[Federal Register Volume 63, Number 169 (Tuesday, September 1, 1998)]
[Rules and Regulations]
[Pages 46596-46627]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23565]



[[Page 46595]]

_______________________________________________________________________

Part IX





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Parts 901 and 902



Public Housing Assessment System; Final Rule

  Federal Register / Vol. 63, No. 169 / Tuesday, September 1, 1998 / 
Rules and Regulations  

[[Page 46596]]


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

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 suggested that the 
resident samples include a cross-section of tenants that reflects 
racial, ethnic, economic, age, and length of tenancy characteristics. 
Another commenter remarked that to conduct a truly valid survey, it is 
essential that the respondents be pre-identified as actual leaseholders 
in good standing. Five commenters wrote that PHAs should not be 
penalized if only a small number of residents respond to the surveys. 
One of these commenters wrote that a lack of response could indicate 
that the residents think the PHA is doing a good job. This commenter 
worried that only dissatisfied tenants might complete the survey. One 
commenter questioned how resident samples would be drawn in areas (such 
as Alaska), where a PHA's projects are widely dispersed geographically. 
The commenter worried about the costs involved if each project must be 
sampled.
    With respect to these comments, HUD responds as follows. HUD has 
not finalized its decision to use a response rate for measurement at 
this time. HUD will use a standard proven survey methodology to improve 
PHAs' response rates. This includes, but is not limited to, providing 
technical assistance to PHAs by preparing the survey in several 
languages, providing recommendations to promote the survey process by 
distributing lead letters, bulletin board communications, and resident 
meetings.
    HUD is in the process of testing the various collection and 
sampling methods. The sampling process includes testing the survey in a 
statistically valid sample of developments selected by HUD. The widely 
dispersed geographical units will be considered during the selection 
process.
    Scoring System Is Vague. Many commenters wrote that the proposed 
rule was unclear regarding how the resident services and satisfaction 
component would be scored and weighted. One of the commenters asked 
whether adjustments would be made for the PHA's size, population 
density, and social and economic environment.

[[Page 46613]]

    HUD has determined that the final PHAS rule will only score the 
first two components as published in the proposed PHAS rule (survey 
results; and level of implementation/follow-up action process), with a 
value of five points each. The third component, verification that the 
survey process was managed in a manner consistent with guidance 
provided by HUD, will not be scored, but is a threshold requirement. A 
PHA will not receive any points under this indicator if the survey 
process is not managed in a manner consistent with the guidance 
provided by HUD or the survey results are determined to be altered. 
Section 901.53 is revised accordingly.
    Concerns about Objectivity of Surveys. Several commenters expressed 
concern about the objectivity of the resident surveys. Four of the 
commenters remarked that in an assessment system designed to be 
objective, this indicator appears to be entirely subjective, since the 
rating will be based on resident evaluation or opinion. Another 
commenter asked whether the reasonableness of the resident comments 
will be evaluated.
    The measurement of residents' living conditions is measuring how 
residents perceive the performance of management providing the housing 
services. The opinions of the residents are important. There is an 
assumption made that if the majority of those surveyed identify the 
same problem, the problem is most likely a factual problem. The 
residents' perception plays a key role in responding to the survey 
questions. However, HUD will not rely on the residents' response alone, 
but compare it to the other assessment indicators under the PHAS to 
identify and address other issues.
    Data Collection and Verification of Survey Data. Several commenters 
submitted comments on collection and verification of survey data. Five 
of the commenters asked about the methods HUD will use to verify the 
data. Two of the commenters inquired about the format the PHAs would be 
required to use to maintain data. Another commenter asked that HUD 
provide greater specificity regarding the records PHAs must maintain to 
demonstrate that the surveys were distributed and collected properly.
    HUD is in the process of testing the various survey data collection 
methods. A methodology for collecting, verifying and maintaining the 
survey data will be finalized after the testing of the survey 
instrument.
    Conditions Outside PHA Control. Several commenters wrote that 
several of the areas to be covered by the survey are outside the 
control of the PHA. Several of these comments focused on community 
services provided by entities other than the PHA. For example, two of 
the commenters remarked that a PHA does not control electric, gas, and 
water/sewer service works. Other commenters wrote that the survey 
should not include questions about the effectiveness of the local 
police department or religious institutions. These commenters remarked 
that PHA management should not be judged according to the resident's 
trust of the local Police Department, or of other institutions not 
controlled by the PHA. Some commenters wrote that there are several 
aspects of public housing that residents are often dissatisfied with 
that are beyond the control of the PHA, either due to HUD regulation, 
prohibitive cost, or in conflict with higher priority needs of other 
residents. Examples would include the lack of air conditioning in 
individual units; the definition for rent not having more exclusions 
from gross income; and the 30% of income formula for tenant payments.
    HUD has determined to include questions that will not be scored but 
used strictly for information purposes. However, HUD will make every 
effort to finalize the questions within the survey instrument to 
include elements that are the responsibility of the PHA.
    Cost and Administrative Burden Issues. Several commenters expressed 
concern about the costs and administrative burdens that would be faced 
by PHAs in conducting the surveys. Two of the commenters wrote that the 
survey requirement constituted an unfunded mandate imposed on PHAs. 
Several commenters recommended that HUD reimburse PHAs for the costs of 
conducting the resident surveys. Four commenters remarked that this 
indicator amounts to another unfunded mandate on PHAs and further 
erodes the financial capability of PHAs to carry out day-to-day 
operations with limited staff and resources.
    HUD has determined that if the survey process imposes a financial 
burden on PHAs, HUD reserves the right to implement other cost-
effective methods for implementing the survey process.
    Language and Educational Barriers May Affect Survey Results. Five 
commenters expressed concern that language and educational barriers, 
such as illiteracy, might skew the survey results. Three of the 
commenters remarked that the survey would need to be translated to the 
appropriate language for many residents. These commenters asked whether 
HUD would supply the PHAs with translated surveys. One of the 
commenters asked that the final rule provide greater specificity 
regarding the conduct of surveys with non-English speaking residents 
and persons with disabilities.
    HUD has considered the language barrier concerns associated with 
the survey process. At this time, HUD plans to offer the survey in at 
least two languages. Other languages may be considered if a significant 
portion of the population remains underrepresented by the selected 
survey languages. HUD is seeking the highest possible response from the 
selected population. This includes considering methods which will 
alleviate potential obstacles to survey response.
    Points for Resident Satisfaction Indicator Should Be Increased. 
Many commenters recommended that the 10 points allocated for the 
resident services and satisfaction indicator be increased. Those 
commenters recommending specific point values, suggested that 20-25 
points would be appropriate for this indicator.
    HUD has determined that the 10 points allocated for this indicator 
is appropriate at this time.

G. Comments on Subpart F--PHAS Scoring

    Data Submission Deadlines Should be Extended. Three commenters 
suggested that HUD extend the 60-day deadline for submission of data 
set forth in proposed Sec. 901.60 (now Sec. 902.60). One of the 
commenters wrote that HUD should be open to extenuating circumstances 
if there is a delay in submitting data by the deadline.
    HUD believes that the 60-day data submission deadline is 
reasonable. Under the current PHMAP rule, PHAs are required to submit 
certifications within 60 calendar days after fiscal year end (FYE) and 
are required to submit year end financial statements within 45 calendar 
days after FYE.
    Process for Fair Housing Adjustments of Scores is Unclear. One 
commenter wrote that HUD should provide additional details regarding 
the conditions under which PHAS scores can be modified due to a fair 
housing review. The commenter remarked that proposed Sec. 901.60(e) 
(now Sec. 902.60(e)) refers to HUD's ability to change scores through 
reviews and investigations by HUD's Office of Fair Housing and Equal 
Opportunity (FHEO). The commenter wrote that in the absence of clear 
criteria, the meaning of this provision is unclear. The commenter also 
asked whether PHAs would be able to appeal

[[Page 46614]]

