart B of this part. The HQS is no longer used as a standard for
inspection of public housing subject to this part.
Comment on ``Security'' Component--Clarify Nature of Security
Component. A few commenters stated that the security indicator should
not evaluate the PHA's relationship with police or grant performance,
and the name should be changed from Security to Applicant Screening and
Lease Enforcement.
HUD has determined that changes to this sub-indicator will be
considered as
[[Page 46612]]
possible future changes to the PHAS. In order to make the transition
from the PHMAP to the PHAS, it was determined to make as few changes as
possible between the current PHMAP and the management operations
indicator under the PHAS.
Resident Services and Satisfaction Should Not Be a Separate PHAS
Indicator but a Component of Management Indicator. Several commenters
stated that the elimination of PHMAP Indicator #7, Resident Services
and Community Building is supported. Other commenters stated that if
``Resident Satisfaction'' is to be a rating factor, it should be
included as a component of this indicator, not elevated to the status
of a separate indicator.
Because residents are stakeholders in the PHAS process, it was
determined that resident service and satisfaction should be elevated to
the status of a separate indicator. The opinions of the residents that
live in public housing should be considered in the overall operation of
a PHA.
F. Comments on Subpart E--PHAS Indicator #4 Resident Service and
Satisfaction
Surveys Should Not Be Independent Indicator, but a Component of
Management Indicator. Some commenters wrote in opposition to the
proposed survey requirement. Two of the commenters stated that, if used
at all, this indicator should be included as a component of PHAs
Indicator #3 (Management Operations), and only as a pass/fail
requirement that each PHA employ some form of resident satisfaction
survey on a regular basis.
HUD has determined that residents' opinions of their living
conditions are very important to the PHAS assessment process.
Therefore, HUD has decided that the resident service and satisfaction
indicator will be separate. HUD has designed an initial survey
instrument for completion by a statistically valid sample of residents
selected by HUD, and HUD anticipates to begin testing the survey
instrument in the near future.
Small PHAs Should be Excluded from Indicator #4. Two commenters
wrote that PHAS indicator #4 should exclude small housing authorities
from issues concerning resident organizations and resident initiative
programs, as PHMAP does.
HUD has determined that due to the importance of residents'
opinions of their living conditions, small housing authorities will not
be excluded from the assessment process, including the assessment of
resident service and satisfaction.
PHAs Should be Allowed to Develop Own Surveys. Two commenters
recommended that the rule be amended to permit PHAs to design their own
resident surveys. One commenter remarked that local PHAs could do a
better job designing surveys that take regional and demographic factors
into account. The other commenter wrote that PHAs should be allowed to
develop surveys in accordance with HUD-established guidelines.
The REAC is responsible for the development of a uniform standard
assessment of all PHAs and a Customer Satisfaction Survey to assess
residents' living conditions. HUD allowing PHAs to develop individual
surveys would create different tools for measuring the physical,
financial and management condition of properties, as well as resident
satisfaction of living conditions. HUD has determined that there must
be a standard measurement tool to compare and score the results of the
survey.
Surveys Should Not be Conducted by PHAs. Several commenters
objected to PHA-administered resident surveys. Several of the
commenters wrote that there is often a lack of trust and forthrightness
between a PHA and residents. These commenters remarked that a survey
administered by a local or regional resident organization, or an
independently administered survey, would be preferable. Another
commenter wrote that fear of retaliation will prevent honest answers
from being given to a survey administered by the PHA. One commenter
suggested that the surveys should be administered and monitored by HUD.
HUD has determined that PHAs will manage the Customer Satisfaction
Survey. A resident against whom a PHA is taking retaliation should
report such action to HUD's Inspector General Hotline at 1-(800)-347-
3735.
Good Management Practices May Produce Unfavorable Ratings. Several
commenters remarked that good management practices, such as evictions
for failure to pay rent or abide by rules and regulations, may not
always translate into popular management practices. These commenters
wrote that high-performing PHAs should not be singled out negatively
under this indicator for aggressive management. The commenters
recommended that such factors should be taken into consideration in
computing the score for this indicator.
HUD agrees that good management practices, such as lease
enforcement, may not always be viewed by those being evicted with
favor. Therefore, this issue will be considered during the refinement
of the survey's questions.
