[Federal Register Volume 65, Number 7 (Tuesday, January 11, 2000)]
[Rules and Regulations]
[Pages 1712-1754]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-591]



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Part IV





Department of Housing and Urban Development





_______________________________________________________________________



24 CFR Part 902



Public Housing Assessment System (PHAS) Amendments; Final Rule

  Federal Register / Vol. 65, No. 7 / Tuesday, January 11, 2000 / Rules 
and Regulations  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 902

[Docket No. FR-4497-F-05]
RIN 2577-AC08


Public Housing Assessment System (PHAS) Amendments to the PHAS

AGENCY: Office of the Assistant Secretary for Public and Indian 
Housing, and Office of the Director of the Real Estate Assessment 
Center, HUD.

ACTION: Final rule.

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SUMMARY: This rule amends the Public Housing Assessment System (PHAS) 
regulation at 24 CFR part 902 to provide additional information and 
revise certain procedures and establish others for the assessment of 
the physical condition, financial health, management operations and 
resident services and satisfaction with PHA services in public housing, 
including the technical review of physical inspection results and 
resident survey results, and appeals of PHAS scores. The rule also 
implements certain recently enacted statutory amendments. The rule 
takes into consideration public comments received on the June 22, 1999, 
proposed rule, as well as additional input HUD sought on this proposed 
rule through informal meetings with representatives of PHAs and public 
housing residents, and an analysis of PHAS advisory scores issued in 
calendar years 1998 and 1999.
    The purpose of the PHAS is to function as a management tool that 
effectively and fairly measures a PHA's performance based on standards 
that are objective, uniform and verifiable.

DATES: Effective Date: February 10, 2000.

FOR FURTHER INFORMATION CONTACT: For further information contact the 
Real Estate Assessment Center (REAC), Attention: Wanda Funk, U.S. 
Department of Housing and Urban Development, 1280 Maryland Avenue, SW, 
Suite 800, Washington, DC 20024; telephone Technical Assistance Center 
at (888) 245-4860 (this is 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. Additional 
information is available from the REAC Internet Site, http://
www.hud.gov/reac.

SUPPLEMENTARY INFORMATION:

I. Background

    HUD's Public Housing Assessment System (PHAS) provides a 
significant oversight tool that effectively and fairly measures the 
performance of a public housing agency (PHA) based on standards that 
are objective and uniform. The final rule implementing the PHAS was 
issued September 1, 1998 (63 FR 46596), and became effective October 1, 
1998. Although the PHAS regulation became effective October 1, 1998, 
the September 1, 1998, final rule provided a delayed implementation 
date for the PHAS. The final rule took into consideration that time was 
needed by PHAS to become familiar with and make the transition to this 
new assessment system. The September 1, 1998, final rule provided that 
the PHAS becomes effective for all PHAs with fiscal years ending on and 
after September 30, 1999, and at that time, will replace the previous 
assessment system, the Public Housing Management Assessment Program 
(PHMAP). (As will be discussed later in this preamble, the schedule for 
full implementation of PHAS for certain PHAS was revised by notice 
published on October 21, 1999 (64 FR 56676).)
    Under the PHAS, HUD evaluates a PHA based on the following four 
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) the residents' assessment (through a resident 
survey) of the PHA's performance. HUD's Real Estate Assessment Center 
(REAC) is charged with the responsibility for assessing and scoring the 
performance of PHAs under the PHAS.
    On June 22, 1999 (64 FR 33348), HUD published a rule that proposed 
to amend the PHAS regulation, codified at 24 CFR part 902, to provide 
additional information about the PHAS scoring systems, revise certain 
procedures and establish others for the assessment of the physical 
condition, financial health, management operations and resident service 
and satisfaction in public housing, including the technical review of 
physical inspection results and appeals of PHAS scores. The June 22, 
1999, rule also proposed to implement certain recently enacted 
statutory amendments. Although the June 22, 1999, rule only proposed to 
implement certain provisions of the PHAS regulation, for the 
convenience of the reader, HUD published the entire PHAS regulation.
    On June 23, 1999, HUD published, in connection with the PHAS rule, 
several notices that provide additional information on the scoring 
process under the PHAS. These notices pertain to: (1) the Physical 
Condition Scoring Process (64 FR 33650); (2) the Financial Condition 
Scoring Process (64 FR 33700); (3) the Management Operations Scoring 
Process (64 FR 33708); and the Resident Service and Satisfaction Survey 
Scoring Process (64 FR 33712). The publication of these notices on June 
23, 1999, was the second publication for each of these notices. All 
four notices were previously published on May 13, 1999, at 64 FR 26166, 
64 FR 26222, 64 FR 26232, and 64 FR 26236. At both the time of the May 
1999 publication and the June 1999 publication, HUD solicited comments 
on the scoring systems for each of the four PHAS Indicators. The issues 
raised by the public commenters on the Notices are addressed in this 
rule.
    Sections II and III of the preamble to the June 22, 1999, proposed 
rule provided a detailed discussion of the changes proposed to be made 
to the PHAS regulations (see 64 FR 33348 at 33349-3351). The preamble 
to this final rule does not repeat that discussion. HUD refers the 
reader back to the June 22, 1999, proposed rule for the discussion of 
proposed changes.
    The public comment period on the PHAS proposed rule closed on 
August 23, 1999. At the close of the public comment period, HUD had 
received 29 comments. The commenters included housing authorities, 
national organizations representing housing authorities, a law firm and 
a national policy organization. All the comments were carefully 
considered in the development of this final rule.
    In addition to solicitation of public comments through the 
rulemaking process, following the close of the public comment period on 
the June 22, 1999 proposed rule, HUD held several meetings with PHAs 
and their representatives to discuss the PHAS, implementation of the 
PHAS, and to seek additional suggestions and recommendations on changes 
and refinements. HUD also solicited additional input from residents, 
and continued its analysis of the PHAS advisory scores that was started 
during the one year transition period following the September 1, 1998 
final rule. This additional consultation and continued analysis of the 
PHAS was in keeping with HUD's commitment, made during the 1998 
rulemaking process, to work closely with PHAs and residents and their 
respective representatives in making the transition to the PHAS, to 
make any necessary refinements to the PHAS as a result of testing PHAS 
and consultation with PHAs and residents, and to make PHAS an effective 
and efficient assessment system. This additional consultation and 
analysis also satisfies direction provided to HUD

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in the Conference Report to HUD's Fiscal Year 2000 Appropriations Act 
(Pub. L. 106-74, 113 Stat 1047, approved October 20, 1999). The 
conferees directed HUD to (1) delay implementation of the PHAS until, 
in consultation with PHAs and their designated representatives, HUD 
conducted a thorough analysis of all advisory PHAS assessments and 
reviewed the GAO's analysis of the PHAS, and (2) publish a new 
consensus-based PHAS final rule that incorporates any recommendations 
resulting from this consultation and review process. Although GAO's 
report on its analysis of the PHAS has not been issued in final form, 
HUD has had ongoing discussions with GAO on its analysis of the PHAS to 
date, and has considered this analysis in the development of the final 
rule. This final rule published today reflects input from this 
consultation and review process.
    Section III of this preamble highlights the changes made at this 
final rule stage. Section IV of this preamble addresses the significant 
issues raised by the public commenters. Section V of this preamble 
addresses the comments received on the scoring process notices 
published on June 23, 1999. In the preamble to the June 22, 1999 
proposed rule, HUD specifically solicited comments on certain issues. 
The comments received on these issues are provided in Section VI of the 
preamble to this final rule. Section VII addresses general comments 
directed to this rulemaking.
    HUD notes that some of the comments from housing authorities raised 
issues very specific to their public housing developments or their 
advisory scores, and were not issues directed to the regulatory 
provisions in the proposed rule or the scoring systems described in the 
notices. Accordingly, these comments are not addressed in this rule. 
HUD, however, appreciates PHAs advising HUD of these specific concerns. 
HUD has followed up with several PHAs and will continue to follow-up 
with PHAs where there appear to be issues of discrepancies or problems 
with their physical inspections, or with other aspects of the PHAS 
particular to the PHA that commented.
    Section II of this preamble, which immediately follows, provides a 
brief overview of the public comments received on the proposed rule.

II. Overview of Public Comments on Proposed Rule

    As noted earlier in this preamble, HUD received 29 comments on the 
PHAS proposed rule published on June 22, 1999. The majority of the 
commenters expressed their support for a uniform and objective system 
to assess a PHA's performance. The majority of the commenters, however, 
also believed that neither HUD nor PHAs were ready for full 
implementation of the PHAS commencing October 1, 1999, as originally 
scheduled. Many of the PHAs stated that they had only recently received 
their PHAS advisory scores, and needed additional time to review and 
comprehend these scores and prepare for implementation of PHAS. Other 
PHAs stated that HUD needed additional time to prepare for PHAS because 
PHAs were experiencing problems with electronic data submission to HUD, 
as required by the PHAS regulation, and problems were encountered with 
HUD systems. These commenters stated that neither HUD nor PHAs were 
ready for implementation of PHAS, and requested that HUD delay 
implementation of PHAS for another year. (Concerns about specific 
components of PHAS are addressed in Section IV of this preamble.)
    HUD recognizes that with the start-up of any new system, problems 
will arise and aspects of the system will need to be fine-tuned. For 
these reasons, HUD provided, in its PHAS final rule issued on September 
1, 1998, that PHAS would be implemented for PHAs with fiscal years 
ending on and after September 30, 1999. During the year of transition 
that preceded the scheduled implementation of PHAS (September 1998 to 
September 1999), HUD continued to examine its PHAS processes, tested 
PHAS systems, obtained feedback about the PHAS from PHAs and public 
housing residents, and, as a result, gained valuable information, which 
HUD has used to refine various elements of the PHAS. During this 
period, HUD also continued its PHAS education and training program for 
PHAs both through HUD's internet site and through training conducted 
across the nation. For these reasons, HUD does not believe delaying 
implementation of the PHAS for all PHAs for another full year is 
necessary. However, as HUD already has shown through publication of its 
October 21, 1999 notice, HUD agrees that additional time is necessary 
for certain PHAs, and additional time was provided to these PHAs.
    HUD recognized that even with the one-year delayed implementation 
of PHAS, those PHAs which, under the September 1, 1998 final rule, will 
be the first PHAs to be issued PHAS scores (PHAs with fiscal years 
ending September 30, 1999 and December 31, 1999), additional time and/
or additional assistance may be necessary to review advisory scores and 
prepare for compliance with the requirements of the new assessment 
system. For these PHAs, HUD already has advised that it will not issue 
PHAS scores for fiscal years ending September 30, 1999 and December 31, 
1999. For these PHAs, HUD will issue a PHAS advisory scores for all 
four PHAS Indicators. For these PHAS, HUD also will issue an assessment 
score based only on the management component of the PHAS (subpart D of 
the part 902 regulation). Section III of this preamble discusses this 
assistance in more detail.
    An additional concern raised by many PHA commenters is that a PHA's 
score under PHAS was very different from the score the PHA previously 
received under PHMAP, and PHAs were concerned about the discrepancy 
between the two scores. As HUD stated in the first PHAS proposed rule 
published on June 30, 1998, the PHAS is a different system from PHMAP. 
The PHAS was designed to assess more than the management operations of 
PHAs. The PHAS provides for an assessment of a PHA's physical 
condition, financial condition, management operations, and resident 
services and satisfaction, and the PHAS provides for this assessment to 
be done using, to the extent feasible, uniform and objective measures. 
With this broader assessment, a PHA's overall PHAS score will be 
different from the PHA's overall PHMAP score.
    Another concern voiced by commenters is that the PHAS is not 
consistent with the flexibility provided to PHAs by the Quality Housing 
and Work Responsibility Act of 1998 (Pub. L. 105-276, approved October 
21, 1998) (commonly referred to as the ``Public Housing Reform Act.''). 
This statute which amended the U.S. Housing Act of 1937 (the 1937 Act) 
made significant changes to HUD's public housing and Section 8 
assistance programs. HUD agrees with the commenters that the Public 
Housing Reform Act increased PHA flexibility with respect to management 
and operations of their programs. The statute, however, did not relieve 
HUD of the obligation to fulfill its public trust responsibilities, 
which include the appropriate oversight of the entities receiving 
taxpayers funds to administer HUD programs. To the contrary, HUD 
believes that the Public Housing Reform Act strengthened HUD's 
oversight authority with respect to assessment of the performance of 
PHAs.
    On the subject of improvement and refinement of the PHAS, HUD notes 
that the number of comments and concerns raised about PHAS were 
significantly less than those raised during the initial

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rulemaking on the PHAS in 1998. HUD received 776 comments on the first 
PHAS proposed rule, published on July 30, 1998. Although 670 of the 776 
comments were form letters, in reviewing the comments raised on the 
first PHAS proposed rule and this second proposed rule, HUD believes 
that it has made significant progress in addressing initial concerns 
about the PHAS, and both HUD and PHAs benefitted from the transition 
period that followed the September 1, 1998, final rule.
    HUD recognizes that there is anxiety about significant change, and 
the PHAS represents a marked departure from the PHMAP. HUD believes, 
however, that the PHAS represents not only a marked departure from, but 
an improvement over, the PHMAP. HUD also acknowledges that the PHAS is 
not a perfect system, but no system is perfect. HUD expects that in the 
implementation of PHAS, problems will arise from time to time. Where 
those problems result from HUD's systems, HUD will work to quickly 
remedy the problems and correct any errors. Where the PHAS shows that 
problems are with the PHA in the performance of one or more areas, HUD 
will work with the PHA to remedy its problems, and, when necessary, 
take appropriate actions to ensure that PHAs are in compliance with 
applicable laws and regulations. At the foundation of PHAS is the goal 
to have all PHAs perform as high performers, which means PHAs are 
delivering decent, safe and affordable housing to their residents.

III. Changes Made to the PHAS at the Final Rule Stage

PHAS Scoring Notices

    The scoring notices for the four PHAS Indicators were published on 
June 23, 1999, and HUD solicited public comment on these notices. As a 
result of public comment and further consultation with PHAs and 
residents, several clarifying changes and improvements were made to the 
notices. Each notice will describe the changes made since the previous 
publication. These four notices published in conjunction with this 
final rule, to be published soon, establish the scoring processes for 
the four PHAS Indicators. These scoring notices will remain in place as 
published. As provided in the rule, in the event HUD decides to make 
any future substantive changes to these notices, they will be published 
for comment before being issued in final form.
    Two scoring notices will be published for the Management Operations 
Indicator. As will be explained later in this preamble, this final rule 
revises the sub-indicators of the Management Operations Indicator. One 
Management Operations scoring notice establishes the scoring process 
for the Management Operations Indicator, before it was revised by this 
final rule, and the second notice establishes the scoring process for 
the revised Management Operations Indicator.

PHAS Regulation

    In this final rule, HUD has made the following changes to the 
regulation:
     Section 902.1 (Purpose and General Description), HUD 
revised paragraph (e) that provided that a PHA may not change its 
fiscal year for the first three full fiscal years following October 1, 
1998. HUD added language to this section to provide that a PHA may not 
change its fiscal year ``unless the change has been approved by HUD.'' 
The requirements under the new PHA Plan regulations, published as an 
interim rule on February 18, 1999 (64 FR 8170), and as a final rule on 
October 21, 1999 (64 FR 56844), may necessitate a change in fiscal 
years for some PHAs in future years. This language will provide HUD and 
the PHAs with the flexibility to address this matter if necessary.
     Section 902.5 (Applicability) was reorganized to include 
the discussion of the applicability of the PHAS regulation to Resident 
Management Corporations (RMCs) and Alternative Management Entities 
(AMEs) in one paragraph of this section, revised paragraph (a). Revised 
paragraph (a) recognizes that RMCs may now be direct recipients of 
certain HUD funds. Section 532 of the Public Housing Reform Act amended 
section 20 of the 1937 Act to provide, among other things that the 
Secretary shall directly provide assistance from the Operating and 
Capital Funds to a RMC under certain conditions. If the Secretary 
provides direct funding to RMCs (DF-RMCs) as provided by section 20, 
section 20 provides that the PHA shall not be responsible for the 
actions of the RMC.
    Revised paragraph (a) provides that RMCs and DF-RMCs will be 
assessed and issued their own numeric scores under the PHAS based on 
the public housing developments or portions of public housing 
developments that they manage and the responsibilities they assume 
which can be scored under PHAS. Paragraph (a) provided that because 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 (including a court 
ordered receivership agreement, if applicable). Revised paragraph (a) 
includes this language but also provides that the PHAS score of a PHA 
will not be based on developments managed by a DF-RMC. Again, a PHA is 
not responsible for developments managed by a DF-RMC.
    References in the PHAS regulation to PHAs include RMCs, unless 
otherwise stated. References in the PHAS regulation to RMCs include DF-
RMCs, unless otherwise stated, and the PHAS regulation is applicable to 
RMCs, including DF-RMCs, unless otherwise stated.
    Revised paragraph (a) also clarifies that AMEs are not issued PHAS 
scores. The performance of the AME contributes to the PHAS score of the 
PHA or the PHAs for which they assumed management responsibilities.
     In Sec. 902.5, as part of the reorganization of this 
section, HUD amended paragraph (b) to reflect the following revised 
implementation schedule of PHAS for PHAs with fiscal years ending 
September 30, 1999, or December 31, 1999, that was published in the 
Federal Register on October 21, 1999. Section 902.5 provides that for 
PHAs with fiscal years ending September 30, 1999, or December 31, 1999, 
HUD will not issue PHAS scores for the fiscal years ending on these 
dates. For these PHAs, in lieu of a PHAS score, HUD will issue the 
following:
    (1) PHAS Advisory Score. A PHA with a fiscal year ending September 
30, 1999, or December 31, 1999, will be issued a PHAS advisory score 
for all four PHAS Indicators. The PHA must comply with the requirements 
of this part so that HUD may issue the advisory score. Physical 
inspections will be conducted using HUD uniform physical inspection 
protocol. For these PHAs to successfully make the transition to PHAS, 
they must comply with the requirements of PHAS and be assessed by HUD 
under the PHAS, if only on an advisory basis.
    (2) Management Assessment Score. A PHA with a fiscal year ending 
September 30, 1999, or December 31, 1999, will receive an assessment 
score on the basis of HUD's assessment of the PHA's management 
operations in accordance with subpart D of part 902.
    This section also provides that PHAs with fiscal years ending after 
December 31, 1999, will be issued PHAS scores.
     In Sec. 902.7 (Definitions), HUD added a definition of 
``Act'' to refer to the U.S. Housing Act of 1937 (42 U.S.C. 1437 et 
seq.), which is referenced throughout the rule.

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     In Sec. 902.7, HUD removed language from the definition of 
``Alternative Management Entity (AME)'' which was duplicative of the 
language in Sec. 902.5. HUD included in the definition of ``AME'' 
reference to an entity that has entered into a Regulatory and Operating 
Agreement with a PHA to clarify that the units managed by an AME under 
this agreement are covered by this rule.
     In Sec. 902.7, in the definition of ``reduced actual 
vacancy rate within the previous three years,'' HUD clarifies that this 
rate only applies to PHAs with fiscal years ending September 30, 1999, 
and December 31, 1999. As provided in the PHAS Transition Notice, 
published on October 21, 1999, PHAs with fiscal years ending September 
30, 1999, and December 31, 1999, will be assessed under requirements of 
part 902, subpart D, as in effect before issuance of this final rule.
     In Sec. 902.7, HUD added definitions for ``unit months 
available'' and ``unit months leased.''
     In Sec. 902.7, HUD removed the definition of ``vacancy 
loss'' and replaced this definition with one for ``occupancy loss.''
     In Sec. 902.20 (Physical Condition Assessment), HUD 
clarifies that occupied units, which are the units subject to physical 
inspection are subject to inspection but not as dwelling units; for 
example, units used for daycare or for meetings (units used for such 
purposes are inspected as common areas).
     In Sec. 902.23 (Physical Condition Standards), HUD added 
language to clarify that HUD's Uniform Physical Condition Standards are 
concerned with acceptable basic living conditions, not the decor or 
cosmetic appearance of the housing.
     In Sec. 902.23, HUD added language to clarify that the 
five major inspectable areas may include the components for each area 
listed in this section, but need not, in each case, include all these 
components, or may include other components, similar to those listed, 
but unique to the housing being inspected, or referred to by another 
name other than the term referenced in the rule.
     In Sec. 902.24 (Physical Inspection of Properties), HUD 
added language in the definition of ``score'' in paragraph (b) that 
highlights that PHAs are notified of health and safety deficiencies at 
the time of the physical inspection and the PHA is expected to promptly 
address all health and safety deficiencies.
     In Sec. 902.25 (Physical Condition Scoring and Thresholds) 
HUD revised paragraph (b)(3)(i) to remove reference to outdated form 
HUD 50072, and to provide that the certification required under this 
paragraph shall be in the manner prescribed by HUD.
     In Sec. 902.25, HUD added a new paragraph (c) that 
provides for adjustment of the physical condition score based on 
certain circumstances that include: (1) Inconsistencies between local 
code requirements and HUD's inspection protocol, or conditions which 
are permitted by variance or license, or which are preexisting physical 
features; (2) deficiencies in the physical condition of the property, 
the cause of which were beyond the control of the PHA (but the PHA is 
responsible for correction); and (3) modernization work in progress in 
a dwelling unit.
     In Secs. 902.25, 902.35 (Financial Condition Scoring and 
Thresholds) and 902.45 (Management Operations Scoring and Threshold), 
HUD clarified that to receive a passing score under the Physical 
Condition, Financial Condition and Management Operations Indicators, a 
PHA must achieve a score of at least 18 points or 60 percent of the 
available points under these indicators.
     In Sec. 902.26 (Physical Inspection Report), HUD added new 
subparagraphs to paragraph (a) to provide a process for correcting 
exigent health and safety deficiencies identified during the physical 
inspection and noted on the physical inspection report before the 
physical inspection report becomes final.
     In Sec. 902.33 (Financial Reporting Requirements), HUD 
provides an extension of time to submit the required financial 
information. For the following four quarters--September 30, 1999, 
December 31, 1999, March 31, 2000 and June 30, 2000--PHAs will receive 
an automatic one month extension for the submission of their required 
financial information. For fiscal years ending after June 30, 2000, the 
final rule provides PHAs with a 15-day ``grace'' period beyond the 
submission due date. This same automatic one month extension is 
provided for the information required to be submitted under PHAS 
Indicator #3 (Management Operations) and Indicator #4 (Resident 
Services and Satisfaction) (see discussion of Sec. 902.60 below).
     In Sec. 902.33, HUD also revised paragraph (a) to add a 
new paragraph (3). New paragraph (3) provides under the scoring process 
for the Financial Condition Indicator, no points will be deducted under 
the Current Ratio or Monthly Expendable Fund Balance components for a 
PHA that has too high liquidity or reserves if the PHA has achieved at 
least 90 percent of the points available under the Physical Condition 
Indicator, and is not required to prepare a follow-up survey plan under 
the Resident Service and Satisfaction Indicator. For a PHA that has too 
high liquidity or reserves but does not meet the qualifications 
described in paragraph (a)(3)(i), the PHA may appeal point deductions 
under the Current Ratio or Monthly Expenditure Fund Balance components 
based on mitigating circumstances if the PHA's physical condition score 
is at least 60 percent of the total available points under the Physical 
Condition Indicator. The appeal may be made without regard to change in 
designation. The appeal process is similar to that provided for 
adjustments of scores under the Physical Condition Indicator.
     In Sec. 902.35 (Financial Condition Scoring and 
Thresholds), HUD added a new paragraph (paragraph (a)(2)) to provide 
that PHAs with fiscal years ending September 30, 1999, December 31, 
1999, March 31, 2000, and June 30, 2000, will receive an advisory score 
for HUD's financial assessment of the PHA's entity-wide operations. An 
entity-wide assessment includes financial information on other HUD 
funds, such as Section 8 or Community Development Block Grant funds 
(received from the CDBG grantee), as well as funds from non-HUD 
sources.
    HUD's notice published on October 21, 1999, already notified PHAs 
with fiscal years ending September 30, 1999 or December 31, 1999 that 
they would receive a financial advisory score. Although the final rule 
extends the entity-wide advisory score to PHAs with fiscal years ending 
March 31, 2000, and June 30, 2000, the rule does not exempt these 
latter PHAs from a PHAS financial score.
    PHAs with fiscal years ending March 31, 2000, and June 30, 2000, 
will receive a PHAS financial score based on their public housing 
operating subsidies program. PHAs with fiscal years ending after June 
30, 2000, will receive PHAS financial scores that are based on the 
PHA's entity-wide operations. HUD has extended entity-wide advisory 
scores to PHAs with fiscal years ending March 31, 2000, and June 30, 
2000, as a result of HUD's consultation with the industry, and because 
of the conversion from HUD accounting to GAAP. The chart that follows 
provides an overview of the financial scoring process into the year 
2000.