fair housing related adjustments of their PHAS scores.
    Section 902.60(f)(3) refers to data included in the independent 
audit report or reviews conducted by various HUD offices, including 
FHEO, where management deficiencies are identified that were not 
reflected in a PHA's certification submission. For purposes of 
reassessment, the REAC will schedule a reinspection and/or acquire 
audit services, if appropriate.
    Questions Regarding Appeals Process. Many commenters raised 
questions regarding the appeals process set forth in proposed 
Sec. 901.69 (Sec. 902.69). Several of the commenters recommended that 
HUD expand the appeals process to include all PHAs, and not just those 
that are designated as ``troubled.'' One of these commenters wrote that 
since PHAS will have a much more complex scoring system than PHMAP, 
there may be greater room for error in the calculation of PHAS scores. 
The commenter urged that all PHAs be granted the right to appeal PHAS 
scores. Other commenters suggested that HUD expand the appeals process 
to permit the appeal of the scores for the individual PHAS components, 
as well as the overall PHAS score. Two other commenters, however, asked 
how scores could be disputed or appealed given the vagueness of the 
proposed rule. Another commenter recommended that the current PHMAP 
appeals process be incorporated into PHAS. The commenter remarked that 
appeals are particularly important for PHAs seeking non-HUD financing, 
since lenders look at assessment scores.
    Section 6(j) of the U.S. Housing Act of 1937 provides for the 
petition for the removal of troubled and mod-troubled designations, and 
the appeal of a denial of such petition. These appeals are preserved in 
the PHAS. Since all of the indicators under the PHAS will be verified 
by independent third parties, the requirement for an extensive appeal 
process has been greatly diminished. As appropriate, and for purposes 
of reassessment, the REAC will schedule a reinspection and/or acquire 
audit services.
    Board of Review Composition. There were a few comments on the 
composition of the Board of Review. Two commenters wrote that the Board 
of Review should include a resident representative. One commenter 
recommended that, to insure the integrity of the appeals process, HUD 
should create an independent PHAS Appeals Board, similar to HUD's Board 
of Contract Appeals and Mortgagee Review Boards.
    These comments are noted by HUD. As stated in the proposed PHAS 
rule, the third member of the Board will be from such other office or 
representative as the Secretary may designate (excluding, however, 
representation from the TARCs).
    PHAS Scores Should Be Provided to Residents. One commenter 
recommended that HUD automatically provide all inspection results, 
resident satisfaction surveys, and PHAS scores to all local resident 
organizations, at the time they are made available to the PHAs.
    The REAC will provide the results of the assessment of the four 
PHAS indicators, as well as the overall PHAS score to PHAs. At that 
time, the results of the PHAS assessment becomes public information and 
will be available to all interested parties. In addition, 
Sec. 902.63(d) requires a PHA to post a notice of its final score and 
status in appropriate conspicuous and accessible locations in its 
offices within two weeks of its final score and status.
    PHAs Should Be Notified and Have Opportunity to Review Score Before 
Issuance. One commenter wrote that prior to issuing and posting a PHA's 
score, the grade and how it was arrived at should be reviewed with the 
PHA. Another commenter remarked that the proposed rule did not seem to 
include a provision regarding PHA notification of its PHAS score.
    A PHA's final PHAS score will be issued by the REAC after 
independent verification of all four indicators. As in the current 
PHMAP rule, a PHA's PHAS score will be issued without prior review by 
the PHA. Section 902.63(a) states that an overall PHAS score will be 
issued by REAC for each PHA 60 to 90 days after the end of the PHA's 
fiscal year.
    Questions Regarding Designation Status. Several commenters raised 
questions regarding designation status. One of these commenters asked 
whether a PHA that scores below the threshold on any component would be 
referred to a TARC. The commenter also asked whether a PHA that does 
not receive a passing score on any PHAS indicator would be designated 
as a troubled PHA. Another commenter wrote that the proposed rule did 
not state whether the PHAS score would be a measure of the PHA's 
absolute performance, or reflect the PHA's relative performance against 
other PHAs. The commenter also asked whether PHAs would, for scoring 
purposes, be divided by factors such as size, age and location. One 
commenter expressed confusion regarding the definition of ``top 
performer.'' The commenter asked whether top performers constitute the 
top 10% of all PHAs, or PHAs with an overall PHAS score of 90% or 
greater. One commenter expressed concern that the proposed rule would 
``debase'' the troubled PHA designation. The commenter wrote that under 
the proposed assessment system, a housing authority that scores below 
60 percent on Indicators 1, 2, or 3 will receive a troubled designation 
even if the overall score is well over 60. This commenter remarked that 
this requirement would unfairly force many housing authorities to 
become troubled. According to the commenter, this designation should be 
an indication recognized by all that the housing authority has serious 
problems. The commenter suggested that instead of receiving a troubled 
designation, a PHA that scores above 60% overall but fails to achieve 
60% on indicators 1, 2, or 3 should be referred to for technical 
assistance rather than some form of punitive action. Another commenter 
suggested that the rule should make compliance with fair housing laws 
and regulations a prerequisite to designation as a high performer.
    With respect to these comments, HUD notes that Sec. 902.67(a)(3) 
states that a PHA that achieves a total PHAS score of less that 60%, or 
achieves a score of less than 60% of the total points available under 
PHAS indicators #1, #2 or #3 shall be designated as troubled, and 
referred to the TARC as described in Sec. 902.75.
    Under PHAS Indicators #1, #2 and #4, the PHAS score will reflect 
the PHA's relative performance against other PHAs. Under indicator #3, 
the PHAS score will be a measure of the PHA's absolute performance. As 
in the current PHMAP rule, PHAs will not be divided by factors such as 
size, age or location for scoring purposes.
    The term ``top performer'' refers to a high performer PHA. To avoid 
confusion, HUD has only used the term ``high performer'' in the final 
rule.
    HUD agrees that a PHA that scores below 60% under indicators #1, #2 
and #3 has serious problems, and troubled designation is warranted. 
Referral to the TARC should be viewed as a remedial action rather than 
a punitive action. If a PHA is referred to the TARC, it will develop a 
Recovery Plan and MOA in conjunction with the TARC, and receive intense 
technical assistance to improve the physical condition of the 
properties, the financial health of the agency, and/or overall 
management operations.
    On the fair housing issue, HUD has determined that changes to the 
requirements for high performer designation will be considered as 
possible future changes to the PHAS. In order to make the transition 
from the

[[Page 46615]]

PHMAP to the PHAS, it was determined to make as few changes as possible 
between the current PHMAP and the management operations indicator under 
the PHAS.

H. Comments on Subpart G--PHAS Incentives and Remedies

    Comments on Incentives for High Performers. Comments on this 
subject (addressed in Sec. 902.71 of the final rule) are as follows: 
the rule is vague on incentives; the incentives for high performers are 
inadequate; how will PHAS incentives differ from PHMAP incentives; 
physical condition inspections for high performers should be every 
three years (less frequently than annual); bonus points should be 
provided on all HUD competitive funding; permit PHAs to establish 
development-based applicant waiting lists, subject to fair housing 
requirements; continue the current relief measures provided to high 
performers which include flexibility in the Comprehensive Grant program 
(CGP) on maximum percentages allowed for management improvements and 
administrative costs, and using CGP funds from troubled PHAs to 
increase the funds available to PHAs that perform well; provide high 
performers with the option to refuse to renew the lease for those 
tenants who have lease violations (poor payment history, poor 
housekeeping habits, evidence of tenant abuse to PHA property, history 
of causing disturbances in the community, etc.); provide high 
performers with significantly reduced reporting requirements; permit 
high performers to use the equity from properties to leverage financing 
for development purposes; and allow high performers to review income 
and conduct re-certification on flexible schedules or every two years.
    HUD agrees that incentives under the PHAS should be meaningful and 
reflect high performer designation. HUD intends to consult further with 
industry groups to develop such incentives.
    Clarify Rule's Relationship to Moving to Work Initiative. Since 
PHAs participating in HUD's Moving To Work (MTW) Initiative have 
largely been assured freedom from HUD oversight, the applicability of 
the proposed rule to them needs to be clarified. The incentives 
proposed for high performers under the rule are the same as those under 
MTW.
    A PHA that is participating in the MTW incentive will receive less 
oversight from HUD, as will those PHAs that are high performers but not 
participating in the MTW initiative.
    Field Office Discretion to Impose Program Requirement Waived by 
REAC Should Be Eliminated. A few commenters objected to the provision 
in Secs. 902.67(b) and 902.71(d) that would accord the field office the 
discretion to impose on a PHA any program requirement that had been 
waived by REAC as a high-performer incentive. The rule should not 
provide the field office any mechanism to achieve a back-door 
nullification of the PHAS process or results.
    HUD agrees with this comment, and these sections have been removed 
from the final PHAS rule.
    Comments on Referral to an Area/HUB Program Center. Commenters 
offered the following comments on the provisions of Sec. 902.73--
Referral to an Area HUB/Program Center: what uniform criteria will HUD 
use to determine which ``standard'' agencies will be required to submit 
improvement plans? This is vague. HUD should define the deficiencies 
and make sure they will be applied consistently across the HUBs; where 
does the authority and expertise lie in the HUBs to make these 
determinations; is there a link to Central Office PIH; are HUBs 
reporting to HUD Headquarters, to REAC, or somewhere else; and will 
HUBs be assigned the task of deciding what PHAs will file Improvement 
Plans. Another commenter stated that a standard PHA should not be 
required to submit a corrective action plan for any indicator or 
component for which it receives a passing score. One commenter stated 
that the requirement for ``standard performers'' to submit an 
improvement plan should be based solely on the PHAS scores.
    To address these concerns, HUD offers the following. The 
requirement at Sec. 902.73(a) (Sec. 901.73(a) in the proposed rule) 
states that a PHA that receives a total PHAS score of less than 70% but 
not less than 60% shall be required to submit an Improvement Plan to 
eliminate deficiencies in the PHA's performance. This requirement is 
similar to the current PHMAP rule which requires an Improvement Plan 
for any indicator that scored a grade of F. The requirement at 
Sec. 902.73(b)(2) states that the HUD/Program Center may require, on a 
risk management basis, a standard performer PHA with a score of not 
less than 70% to submit within 30 days after receipt of its PHAS score 
an Improvement Plan. This requirement is similar to the current PHMAP 
rule which states that a Field Office may require, on a risk management 
basis, a PHA to submit an Improvement Plan for each indicator that a 
PHA scored a grade D or E.
    The intent of this language in both the PHMAP and PHAS rules is for 
HUD and PHAs to be proactive regarding potential problem areas, and for 
HUD to provide technical assistance to a PHA before troubled 
designation is assigned. Since the local Office has the most frequent 
contact with the PHAs under its jurisdiction, it is in the best 
position to make such determinations.
    A deficiency is defined in Sec. 902.7 as any PHAS score below 60% 
of the available points in any indicator or component. This definition 
has been revised in this final rule to read: any PHAS score below 60% 
of the available points in any indicator, sub-indicator or component.
    HUB/Program Centers report to the Assistant Secretary for PIH. The 
requirement to submit Improvement Plans is based solely on the PHAS 
scores, e.g., on a PHA receiving a score of less than 70% but not less 
than 60%. However, a HUB/Program Center may require, on a risk 
management basis, a PHA with a score of not less than 70% to submit an 
Improvement Plan.
    Response Time to Correct Deficiencies Is Too Short. A few 
commenters stated that the response time allowed for an agency to 
correct any identified deficiency is too short.
    HUD believes that 30 days is sufficient time for a PHA to submit an 
Improvement Plan for the correction of identified deficiencies. Since 
the deficiencies would have been identified by the PHAS assessment, a 
PHA should be able to develop a plan to correct identified deficiencies 
within 30 days. The longer a deficiency is present without corrective 
action being taken, the worse the deficiency becomes, and the more 
costly it is to remedy. Comments on Referral to TARC. Commenters 
offered the following comments on the provisions of Sec. 902.75--
Referral to a HUB/Program Center.
    Receivership Determination Should Be Appealable to Assistant 
Secretary for PIH. A few commenters stated that it appears that the 
rule mandates receivership for a PHA that does not show ``substantial 
improvement'' within one fiscal year. At the very least, such a PHA 
should be permitted to make its case to the Assistant Secretary for 
Public and Indian Housing, who should be given the final authority 
under the rule to determine if appointment of a receiver should be 
sought.
    The PHAS proposed rule at Sec. 901.77 states that the Enforcement 
Center is officially responsible for recommending to the Assistant 
Secretary for PIH that a troubled PHA be declared in substantial 
default.