Comments on Sample of Residents to Be Surveyed. There were several
comments on the sample of residents. Several commenters remarked that
the proposed rule did not state what constitutes a statistically
significant sample of residents. Some of the commenters recommended
that the rule require that survey samples be obtained from all
developments in a PHA's jurisdiction. One commenter suggested that the
resident samples include a cross-section of tenants that reflects
racial, ethnic, economic, age, and length of tenancy characteristics.
Another commenter remarked that to conduct a truly valid survey, it is
essential that the respondents be pre-identified as actual leaseholders
in good standing. Five commenters wrote that PHAs should not be
penalized if only a small number of residents respond to the surveys.
One of these commenters wrote that a lack of response could indicate
that the residents think the PHA is doing a good job. This commenter
worried that only dissatisfied tenants might complete the survey. One
commenter questioned how resident samples would be drawn in areas (such
as Alaska), where a PHA's projects are widely dispersed geographically.
The commenter worried about the costs involved if each project must be
sampled.
With respect to these comments, HUD responds as follows. HUD has
not finalized its decision to use a response rate for measurement at
this time. HUD will use a standard proven survey methodology to improve
PHAs' response rates. This includes, but is not limited to, providing
technical assistance to PHAs by preparing the survey in several
languages, providing recommendations to promote the survey process by
distributing lead letters, bulletin board communications, and resident
meetings.
HUD is in the process of testing the various collection and
sampling methods. The sampling process includes testing the survey in a
statistically valid sample of developments selected by HUD. The widely
dispersed geographical units will be considered during the selection
process.
Scoring System Is Vague. Many commenters wrote that the proposed
rule was unclear regarding how the resident services and satisfaction
component would be scored and weighted. One of the commenters asked
whether adjustments would be made for the PHA's size, population
density, and social and economic environment.
[[Page 46613]]
HUD has determined that the final PHAS rule will only score the
first two components as published in the proposed PHAS rule (survey
results; and level of implementation/follow-up action process), with a
value of five points each. The third component, verification that the
survey process was managed in a manner consistent with guidance
provided by HUD, will not be scored, but is a threshold requirement. A
PHA will not receive any points under this indicator if the survey
process is not managed in a manner consistent with the guidance
provided by HUD or the survey results are determined to be altered.
Section 901.53 is revised accordingly.
Concerns about Objectivity of Surveys. Several commenters expressed
concern about the objectivity of the resident surveys. Four of the
commenters remarked that in an assessment system designed to be
objective, this indicator appears to be entirely subjective, since the
rating will be based on resident evaluation or opinion. Another
commenter asked whether the reasonableness of the resident comments
will be evaluated.
The measurement of residents' living conditions is measuring how
residents perceive the performance of management providing the housing
services. The opinions of the residents are important. There is an
assumption made that if the majority of those surveyed identify the
same problem, the problem is most likely a factual problem. The
residents' perception plays a key role in responding to the survey
questions. However, HUD will not rely on the residents' response alone,
but compare it to the other assessment indicators under the PHAS to
identify and address other issues.
Data Collection and Verification of Survey Data. Several commenters
submitted comments on collection and verification of survey data. Five
of the commenters asked about the methods HUD will use to verify the
data. Two of the commenters inquired about the format the PHAs would be
required to use to maintain data. Another commenter asked that HUD
provide greater specificity regarding the records PHAs must maintain to
demonstrate that the surveys were distributed and collected properly.
HUD is in the process of testing the various survey data collection
methods. A methodology for collecting, verifying and maintaining the
survey data will be finalized after the testing of the survey
instrument.
Conditions Outside PHA Control. Several commenters wrote that
several of the areas to be covered by the survey are outside the
control of the PHA. Several of these comments focused on community
services provided by entities other than the PHA. For example, two of
the commenters remarked that a PHA does not control electric, gas, and
water/sewer service works. Other commenters wrote that the survey
should not include questions about the effectiveness of the local
police department or religious institutions. These commenters remarked
that PHA management should not be judged according to the resident's
trust of the local Police Department, or of other institutions not
controlled by the PHA. Some commenters wrote that there are several
aspects of public housing that residents are often dissatisfied with
that are beyond the control of the PHA, either due to HUD regulation,
prohibitive cost, or in conflict with higher priority needs of other
residents. Examples would include the lack of air conditioning in
individual units; the definition for rent not having more exclusions
from gross income; and the 30% of income formula for tenant payments.
HUD has determined to include questions that will not be scored but
used strictly for information purposes. However, HUD will make every
effort to finalize the questions within the survey instrument to
include elements that are the responsibility of the PHA.
