[Federal Register Volume 61, Number 190 (Monday, September 30, 1996)]
[Rules and Regulations]
[Pages 51178-51184]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24874]



[[Page 51177]]


_______________________________________________________________________

Part V





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Parts 950 and 990



Public and Indian Housing Performance Funding System: Incentives; 
Interim Rule

  Federal Register / Vol. 61, No. 190 / Monday, September 30, 1996 / 
Rules and Regulations  

[[Page 51178]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Public and Indian Housing

24 CFR Parts 950 and 990

[Docket No. FR-4072-I-01]
RIN 2577-AB65


Public and Indian Housing Performance Funding System: Incentives

AGENCY: Office of the Assistant Secretary for Public and Indian 
Housing, HUD.

ACTION: Interim rule.

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

SUMMARY: This interim rule amends HUD's regulations for the Performance 
Funding System that governs payment of operating subsidy to Public 
Housing Agencies and Indian Housing Authorities (collectively called 
Housing Agencies or HAs). It makes four principal changes: it codifies 
incentive adjustments that were made for Federal Fiscal Years 1996 
through 1998 via a Notice to Housing Agencies; it adds a provision to 
gradually phase down operating subsidies provided to Housing Agencies 
when they obtain HUD approval to demolish units; it clarifies how 
combining two efficiency units into a one-bedroom unit is to be treated 
for operating subsidy eligibility; and it removes a limitation on the 
time period that applies to an HA's eligibility to benefit from certain 
utility savings efforts.
    A rule is necessary because the incentives that were contained in 
the referenced Notice were based on legislation that expires after 
September 30, 1996. Without action by HUD to continue these incentives 
beyond that date, HAs may be reluctant to adopt and implement 
worthwhile practices based solely on the provisions of the Notice. 
Since the Secretary has authority to regulate in this area, 
promulgation of this interim rule will give HAs a regulatory basis for 
adopting worthy changes. The change with respect to utility savings is 
to conform the regulation to the statute, since a six-year limitation 
was just removed from the authorizing statute.

DATES: Effective date: October 30, 1996, except that Secs. 950.725(b), 
950.756, 950.757, 990.109(b), 990.114, and 990.116 shall not become 
effective until the OMB approval of the information collections 
contained in those sections are announced by a separate publication in 
the Federal Register.
    Comment due date: Comments must be submitted by November 29, 1996.
    The deadline for comments on the information collection 
requirements is November 29, 1996, although commenters are advised that 
a comment is best assured of having its full effect if it is received 
by the Office of Management and Budget (OMB) within 30 days of 
publication. See the Public Reporting Burden heading under the Findings 
and Certifications section of this preamble regarding the information 
collection burden.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Office of the General Counsel, Rules Docket Clerk, 
room 10276, Department of Housing and Urban Development, 451 Seventh 
Street, SW, Washington, DC 20410-0500. Comments should refer to the 
above docket number and title of the rule. Facsimile (FAX) comments are 
not acceptable. A copy of each communication submitted will be 
available for public inspection and copying during regular business 
hours (weekdays 7:30 a.m. to 5:30 p.m. Eastern time) at the above 
address.
    Comments on the information collections contained in the rule, 
which are described in detail in the section, Findings and 
Certifications, must refer to the docket number and title of the rule 
and be sent to:

Joseph F. Lackey, Jr., HUD Desk Officer, Office of Management and 
Budget, New Executive Office Building, Washington, DC 20503
    and
Reports Liaison Officer, Room 4238, Office of Public and Indian 
Housing, Department of Housing and Urban Development, 451 Seventh 
Street, SW, Washington, DC 20410-5000.

FOR FURTHER INFORMATION CONTACT: For the public housing program, 
contact Joan DeWitt, Director, Finance and Budget Division, Office of 
Public and Assisted Housing Operations, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Washington, DC 20410, telephone 
(voice): (202) 708-1872, ext. 4035. (This is not a toll-free number.) 
For hearing- and speech-impaired persons, this number may be accessed 
via text telephone by dialing the Federal Information Relay Service at 
1-800-877-8339.
    For the Indian housing programs, contact Deborah Lalancette, 
Director, Housing Management Division, Office of Native American 
Programs, Department of Housing and Urban Development, Room B-133, 451 
Seventh Street, SW., Washington, DC 20410, telephone (voice): (202) 
755-0088. (This is not a toll-free number.) For hearing- and speech-
impaired persons, this number may be accessed via text telephone by 
dialing the Federal Information Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Changes to Encourage HAs to Facilitate Resident Employment and 
Undertake Entrepreneurial Initiatives