[[Page 46616]]

    Rule Needs to Address Impact on Tenants When PHA Is Referred to 
TARC or Enforcement Center. Some commenters stated that the rule does 
not discuss the implications upon the residents of referral of a PHA to 
the TARC or the Enforcement Center. Since the residents are the 
ultimate beneficiaries of the PHA and HUD and HUD's consumers, we 
expect that HUD would intend to protect their interests and legal 
rights, but the regulation is silent. The regulation should articulate 
what will happen to tenants, that all services will continue 
uninterrupted, and those services which the PHA may have been failing 
to properly deliver would be restored.
    Language has been added to the final PHAS regulation at 
Secs. 902.75 and 902.77 which states that to the extent feasible, all 
services to residents will continue uninterrupted.
    A One-Year Recovery Period Is Not Sufficient. We do not agree that 
once a PHA is designated as troubled and is referred to a TARC for 
assistance that the time allotted...is sufficient time for recovery. 
Due to the severity of need, multiple year solutions may be required 
and to lock a PHA to one year in the TARC is unrealistic, especially in 
large troubled PHAs.
    Initially, a PHA is afforded one year after the score is issued to 
the PHA to demonstrate substantial improvement (50% of the points 
needed to achieve a passing score). If the PHA demonstrates substantial 
improvement after one year, then the PHA will have an additional year 
to continue recovery efforts in the TARC.
    Recovery Plan Prepared by TARC Should Include a Timetable. One 
commenter stated that the recovery plan prepared by the TARC should 
include a timetable.
    The proposed PHAS regulation at Sec. 901.75(c)(2) provides for 
annual and quarterly performance targets for the MOA. Since the MOA is 
part of the Recovery Plan, the Recovery Plan does include a timetable.
    Ten Days to Review Recovery Plan and MOA Are Insufficient. Other 
commenters stated that ten days for a PHA to review the recovery plan 
and the MOA is not sufficient and should be extended.
    Within 30 days of notification of the designation of a troubled PHA 
within its jurisdiction, the appropriate TARC will be on-site at the 
PHA to develop a Recovery Plan. Since the PHA will be involved in the 
development of both the Recovery Plan and the MOA, a ten day review 
period is not unreasonable.
    Is Process for Developing MOA Between Troubled PHAs and HUD 
Consistent with PHMAP Statute. A few commenters asked whether the 
process for developing a MOA between troubled agencies and HUD is 
consistent with the law? One commenter noted that section 6(j)(2)(B) of 
the 1937 Act states that ``the Secretary shall provide for an on-site, 
independent assessment of the management of the agency'' and provides a 
definition of the independent assessors. The Secretary should seek to 
enter into an agreement with the troubled public housing agency only 
after consulting with the assessment team and reviewing its report. The 
proposed rule appears to be inconsistent with the statute.
    The independent assessment will be undertaken by the appropriate 
TARC, which within 30 days of notification of the designation of a 
troubled PHA within its area, will deploy an on-site team to develop a 
Recovery Plan (Sec. 902.75(a)).
    Rule Should Provide More Detail on Credible Source. Two commenters 
stated that HUD should provide more detail on what or who a credible 
source might be, and should be clear about what documentation is 
required.
    The proposed regulation did not include examples of a credible 
source because it may differ in each case. However, language will be 
added to the final PHAS regulation that gives examples of a credible 
source, including but not limited to, the Office of Fair Housing and 
Equal Opportunity, judicial referral, Mayor, etc.
    Comment on Resident Petitions for Remedial Action (Sec. 901.85). 
One commenter stated that the 20% requirement may be good for larger 
PHAs, but works against smaller ones.
    Although a fewer number of residents is required to equate to the 
20% of residents required in order to petition HUD to take remedial 
action, in accordance with Sec. 902.79(b), HUD is required to advise a 
PHA of such action, and a PHA will have the opportunity to initiate 
corrective action, or to demonstrate that the information is incorrect.

IV. Findings and Certifications

Paperwork Reduction Act Statement

    The information collection requirements in this rule have been 
approved by the Office of Management and Budget (OMB) in accordance 
with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and 
assigned OMB control number 2535-0106. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless the collection displays a valid control number.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 establishes 
requirements for Federal agencies to assess the effects of their 
regulatory actions on State, local, and tribal governments and the 
private sector. This rule will not impose any Federal mandates on any 
State, local, or tribal governments or the private sector within the 
meaning of the Unfunded Mandates Reform Act of 1995.

Environmental Review

    During the development of the June 30, 1998 proposed rule, a 
Finding of No Significant Impact with respect to the environment was 
made in accordance with HUD regulations in 24 CFR part 50 that 
implement section 102(2)(C) of the National Environmental Policy Act of 
1969 (42 U.S.C. 4223). That Finding continues to apply to this final 
rule, and is available for public inspection between 7:30 a.m. and 5:30 
p.m. weekdays in the Office of the Rules Docket Clerk, Office of 
General Counsel, Room 10276, Department of Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC.

Impact on Small Entities

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this rule, and in so doing 
certifies that this rule is not anticipated to have a significant 
economic impact on a substantial number of small entities. This rule 
revises HUD's previous regulations for the assessment of public housing 
(PHMAP). The new PHAS incorporates the statutory indicators of PHMAP, 
and adds three additional indicators. One of the new indicators--
physical condition--would assess the extent to which PHAs are providing 
public housing that is decent, safe, and sanitary. Public housing has 
always been subject to a statutory standard of ``decent, safe, and 
sanitary.'' This rule simply provides a clear and objective statement 
of the standard. This indicator also entails an annual independent HUD 
inspection of public housing, but it does not impose additional 
inspection requirements upon PHAs. The clarity and consistency of this 
new indicator provides a fair, accurate, and reliable assessment of the 
physical condition of the large public housing portfolio. However, 
since this rule does not alter the statutory standard for physical 
condition, nor impose additional inspection obligations, the new 
physical condition indicator will not have a

[[Page 46617]]

significant economic impact on a substantial number of small entities.
    The second indicator--financial condition--assesses the financial 
condition of PHAs, requiring them to submit financial reports to HUD 
electronically and in accordance with GAAP. HUD estimates that 
electronic submission of financial information will be less burdensome 
to PHAs, since many PHAs are making more extensive use of automated 
systems. This rule allows exceptions if the cost of electronic 
submission will be excessive. GAAP-based accounting reports, which are 
widely accepted and recognized, are not substantially different than 
the reports that PHAs previously submitted. A number of PHAs were 
already required to use GAAP or are otherwise using GAAP, and the 
majority of the PHAs with which HUD has consulted support the change to 
GAAP. For those PHAs that were not yet using GAAP, HUD is taking 
several steps to ease the conversion, including making only simple 
additions to the current PHA accounting guide and chart of accounts, 
and providing other conversion guidance and training, particularly to 
small entities. Increasing the speed of information exchange (through 
electronic submission) and the consistency and accuracy of the 
information (through GAAP) will greatly enhance the assessment of a 
PHA's financial condition. However, this new indicator will not have a 
significant economic impact on a substantial number of small entities.
    The fourth indicator--resident service and satisfaction--entails a 
new resident service and satisfaction survey. This survey is key to 
obtaining input from public housing residents, which is an important 
aspect of assessing public housing. HUD intends that this survey will 
be conducted through an automated process, and accordingly, will 
present a minimal administrative burden for PHAs in terms of 
administering and evaluating the survey. HUD intends to provide the 
survey format and the electronic reporting format, as well as software 
specifications. Therefore, this survey will not have a significant 
economic impact on a substantial number of small entities.
    HUD is also seeking to minimize any burden on PHAs by allowing a 
significant transition period for converting to the new PHAS. PHAs will 
have at least 1 year before new scores are issued under the PHAS. 
During that transition period, HUD may issue advisory scores regarding 
physical condition and financial management to provide guidance to PHAs 
and to ease the conversion to the new PHAS.
    The new PHAS is fundamentally designed to provide relevant and 
verifiable measures that directly relate to a PHA's performance and 
that result in an accurate and reliable score. This improved assessment 
process will allow HUD to target its oversight resources on those PHAs 
most in need of attention; high-performing PHAs will receive 
recognition, along with reduced HUD scrutiny and additional 
flexibility. Since the revised assessment system in this rule does not 
impose any significant new requirements upon PHAs, and since HUD will 
assist PHAs in their conversion to the system, this rule will not have 
a significant economic impact on a substantial number of small 
entities.

Federalism

    The General Counsel, as the Designated Official under Executive 
Order 12612, Federalism, has determined that the policies contained in 
this rule will not have substantial direct effects on States or their 
political subdivisions, on the relationship between the Federal 
Government and the States, or on the distribution of power and 
responsibilities among the various levels of government. This rule is 
intended to promote good management practices by including, in HUD's 
relationship with PHAs, continuing review of PHAs' compliance with 
already existing requirements. The rule will not create any new 
significant requirements. As a result, the rule is not subject to 
review under the Order.

Catalog of Federal Domestic Assistance

    The Catalog of Federal Domestic Assistance numbers for Public 
Housing is 14.850.

List of Subjects in 24 CFR Parts 901 and 902

    Administrative practice and procedure, Public housing, Reporting 
and recordkeeping requirements.

    Accordingly, Chapter IX 901 of title 24 of the Code of Federal 
Regulations is amended as follows:

PART 901--PUBLIC HOUSING MANAGEMENT ASSESSMENT PROGRAM

    1. The authority citation continues to read as follows:

    Authority: 42 U.S.C. 1437d(j); 42 U.S.C. 3535(d).

    2. In Sec. 901.1, paragraph (c)(1) is designated as paragraph 
(c)(1)(ii) and a new paragraph (c)(i) is added to read as follows:


Sec. 901.1  Purpose, program scope and applicability.

* * * * *
    (c)(1)(i) The provisions of this part remain applicable to PHAs and 
RMC/AMEs as described in paragraph (c)(1)(ii) until September 30, 1999.
* * * * *
    3. A new part 902 is added to read as follows:

PART 902--PUBLIC HOUSING ASSESSMENT SYSTEM

Subpart A--General Provisions

Sec.
902.1  Purpose and general description.
902.3  Scope.
902.5  Applicability.
902.7  Definitions.

Subpart B--PHAS Indicator #1: Physical Condition

902.20  Physical condition assessment.
902.23  Physical condition standards for public housing--decent, 
safe, sanitary and in good repair (DSS/GR).
902.25  Physical condition scoring and thresholds.
902.27  Physical condition portion of total PHAS points.

Subpart C--PHAS Indicator #2: Financial Condition

902.30  Financial condition assessment.
902.33  Financial reporting requirements.
902.35  Financial condition scoring and thresholds.
902.37  Financial condition portion of total PHAS points.

Subpart D--PHAS Indicator #3: Management Operations

902.40  Management operations assessment.
902.43  Management operations performance standards.
902.45  Management operations scoring and thresholds.
902.47  Management operations portion of total PHAS points.

Subpart E--PHAS Indicator #4: Resident Service and Satisfaction

902.50  Resident service and satisfaction assessment.
902.53  Resident service and satisfaction scoring and thresholds.
902.55  Resident service and satisfaction portion of total PHAS 
points.

Subpart F--PHAS Scoring

902.60  Data collection.
902.63  PHAS scoring.
902.67  Score and designation status.
902.69  PHA right of petition and appeal.

Subpart G--PHAS Incentives and Remedies

902.71  Incentives for high performers.
902.73  Referral to an Area HUB/Program Center.
902.75  Referral to a TARC.
902.77  Referral to the Enforcement Center.
902.79  Substantial default.
902.83  Interventions.
902.85  Resident petitions for remedial action.

[[Page 46618]]

Appendix A to Part 902--Areas and Items to be Inspected

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

Subpart A--General Provisions


Sec. 902.1  Purpose and general description.