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--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Financial condition                          Management
             Quarter             ----------------------------------------------------------------------------------      Physical           Resident
                                    Public  Housing        Entity-wide        Six  Indicators    Five  Indicators
--------------------------------------------------------------------------------------------------------------------------------------------------------
9/30/99.........................  Advisory...........  Advisory...........  Score.............  N/A...............  Advisory..........  Advisory.
12/31/99........................  Advisory...........  Advisory...........  Score.............  N/A...............  Advisory..........  Advisory.
3/31/00.........................  Score..............  Advisory...........  N/A...............  Score.............  Score.............  Score.
6/30/00.........................  Score..............  Advisory...........  N/A...............  Score.............  Score.............  Score.
9/30/00 and beyond..............  N/A................  Score..............  N/A...............  Score.............  Score.............  Score.
--------------------------------------------------------------------------------------------------------------------------------------------------------

     In Sec. 902.35, HUD reversed the order of Net Income or 
Loss divided by the Expendable Fund Balance (Net Income) and Expense 
Management/Utility Consumption (Expense Management). Expense Management 
now precedes Net Income. The order was reversed to be consistent with 
the previously published guidance on the PHAS Financial Condition 
Indicator.
     In Sec. 902.35, HUD revised the definitions of ``Number of 
Months Expendable Fund Balance'' and ``Occupancy Loss.''
     In Sec. 902.43 (Management Operations Performance 
Standards), HUD removed Management sub-indicators #1 (Vacancy Rate and 
Unit Turnaround Time) and #3 (Rents Uncollected). HUD agreed with 
commenters that stated that these factors are assessed under the 
Financial Condition Indicator through the ``Occupancy Loss'' and 
``Tenant Receivable Outstanding'' (formerly Days Receivable 
Outstanding) components, and the inclusion of these components under 
both the Financial Condition Indicator and Management Operations 
Indicator was duplicative.
    HUD notes, however, that for PHAs with fiscal years ending 
September 30, 1999, and December 31, 1999, which are being assessed 
under 24 CFR part 902, subpart D (Management Operations) and only 
receiving PHAS advisory scores, HUD's assessment will be based on the 
requirements of subpart D as in effect before issuance of this final 
rule. This means that the management assessment will be based on all 
six sub-indicators of the Management Operations Indicator.
    The amendment made to the sub-indicators in the Management 
Operations Indicator by this final rule now provides for five sub-
indicators. Former sub-indicator #6--Security and Economic Self-
Sufficiency--are now two separate sub-indicators. Although the rule 
does not reflect the points for each of the sub-indicators of the 
Management Operations Indicator, these are provided in the Management 
Operations scoring notice, the points for the six sub-indicators have 
been redistributed proportionally among the current five sub-
indicators. As a result of this redistribution, economic self-
sufficiency sub-indicator is assigned greater weight than assigned at 
the proposed rule stage. This redistribution of points will be 
reflected in the new Management Operations scoring notice.
     In Sec. 902.43, HUD removed language from paragraph (b) 
that provided that a PHA in reporting under the Management Operations 
Indicator which was unable to submit its information electronically, 
should consider utilizing library or local government location to 
access the internet. This paragraph also provided that in the event 
local resources were not available, a PHA should go to the nearest HUD 
Public and Indian Housing program office for assistance. This language 
was informational only, and not appropriate for the regulatory text. If 
a PHA does not have internet capability, the PHA should seek assistance 
from local resources in submitting its information electronically to 
HUD, and the HUD offices are willing to assist PHAs in meeting their 
reporting requirements under the PHAS. This language was included in 
the PHAS rule issued in 1998. HUD believes that as we approach the new 
millennium the number of PHAs that needed this type of assistance in 
1998 are dwindling quickly and it is HUD's intent, consistent with this 
Administration's goal, that information is provided and exchanged 
electronically.. [Note: HUD made this same change in Sec. 902.50(c) and 
902.51(c)].
     In Sec. 902.50 (Resident Service and Satisfaction), HUD 
added language in paragraph (c) that advises that at the completion of 
the resident survey process, a PHA will be audited as part of the 
Independent Audit to ensure the resident survey process has been 
managed as directed by HUD. HUD also added language to clarify that (1) 
implementation plans are to be submitted to HUD via the internet; and 
(2) any follow-up plans that a PHA may be required to submit are to be 
submitted with the PHA's Annual Plan submission in accordance with 24 
CFR part 903.
     In Sec. 902.51 (Updating of Resident Information), HUD 
added language in paragraph (c) to clarify that the electronic updating 
of the public housing unit address list is to be done through the 
internet. HUD also revised paragraph (c)(3) to provide that REAC will 
respond to a PHA's request to update its list manually upon REAC's 
receipt of the PHA request.
     In Sec. 902.52 (Distribution of Survey to Residents), HUD 
replaced the term ``residents'' with ``units'' in several places to 
emphasize that the survey selection process is random and objective; it 
is based on occupied units and not on particular information about the 
residents in those units.
     In Sec. 902.60 (Data Collection), HUD made the same 
revision to paragraph (a) as HUD made to Sec. 902.1(e).
     In Sec. 902.60, HUD added the extensions in filing 
submission that it provided in Sec. 902.33, discussed above.
     In Sec. 902.63 (PHAS Scoring), HUD clarified in paragraph 
(c) when a PHA's overall PHAS score becomes its final PHAS score. HUD 
also reorganized the paragraphs in this section to present a more 
logical order. HUD also added a new paragraph (d) to provide that REAC 
will perform an audit review of a PHA whose audit has been found 
deficient.
     In Sec. 902.67 (Score and Designation status), HUD revised 
the definition of ``standard performer'' in paragraph (a) to clarify 
that to be designated a standard performer a PHA must receive a passing 
score in PHAS Indicators #1 (Physical), #2 (Financial), and #3 
(Management Operations).
     In Sec. 902.67, HUD added language in paragraph (b) that 
notes, in accordance with new section 5A(j) of the 1937 Act (42 U.S.C. 
1437c-1), that a PHA that achieves a total score of less than 70 
percent but not less than 60 percent is at risk of being designated 
troubled. New section 5A(j) provides generally that HUD may require, 
for each PHA that is at risk of being designated as troubled under 
section 6(j)(2) of the 1937 Act, that the public housing agency plan 
for such PHA include any additional information that the

[[Page 1717]]

determines to be appropriate. The proposed rule did not clearly 
indicate PHAs that are at risk of being troubled.
     In Sec. 902.67(c)(2), HUD included language that was in 
the previous PHAS rule issued on September 1, 1998, but inadvertently 
omitted in the June 22, 1999, proposed rule. This language pertains to 
troubled with respect to modernization and was in the previous PHAS 
rule at Sec. 902.67(c). The language reinserted, however, is revised 
from the September 1, 1998 final rule, to reflect that the Capital Fund 
Program is replacing the Comprehensive Improvement Assistance Program 
and the Comprehensive Grant Program.
     In Sec. 902.67, HUD provides that a PHA whose designation 
as a standard or high performer has been withheld or rescinded, as a 
result of a PHA's involvement in any of the circumstances described in 
Sec. 902.67(d) (e.g., involved in litigation bearing directly upon the 
physical, financial or management performance of a PHA, operating under 
a court order) may request the Assistant Secretary for Public and 
Indian Housing to reinstate the designation and provide the basis for 
the reinstatement. HUD clarifies that a designation assigned or 
withheld under Sec. 902.67, and any reinstatement determined 
appropriate by the Assistant Secretary, does not result in a change in 
the PHA's PHAS score.
     In Sec. 902.68 (Technical Review of Results of PHAS 
Indicators #1 and 4), HUD revised the paragraph concerning ``unit 
error'' to clarify that only a PHA's public housing units are 
considered in the scoring.
     In Sec. 902.69 (PHA Right of Petition and Appeal), HUD 
revised paragraph (c) to clarify the procedures that govern appeal of 
troubled designation and refusal to remove trouble designation. These 
procedures were present in the September 1, 1998 final rule but became 
merged, in some aspects inappropriately, with the procedures that 
govern appeal of a PHAS score. In paragraphs (d) and (e) of this 
section, HUD also clarified how final decisions are reached by the 
Board of Review. The Board of Review reaches a decision on the appeal 
and the PHA is notified of the final decision by the Assistant 
Secretary for Public and Indian Housing.
     In Sec. 902.71 (Incentives for High Performers), a new 
paragraph (a)(4) is added to reference the performance reward available 
to high performing PHAs under the regulations of the Capital Fund 
Formula. (See Sec. 905.10(j) of the proposed rule published on 
September 14, 1999. A performance reward factor is expected to be part 
of this formula and part of the final rule on the Capital Fund Formula 
to be published in the near future.)
     In Sec. 902.71, HUD clarifies that the bonus points 
available to high performers in HUD's funding competitions, where 
permissible by statute and regulation, will be provided in HUD's 
notices of funding availability.
     In Sec. 902.73 (Referral to an Area HUB/Program Center), 
HUD removed language in paragraph (b) that described the contents of 
the Improvement Plan because this language was duplicative of that in 
paragraph (d) of this section.
     In Sec. 902.75 (Referral to a Troubled Agency Recovery 
Center (TARC)), HUD revised paragraph (a) to include PHAs designated 
troubled under the PHMAP regulations in 24 CFR part 901. Since PHAS is 
a fairly new system, this revision recognizes that some PHAs were 
designated as troubled (and remain under such designation) under the 
PHMAP regulations. PHAs designated troubled under PHMAP are subject to 
the provisions of Secs. 902.75 through 902.85.
     In Sec. 902.75(a), HUD clarifies that the referral by the 
TARC of a troubled PHA to a HUB/Program Center is for the purpose of 
having the HUB/Program Center assist with the oversight and monitoring 
of the PHA's planned recovery. In Sec. 902.75, HUD is also removing the 
requirement of a Recovery Plan. On further consideration, HUD believes 
that the Memorandum of Agreement (MOA) is the only required document 
necessary to address the plan for recovery of a troubled PHA.
     In Sec. 902.75, HUD also clarifies in paragraph (b)(2) 
that performance targets may be annual, quarterly, or monthly.
     In Sec. 902.75(d), HUD clarifies that the PHA must improve 
its performance and achieve an overall PHAS score of at least 60 
percent, and achieve a score of at least 60 percent of the total points 
available under each of PHAS Indicators #1 (Physical Condition), #2 
(Financial Condition) and #3 (Management Operations).
     In Sec. 902.75(e)(4), HUD clarifies that the Board of 
Commissioners will be a party to the MOA unless exempted by the TARC 
(not the HUB/Program Center as the rule previously provided). HUD also 
revised the example provided in paragraph (g) of this section to be 
more helpful to the reader.
     In Sec. 902.75, HUD adds a new paragraph (h) to address 
the audit review of a PHA designated as troubled. This new provision is 
based on practice under the PHMAP regulations.
    Under the PHMAP regulations, a troubled PHA with more than 100 
units was required to undergo a confirmatory review by HUD before the 
PHA's troubled designation was removed. This review is conducted by a 
team appointed by the Office of Public and Indian Housing. For large 
troubled PHAs, the team is comprised of housing specialists and 
financial analysts from throughout the country (as opposed to staff 
from HUD's Field Office with jurisdiction over the PHA). This process 
provides for an accurate and objective assessment of the PHA and 
appropriately removes these duties from the Field Office that provides 
the technical assistance to the PHA.
    As revised by this final rule, the PHAS will provide a similar 
process for PHAS, but only in relation to the PHAS Financial Indicator. 
REAC may, at its discretion, select an audit firm that will perform the 
audit of PHAs identified as troubled under PHAS, and its predecessor 
PHMAP, and REAC will serve as the audit committee for the audit in 
question. At its discretion, REAC will either select the auditor from 
the existing request for proposals of audit work issued by the PHA, or 
REAC will conduct its own request for proposals and will conduct the 
selection process. If REAC conduct its own request for proposals and 
conducts the selection process, the audit engagement may be paid from 
funds assigned to the PHA by HUD for such purposes, as provided by law.
    In Sec. 902.77 (Referral to the Departmental Enforcement Center), 
HUD clarifies that the Assistant Secretary for Public and Indian 
Housing makes the determination that a troubled PHA shall be declared 
in substantial default.
    In addition to these changes, HUD has made editorial and technical 
changes throughout the rule for purposes of clarity.

IV. Discussion of Public Comments

    This section presents HUD responses to the significant issues 
raised by the public commenters. The organization of the public 
comments generally follows the organization of the proposed rule. The 
heading ``Comment'' states the comment or comments made by the 
commenter or commenters, and the heading ``Response'' presents HUD's 
response to the issue or issues raised by the commenters. With respect 
to comments about the scoring processes of the PHAS Indicators, the 
majority of these comments are discussed in Section V of this preamble, 
but there may be some overlap in discussion of the processes between 
this Section IV and Section V.

[[Page 1718]]

Subpart A--General Provisions

Section 902.1  Purpose and General Description

    Comment. The PHAS fails to consider differences related in the 
overall mission and goals of PHAs nationally. The PHAS assessment does 
not take relative size, mission, condition, geographic, and other local 
variances into consideration. The effect of a ``one-size-fits-all'' 
construct is in direct opposition to the intent of the Quality Housing 
and Work Responsibility Act of 1998, which promotes and encourages 
local flexibility. Additionally, PHAs that serve the elderly or persons 
with disabilities should not be compared to PHAs that predominantly 
serve low-income families.
    Response. PHAS, like PHMAP, was never intended to be an all 
encompassing assessment tool. There are many aspects of PHA management 
that PHMAP did not assess and the PHAS does not assess. Instead, key 
indicators of performance, that are common to all PHAs, are identified 
for review. In determining how best to structure the PHAS, HUD's 
approach was to strike a balance on many issues, including those raised 
by this comment. HUD decided that uniform, standardized, and objective 
criteria among its programs are essential to effective management. A 
standard of decent, safe and sanitary for housing should not be 
dependent upon the location of a PHA's public housing or the residents 
that it serves. Similarly, the PHA's financial condition or the ability 
to manage its operations in accordance with certain standards should 
not be dependent upon geography, or residents served. HUD notes that 
where local variances should be taken into consideration, they will be, 
as provided in the changes made in this final rule.
    With respect to flexibility, HUD regulations governing individual 
public housing programs provide PHAs with the needed flexibility to 
tailor the operation of their programs and to manage their properties 
in a manner that is sensible given their particular circumstances. HUD 
believes that the PHAS significantly improves upon the PHMAP.

Section 902.5  Applicability

    Comment. Private owners or owner entities that operate mixed-income 
developments that contain public housing units do not appear to fit the 
definition of ``Alternative Management Entity'' (AME) and therefore 
should be addressed separately. Additionally, there are concerns about 
several aspects of the PHAS to AMEs. All PHAS indicators are not 
applicable to mixed-finance owner entities or public housing units 
owned and operated by such entities. PHAS Indicator #1 (Physical 
Condition) and some but not all of the components of PHAS Indicator #3 
(Management Operations) are applicable to these entities but not PHAS 
Indicator #2 (Financial Condition) and not PHAS Indicator #4 (Resident 
Service and Satisfaction Indicator). These entities should be exempt 
from assessment under Indicators #2 and #4.
    Response. Entities that manage mixed-income, and/or mixed-finance 
developments fall under the definition of an AME. An AME is defined as 
``a receiver, private contractor, private manager, or any other entity 
that is under contract with a PHA, or that is duly appointed or 
contracted (for example, by court order or agency action) to manage all 
or part of a PHA's operations'' (24 CFR 902.7). An owner entity 
managing a mixed-income, mixed-finance development has a contractual 
relationship with the PHA, usually through a Regulatory and Operating 
Agreement, to operate the public housing units that are covered by the 
PHA's Annual Contributions Contract (ACC) contract with HUD. Therefore, 
for the purpose of PHAS, private owners or entities operating mixed-
income developments that include public housing units are treated as 
AMEs.
    HUD disagrees with the comment that all PHAS Indicators are not 
applicable to entities that manage mixed-finance developments. 
Components of PHMAP measured the financial condition of these entities 
and resident services. Accordingly, HUD does not believe there is a 
basis for exempting these entities from the assessments performed under 
PHAS Indicators #2 and #4.

Subpart B--PHAS Indicator #1: Physical Condition

    Certain comments specifically addressed to the PHAS Notice on the 
Physical Condition Scoring Process may be applicable to the regulations 
in Subpart B and vice versa. Please see Section V of this preamble.

Section 902.23  Physical Condition Standards for Public Housing--
Decent, Safe, and Sanitary Housing in Good Repair (DSS/GR)

    Comment. The definition for ``good repair'' is not defined in the 
rule. This term needs to be defined in the rule.
    Response. The term ``good repair,'' like the terms ``decent, safe, 
and sanitary,'' is defined in Sec. 902.23, and in Sec. 5.703 of HUD's 
Uniform Physical Condition Standards rule, published in final on 
September 1, 1998 (63 FR 46566). For each of the major inspectable 
areas that are inspected as part of a physical condition inspection, 
these terms are defined through descriptions such as ``proper operating 
condition,'' and ``structurally sound'' of the items that make up the 
inspectable areas. These terms were elaborated upon in the PHAS Notice 
on the Physical Condition Scoring Process, and in the preamble to both 
the June 30, 1998, PHAS proposed rule, and the June 30, 1998, Uniform 
Physical Condition Standards proposed rule. As noted in both preambles, 
the statutory physical condition standard for public housing required 
by the 1937 Act was expressed in terms of ``decent, safe and 
sanitary.'' (However, the physical condition standard presently 
required under section 2 of the 1937 Act is referred to as ``decent and 
safe'' which HUD does not consider a substantive change to the previous 
statutory standard.) For FHA-related properties, the statutory standard 
is expressed in terms of ``good repair and condition.'' In adopting 
physical standards that are applicable to both public housing and FHA-
related properties, HUD uses the descriptive term--``decent, safe, 
sanitary and in good repair.''
    Comment. The physical condition standards are not clearly defined. 
The standards by which PHAs are judged must be defined.
    Response. The preceding response addresses this issue to some 
extent. Additionally, HUD addressed this issue in its proposed rule on 
Uniform Physical Condition Standards, published on June 30, 1998. In 
the preamble to that proposed rule, HUD stated that the standards are 
intentionally broad and are defined with terms such as in ``proper 
operating condition,'' ``adequately functional,'' and ``free of health 
and safety hazards.'' Given the differences in design of HUD housing, 
and the different types of electrical and utility systems that will be 
encountered, a rule cannot define or describe proper operating 
condition for every type of system, or every type of element. This 
information is rightly placed in supplementary documents, which have 
been made available to PHAs directly, through HUD's website, since 
1998. This information also was made available through notices 
published in the Federal Register in May 1999 and June 1999, as 
discussed earlier in this preamble.

[[Page 1719]]

Section 902.24  Physical Inspection of PHA Properties.

    Comment. The majority of the commenters commended HUD for removing 
vacant units from the physical inspection process. Several commenters, 
however, stated that the rule also should exclude from inspection units 
that are in the process of being modernized. As an example, commenters 
noted that deficiency ratings should not be assigned to units or 
buildings to be replaced as part of HOPE VI revitalization. This 
information can be obtained by HUD's review of the PHA's on-going 
modernization projects and Physical Needs Assessment.
    Response. HUD believes that many of the concerns raised by the 
commenters with respect to modernization result from advisory 
inspections that occurred before HUD issued its proposed rule on June 
22, 1999. HUD addressed concerns regarding modernization issues in the 
June 22, 1999, proposed rule. The June 22, 1999, proposed rule advised 
that it would add to the PHAS rule (and this final rule includes this 
amendment), three categories of exemptions which assist PHAs by 
providing flexibility in scoring for reasonable unforeseen 
circumstances in conducting physical inspections. The exemptions 
consist of the following categories of units that are not under lease: 
(1) units undergoing vacant unit turnaround--vacant units that are in 
the routine process of turn over, i.e., the period between which one 
resident has vacated a unit and a new lease takes effect; (2) units 
undergoing rehabilitation--vacant units that have substantial 
rehabilitation needs already identified, and there is an approved 
implementation plan to address the identified rehabilitation needs and 
the plan is fully funded; and (3) off-line units--vacant units that 
have repair requirements such that the units cannot be occupied in a 
normal period of time (considered to be between five to seven days) and 
which are not included under any approved rehabilitation plan.
    HUD declines to exempt occupied units that are undergoing 
modernization from physical inspections. If a unit is occupied it must 
be decent, safe, sanitary and in good repair. However, the final rule 
provides that HUD may determine occupied dwelling units undergoing 
modernization work in progress require an adjustment to the physical 
condition score and will consider such adjustment as provided in 
Sec. 902.25(c)(3) of this final rule.
    Comment. PHAs should be given credit for items needing repair or 
modernization and for which repair or modernization is pending but not 
yet begun because of lack of funding due to Federal budget decisions. 
PHAs should not be penalized for circumstances (such as funding) beyond 
their control. Rather than a ``point in time'' physical inspection, 
PHAs should be given points for doing their jobs well under difficult 
circumstances.
    Response. The 1937 Act and the ACC place the responsibility for 
maintaining public housing in the hands of the PHA. HUD understands 
budgetary constraints, but part of good management is maintaining 
housing in a decent, safe and sanitary condition even when funding 
sources are limited. Maintaining housing in acceptable living condition 
is not just a regulatory standard but also a statutory standard. HUD's 
Uniform Physical Condition Standards and the PHAS rule assess the 
extent to which PHAs are maintaining public housing in accordance with 
the statutory standard.
    Of necessity, the inspection of the public housing inventory is an 
inspection at ``a point in time.'' HUD believes it would be misleading 
to report a condition of public housing other than the actual condition 
of the housing. If a PHA maintains its housing in a condition that is 
decent, safe, and sanitary despite limited funding, the PHA is 
fulfilling its statutory mandate and will receive a passing score under 
PHAS Indicator #1.
    With respect to modernization needs, HUD notes that the final rule 
provides an adjustment to the physical condition score for 
modernization work in progress. (Please see earlier discussion on 
Sec. 902.25(c)(3).)
    Comment. The rule needs to clarify how units are selected for 
physical inspection. Rating a PHA only on a certain percentage of the 
units inspected is unfair.
    Response. To ensure accuracy in the physical condition standards 
and inspection requirements, units are chosen for physical inspections 
by a statistically valid random sample determined by the size of the 
property. The sample does not distinguish between the type of 
property(s) (i.e., elderly or family) or units (i.e., one bedroom, two 
bedroom, three bedroom, etc.) that are involved. The system generated 
sample will evenly distribute the buildings and units to be inspected 
among the different types if more than one building type is contained 
in a particular property.
    In developing the PHAS rule, HUD considered the extent to which it 
needed to inspect all units or some lesser number. HUD concluded that 
it should not inspect all units because that would be costly and PHAs 
are already required to inspect 100% of their units and systems under 
PHAS Indicator #3, Management Operations. HUD decided to use a 
statistically valid random sample methodology. This methodology is 
accepted throughout the scientific and business communities for making 
assessments regarding large universes.
    Comment. PHAs should not receive deficiency ratings for items that 
are outside of a PHA's control, e.g., city or town sidewalks, or roads 
near public housing developments.
    Response. The physical condition standards and inspection 
requirements under the PHAS rule do not hold PHAs accountable for site 
areas which are not within their control. The rule only applies to 
aspects of the housing that are within the ownership of the PHA. For 
instance, a PHA owner is not responsible for maintaining a road, 
sidewalk, etc., if the PHA does not own the site area; however, the PHA 
will be responsible for maintaining all areas which are legally part of 
the property. In instances involving items scored but that are not 
within a PHA's control, the PHA may request an adjustment in accordance 
with new paragraph (c) of Sec. 902.25.
    Comment. The final rule needs to resolve possible conflict with 
fair housing issues and issues of reasonable accommodation under 
section 504 of the Rehabilitation Act of 1973. A PHA received a 
deficiency rating because a unit was not painted, but the unit was not 
painted at the request of a tenant who claimed disability on the basis 
of allergic reaction. This type of situation needs to be addressed in 
the final rule.
    Response. Section 902.24 (Physical Inspection of PHA Properties), 
introduced by the June 22, 1999 proposed rule, addresses the issue of 
compliance with civil rights and accessibility requirements. This 
section provides that HUD will review certain elements during the 
physical inspection to determine possible indications of noncompliance 
with the Fair Housing Act and section 504 of the Rehabilitation Act of 
1973, but a PHA will not be scored on those elements. Any indication of 
possible noncompliance will be referred to HUD's Office of Fair Housing 
and Equal Opportunity.
    Comment. The final rule should provide for separate inspection 
protocols for high rise buildings and scattered site projects. The 
current inspection protocol apparently was designed for both high rise 
and townhouse developments, so its treatment of common areas is 
somewhat uneven and unreliable. The inspection protocol is even less 
accurate when