    Congress enacted the Balanced Budget Downpayment Act I on January 
26, 1996 (Pub. L. No. 104-99), effective only for Federal Fiscal Year 
1996. This legislation permitted housing agencies to take actions to 
attract and retain working families in occupancy such as the adoption 
of ceiling rents, adoption of earned income adjustments that would make 
work attractive to tenants, and adoption of local preferences. The 
legislation also repealed Federal admissions preferences.
    HUD issued a Notice to housing agencies (PIH 96-24) in the spring 
of 1996, providing an incentive under the Performance Funding System 
(PFS) for HAs that make significant efforts to utilize the new optional 
earned income adjustments for existing residents or that undertake 
entrepreneurial activities. The Notice made the incentive effective for 
the shorter of the period of three Federal Fiscal Years (FFYs), 1996-
1998, or the period during which there is a shortfall in the 
availability of funds to pay full operating subsidy eligibility to all 
HAs. Specifically, the Notice permitted HAs that implement the optional 
earned income exclusion for existing residents to offset performance 
funding system (PFS) funding shortfalls by retaining increases in 
dwelling rental income that result from increases in residents' earned 
incomes. The Notice also provided an incentive related to other income 
earned by the HAs through entrepreneurial activities. This rule adopts 
similar changes.
    The Secretary has authority under section 3 of the United States 
Housing Act of 1937, 42 U.S.C. 1437a, to define the term ``income,'' as 
it used for purposes of determining eligibility and rental payment in 
the public and Indian housing programs. Although the Appropriations Act 
provision expires at the end of the current fiscal year (September 30, 
1996), a change made by the Secretary in the definition of income 
permitting HAs to adopt an exclusion for earned income can have longer 
lasting effect. The Secretary is exercising this authority in another 
pending rulemaking, but this rule specifies the impact of adoption of 
such an exclusion by an HA.

[[Page 51179]]

    Under this new policy, HAs have the authority to establish their 
own earned income exclusion, as a means of attracting and retaining 
more tenants with earned income. PFS subsidies, however, will be 
calculated without respect to either decreases in rental income 
resulting from the exclusion, or increases resulting from higher rents 
received from households with earned income. In general, HAs that opt 
to adopt earned income exclusions will increase their total income if 
they are successful in obtaining more and/or higher income working 
tenants but will lose income if their policies do not produce a net 
increase in rent revenues.
    To permit proper determination of operating subsidy eligibility, in 
accordance with the principle stated above, a housing agency that 
adopts an earned income exclusion will have to calculate and document 
the following:
    (1) Per unit rental income from resident earned income in the April 
1, 1996 rent roll;
    (2) A future month's per unit rental income from resident earned 
income (see Secs. 950.757(b) and 990.116(b)); and
    (3) A future month's rent roll adjusted so that it does not reflect 
decreases resulting from the HA's implementation of an optional earned 
income exclusion (see Secs. 950.725(b)(1)(ii) and 990.109(b)(1)(ii)).
    In addition to the change with respect to an earned income 
adjustment, the Department's recent Notice suspended a three percent 
change factor applied to project an HA's dwelling rental income. In 
recent years this assumption of an increase in the dwelling rental 
income has not been realized. In order to ensure that all HAs receive a 
level of funding that most nearly reflects their final eligibility 
based on actual experience, without requiring them to request a year 
end adjustment, the Department suspended use of the change factor for 
the same period of time as applies to the earned income exclusion. This 
rule codifies that change, as well.
    The rationale for incorporating these changes in the PFS regulation 
is to ensure some degree of continuity in Departmental policy on which 
HAs may rely. The Department believes that these measures can 
significantly improve the stability of HAs by permitting HAs to improve 
the income mix in their developments, and thus increase dwelling rental 
income. The retention by HAs of additional rental income--and other 
income--above that permitted under the current PFS formula, up to 100 
percent of their PFS eligibility, will directly allow these HAs to 
provide better housing services in their communities.
    There is statutory authority for these changes under section 9 of 
the United States Housing Act of 1937, 42 U.S.C. 1437g. That provision 
authorizes HUD to base operating subsidy to housing agencies on a 
performance funding system that is substantially based on the system 
defined in regulations and in effect on February 5, 1988. These changes 
to the PFS are not substantial changes. They deal only with the matter 
of how to cope with a subsidy shortfall during the three-year period of 
FY 1996 through FY 1998, but they do not apply during any FFY during 
which there is not an overall PFS shortfall.