Cost and Administrative Burden Issues. Several commenters expressed
concern about the costs and administrative burdens that would be faced
by PHAs in conducting the surveys. Two of the commenters wrote that the
survey requirement constituted an unfunded mandate imposed on PHAs.
Several commenters recommended that HUD reimburse PHAs for the costs of
conducting the resident surveys. Four commenters remarked that this
indicator amounts to another unfunded mandate on PHAs and further
erodes the financial capability of PHAs to carry out day-to-day
operations with limited staff and resources.
HUD has determined that if the survey process imposes a financial
burden on PHAs, HUD reserves the right to implement other cost-
effective methods for implementing the survey process.
Language and Educational Barriers May Affect Survey Results. Five
commenters expressed concern that language and educational barriers,
such as illiteracy, might skew the survey results. Three of the
commenters remarked that the survey would need to be translated to the
appropriate language for many residents. These commenters asked whether
HUD would supply the PHAs with translated surveys. One of the
commenters asked that the final rule provide greater specificity
regarding the conduct of surveys with non-English speaking residents
and persons with disabilities.
HUD has considered the language barrier concerns associated with
the survey process. At this time, HUD plans to offer the survey in at
least two languages. Other languages may be considered if a significant
portion of the population remains underrepresented by the selected
survey languages. HUD is seeking the highest possible response from the
selected population. This includes considering methods which will
alleviate potential obstacles to survey response.
Points for Resident Satisfaction Indicator Should Be Increased.
Many commenters recommended that the 10 points allocated for the
resident services and satisfaction indicator be increased. Those
commenters recommending specific point values, suggested that 20-25
points would be appropriate for this indicator.
HUD has determined that the 10 points allocated for this indicator
is appropriate at this time.
G. Comments on Subpart F--PHAS Scoring
Data Submission Deadlines Should be Extended. Three commenters
suggested that HUD extend the 60-day deadline for submission of data
set forth in proposed Sec. 901.60 (now Sec. 902.60). One of the
commenters wrote that HUD should be open to extenuating circumstances
if there is a delay in submitting data by the deadline.
HUD believes that the 60-day data submission deadline is
reasonable. Under the current PHMAP rule, PHAs are required to submit
certifications within 60 calendar days after fiscal year end (FYE) and
are required to submit year end financial statements within 45 calendar
days after FYE.
Process for Fair Housing Adjustments of Scores is Unclear. One
commenter wrote that HUD should provide additional details regarding
the conditions under which PHAS scores can be modified due to a fair
housing review. The commenter remarked that proposed Sec. 901.60(e)
(now Sec. 902.60(e)) refers to HUD's ability to change scores through
reviews and investigations by HUD's Office of Fair Housing and Equal
Opportunity (FHEO). The commenter wrote that in the absence of clear
criteria, the meaning of this provision is unclear. The commenter also
asked whether PHAs would be able to appeal
[[Page 46614]]
fair housing related adjustments of their PHAS scores.
Section 902.60(f)(3) refers to data included in the independent
audit report or reviews conducted by various HUD offices, including
FHEO, where management deficiencies are identified that were not
reflected in a PHA's certification submission. For purposes of
reassessment, the REAC will schedule a reinspection and/or acquire
audit services, if appropriate.
Questions Regarding Appeals Process. Many commenters raised
questions regarding the appeals process set forth in proposed
Sec. 901.69 (Sec. 902.69). Several of the commenters recommended that
HUD expand the appeals process to include all PHAs, and not just those
that are designated as ``troubled.'' One of these commenters wrote that
since PHAS will have a much more complex scoring system than PHMAP,
there may be greater room for error in the calculation of PHAS scores.
The commenter urged that all PHAs be granted the right to appeal PHAS
scores. Other commenters suggested that HUD expand the appeals process
to permit the appeal of the scores for the individual PHAS components,
as well as the overall PHAS score. Two other commenters, however, asked
how scores could be disputed or appealed given the vagueness of the
proposed rule. Another commenter recommended that the current PHMAP
appeals process be incorporated into PHAS. The commenter remarked that
appeals are particularly important for PHAs seeking non-HUD financing,
since lenders look at assessment scores.
Section 6(j) of the U.S. Housing Act of 1937 provides for the
petition for the removal of troubled and mod-troubled designations, and
the appeal of a denial of such petition. These appeals are preserved in
the PHAS. Since all of the indicators under the PHAS will be verified
by independent third parties, the requirement for an extensive appeal
process has been greatly diminished. As appropriate, and for purposes
of reassessment, the REAC will schedule a reinspection and/or acquire
audit services.