[[Page 1720]]

applied to scattered sites. Some scattered site ``clusters'' have 
communal sites and common areas, but truly scattered single family 
homes and duplexes do not.
    Response. When HUD introduced its Uniform Physical Condition 
Standards in the proposed rule, by the same name, published on June 30, 
1998, and in the first PHAS proposed rule, also published on June 30, 
1998, HUD specifically advised that one of the objectives in 
formulating these standards and in designing a new inspection protocol 
was to move away from the different physical condition standards and 
inspection procedures that were applicable to housing administered by 
HUD programs. The PHAS takes into account all housing types, including 
high rise housing (4 stories or more) and other building types, and 
proportionately allocates the sample of units between those two types 
of buildings. The scoring system only assesses elements that are 
present. In cases where there are no common areas, for example, the 
scoring system redistributes the available points to the other 
inspectable areas.
    Comment. PHAs should not receive deficiency ratings for recent 
tenant damage or unreported repair needs. Deficiency ratings occurred 
even when tenants acknowledged that they had not reported damage or 
need for repairs to the PHA. The inspection process should require HUD 
to review work order files to determine if the resident has reported 
the noted deficiency. The PHA should only be responsible for those 
items left unrepaired following proper notification.
    Response. HUD's physical inspection system is objective and does 
not distinguish those defects that are the fault of the resident, nor 
does the system in itself recognize good faith efforts of the owner. 
The system is simply a tool for observing and transmitting data 
regarding the physical condition of the property at the time of the 
inspection. An owner of HUD assisted or insured housing is statutorily 
and contractually responsible for maintaining the physical condition of 
the property. HUD anticipates that such owners, like all landlords, 
would rely on lease provisions regarding the resident maintenance or 
destruction of the units, and HUD would encourage them to do so in 
furtherance of compliance with the physical condition standards. Good 
property management, which includes regular housekeeping and 
preventative maintenance inspections throughout the year, coupled with 
strict lease enforcement, will result in well-maintained housing that 
meets the standard.
    Comment. The rule needs to address further the inspection 
notification process. The scheduling of the inspection appears to be 
kept a secret until the last moment. In one PHA's development, although 
some tenants did not want their units inspected, the inspector advised 
that the tenants would have to confirm that to the inspector in person. 
Advance notice of the inspection needs to be provided and tenant rights 
need to be considered and respected by the inspector.
    Response. The rule provides the timing of the inspections. 
Specifically, PHAs are to be assessed annually. Physical inspections 
are to take place in the three months immediately preceding the end of 
the PHA's fiscal year. In addition, HUD's ACC does not afford tenants 
the right of refusal to have a unit inspected. In accordance with the 
ACC, PHA's are required to provide HUD or its representative with full 
and free access to all facilities (units and appurtenances) contained 
in the project in order to permit physical inspections. In the event 
that a PHA fails to provide access as required by HUD or its 
representative, the PHA will be given ``0'' points for the project(s) 
involved which will be reflected in the physical condition and overall 
PHAS score. With respect to notification of the physical inspection, 
HUD provides written notification to the PHA that its properties will 
be inspected within the next 30 to 90 days. The HUD contract inspector 
will schedule the inspection, providing a minimum 10 days notification, 
which is confirmed with the PHA in writing by the contractor. HUD's 
notification of inspection requires the PHAs to provide proper 
notification to tenants. The contractor's confirmation letter also 
reminds PHAs of the tenant notification requirement.
    Comment. HUD's authority to access tenant dwelling units as 
provided in Sec. 902.24(d) is questionable. Section 902.24(d) states 
that ``PHAs are required by the Annual Contributions Contract (ACC) to 
provide the government with full and free access to all facilities 
contained in the project.'' However, the degree of access envisioned by 
Section 15 of the ACC is circumscribed by the auditing function, and is 
not meant to authorize unbridled access to tenant dwelling units. 
Additionally, portions of the public housing program regulation at 24 
CFR 966.4(j) do not give HUD full and free access to tenant dwelling 
units. The PHAS rule does not justify entry by HUD of a tenant dwelling 
unit without notification which specifies a date and time of 
inspection, or entry by the HUD without notice because a physical 
inspection would not be considered an ``emergency'' within the 
regulation.
    Response. HUD has the requisite statutory and regulatory authority 
to inspect tenant dwelling units. Notification of inspection is 
provided to the PHA who is required to provide proper notification to 
tenants. However, HUD notes that Sec. 966.4(j) of its regulations does 
not require a specific time or date, only reasonable advance 
notification, that inspections will be performed during reasonable 
hours.
    Comment. The PHAS inspections establish unfunded financial burdens 
and constitute an unfunded mandate. Although HUD outsources the 
inspections, PHAs are required to accompany contractors during 
inspections, resulting in added maintenance and managerial costs. When 
coordinating inspections for scattered site public housing units, a lot 
of time is wasted inspecting units in one part of the city and then 
going to an entirely different section of the city on the same day. HUD 
should schedule scattered site inspections with regards to geographical 
considerations such as zip codes to maximize routing efficiencies and 
to keep the already excessive administrative costs of this process to a 
minimum.
    Response. HUD has a statutory obligation to assess the performance 
of PHAs, including the physical condition of their properties. 
Additionally, the ACC has always provided that PHAs must provide HUD 
with full and free access to their developments. HUD has conducted on-
site reviews of PHAs either through PHMAP confirmatory reviews or other 
management reviews for at least two decades. Therefore, Federal 
oversight of the physical inspection of public housing units is not new 
for PHAs. It is an inherent part of receiving Federal financial 
assistance and is customary in most, if not all Federal grant programs, 
regardless of the administering agency. HUD believes that there should 
be little or no difference in the way a physical inspection should be 
conducted between Federal programs. HUD believes that it is important 
to have a consistent standard across programs and geographical regions. 
In this way, all properties and property owners are treated fairly and 
equally.
    With respect to inspection of units at scattered sites and the 
additional time involved, it is HUD's intent to reduce the 
administrative burden to the PHAs to the extent possible. HUD will 
examine inspection schedules and make every effort to schedule 
inspections that

[[Page 1721]]

minimize the use of resources on the part of the PHA.
    Comment. The HUD contract inspectors are poorly organized, 
inadequately skilled and highly inefficient, and PHAS physical 
inspection quality controls are inadequate. Inspectors did not keep the 
inspection schedules as promised, and did not perform the inspection 
process as required. Inspectors did not inform PHA staff of inspection 
schedules as required. The rule needs to ensure consistency in 
inspection. Inspectors in one area may be more lenient, whereas 
inspectors in another area may be more stringent in interpreting 
inspection standards. Inspection standards should be clarified in the 
new rule and independent contractors should communicate their 
interpretation of the standards to PHAs before the inspection is 
conducted.
    Response. HUD contract inspectors, contracted under the national 
inspection contract (NIC), successfully conducted approximately 24,000 
inspections nationally during the first year. Other contract inspectors 
under the baseline inspection contract (BIC) will inspect approximately 
16,000 properties by the end of this calendar year. These contract 
inspectors were trained using a new and unique protocol, and 
successfully scheduled and completed the required inspections. All of 
this required a tremendous amount of organization and logistics.
    All HUD contract inspectors must meet certain basic qualifications 
involving knowledge, experience and/or education in the building trades 
or conducting inspections. In addition, these inspectors completed a 5 
day training course in the new inspection software and were required to 
pass proficiency tests in the use of the software. Since these 
inspections started for the first time in October 1, 1998, the initial 
start-up involved some refining as one would expect given the size and 
magnitude of this effort. In certain cases, problems were encountered 
and HUD responded to those problems. HUD believes that the process, 
overall, is running smoothly. HUD is striving to constantly improve and 
refine the process and will continue to do so in the future. In this 
regard, HUD also provides for required periodic retraining of the 
inspectors, to ensure that the inspectors are up-to-date and familiar 
with any changes made to the PHAS regulation, physical condition 
protocols and the physical condition inspection software.
    HUD acknowledges that even with qualification and training 
requirements imposed on inspectors, some inspectors, as is the case in 
any profession, perform better than others. For this reason, HUD has 
developed a four tiered quality control/assurance process.
    First, each contractor is required to have a quality control 
program to ensure that the HUD protocol is being followed. Second, REAC 
has its own quality assurance staff, who are employees of the Federal 
government. Their sole job is to review the performance of the contract 
inspectors to ensure that the inspection protocol is being followed. 
Third, REAC also has a Technical Assistance Center and a toll free 
telephone number (1-888-245-4860) for program participants to call when 
experiencing problems like the inspector failing to show up for 
scheduled inspections. In many cases, failure to show up for 
inspections is the result of unexpected delays (e.g., weather, more 
difficult and complex inspections than anticipated, etc.). Fourth, HUD 
has provided a technical review procedure to address material errors in 
an inspection. This review procedure was first announced in a notice 
published in the Federal Register on May 13, 1999, and was part of the 
PHAS proposed rule published on June 22, 1999.
    Comment. The sheer volume of inspectable items makes the inspection 
even more vulnerable to differences in interpretation and error.
    Response. HUD does not believe that the number of inspectable items 
is either excessive or makes the inspection vulnerable to different 
interpretations. The number of inspectable items is similar to those 
contained in the Section 8 Housing Quality Standards (HQS) inspection. 
While there is a considerable number of deficiency definitions, all 
elements of the inspection protocol, including the definitions, are 
contained in the inspection software and are easily retrievable by the 
inspector, and are designed to preclude subjective interpretations on 
the part of the contract inspectors. The more experience that the 
contract inspectors have with the protocol the easier the inspection 
process becomes. HUD does not believe that the inspection protocol is 
beyond the capabilities of the inspection profession.
    With respect to deficiency definitions, HUD has revised a 
considerable number of definitions for purposes of clarity and 
simplification. The revised Dictionary or Deficiency Definitions is 
currently available for review on HUD's website.
    Comments. The rule should allow for PHAs to correct minor 
deficiencies while an inspector is on site, to avoid potential problems 
related to the inspection.
    Response. New paragraph (b) in Sec. 902.26 allows for PHAs to 
correct deficiencies before HUD issues its final physical inspection 
report to the PHA.
    Comment. Certain elements of the inspection are equivalent to an 
appearance-oriented inspection that is like a military ``white glove'' 
test and is beyond determining whether the property is decent, safe, 
sanitary and good repair, or the property components work and function 
properly. The PHAS physical inspection should not be an assessment of 
the tenant's housekeeping.
    Response. HUD disagrees that elements of the inspection go beyond 
the statutory mandate regarding the physical condition of the property. 
The PHAS physical inspection is not an appearance-oriented assessment 
or an assessment of a resident's housekeeping. The focus of the 
inspection is whether the housing is in a condition of decent, safe, 
sanitary and in good repair. The inspection assesses the condition of 
the PHA's property, including occupied units. HUD has revised the 
physical inspection report and the revised report is more user friendly 
and clarifies for the PHA the exact nature of the deficiency.
    Comment. HUD inspectors should skip the relatively few units with 
``problem'' tenants, such as those who are mentally ill and hostile, or 
currently bringing legal actions against the PHA.
    Response. HUD understands the challenges that PHAs face. HUD, 
however, has a statutory obligation to determine the condition of the 
PHA's property. Resident evictions and related actions are a normal 
part of residential management. Given HUD's statutory obligation, HUD 
cannot forgo inspection of occupied units because certain tenants are 
considered ``problem'' tenants.
    Comment. Tenant-owned appliances and smoke detectors should not be 
scored in the physical inspection of a property. One PHAS inspector 
cited a defunct battery operated smoke detector which a tenant had 
installed, even though the PHA-provided hard-wired smoke detector that 
worked. PHAs should not receive deductions for items that are not the 
property of the PHA.
    Response. Any deductions that may be made for resident-owned 
property such as that described in the comment can be accommodated by a 
PHA's request for an adjustment in accordance with new paragraph (c) of 
Sec. 902.25.
    Comment. There should be no deficiency ratings for elements or 
items of the public housing development that

[[Page 1722]]

pass local code requirements, and no deductions should be made for 
items that are not present and are not required by national codes or 
HUD mandates. PHAs should be protected from negative consequences for 
meeting local code requirements. Additionally, while objectivity is a 
sound principle for inspection, under the PHAS advisory inspection 
process, it all too often translated into rigidity.
    Response. As noted earlier in Section III of this preamble, HUD has 
added a new paragraph (c) to Sec. 902.25 that takes into consideration 
local code requirements that may be inconsistent with HUD's physical 
inspection protocols, or other conditions, including preexisting 
physical features of a building, that are permitted by local variance 
or license.
    Comment. The PHAS standard for lead-based paint ``owner 
certification'' is not clear. Different PHAS inspectors interpret this 
standard different ways. This factor should be treated like smoke 
detectors, with a separate code appended to the numerical score to 
indicate the possible presence of lead-based paint in units, or the 
absence of certifications that all units are lead-free.
    Response. The certification section, which includes the lead-based 
paint certification, is not scored; the certification is only recorded 
as submitted. Accordingly, the Lead-Based Paint certification is 
currently being treated like smoke detectors, only a separate 
identifier is not used.
    Comment. Smoke detectors should not be required in unfinished 
basements which are not living areas. This is the standard for some 
local codes. The PHAS physical inspection protocol is not clear on this 
issue.
    Response. The PHAS regulation requires smoke detectors on ``each 
level of the dwelling unit.'' The basement, whether or not it is a 
living area, must have a smoke detector if it is part of the dwelling 
unit.

Section 902.25  Physical Condition Scoring and Thresholds

    Comment. This section provides that the PHA may claim an adjustment 
on its physical property score due to age and neighborhood environment 
by certifying to the adjustment on form HUD-50072. The form, as is 
currently available on HUD's website, is still the PHMAP certification 
form. The section of the form pertaining to this adjustment does not 
permit the PHA to specify which developments are qualified to receive 
the adjustment.
    Response. The new Management Operations Certification Form is now 
available on REAC's website, as well as an instruction guidebook for 
completing the form. The certification for the physical condition and/
or neighborhood environment includes project number, project name, and 
the three areas where the adjustment applies. The PHA is to indicate 
for each project which area(s) apply.

Section 902.26  Physical Inspection Report

    Comment. The physical inspection reports are difficult to 
understand. The report lacks the necessary detail for staff to 
understand the nature of the deficiency so that the PHA may take the 
appropriate corrective action required.
    Response. HUD appreciates the comment and as noted earlier in this 
preamble, HUD has revised the physical inspection report so that PHAs 
may better understand the nature and location of deficiencies cited for 
their properties.
    Comment. The final physical inspection report should be supplied to 
PHAs within 15 to 30 days after the inspection is completed.
    Response. As provided in the rule, the PHA's property 
representative will receive the list of every observed exigent/fire 
safety, health and safety deficiency that calls for immediate attention 
or remedy before the inspector leaves the site. HUD will endeavor to 
provide complete inspection results as soon as possible after 
inspections are completed. HUD will provide inspection results on its 
website as soon as all inspections are completed, rather than waiting 
until all data needed to issue a PHAS score is received.
    Comment. There should be an exit conference with the inspector to 
review the inspection for accuracy in what was inspected. Additionally, 
no information about PHAS should be released without the approval of 
the PHA. Response. This issue was raised in response to HUD's June 30, 
1998, proposed rule on the PHAS (the first PHAS proposed rule). For the 
same reasons stated in the preamble to the PHAS final rule (published 
September 1, 1998) that addressed this issue, HUD declines to adopt the 
suggestion. 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. 
(See Federal Register of September 1, 1998, at 63 FR 46603.) 
Additionally, as noted in the preceding comment, PHAs will be notified 
of every exigent/fire safety, health and safety deficiency on the same 
day of the inspection, before the inspector leaves the site. Further, 
HUD has added a new paragraph to Sec. 902.26 that allows PHAs to 
correct deficiencies identified during the inspection process, and 
noted on the report, before the final physical inspection report is 
issued.
    With respect to the confidentiality of PHAS scores, HUD notes that 
release of official documents are subject to certain statutes such as 
the Freedom of Information Act, the Privacy Act., etc.) HUD is 
therefore further examining this issue in an effort to maintain the 
confidentiality of the PHAS scores until these scores become final and 
are required to be posted by the PHA in an appropriate location and 
published by HUD in the Federal Register in accordance with the PHAS 
regulations. As noted earlier in this preamble, Sec. 902.63 has been 
revised to clarify when a PHA's PHAS score becomes the PHA's final PHAS 
score (e.g., any adjustments that needed to be made have been made, and 
any technical review or appeal issues have been decided).

Subpart C--PHAS Indicator #2: Financial Condition

    Certain comments specifically addressed to the PHAS Notice on the 
Financial Condition Scoring Process may be applicable to the 
regulations in Subpart C and vice versa. Please see Section V of this 
preamble.

Section 902.30  Financial Condition Assessment

    Comment. HUD should reconsider its plan to measure the financial 
condition of a PHA on an entity-wide basis by comparing a housing 
authority to other housing authorities administering a similar number 
of units. Additionally, comparison should be limited to public housing 
funds only (Operating Fund, Capital Fund, DEG, EDSS, etc.). The 
inclusion of other funds (Section 8, CDBG, local development, etc.) 
simply distorts any meaningful comparison. The comparison becomes more 
distorted if one housing authority administers CDBG and HOME funds.
    Response. HUD has considered whether PHAs should be financially 
assessed on an entity-wide basis, and has decided that they should. As 
discussed in Section III of this preamble, HUD has, however, provided 
additional time for PHAs to adjust to financial assessment on an 
entity-wide basis. The final rule provides that PHAs with fiscal years 
ending September 30, 1999, December 31, 1999, March 31, 2000, and June 
30, 2000, will receive an advisory score for HUD's assessment of the 
PHA's entity-wide operations. Again, PHAs with fiscal years ending

[[Page 1723]]

September 30, 1999, and December 31, 1999, were already notified 
through HUD's notice published on October 21, 1999, that their 
financial scores would be advisory. Although PHAs with fiscal years 
ending March 31, 2000, and June 30, 2000, will receive advisory scores 
on the financial assessment of their entity-wide operations, they are 
not exempt under the rule from a PHAS financial score. PHAs with fiscal 
years ending March 31, 2000, and June 30, 2000, will receive a PHAS 
financial score based on their public housing operating subsidies 
program. PHAs with fiscal years ending after June 30, 2000, will 
receive PHAS financial scores that are based on the PHA's entity-wide 
operations.
    HUD believes that there is a valid basis for conducting the 
assessment on a PHA's entity-wide operations. In addition to overseeing 
its individual grant and subsidy programs, HUD is concerned with the 
overall financial condition of entities managing public housing without 
regard to additional sources of funding. The focus of the PHAS 
Financial Condition Indicator is on the long term viability and 
financial performance of PHAs.
    In addition, HUD has the authority to assess any factors it 
determines appropriate as provided by section 6(j)(1)(K) of the 1937 
Act, and the Single Audit Act and OMB Circular A-133 require entity-
wide audits of the financial statements of PHAs receiving federal 
funds. To the extent that PHAs enter into non-Federal activities that 
contribute to their financial health, these PHAs should receive higher 
scores than those PHAs that have entered into arrangements that 
negatively affect the financial health of the PHA (e.g. commitments, 
contingencies). Generally Accepted Accounting Principles (GASB 14) 
requires that an entity include in its financial statement all 
operations for which it is financially accountable. The issuance of 
entity-wide financial advisory scores for the first four quarters of 
PHAS scoring is an accommodation HUD was willing to make based on 
consultation with the industry and HUD's recognition of the newness of 
the GAAP conversion process for some PHAs.
    Comment. Peer groups should not be based on unit counts alone.
    Response. With respect to financial assessment, HUD has and 
continues to research the possibility of establishing peer groups based 
on other common PHA characteristics such as tenant composition (elderly 
vs. family), building type (high rise vs. garden style) and location. 
Tenant composition and building type have not been incorporated into 
the scoring process at this time because PHAs have different mixes of 
tenants and building types and such data is not as accurately tracked 
as unit count. HUD's research to date shows no clear statistical 
differences in PHA financial performance based on the type of tenant or 
building. This may change in the future as additional data becomes 
available.
    Peer groupings based on location, on the other hand, have been 
established to evaluate expenses in addition to unit count because 
information on PHA location is readily available and accurate. As 
additional data becomes available and statistical analysis demonstrates 
that peer groupings based on additional factors will improve the 
accuracy of scoring, these factors will be taken into consideration.
    Comment. The peer group sizes are insufficient for measurement of 
financial condition. The PHAS final rule should provide for two 
additional PHA size categories: one size category for those PHAs 
administering 1,250 to 5,000 units; and a second size category for 
extra large PHAs defined as those PHAs administering more than 10,000 
units.
    Response. HUD has addressed some of these concerns by adding an 
extra-large size category of PHAs. The extra-large size category 
includes those PHAs administering more than 10,000 units based on 
statistical analyses demonstrating that there is a statistical 
difference between those PHAs administering between 1,250 and 9,999 
units. The addition of an extra-large size category is reflected in the 
PHAS Notice on the Financial Condition Scoring Process, which will be 
updated and published in the near future. At this time, the PHAS 
financial scoring process leaves the other five peer groupings 
unchanged. In the future, the PHAS scoring process for the Financial 
Condition Indicator may be revised to include additional peer group 
sizes should a statistical validity be proven.