II. Transition Funding for Units Approved for Demolition

    This rule also contains a change to the PFS regulations to provide 
a short transition period of funding for HAs that have received 
approval to demolish HA-owned public or Indian housing units. The 
purpose of the change is to encourage and support efforts by an HA to 
reduce its overhead costs in a planned and orderly manner when its 
inventory of units is reduced by demolition.
    Under the current PFS regulations, units are no longer eligible for 
operating subsidy when the Department approves the unit for 
deprogramming (including approval to demolish the unit) and the unit is 
vacant. The only funding provided after that point is funding for 
direct costs relating to preserving and protecting the unit pending 
actual demolition or disposition.
    This abrupt cut-off in subsidy does not provide an opportunity for 
affected HAs to reduce their overhead costs in a planned and orderly 
way. An HA that undertakes a significant reduction to its inventory 
will need to rethink and possibly restructure the way it does business. 
This is especially true if the units are not going to be replaced or if 
some different type of development management is contemplated. Some HAs 
are contemplating the demolition of up to 20% of their inventory.
    Faced with the prospect of a sudden and sharp decrease in subsidy 
funding, some HAs may decide to postpone the decision to seek HUD 
approval to demolish units that clearly meet the criteria for such an 
action, especially where the units are not being replaced by tenant-
based subsidy, such as Section 8 Certificates or Vouchers. By retaining 
these units in its inventory, an HA continues to receive some level of 
operating subsidy support.
    This proposed rule strikes a balance between the need to eliminate 
disincentives and the need to achieve a reduction in operating subsidy 
as a result of demolition activity. Subsidy funding will be continued 
to units approved by HUD for demolition under the following conditions:
    (1) Units replaced with Section 8 Certificates or Vouchers will not 
be eligible for phase-down subsidy;
    (2) Units that have been continuously vacant for the twelve-month 
period immediately preceding HUD approval for the demolition will be 
eligible for subsidy funding based on 20% of the Allowable Expense 
Level (AEL) for 12 months beginning with the month that the demolition 
request was approved by HUD; and
    (3) For units that have not been continuously vacant for twelve 
months, the rule phases out the subsidy over a three-year period, 
starting with the month in which the unit is approved for demolition 
and is vacant. For the initial 12-month period, the unit will be 
eligible for subsidy funding based on 100% of AEL. For the next 12-
month period, the unit will be eligible for subsidy funding based on 
66% of the AEL. For the third 12-month period, the unit will be 
eligible for funding based on 33% of the AEL.
    (4) Units that are approved for demolition and are replaced with 
conventional public or Indian housing units will not be eligible for 
phase-down subsidy when the replacement units become eligible for 
subsidy.
    (5) Units that are removed from the inventory as a result of being 
combined with other units are not considered to be demolished units for 
this purpose.
    The intent of this change is to maintain the momentum that has been 
achieved to demolish the worst parts of the public housing inventory. 
The Department is concerned that if it does not address the legitimate 
transitional funding need problems of HAs undergoing inventory and 
funding reductions, this momentum will be lost.
    This change to the PFS regulations falls within the authority of 
the Secretary to define the PFS for payment of operating subsidy. The 
change merely removes some of the obstacles to demolishing seriously 
deteriorated or obsolete housing stock, while coping with an operating 
subsidy shortfall.
    One limitation on the Department's ability to issue rules on the 
subject of PFS is the statutory requirement that ``any proposed 
regulation providing for amendment, alteration, adjustment, or other 
change in the performance funding system relating to vacant units shall 
be issued pursuant to a negotiated rule making procedure * * *.''
    This rule will provide additional operating subsidy to certain HAs 
that had or will have (vacant) units approved

[[Page 51180]]

for demolition in 1995 or later. The additional costs to the PFS are 
estimated as follows: $17.6 million in FY 1997 (including $1.3 million 
for FY 1995, $6 million for FY 1996, and $10.3 million for FY 1997); 
$19.6 million in FY 1998; and $25.5 million in FY 1999. The 
corresponding savings for the PFS resulting from the demolitions are as 
follows: $4.9 million in FY 1996; $10.8 million in FY 1997; $44.1 
million in FY 1998; and $81.9 million in FY 1999. When the savings are 
compared with the cost, the results are a net cost of $1.9 million for 
FYs 1995 through 1997, but a net savings of $24.5 million and $56.4 
million, respectively, for FYs 1998 and 1999. Thus, the net effect of 
this rule on PFS during the period is a savings in total operating 
subsidy eligibility amount.
    Moreover, compared to the magnitude of the PFS in its entirety, 
this phase-down funding is minimal in scale. The $1,900,000 of net cost 
in FYs 1996 and 1997 can be contrasted with the amount provided in the 
FY 1997 HUD appropriations bill as passed by the House of 
$2,850,000,000. In addition, it should be noted that most HAs that are 
demolishing public or Indian housing units are receiving certificates 
as replacement for those lost units. Those HAs are not eligible for 
phase-down of subsidy under this rule, and so are not affected by this 
provision.
    The purpose to be served by a negotiated rulemaking is to assure 
that all interested parties have an opportunity to advance their 
interests during the development of a proposal that will affect them. 
Since the phase-down of subsidy for units approved for demolition 
produces an overall savings to the PFS and is minimal in effect when 
compared with the overall level of PFS funding, the impact on HAs and 
tenants of this rule does not rise to the level to necessitate 
participation in a negotiated rulemaking. Therefore, the Department has 
determined that the phase-down provision does not constitute the type 
of change in PFS relating to vacant units for which a negotiated 
rulemaking is required.