    (a) Purpose. The purpose of the Public Housing Assessment System 
(PHAS) is to enhance trust in the public housing system among public 
housing agencies (PHAs), public housing residents, HUD and the general 
public by providing a comprehensive management tool for effectively and 
fairly measuring the performance of a public housing agency in 
essential housing operations, including rewards for high performers and 
consequences for poor performers.
    (b) Responsible office for PHAS assessments. The Real Estate 
Assessment Center (REAC) is responsible for assessing and scoring the 
performance of PHAs.
    (c) PHAS indicators of a PHA's performance. REAC will assess and 
score a PHA's performance based on the following four indicators:
    (1) PHAS Indicator #1--the physical condition of a PHA's properties 
(addressed in subpart B of this part);
    (2) PHAS Indicator #2--the financial condition of a PHA (addressed 
in subpart C of this part);
    (3) PHAS Indicator #3--the management operations of a PHA 
(addressed in subpart D of this part); and
    (4) PHAS Indicator #4--the resident service and satisfaction 
feedback on a PHA's operations (addressed in subpart E of this part).
    (d) Assessment tools. REAC will make use of uniform and objective 
protocols for the physical inspection of properties and the financial 
assessment of the PHA, and will gather relevant data from the PHA on 
the Management Operations Indicator and the Resident Service and 
Satisfaction Indicator. On the basis of this data, REAC will assess and 
score the results, advise PHAs of their scores and identify low scoring 
and failing PHAs so that these PHAs will receive the appropriate 
attention and assistance.
    (e) Limitation of change of PHA's fiscal year. To allow for a 
period of consistent assessment of the PHAS indicators, a PHA is not 
permitted to change its fiscal year for the first 3 full fiscal years 
following October 1, 1998.


Sec. 902.3  Scope.

    The PHAS is a strategic measure of a PHA's essential housing 
operations. The PHAS, however, does not evaluate a PHA's compliance 
with or response to every Department-wide or program specific 
requirement or objective. Although not specifically referenced in this 
part, PHAs remain responsible for complying with such requirements as 
fair housing and equal opportunity requirements, requirements under 
section 504 of the Rehabilitation Act of 1973 (29 U.S.C. 794) and 
requirements of programs under which the PHA is receiving assistance. 
PHAs' adherence to these requirements will be monitored in accordance 
with the applicable program regulations and the PHA's annual 
contributions contract.


Sec. 902.5  Applicability.

    (a) PHAs, RMCs, AMEs. (1) This part applies to PHAs, Resident 
Management Corporations (RMCs) and Alternate Management Entities 
(AMEs). The management assessment of an RMC/AME differs from that of a 
PHA. Because an RMC/AME enters into a contract with a PHA to perform 
specific management functions on a development-by-development or 
program basis, and because the scope of the management that is 
undertaken varies, not every indicator that applies to a PHA would be 
applicable to each RMC/AME.
    (2) This part is applicable beginning October 1, 1999.
    (b) PHA ultimate responsible entity under ACC. Due to the fact that 
the PHA and not the RMC/AME is ultimately responsible to HUD under the 
Annual Contributions Contract (ACC), the PHAS score of a PHA will be 
based on all of the developments covered by the ACC, including those 
with management operations assumed by an RMC or AME (pursuant to a 
court ordered receivership agreement, if applicable).
    (c) Assumption of management operations by AME. When a PHA's 
management operations have been assumed by an AME:
    (1) If the AME assumes only a portion of the PHA's management 
operations, the provisions of this part that apply to RMCs apply to the 
AME (pursuant to a court ordered receivership agreement, if 
applicable); or
    (2) If the AME assumes all, or substantially all, of the PHA's 
management functions, the provisions of this part that apply to PHAs 
apply to the AME (pursuant to a court ordered receivership agreement, 
if applicable).


Sec. 902.7  Definitions.

    As used in this part:
    Adjustment for physical condition (project age) and neighborhood 
environment is a total of 3 additional points added to PHAS Indicator 
#1 (Physical Condition). The 3 additional points, however, shall not 
result in a total point value over the total points available for PHAS 
Indicator #1 (established in subpart B of this part).
    Alternative management entity (AME) is a receiver, private 
contractor, private manager, or any other entity that is under contract 
with a PHA, or that is otherwise duly appointed or contracted (for 
example, by court order or agency action), to manage all or part of a 
PHA's operations. Depending upon the scope of PHA management functions 
assumed by the AME, in accordance with Sec. 902.5(c), the AME is 
treated as a PHA or an RMC for purposes of this part and, as 
appropriate, the terms PHA and RMC include AME.
    Assessed fiscal year is the PHA fiscal year that has been assessed 
under the PHAS.
    Average number of days nonemergency work orders were active is 
calculated:
    (1) By dividing the total of--
    (i) The number of days in the assessed fiscal year it takes to 
close active nonemergency work orders carried over from the previous 
fiscal year;
    (ii) The number of days it takes to complete nonemergency work 
orders issued and closed during the assessed fiscal year; and
    (iii) The number of days all active nonemergency work orders are 
open in the assessed fiscal year, but not completed;
    (2) By the total number of nonemergency work orders used in the 
calculation of paragraphs (1)(i), (ii) and (iii) of this definition.
    Days Receivable Outstanding is Tenant Receivables divided by Daily 
Tenant Revenue.
    Deficiency means any PHAS score below 60 percent of the available 
points in any indicator, sub-indicator or component.
    Improvement plan is a document developed by a PHA, specifying the 
actions to be taken, including timetables, that shall be required to 
correct deficiencies identified under any of the indicators and 
components within the indicator(s), identified as a result of the PHAS 
assessment when an MOA is not required.
    Reduced actual vacancy rate within the previous 3 years is a 
comparison of the vacancy rate in the PHAS assessed fiscal year (the 
immediate past fiscal year) with the vacancy rate of that fiscal year 
that is 2 years previous to the assessed fiscal year. It is calculated 
by subtracting the vacancy rate in the assessed fiscal year from the 
vacancy rate in the earlier year. If a PHA elects to certify to the 
reduction of the vacancy rate within the previous 3 years, the PHA 
shall retain justifying

[[Page 46619]]

documentation to support its certification for HUD post review.
    Reduced the average time nonemergency work orders were active 
during the previous 3 years is a comparison of the average time 
nonemergency work orders were active in the PHAS assessment year (the 
immediate past fiscal year) with the average time nonemergency work 
orders were active in that fiscal year that is 2 years previous to the 
assessment year. It is calculated by subtracting the average time 
nonemergency work orders were active in the PHAS assessment year from 
the average time nonemergency work orders were active in the earlier 
year. If a PHA elects to certify to the reduction of the average time 
nonemergency work orders were active during the previous 3 years, the 
PHA shall retain justifying documentation to support its certification 
for HUD post review.
    Vacancy loss is vacant unit potential rent divided by gross 
potential rent.
    Work order deferred for modernization is any work order that is 
combined with similar work items and completed within the current PHAS 
assessment year, or will be completed in the following year if there 
are less than 3 months remaining before the end of the PHA fiscal year 
when the work order was generated, under the PHA's modernization 
program or other PHA capital improvements program.

Subpart B--PHAS Indicator #1: Physical Condition


Sec. 902.20  Physical condition assessment.

    (a) Objective. The objective of the Physical Condition Indicator is 
to determine whether a PHA is maintaining its public housing in a 
condition that is decent, safe, sanitary and in good repair (DSS/GR), 
as this standard is defined Sec. 902.23.
    (b) Physical inspection under PHAS Indicator #1. REAC will provide 
for an independent physical inspection of, at minimum, a statistically 
valid sample of the units in the PHA's public housing portfolio to 
determine compliance with DSS/GR standard.
    (c) PHA physical inspection requirement. The HUD-conducted physical 
inspections required by this part do not relieve the PHA of the 
responsibility to inspect public housing units as provided in section 
6(j)(1) of the U.S. Housing Act of 1937 (42 U.S.C. 1437d(j)(1)), and 
Sec. 902.43(a)(5).
    (d) Compliance with State and local codes. The physical condition 
standards in this subpart do not supersede or preempt State and local 
building and maintenance codes with which the PHA's public housing must 
comply. PHAs must continue to adhere to these codes.


Sec. 902.23  Physical condition standards for public housing--decent, 
safe, sanitary and in good repair (DSS/GR).

    (a) Public housing must be maintained in a manner that meets the 
physical condition standards set forth in this section in order to be 
considered decent, safe, sanitary and in good repair. These standards 
address the major areas of public housing: the site; the building 
exterior; the building systems; the dwelling units; the common areas; 
and health and safety considerations.
    (1) Site. The site components, such as fencing and retaining walls, 
grounds, lighting, mailboxes/project signs, parking lots/driveways, 
play areas and equipment, refuse disposal, roads, storm drainage and 
walkways must be free of health and safety hazards and be in good 
repair. The site must not be subject to material adverse conditions, 
such as abandoned vehicles, dangerous walks or steps, poor drainage, 
septic tank back-ups, sewer hazards, excess accumulations of trash, 
vermin or rodent infestation or fire hazards.
    (2) Building exterior. Each building on the site must be 
structurally sound, secure, habitable, and in good repair. Each 
building's doors, fire escapes, foundations, lighting, roofs, walls, 
and windows, where applicable, must be free of health and safety 
hazards, operable, and in good repair.
    (3) Building systems. Each building's domestic water, electrical 
system, elevators, emergency power, fire protection, HVAC, and sanitary 
system must be free of health and safety hazards, functionally 
adequate, operable, and in good repair.
    (4) Dwelling units. (i) Each dwelling unit within a building must 
be structurally sound, habitable, and in good repair. All areas and 
aspects of the dwelling unit (for example, the unit's bathroom, call-
for-aid, ceiling, doors, electrical systems, floors, hot water heater, 
HVAC (where individual units are provided), kitchen, lighting, outlets/
switches, patio/porch/balcony, smoke detectors, stairs, walls, and 
windows) must be free of health and safety hazards, functionally 
adequate, operable, and in good repair.
    (ii) Where applicable, the dwelling unit must have hot and cold 
running water, including an adequate source of potable water.
    (iii) If the dwelling unit includes its own sanitary facility, it 
must be in proper operating condition, usable in privacy, and adequate 
for personal hygiene and the disposal of human waste.
    (iv) The dwelling unit must include at least one battery-operated 
or hard-wired smoke detector, in proper working condition, on each 
level of the unit.
    (5) Common areas. The common areas must be structurally sound, 
secure, and functionally adequate for the purposes intended. The 
basement/garage/carport, restrooms, closets, utility, mechanical, 
community rooms, day care, halls/corridors, stairs, kitchens, laundry 
rooms, office, porch, patio, balcony, and trash collection areas, if 
applicable, must be free of health and safety hazards, operable, and in 
good repair. All common area ceilings, doors, floors, HVAC, lighting, 
outlets/switches, smoke detectors, stairs, walls, and windows, to the 
extent applicable, must be free of health and safety hazards, operable, 
and in good repair.
    (6) Health and safety concerns. All areas and components of the 
housing must be free of health and safety hazards. These areas include, 
but are not limited to, air quality, electrical hazards, elevators, 
emergency/fire exits, flammable materials, garbage and debris, handrail 
hazards, infestation, and lead-based paint. For example, the buildings 
must have fire exits that are not blocked and have hand rails that are 
undamaged and have no other observable deficiencies. The housing must 
have no evidence of infestation by rats, mice, or other vermin, or of 
garbage and debris. The housing must have no evidence of electrical 
hazards, natural hazards, or fire hazards. The dwelling units and 
common areas must have proper ventilation and be free of mold, odor 
(e.g., propane, natural gas, methane gas), or other observable 
deficiencies. The housing must comply with all requirements related to 
the evaluation and reduction of lead-based paint hazards and have 
available proper certifications of such (see 24 CFR part 35).
    (b) Appendix A to this part lists the areas to be inspected and the 
items in each area to be inspected.