Board of Review Composition. There were a few comments on the
composition of the Board of Review. Two commenters wrote that the Board
of Review should include a resident representative. One commenter
recommended that, to insure the integrity of the appeals process, HUD
should create an independent PHAS Appeals Board, similar to HUD's Board
of Contract Appeals and Mortgagee Review Boards.
These comments are noted by HUD. As stated in the proposed PHAS
rule, the third member of the Board will be from such other office or
representative as the Secretary may designate (excluding, however,
representation from the TARCs).
PHAS Scores Should Be Provided to Residents. One commenter
recommended that HUD automatically provide all inspection results,
resident satisfaction surveys, and PHAS scores to all local resident
organizations, at the time they are made available to the PHAs.
The REAC will provide the results of the assessment of the four
PHAS indicators, as well as the overall PHAS score to PHAs. At that
time, the results of the PHAS assessment becomes public information and
will be available to all interested parties. In addition,
Sec. 902.63(d) requires a PHA to post a notice of its final score and
status in appropriate conspicuous and accessible locations in its
offices within two weeks of its final score and status.
PHAs Should Be Notified and Have Opportunity to Review Score Before
Issuance. One commenter wrote that prior to issuing and posting a PHA's
score, the grade and how it was arrived at should be reviewed with the
PHA. Another commenter remarked that the proposed rule did not seem to
include a provision regarding PHA notification of its PHAS score.
A PHA's final PHAS score will be issued by the REAC after
independent verification of all four indicators. As in the current
PHMAP rule, a PHA's PHAS score will be issued without prior review by
the PHA. Section 902.63(a) states that an overall PHAS score will be
issued by REAC for each PHA 60 to 90 days after the end of the PHA's
fiscal year.
Questions Regarding Designation Status. Several commenters raised
questions regarding designation status. One of these commenters asked
whether a PHA that scores below the threshold on any component would be
referred to a TARC. The commenter also asked whether a PHA that does
not receive a passing score on any PHAS indicator would be designated
as a troubled PHA. Another commenter wrote that the proposed rule did
not state whether the PHAS score would be a measure of the PHA's
absolute performance, or reflect the PHA's relative performance against
other PHAs. The commenter also asked whether PHAs would, for scoring
purposes, be divided by factors such as size, age and location. One
commenter expressed confusion regarding the definition of ``top
performer.'' The commenter asked whether top performers constitute the
top 10% of all PHAs, or PHAs with an overall PHAS score of 90% or
greater. One commenter expressed concern that the proposed rule would
``debase'' the troubled PHA designation. The commenter wrote that under
the proposed assessment system, a housing authority that scores below
60 percent on Indicators 1, 2, or 3 will receive a troubled designation
even if the overall score is well over 60. This commenter remarked that
this requirement would unfairly force many housing authorities to
become troubled. According to the commenter, this designation should be
an indication recognized by all that the housing authority has serious
problems. The commenter suggested that instead of receiving a troubled
designation, a PHA that scores above 60% overall but fails to achieve
60% on indicators 1, 2, or 3 should be referred to for technical
assistance rather than some form of punitive action. Another commenter
suggested that the rule should make compliance with fair housing laws
and regulations a prerequisite to designation as a high performer.
With respect to these comments, HUD notes that Sec. 902.67(a)(3)
states that a PHA that achieves a total PHAS score of less that 60%, or
achieves a score of less than 60% of the total points available under
PHAS indicators #1, #2 or #3 shall be designated as troubled, and
referred to the TARC as described in Sec. 902.75.
Under PHAS Indicators #1, #2 and #4, the PHAS score will reflect
the PHA's relative performance against other PHAs. Under indicator #3,
the PHAS score will be a measure of the PHA's absolute performance. As
in the current PHMAP rule, PHAs will not be divided by factors such as
size, age or location for scoring purposes.
The term ``top performer'' refers to a high performer PHA. To avoid
confusion, HUD has only used the term ``high performer'' in the final
rule.
HUD agrees that a PHA that scores below 60% under indicators #1, #2
and #3 has serious problems, and troubled designation is warranted.