Section 902.33  Financial Reporting Requirements

    Comment. The requirement for electronic transmission of data using 
GAAP principles is of concern because experience in general with data 
transmitted to and from HUD has resulted in problems. The experience 
has been one of difficulty in getting into HUD systems both in terms of 
timeliness and access. Response. HUD continues to improve its ability 
to receive and process the electronic submission of data. With any new 
system, there is a learning period that must take place. The electronic 
submission system has been in development for over a year and has 
undergone a series of tests both internally and externally at selected 
PHA locations. HUD's Financial Assessment Subsystem (FASS) Release 3.01 
has been streamlined to improve performance and will be tested at over 
12 pilot locations nationwide. To the extent PHAs have trouble 
submitting data as a result of HUD servers or communication problems, 
PHAs can enter the reason for late submissions on the FASS template and 
REAC will have the ability to waive late submission penalties. Further 
guidance will be provided in an upcoming Notice. Additionally, although 
the FASS does not allow anyone other than the PHA to enter and/or 
change data in the PHA's financial submission, the system provides a 
PHA with the ability to review its financial information after the 
information has been submitted to HUD if the PHA wishes to verify the 
accuracy of the submission.
    Comment. The requirement to submit financial reports electronically 
via the Financial Data Schedule (FDS) within two months of the PHA's 
fiscal year end is unrealistic for the first year of submission. The 
conversion to GAAP is complex, particularly for large PHAs 
administering many programs, and thus, PHAs need more time to make 
certain that all GAAP conversion items are properly recorded in the 
initial FDS submission.
    Response. HUD understands that conversion to GAAP may not be easy 
for some PHAs and may take some time, which is why HUD allowed a year 
for PHAs to make the conversion to GAAP. PHAs were informed of the 
conversion to GAAP with the issuance of the first PHAs proposed rule on 
June 30, 1998, and the PHAs final rule published on September 1, 1998. 
With respect to submission of financial reports, as discussed in the 
preambles to both of those earlier rules, PHAs were already obligated 
to submit, under other program requirements, similar financial 
information to HUD within 45 days after the PHA's fiscal year end. 
Under PHAs, PHAs are required to submit their financial information 
within two months after the PHA's fiscal year end. However, since this 
is the first year reporting under GAAP, HUD has provided for an 
automatic 30 day extension for PHAs to submit their year-end financial 
information. This automatic extension is for the first year of 
reporting only.
    Comment. REAC should assign a reporting model (Enterprise vs. 
Government) for HUD-based programs, and issue guidebooks.

[[Page 1724]]

    Response. HUD no longer sets accounting standards and thus cannot 
prescribe which accounting model to use. The National Council on 
Government Accounting, Statement 1 (NCGA1) entitled ``Governmental 
Accounting Reporting Principles'' provides guidance as to which method 
best represents the reporting entity business. GAAP Flyer #1, which is 
available on REAC's financial website (http://www.hud.gov/reac/
reafin.html), indicates that HUD prefers the Enterprise method for most 
PHAs based on our interpretation of NCGA1. In addition, Government 
Accounting Standards Board (GASB) Statement #34 provides that all 
government entities will be required to report entity wide operations 
using full accrual accounting. This reinforces HUD's interpretation 
that PHAs should use the enterprise model to report operations.

Section 902.35   Financial Condition Scoring and Thresholds

    Comment. The PHAS rule measures operating budget and expenditure 
performance through such indicators as net income/loss, number of days 
expendable balance, and expense management which is not necessarily 
appropriate. PHAs budget and manage funds for a host of programs, both 
federal and non-federal, which are not reflected in these indicators. A 
more clear measurement is whether a PHA has a sound cost allocation 
plan and is adhering to it.
    Response. The PHAS measures the overall financial condition of PHAs 
without regard to the source of funding. This is referred to as an 
entity-wide assessment. See HUD's response to the first comment under 
Sec. 902.30 of this preamble. In addition, cost allocation coverage is 
obtained through audit procedures in accordance with OMB Circular A-133 
(Audits of States, Local Governments and Non-Profit Organizations).
    Comment. The PHAS Financial Condition Indicator inappropriately 
compares a PHA's management responsibilities to those of private real 
estate entities. Without taking into account the unique operating and 
related service requirements of the PHA, the comparison to private 
sector management is difficult to make on an individual or group basis 
for PHAs.
    Response. The assessment provided under the PHAS Financial 
Condition Indicator does not compare PHA management to management in 
the private real estate market. Instead, the PHAS performs a financial 
assessment of PHAs based on a peer comparison within the public housing 
industry. The private real estate market has capital reserve 
requirements for the long-term upkeep of its properties and operates 
for-profit. On the other hand, the private real estate market does not 
provide the extensive services provided by PHAs to its residents.
    The PHAS uses appropriate financial benchmarks used by many 
industries to assess the financial condition of their operations. For 
example, Current Ratio, Net Income, and Expense Management are 
indicators widely used in many industries. Two other indicators, 
Occupancy Loss and Tenant Receivable Outstanding, are revised versions 
of the previous PHMAP Management indicators modified to better assess 
financial condition (and as noted earlier in this preamble, they have 
been dropped from the Management Operations Indicator; they are now 
only part of the Financial Condition Indicator).
    Comment. The PHAS Occupancy Loss component includes vacancy days 
that (1) result from units being taken off-line or held for demolition 
or major redevelopment, and (2) are counted as income loss if part of 
the PHA's Unit Months Available (UMA). Given the capital funding 
process for PHAs and the requirements for demolition and disposition, 
HUD's inclusion of these types of units in an income loss calculation 
is inappropriate and further, is not a fair or rational basis for 
comparison to private real estate providers.
    Response. During the advisory score process, all units were counted 
in the UMA calculation. However, after consultation with several 
housing authority representatives and HUD program staff, HUD has 
revised its UMA calculation to exclude units approved for demolition/
disposition, including units approved for mandatory conversions, since 
these units are also excluded from the Performance Funding System (PFS) 
calculations and can be verified through form HUD-52723. In addition, 
vacant units approved by HUD to be taken off-line for on-going 
modernization or conversion will be excluded from the calculation.
    Comment. The PHAS Financial Condition Indicator relies too heavily 
on Occupancy Loss, Net Income/Loss, Expense Management, etc., and does 
not rely sufficiently on sound financial management. While the PHAS 
rule indicates that it will include points for certain items relating 
to financial management, these items are secondary. The issue of an 
unqualified audit opinion, no material internal control weaknesses and 
no material adjusting entries seems to be the most appropriate basis 
for measuring financial management coupled with maintaining adequate 
working capital which is easily measured by the expendable fund balance 
and a sound and adhered to cost allocation plan.
    Response. The components of the PHAS Financial Condition Indicator 
measure the financial condition of PHAs and are reflective of sound 
financial management practices. A PHA can have a clean audit opinion 
and good internal controls yet be in poor financial condition due to 
many circumstances including unsound management decisions. The rule 
states that points will be subtracted, not added, as a result of audit 
findings.
    Comment. The Expense Management component of the PHAS Financial 
Condition Indicator includes utility expenses. HUD needs to examine and 
take into consideration regional differences in utility costs. Regional 
utility costs will materially impact on comparisons between PHAs. 
Therefore, adjustments need to be made if PHAs are to be compared 
fairly.
    Response. These comments were addressed by adding regional peer 
groupings to the Expense Management component to take into account the 
impact on PHA expenses because of regional differences. These changes 
to the Expense Management component are reflected in the PHAS Notice on 
the Financial Condition Scoring Process, which will be updated and 
published in the near future.
    Comment. Days Receivable Outstanding is also included in the 
Management Operations Indicator. This component should be included in 
just one PHAS indicator.
    Response. HUD agrees with the commenters and this component 
(identified in the final rule as Tenant Receivable Outstanding) is now 
only part of the Financial Condition Indicator.
    Comment. Is occupancy loss expressed in terms of dollars lost?
    Response. This measure is not expressed in dollars. Because 
different amounts of rent are paid for like units, the financial 
indicator measures occupancy loss as a percentage of total units.
    Comment. The use of a two year average of accounts when calculating 
Days Receivable Outstanding (DRO) will prevent PHAs from immediately 
seeing an increase in score if the management has made some significant 
improvements.
    Response. In calculating non-GAAP advisory scores a two year 
average of accounts receivable was used to calculate Tenant Receivable

[[Page 1725]]

Outstanding (formerly titled DRO) because, if a PHA is experiencing an 
unusually difficult year in collecting outstanding receivables, the PHA 
would be penalized. This method of calculating this component while 
preventing some PHAs from immediately seeing a decrease in score also 
prevents PHAs from seeing a dramatic increase in score as a result of 
significant management improvements such as enforcing evictions. For 
purposes of reporting under GAAP, Tenant Receivable Outstanding is 
calculated using the accounts receivable balance at a PHA's fiscal year 
end.
    Comment. HUD should take into consideration differences between 
PHAs in tenant-paid utilities versus nontenant-paid utilities when 
making the calculation under the Expense Management component.
    Response. Differences in PHA costs for those with tenant-paid 
utilities versus nontenant-paid utilities have not been incorporated 
into the Expense Management component because no accurate data is 
available as to an individual PHA's composition of tenant-paid versus 
nontenant-paid utilities. As a result, of the six expense categories 
that comprises the Expense Management component, the utilities expense 
category is worth 3 percent of the overall 1.5 points available under 
Expense Management. In short, 95 percent of all PHAs will pass the 
utility expense category under the Expense Management component with 
only outliers failing.

Subpart D--PHAS Indicator #3: Management Operations

    Certain comments specifically addressed to the PHAS Notice on the 
Management Operations Scoring Process may be applicable to the 
regulations in Subpart D and vice versa. Please see Section V of this 
preamble.

Section 902.43  Management Operations Performance Standards

    Comment. The rule is not clear concerning the extent to which the 
old PHMAP regulation will survive and the extent to which the 
management indicators have been modified by the new PHAS rule. The 
method of assigning PHMAP letter grades, with their associated 
numerical formula value, is not clearly defined in the amendments. This 
is critical and substantive information that belongs in the rule.
    Response. HUD's PHMAP regulation in 24 CFR part 901 is being 
removed by this rule, effective March 31, 2000. Those sections of the 
PHMAP regulation that HUD needs to retain have become part of the 
Management Operations Scoring Notice. The PHAS Notice on the Management 
Operations Scoring Process is referenced in Sec. 902.45 of the PHAS 
rule.
    Comment. PHAs should not be required to report to the local law 
enforcement agency every activity which is investigated by the PHA's 
Security Department.
    Response. The PHAS does not require PHAs to report every activity 
which is investigated by the PHA Security Department to the local law 
enforcement agency. The PHAS management sub-indicator #6, which relates 
to Security and Economic Self-Sufficiency, recognizes policies adopted 
by the PHA Board and the procedures implemented by the PHA which assist 
a PHA in accomplishing the following: track crime and crime-related 
problems in at least 90 percent of the PHA's developments; have a 
cooperative system for tracking and reporting incidents of crime to 
local police authorities; and coordinates with local government 
officials and residents to implement anticrime strategies. HUD's 
expectation is that PHAs will follow their own policies and procedures 
for tracking and reporting crime related activities. HUD respects all 
good-faith efforts of PHAs to partner with local authorities to address 
these important issues.
    Comment. PHAs should not be held accountable for rent uncollected 
after a resident vacates the unit if the PHA can document activity to 
collect the outstanding charges. Such activity can include notifying 
the resident by letter at the resident's last known address; detailing 
the amount of resident owes and demanding payment; contacting the 
credit bureau for slow or no payment; attaching a lien on the 
resident's property (if State law allows; and securing the services of 
a third party collection agency).
    Response. This component is no longer part of the assessment 
conducted under the Management Operations Indicator. Rents uncollected 
component is now addressed only under ``Tenant Receivable Outstanding'' 
under the Financial Condition Indicator.

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

    Certain comments specifically addressed to the PHAS Notice on the 
Resident Service and Satisfaction Survey Scoring Process may be 
applicable to the regulations in Subpart E and vice versa. Please see 
Section V of this preamble.

Section 902.50  Resident Service and Satisfaction Assessment

    Comment. The survey is a tool that residents will use to get back 
at managers who enforce regulations and housing standards. As a result, 
managers will be less effective in being objective in managing their 
properties. There are other ways of measuring the effectiveness of 
property management instead of asking residents, who may be subjective 
based on their impressions of the manager instead of the facts. HUD 
should retain the measurements utilized under PHMAP to assess resident 
services and satisfaction.
    Response. Based on the results of the pilot test of the resident 
service and satisfaction assessment, HUD has been presented no evidence 
to support this claim. In developing its resident survey, HUD adhered 
to sound principles of survey development in order to minimize 
responses that may simply be retaliatory on the part of residents as 
suggested by the comment. These survey principles also include that if 
the majority of those surveyed identify the same problem, the problem 
is assumed to be true, unless found to be otherwise. The PHAS makes 
clear that the PHAS score issued to a PHA is not based solely on the 
residents assessment of the PHA. The PHAS score represents a 
compilation of scores for all four PHAS indicators. HUD strongly 
believes, however, that the opinions of residents are important and 
that the survey is an effective tool to gauge these opinions. Similar 
surveys are recognized in the commercial property sector as effective 
management tools. Furthermore, answers to some questions will be used 
for informational purposes only and not calculated into the score for 
the PHA. Only questions with a statutory and/or regulatory basis (e.g., 
questions that address services which a PHA is legally responsible to 
provide) will be ``scored.'' HUD believes that its survey process is a 
more effective measurement than the measurements utilized in PHMAP.
    Comment. This indicator appears to be the subject of greater 
substantive change from the September 1, 1998, final rule than any of 
the other indicators. The PHA is removed from the survey process 
itself. Surveys will be distributed by ``a third party organization 
designated by HUD'' to a ``statistically valid number of residents'' 
chosen randomly by the third-party organization to participate in the 
survey. Aggregate results will be transmitted by the third party 
organization to HUD for ``analysis and scoring.'' The scores will be 
reported to PHAs as single scores for

[[Page 1726]]

five ``survey sections.'' Because the survey results will not be broken 
down by development either to HUD or to the PHA, there will be no 
ability to attribute particular survey results to any development 
operated by a mixed-finance owner entity (or by an RMC or an AME such 
as a private management contractor) as distinguished from the PHA 
itself, or for that matter to any particular PHA-managed project as 
opposed to another. While this process presumably will preclude 
attribution of any particular grade to a mixed-finance project, it also 
appears to put in question the ability of the PHA to develop any 
reasonably targeted ``Survey Follow-Up Plan.''
    It also appears that scoring under this indicator will not be based 
on resident satisfaction. Review of the survey form does not reveal 
readily which questions can be regarded as ``directly related to 
compliance with the regulations or statutes applicable to the 
management of public housing.'' An anonymous and unverifiable survey 
form appears a dubious basis for compliance assessment in any event.
    The pre-survey implementation process and the survey itself are 
ill-suited, if not destructive, to a mixed finance project. Separate 
treatment or classification of the public housing residents vs. the 
non-public housing residents in a mixed-finance project should be 
avoided. It is destructive of the cohesiveness of the mixed-income 
community.
    Response. HUD disagrees that the PHA is removed from the survey 
process. The PHA will have an instrumental role in the survey process 
by providing unit addresses and marketing the survey to residents using 
promotional materials provided by HUD. PHAs also will develop a follow-
up plan, if appropriate, to address any issues surfaced by aggregated 
survey results. The third party organization will not select the sample 
of residents. Rather, HUD selects the sample and sends it to the third 
party organization.
    At this time, HUD will not provide responses at the development 
level in an effort to protect respondent confidentiality. HUD, however, 
will provide survey section scores at the PHA level. HUD does not agree 
that this will prevent PHAs from developing a follow-up plan. At this 
initial implementation of PHAS, the survey is not intended to identify 
individual problems, but rather to identify those at the PHA level. HUD 
intends, however, that in the future the survey will provide for 
responses at the developmental level, and HUD is proceeding to work 
toward that goal. HUD recognizes the benefits that can be achieved by 
surveys conducted at the developmental level.
    The survey results will account for five out of the ten possible 
points for this indicator. Only those survey questions that are based 
on statutory and/or regulatory requirements will be ``scored.'' A copy 
of the survey instrument and the associated weights for the ``scored'' 
questions are attached as an appendix to the PHAS Notice on the 
Resident Service and Satisfaction Survey Scoring Process, which will be 
updated and published in the near future.
    HUD also disagrees that the survey process is ill-suited to a mixed 
finance project. HUD believes that it is important to assess the 
services provided to the residents' satisfaction with these services 
for all residents in public housing, including those in public housing 
units in mixed-income developments. Therefore, public housing units in 
mixed finance projects will not be excluded from the survey. Residents 
are selected at random to participate, so no one income group would be 
singled out in any given year.

Section 902.51  Updating of Resident Information

    Comment. The updating of resident information can be a time 
consuming process. Under the pilot testing, a PHA received notification 
to appoint a staff person to access the Resident Satisfaction and 
Services Assessment System (RASS), review list of addresses from HUD 
which are supposed to represent all of a PHA's property and unit 
addresses, edit and enter correct information. Staff expended long 
hours to correct address information.
    Response. HUD recognizes that as a new system, there is some 
additional time involved at the outset by both HUD and a PHA to compile 
the information and data necessary to perform the assessments required 
by the PHAS. Once this information is compiled, however, any revisions 
necessary should be considerably less time consuming. For the first 
year of implementation, HUD intends to enhance direct communication 
with all PHAs to assist PHAs with the updating of resident information. 
Also, HUD will assist on an individual basis those PHAs that are 
experiencing technical problems or need assistance with entering a 
large volume of unit address data in RASS.
    Comment. Reliance on the form HUD-50058 for the requisite updating 
of units and addresses may pose a problem for PHAs. Industry groups 
have met with HUD to discuss ways to improve MTCS reporting, but little 
has been accomplished to make reporting easier and accurate. There is a 
concern that PHAs will receive incomplete files from HUD and will 
require more than 30 days to update and clean their data files. This 
process has not been tested under the advisory period and there is no 
way of knowing where the problems may lie. PHAs should have 60 days to 
update the files. HUD should be more realistic about the limited role 
MTCS should play in all its programs--it is not ready to be universally 
adopted by all programs.
    Response. HUD is aware that the MTCS reporting process needs 
improvement. Therefore, for the first year of implementation, HUD 
intends to assist on an individual basis those PHAs that are 
experiencing technical problems or need assistance with entering a 
large volume of unit address data in RASS. Due to limited data reported 
in MTCS, HUD must rely on PHAs to validate unit addresses to ensure 
survey mailing accuracy. PHAs should make additions, deletions and/or 
corrections to unit addresses under their jurisdiction. Any incorrect 
or obsolete address information will impact the survey results if the 
unit address information is incorrect or incomplete. REAC will be 
unable to select a statistically valid number of residents to 
participate in the survey. Under those conditions, a survey cannot be 
conducted at the PHA site and the PHA would not receive any points for 
PHAS Indicator #4. At this time, PHAs have a two month period to 
complete unit address certification.
    Comment. PHAs were advised to register for IDs to verify unit 
addresses via the RASS but given very little time to register. Because 
this process of permitting PHAs to verify unit addresses for purposes 
of the resident satisfaction survey is crucial for the RASS and 
physical inspection, it is essential that HUD improves its 
communication with the industry and provide ample lead-time to 
implement the RASS. HUD should increase its server capacity for 
agencies to adequately transmit data to RASS.
    Response. HUD agrees that it is HUD's responsibility to ensure that 
PHAs have adequate notice and sufficient time to take the steps and 
complete the processes required by this Indicator. To improve 
communications between PHAs and HUD on this Indicator, HUD intends to 
have regular meetings with industry representatives to discuss the 
survey process and continue providing technical assistance to PHA 
personnel. HUD is also working to improve its

[[Page 1727]]

server capacity for easier transmission of data to RASS.

Section 902.52  Distribution of Survey to Residents

    Comment. A PHA must spend a considerable amount of staff time to 
market the survey. The time period set for this process does not appear 
to allow adequate time to respond or provide meaningful follow-up.
    Response. HUD has allotted 30 days for PHAs at the beginning of the 
survey process to market the survey. At the conclusion of the survey 
period, the survey results will be posted and the PHA will have 30 days 
to access the results via the Resident Assessment Subsystem. Based on 
the survey results, PHAs will be required to develop a follow-up plan 
to address and resolve performance weaknesses. The follow-up plan must 
be available as a supporting document for the PHA's Annual Plan in 
accordance with 24 CFR 903.23(d).
    Comment. The draft resident survey should have been published as 
part of the proposed rule. Publishing the document separately was not 
helpful.
    Response. In retrospect, HUD recognizes that it would have been 
helpful to have published the survey at the time of publication of the 
June 22, 1999, proposed rule. HUD, however, had posted the survey, both 
in draft and final form on the HUD REAC website for an extensive period 
of time, and at this website, the PHAS Notice on the Resident Service 
and Satisfaction Survey Scoring Process is also posted. The survey was 
also widely distributed to PHAs beginning in February 1999. HUD has 
included the survey as an appendix to the PHAS Notice on the Resident 
Service and Satisfaction Survey Scoring Process.
    Comment. HUD must ensure that the language regarding media 
outreach, posting flyers, and using newsletters to notify tenants about 
the resident survey on the RASS website is corrected so that it is 
consistent with the PHAS Scoring Notice on the Resident Service and 
Satisfaction Indicator which does not mandate the use of newsletters.
    Response. HUD's website on the RASS and the PHAS Scoring Notice on 
the RASS have been made consistent.

Subpart F--PHAS Scoring

Section 902.60  Data Collection

    Comment. The rules pertaining to which certifications are needed 
and where they must be located should be reasonable and in conformance 
with standard industry practice and HUD regulations. These requirements 
then must be communicated to PHAs before physical inspections are 
conducted and performance judgments made.
    Response. HUD has provided copies of the HUD physical inspection 
training manuals on REAC's website at www.hud.gov/reac since 1998. The 
training manuals, along with the software, which is also on REAC's 
website, provides the procedures used by the HUD inspectors including 
the need for certifications and where they must be located. These are 
available to PHAs at no cost and may be accessed directly from HUD's 
website.

Section 902.67  Score and Designation Status

    Comment. One commenter praised HUD for adding to the designation of 
``troubled,'' the subdesignation of ``substandard.'' The commenter 
advised that this subdesignation helped to distinguish among those PHAs 
troubled in a particular area (and identify which area a PHA was 
experiencing problems) and PHAs that are troubled overall. Two other 
commenters, however, stated that the proposed rule added a new 
classification, ``sub-standard,'' without explanation of its meaning or 
justification for its use. HUD should clearly define the term and 
explain its value.
    Response. The preamble to the June 22, 1999, proposed rule 
explained HUD's addition of term ``substandard'' to the PHAS 
regulation. Section II.D. of the preamble (64 FR 33350) stated that the 
purpose of introducing the term ``substandard'' in connection with 
troubled PHAs was to identify the particular area in which a PHA 
received a below passing or standard rating in the three major PHAS 
Indicators--Physical Condition, Financial Condition, and Management 
Operations--and to distinguish PHAs with a single problem area from 
those that have widespread issues. For example, if a PHA received less 
than 60 percent of the available points for the Physical Condition 
Indicator, but above 60 percent of the available points for the 
Financial Condition and Management Operations Indicators, the PHA is 
designated troubled (the PHA is troubled in one area), but for purposes 
of clarifying how the PHA is troubled, the PHA is categorized as 
substandard because it is substandard with respect to the physical 
condition of its properties.
    HUD believes that the introduction of the term ``substandard'' to 
the PHAS regulation is consistent with Congressional directive in the 
Public Housing Reform Act. In amending section 6(j) of the 1937 Act (42 
U.S.C. 1437d(j)), the Congress directed HUD to establish procedures for 
designating troubled PHAs and the procedures are to include 
identification of serious and substantial failure to perform as 
measured by the performance indicators specified under paragraph (1) of 
section 6(j) and such other factors as HUD may determine appropriate. 
The substandard categorization helps to identify the area in which the 
PHA is troubled, and to distinguish a PHA that is troubled in one area 
from a PHA that is overall troubled (that is, troubled in more than one 
area or with an overall PHAS score of less than 60 percent).
    Comment. HUD should temporarily abandon the thresholds to determine 
troubled designation for the first two years of implementation of the 
PHAS.
    Response. It would be a breach of the public's trust in HUD, and a 
breach of HUD's statutory obligation, to abandon the thresholds, and in 
essence abandon the designation of troubled for PHAs that are 
substandard (and therefore troubled) physically, financially, or with 
respect to their management operations. HUD determined that 60% (or 18 
points) was the passing mark for the Physical Condition, Financial 
Condition and Management Operations Indicators. This was part of the 
first PHAS proposed rule published on June 30, 1998, and on which HUD 
solicited public comment. HUD will not disregard these thresholds even 
for a temporary period. HUD believes that the recent amendments made to 
section 6(j) of the 1937 Act support that there should be no halt to 
HUD's assessment of PHAs.