Sec. 902.25  Physical condition scoring and thresholds.

    (a) Scoring. Under PHAS Indicator #1, REAC will calculate a score 
of the overall condition of the PHA's public housing portfolio that 
reflects weights based on the relative importance of the individual 
inspectable areas and the relative severity of the deficiencies 
observed.
    (b) Adjustment for physical condition (project age) and 
neighborhood environment. In accordance with section 6(j)(1)(I)(2) of 
the 1937 Act (42

[[Page 46620]]

U.S.C. 1437d(j)(1)(I)(2)), the physical score for a project will be 
upwardly adjusted to the extent that negative conditions are caused by 
situations outside the control of the PHA. These situations are related 
to the poor physical condition of the project or the overall depressed 
condition of the immediately surrounding neighborhood. The intent of 
this adjustment is to not unfairly penalize the PHA, and to 
appropriately apply the adjustment.
    (1) Adjustments in three areas. Adjustments to the PHA physical 
project score will be made in three factually observed and assessed 
areas (inspectable areas):
    (i) Physical condition of the site;
    (ii) Physical condition of the common areas on the project; and
    (iii) Physical condition of the building exteriors.
    (2) Definitions. Definitions and application of physical condition 
and neighborhood environment factors are:
    (i) Physical condition applies to projects over 10 years old and 
that have not had substantial rehabilitation in the last 10 years.
    (ii) Neighborhood environment applies to projects located where the 
immediate surrounding neighborhood (that is a majority of the 
population that resides in the census tracts or census block groups on 
all sides of the development) has at least 51 percent of families with 
incomes below the poverty rate as documented by the latest census data.
    (3) Adjustment is for physical condition (project age) and 
neighborhood environment. HUD will adjust the physical score of a PHA's 
project subject to both the physical condition (project age) and 
neighborhood environment conditions. The adjustments will be made to 
the scores assigned to the applicable inspectable areas so as to 
reflect the difficulty in managing. In each instance where the actual 
physical condition of the inspectable area (site, common areas, 
building exterior) is rated below the maximum score for that area, 1 
point will be added, but not to exceed the maximum number of points 
available to that inspectable area.
    (i) These extra points will be added to the score of the specific 
inspectable area, by project, to which these conditions may apply. A 
PHA is required to certify on form HUD-50072, PHAS Certification (which 
is available from the Department of Housing and Urban Development, HUD 
Customer Service Center, 451 Seventh Street, SW, Room B-102, 
Washington, DC 20410; telephone (800) 767-7468), the extent to which 
the conditions apply, and to the inspectable area the extra scoring 
point should be added.
    (ii) A PHA that receives the maximum potential weighted points on 
the inspectable areas may not claim any additional adjustments for 
physical condition and/or neighborhood environments for the respective 
inspectable area(s). In no circumstance shall a PHA's score for the 
inspectable area, after any adjustment(s) for physical condition and/or 
neighborhood environments, exceed the maximum potential weighted points 
assigned to the respective inspectable area(s).
    (4) Scattered site projects. The Date of Full Availability (DOFA) 
shall apply to scattered site projects, where the age of units and 
buildings vary, to determine whether the projects have received 
substantial rehabilitation within the past 10 years and are eligible 
for an adjusted score for the Physical Condition Indicator.
    (5) Maintenance of supporting documentation. PHAs shall maintain 
supporting documentation to show how they arrived at the determination 
that the project's score is subject to adjustment under this section.
    (i) If the basis was neighborhood environments, the PHA shall have 
on file the appropriate maps showing the census block groups 
surrounding the development(s) in question with supporting census data 
showing the level of poverty. Projects that fall into this category but 
which have already been removed from consideration for other reasons 
(permitted exemptions and modifications and/or exclusions) shall not be 
counted in this calculation.
    (ii) For the physical condition factor, a PHA would have to 
maintain documentation showing the age and condition of the projects 
and the record of capital improvements, indicating that these 
particular projects have not received modernization funds.
    (iii) PHAs shall also document that in all cases, projects that 
were exempted for other reasons were not included in the calculation.
    (c) Thresholds. In order to receive a passing score under the 
Physical Condition Indicator, the PHA's score must fall above a minimum 
threshold of 18 points or 60 percent of the available points under this 
indicator. Further, in order to receive an overall passing score under 
the PHAS, the PHA must receive a passing score on the Physical 
Condition Indicator.


Sec. 902.27  Physical condition portion of total PHAS points.

    Of the total 100 points available for a PHAS score, a PHA may 
receive up to 30 points based on the Physical Condition Indicator.

Subpart C--PHAS Indicator #2: Financial Condition


Sec. 902.30  Financial condition assessment.

    (a) Objective. The objective of the Financial Condition Indicator 
is to measure the financial condition of a PHA for the purpose of 
evaluating whether it has sufficient financial resources and is capable 
of managing those financial resources effectively to support the 
provision of housing that is decent, safe, sanitary and in good repair.
    (b) Financial reporting standards. A PHA's financial condition will 
be assessed under this indicator on the basis of the annual financial 
report provided in accordance with Sec. 902.33.


Sec. 902.33  Financial reporting requirements.

    (a) Annual financial reports. PHAs must provide to HUD, on an 
annual basis, such financial information, as required by HUD. The 
financial information must be:
    (1) Prepared in accordance with Generally Accepted Accounting 
Principles (GAAP) as further defined by HUD in supplementary guidance;
    (2) Submitted electronically in the electronic format designated by 
HUD; and
    (3) Submitted in such form and substance prescribed by HUD.
    (b) Annual financial report filing dates. The financial information 
to be submitted to HUD in accordance with paragraph (a) of this 
section, must be submitted to HUD annually, no later than 60 days after 
the end of the fiscal year of the reporting period, and as otherwise 
provided by law.
    (c) Reporting compliance dates. The requirement for compliance with 
the financial reporting requirements of this section begins with PHAs 
with fiscal years ending September 30, 1999 and thereafter. Unaudited 
financial statements will be required 60 days after the PHA's fiscal 
year end, and audited financial statements will then be required no 
later than 9 months after the PHA's fiscal year end, in accordance with 
the Single Audit Act and OMB Circular A-133. (See 24 CFR 84.26). A PHA 
with a fiscal year ending September 30, 1999 that elects to submit its 
unaudited report earlier than the due date of November 30, 1999 must 
submit its financial report as required in this section. On or after 
September 30, 1998, but prior to November 30, 1999 (except for a PHA 
with its fiscal year ending September 30, 1999), PHAs may submit their 
financial reports in accordance with this section.

[[Page 46621]]

Sec. 902.35  Financial condition scoring and thresholds.

    (a) Scoring. Under PHAS Indicator 2, REAC will calculate a 
score that relies on the key components of financial health and 
management as well as audit and internal control flags.
    (1) The key components of PHAS Indicator #2 include:
    (i) Current Ratio--current assets divided by current liabilities;
    (ii) Number of Months Expendable Fund Balance--number of months a 
PHA can operate on the Expendable Fund Balance without additional 
resources; Expendable Fund Balance is the portion of the fund balance 
representing expendable available financial resources; unreserved and 
undesignated fund balance;
    (iii) Days Receivable Outstanding--average number of days tenant 
receivables are outstanding;
    (iv) Vacancy Loss--loss of potential rent due to vacancy;
    (v) Expense Management/Energy Consumption--expense per unit for key 
expenses, including energy consumption, and other expenses such as 
utilities, maintenance, security; and
    (vi) Net Income or Loss divided by the Expendable Fund Balance--
measures how the year's operations have affected the PHA's viability.
    (2) Additional components. Additional components may be used to 
identify circumstances in which there exists the possibility of higher 
risk of waste, fraud and abuse. These components will be used to detect 
fraud and will be used to generate ``flags'' that will signal field 
staff, Enforcement Center staff, or fraud investigators to take 
appropriate action. These components will primarily relate to financial 
management, but may also be used to provide a PHA with benchmarking 
information to allow the PHA to measure its own performance against its 
peers.
    (b) Thresholds. In order to receive a passing score under the 
Financial Condition Indicator, the PHA's score must fall above a 
minimum threshold of 18 points or 60 percent of the available points 
under this indicator. Further, in order to receive an overall passing 
score under the PHAS, the PHA must receive a passing score on the 
Financial Condition Indicator.


Sec. 902.37  Financial condition portion of total PHAS points.

    Of the total 100 points available for a PHAS score, a PHA may 
receive up to 30 points based on the Financial Condition Indicator.

Subpart D--PHAS Indicator #3: Management Operations


Sec. 902.40  Management operations assessment.

    (a) Objective. The objective of the Management Operations Indicator 
is to measure certain key management operations and responsibilities of 
a PHA for the purpose of assessing the PHA's management operations 
capabilities.
    (b) Management assessment. PHAS Indicator #3 pertaining to 
Management Operations incorporates the majority of the statutory 
indicators of section 6(j) of the U.S. Housing Act of 1937, and an 
additional nonstatutory indicator (security), as provided in 
Sec. 902.43.


Sec. 902.43  Management operations performance standards.