Referral to the TARC should be viewed as a remedial action rather than
a punitive action. If a PHA is referred to the TARC, it will develop a
Recovery Plan and MOA in conjunction with the TARC, and receive intense
technical assistance to improve the physical condition of the
properties, the financial health of the agency, and/or overall
management operations.
On the fair housing issue, HUD has determined that changes to the
requirements for high performer designation will be considered as
possible future changes to the PHAS. In order to make the transition
from the
[[Page 46615]]
PHMAP to the PHAS, it was determined to make as few changes as possible
between the current PHMAP and the management operations indicator under
the PHAS.
H. Comments on Subpart G--PHAS Incentives and Remedies
Comments on Incentives for High Performers. Comments on this
subject (addressed in Sec. 902.71 of the final rule) are as follows:
the rule is vague on incentives; the incentives for high performers are
inadequate; how will PHAS incentives differ from PHMAP incentives;
physical condition inspections for high performers should be every
three years (less frequently than annual); bonus points should be
provided on all HUD competitive funding; permit PHAs to establish
development-based applicant waiting lists, subject to fair housing
requirements; continue the current relief measures provided to high
performers which include flexibility in the Comprehensive Grant program
(CGP) on maximum percentages allowed for management improvements and
administrative costs, and using CGP funds from troubled PHAs to
increase the funds available to PHAs that perform well; provide high
performers with the option to refuse to renew the lease for those
tenants who have lease violations (poor payment history, poor
housekeeping habits, evidence of tenant abuse to PHA property, history
of causing disturbances in the community, etc.); provide high
performers with significantly reduced reporting requirements; permit
high performers to use the equity from properties to leverage financing
for development purposes; and allow high performers to review income
and conduct re-certification on flexible schedules or every two years.
HUD agrees that incentives under the PHAS should be meaningful and
reflect high performer designation. HUD intends to consult further with
industry groups to develop such incentives.
Clarify Rule's Relationship to Moving to Work Initiative. Since
PHAs participating in HUD's Moving To Work (MTW) Initiative have
largely been assured freedom from HUD oversight, the applicability of
the proposed rule to them needs to be clarified. The incentives
proposed for high performers under the rule are the same as those under
MTW.
A PHA that is participating in the MTW incentive will receive less
oversight from HUD, as will those PHAs that are high performers but not
participating in the MTW initiative.
Field Office Discretion to Impose Program Requirement Waived by
REAC Should Be Eliminated. A few commenters objected to the provision
in Secs. 902.67(b) and 902.71(d) that would accord the field office the
discretion to impose on a PHA any program requirement that had been
waived by REAC as a high-performer incentive. The rule should not
provide the field office any mechanism to achieve a back-door
nullification of the PHAS process or results.
HUD agrees with this comment, and these sections have been removed
from the final PHAS rule.
Comments on Referral to an Area/HUB Program Center. Commenters
offered the following comments on the provisions of Sec. 902.73--
Referral to an Area HUB/Program Center: what uniform criteria will HUD
use to determine which ``standard'' agencies will be required to submit
improvement plans? This is vague. HUD should define the deficiencies
and make sure they will be applied consistently across the HUBs; where
does the authority and expertise lie in the HUBs to make these
determinations; is there a link to Central Office PIH; are HUBs
reporting to HUD Headquarters, to REAC, or somewhere else; and will
HUBs be assigned the task of deciding what PHAs will file Improvement
Plans. Another commenter stated that a standard PHA should not be
required to submit a corrective action plan for any indicator or
component for which it receives a passing score. One commenter stated
that the requirement for ``standard performers'' to submit an
improvement plan should be based solely on the PHAS scores.
To address these concerns, HUD offers the following. The
requirement at Sec. 902.73(a) (Sec. 901.73(a) in the proposed rule)
states that a PHA that receives a total PHAS score of less than 70% but
not less than 60% shall be required to submit an Improvement Plan to
eliminate deficiencies in the PHA's performance. This requirement is
similar to the current PHMAP rule which requires an Improvement Plan
for any indicator that scored a grade of F. The requirement at
Sec. 902.73(b)(2) states that the HUD/Program Center may require, on a
risk management basis, a standard performer PHA with a score of not
less than 70% to submit within 30 days after receipt of its PHAS score
an Improvement Plan. This requirement is similar to the current PHMAP
rule which states that a Field Office may require, on a risk management
basis, a PHA to submit an Improvement Plan for each indicator that a
PHA scored a grade D or E.