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

    In recognition of the marketing problem HAs have regarding 
efficiency apartments and the resulting high vacancy rates in these 
units, the Department wants to support HAs which make the decision to 
convert efficiency units into one bedroom units. This rule amends 
Secs. 990.108(d) and 950.720(e), Costs resulting from combination of 
two or more units, to treat the conversion of two efficiency units into 
a one-bedroom unit as eligible for funding under this section.

IV. Changes to Utility Savings Retention Period

    In enacting the 1996 Omnibus Appropriations Act, Congress removed 
the statutory restriction of six years imposed after the first year of 
utility rate savings that an HA is permitted to share. Therefore, this 
rule removes the language from the rule that enforced that time limit. 
Now, the utility rate savings can continue to be shared for as long as 
the actions of the HA continue to be cost-effective.
    This change is being made not only for public housing but also for 
Indian housing. Section 201(b)(2) of the United States Housing Act of 
1937 (42 U.S.C. 1437aa(b)(2), ``the 1937 Act'') provides that 
amendments to provisions found in title II of the 1937 Act do not apply 
to Indian housing unless the amendment so states. Nevertheless, when 
the statutory authority to extend the period of permitted rate savings 
sharing from one year to seven years was implemented, the extension was 
made applicable to Indian housing despite the absence of specific 
mention of Indian housing in the statutory amendment. The preamble of 
the rule implementing the extension stated (at 59 FR 33653) that, ``Not 
to do so would frustrate the goals of providing incentives to undertake 
energy conservation activities.'' That policy still governs, and 
therefore this change to extend the period during which utility rate 
savings can continue is being applied to Indian housing, as well.

V. Findings and Certifications

A. Justification for Interim Rule

    The Department generally publishes a rule for public comment before 
issuing a rule for effect, in accordance with its regulations on 
rulemaking in 24 CFR part 10. However, part 10 provides that prior 
public procedure will be omitted if HUD determines that it is 
``impracticable, unnecessary, or contrary to the public interest'' (24 
CFR 10.1).
    The change made by this interim rule merely adds an optional 
exclusion to the definition of income used by Housing Agencies, which 
supports the statutory policy of obtaining a broad range of income 
levels in public housing and Indian housing developments and the 
Secretary's policy of encouraging HAs to increase the number of working 
families residing in these developments. As noted earlier, the 
Department has already authorized the use of such income exclusions for 
a limited period of time, based on the Balanced Budget Downpayment Act 
I, in a Notice. Authorization of such an optional exclusion in this 
rule is expected to increase the number of HAs using it, helping to 
encourage the participation of working families in these programs.
    Implementation of the rule's provisions is needed as soon as 
possible to facilitate the adoption of this type of exclusion to 
realize the benefits of increasing the incentives for working families 
to participate and to prevent HAs who are now excluding earned income 
from having to change their policy starting on October 1, 1996, only to 
re-institute it later. Therefore, the Department has determined that 
good cause exists to omit prior public procedure for this final rule 
because such delay would be contrary to the public interest and 
unnecessary.
    In the interest of obtaining the fullest participation possible in 
determining the factors that should be considered in an HA's 
determination to adopt an earned income exclusion and to assure that 
other changes made are well-tailored to HA operations, the Department 
does invite public comment on the rule. The comments received within 
the 60-day comment period will be considered during development of a 
final rule that will supersede this interim rule.

B. Impact on the Environment

    In accordance with 40 CFR 1508.4 of the regulations of the Council 
on Environmental Quality and 24 CFR 50.20(o) of the HUD regulations, 
the policies and procedures contained in this interim rule relate only 
to operating costs that do not affect a physical structure or property 
and, therefore, are categorically excluded from the requirements of the 
National Environmental Policy Act (42 U.S.C. 4332).

C. Federalism Impact

    The General Counsel, as the Designated Official under section 6(a) 
of Executive Order 12612, Federalism, has determined that the policies 
contained in this rule do not have significant impact on States or 
their political subdivisions, or the relationship between the Federal 
government and the States, or on the distribution of power and 
responsibilities among the various levels of government. As a result, 
the rule is not subject to review under the Order. The rule adds some 
incentives to the formula under which operating subsidies are paid on 
HUD-assisted housing owned and operated by HAs, but will not interfere 
with State or local government functions.

