# Public Housing Assessment System

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URL: https://www.frixlaw.com/law-library/documents/fr%3A98-23565

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** September 1, 1998
- **Citation:** 63 FR 46596

## Text

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.

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

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
--------------------------------------------------------------------------------------------------------------------------------------------------------
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 sugges

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A98-23565. Public record. Not legal advice.