The intent of this language in both the PHMAP and PHAS rules is for
HUD and PHAs to be proactive regarding potential problem areas, and for
HUD to provide technical assistance to a PHA before troubled
designation is assigned. Since the local Office has the most frequent
contact with the PHAs under its jurisdiction, it is in the best
position to make such determinations.
A deficiency is defined in Sec. 902.7 as any PHAS score below 60%
of the available points in any indicator or component. This definition
has been revised in this final rule to read: any PHAS score below 60%
of the available points in any indicator, sub-indicator or component.
HUB/Program Centers report to the Assistant Secretary for PIH. The
requirement to submit Improvement Plans is based solely on the PHAS
scores, e.g., on a PHA receiving a score of less than 70% but not less
than 60%. However, a HUB/Program Center may require, on a risk
management basis, a PHA with a score of not less than 70% to submit an
Improvement Plan.
Response Time to Correct Deficiencies Is Too Short. A few
commenters stated that the response time allowed for an agency to
correct any identified deficiency is too short.
HUD believes that 30 days is sufficient time for a PHA to submit an
Improvement Plan for the correction of identified deficiencies. Since
the deficiencies would have been identified by the PHAS assessment, a
PHA should be able to develop a plan to correct identified deficiencies
within 30 days. The longer a deficiency is present without corrective
action being taken, the worse the deficiency becomes, and the more
costly it is to remedy. Comments on Referral to TARC. Commenters
offered the following comments on the provisions of Sec. 902.75--
Referral to a HUB/Program Center.
Receivership Determination Should Be Appealable to Assistant
Secretary for PIH. A few commenters stated that it appears that the
rule mandates receivership for a PHA that does not show ``substantial
improvement'' within one fiscal year. At the very least, such a PHA
should be permitted to make its case to the Assistant Secretary for
Public and Indian Housing, who should be given the final authority
under the rule to determine if appointment of a receiver should be
sought.
The PHAS proposed rule at Sec. 901.77 states that the Enforcement
Center is officially responsible for recommending to the Assistant
Secretary for PIH that a troubled PHA be declared in substantial
default.
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Rule Needs to Address Impact on Tenants When PHA Is Referred to
TARC or Enforcement Center. Some commenters stated that the rule does
not discuss the implications upon the residents of referral of a PHA to
the TARC or the Enforcement Center. Since the residents are the
ultimate beneficiaries of the PHA and HUD and HUD's consumers, we
expect that HUD would intend to protect their interests and legal
rights, but the regulation is silent. The regulation should articulate
what will happen to tenants, that all services will continue
uninterrupted, and those services which the PHA may have been failing
to properly deliver would be restored.
Language has been added to the final PHAS regulation at
Secs. 902.75 and 902.77 which states that to the extent feasible, all
services to residents will continue uninterrupted.
A One-Year Recovery Period Is Not Sufficient. We do not agree that
once a PHA is designated as troubled and is referred to a TARC for
assistance that the time allotted...is sufficient time for recovery.
Due to the severity of need, multiple year solutions may be required
and to lock a PHA to one year in the TARC is unrealistic, especially in
large troubled PHAs.
Initially, a PHA is afforded one year after the score is issued to
the PHA to demonstrate substantial improvement (50% of the points
needed to achieve a passing score). If the PHA demonstrates substantial
improvement after one year, then the PHA will have an additional year
to continue recovery efforts in the TARC.
Recovery Plan Prepared by TARC Should Include a Timetable. One
commenter stated that the recovery plan prepared by the TARC should
include a timetable.
The proposed PHAS regulation at Sec. 901.75(c)(2) provides for
annual and quarterly performance targets for the MOA. Since the MOA is
part of the Recovery Plan, the Recovery Plan does include a timetable.
Ten Days to Review Recovery Plan and MOA Are Insufficient. Other
commenters stated that ten days for a PHA to review the recovery plan
and the MOA is not sufficient and should be extended.
Within 30 days of notification of the designation of a troubled PHA
within its jurisdiction, the appropriate TARC will be on-site at the
PHA to develop a Recovery Plan. Since the PHA will be involved in the
development of both the Recovery Plan and the MOA, a ten day review
period is not unreasonable.
Is Process for Developing MOA Between Troubled PHAs and HUD
Consistent with PHMAP Statute. A few commenters asked whether the
process for developing a MOA between troubled agencies and HUD is
consistent with the law? One commenter noted that section 6(j)(2)(B) of
the 1937 Act states that ``the Secretary shall provide for an on-site,
independent assessment of the management of the agency'' and provides a
definition of the independent assessors. The Secretary should seek to
enter into an agreement with the troubled public housing agency only
after consulting with the assessment team and reviewing its report. The
proposed rule appears to be inconsistent with the statute.