Section 902.68  Technical Review of Results of PHAS Indicators #1 or #4

    Comments. Fifteen (15) days to request a technical review and 30 
days to request an appeal are not enough time for a small PHA with 
limited staff resources. The rule provides no limit on the amount of 
time REAC has to respond to a request for a technical review or appeal. 
The rule should provide for REAC to respond within 30 days of receipt 
of the appeal. The 30 day appeal process should follow not only the 
issuance of the PHAS score but also any final determination of a 
request for a technical review. Another comment suggests that the 
period to request a technical review should be extended from 15 days to 
60 days.
    Response. HUD believes that 15 days, or approximately two weeks, is 
sufficient time to review the physical inspection report and request a 
technical review, and in the case of an appeal, 30 days is sufficient. 
HUD notes that the final rule now provides PHAs with the opportunity to 
review the physical inspection report, correct

[[Page 1728]]

exigent health and safety deficiencies identified in the report and 
request a reinspection before the physical inspection report is to be 
final (see Sec. 902.26(b) of the final rule).
    With respect to the physical inspection of properties, the PHA is 
present on a site during the inspection, and as a result is aware of 
the parameters of the inspection. Further, on the day of inspection, 
the PHA's property representative receives a list of every health and 
safety deficiency before the inspector leaves the site.
    In order to give appropriate consideration to requests for appeals 
and technical reviews, HUD is not going to set a time limit but will 
make every effort to respond to the request within a 30 day time 
period. HUD notes that until it responds to the technical review 
request or appeal, the PHAS score is not considered final.
    Additionally, HUD notes that under PHMAP, the time for appeal was 
15 days. The 30-day period for appeals under the PHAS represents a 
substantial increase in time over the PHMAP appeal, and the technical 
review was not a procedure provided by PHMAP.
    Comment. Technical review should be expanded to include the 
erroneous financial scoring results that easily occur in the 
transmission of information to HUD over the internet. Another comment 
suggests that all four PHAS indicators should be afforded the technical 
review process, at least in the first 2 to 4 years of PHAS 
implementation. The technical review process is burdensome and the 
proposed rule acknowledges this burden by limiting appeals to a narrow 
category of areas eligible for technical review. Given the investment 
of time and resources being made by the PHA, and given that PHAs must 
provide photos and other objective evidence to support a review, it is 
difficult to understand why HUD will not revisit the severity of the 
deficiency as part of the technical review.
    Response. HUD disagrees with these recommendations. While HUD has 
acknowledged that the technical review process is a burden on HUD if it 
was permitted for all PHAS Indicators, it is a burden HUD would readily 
assume if there was a substantial benefit to this process for PHAs for 
all four PHAS Indicators. The technical review process was established 
as a mechanism to correct unintentional errors caused by a third party. 
There is no third party involved in the reporting of financial 
information or in the PHA's provision of the management indicator 
information as there is in the physical inspection process and the 
resident survey. While the technical review process is not available 
for the reporting of financial information or in the reporting of 
management operations information, this final rule, as already 
discussed in this preamble, provides procedures by which PHAs can 
notify HUD of errors and seek correction or adjustments to the score 
without regard to designation status.
    Comment. HUD should permit a technical review where there has been 
an inspection of a unit which, as a result of the proposed PHAS 
amendments, is now exempt from inspection. Additionally, a technical 
review should be permitted where the inspector has failed to adhere to 
REAC instructions regarding the conduct of inspections.
    Response. Several commenters expressed concern about inspection of 
vacant units that are now exempt under the new PHAS regulation. The 
inspection of vacant units conducted before issuance of this final rule 
were advisory in nature, and will not affect a PHA's PHAS designation. 
HUD has exempted vacant units from the physical inspection process for 
fiscal years ending September 30, 1999, and thereafter. No official 
physical inspection score will be based on an inspection of any unit, 
not under lease, that meets one of the three categories of units exempt 
from physical inspection as provided in this final rule.
    If the HUD contractor fails to adhere to REAC instructions, the PHA 
should notify REAC. As noted earlier in this preamble, REAC has its own 
quality assurance staff, who are employees of the Federal government. 
Their sole job is to review the performance of the contract inspectors 
to ensure that the inspection protocol is being followed. REAC also has 
a Technical Assistance Center and a toll free telephone number (1-888-
245-4860) and program participants are encouraged to call REAC if they 
experience problems with the inspectors. If a contractor's failure to 
adhere to REAC requirements results in the type of error, the technical 
review process is designed to address, then this process is available 
to the PHA.
    Comment. HUD also should clarify its intent to permit appeals where 
a PHA has been declared ``substandard'' in one major indicator (per 
Sec. 902.67(c)(2)), and has been denied ``high-performer'' status due 
to withdrawal of designation (per Sec. 902.67(d)), or has been denied 
such status pursuant to 902.67(a), due to deficient grade on the 
Resident Service and Satisfaction indicator.
    Response. ``Substandard'' is a subdesignation under the designation 
of ``troubled'' and therefore, appealable. The PHAS rule provides that 
a PHA may appeal any of its individual PHAS scores as a result of an 
error which the PHA believes, if corrected, would result in a 
significant change in the PHA's PHAS score and its designation. A PHA 
whose high performer or standard designation has been withheld or 
rescinded under the provisions of Sec. 902.67 may request that the 
Assistant Secretary of Public and Indian Housing reinstate the 
designation as provided in Sec. 902.67(d)(3).
    Comment. The rule provides that technical review will not be 
granted for challenges to the inspector's findings, or disagreement 
with the inspector's obligations. Knowing full well human error will 
affect some authorities, PHAs should be allowed to challenge error.
    Response. The purpose of this statement is to avoid challenges that 
are simply based on a PHA's disagreement with the inspectors findings. 
For example, the inspector cites a deficiency as major, but the PHA 
believes it is minor. In performing the inspection, the inspector is 
guided by HUD's physical inspection software which is to eliminate 
subjective findings on the part of inspectors. The purpose of the 
inspection protocol is to promote consistency and fairness in the 
inspection process. Therefore, a PHA's statement that a deficiency 
cited by an inspector as major is really minor is not a sufficient 
basis to request a technical review.

Section 902.69  PHA Right of Petition and Appeal

    Comment. The present abbreviated appeal process provided by the 
rule does not allow for review of the scoring process itself, nor does 
it allow for discussion or explanation of items beyond the control of 
the local housing authority. A better appeal system would be one that 
allows for local, or at least regional, review of PHAS scores and 
processing. Additionally, the appeal process should not be limited to 
status changes and the appeal process should be extended from 30 to 60 
days.
    Response. The appeal of a PHAS score, as provided in Sec. 902.69, 
necessarily involves the review of the scoring process. The appeal 
process is coordinated by REAC because scores are issued by REAC, and 
not by HUD's local or regional offices. Additionally, the appeal 
process provided in Sec. 902.69 is not an abbreviated process, but 
rather requires considerable time and effort. For this reason, the 
appeal process is not appropriate for errors that do not result in a 
significant change in a PHA's PHAS score and its designation. (HUD, 
however, has introduced several procedures in this final rule that 
address

[[Page 1729]]

errors of the types raised by the commenters. Please see Section III of 
the preamble.)
    Through the PHAS appeal process, a PHA may request an appeal of its 
PHAS score in writing to the Director of the Real Estate Assessment 
Center (REAC) within 30 calendar days following the issuance of the 
PHAS score. The appeal must be accompanied by the PHA's reasonable 
evidence that an objectively verifiable and material error has 
occurred, which if corrected, will result in a significant change in 
the PHA's PHAS score. Those errors may be the result of items beyond 
the control of the PHA, and the PHA should submit this evidence with 
its appeal.
    Upon receipt of the appeal, REAC will convene a Board of Review to 
evaluate the appeal and its merits for the purpose of determining 
whether a reassessment of the PHA is warranted. The Board of Review 
will include representation from REAC, the Office of Public and Indian 
Housing, and such other office or representative as the Secretary may 
designate. HUD will make a final decision on appeals within 30 days of 
receipt of an appeal, and may extend this period an additional 30 days 
if further inquiry is necessary.
    HUD addressed earlier in this preamble the appeal period of 30 
days. HUD believes that 30 days is sufficient, and again, notes that it 
is an increase in the amount of time provided for the PHMAP appeal 
process.
    Comment. The Board of Review should be eliminated and the Office of 
Public and Indian Housing (PIH) should act on all appeals.
    Response. HUD disagrees with this comment. HUD believes that the 
Board composition, as provided in the rule (a representative from REAC, 
PIH, and other office as the Secretary may designate, excluding the 
TARC) ensures fairness and equity in the appeal process.
    Comment. A representative of public housing agencies should be 
included as a member of the Board of Review discussed in 
Sec. 902.69(b)(3).
    Response. HUD declines to make this change at the final rule stage, 
but is taking this recommendation under advisement.

Subpart G--PHAS Incentives and Remedies

Section 902.71  Incentives for High Performers

    Comment. The incentives for becoming a high performer under 
Sec. 902.71 are ambiguous. The section does not list what specific HUD 
requirements a high performer would be relieved from, as well as how 
bonus points for HUD funding competitions would be utilized.
    Response. This regulatory section describes the incentives for high 
performers broadly to allow HUD the flexibility to create incentives 
for high performers as HUD reviews the statutory framework and 
regulatory requirements of new and existing programs and initiatives 
and identifies appropriate and permissible incentives. For example, 
HUD's proposed rule on the ``Allocation of Funds under the Capital 
Fund; Capital Fund Formula,'' published on September 14, 1999 (64 FR 
49924) provides for a performance reward for high performers in 
Sec. 905.10(j) (see 64 FR at 49929). HUD is reviewing aspects of other 
programs to determine appropriate and permissible incentives to reward 
high performers, and is considering various incentive alternatives. HUD 
will notify PHAs of additional incentives when they have been 
determined.
    With respect to relief from requirements, Sec. 902.71 provides a 
few examples of the requirements that high performers would receive 
relief from. The rule does not list all requirements because the 
requirements from which PHAs may be granted relief may change from time 
to time. Bonus points for high performing PHAs may be provided under 
future HUD NOFAs.
    Comment. The rule should provide as an added incentive for high 
performers relief from reporting on financial indicator requirements 
such as operating budgets, supporting schedules to include, all 
position salaries, and non-routine expenditures and administrative 
expense other than salaries. An additional incentive to include in the 
rule would be to provide an automatic extension for submission of year-
end financial statements and audit reports, as well as streamlined 
budget submissions and year-end financial reports.
    Response. There is no longer a requirement for submitting 
information of this type, unless a PHA is designated as troubled. 
Therefore, to adopt this recommendation would not provide any added 
incentive for high performers. PHAS offers other incentive for high 
performance, such as public recognition for achievement and bonus 
points in funding competitions, where such bonus points are not 
restricted by statute or regulation. If by this comment, the 
recommendation is to exempt a PHA from submission of the year-end 
financial information required under PHAS, HUD will not adopt this 
recommendation. The timely submission of year-end financial statements 
and audit reports is a principle of good management and, therefore not 
an appropriate incentive.
    Comments. As incentive for good performance, HUD should reduce 
physical inspection to every 3 years for PHAs that score 80% on the 
PHAS physical condition assessment. Another comment suggest that high 
performers be rewarded with physical inspection reduced to every 3 
years.
    Response. For the initial implementation of PHAS, HUD believes that 
a physical inspection every two years of a property that scored at 
least 90 percent on the PHAS Physical Condition Indicator is an 
appropriate incentive. As official and full implementation of PHAS gets 
underway, HUD will continue its review of all aspects of PHAS, all 
aspects of its public housing programs, and determine whether the 
incentives provided in this final rule should be revised.

Section 902.73  Referral to an Area HUB/Program Center

    Comment. The scoring function of the PHAS under Sec. 902.73 does 
not provide guidelines to determine when HUD may request ``other 
standard performers'' to submit an Improvement Plan to HUD. Requiring 
Improvement Plans for PHAs with scores between 60 and 70 seems clear. 
However, for standard performers scoring above 70, the reasons are not 
clear. Without guidelines, HUD could require the submission of an 
Improvement Plan from a PHA with the highest level (89) of a standard 
performer. The rule's discretion to HUD to require Improvement Plans of 
PHAs scoring above 70 should be removed.
    Response. Public Housing HUBs are required to monitor the PHAs 
within their jurisdiction. If a PHA has deficiencies in its performance 
regardless of its PHAS score, the PHA must correct those deficiencies. 
An Improvement Plan is both a strategic device and a monitoring tool. 
The Improvement Plan provides goals and direction to the PHA to correct 
its deficiencies. Additionally, the Improvement Plan allows the Public 
Housing HUB to ensure that progress is being made in the correction of 
the deficiencies.
    Comment. The rule needs to clarify the relationship of a troubled 
designation to the requirement for submission of Improvement Plans to 
the HUB/Program Center and the TARC.
    Response. If the confusion arises because of reference in 
Sec. 902.75 (Referral to a Troubled Agency Recovery Center (TARC)) to 
the HUB/Program Center, this reference is included because there may be 
cases in which the

[[Page 1730]]

TARC will refer a troubled PHA to a HUB/Program Center for assistance 
in oversight and monitoring. A troubled PHA, however, is not required 
to submit both an Improvement Plan and enter into an MOA, nor is a 
troubled PHA subject to the provisions of Sec. 902.73 and Sec. 902.75. 
PHAs that are categorized as troubled in one area do not submit 
Improvement Plans to either the HUB/Program Center or the TARC. PHAs 
that are categorized as troubled in one area are required to enter into 
a Memorandum of Agreement (MOA), as statutorily required of all 
troubled PHAs in accordance with the provisions of Sec. 902.75. A PHA 
designated as troubled and that is referred to the HUB/Program Center 
will be subject to the actions provided in Sec. 902.75, the same as 
those PHAs that remain under the jurisdiction of the TARC. For certain 
troubled PHAs, the TARC may determine that the HUB/Program Center is 
better suited to work with and monitor the troubled PHA. In an effort 
to clarify an ambiguity, HUD has added language to Sec. 902.75 that 
states that the referral to the HUB/Program Center is for purposes of 
oversight and monitoring.

Section 902.75  Referral to a Troubled Agency Recovery Center (TARC)

    Comment. HUD must ensure that the Department has the capacity to 
provide constructive technical assistance to PHAs that are classified 
as troubled or substandard performer for individual components or the 
overall PHAS assessment.
    Response. HUD, by adding TARCs to its organizational structure, 
made provisions to ensure that it has the requisite capacity.

V. PHAS Scoring Notices

1. Physical Condition Scoring Notice

    Comment. The physical condition rating process needs to be refined. 
PHAs receive the same deficiency rating whether there are two missing 
shingles on a roof or 20, or if there is 1 inch of paint peel or 1 foot 
of paint peel. No discretion appears to be built into the process to 
determine whether the deficiency is large or small. The same rating for 
this type of discrepancy needs to be addressed.
    Response. In developing the PHAS, one of the objectives was to 
establish, to the extent possible and permissible under law, a uniform 
and objective means of assessing the physical condition of properties. 
Hence, the physical condition standard defines the inspectable areas 
and inspectable items that are required to be examined. The physical 
inspection protocol further defines the deficiencies to be identified 
and the severity levels that distinguish between the varying levels of 
deficiencies for the same item. The levels of severity are level 1 
(minor), level 2 (major) and level 3 (severe). This achieves the 
objective of the comment to distinguish between large/small 
deficiencies of the same nature. It is important to define these 
differences to remove subjective judgements in favor of objective 
assessments. The inspection protocol only records deficiencies based on 
the specific inspectable areas, inspectable items and severity 
definitions. It does not record a defect if a defect is not present. As 
noted above, however, the protocol does differentiate between the 
severity levels for a given deficiency. This differentiation is 
important in order to provide scalable scores which represent the 
overall condition of the property. HUD, however, is constantly 
reviewing and refining the deficiency definitions, and HUD will take 
this comment under advisement.
    Comment. The physical condition scoring process is overly 
complicated. Although the scoring notices detail the item weights and 
criticality levels for each inspectable area, it is difficult to 
determine the effect of individual deficiencies on the overall score. 
The issue is important to PHAs because they will not be granted a 
technical review unless it is determined that contractor error resulted 
in a significant change in the property score and the PHAS designation 
assigned to the PHA. HUD should revise the system to indicate that an 
appeal will be considered on the basis of errors in other areas, 
including the inspector's judgment of the severity of deficiencies, and 
to permit appeals regardless of any change in the performance 
designation.
    Response. HUD has made considerable effort to simplify and make 
more understandable the physical inspection scoring process, and 
believes that the Notice on the PHAS Physical Condition Scoring Process 
reflects HUD's success in this effort. With respect to appeals, the 
final rule provides for additional ways for PHAs to appeal or request 
review items in the assessment process that they believe are in error 
or inaccurate.
    Comment. The PHAS inspection process inspects too many elements. 
HQS and local codes should be the standards by which PHA properties are 
physically assessed. HUD should revisit the physical inspection 
protocols. PHAs are being unfairly penalized in the physical condition 
inspection process for items that meet local building codes but do not 
meet HUD's physical condition standards.
    Response. Before development of HUD's Uniform Physical Condition 
Standards and physical inspection protocols, HUD has had a number of 
inspections systems in its various programs. Part of HUD's 2020 
Management Reform Plan was to develop standardized, uniform and 
objective protocols, and HUD sought and obtained industry input in the 
development of its standards and inspection protocol. The product of 
this effort is HUD's Uniform Physical Condition Standards, which was 
the subject of a final rule issued on September 1, 1998, and also was 
part of the PHAS final rule published on September 1, 1998. These 
standards are also applicable to HUD's multifamily insured, Section 8 
project based, Section 202, and multifamily properties with HUD held 
mortgages in addition to public housing owned properties. HUD believes 
that this consistency is crucial to the effective management of the 
properties that receive assistance from the Federal government. PHAs 
are still required to meet any applicable local codes or ordinances. 
HUD's Uniform Physical Condition Standards notes that the standards do 
not supersede or preempt State and local building and maintenance codes 
to which HUD program participants must comply (see 24 CFR 5.703(g) and 
24 CFR 902.20(d).) Complying with local and Federal standards is not 
new. This is the case in developing new public housing, modernizing 
public housing as well as maintaining public housing. In any case where 
there is conflict, the general rule is that the more stringent standard 
is applicable. Accordingly, HUD will maintain the uniform physical 
condition standards. In cases where the HUD standard conflicts with 
local code, this final rule provides for an adjustment under the 
procedures described in Sec. 902.25(c).
    Comment. The PHAS physical inspection scoring process allows for 
multiple deductions for the existence of only one deficiency. A single 
item with a cited deficiency can be included in two inspectable areas. 
The scoring system does not include adjustments based on physical 
condition of the site, common areas, and building exterior for 
properties over 10 years old. The impact of cosmetic deficiencies 
should be reduced by exclusion or adjustment in item weight, 
criticality or severity values. Restrict the assessment to only the 
standards relevant to ``adequately functional and free of health and 
safety standards.'' The scoring process is inconsistent within 
properties and the

[[Page 1731]]

objective of determining whether a PHA is meeting the standard of 
decent, safe, sanitary and in good repair.
    Response. One of the unique features of the new uniform physical 
condition standard inspection is that it produces a scalable score to 
enable PHAs and HUD to better manage the properties. HUD believes that 
this is a significant improvement over inspections that produce only a 
pass or fail rating. Oftentimes the pass or fail rating is based only 
on a single element. This does not give HUD or the PHA an accurate 
picture of the overall condition of the property.
    In developing a scalable score, HUD believes it is prudent to 
distinguish in the scoring between more important elements such as the 
heating system and less important elements such as lawns and plantings. 
HUD has provided PHAs with an itemized list of each inspectable item 
and its criticality level (from 1 to 5, with 5 being the most 
critical). This list is found on REAC website at www.hud.gov/reac. 
Similarly, it is also important when developing a scalable score to 
differentiate between the severity levels of individual deficiencies. 
It is also important to note that the scoring process does not deduct 
for cosmetic deficiencies. As discussed earlier in this preamble, the 
physical condition protocol is concerned with physical condition 
deficiencies not cosmetic appearance, but HUD recognizes that several 
commenters expressed concern about deductions for cosmetic appearance. 
Following consultation with industry, HUD re-examined the Dictionary of 
Deficiency Definitions, to assure that cosmetic deficiencies are not 
included. The revised Dictionary of Deficiency Definitions is posted on 
HUD's website.
    Comment. No deductions should be applied to items that were not 
present in the design, construction and/or rehabilitation of projects 
when they have been maintained substantially the same as at the time of 
their acceptance. No deductions also should be made for items that are 
not present and that are not required by National Codes or HUD 
mandates.
    Response. HUD has received comments similar to this one on the 
earlier PHAS rulemaking in 1998. While HUD believes that good design 
practice calls for the provision of window screens, gutters and down 
spouts, HUD recognizes that not all properties were built with these 
elements. Similarly, HUD believes that residents should be afforded 
privacy in bedrooms and bathrooms through the use of door locks, but 
again recognizes that not all properties were built with these 
features. Based on these concerns, HUD has modified its protocol to 
only assess elements that are present at the time of the inspection.
    Comment. The PHAS physical condition scoring process should be 
corrected so that excessive point deduction for relatively few 
deficiencies do not occur. The system must return reasonable score 
results in order to be a valid measure of the physical condition found.
    Response. If the deficiencies are severe, then even if they are a 
few deficiencies the point deduction will appropriately represent the 
severity of the deficiencies. HUD disagrees that the PHAS physical 
inspection scoring methodology results in excessive point deduction for 
an important element in the scoring system is the concept that not all 
inspectable items are of equal importance. Some elements like roofs, 
heating systems, etc., are more important than other elements such as 
lawns or plantings. Because of that, if a few high criticality level 
deficiencies are assessed as severe, and also have relatively high item 
weights, the score will be significantly reduced. Given the high item 
weights, criticality level and severity, however, the deductions are 
appropriate. The weights and levels assigned to the deficiencies are 
appropriate given their relative importance in terms of maintaining a 
condition that is decent, safe, sanitary and in good repair.
    Comment. The contract inspector should share each observed 
deficiency noted with the PHA representative accompanying the inspector 
so the PHA will have a better understanding of the observed deficiency 
location and can ask questions and seek clarification where needed.
    Response. HUD has developed an electronic system of capturing and 
providing inspection results. HUD believes that it is appropriate to 
review the results before conveying them the PHA. Again, however, HUD 
points out that the inspector shares the health and safety deficiencies 
with the PHA's representative on the day of inspection before the 
inspector leaves the site, and HUD, at this final rule stage, provides 
for the PHA to review and comment on the physical inspection report 
before it is issued in final. Additionally, as noted earlier, HUD has 
revised the physical inspection report to make it easier to identify 
the deficiencies noted.
    Comments. HUD should consider a mechanism for making allowances for 
unavoidable downtime conditions resulting from scheduled repairs or 
unanticipated equipment problems. Such allowances should reflect a 
PHA's actions to minimize inconveniences to building residents. Another 
comment suggests that vacant or occupied buildings and units with 
substandard conditions that HUD has approved for mandatory conversion, 
HOPE VI redevelopment, demolition or disposition, or a comprehensive 
modernization plan should be exempt from the PHAS physical inspection.
    Response. This final rule amends the inspection protocol to exempt 
vacant units from the physical inspection requirement. This accounts 
for repairs that are ongoing while the units are not occupied. Occupied 
units, however, are subject to inspection (although occupied units 
undergoing modernization may be eligible for scoring adjustment, as 
provided in Sec. 902.25) HUD must ensure that residents are living in 
housing that is decent, safe, sanitary, and in good repair.
    Comment. Deductions for ponding should be restricted where it is 
evident that standing water is causing visible damage to the roof 
surface or underlying materials. HUD should consider accepting ponding 
as a natural consequence of flat roof design while it is raining, and 
that flat roofs are an acceptable design standard for high-rise 
buildings.
    Response. Any ponding or standing water on a roof can compromise 
the structural integrity if left too long. It is impossible to tell at 
the time of the inspection how long or to what extent damage may have 
been caused. For these reasons, HUD declines to adopt the suggestion, 
but HUD also recognizes the complexity of this issue, and HUD's 
inspection protocols now provide that if a measurable precipitation 
event has occurred within the previous 48 hours, consideration will be 
given to the impact on the extent of ponding.
    Comment. Mold and mildew can be a serious problem, but often is not 
a result of a PHA's performance. The physical condition scoring process 
must allow for judgment to be exercised by the inspector to determine 
if the presence of mold/mildew is a result of resident behavior or poor 
property management.
    Response. While HUD appreciates that not all conditions are the 
result of the PHA's performance, the PHA is ultimately responsible for 
the condition of the properties. The protocol is designed to determine 
the condition of the property, for which the PHA is responsible.
    Comment. HUD should explain why maintenance areas are considered 
common areas when residents are not allowed in maintenance work area, 
boiler rooms, and elevator equipment rooms.

