[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]


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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.

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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

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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]
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                                                                                       Metro         Nonmetro
                HUD region                                  Area                     (percent)       (percent)
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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
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    U.S.TOTAL.............................  ....................................             2.2             1.9
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[FR Doc. 98-28648 Filed 10-26-98; 8:45 am]
BILLING CODE 4210-27-P