[Federal Register Volume 63, Number 207 (Tuesday, October 27, 1998)] [Notices] [Pages 57306-57308] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 98-28648] ----------------------------------------------------------------------- DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT [Docket No. FR-4295-N-02] Notice of Operating Cost Adjustment Factors for Low-Income Housing Preservation and Resident Homeownership Projects Assisted with Section 8 Housing Assistance Payments AGENCY: Office of the Secretary, HUD. ACTION: Retraction and reissuance of February 25, 1998 Notice. ----------------------------------------------------------------------- SUMMARY: The Low-Income Housing Preservation and Resident Homeownership Act of 1990 (``LIHPRHA'') requires that future rent adjustments for LIHPRHA projects be made by applying an annual factor to be determined by the Secretary to the portion of rent attributable to operating expenses for the project and, where the owner is a priority purchaser, to the portion of rent attributable to project oversight costs. This notice supersedes and corrects HUD's February 25, 1998 Federal Register notice announcing the Operating Cost Adjustment Factors (``OCAF(s)'') to be used for rent increases under LIHPRHA, which inadvertently set forth erroneous OCAFs. In those cases where the application of an erroneous OCAF resulted in the use of a budget-based rent adjustment, the budget-based calculation will remain in effect for the remainder of the annual period. If an owner accepted the erroneous OCAF published in the February 25, 1998 notice without taking the budget-based rent adjustment option, then, at such owner's request, the Department will retroactively apply the revised OCAFs contained in this notice to the appropriate gross rent potential. The corrected OCAFs set forth in this notice apply in all other cases. The most recent published OCAF will be applied on the anniversary date of the housing assistance payments contract. For the convenience of readers, this notice reprints the text of the February 25, 1998 notice, which included an explanation of the methodology employed to develop the OCAFs. EFFECTIVE DATE: July 1, 1998. FOR FURTHER INFORMATION CONTACT: Ulyses Brinkley, Office of Multifamily Housing Management, Department of Housing and Urban Development, 451 Seventh Street, SW, Washington, DC 20410; telephone (202) 708-0558; (This is not a toll-free number). Hearing or speech-impaired individuals may access this number via TTY by calling the toll- [[Page 57307]] free Federal Information Relay Service at 1-800-877-8339. SUPPLEMENTARY INFORMATION: I. OCAFS The Low-Income Housing Preservation and Resident Homeownership Act of 1990 (``LIHPRHA'') (see, in particular, section 222(a)(2)(G)(i) of LIHPRHA, 12 USC 4112(a)(2)(G) and the regulations at 24 CFR 248.145(a)(9)) requires that future rent adjustments for LIHPRHA projects be made by applying an annual factor to be determined by the Secretary to the portion of project rent attributable to operating expenses for the project and, where the owner is a priority purchaser, to the portion of project rent attributable to project oversight costs. The Secretary has determined to use the OCAF as the annual factor. II. Budget-Based Method of Calculating Contract Rent Increases If an owner believes that the contract rents approved by the Secretary pursuant to the OCAF are not adequate, an owner may request that its contract rent increase be calculated using the budget-based method. Owners shall: (1) submit documentation to HUD pursuant to the procedures in Chapter 7 of HUD Handbook 4350.1, Insured Project Servicing Handbook, and (2) demonstrate that an increase in contract rents above that provided by the OCAF is necessary to reflect extraordinary necessary expenses of owning and maintaining the Housing. If the Secretary determines that the project rents pursuant to the OCAF are insufficient to cover project operating expenses, the Secretary may increase contract rents in excess of the amount determined pursuant to the OCAF to reflect extraordinary necessary expenses of owning and maintaining the project. Any contract rent increase resulting from using the budget-based method shall be effective for the year approved. III. Method for Calculating OCAF In seeking to find the best operating cost adjustment factors for this purpose, the Department analyzed several sources of data. HUD's own data on rental project operating costs formed the largest and most reliable set of time-series data on actual project expenses. Bureau of Labor Statistics (BLS) data on wages and prices were found to offer the most reliable surrogate data sources. After exploring alternative approaches, two methods of developing OCAFs were considered for detailed review. One was to use administrative and operating expense data for unsubsidized FHA-insured projects as the basis for developing factors. The other was to use BLS data on wages and prices as a surrogate indicator of operating cost changes. An analysis of the HUD FHA data from the form HUD-92410 showed that utility, tax, and insurance expenses had such a high degree of variability that measurements of area- or regional-level average or median expense changes had little relevance to most projects, and that these data could not be used to provide meaningful measures of change. Analysis efforts were therefore concentrated on the ``Administrative'' and ``Operating and Maintenance'' expense items reported on the form HUD-92410. It was found that a large percentage of FHA-insured, unassisted projects had unusual changes in year-to-year administrative and operating costs, possibly due to expensing of major repairs using reserve funds that are transferred into the operating expense account. This is of concern, since using operating expense change factors that partly reflect unspecified inclusions of reserve expenditures means that the data do not provide a good indicator of normal, on-going operating expenses or of changes in those