    (a) Management operations indicators. The following indicators will 
be used to assess a PHA's management operations:
    (1) Management Indicator #1--Vacancy rate and unit turnaround time. 
This management indicator examines the vacancy rate, a PHA's progress 
in reducing vacancies, and unit turnaround time. Implicit in this 
management indicator is the adequacy of the PHA's system to track the 
duration of vacancies and unit turnaround, including down time, make 
ready time, and lease up time.
    (2) Management Indicator #2--Modernization. This management 
indicator is automatically excluded if a PHA does not have a 
modernization program. This management indicator examines the amount of 
unexpended funds over 3 Federal fiscal years (FFY) old, the timeliness 
of fund obligation, the adequacy of contract administration, the 
quality of the physical work, and the adequacy of budget controls. All 
components of this management indicator apply to the Comprehensive 
Grant Program (CGP), the Comprehensive Improvement Assistance Program 
(CIAP), the HOPE VI assistance, vacancy reduction, and lead based paint 
risk assessment funding (1992-1995), and any successor program(s) to 
the CGP or the CIAP.
    (3) Management Indicator #3--Rents uncollected. This management 
indicator examines the PHA's ability to collect dwelling rents owed by 
residents in possession during the immediate past fiscal year by 
measuring the balance of dwelling rents uncollected as a percentage of 
total dwelling rents to be collected.
    (4) Management Indicator #4--Work orders. This management indicator 
examines the time it takes to complete or abate emergency work orders, 
the average number of days nonemergency work order were active, and any 
progress a PHA has made during the preceding 3 years to reduce the 
period of time nonemergency maintenance work orders were active. 
Implicit in this management indicator is the adequacy of the PHA's work 
order system in terms of how a PHA accounts for and controls its work 
orders, and its timeliness in preparing/issuing work orders.
    (5) Management Indicator #5--PHA annual inspection of units and 
systems. This management indicator examines the percentage of units 
that a PHA inspects on an annual basis in order to determine short-term 
maintenance needs and long-term modernization needs. This management 
indicator requires a PHA's inspection to utilize the HUD uniform 
physical condition standards set forth in subpart B of this part. All 
occupied units are required to be inspected.
    (6) Management Indicator #6--Security. This management indicator 
evaluates the PHA's performance in tracking crime related problems in 
their developments, reporting incidence of crime to local law 
enforcement agencies, the adoption and implementation, consistent with 
section 9 of the Housing Opportunity Program Extension Act of 1996 
(One-Strike and You're Out) (42 U.S.C. 1437d(r)), of applicant 
screening and resident eviction policies and procedures, and, as 
applicable, PHA performance under any HUD drug prevention or crime 
reduction grant(s). A PHA may receive credit for performance under non-
HUD funded programs if it provides auditable financial and statistical 
documentation for these programs.
    (b) Reporting on performance under the Management Operations 
Indicator. Each PHA will provide to HUD a certification on its 
performance under each of the management indicators in paragraph (a) of 
this section. The certifications shall comply with the requirements of 
Sec. 902.60.


Sec. 902.45 Management operations scoring and thresholds.

    (a) Scoring. Under PHAS Indicator #3, REAC will calculate a score 
of the overall management operations of a PHA that reflects weights 
based on the relative importance of the individual management 
indicators.
    (b) Thresholds. In order to receive a passing score under the 
Management Operations Indicator, the PHA's score must fall above a 
minimum threshold of 18 points or 60 percent of the available points 
under this PHAS Indicator #3. Further, in order to receive an overall 
passing score under the PHAS, the PHA

[[Page 46622]]

must receive a passing score on the Management Operations Indicator.


Sec. 902.47  Management operations portion of total PHAS points.

    Of the total 100 points available for a PHAS score, a PHA may 
receive up to 30 points based on the Management Operations Indicator.

Subpart E--PHAS Indicator #4: Resident Service and Satisfaction


Sec. 902.50  Resident service and satisfaction assessment.

    (a) Objective. The objective of the Resident Service and 
Satisfaction Indicator is to measure the level of resident satisfaction 
with living conditions at the PHA.
    (b) Reporting information on resident service and satisfaction. The 
assessment will be performed through the use of a resident service and 
satisfaction survey. The survey process will be managed by the PHA in 
accordance with a methodology prescribed by HUD. The PHA will be 
responsible for maintaining original copies of completed survey data, 
subject to independent audit, and for developing a follow-up plan to 
address issues resulting from the survey.


Sec. 902.53  Resident service and satisfaction scoring and thresholds.

    (a) Scoring. Under the PHAS Indicator #4, REAC will calculate a 
score based upon two components that receive points and a third 
component that is a threshold requirement. One component will be the 
point score of the survey results. The survey content will focus on 
resident evaluation of the overall living conditions, to include basic 
constructs such as: maintenance and repair (i.e., work order response); 
communications (i.e, perceived effectiveness); safety (i.e., perception 
of personal security); services (i.e., recreation and personal 
programs); and neighborhood appearance. The second component will be a 
point score based on the level of implementation and follow-up or 
corrective actions based on the results of the survey. The final 
component, which is not scored for points, but which is a threshold 
requirement, is verification that the survey process was managed in a 
manner consistent with guidance provided by HUD.
    (b) Thresholds. A PHA will not receive any points under PHAS 
Indicator #4 if the survey process is not managed as directed by HUD or 
the survey results are determined to be altered. A PHA will receive a 
passing score on the Resident Service and Satisfaction Indicator if it 
receives at least 6 points, or 60% of the available points under this 
PHAS Indicator #4.


Sec. 902.55  Resident service and satisfaction portion of total PHAS 
points.

    Of the total 100 points available for a PHAS score, a PHA may 
receive up to 10 points based on the Resident Service and Satisfaction 
Indicator.

Subpart F--PHAS Scoring


Sec. 902.60  Data collection.

    (a) Fiscal Year Reporting Period--limitation on changes after PHAS 
effectiveness. An assessed fiscal year for purposes of the PHAS 
corresponds to a PHA's fiscal year. To allow for a period of consistent 
assessments to refine and make necessary adjustments to the PHAS, a PHA 
is not permitted to change its fiscal year for the first 3 full fiscal 
years following the effective date of this part (see Sec. 902.1(e)).
    (b) Physical Condition information. 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.
    (c) Financial Condition information. Year-end financial information 
to conduct the assessment under subpart C, Financial Condition, of this 
part will be submitted by a PHA through electronic transmission of the 
data to HUD not later than 60 days after the end of the PHA's fiscal 
year. An audited report of the year-end financial information is due 
not later than 9 months after the end of the PHA's fiscal year.
    (d) Management Operations and Resident Service and Satisfaction 
Information. A PHA shall provide certification to HUD as to data 
required under subpart D, Management Operations, of this part and 
subpart E, Resident Service and Satisfaction, of this part not later 
than 60 days after the end of the PHA's fiscal year.
    (1) The certification shall be approved by PHA Board resolution, 
and signed and attested to by the Executive Director.
    (2) PHAs shall maintain documentation for 3 years verifying all 
certified indicators for HUD on-site review.
    (e) Failure to submit data by due date. If a PHA without a finding 
of good cause by HUD does not submit its certifications or year-end 
financial information, required by this part, or submits its 
certifications or year-end financial information more than 15 days past 
the due date, appropriate sanctions may be imposed, including a 
reduction of 1 point in the total PHAS score for each 15-day period 
past the due date. If all certifications or year-end financial 
information are not received within 90 days past the due date, the PHA 
will receive a presumptive rating of failure in all of the PHAS 
indicators and components certified to, which shall result in troubled 
and mod-troubled designations.
    (f) Verification of information submitted. (1) A PHA's 
certifications, year-end financial information and any supporting 
documentation are subject to verification by HUD at any time. 
Appropriate sanctions for intentional false certification will be 
imposed, including civil penalties, suspension or debarment of the 
signatories, the loss of high performer designation, a lower score 
under individual PHAS indicators and a lower overall PHAS score.
    (2) A PHA that cannot provide justifying documentation to REAC, or 
to the PHA's independent auditor for the assessment under any 
indicator(s) or component(s) shall receive a score of 0 for the 
relevant indicator(s) or component(s), and its overall PHAS score shall 
be lowered.
    (3) A PHA's PHAS score under individual indicators or components, 
or its overall PHAS score, may be changed by HUD pursuant to the data 
included in the independent audit report, or obtained through such 
sources as HUD on-site review, investigations by HUD's Office of Fair 
Housing and Equal Opportunity, or reinspection by REAC, as applicable.
    (g) Management operations assumed by an RMC. For those developments 
of a PHA where management operations have been assumed by an RMC, the 
PHA's certification shall identify the development and the management 
functions assumed by the RMC. The PHA shall obtain a certified 
questionnaire from the RMC as to the management functions undertaken by 
the RMC. Following verification of the RMC's certification, the PHA 
shall submit the RMC's certified questionnaire along with its own. The 
RMC's certification shall be approved by its Executive Director or 
Chief Executive Officer or responsible party.


Sec. 902.63  PHAS scoring.

    (a) Issuance of score by HUD. An overall PHAS score will be issued 
by REAC for each PHA 60 to 90 days after the end of the PHA's fiscal 
year.
    (b) Computing the PHAS score. Each of the four PHAS indicators in 
this part will be scored individually, and then will be used to 
determine an overall score for the PHA. Components within each of the 
four PHAS indicators will be

[[Page 46623]]

scored individually, and the scores for the components will be used to 
determine a single score for each of the PHAS indicators.
    (c) Adjustments to the PHAS score. Adjustments to the score may be 
made after a PHA's audit report for the year being assessed is 
transmitted to HUD. If significant differences (as defined in GAAP 
guidance materials provided to PHAs) are noted between unaudited and 
audited results, a PHA's PHAS score will be raised or lowered, as 
applicable, in accordance with the audited results.
    (d) Posting and publication of PHAS scores. Each PHA shall post a 
notice of its final PHAS score and status in appropriate conspicuous 
and accessible locations in its offices within 2 weeks of receipt of 
its final score and status. In addition, HUD will publish every PHA's 
score and status in the Federal Register.


Sec. 902.67  Score and designation status.

    Designation status corresponding to score. A PHA will be scored 
with a corresponding designation of status as follows:
    (a) High Performer. A PHA that achieves a score of at least 60 
percent of the points available under each of the four PHAS Indicators 
(addressed in subparts B through E of this part) and achieves an 
overall PHAS score of 90 percent or greater shall be designated a high 
performer. A PHA shall not be designated a high performer if it scores 
below the threshold established for any indicator. High performers will 
be afforded incentives that include relief from reporting and other 
requirements, as described in Sec. 902.71.
    (b) Standard Performer. A PHA that achieves a total PHAS score of 
less than 90 percent but not less than 60 percent shall be designated a 
standard performer. All standard performers must correct reported 
deficiencies. A standard performer that receives a score less than 70 
percent but not less than 60 percent shall be subject to other 
oversight, as described in Sec. 902.73. A PHA that achieves a score of 
less than 60 percent of the total points available under PHAS 
Indicators 1, 2, or 3 shall not be designated a standard performer, but 
shall be designated a troubled performer, as provided in paragraph (c) 
of this section.
    (c) Troubled Performer. A PHA that achieves a total PHAS score of 
less than 60 percent, or achieves a score of less than 60 percent of 
the total points available under PHAS Indicators 1, 2, or 3, shall be 
designated as troubled, and referred to the TARC as described in 
Sec. 902.75. In accordance with section 6(j)(2) of the 1937 Act, a PHA 
that receives less than 60 percent of the maximum calculation for the 
modernization indicator under PHAS Indicator #3 (Management Operations, 
subpart D of this part) may be subject to the following sanctions: 
under the Comprehensive Grant Program to a reduction of formula 
allocation or other sanctions (24 CFR part 968, subpart C); under the 
Comprehensive Improvement Assistance Program to disapproval of new 
funding or other sanctions (24 CFR part 968, subpart B); or disapproval 
of funding under the HOPE VI Program.


Sec. 902.69  PHA right of petition and appeal.