[[Page 51181]]

D. Impact on the Family

    The General Counsel, as the Designated Official under Executive 
Order 12606, The Family, has determined that this rule does not have 
potential for significant impact on family formation, maintenance, and 
general well-being. Therefore, the rule is not subject to review under 
the Order. No significant change in existing HUD policies or programs 
results from promulgation of this rule, as those policies and programs 
relate to family concerns. The rule merely involves the amount of 
funding that a HA should receive under a refinement of an existing 
procedure.

E. Impact on Small Entities

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed this rule before publication and by 
approving it certifies that this rule will not have a significant 
impact on a substantial number of small entities. This rule will permit 
some modest increase in subsidy eligibility for HAs that take advantage 
of the incentives. The rule would be unlikely to have any significant 
impact on small HAs.

F. Unfunded Mandates Reform Act

    The Secretary has reviewed this rule before publication and by 
approving it certifies, in accordance with the Unfunded Mandates Reform 
Act of 1995 (2 U.S.C. 1532), that this rule does not impose a Federal 
mandate that will result in the expenditure by State, local, and tribal 
governments, in the aggregate, or by the private sector, of $100 
million or more in any one year.

G. Regulatory Review

    This interim rule was reviewed by the Office of Management and 
Budget under Executive Order 12866. Any changes made in this interim 
rule as a result of that review are clearly identified in the docket 
file for this interim rule, which is available for public inspection in 
the HUD's Office of the Rules Docket Clerk, Room 10276, 451 Seventh 
Street, SW., Washington, DC 20410-0500.

H. Public Reporting Burden

    The information collection requirements contained in this rule, as 
described in Secs. 950.725(b), 950.756, 950.757, 990.109(b), 990.114, 
and 990.116 have been submitted to the Office of Management and Budget 
for review under the Paperwork Reduction Act of 1995 (42 U.S.C. 3501-
3520).
    1. In accordance with 5 CFR 1320.5(a)(1)(iv), the Department is 
setting forth the following concerning the proposed collection of 
information:
    (a) Title of the information collection proposal: Performance 
Funding System Incentives.
    (b) Summary of the collection of information: The information 
collected is alternate information about rental income that would have 
been collected if the HA had not adopted an earned income exclusion, 
information about vacant units that have been approved for demolition 
and would not otherwise be eligible for operating subsidy, and 
identifying increases in earned income so as to exclude some of that 
income.
    (c) Description of the need for the information and its proposed 
use: The information is needed to permit calculation of operating 
subsidy eligibility for HAs that want to take advantage of incentives 
to facilitate resident employment and to encourage demolition of 
seriously deteriorated vacant units.
    (d) Description of the likely respondents, including the estimated 
number of likely respondents, and proposed frequency of response to the 
collection of information: The likely respondents are the approximately 
700 HAs that are estimated to take advantage of the incentives.
    (e) Estimate of the total reporting and recordkeeping burden that 
will result from the collection of information: The total number of 
burden hours for this collection of information is estimated to be 
16,120 hours, including the time for reviewing instructions, gathering 
and maintaining the data, and calculating and requesting the incentive 
adjustment. The information will be collected as part of the annual 
calculation of eligibility for operating subsidy. The 700 HAs will 
determine the effect of the incentives, at a cost of about $15 per 
hour, for a total cost of $241,800. This amount is expected to be more 
than offset by the resulting increase in operating subsidy payments. 
These estimates were developed by consulting with eight housing 
agencies.
    Reporting Burden:

----------------------------------------------------------------------------------------------------------------
                                Proposed section                                     Est. ave.                  
      Type of collection            of 24 CFR        Number of     Frequency of    response time   Annual burden
                                    affected        respondents      response         (hrs.)          (hrs.)    
----------------------------------------------------------------------------------------------------------------
Addition to PFS rent roll of    950.725& 990.109             700               1               3           2,100
 Earned Income Exclusions.       (b)(1)(ii).                                                                    
Phase-down for demolished       950.756, 990.114              20               1               1              20
 units.                                                                                                         
Incentive for increases in      950.757, 990.116             700               1              20          14,000
 earned income.                                                                                                 
                                                                                                 ---------------
      Total Burden............  ................  ..............  ..............  ..............          16,120
----------------------------------------------------------------------------------------------------------------