expenses. This also appears to explain why change factors developed using FHA-insured administrative and operating expense data do not have a significant central grouping tendency, but instead are spread relatively evenly over a wide range of values. Use of an average or median value has less meaning in such situations than it normally does, since only a few projects have values near the average. Starting in 1993, HUD began to collect more detailed budget information for all FHA-insured projects, including information on funds transferred from project reserves to cover work reported as operating and maintenance expenses. In future years, this information may make it feasible to develop reliable OCAFs based on costs incurred by unassisted, FHA-insured projects. The Department intends to re- examine the feasibility of this approach as more data become available, but believes that actual operating expense data are not a reliable basis for developing OCAFs at this time and does not intend to use these data to calculate OCAFs. The second option studied takes advantage of the fact that nearly all administrative and operating expenses are either labor-related or are tied to the cost of non-food producer goods. Labor-related costs should normally tend to move with regional changes in wages, while the cost of most producer goods should change in a similar manner throughout the country. The cost of changes in goods used in administrative and maintenance work can be measured by the BLS Producer Price Index. Wage and employment data are collected on a comprehensive and highly reliable basis by the Bureau of Labor Statistics (BLS). HUD uses BLS wage data in calculating median family income levels, and it uses BLS government wage data as the main determinant of the annual increases for Public Housing Allowed Expense Levels. Research on Public Housing program administrative and operating expenses has shown that approximately 60 percent of such expenses are labor-related and 40 percent are tied to purchased goods. Since 1983 HUD has used this 60-percent-wage/40-percent-price-index ratio to update Public Housing Allowed Operating Expenses. The approach has been the subject of research and has been found to work well. It was used to develop OCAF factors that measure changes in ``Administrative'' and ``Operating and Maintenance'' expenses, as follows: OCAF=(60%*BLS private sector wage change+40%*BLS non-food PPI change)*(avg. operating and maintenance costs/avg. non-debt service costs) The FY 1998 OCAF figures, shown on the accompanying appendix, were produced for the metropolitan and nonmetropolitan area parts of each of the ten HUD Regions using the BLS data from the final annual ES-202 series data on employment and wages. This is the same level of geography used for Section 8 Annual Adjustment Factors (AAFs), and has the advantage of capturing regional economic trends while avoiding the sometimes erratic changes that would result from use of more localized data. Future OCAF factors will be published on an annual basis. IV. Findings and Certifications Environmental Impact In accordance with 24 CFR 50.19(c)(6) of the HUD regulations, the policies and procedures contained in this notice set forth rate determinations and related external administrative requirements and procedures which do not constitute a development decision that affects the physical condition of specific project areas or building sites, and therefore are categorically excluded from the requirements of the National Environmental Policy Act. Executive Order 12612, Federalism The General Counsel, as the Designated Official under section 6(a) of Executive Order 12612, Federalism, has [[Page 57308]] determined that the policies contained in this notice will not have substantial direct effects on States or their political subdivisions, or the relationship between the Federal government and the States, or on the distribution of power and responsibilities among the various levels of government. As a result, the notice is not subject to review under the Order. This notice pertains to Operating Cost Adjustment Factors (``OCAF(s)''), to be used for rent increases under LIHPRHA, and does not substantially alter the established roles of the Department, the States, and local governments. (The Catalog of Federal Domestic Assistance Number for this program is 14.187.) Dated: September 25, 1998. Andrew Cuomo, Secretary. Appendix--Low Income Housing Preservation and Resident Homeownership Act of 1990 [FY 1998 Operating Cost Adjustment Factors] ---------------------------------------------------------------------------------------------------------------- Metro Nonmetro HUD region Area (percent) (percent) ---------------------------------------------------------------------------------------------------------------- 1......................................... NEW ENGLAND......................... 2.5 1.8 2......................................... NEW YORK-NEW JERSEY................. 2.4 1.8 3......................................... MID-ATLANTIC........................ 2.1 1.7 4......................................... SOUTHEAST........................... 2.4 2.0 5......................................... MIDWEST............................. 2.1 1.8 6......................................... SOUTHWEST........................... 2.2 1.8 7......................................... GREAT PLAINS........................ 2.5 2.0 8......................................... ROCKY MOUNTAINS..................... 2.2 1.8 9......................................... PACIFIC/HAWAII...................... 2.0 1.6 10........................................ NORTHWEST/ALASKA.................... 2.5 2.1 --------------------------------------------------------------------- U.S.TOTAL............................. .................................... 2.2 1.9 ---------------------------------------------------------------------------------------------------------------- [FR Doc. 98-28648 Filed 10-26-98; 8:45 am] BILLING CODE 4210-27-P