The independent assessment will be undertaken by the appropriate
TARC, which within 30 days of notification of the designation of a
troubled PHA within its area, will deploy an on-site team to develop a
Recovery Plan (Sec. 902.75(a)).
Rule Should Provide More Detail on Credible Source. Two commenters
stated that HUD should provide more detail on what or who a credible
source might be, and should be clear about what documentation is
required.
The proposed regulation did not include examples of a credible
source because it may differ in each case. However, language will be
added to the final PHAS regulation that gives examples of a credible
source, including but not limited to, the Office of Fair Housing and
Equal Opportunity, judicial referral, Mayor, etc.
Comment on Resident Petitions for Remedial Action (Sec. 901.85).
One commenter stated that the 20% requirement may be good for larger
PHAs, but works against smaller ones.
Although a fewer number of residents is required to equate to the
20% of residents required in order to petition HUD to take remedial
action, in accordance with Sec. 902.79(b), HUD is required to advise a
PHA of such action, and a PHA will have the opportunity to initiate
corrective action, or to demonstrate that the information is incorrect.
IV. Findings and Certifications
Paperwork Reduction Act Statement
The information collection requirements in this rule have been
approved by the Office of Management and Budget (OMB) in accordance
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and
assigned OMB control number 2535-0106. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless the collection displays a valid control number.
Unfunded Mandates Reform Act
Title II of the Unfunded Mandates Reform Act of 1995 establishes
requirements for Federal agencies to assess the effects of their
regulatory actions on State, local, and tribal governments and the
private sector. This rule will not impose any Federal mandates on any
State, local, or tribal governments or the private sector within the
meaning of the Unfunded Mandates Reform Act of 1995.
Environmental Review
During the development of the June 30, 1998 proposed rule, a
Finding of No Significant Impact with respect to the environment was
made in accordance with HUD regulations in 24 CFR part 50 that
implement section 102(2)(C) of the National Environmental Policy Act of
1969 (42 U.S.C. 4223). That Finding continues to apply to this final
rule, and is available for public inspection between 7:30 a.m. and 5:30
p.m. weekdays in the Office of the Rules Docket Clerk, Office of
General Counsel, Room 10276, Department of Housing and Urban
Development, 451 Seventh Street, SW, Washington, DC.
Impact on Small Entities
The Secretary, in accordance with the Regulatory Flexibility Act (5
U.S.C. 605(b)), has reviewed and approved this rule, and in so doing
certifies that this rule is not anticipated to have a significant
economic impact on a substantial number of small entities. This rule
revises HUD's previous regulations for the assessment of public housing
(PHMAP). The new PHAS incorporates the statutory indicators of PHMAP,
and adds three additional indicators. One of the new indicators--
physical condition--would assess the extent to which PHAs are providing
public housing that is decent, safe, and sanitary. Public housing has
always been subject to a statutory standard of ``decent, safe, and
sanitary.'' This rule simply provides a clear and objective statement
of the standard. This indicator also entails an annual independent HUD
inspection of public housing, but it does not impose additional
inspection requirements upon PHAs. The clarity and consistency of this
new indicator provides a fair, accurate, and reliable assessment of the
physical condition of the large public housing portfolio. However,
since this rule does not alter the statutory standard for physical
condition, nor impose additional inspection obligations, the new
physical condition indicator will not have a
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significant economic impact on a substantial number of small entities.
The second indicator--financial condition--assesses the financial
condition of PHAs, requiring them to submit financial reports to HUD
electronically and in accordance with GAAP. HUD estimates that
electronic submission of financial information will be less burdensome
to PHAs, since many PHAs are making more extensive use of automated
systems. This rule allows exceptions if the cost of electronic
submission will be excessive. GAAP-based accounting reports, which are
widely accepted and recognized, are not substantially different than
the reports that PHAs previously submitted. A number of PHAs were
already required to use GAAP or are otherwise using GAAP, and the
majority of the PHAs with which HUD has consulted support the change to
GAAP. For those PHAs that were not yet using GAAP, HUD is taking
several steps to ease the conversion, including making only simple
additions to the current PHA accounting guide and chart of accounts,
and providing other conversion guidance and training, particularly to
small entities. Increasing the speed of information exchange (through
electronic submission) and the consistency and accuracy of the
information (through GAAP) will greatly enhance the assessment of a
PHA's financial condition. However, this new indicator will not have a
significant economic impact on a substantial number of small entities.