    (a) Appeal of troubled designation and petition for removal. A PHA 
may:
    (1) Appeal designation as a troubled agency (including designation 
as troubled with respect to the modernization program);
    (2) Petition for removal of such designation; and
    (3) Appeal any refusal to remove such designation.
    (b) Appeal process. The appeal shall be submitted by a PHA to the 
REAC within 30 days of a PHA's receipt of its score, and shall include 
supporting documentation and justification of the reasons for the 
appeal. An appeal submitted to the REAC without appropriate 
documentation will not be considered and will be returned to the PHA.
    (c) Consideration of appeal by REAC. Upon receipt of an appeal from 
a PHA, the REAC will convene a Board of Review (the Board) to evaluate 
the appeal and its merits for the purpose of determining whether a 
reassessment of the PHA is warranted. Board membership will be 
comprised of a representative from REAC, the Office of Public and 
Indian Housing, and such other office or representative as the 
Secretary may designate (excluding, however, representation from the 
Troubled Agency Recovery Center). For purposes of reassessment, the 
REAC will schedule a reinspection and/or acquire audit services, as 
determined by the Board, and a new score will be issued, if 
appropriate.
    (d) Final appeal decisions. HUD will make final decisions of 
appeals within 30 days of receipt of an appeal, and may extend this 
period an additional 30 days if further inquiry is necessary. Failure 
by a PHA to submit requested information within the 30-day period or 
any additional period granted by HUD is grounds for denial of an 
appeal.

Subpart G--PHAS Incentives and Remedies


Sec. 902.71  Incentives for high performers.

    (a) Incentives for high-performer PHAs. A PHA that is designated a 
high performer will be eligible for the following incentives:
    (1) Relief from specific HUD requirements. A PHA that is designated 
high performer will be relieved of specific HUD requirements (for 
example, fewer reviews and less monitoring), effective upon 
notification of high performer designation.
    (2) Public recognition. High-performer PHAs and RMCs that receive a 
score of at least 60 percent of the points available under each of the 
four PHAS Indicators and achieves an overall PHAS score of 90, will 
receive a Certificate of Commendation from HUD as well as special 
public recognition, as provided by the HUB/Program Center.
    (3) Bonus points in funding competitions. A high-performer PHA will 
be eligible for bonus points in HUD's funding competitions, where such 
bonus points are not restricted by statute or regulation governing the 
funding program.
    (b) Compliance with applicable Federal laws and regulations. Relief 
from any standard procedural requirement that may be provided under 
this section, does not mean that a PHA is relieved from compliance with 
the provisions of Federal law and regulations or other handbook 
requirements. For example, although a high performer or standard 
performer may be relieved of requirements for prior HUD approval for 
certain types of contracts for services, the PHA must still comply with 
all other Federal and State requirements that remain in effect, such as 
those for competitive bidding or competitive negotiation (see 24 CFR 
85.36).
    (c) Audits and reviews not relieved by designation. A PHA 
designated as a high performer or standard performer remains subject 
to:
    (1) Regular independent auditor (IA) audits.
    (2) Office of Inspector General (OIG) audits or investigations will 
continue to be conducted as circumstances may warrant.


Sec. 902.73  Referral to an Area HUB/Program Center.

    (a) Standard performers will be referred to the HUB/Program Center 
for appropriate action. A standard performer that receives a total 
score of less than 70 percent but not less than 60 percent shall be 
required to submit an Improvement Plan to eliminate deficiencies in the 
PHA's performance. A standard performer that receives a score of not 
less than 70 percent may be required, at the discretion of the 
appropriate area HUB/Program Center,

[[Page 46624]]

to submit an Improvement Plan to address specific deficiencies.
    (b) Submission of an Improvement Plan. (1) Within 30 days after a 
PHAS score is issued, a standard performer with a score less than 70 
percent is required to submit an Improvement Plan, which includes the 
information stated in paragraph (d) of this section and determined 
acceptable by the HUB/Program Center, for each indicator and/or 
component identified as deficient as well as other performance and/or 
compliance deficiencies as may be identified as a result of an on-site 
review of the PHA's operations. An RMC that is required to submit an 
Improvement Plan must develop the plan in consultation with its PHA and 
submit the Plan to the HUB/Program Center through its PHA.
    (2) The HUB/Program Center may require, on a risk management basis, 
a standard performer with a score of not less than 70 percent to submit 
within 30 days after receipt of its PHAS score an Improvement Plan, 
which includes the information stated in paragraph (d) of this section, 
for each indicator and/or component of a PHAS indicator identified as 
deficient.
    (c) Correction of deficiencies. (1) Time period for correction. 
After a PHA's receipt of its PHAS score and designation as a standard 
performer or, in the case of an RMC, notification of its score from a 
PHA, a PHA or RMC shall correct any deficiency indicated in its 
assessment within 90 days, or within such period as provided in the HUD 
approved Improvement Plan if an Improvement Plan is required.
    (2) Notification and report to HUB/Program Center. A PHA shall 
notify the HUB/Program Center of its action to correct a deficiency. A 
PHA shall also forward to the HUB/Program Center an RMC's report of its 
action to correct a deficiency.
    (d) Improvement Plan. An Improvement Plan shall:
    (1) Identify baseline data, which should be raw data but may be the 
PHA's score under each individual PHAS indicator and/or component that 
was identified as a deficiency;
    (2) Describe the procedures that will be followed to correct each 
deficiency;
    (3) Provide a timetable for the correction of each deficiency; and
    (4) Provide for or facilitate technical assistance to the PHA.
    (e) Determination of acceptability of Improvement Plan (1) The HUB/
Program Center will approve or deny a PHA's (or RMC's Improvement Plan 
submitted to the HUB/Program Center through the RMC's PHA), and notify 
the PHA of its decision. A PHA that submits an RMC's Improvement Plan 
must notify the RMC in writing, immediately upon receipt of the HUB/
Program Center notification, of the HUB/Program Center approval or 
denial of the RMC's Improvement Plan.
    (2) An Improvement Plan that is not approved will be returned to 
the PHA with recommendations from the HUB/Program Center for revising 
the Improvement Plan to obtain approval.
    (f) Submission of revised Improvement Plan. A revised Improvement 
Plan shall be resubmitted by the PHA within 30 calendar days of its 
receipt of the HUB/Program Center recommendations.
    (g) Failure to submit acceptable Improvement Plan. If a PHA fails 
to submit an acceptable Improvement Plan, or to correct deficiencies 
within the time specified in an Improvement Plan or such extensions as 
may be granted by HUD, the HUB/Program Center will notify the PHA of 
its noncompliance. The PHA (or the RMC through the PHA) will provide 
the HUB/Program Center its reasons for lack of progress in submitting 
or carrying out the Improvement Plan within 30 calendar days of its 
receipt of the noncompliance notification. HUD will advise the PHA as 
to the acceptability of its reasons for lack of progress and, if 
unacceptable, will notify the PHA that it will be referred to the TARC 
for remedial actions or such actions as the TARC may determine 
appropriate in accordance with the provisions of the ACC, this part and 
other HUD regulations. 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 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.


Sec. 902.75  Referral to a TARC.

    Upon designation of a PHA as troubled, in accordance with the 
requirements of section 6(j)(2)(B) of the 1937 Act and in accordance 
with this part, the REAC shall refer each troubled PHA to the PHA's 
area TARC for remedial action. The actions to be taken by the TARC and 
the PHA shall be as follows:
    (a) Recovery plan and MOA. Within 30 days of notification of the 
designation of a troubled PHA within its area, the appropriate TARC 
will deploy an on-site team to develop a Recovery Plan. The Recovery 
Plan shall include recommendations for improvements to correct or 
eliminate deficiencies that resulted in a failing PHAS score and 
designation as troubled. The Recovery Plan will incorporate a 
memorandum of agreement (MOA) as described in paragraph (c) of this 
section.
    (b) PHA review of recovery plan and MOA. The PHA will have 10 days 
to review the recovery plan and the MOA. During this 10-day period, the 
PHA shall resolve any claimed discrepancies in the plan with its area 
TARC, and discuss any recommended changes and target dates for 
improvement to be incorporated in the final MOA. Unless the time period 
is extended by the TARC, the MOA is to be executed 15 days following 
issuance of the preliminary MOA.
    (c) Memorandum of agreement (MOA). The final MOA is a binding 
contractual agreement between HUD and a PHA. The scope of the MOA may 
vary depending upon the extent of the problems present in the PHA, but 
shall include:
    (1) Baseline data, which should be raw data but may be the PHA's 
score in each of the PHAS indicators or components identified as a 
deficiency;
    (2) Annual and quarterly performance targets, which may be the 
attainment of a higher score within an indicator that is a problem, or 
the description of a goal to be achieved;
    (3) Strategies to be used by the PHA in achieving the performance 
targets within the time period of the MOA;
    (4) Technical assistance to the PHA provided or facilitated by HUD, 
for example, the training of PHA employees in specific management areas 
or assistance in the resolution of outstanding HUD monitoring findings;
    (5) The PHA's commitment to take all actions within its control to 
achieve the targets;
    (6) Incentives for meeting such targets, such as the removal of 
troubled or mod-troubled designation and Departmental recognition for 
the most improved PHAs;
    (7) The consequences of failing to meet the targets, including, but 
not limited to, such sanctions as the imposition of budget and 
management controls by the TARC, declaration of substantial default and 
subsequent actions, including referral to the Enforcement Center for 
judicial appointment of a receiver, limited denial of participation, 
suspension, debarment, or other actions deemed appropriate by the 
Enforcement Center; and
    (8) A description of the involvement of local public and private 
entities, including PHA resident leaders, in carrying out the agreement 
and rectifying the PHA's problems. A PHA shall have primary 
responsibility for obtaining active local public and private entity 
participation, including the

[[Page 46625]]

involvement of public housing resident leaders, in assisting PHA 
improvement efforts. Local public and private entity participation 
should be premised upon the participant's knowledge of the PHA, ability 
to contribute technical expertise with regard to the PHA's specific 
problem areas and authority to make preliminary/tentative commitments 
of support, financial or otherwise.
    (d) Maximum recovery period. Unless extended by the TARC and 
documented in the MOA, the maximum recovery period for a troubled PHA 
is the first full fiscal year following execution of the MOA.
    (e) Parties to the MOA. An MOA shall be executed by:
    (1) The PHA Board Chairperson and accompanied by a Board 
resolution, or a receiver (pursuant to a court ordered receivership 
agreement, if applicable) or other AME acting in lieu of the PHA Board;
    (2) The PHA Executive Director, or a designated receiver (pursuant 
to a court ordered receivership agreement, if applicable) or other AME-
designated Chief Executive Officer;
    (3) The Director of the area TARC; and
    (4) The appointing authorities of the Board of Commissioners, 
unless exempted by the HUD/Program Center.
    (f) Involvement of resident leadership in the MOA. HUD encourages 
the inclusion of the resident leadership in the execution of the MOA.
    (g) Failure to execute MOA or make substantial improvement under 
MOA. (1) If a troubled PHA does not execute an MOA within the period 
provided in paragraph (b) of this section, or the TARC determines that 
the PHA does not show a substantial improvement toward a passing PHAS 
score following the issuance of the failing PHAS score by the REAC, the 
TARC shall refer the PHA to the Enforcement Center, which shall 
initiate proceedings for judicial appointment of a receiver, and other 
sanctions as may be appropriate. For purposes of this paragraph (g), 
substantial improvement is defined as 50 percent of the points needed 
to achieve a passing PHAS score as determined by the REAC. The maximum 
period of time for remaining in troubled status before being referred 
to the Enforcement Center is 2 years.
    (2) The following example illustrates the provisions of paragraph 
(g)(1) of this section:

    Example: A PHA receives a score of 50; 60 is a passing score. 
The PHA is referred to the TARC. Within 1 year after the score is 
issued to the PHA, the PHA must achieve a 5-point increase to 
continue recovery efforts in the TARC. If the PHA fails to achieve 
the 5-point increase, the PHA will be referred to the Enforcement 
Center. The maximum period of time for remaining in troubled status 
before being referred to the Enforcement Center is 2 years.