[[Page 1732]]

    Response. The physical condition standards of decent, safe, 
sanitary and in good repair applies to the total property, not just 
areas where residents are allowed. These areas may not permit tenant 
access, but there is access to PHA maintenance staff.
    In developing the Uniform Physical Condition Standards, HUD 
identified the major components of a property (i.e., site, building 
exterior, building systems and units). In attempting to not overly 
complicate the structure of the standard, HUD classified the remaining 
elements under common areas. This is not unlike the system used by HUD 
public housing Field Office staff under Handbook 7460.1 REV-1, the 
public housing ``Project Engineering Survey'' (Form HUD-52414)--``Other 
Items.'' Similarly, the Section 8 Housing Quality Standards Inspection 
form (Form HUD-52580), deals with these items under All Secondary Rooms 
Not Used for Living. HUD believes that its classification is 
reasonable.
    Comment. HUD advised that algorithms, which would provide a 
methodology to compare vastly different types of housing across the 
country, would be included in the Physical Condition Scoring Notice, 
but they were not. If the algorithms are not to be used, the Assistant 
Secretary for PIH should therefore make a determination of a reasonable 
basis for scoring these properties, to take in the differences across 
the country.
    Response. As HUD has stated frequently, the objective of its 
Uniform Physical Condition Standards and its uniform physical condition 
inspection protocols is to provide basic standards that are applicable 
to all types of housing, located in all types of areas. To the extent 
that adjustments to the physical condition inspection and score may be 
needed because of unique local building codes, or physical features of 
a housing that are unique to a geographic area and not contemplated by 
HUD's standards and inspection protocols, the final rule provides the 
flexibility to make such adjustments.
    Comment. HUD should reconsider the current weights in the PHAS. In 
some areas, for example, the common area, which is only 15% of the 
entire building score, includes so many items, such as laundry rooms, 
lobbies, offices, community space that the deficiencies add up to over 
70% of all the deficiencies in the entire inspection.
    Response. As noted in this preamble, the weighting system for 
physical inspection scoring was the subject of industry and 
professional consultations. HUD believes that the current weights 
represent reasonable values to attribute to those property components. 
Regardless of the number of inspectable items in an inspectable area, 
the maximum value of the area is limited to the relative value of the 
area.
    Comment. Properties should not be downgraded for penetrating 
vegetation that are attractive vines on fences and walls. HUD should 
not penalize PHAs for features which are considered amenities in the 
private market. In some cases, a neighbor would be justifiably upset if 
the PHA removed a vine owned by this neighbor from the PHA's fence.
    Response. Penetrating vegetation can affect the livability and 
structural integrity of the property. HUD believes that the deficiency 
is justified.
    Comment. The PHAS is still not clear how health and safety 
deficiencies affect a PHA's numerical score. The version of this notice 
accompanying the final rule needs to provide explicit examples of how 
these deficiencies figure into the numerical grade.
    Response. Health and safety deductions are treated like all other 
deductions in the scoring algorithm, and take into account the assigned 
item weights and criticality values. The PHAS physical inspection 
protocol emphasizes health and safety because of its crucial importance 
to the well-being of residents. All health and safety deductions are 
therefore categorized as level 3 (severe).

2. Financial Condition Scoring Notice

    Comment. There are contradictory explanations of the scoring of 
Expense Management and Net Income under the Financial Condition 
Indicator. In Appendix 1 of the PHAS Notice on the Financial Condition 
Scoring Process, HUD states that these would be scored based on 
deviations from a statistical mean. Those either above or below the 
allowable deviation would score 0 and all others would score 1.5. In 
Appendix 2 of this Notice, HUD states that these components would be 
scored only in one direction. HUD needs to state which of the two 
methods will be used.
    Response. As specified in Appendix 1 to the PHAS Notice on the 
Financial Condition Scoring Process, the deviation from a statistical 
mean only applies to the first two indicators: Current Ratio and Months 
Expendable Fund Balance. For the remaining indicators the methodology 
is clearly delineated. Appendix 2 of this Notice is simply a set of 
tables providing the threshold values for each indicator by PHA size 
category consistent with the methodology described in Appendix 1.
    Comment. Four categories within the expense management indicator: 
administrative, utilities, ordinary maintenance, and general expense 
are too detailed and unnecessary. Moreover, the cost categories are 
more detailed than high performing PHAs are currently required to 
report on their budget and subsidy requests. The Financial Condition 
Indicator should confine its review to overall routine costs and permit 
the PHA to have the discretion of distributing their expenses across 
those categories according to its needs and the goals and mandate of 
the Public Housing Reform Act.
    Response. Six categories are measured under the Expense Management 
indicator: administrative, general, tenant service, protective service, 
maintenance and operation, and utilities expense. The six expense 
categories were modeled after the Statement of Operating Receipts and 
Expenditures form (HUD-52599). HUD already has requested this 
information annually from PHAs that are using this form. HUD believes 
that a review of overall routine costs is insufficient because a PHA's 
allocation of its resources has a significant impact on the quality of 
housing and services provided to its residents. Thus, in addition to 
the above described changes to the Expense Management Indicator to 
account for regional differences among PHAs, REAC has revised the 
calculation for the expense management component to assign weights to 
the six expense categories mentioned above. Weights have been assigned 
to non-tenant related expense categories to encourage PHAs to allocate 
resources to tenant-related activities.
    Comment. PHAs should not be scored on the Expense Management 
indicator if they are performing well on other indicators.
    Response. HUD believes that a PHA's allocation of resources is a 
valuable measure of efficiency and thus, all PHAs should be assessed on 
this measure. A PHA whose circumstances show a reasonable business 
reason will be able to appeal this indicator.
    Comment. Under the scoring process for the Quick Ratio and Months 
Expendable Funds Balance, HUD proposes to utilize statistical 
distributions as the basis for its scoring. Specifically, HUD proposes 
to award the maximum number of points to PHA's with liquidity and 
operating values falling between the 30th and 80th percentiles. HUD, 
however, will give incrementally fewer points to PHAs with liquidity 
and operating reserves, values above the upper level of this range. In 
other words, PHAs with very high short term liquidity and very high 
operating reserves will be penalized through the loss of points. In 
effect, too

[[Page 1733]]

high of reserves and liquidity has now become a bad practice. This type 
of scoring does not make sense. PHAs with high liquidity or reserve 
values which place them above the 80th percentile range should be given 
the full number of points when these PHAs also score high under the 
PHAS management practices and physical inspection indicators.
    Response. HUD believes that its scoring methodology with respect to 
reserves is appropriate but has made accommodations to recognize 
circumstances unique to a PHA.
    Scoring Methodology. The scoring methodology for indicators 1 and 2 
(Current Ratio and Months Expendable Fund Balance) take into account 
the difference between for-profit and not-for-profit entities. The 
focus of for-profit entities is profit maximization (i.e., high-
retained earnings and liquidity), whereas the focus of not-for-profit 
entities, such as PHAs, is to maximize the use of scarce resources to 
the benefit of their residents. Thus, HUD believes that PHAs with too 
high liquidity or reserves could be better utilizing their resources to 
improve the quality of housing or services to their residents.
    HUD recognizes there is a much higher risk to HUD associated with 
PHAs exhibiting substandard levels of reserves as reflected in a score 
that reaches zero for those indicators. Those PHAs with too high 
reserves and liquidity, on the other hand, only stand to lose a maximum 
of 1.5 points out of 9 possible points for each of the two indicators.
    Recognition of Unique Circumstances. The Notice on the PHAS 
Financial Condition Scoring Process that will be published in the 
Federal Register will provide that a PHA will not lose points under 
current ratio or monthly expenditure fund balance if the PHA has too 
high liquidity or reserves if the PHA has achieved at least 90 percent 
of the points available under the Physical Condition Indicator and is 
not required to prepare a follow-up plan under the PHAS Indicator #4 
(Resident Service and Satisfaction). Additionally, this final rule 
provides that a PHA may appeal on the basis of mitigating circumstances 
any point deduction on the basis of too high liquidity or reserves, 
without regard to change of designation if the PHA receives a score of 
at least 60 percent in the Physical Condition Indicator.
    Comment. The use of percentile scoring in the financial condition 
scoring process and the fact that the standards are not fixed are of 
concern to PHAs. The use of the Bell Curve for scoring PHAs appears to 
be inequitable. The use of relational scoring should be discontinued 
for all components.
    Response. The concern that there is not an absolute value or 
standard toward which PHAs may strive is a valid one that has been and 
continues to be raised. Based on extensive economic and financial 
analysis, it has been concluded that it would be unfair to PHAs for HUD 
to identify a single value as the optimum performance measure among 
PHAs. Such number or standard would be debatable as it is really 
impossible to have a basis for selecting a single value as the optimum 
measure for a PHA of a certain size or location. Even PHAs that bear 
similar characteristics such as size and location operate differently 
due to a number of unique circumstances. It would be difficult to 
justify to PHAs that a certain amount of administrative expense or 
utility cost is the number to which they should strive because no two 
PHAs are the same.
    The peer assessment approach is an equitable means of measuring 
financial performance because it rewards PHAs in the middle to upper 
range of performance with the highest number of points. For example, 
PHAs who have a current ratio in the 30th to 80th percentile receive 
all of the 9 points allocated to this indicator. Another example is 
expense management where only the PHAs in the top 95th percentile do 
not receive the full 1.5 points.
    Comment. The PHAS financial scoring process may penalize PHAs under 
the current ratio component, for making capital improvements with local 
operating reserve funds. The PHAS also appears to include a penalty 
under the Physical Condition Indicator if PHAs do not make the capital 
improvements.
    Response. The Current Ratio indicator measures the cash liquidity 
of a PHA compared to its peers by dividing current assets by current 
liabilities. This is done irrespective of the PHA's operating reserves. 
The numerator includes all cash and current assets of the PHA whether 
or not reserved for capital activities. The denominator includes all 
current liabilities of the PHA. PHAs are not penalized for either 
capital or operating expenses under the Current Ratio indicator. This 
indicator simply predicts whether or not the PHA can meet its current 
obligations as compared to the rest of the PHAs of the same size.
    Comment. HUD should remove Payment In Lieu of Taxes (PILOT) when 
computing a PHA's General Expenses component. PILOT is a computation 
which involves utility costs and thus is subject to regional costs 
differences. PILOT's computation also involves input of a local 
property tax rate. Additionally, a significant number of PHAs no longer 
make PILOT payments, thus their expense level will be significantly 
lower when compared to those PHAs making PILOT payments.
    Response. HUD's research of over 10,000 Statement of Operating 
Receipts and Expenditures forms (HUD-52599) shows over 87 percent of 
all PHAs pay PILOT expenses. The Expense Management indicator has been 
changed to assign weights to each individual expense management 
category. PILOT payments would affect the General Expenses category, 
which is weighted at 34 percent of the total 1.5 points, awarded. 
Furthermore, the Expense Management indicator awards full points to 
PHAs that fall within the 95th percentile of their group. The fact that 
the commenter's PILOT payment comprises only 22 percent of its total 
General Expense category does not represent a substantial difference 
between PHAs that pay PILOT and PHAs that do not.
    Comment. The method for scoring Current Ratio and Months Expendable 
Fund Balance contain numbers that in the long run do not affect the 
overall scoring of the component. These include project loan notes, the 
interest payable-development notes, book value of conveyed projects, 
cumulative HUD grants, cumulative HUD annual contributions and various 
other surplus accounts. Several numbers used for scoring these two 
components will change substantially during the changeover to GAAP. The 
GAAP conversion can substantially change the Land Structures and 
Equipment, the permanent note account and other accounts. This system 
should be tested with the GAAP conversion before putting the scoring 
system in place.
    Response. These concerns are currently being addressed. Analyses 
have been conducted to compare the line items in both the HUD-52595--
Balance Sheet for Section 8 and Public Housing and HUD-52599--Statement 
of Operating Receipts and Expenditures with the FDS--Financial Data 
Schedule to identify the impact of GAAP adjustments on account 
balances. Other analyses have focused on comparisons between the 
indicator values and scores calculated using the respective thresholds 
for Non-GAAP and GAAP. The results of HUD's analyses show that PHAs 
that perform well in Non-GAAP performed well in GAAP. The assessment 
will remain peer-based, as such all PHAs will be affected the same way. 
The GAAP thresholds that were established based on limited data have 
been compared to the Non-GAAP

[[Page 1734]]

thresholds using various statistical measures. Though the GAAP 
thresholds are not expected to be similar to the Non-GAAP because of 
the differences in account balances and the large sample of Non-GAAP 
data, the statistical comparisons again showed that performance was 
relatively constant. The GAAP thresholds will be closely monitored once 
PHAS is implemented and PHAs begin to submit GAAP basis financial 
statements. After the first year of submissions they will be re-
evaluated and proposed adjustments will be communicated in future 
notices.
    Comment. HUD's Uniform Reporting Requirements will also affect the 
final scoring for the Financial Condition of PHAs. Until HUD has tested 
the scoring system for the overall financial condition of housing 
authorities and not just the public housing operating condition, the 
upcoming year's score should be based only on the public housing 
financials. HUD should review the composite numbers for future scoring 
purposes.
    Response. HUD has tested the scoring system for several hundred 
PHAs currently reporting under GAAP. The testing was conducted for the 
entire PHA operations not just public housing programs. In addition, 
extensive statistical analysis has been conducted to compare the non-
GAAP to GAAP scores in order to arrive at its scoring methodology. As 
discussed earlier in this preamble, HUD is not foregoing financial 
assessment of a PHA's entity-wide operations. HUD has, however, 
deferred issuance of a PHAS financial score based on a PHA's entity-
wide operations to those PHAs with fiscal years ending after June 30, 
2000. (Please see Section III of the preamble for a more detailed 
discussion of this issue.)
    Comment. PHAs have no control over several accounts that HUD 
calculates and PHAs should not be penalized for the balances of these 
accounts.
    Response. Because scoring is based on peer comparison PHAs are 
treated equitably. Although PHAs do not have control over all amounts 
in their financial statements, these figures impact the financial 
health and viability of PHAs and therefore cannot be ignored. Most 
decisions made by HUD and Congress generally treat all PHAs in the same 
manner.
    Comment. HUD's scoring sheet is not user friendly. The scoring 
sheets do not have enough spaces to include all of the digits in longer 
numbers and therefore, it is difficult to follow HUD calculations.
    Response. HUD assumes by the term ``scoring sheet'' that the 
commenter is referring to the electronic Financial Data Schedule (FDS) 
in Excel. PHAs wanting to use this spreadsheet can adjust the width of 
the columns. Additionally, HUD has reviewed this scoring sheet and has 
made other adjustments to make this form more user friendly.
    Comment. HUD should consider making exceptions for mitigating 
circumstances.
    Response. As noted in a response to an earlier comment, this final 
rule takes into consideration mitigating circumstances with respect to 
too high liquidity, high reserves and expense management. It would be 
impossible for HUD, however, to incorporate every mitigating 
circumstance that may arise into the scoring process because many of 
the circumstances would be specific to only one PHA.
    Comment. HUD must revisit the graphs and tables that accompany the 
PHAS Notice on the Financial Condition Scoring Process. They are 
largely incomprehensible to those who are not trained in statistics. 
HUD has embraced the use of plain language in its rulemaking. These 
graphs and tables fall short of the plain language goal.
    Response. HUD will update its PHAS Notice on the Financial 
Condition Scoring Process, will strive to make this notice more 
comprehensible and will attempt to simplify the graphs and charts.
    Comment. The PHAS Notice on the Financial Condition Scoring Process 
states that the scoring of certain components follows generally 
recognized business principles. The explanation continues to discuss 
certain absolute thresholds that are indicated by these principles. 
There is concern about HUD's lack of a definition for sound business 
principles. The impression is that GAAP already takes into 
consideration sound business principles.
    Response. The term ``sound business principles'' in the context of 
this paragraph pertains to the setting of thresholds for PHAS scoring 
purposes. For example, a PHA with a Current Ratio of less than 1 (i.e. 
where current liabilities is greater than current assets) may receive 
some points depending on its current ratio compared to other PHAs of 
the same size. However, sound business principles would dictate that a 
PHA with a Current Ratio of less than 1 would still pose a financial 
risk because it may be unable to cover its current obligations and thus 
should merit a score of zero for the Current Ratio indicator.
    Comment. The Financial Condition scoring process does not 
adequately take into consideration decisions by HUD or Congress that 
impact PHA resources. This year, HUD funded the PFS at 92.5% of 
eligibility and did not allow PHAs to request year-end adjustments or 
to retain entrepreneurial income. These decisions will have a direct 
impact on a PHA's financial condition. The scoring of this indicator 
should have an adjustment for factors beyond a PHA's control.
    Response. HUD is sympathetic to PHA concerns about meeting 
management responsibilities during times of budgetary setbacks. While 
Congressional decisions may impact a PHA's financial resources, the 
purpose of the PHAS is to assess a PHA's management of its financial 
resources, even when resources are not at the levels desired by PHAs or 
HUD. In addition, since the scores are based on a peer comparison and 
all PHAs are proportionally affected by partial PFS funding, HUD is 
taking into consideration decisions made by Congress that impact PHA 
resources. Every organization, whether private or non-profit, 
governmental or non-governmental, is expected to fulfill its 
responsibilities and carry out it functions within the budget provided.

3. Management Operations Scoring Notice

    Comment. The Management Operations Scoring Process Notice states 
that one of the graded components of the Security/Economic Self-
sufficiency subindicator is entitled ``grant program goals.'' 
Presumably, this incorporates the standard for a PHA's economic self-
sufficiency program in 42 U.S.C 1437u(b), as amended by section 509 of 
the Public Housing Reform Act, and would also incorporate PHA 
activities to promote self-sufficiency in accordance with the statute. 
HUD should explain, either in preamble to the final rule or in the 
final version of the Management Operations Scoring Notice, how it will 
weigh PHA activities under the separate statutory provisions in the 
grading process.
    Response. PHAs will be graded on the combination of grant program 
goals for both drug prevention activities and self-sufficiency 
activities met in the appropriate percentage of its developments. As 
discussed in more detail under section VI of this preamble, HUD is 
continuing to work on this component to strengthen HUD's assessment of 
PHA's activities to promote self-sufficiency.

4. Resident Service and Satisfaction Scoring Notice

    Comment. Will each of the five components of the survey be worth 
one point? This should be made clear in the

[[Page 1735]]

scoring section. Also, since there is more than one question per 
section, will some questions count while others will not, or will each 
question be scored separately?
    Response. HUD agrees that the scoring section should be clarified 
for this indicator. Each of the five survey sections (i.e., maintenance 
and repair, communication, safety, services, and neighborhood 
appearance) will be worth one point. Answers to some questions on the 
survey will be used for informational purposes only and will not be 
calculated into the overall score. Weights will be associated only with 
``scoreable'' questions in each survey section. Scores for each survey 
section will be calculated in the following manner: (1) Each section 
will be given a score between zero and one; and (2) the total survey 
score will be the sum of the five survey section scores, presented in a 
numeric format with one decimal place (i.e., 4.3).
    Comment. The last section of the survey is called ``neighborhood 
appearance.'' PHAs were led to believe that aspects not under the PHAs 
control would not be scored. Is this ``development appearance?''
    Response. HUD recognizes these concerns. The PHAS rule stipulates 
that this section of the survey should be titled ``neighborhood 
appearance.'' Nevertheless, the only questions that will be included in 
the score for this section will be questions that can be directly 
associated with regulations or statutes applicable to the management of 
public housing. PHAs will not be held accountable for aspects of 
neighborhood appearance for which they are not responsible.
    Comment. PHAs have diverse populations with language requirements. 
The survey must be translated into these languages for participation of 
all residents.
    Response. The survey is now available in Spanish, as well as 
English. During the first year of operation, RASS asks each PHA to 
input information relative to alternative languages needed by more than 
20 percent of their residents. Full assessment of other translation 
needs will be made prior to the second year of the survey process.
    Comment. HUD has stated that not all questions would be scored but 
has not stated which specific questions will be scored and what the 
questions are worth. HUD should publish the survey and indicate the 
scoring weights of individual questions.
    Response. The attachment to the PHAS Notice on the Resident Service 
and Satisfaction Survey Scoring Process, which will be published in the 
near future, provides a copy of the survey instrument and the 
associated weights for the ``scored'' questions.

VI. Comments on Specific Issues Raised by HUD

    In addition to requesting public comment on the June 22, 1999, 
proposed rule, and the four PHAS scoring notices, HUD specifically 
requested comment on the following issues. Comments received on these 
issues are noted below, and HUD's responses to these comments, where 
appropriate, are provided.

1. PHA Efforts to Keep Units Occupied

    The June 22, 1999, rule proposed to inspect only occupied units. 
HUD noted its concern that PHAs make appropriate efforts to have as 
many units on line and occupied as possible. For example, PHAs should 
be keeping units unoccupied for modernization or unit turnover for the 
minimum possible time. The rule addresses this concern to an extent in 
the PHAS finance and management indicators. HUD requested comments 
whether this concern should be addressed further, and sought 
suggestions and recommendations on ways to do address this matter in 
the PHAS rule or elsewhere (e.g., other regulations). Comments and 
recommendations were as follows:
    Comment--Vacancy is Already Addressed by Two Indicators. Since 
occupancy is already measured by both the Financial and Management 
Indicators, there is no need for HUD to address occupancy an additional 
time in PHAS or other regulations. The assessment indicators for vacant 
units and vacancy loss are duplicative and more than adequate for 
stressing the importance of keeping units on-line to provide affordable 
housing to the maximum extent possible.
    Comment--No Need to Further Address This Issue; It's In the 
Interest of PHAs to Keep Units Occupied. It is not necessary to address 
the matter of keeping units on-line and occupied to any greater extent 
in PHAS. It is in the best financial interests of public housing 
authorities to keep units off-line and unoccupied for a minimal amount 
of time.
    Comment-No Additional Constraints or Time Limits Are Necessary. HUD 
asked whether the final rule should contain additional time constraints 
upon the exemption of unoccupied units from the PHAS inspection 
process. The three listed categories of exempt unit are subject to an 
inherent time limit and there is no need to superimpose any further 
time constraints.
    Response. HUD agrees with the comments that no further assessment 
is necessary under the PHAS with respect to a PHA's efforts to keeping 
units occupied, and as noted earlier, this component is now found under 
only one PHAS Indicator (Indicator #2). PHAs are in the business of 
providing housing assistance and HUD recognizes that PHAs are aware 
that it is in their best interest, the interest of public housing 
residents and taxpayers to keep units occupied and on-line.