The fourth indicator--resident service and satisfaction--entails a
new resident service and satisfaction survey. This survey is key to
obtaining input from public housing residents, which is an important
aspect of assessing public housing. HUD intends that this survey will
be conducted through an automated process, and accordingly, will
present a minimal administrative burden for PHAs in terms of
administering and evaluating the survey. HUD intends to provide the
survey format and the electronic reporting format, as well as software
specifications. Therefore, this survey will not have a significant
economic impact on a substantial number of small entities.
HUD is also seeking to minimize any burden on PHAs by allowing a
significant transition period for converting to the new PHAS. PHAs will
have at least 1 year before new scores are issued under the PHAS.
During that transition period, HUD may issue advisory scores regarding
physical condition and financial management to provide guidance to PHAs
and to ease the conversion to the new PHAS.
The new PHAS is fundamentally designed to provide relevant and
verifiable measures that directly relate to a PHA's performance and
that result in an accurate and reliable score. This improved assessment
process will allow HUD to target its oversight resources on those PHAs
most in need of attention; high-performing PHAs will receive
recognition, along with reduced HUD scrutiny and additional
flexibility. Since the revised assessment system in this rule does not
impose any significant new requirements upon PHAs, and since HUD will
assist PHAs in their conversion to the system, this rule will not have
a significant economic impact on a substantial number of small
entities.
Federalism
The General Counsel, as the Designated Official under Executive
Order 12612, Federalism, has determined that the policies contained in
this rule will not have substantial direct effects on States or their
political subdivisions, on the relationship between the Federal
Government and the States, or on the distribution of power and
responsibilities among the various levels of government. This rule is
intended to promote good management practices by including, in HUD's
relationship with PHAs, continuing review of PHAs' compliance with
already existing requirements. The rule will not create any new
significant requirements. As a result, the rule is not subject to
review under the Order.
Catalog of Federal Domestic Assistance
The Catalog of Federal Domestic Assistance numbers for Public
Housing is 14.850.
List of Subjects in 24 CFR Parts 901 and 902
Administrative practice and procedure, Public housing, Reporting
and recordkeeping requirements.
Accordingly, Chapter IX 901 of title 24 of the Code of Federal
Regulations is amended as follows:
PART 901--PUBLIC HOUSING MANAGEMENT ASSESSMENT PROGRAM
1. The authority citation continues to read as follows:
Authority: 42 U.S.C. 1437d(j); 42 U.S.C. 3535(d).
2. In Sec. 901.1, paragraph (c)(1) is designated as paragraph
(c)(1)(ii) and a new paragraph (c)(i) is added to read as follows:
Sec. 901.1 Purpose, program scope and applicability.
* * * * *
(c)(1)(i) The provisions of this part remain applicable to PHAs and
RMC/AMEs as described in paragraph (c)(1)(ii) until September 30, 1999.
* * * * *
3. A new part 902 is added to read as follows:
PART 902--PUBLIC HOUSING ASSESSMENT SYSTEM
Subpart A--General Provisions
Sec.
902.1 Purpose and general description.
902.3 Scope.
902.5 Applicability.
902.7 Definitions.
Subpart B--PHAS Indicator #1: Physical Condition
902.20 Physical condition assessment.
902.23 Physical condition standards for public housing--decent,
safe, sanitary and in good repair (DSS/GR).
902.25 Physical condition scoring and thresholds.
902.27 Physical condition portion of total PHAS points.
Subpart C--PHAS Indicator #2: Financial Condition
902.30 Financial condition assessment.
902.33 Financial reporting requirements.
902.35 Financial condition scoring and thresholds.
902.37 Financial condition portion of total PHAS points.
Subpart D--PHAS Indicator #3: Management Operations
902.40 Management operations assessment.
902.43 Management operations performance standards.
902.45 Management operations scoring and thresholds.
902.47 Management operations portion of total PHAS points.
Subpart E--PHAS Indicator #4: Resident Service and Satisfaction
902.50 Resident service and satisfaction assessment.
902.53 Resident service and satisfaction scoring and thresholds.
902.55 Resident service and satisfaction portion of total PHAS
points.
Subpart F--PHAS Sc
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