    (h) To the extent feasible, while a PHA is under a referral to a 
TARC, all services to residents will continue uninterrupted.


Sec. 902.77  Referral to the Enforcement Center.

    (a) Failure of a troubled PHA to execute or meet the requirements 
of a memorandum of agreement in accordance with Sec. 902.75 constitutes 
a substantial default in accordance with Sec. 902.79 and shall result 
in referral to the Enforcement Center. The Enforcement Center is 
officially responsible for recommending to the Assistant Secretary for 
Public and Indian Housing that a troubled performer PHA be declared in 
substantial default. The Enforcement Center shall initiate the judicial 
appointment of a receiver or the interventions provided in Sec. 902.83; 
and may initiate limited denial of participation, suspension, 
debarment, the imposition of other sanctions available to the 
Enforcement Center including referral to the appropriate Federal 
government agencies or offices for the imposition of civil or criminal 
sanctions.
    (b) To the extent feasible, while a PHA is under a referral to the 
Enforcement Center, all services to residents will continue 
uninterrupted.


Sec. 902.79  Substantial default.

    (a) Events or conditions that constitute substantial default. The 
following events or conditions shall constitute substantial default.
    (1) HUD may determine that events have occurred or that conditions 
exist that constitute a substantial default if a PHA is determined to 
be in violation of Federal statutes, including but not limited to, the 
1937 Act, or in violation of regulations implementing such statutory 
requirements, whether or not such violations would constitute a 
substantial breach or default under provisions of the relevant ACC.
    (2) HUD may determine that a PHA's failure to satisfy the terms of 
a memorandum of agreement entered into in accordance with Sec. 902.75, 
or to make reasonable progress to execute or meet requirements included 
in a memorandum of agreement, are events or conditions that constitute 
a substantial default.
    (3) HUD shall determine that a PHA that has been designated as 
troubled and does not show substantial improvement, as defined in 
Sec. 902.75(g), in its PHAS score in 1 year following issuance of the 
failed score is in substantial default.
    (4) HUD may declare a substantial breach or default under the ACC, 
in accordance with its terms and conditions.
    (5) HUD may determine that the events or conditions constituting a 
substantial default are limited to a portion of a PHA's public housing 
operations, designated either by program, by operational area, or by 
development(s).
    (b) Notification of substantial default and response. If 
information from an annual assessment or audit, or any other credible 
source (including but not limited to the Office of Fair Housing 
Enforcement, the Office of the Inspector General, a judicial referral 
or a referral from a mayor or other official) indicates that there may 
exist events or conditions constituting a substantial breach or 
default, HUD shall advise a PHA of such information. HUD is authorized 
to protect the confidentiality of the source(s) of such information in 
appropriate cases. Before taking further action, except in cases of 
apparent fraud or criminality, and/or in cases where emergency 
conditions exist posing an imminent threat to the life, health, or 
safety of residents, HUD shall afford the PHA a timely opportunity to 
initiate corrective action, including the remedies and procedures 
available to PHAs designated as troubled PHAs, or to demonstrate that 
the information is incorrect.
    (1) Form of notification. Upon a determination or finding that 
events have occurred or that conditions exist that constitute a 
substantial default, the Assistant Secretary shall provide written 
notification of such determination or finding to the affected PHA. 
Written notification shall be transmitted to the Executive Director, 
the Chairperson of the Board, and the appointing authority(ies) of the 
Board, and shall include, but is not limited to:
    (i) Identification of the specific covenants, conditions, and/or 
agreements under which the PHA is determined to be in noncompliance;
    (ii) Identification of the specific events, occurrences, or 
conditions that constitute the determined noncompliance;
    (iii) Citation of the communications and opportunities to effect 
remedies afforded pursuant to paragraph (a) of this section;
    (iv) Notification to the PHA of a specific time period, to be not 
less than 10 calendar days, except in cases of apparent fraud or other 
criminal behavior, and/or under emergency conditions as described in 
paragraph (a)

[[Page 46626]]

of this section, nor more than 30 calendar days, during which the PHA 
shall be required to demonstrate that the determination or finding is 
not substantively accurate; and
    (v) Notification to the PHA that, absent a satisfactory response in 
accordance with paragraph (b) of this section, HUD will refer the PHA 
to the Enforcement Center, using any or all of the interventions 
specified in Sec. 902.83, and determined to be appropriate to remedy 
the noncompliance, citing Sec. 902.83, and any additional authority for 
such action.
    (2) Receipt of notification. Upon receipt of the notification 
described in paragraph (b)(1) of this section, the PHA must 
demonstrate, within the time period permitted in the notification, 
factual error in HUD's description of events, occurrences, or 
conditions, or show that the events, occurrences, or conditions do not 
constitute noncompliance with the statute, regulation, or covenants or 
conditions to which the PHA is cited in the notification.
    (3) Waiver of notification. A PHA may waive, in writing, receipt of 
explicit notice from HUD as to a finding of substantial default, and 
voluntarily consent to a determination of substantial default. The PHA 
must concur on the existence of substantial default conditions which 
can be remedied by technical assistance, and the PHA shall provide HUD 
with written assurances that all deficiencies will be addressed by the 
PHA. HUD will then immediately proceed with interventions as provided 
in Sec. 902.83.
    (4) Emergency situations. In any situation determined to be an 
emergency, or in any case where the events or conditions precipitating 
the intervention are determined to be the result of criminal or 
fraudulent activity, the Secretary or the Secretary's designee is 
authorized to intercede to protect the residents' and HUD's interests 
by causing the proposed interventions to be implemented without further 
appeals or delays.


Sec. 902.83  Interventions.

    (a) Interventions under this part (including an assumption of 
operating responsibilities) may be limited to one or more of a PHA's 
specific operational areas (e.g., maintenance, modernization, 
occupancy, or financial management) or to a single development or a 
group of developments. Under this limited intervention procedure, HUD 
could select, or participate in the selection of, an AME to assume 
management responsibility for a specific development, a group of 
developments in a geographical area, or a specific operational area, 
while permitting the PHA to retain responsibility for all programs, 
operational areas, and developments not so designated.
    (b) Upon determining that a substantial default exists under this 
part, HUD may initiate any interventions deemed necessary to maintain 
decent, safe, and sanitary dwellings for residents. Such intervention 
may include:
    (1) Providing technical assistance for existing PHA management 
staff;
    (2) Selecting or participating in the selection of an AME to 
provide technical assistance or other services up to and including 
contract management of all or any part of the public housing 
developments administered by a PHA;
    (3) Assuming possession and operational responsibility for all or 
any part of the public housing administered by a PHA;
    (4) Entering into agreements, arrangements, and/or contracts for or 
on behalf of a PHA, or acting as the PHA, and expending or authorizing 
the expenditure of PHA funds, irrespective of the source of such funds, 
to remedy the events or conditions constituting the substantial 
default;
    (5) The provision of intervention and assistance necessary to 
remedy emergency conditions;
    (6) After the solicitation of competitive proposals, select an 
administrative receiver to manage and operate all or part of the PHA's 
housing; and
    (7) Petition for the appointment of a receiver to any District 
Court of the United States or any court of the State in which real 
property of the PHA is located.
    (c) The receiver is to conduct the affairs of the PHA in a manner 
consistent with statutory, regulatory, and contractual obligations of 
the PHA and in accordance with such additional terms and conditions 
that the court may provide.
    (d) The appointment of a receiver pursuant to this section may be 
terminated upon the petition to the court by the PHA, the receiver, or 
HUD, and upon a finding by the court that the circumstances or 
conditions that constituted substantial default by the PHA no longer 
exist and that the operations of the PHA will be conducted in 
accordance with applicable statutes and regulations, and contractual 
covenants and conditions to which the PHA and its public housing 
programs are subject.
    (e) HUD may take the actions described in this part sequentially or 
simultaneously in any combination.


Sec. 902.85  Resident petitions for remedial action.

    The total number of residents that petition HUD to take remedial 
action pursuant to sections 6(j)(3)(A)(i) through (iv) of the 1937 Act 
must equal at least 20 percent of the residents, or the petition must 
be from an organization or organizations of residents whose membership 
must equal at least 20 percent of the PHA's residents.

Appendix A to Part 902--Areas and Items to be Inspected

AREA: Site

Items:

Fencing and Retaining Walls
Grounds
Lighting
Mail Boxes/Project Signs
Market Appeal
Parking Lots/Driveways
Play Areas and Equipment
Refuse Disposal
Roads
Storm Drainage
Walkways

AREA: Building Exterior

Items:

Doors
Fire Escapes
Foundations
Lighting
Roofs
Walls
Windows

AREA: Building Systems

Items:

Domestic Water
Electrical System
Elevators
Emergency Power
Fire Protection
HVAC
Sanitary System

AREA: Dwelling Unit

Items:

Bathroom
Cell-for-Aid
Ceiling
Doors
Electrical System
Floors
Hot Water Heater
HVAC System
Kitchen
Lighting
Outlets/Switches
Patio/Porch/Balcony
Smoke Detector
Stairs
Walls
Windows

AREA: Common Areas

Items:

Basement/Garage/Carport
Closets/Utility/Mechanical
Community Room
Day Care

[[Page 46627]]

Halls/Corridors/Stairs
Kitchen
Laundry Room
Lobby
Office
Other Community Spaces
Patio/Porch/Balcony
Pools and Related Structures
Restroom
Storage
Trash Collection Areas

AREA: Health and Safety

Items:

Air Quality
Electrical Hazards
Elevator
Emergency/Fire Exits
Fire Escapes
Flammable Materials
Garbage and Debris
Ground Fault Interrupters
Handrails
Hazards
Hot Water Heater
Infestation
Lead Paint
Pools and Related Structures
Smoke Detectors

    Dated: August 27, 1998.
Deborah Vincent,
General Deputy Assistant Secretary for Public and Indian Housing.
[FR Doc. 98-23565 Filed 8-31-98; 8:45 am]
BILLING CODE 4210-33-P