    2. In accordance with 5 CFR 1320.8(b)(3), the Department makes the 
following statement:
    The reason for collecting the information is to give HUD the basis 
for approving a request for a PFS incentive adjustment in operating 
subsidy. The information will be used by HUD to approve an adjustment 
based on the adoption of an earned income exclusion and/or based on a 
phase-down of operating subsidy in connection with demolition of units. 
The information collected is public information and does not lend 
itself to confidentiality. In accordance with the Paperwork Reduction 
Act, HUD may not conduct or sponsor, and a person is not required to 
respond to, a collection of information unless the collection displays 
a currently valid OMB control number.
    3. In accordance with 5 CFR 1320.8(d)(1), the Department is 
soliciting comments from members of the public and affected agencies 
(see DATES and ADDRESSES sections above) concerning the proposed 
collection of information to:
    (a) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including whether the information will have practical utility;
    (b) Evaluate the accuracy of the agency's estimate of the burden of 
the proposed collection of information;
    (c) Enhance the quality, utility, and clarity of the information to 
be collected; and
    (d) Minimize the burden of the collection of information on those 
who

[[Page 51182]]

are to respond; including through the use of appropriate automated 
collection techniques or other forms of information technology, e.g., 
permitting electronic submission of responses.

Catalog

    The Catalog of Federal Domestic Assistance number for the 
programs affected by this rule is 14.850.

List of Subjects

24 CFR Part 950

    Aged, Grant programs--housing and community development, Grant 
programs--Indians, Indians, Individuals with disabilities, Low and 
moderate income housing, Public housing, Reporting and recordkeeping 
requirements.

24 CFR Part 990

    Grant programs--housing and community development, Public housing, 
Reporting and recordkeeping requirements.

    Accordingly, parts 950 and 990 of title 24 of the Code of Federal 
Regulations are amended as follows:

PART 950--INDIAN HOUSING PROGRAMS

    1. The authority citation for part 950 continues to read as 
follows:

    Authority: 25 U.S.C. 450e(b); 42 U.S.C. 1437aa-1437ee and 
3535(d).

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


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

* * * * *
    (c) A special phase-down of subsidy to IHAs is applicable when 
demolition of units is approved by HUD in Federal Fiscal Year 1995 and 
later. See Sec. 950.756.


Sec. 950.715  [Amended]

    3. In Sec. 950.715, paragraph (b)(2) is amended by removing the 
phrase ``for an additional period not to exceed six years''.
    4. In Sec. 950.720, paragraph (e) is amended by redesignating the 
text as paragraph (e)(1), and by adding a new paragraph (e)(2), to read 
as follows:


Sec. 950.720  Other costs.

* * * * *
    (e) * * *
    (2) An exception to paragraph (e)(1) of this section is made when 
an IHA combines two efficiency units into a one-bedroom unit. In these 
cases, the AEL for the requested year shall be multiplied by the number 
of unit months not included in the requested year's unit months 
available as a result of these combinations that have occurred since 
the Base Year.
* * * * *
    5. In Sec. 950.725, paragraph (b) is amended by redesignating 
paragraph (b)(1) as paragraph (b)(1)(i), by adding a new paragraph 
(b)(1)(ii), and by revising paragraph (b)(2), to read as follows:


Sec. 950.725  Projected operating income level.

* * * * *
    (b) * * *
    (1) * * *
    (ii) The Rent Roll used for calculating the projected operating 
income level will not reflect decreases resulting from the IHA's 
implementation of an optional earned income exclusion authorized by the 
definition of ``annual income'' in Sec. 950.102. But see Sec. 950.757 
for the earned income incentive adjustment.
    (2) Three percent increase. The average monthly dwelling rental 
charge per unit, computed under paragraph (b)(1) of this section, is 
increased by 3 percent to obtain the projected average monthly dwelling 
rental charge per unit of the IHA for the Requested Budget Year, except 
that for the shorter of Federal Fiscal Years 1996 through 1998 or the 
period during which HUD has an operating subsidy shortfall, no increase 
factor will be used.
* * * * *


Sec. 950.730  [Amended]

    6. In Sec. 950.730, paragraph (c)(1)(i) is amended by removing the 
phrase, ``up to an additional six years,''.
    7. A new Sec. 950.756 is added to read as follows:


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

    (a) General. Units that have both been approved by HUD for 
demolition and been vacated in FFY 1995 and after will be excluded from 
an IHA's determination of Unit Months Available when vacated, but they 
will remain eligible for subsidy in the following way:
    (1) For the first twelve months beginning with the month that a 
unit meets both conditions of being approved for demolition and vacant, 
the full AEL will be allowed for the unit.
    (2) During the second twelve-month period after meeting both 
conditions, 66 percent of the AEL will be allowed for the unit.
    (3) During the third twelve-month period after meeting both 
conditions, 33 percent of the AEL will be allowed for the unit.
    (b) Special case for long-term vacant units. Units that have been 
vacant for longer than 12 months when they are approved for demolition 
are eligible for funding equal to 20% of the AEL for a 12-month period.
    (c) Treatment of units replaced with Section 8 Certificates or 
Vouchers. Units that are replaced with Section 8 Certificates or 
Vouchers are not subject to the provisions of this section.
    (d) Treatment of units replaced with Indian housing units. When 
replacement conventional Indian housing units become eligible for 
operating subsidy, the demolished unit is no longer eligible for any 
funding under this section.
    (e) Determination of what units are ``replaced.'' For purposes of 
this section, replacements are applied first against units that 
otherwise would fall in paragraph (a) of this section; any remaining 
replacements should be used to reduce the number of units qualifying 
under paragraph (b) of this section.
    (f) Treatment of units combined with other units. Units that are 
removed from the inventory as a result of being combined with other 
units are not considered to be demolished units for this purpose.
    (g) Retroactive effect. This section is to be applied retroactively 
for units approved for demolition during Federal Fiscal Years 1995 and 
1996. IHAs affected by this provision may submit a revised calculation 
of operating subsidy eligibility for the subject fiscal year(s).
    8. A new Sec. 950.757 is added to read as follows:


Sec. 950.757  Three-year incentive adjustments.

    (a) Applicability. For the period of Federal Fiscal Year 1996 
through Federal Fiscal Year 1998, the provisions of this section apply 
to permit IHAs to retain certain sources of income that would otherwise 
be offset by a reduction of subsidy. The combined amount retained in 
accordance with the provisions of this section may not exceed the 
amount of the PFS subsidy shortfall applicable to an IHA in the subject 
fiscal year.
    (b) Increases in earned income. IHAs are permitted to retain any 
increase in dwelling rental income realized after April 1, 1996 as a 
result of increased resident earned income, where the governing body of 
the IHA has certified that the IHA is making significant efforts to 
increase the earned income of existing residents by adopting the 
optional earned income exclusion and not just taking actions regarding 
new admissions. To implement this paragraph (b), the IHA will compare 
the rental income per occupied unit from earned income from April 1, 
1996 to the

[[Page 51183]]

rental income per occupied unit from earned income on the date of the 
rent roll used for PFS calculation. If an IHA does not have the April 
1, 1996 data available, HUD may approve the use of data from a later 
month.
    (c) Increases in other income. IHAs are permitted to retain any 
increase in ``other income'' based on using the definition provided in 
this section, as compared with using the definition found in 
Sec. 950.102. For purposes of this section, the amount of ``other 
income'' is limited to the following three sources:
    (1) Excess Utilities: charges to tenants for excess utility 
consumption for IHA-supplied utilities.
    (2) Nondwelling Rental Income: Rent billed to lessees of dwelling 
units rented for nondwelling purposes. Rent billed to lessees of 
nondwelling facilities will not be included except for rent billed to 
other HUD programs (e.g.; Section 8, congregate housing, family 
investment centers).
    (3) Other Income: Only charges to other HUD programs (e.g.; Section 
8, congregate housing, family investment centers) for use of community 
space, central office management and maintenance space will be taken 
into consideration. IHAs will calculate the amount of ``other income'' 
to be retained in a manner prescribed by HUD.

PART 990--ANNUAL CONTRIBUTIONS FOR OPERATING SUBSIDY

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

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

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


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

* * * * *
    (c) A special phase-down of subsidy to HAs is applicable when 
demolition of units is approved by HUD in Federal Fiscal Year 1995 and 
later. See Sec. 990.114.


Sec. 990.107  [Amended]

    11. In Sec. 990.107, paragraph (b)(2) is amended by removing the 
phrase ``for an additional period not to exceed six years''.
    12. In Sec. 990.108, paragraph (d) is amended by redesignating the 
text as paragraph (d)(1), and by adding a new paragraph (d)(2), to read 
as follows:


Sec. 990.108  Other costs.

* * * * *
    (d) * * *
    (2) An exception to paragraph (d)(1) of this section is made when 
an HA combines two efficiency units into a one-bedroom unit. In these 
cases, the AEL for the requested year shall be multiplied by the number 
of unit months not included in the requested year's unit months 
available as a result of these combinations that have occurred since 
the Base Year.
* * * * *
    13. In Sec. 990.109, paragraph (b) is amended by redesignating 
paragraph (b)(1) as paragraph (b)(1)(i), by adding a new paragraph 
(b)(1)(ii), and by revising paragraph (b)(2), to read as follows:


Sec. 990.109  Projected operating income level.