2. Missing or Inoperable Smoke Detectors

    The June 22, 1999, rule did not propose to penalize PHAs in the 
PHAS score for missing or inoperable smoke detectors because of the 
extent to which this may not be within a PHA's control. HUD, however, 
noted its concern about this issue in view of the critical importance 
of fire prevention. Because of the safety risk presented by missing or 
inoperable smoke detectors, HUD advised that it considered whether the 
final rule should provide some consequence to PHAs for missing or 
inoperable smoke detectors (particularly if the number is high), 
including possibly a reduction in a PHA's physical inspection score. 
HUD requested comments on this option, and solicited suggestions as to 
the availability of working smoke detectors can be encouraged further, 
either in the PHAS rule or elsewhere.
    Comment--PHA Should Certify to Certain Actions. PHAs should not be 
penalized for missing or inoperable smoke detectors because they truly 
are not within the control of PHAs. PHAs should take reasonable 
measures to assure that smoke detectors are operable and take 
appropriate action when they are found inoperable. These measures could 
include certifying that all detectors are tested annually; that they 
are immediately (within 24 hours) replaced or defective detectors are 
repaired; they are in compliance with Federal, State and local laws 
regarding smoke detectors; and PHAs follow an enforcement process when 
they find that tenants have tampered with smoke detectors.
    Comment--Reflect Missing & Inoperable Smoke Detectors in Physical 
Condition Score. The maintenance of operable smoke detectors is a 
critical factor in the physical condition of housing. If smoke 
detectors are missing or inoperable, this should be reflected in the 
physical condition numerical scoring.
    Comment--PHAs Should Not Be Held Accountable for Resident Removal 
or Tampering with Smoke Detectors. We

[[Page 1736]]

remain adamant that PHAs should not be held responsible when residents 
remove batteries or tamper with safety equipment. Even when PHAs have 
gone to great expense to hardwire smoke detectors, some residents have 
disconnected them. In short, if a PHA can demonstrate that it has smoke 
detectors, or it has a system in place that provided smoke detectors, 
it should not be held accountable for the removal of batteries or the 
removal system of components.
    Comment--No Penalty if PHA Records Reflect Appropriate Measures 
Taken by PHAs. A PHA should not be penalized for a defective or missing 
detector in a dwelling unit if the PHA's records reflect either of the 
following: (a) At the most recent PHA inspection, the PHA found that 
the dwelling had an operable smoke-detector; (b) inspection revealed 
that the detector was missing or inoperable, and the PHA made the 
needed replacement or repair; or (c) subsequent to the most recent 
inspection, the PHA responded to a work order for repair or replacement 
of the detector. In regard to smoke-detectors in common areas, a PHA 
should not be penalized if records reflect that the missing or 
inoperable detector is scheduled to be replaced or repaired within 24 
hours.
    Comment--Smoke Detector Maintenance Program. PHAs should not be 
penalized for missing or inoperable smoke detectors. PHAs should be 
responsible for maintaining a smoke detector maintenance program by 
which PHAs could be assessed under the appropriate sub-indicator.
    Response. HUD appreciates all the comments on this issue, and at 
this time, declines to penalize PHAs for missing or inoperable smoke 
detectors. HUD notes, as it has previously in this preamble, that 
missing or inoperable smoke detectors constitute health and safety 
deficiencies, and health and safety deficiencies are presented to the 
PHA before the HUD inspector leaves the site, and health and safety 
deficiencies are to be immediately addressed by the PHA. HUD, however, 
remains concerned about this issue and is going to continue to examine 
this issue and work with PHAs on how to best to promote fire 
prevention. HUD is exploring new technology in the area of tamper-proof 
smoke detectors. If HUD determines that this is a chronic problem with 
PHAs, HUD may take action through rule or other means, as appropriate, 
to ensure that this problem is resolved. Such action may include the 
imposition of penalties on PHAs or residents, or both.

3. More Effective Implementation of the Economic Self-Sufficiency 
Indicator

    HUD requested comments on ways of improving the economic self-
sufficiency sub-indicator so that it may be implemented more 
effectively, and specifically sought comments on whether the sub-
indicator is properly weighted and appropriately placed in the rule as 
part of management sub-indicator #6 (see Sec. 902.43(a)(6)).
    Comment--HUD's Treatment of New Indicators Is Inadequate. The 
economic self-sufficiency indicator correctly belongs under the 
Management Operations Indicator. While the relative weight to be 
assigned to a PHAS indicator is undoubtedly a complex judgement, to 
attribute less than one point to a PHA's economic self-sufficiency 
efforts sends the message that HUD attributes minimal importance to 
such efforts. HUD's response to this statutory provision is entirely 
inadequate. There are several ways that HUD could provide appropriate 
weight to this indicator. HUD could reduce one or more of the 
management sub-indicators that are substantially duplicative of sub-
indicators within the Physical Condition or Financial Condition 
Indicators, without adverse results. HUD could measure a PHA's degree 
of compliance with mandatory HUD programs designed to promote economic 
self-sufficiency, including the Family Self-Sufficiency program and 
section 3 (section of the Housing and Urban Development Act of 1968). 
HUD could include an outcome-base measure that evaluates the progress 
PHAs have made in increasing the extent of employment and earnings 
among public housing families while they reside in public housing.
    Response. HUD appreciates the suggestions for strengthening the 
measurement of the economic self-sufficiency assessment. HUD 
acknowledges that the June 22, 1999, proposed rule did not reflect 
HUD's ultimate goal for this new subindicator, which is to effectively 
measure the extent to which the PHA coordinates, promotes or provides 
effective programs and activities to promote the economic self-
sufficiency of public housing residents. This final rule provides for 
greater weight than that provided in the June 22, 1999, proposed rule 
(please see the preamble discussion of the changes made to this sub-
indicator in Sec. 902.43), and on this basis, is an improvement over 
the proposed rule. HUD recognizes, however, that this final rule does 
not fully provide for the measurement of performance under this sub-
indicator that HUD desires. HUD is continuing to work on this sub-
indicator to better incorporate an appropriate measurement of a PHA's 
activities to promote economic self-sufficiency.

4. Withholding Designation

    HUD sought comments on the consequences to PHAs of withholding 
designation as provided in new paragraph (d)(2) of Sec. 902.67.
    Comment--Designation Should Not Be Withheld. Exceptional 
circumstances is too subjective a term, and leaves room for 
considerable discretion. This is an administratively meddlesome 
provision which is tantamount to double jeopardy.
    Comment--Withholding of Designation Manifestly Unfair. Withholding 
designation because a PHA is involved in litigation that bears directly 
upon the physical, financial, or management performance of a PHA, or is 
operating under a court order is manifestly unfair and constitutionally 
suspect. If HUD is going to permit withholding of designation, HUD 
should reinstate the PHMAP procedure that permits a PHA to directly 
appeal a Field Office's denial of designation to the Assistant 
Secretary for Public and Indian Housing.
    Response. The regulatory provision concerning withholding of a 
PHA's high performer or standard designation is not unfamiliar to PHAs. 
This provision was part of the PHMAP regulation at 24 CFR 
Sec. 901.115(k). In egregious situations (as described in the 
regulation), HUD has an obligation to protect the Federal investment in 
a public housing property as well as the rights of residents. The PHAS 
was never intended to be, nor can it be, the only criteria for 
assessing the performance of PHAs in all areas, especially in the areas 
of civil rights, nondiscrimination and fair housing laws and 
regulations. HUD has added a provision to this section of the rule 
concerning withholding or rescission of designation that allows for the 
PHA to request from the Assistant Secretary for Public and Indian 
Housing reinstatement of its designation and provide the basis for its 
request for reinstatement.

5. Assessing PHA Responsibility to Submit Accurate and Timely Occupancy 
Data to MTCS

    HUD also requested comments on how PHAs should be assessed with 
respect to their responsibility to submit occupancy data to the 
Multifamily Tenant Characteristics System (MTCS) in an accurate, 
complete and timely manner.
    Comment--Assist PHAs in Becoming Automated and Phase-In Electronic 
Submission Requirement. With the

[[Page 1737]]

increased requirements imposed by HUD for electronic submission, PHAs 
need technical resources to become fully automated to meet these 
requirements. Additionally, PHAs should not be responsible for 
submission of up to 85% of its occupancy data for transmission problems 
beyond the control of the PHA. Electronic submission requirements 
should be phased in.
    Comment--Problems with Accurate Submission of Occupancy Data is 
Often Beyond Control of PHAs. The difficulty that PHAs have experienced 
with respect to MTCS transmission is frequently a problem beyond their 
control. In some cases the software utilized by PHAs does not have the 
capability to interface with MTCS. Numerous communications with MTCS, 
HUD and the software manufacturer to address the problems with 
occupancy report transmissions have not resolved the problems. Also, it 
appears that MTCS has the same mailbox number for both Section 8 and 
conventional housing. As a result, MTCS cannot distinguish between what 
reports are coming from conventional housing. For these reasons, HUD 
should take no punitive measures against PHAs for their performance 
with respect to the submission of occupancy data to MTCS. HUD should 
assess PHA by their efforts to meet the MTCS reporting requirement.
    Comment--HUD Must Correct MTCS Transmission Problems. It is 
essential that HUD expand the capacity of the server for the HUD REAC 
website in an effort to correct the continuous transmission problems 
associated with the PHAS and MTCS electronic reporting system.
    Response. HUD appreciates the comments but advises that MTCS is a 
fully functional system. It is HUD's primary data system for 
information on public housing and Section 8 family characteristics and 
occupancy events. PHAs are required to submit Forms HUD-50058 for every 
public housing and Section 8 tenant-based assistance family. HUD issued 
Notice PIH 99-2 on January 28, 1999, to clarify the minimum reporting 
requirements and to establish a system of monitoring and technical 
assistance, semi-annual assessment, and formal review and sanctions. 
Under the Notice, HUD may impose sanctions on PHAs that do not meet the 
minimum 85 percent reporting level, which is determined at the semi-
annual assessments (following the June and December MTCS Delinquency 
reports). PHAs may request forbearance from sanctions in writing. The 
request must include an explanation of why the PHA has not attained the 
minimum reporting level, steps that it plans to take to improve 
reporting, and monthly milestones. PHAs that do not meet the minimum 
reporting level and do not obtain forbearance are subject to sanction.
    HUD will take into consideration the transmission problems that can 
be fully documented are beyond the PHAs control in approving these 
forbearance plans. There has and will continue to be industry 
consultation on changes required in MTCS to accommodate statutory 
changes. As of the June 1999 semi-annual reporting period, public 
housing reporting for MTCS has increased to 81% nationally. HUD has and 
will continue to work with PHAs to help them meet the minimum reporting 
rate.

VII. General Comments

    Comment--Delay PHAS Implementation. HUD should consider delaying 
the official implementation of PHAS until October 1, 2000. Concern was 
expressed by commenters that some PHAs have not provided advisory 
scores from REAC, and in order for the PHAS to be an effective and 
meaningful system, PHAS should have a full year to understand advisory 
scores and prepare for actual implementation. Several issues still need 
to be resolved with the PHAS. The advisory score process should be 
extended until these issues are resolved.
    Response. As discussed earlier in this preamble, HUD does not 
believe that a delay in implementation of PHAS until October 1, 2000 is 
warranted. HUD has revised the implementation schedule of PHAS to begin 
with PHAs with fiscal years ending after December 31, 1999, and even 
under that revised schedule, HUD is providing PHAs with fiscal years 
ending March 31, 2000, and June 30, 2000, to receive PHAS financial 
scores based only on an assessment of their public housing operating 
subsidies program. These latter two groups of PHAs will receive 
advisory scores on their entity-wide operations.
    With respect to advisory scores, PHAs are notified of the 
availability of their completed PHAS advisory score by mail, and if 
they have access to the Internet, by e-mail. The PHAS scores are posted 
to REAC's website on a weekly basis. If a PHA requires assistance in 
accessing its advisory score, the PHA is encouraged to contact the REAC 
Technical Assistance Center at 1-888-245-4860.
    Current reports out of REAC indicate that as of August 10, 1999, 93 
percent of all PHAS advisory scores have been posted on REAC website. 
This includes over 99 percent posting of scores for PHAs with fiscal 
years ending September 30, 1998 and December 31, 1998; 90 percent 
posting of scores for PHAs with fiscal years ending March 31, 1999; and 
86 percent posting for PHAs with fiscal years ending June 30, 1999. The 
majority of the delays in posting advisory scores are generally the 
result of PHAs' late filing of their financial or management reports 
(under requirements to date, financial reports are due 45 days after 
fiscal year end).
    Comment--Assessment of PHA Deconcentration Efforts. The rule should 
provide for the assessment of the deconcentration efforts of PHAs. 
Standards of what constitutes good faith efforts should be included in 
the rule as a basis of measurement. For HUD not to penalize PHAs who 
fail to deconcentrate undercuts those PHAs who deconcentrate or make 
good faith efforts to deconcentrate.
    Response. HUD agrees with the commenter about the importance of 
deconcentration efforts. The first PHAS proposed rule, published on 
June 30, 1998, and the PHAS final rule published on September 1, 1998, 
each noted in the ``scope'' provision of the rule (Sec. 901.3) that the 
PHAS does not evaluate a PHA's compliance with or response to every 
departmentwide or program specific requirement or objective. 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, and requirements of programs under 
which the PHA is receiving assistance. The rule states that a PHA's 
adherence to these requirements will be monitored in accordance with 
the applicable program regulations and the PHA's ACC. The same is true 
for deconcentration.
    Comment--Assessment of a PHA's Section 3 Compliance. HUD should 
amend the PHAS rule to include compliance with Section 3 obligations as 
a tool for the assessment of the performance of PHAs (section 3 of the 
Housing and Urban Development Act of 1968, 12 U.S.C. 1701u). 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.
    Response. HUD's response to this comment is similar to its response 
to the comment concerning assessment of a PHA's deconcentration 
efforts. Assessment of Section 3 compliance is addressed by other HUD 
regulations. A PHA's responsibilities with respect to the Section 3 
program are specifically

[[Page 1738]]

addressed in HUD's regulations at 24 CFR part 135.
    Comment--Availability of Hand-Held Computers with HUD Software 
Inspection. REAC should provide a list to PHAs on the HUD website of 
all known manufacturers of hand-held computers, including all versions 
HUD reviewed for its inspection purposes. HUD should also release its 
specification requirements for running inspection protocol software on 
the hand-held computers so that PHAs may purchase and use the PHAS 
physical inspection software for annual inspection purposes to be 
consistent with the condition standards and protocol used by HUD REAC 
inspectors.
    Response. Hand held computers, like other business machines, have 
many producers which enter and leave the market on a regular basis. 
With the extensive information available on the internet, there should 
be a number of websites by consumer associations that list these 
products, prices, and make recommendations, and there is no need for 
HUD to duplicate information available through other sources. 
Additionally, the Federal government must avoid even the appearance of 
endorsing products on the open market. Producing such a list would give 
the appearance that the Federal government favored those particular 
brands. Accordingly, HUD will not maintain a list of hand held computer 
manufacturers. HUD agrees, however, that it would be appropriate to put 
the minimum hardware specifications for the hand held computer on its 
website, and will do so.

VIII. Findings and Certifications

Paperwork Reduction Act Statement

    The information collection requirements for the PHAS regulation at 
24 CFR part 902 were 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.

Regulatory Planning and Review

    The Office of Management and Budget (OMB) reviewed this rule under 
Executive Order 12866, Regulatory Planning and Review. OMB determined 
that this rule is a ``significant regulatory action'' as defined in 
section 3(f) of the Order (although not an economically significant 
regulatory action under the Order). Any changes made to this rule as a 
result of that review are identified in the docket file, which is 
available for public inspection in the office of the Department's Rules 
Docket Clerk, Room 10276, 451 Seventh Street, SW, Washington, DC 20410-
0500.

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

    A Finding of No Significant Impact with respect to the environment 
was made at the proposed rule stage 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). The Finding remains 
available for public inspection during regular business hours in the 
Office of the Rules Docket Clerk, Office of General Counsel, Department 
of Housing and Urban Development, Room 10276, 451 Seventh Street, S.W., 
Washington, DC 20410.

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 existing regulations for the assessment of public housing 
at 24 CFR part 902, PHAS, to provide additional information on the PHAS 
scoring process and to revise certain procedures and establish others 
in accordance with recently enacted statutory requirements. The 
additional information and the revision of certain procedures impose no 
significant economic impact on a substantial number of small entities.

Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits, to the 
extent practicable and permitted by law, an agency from promulgating a 
regulation that has federalism implications and either imposes 
substantial direct compliance costs on State and local governments and 
is not required by statute, or preempts State law, unless the relevant 
requirements of section 6 of the Executive Order are met. This final 
rule does not have federalism implications and does not impose 
substantial direct compliance costs on State and local governments or 
preempt State law within the meaning of the Executive 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 Part 902

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

    Accordingly, HUD revises 24 CFR part 902 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, and sanitary housing in good repair (DSS/GR).
902.24  Physical inspection of PHA properties.
902.25  Physical condition scoring and thresholds.
902.26  Physical Inspection Report.
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.
902.51  Updating of public housing unit address information.
902.52  Distribution of survey to residents.
902.53  Resident service and satisfaction scoring and thresholds.
902.55  Resident service and satisfaction portion of total PHAS 
points.

[[Page 1739]]

Subpart F--PHAS Scoring

902.60  Data collection.
902.63  PHAS scoring.
902.67  Score and designation status.
902.68  Technical review of results of PHAS Indicators #1 or #4.
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 Troubled Agency Recovery Center (TARC).
902.77  Referral to the Departmental Enforcement Center (DEC).
902.79  Substantial default.
902.83  Interventions.
902.85  Resident petitions for remedial action.

    Authority: 42 U.S.C. 1437d(j), 42 U.S.C. 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 improve the delivery of services in public housing and 
enhance trust in the public housing system among public housing 
agencies (PHAs), public housing residents, HUD and the general public 
by providing a 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 and 
the PHA's public housing residents to assess management operations and 
resident services and satisfaction, respectively. 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 three full fiscal 
years following October 1, 1998, unless such change is approved by HUD.


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. A 
PHA's adherence to these requirements will be monitored in accordance 
with the applicable program regulations and the PHA's Annual 
Contributions Contract (ACC).


Sec. 902.5  Applicability.

    (a) PHAs, RMCs, AMEs. (1) Scoring of RMCs and AMEs. This part 
applies to PHAs, Resident Management Corporations (RMCs) and Alternate 
Management Entities (AMEs), as described in this section. As described 
in this section, this part is also applicable to RMCs that receive 
direct funding from HUD in accordance with section 20 of the 1937 Act 
(DF-RMCs).
    (i) RMCs and DF-RMCs will be assessed and issued their own numeric 
scores under the PHAS based on the public housing developments or 
portions of public housing developments that they manage and the 
responsibilities they assume which can be scored under PHAS. References 
in this part to PHAs include RMCs and this part is applicable to RMCs 
unless stated otherwise. References in this part to RMCs include DF-
RMCs and this part is applicable to DF-RMCs unless otherwise stated.
    (ii) AMEs are not issued PHAS scores. The performance of the AME 
contributes to the PHAS score of the PHA or PHAs for which they assumed 
management responsibilities.
    (2) PHA ultimate responsible entity under ACC, except where DF-RMC 
assumes management operations. (i) Because the PHA and not the RMC/AME 
is ultimately responsible to HUD under the 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 (including a 
court ordered receivership agreement, if applicable).
    (ii) A PHA's PHAS score will not be based on developments managed 
by a DF-RMC.
    (b) Implementation of PHAS. The regulations in this part are 
applicable to PHAs with fiscal years ending on and after September 30, 
1999.
    (1) PHAs with fiscal years ending September 30, 1999 or December 
31, 1999. For PHAs with fiscal years ending September 30, 1999, or 
December 31, 1999, HUD will not issue PHAS scores for the fiscal years 
ending on these dates. For these PHAs, in lieu of a PHAS score, HUD 
will issue the following:
    (i) PHAS Advisory Score. A PHA with a fiscal year ending September 
30, 1999, or December 31, 1999, will be issued a PHAS advisory score 
for PHAS Indicators #1 (Physical), #2 (Financial), and #4 (Resident 
Service and Satisfaction). The PHA must comply with the requirements of 
this part so that HUD may issue the advisory score. Physical 
inspections will be conducted using HUD uniform physical inspection 
protocol
    (ii) Management Assessment Score. A PHA with a fiscal year ending 
September 30, 1999, or December 31, 1999, will receive an assessment 
score on the basis of HUD's assessment of the PHA's management 
operations in accordance with subpart D of this part.
    (2) PHAs with fiscal years ending after December 31, 1999. PHAs 
with fiscal years ending after December 31, 1999, will be issued PHAS 
scores.
    (c) Chart on PHAS Advisory Score and PHAS Score Schedule. The 
following chart illustrates when advisory scores will be issued and 
when PHAS scores will be issued and for which PHAS indicators.

[[Page 1740]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Financial condition                          Management
             Quarter             ----------------------------------------------------------------------------------      Physical           Resident
                                     Public housing        Entity-wide        Six indicators      Five indicators
--------------------------------------------------------------------------------------------------------------------------------------------------------
9/30/99.........................  Advisory...........  Advisory...........  Score.............  N/A...............  Advisory..........  Advisory.
12/31/99........................  Advisory...........  Advisory...........  Score.............  N/A...............  Advisory..........  Advisory.
3/31/00.........................  Score..............  Advisory...........  N/A...............  Score.............  Score.............  Score.
6/30/00.........................  Score..............  Advisory...........  N/A...............  Score.............  Score.............  Score.
9/30/00 and beyond..............  N/A................  Score..............  N/A...............  Score.............  Score.............  Score.
--------------------------------------------------------------------------------------------------------------------------------------------------------

Sec. 902.7  Definitions.

    As used in this part:
    Act means the U.S. Housing Act of 1937 (42 U.S.C. 1437 et seq.)
    Adjustment for physical condition (development age) and 
neighborhood environment is a total of three additional points added to 
PHAS Indicator #1 (Physical Condition). The three additional points, 
however, shall not result in a total point value exceeding 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, under a Regulatory and Operating Agreement 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.
    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 in this part, unless otherwise specified, refer to calendar 
days.
    Deficiency means any PHAS score below 60 percent of the available 
points in any indicator, sub-indicator or component. (In the context of 
physical condition and physical inspection, deficiency refers to a 
physical condition and is defined for purposes of subpart B of this 
part in Sec. 902.24)
    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 sub-indicators and 
components within the indicator(s), identified as a result of the PHAS 
assessment when a Memorandum of Agreement (MOA) is not required.
    Occupancy loss is the sum of the number one (1) minus the unit 
months leased divided by unit months available (or Occupancy loss = 
1-(unit months leased/unit months available).
    Property is a project/development with a separate identifying 
project number.
    Reduced actual vacancy rate within the previous three years is a 
comparison of the vacancy rate in the PHAS assessed fiscal year (the 
immediate past fiscal year) to the vacancy rate of that fiscal year two 
years prior 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 three years, the PHA 
shall retain justifying documentation to support its certification for 
HUD post review. Reduced actual vacancy rate within the previous three 
years only applies to PHAs with fiscal years ending September 30, 1999, 
and December 31, 1999.
    Reduced average time nonemergency work orders were active during 
the previous three years is a comparison of the average time 
nonemergency work orders were active in the PHAS assessment year (the 
immediate past fiscal year) to the average time nonemergency work 
orders were active in that fiscal year two years prior 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 three years, 
the PHA shall retain justifying documentation to support its 
certification for HUD post review.
    Tenant Receivable Outstanding is defined in Sec. 902.35(b)(3).
    Unit months available is the total number of units managed by a PHA 
multiplied by 12 (adjusted by new units entering a PHA's public housing 
stock during the fiscal year) exclusive of unit months vacant due to: 
demolition; conversion; ongoing modernization; and units approved for 
non-dwelling purposes.
    Unit months leased is the actual number of months each unit was 
rented during the fiscal year based on the PHA's tenant rent rolls or 
Housing Assistance Payments records.
    Work order deferred to the Capital Fund Program 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 when there are less than three months remaining before the end of 
the PHA fiscal year from the time the work order was generated, under 
the PHA's Capital Fund 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 meeting the standard of decent, safe, 
sanitary, and in good repair (DSS/GR), as this standard is defined in 
Sec. 902.23 (a standard that provides acceptable basic housing 
conditions) and the level to which the PHA is maintaining its public 
housing in accordance with this standard.
    (b) Physical inspection under PHAS Indicator #1. (1) To achieve the 
objective of paragraph (a) of this section, REAC will provide for an 
independent physical inspection of a PHA's property or properties that 
includes, at minimum, a statistically valid sample of the units in the 
PHA's public housing portfolio to determine the extent of compliance 
with the DSS/GR standard.
    (2) Only occupied units will be inspected as dwelling units (except 
units approved by HUD for non-dwelling purposes, e.g., daycare or 
meetings, which are inspected as common areas). Vacant units that are 
not under lease at the time of the

[[Page 1741]]

physical inspection will not be inspected, but vacant units are 
assessed under the Financial Condition Indicator #2 (Sec. 902.35(b)(4)) 
and the Management Operations Indicator #3 (Sec. 902.43(a)(1)). The 
categories of vacant units not under lease that are exempted from 
physical inspection are as follows:
    (i) Units undergoing vacant unit turnaround--vacant units that are 
in the routine process of turn over; i.e., the period between which one 
resident has vacated a unit and a new lease takes effect;
    (ii) Units undergoing rehabilitation--vacant units that have 
substantial rehabilitation needs already identified, and there is an 
approved implementation plan to address the identified rehabilitation 
needs and the plan is fully funded;
    (iii) Off-line units--vacant units that have repair requirements 
such that the units cannot be occupied in a normal period of time 
(considered to be between 5 and 7 days) and which are not included 
under an approved rehabilitation plan;
    (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 Act (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, and sanitary housing in good repair (DSS/GR).