* * * * *
    (b) * * *
    (1) * * *
    (ii) The Rent Roll used for calculating the projected operating 
income level will not reflect decreases resulting from the HA's 
implementation of an optional earned income exclusion authorized by the 
definition of ``annual income'' in 24 CFR 913.106(d). But see 
Sec. 990.116 for the earned income incentive adjustment.
    (2) Three percent increase. The average monthly dwelling rental 
charge per unit, computed under paragraph (b)(1) of this section, is 
increased by 3 percent to obtain the projected average monthly dwelling 
rental charge per unit of the HA for the Requested Budget Year, except 
that for the shorter of Federal Fiscal Years 1996 through 1998 or the 
period during which HUD has an operating subsidy shortfall, no increase 
factor will be used.
* * * * *


Sec. 990.110  [Amended]

    14. In Sec. 990.110, paragraph (c)(1) is amended by removing the 
phrase, ``up to an additional six years,''.
    15. A new Sec. 990.114 is added to read as follows:


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

    (a) General. Units that have both been approved by HUD for 
demolition and been vacated in FFY 1995 and after will be excluded from 
an HA's determination of Unit Months Available when vacated, but they 
will remain eligible for subsidy in the following way:
    (1) For the first twelve months beginning with the month that a 
unit meets both conditions of being approved for demolition and vacant, 
the full AEL will be allowed for the unit.
    (2) During the second twelve-month period after meeting both 
conditions, 66 percent of the AEL will be allowed for the unit.
    (3) During the third twelve-month period after meeting both 
conditions, 33 percent of the AEL will be allowed for the unit.
    (b) Special case for long-term vacant units. Units that have been 
vacant for longer than 12 months when they are approved for demolition 
are eligible for funding equal to 20% of the AEL for a 12-month period.
    (c) Treatment of units replaced with Section 8 Certificates or 
Vouchers. Units that are replaced with Section 8 Certificates or 
Vouchers are not subject to the provisions of this section.
    (d) Treatment of units replaced with public housing units. When 
replacement conventional public housing units become eligible for 
operating subsidy, the demolished unit is no longer eligible for any 
funding under this section.
    (e) Determination of what units are ``replaced.'' For purposes of 
this section, replacements are applied first against units that 
otherwise would fall in paragraph (a) of this section; any remaining 
replacements should be used to reduce the number of units qualifying 
under paragraph (b) of this section.
    (f) Treatment of units combined with other units. Units that are 
removed from the inventory as a result of being combined with other 
units are not considered to be demolished units for this purpose.
    (g) Retroactive effect. This section is to be applied retroactively 
for units approved for demolition during Federal Fiscal Years 1995 and 
1996. HAs affected by this provision may submit a revised calculation 
of operating subsidy eligibility for the subject fiscal year(s).
    16. A new Sec. 990.116 is added to read as follows:


Sec. 990.116  Three-year incentive adjustments.

    (a) Applicability. For the period of Federal Fiscal Year 1996 
through Federal Fiscal Year 1998, the provisions of this section apply 
to permit HAs to retain certain sources of income that would otherwise 
be offset by a reduction of subsidy. The combined amount retained in 
accordance with the provisions of this section may not exceed the 
amount of the PFS subsidy shortfall applicable to an HA in the subject 
fiscal year.
    (b) Increases in earned income. HAs are permitted to retain any 
increase in dwelling rental income realized after April 1, 1996 as a 
result of increased resident earned income, where the Board of 
Commissioners of the HA has certified that the HA is making significant 
efforts to increase the earned income of existing residents by adopting 
the optional earned income exclusion and not just taking actions 
regarding new admissions. To implement this

[[Page 51184]]

paragraph (b), the HA will compare the rental income per occupied unit 
resulting from earned income from April 1, 1996 to the rental income 
per occupied unit resulting from earned income on the date of the rent 
roll used for PFS calculation. If an HA does not have the April 1, 1996 
data available, HUD may approve the use of data from a later month.
    (c) Increases in other income. HAs are permitted to retain any 
increase in ``other income'' based on using the definition provided in 
this section, as compared with using the definition found in 
Sec. 990.102. For purposes of this section, the amount of ``other 
income'' is limited to the following three sources:
    (1) Excess Utilities: charges to tenants for excess utility 
consumption for HA supplied utilities.
    (2) Nondwelling Rental Income: rent billed to lessees of dwelling 
units rented for nondwelling purposes. Rent billed to lessees of 
nondwelling facilities will not be included except for rent billed to 
other HUD programs (e.g.; Section 8, congregate housing, family 
investment centers).
    (3) Other Income: Only charges to other HUD programs (e.g.; Section 
8, congregate housing, family investment centers) for use of community 
space, central office management and maintenance space will be taken 
into consideration. HAs will calculate the amount of ``other income'' 
to be retained in a manner prescribed by HUD.

    Dated: July 29, 1996.
Christopher Hornig,
Acting Assistant Secretary for Public and Indian Housing.
[FR Doc. 96-24874 Filed 9-27-96; 8:45 am]
BILLING CODE 4210-33-P