    (a) General. Public housing must be maintained in a manner that 
meets the physical condition standards set forth in this part in order 
to be considered decent, safe, sanitary and in good repair (standards 
that constitute acceptable basic housing conditions). These standards 
address the major physical areas of public housing: site; building 
exterior; building systems; dwelling units; and common areas (see 
paragraph (b) of this section). These standards also identify health 
and safety considerations (see paragraph (c) of this section). These 
standards address acceptable basic housing conditions, not the 
adornment, decor or other cosmetic appearance of the housing.
    (b) Major inspectable areas. The five major inspectable areas of 
public housing are the following:
    (1) Site. The site includes components, such as fencing and 
retaining walls, grounds, lighting, mailboxes, signs (such as those 
identifying the development or areas of the development), parking lots/
driveways, play areas and equipment, refuse disposal, roads, storm 
drainage and walkways. The site 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. The 
building's exterior components such as 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. The building's systems include components 
such as domestic water, electrical system, elevators, emergency power, 
fire protection, HVAC, and sanitary system. Each building's systems 
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 common 
areas include components such as 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. The common areas 
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.
    (c) 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 regulations and 
requirements related to the ownership of pets, and the evaluation and 
reduction of lead-based paint hazards and have available proper 
certifications of such (see 24 CFR part 35).


Sec. 902.24  Physical inspection of PHA properties.

    (a) The inspection, generally. The score for PHAS Indicator #1 is 
based upon an independent physical inspection of a PHA's properties 
provided by REAC and using HUD's uniform physical inspection protocols.
    (1) During the physical inspection of a property, an inspector 
looks for deficiencies for each inspectable item within the inspectable 
areas, such as holes (deficiencies) in the walls (item) of a dwelling 
unit (area). The dwelling units inspected in a property are a randomly 
selected, statistically valid sample of the units in the property, 
excluding vacant units not under lease at the time of the physical 
inspection, as provided in Sec. 902.20(b)(2).
    (2) To ensure prompt correction of health and safety deficiencies 
before leaving the site, the inspector gives the property 
representative the list of every observed exigent/fire safety health 
and safety deficiency that calls for immediate attention or remedy. The

[[Page 1742]]

property representative acknowledges receipt of the deficiency report 
by signature.
    (3) After the inspection is completed, the inspector transmits the 
results to REAC where the results are verified for accuracy and then 
scored in accordance with the procedures in this subpart.
    (b) Definitions. The following definitions apply to the physical 
condition scoring process in this subpart:
    Criticality means one of five levels that reflect the relative 
importance of the deficiencies for an inspectable item.
    (1) Based on the importance of the deficiency, reflected in its 
criticality value, points are deducted from the score for an 
inspectable area.

------------------------------------------------------------------------
                          Criticality                             Level
------------------------------------------------------------------------
Critical......................................................        5
Very important................................................        4
Important.....................................................        3
Contributes...................................................        2
Slight contribution...........................................        1
------------------------------------------------------------------------

    (2) The Item Weights and Criticality Levels document lists all 
deficiencies with their designated levels, which vary from 1 to 5, with 
5 as the most critical, and the point values assigned to them.
    Deficiencies means the specific problems, comparable to problems 
noted under Housing Quality Standards (HQS), such as a hole in a wall 
or a damaged refrigerator in the kitchen, that can be recorded for 
inspectable items.
    Dictionary of Deficiency Definitions refers to the Dictionary of 
Deficiency Definitions document which is included as an appendix to the 
PHAS Notice on the Physical Condition Scoring Process and contains 
specific definitions of each severity level for deficiencies under this 
subpart. HUD will publish for comment any significant proposed 
amendments to this document. After comments have been considered HUD 
will publish a notice adopting the final Dictionary of Deficiency 
Definitions document or the amendments to the document. The Dictionary 
of Deficiency Definitions that is currently in effect can be found at 
the REAC Internet site at http://www.hud.gov/reac or obtained from 
REAC's Technical Assistance Center at 888-245-4860 (this is a toll free 
number).
    Inspectable areas (or area) means any of the five major components 
of the property that are inspected, which are: site; building 
exteriors; building systems; dwelling units; and common areas.
    Inspectable item means the individual parts, such as walls, 
kitchens, bathrooms, and other things, to be inspected in an 
inspectable area. The number of inspectable items varies for each area. 
Weights are assigned to each item as shown in the Item Weights and 
Criticality Levels document.
    Item Weights and Criticality Levels Document refers to the Item 
Weights and Criticality Levels document which is included as an 
appendix to the PHAS Notice on the Physical Condition Scoring Process 
and contains a listing of the inspectable items, item weights, 
observable deficiencies, criticality levels and values, and severity 
levels and values that apply to this subpart. HUD will publish for 
comment any significant proposed amendments to this document. After 
comments have been considered HUD will publish a notice adopting the 
final Item Weights and Criticality Levels document or the amendments to 
the document. The Item Weights and Criticality Levels document that is 
currently in effect can be found at the REAC Internet site at http://
www.hud.gov/reac or obtained from REAC's Technical Assistance Center at 
888-245-4860 (this is a toll free number).
    Normalized weights mean weights adjusted to reflect the inspectable 
items or areas that are present to be inspected.
    Score means a number on a scale of 0 to 100 that reflects the 
physical condition of a property, inspectable area, or sub-area. To 
record a health or safety deficiency, a specific designation (such as a 
letter--a, b, or c) is added to the property score that highlights that 
a health or safety deficiency (or deficiencies) exists. If smoke 
detectors are noted as inoperable or missing, another designation (such 
as an asterisk (*)) is added to the property score. Although inoperable 
or missing smoke detectors do not reduce the score, they are included 
in the health and safety deficiencies list that the inspector gives the 
PHA's property representative. The PHA is expected to promptly address 
all health and safety deficiencies.
    Severity means one of three levels, level 1 (minor), level 2 
(major), and level 3 (severe), that reflect the extent of the damage or 
problem associated with each deficiency. The Item Weights and 
Criticality Levels document shows the severity levels for each 
deficiency. Based on the severity of each deficiency, the score is 
reduced. Points deducted are calculated as the product of the item 
weight and the values for criticality and severity. For specific 
definitions of each severity level, see REAC's ``Dictionary of 
Deficiency Definitions''.
    Sub-area means an inspectable area for one building. For example, 
if a property has more than one building, each inspectable area for 
each building in the property is treated as a sub-area.
    (c) Compliance with civil rights/nondiscrimination requirements. 
HUD will review certain elements during the physical inspection to 
determine possible indications of noncompliance with the Fair Housing 
Act (42 U.S.C. 3601-19) and section 504 of the Rehabilitation Act of 
1973 (29 U.S.C. 794). A PHA will not be scored on those elements. Any 
indication of possible noncompliance will be referred to HUD's Office 
of Fair Housing and Equal Opportunity.
    (d) HUD access to PHA properties. PHAs are required by the ACC to 
provide the Government with full and free access to all facilities 
contained in the development. PHAs are required to provide HUD or its 
representative with access to the development, all units and 
appurtenances thereto in order to permit physical inspections under 
this part. Access to the units must be provided whether or not the 
resident is home or has installed additional locks for which the PHA 
did not obtain keys. In the event that the PHA fails to provide access 
as required by HUD or its representative, the PHA will be given ``0'' 
points for the development or developments involved which will be 
reflected in the physical condition and overall PHAS score.


Sec. 902.25  Physical condition scoring and thresholds.

    (a) Scoring. Under PHAS Indicator #1, REAC will calculate a score 
for the overall condition of a PHA's public housing portfolio following 
the procedures described in the PHAS Notice on the Physical Condition 
Scoring Process (PHAS PASS Notice 3), which will be published in the 
Federal Register. HUD may revise this notice in the future, but HUD 
will publish for comment any significant proposed amendments to this 
notice. After comments have been considered, HUD will publish a notice 
adopting a final notice or amendment. The PHAS Notice on the Physical 
Condition Scoring Process that is currently in effect can be found at 
the REAC Internet site at http://www.hud.gov/reac or obtained from 
REAC's Technical Assistance Center at 888-245-4860 (this is a toll free 
number).
    (b) Adjustment for physical condition (property age) and 
neighborhood environment. In accordance with section 6(j)(1)(I)(2) of 
the Act (42 U.S.C. 1437d(j)(1)(I)(2)), the overall physical score for a 
property will be adjusted upward to the extent that negative conditions 
are caused by situations outside the control of the PHA. These

[[Page 1743]]

situations are related to the poor physical condition of the property 
or the overall depressed condition of the immediately surrounding 
neighborhood. The intent of this adjustment is to avoid penalizing the 
PHA through appropriate application of the adjustment. (See paragraph 
(c) of this section which provides for further adjustments of physical 
condition score under certain circumstances.)
    (1) Adjustments in three areas. Adjustments to the PHA physical 
condition 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 property; 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 properties over 10 years old and 
that have not received substantial rehabilitation in the last 10 years.
    (ii) Neighborhood environment applies to properties 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 for physical condition (property age) and 
neighborhood environment. HUD will adjust the physical score of a PHA's 
property subject to both the physical condition (property 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 property, to which these conditions may apply. A 
PHA is required to certify in the manner prescribed by HUD, the extent 
to which the conditions apply, and to which 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 property'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 property's inspectable area(s).
    (4) Scattered site properties. The Date of Full Availability (DOFA) 
shall apply to scattered site properties, where the age of units and 
buildings vary, to determine whether the properties 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 property'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. Properties 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 Indicator, a PHA would have to 
maintain documentation showing the age and condition of the properties 
and the record of capital improvements, evidencing that these 
particular properties have not received capital funds.
    (iii) PHAs shall also document that in all cases, properties that 
were exempted for other reasons were not included in the calculation.
    (c) Database adjustment. (1) Adjustments for factors not reflected 
or inappropriately reflected in physical condition score. Under certain 
circumstances, HUD may determine it is appropriate to review the 
results of a PHA's physical inspection which are unusual or incorrect 
due to facts and circumstances affecting the PHA's property which are 
not reflected in the inspection or which are reflected inappropriately 
in the inspection.
    (i) These circumstances are not those that may addressed by the 
technical review process described in Sec. 902.68. The circumstances 
addressed by this paragraph (c)(1) may include inconsistencies between 
local code requirements and the HUD physical inspection protocol; 
conditions which are permitted by local variance or license or which 
are preexisting physical features that do not conform to, or are 
inconsistent with, HUD's physical condition protocol; or the PHA has 
been scored for elements (e.g., roads, sidewalks, mail boxes, resident-
owned appliances, etc.) that it does not own and is not responsible for 
maintaining, and the PHA has notified the proper authorities regarding 
the deficient structure.
    (ii) An adjustment due to these circumstances may be initiated by a 
PHA's notification to the applicable HUD HUB/Program Center and such 
notification shall include appropriate proof of the reasons for the 
unusual or incorrect result. A PHA may submit the request for this 
adjustment either prior to or after the physical inspection has been 
concluded. If the request is made after the conclusion of the physical 
inspection, the request must be made within 15 days of issuance of the 
physical condition score. Based on the recommendation of the applicable 
HUD HUB/Program Center following its review of the PHA's evidence or 
documentation, HUD may determine that a reinspection and/or re-scoring 
of the PHA's property is necessary. HUD shall define, by notice, the 
procedures to be followed to address circumstances described in 
paragraph (c) of this section. The notice will be applicable to both 
public housing and multifamily housing properties covered by 24 CFR 
part 5, subpart G.
    (2) Adjustments for adverse conditions beyond the PHA's control. 
Under certain circumstances, HUD may determine that certain 
deficiencies that adversely and significantly affect the physical 
condition score of the PHA were caused by circumstances beyond the 
control of the PHA. The correction of these conditions, however, 
remains the responsibility of the PHA.
    (i) The circumstances addressed by this paragraph (c)(2) may 
include, but are not limited to, damage caused by third parties (such 
as a private entity or public entity undertaking work near a public 
housing development that results in damage to the development) or 
natural disasters. (The circumstances addressed in paragraph (c)(2) of 
this section are not those addressed by the technical review process in 
Sec. 902.68.)
    (ii) To adjust a physical condition score based on circumstances 
addressed in paragraph (c)(2) of this section, the PHA must submit a 
request to the applicable HUD HUB/Program Center requesting a 
reinspection of the PHA's properties. The request must be submitted 
within 15 days of the issuance of the physical condition score

[[Page 1744]]

to the PHA and must be accompanied by a certification that all 
deficiencies identified in the original report have been corrected. 
Based on the recommendation of the applicable HUD HUB/Program Center 
following its review of the PHA's evidence or documentation, HUD may 
determine that a reinspection and/or re-scoring of the PHA's property 
is necessary.
    (3) Adjustments for modernization work in progress. HUD may 
determine that occupied dwelling units undergoing modernization work in 
progress require an adjustment to the physical condition score.
    (i) An occupied dwelling unit undergoing modernization is subject 
to physical inspection, and all elements of the unit that are not 
undergoing modernization at the time of the inspection (even if 
modernization is planned) will be subject to HUD's physical inspection 
protocol without adjustment. For those elements of the unit that are 
undergoing modernization, deficiencies will be noted in accordance with 
HUD's physical inspection protocol, but the PHA may request adjustment 
of the physical condition score as a result of modernization work in 
progress.
    (ii) An adjustment due to modernization work in progress may be 
initiated by a PHA's notification to the applicable HUD HUB/Program 
Center and the notification shall include supporting documentation of 
the modernization work underway at the time of the physical inspection. 
A PHA may submit the request for this adjustment either prior to or 
after the physical inspection has been concluded. If the request is 
made after the conclusion of the physical inspection, the request must 
be made within 15 days of issuance of the physical condition score. 
Based on the recommendation of the applicable HUD HUB/Program Center, 
HUD may determine that a reinspection and/or re-scoring of the PHA's 
property is necessary.
    (d) Overall PHA Physical Condition Indicator score. The overall 
Physical Condition Indicator score for a PHA is the weighted average of 
the PHA's individual property physical inspection scores, where the 
weights are the number of units in each property divided by the total 
number of units in all properties of the PHA.
    (e) Thresholds. (1) The physical condition score is reduced to a 30 
point basis for the PHAS Physical Condition Indicator.
    (2) In order to receive a passing score under the Physical 
Condition Indicator, the PHA must achieve a score of at least 18 
points, or 60 percent of the available points under this indicator. If 
the PHA fails to receive a passing score on the Physical Condition 
Indicator, the PHA shall be categorized as a substandard physical 
agency.


Sec. 902.26  Physical Inspection Report.

    (a) Following the physical inspection and computation of the score 
under this subpart, each PHA receives a Physical Inspection Report. The 
Physical Inspection Report allows the PHA to see the magnitude of the 
points lost by inspectable area, and the impact on the score of the 
health and safety (H&S) deficiencies.
    (1) If exigent health and safety items are identified in the 
report, the PHA will have the opportunity to correct all exigent health 
and safety deficiencies noted on the report and request a reinspection.
    (2) The correction of exigent health and safety deficiencies and 
the request for reinspection must be made within 15 days of the PHA's 
receipt of the Physical Inspection Report. The request for reinspection 
must be accompanied by the PHA's identification of the exigent health 
and safety deficiencies that have been corrected, and the PHA's 
certification that all such deficiencies identified in the report have 
been corrected.
    (3) If HUD determines that a reinspection is appropriate, REAC will 
arrange for a complete reinspection of the development(s) in question, 
not just the deficiencies previously identified. The reinspection will 
constitute the final physical inspection for the development, and REAC 
will issue a new inspection report (the final inspection report).
    (4) If any of the previously identified exigent health and safety 
deficiencies that the PHA certified were corrected are found during the 
reinspection to be not corrected, the score in the final inspection 
report will reflect a point deduction of triple the value of the 
original deduction, up to the maximum possible points for the unit or 
area, and the PHA must reimburse HUD for the cost of the reinspection.
    (5) If a request for reinspection is not made within 15 days, the 
physical inspection report issued to the PHA will be the final physical 
inspection report.
    (b) The Physical Inspection Report includes the following items:
    (1) Normalized weights as the ``possible points'' by area;
    (2) The area scores, taking into account the points deducted for 
observed deficiencies;
    (3) The H&S deductions for each of the five inspectable areas; a 
listing of all observed smoke detector deficiencies; and a projection 
of the total number of H&S problems that the inspector potentially 
would see in an inspection of all buildings and all units; and
    (4) The overall property score.


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 by measuring the PHA's entity-wide 
performance in each of the components listed in Sec. 902.35, 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 submit their unaudited and 
audited financial data to HUD on an annual basis. The financial 
information must be:
    (1) Prepared in accordance with Generally Accepted Accounting 
Principles (GAAP) as further defined by HUD in supplementary guidance; 
and
    (2) Submitted electronically in the format prescribed by HUD using 
the Financial Data Schedule (FDS).
    (b) Annual financial report filing dates. The unaudited financial 
information to be submitted to HUD in accordance with paragraph (a) of 
this section, must be submitted to HUD annually, no later than two 
months after the end of the PHA's fiscal year end, with no penalty 
applying until the 16th day of the third month after the PHA's fiscal 
year end in accordance with Uniform Financial Reporting Standards (see 
24 CFR part 5, subpart H). An automatic one month extension will be 
granted for PHAs with fiscal years ending September 30, 1999 through 
June 30, 2000.
    (c) Reporting compliance dates. The requirement for compliance with 
the financial reporting requirements of this section begins with PHAs 
with fiscal years ending on and after September 30,

[[Page 1745]]

1999. Unaudited financial statements will be required two months after 
the PHA's fiscal year end, and audited financial statements will 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).


Sec. 902.35  Financial condition scoring and thresholds.

    (a) Scoring. Under PHAS Indicator #2, REAC will calculate a score 
based on the values of financial condition components, as well as audit 
and internal control flags. Each financial condition component has 
several levels of performance, with different point values for each 
level. A PHA's score for a financial condition component depends upon 
both the level of the PHA's performance under a component, and the 
PHA's size, based on the number of public housing and section 8 units 
and other units the PHA operates.
    (1) Under PHAS Indicator #2, REAC will calculate a score following 
the procedures described in the PHAS Notice on the Financial Condition 
Scoring Process (PHAS FASS Notice 3), which will be published in the 
Federal Register. HUD may revise this notice in the future, but HUD 
will publish for comment any significant proposed amendments to this 
notice. After comments have been considered, HUD will publish a notice 
adopting a final notice or amendment. The PHAS Notice on the Financial 
Condition Scoring Process that is currently in effect can be found at 
the REAC Internet site at 
http://www.hud.gov/reac or obtained from REAC's Technical Assistance 
Center at 888-245-4860 (this is a toll free number).
    (2) PHAs with fiscal years ending on or before June 30, 2000, will 
receive an advisory score based on the PHA's entity-wide operations. 
PHAs with fiscal years ending March 31, 2000, and June 30, 2000, will 
also receive a score under this subpart C. These PHAs will receive a 
PHAS financial condition score on the basis of their public housing 
operating subsidies program. PHAs with fiscal years ending after June 
30, 2000, will receive PHAS financial condition scores on the basis of 
their entity-wide operations.
    (3) High liquidity or reserves. (i) Under the scoring process for 
the Financial Condition Indicator, no points will be deducted under the 
Current Ratio or Monthly Expenditure Fund Balance components for a PHA 
that has too high liquidity or reserves if the PHA has achieved at 
least 90 percent of the points available under the Physical Condition 
Indicator, and is not required to prepare a follow-up survey plan under 
the Resident Service and Satisfaction Indicator.
    (ii) A PHA that has too high liquidity or reserves but does not 
meet the qualifications described in paragraph (a)(3)(i) of this 
section may appeal point deductions under the Current Ratio or Monthly 
Expenditure Fund Balance components based on mitigating circumstances 
if the PHA's physical condition score is at least 60 percent of the 
total available points under the Physical Condition Indicator.
    (A) The appeal may be made without regard to change in designation.
    (B) To adjust a financial condition score based on mitigating 
circumstances, the PHA must submit a request to the applicable HUD HUB/
Program Center within 15 days of the issuance of the financial 
condition score to the PHA and must be accompanied by a description of 
the mitigating circumstances. Based on the recommendation of the 
applicable HUD HUB/Program Center following its review of the PHA's 
evidence or documentation, HUD may determine that a point adjustment 
for the financial condition score is acceptable.
    (b) Components of PHAS Indicator #2. The components of PHAS 
Indicator #2 are:
    (1) Current Ratio is current assets divided by current liabilities.
    (2) Number of Months Expendable Fund Balance is expendable fund 
balance (Expendable Fund Balance) divided by monthly operating 
expenses. The Expendable Fund Balance is the portion of the fund 
balance representing expendable available financial resources, that is, 
the unreserved and undesignated fund balance.
    (3) Tenant Receivable Outstanding is the average number of days 
tenant receivables are outstanding calculated by the gross amount of 
tenant receivables divided by 365.
    (4) Occupancy Loss is one minus unit months leased divided by unit 
months available.
    (5) Expense Management/Utility Consumption is the expense per unit 
for key expenses, including utility consumption, and other expenses 
such as maintenance and security.
    (6) Net Income or Loss divided by the Expendable Fund Balance 
measures how the year's operations have affected the PHA's viability.
    (c) Thresholds. In order to receive a passing score under the 
Financial Condition Indicator, the PHA must achieve a score of at least 
18 points, or 60 percent of the available points under this indicator. 
If the PHA fails to receive a passing score on the Financial Condition 
Indicator, the PHA shall be categorized as a substandard financial 
agency.


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 Act, as provided in Sec. 902.43. (The 
remaining statutory indicators are addressed under the other PHAS 
Indicators.)


Sec. 902.43  Management operations performance standards.

    (a) Management operations sub-indicators. The following sub-
indicators listed in this section will be used to assess a PHA's 
management operations. The components and grades for each sub-indicator 
are the same as those provided in Appendix 1 to the PHAS Notice on the 
Management Operations Scoring Process, except as may be otherwise noted 
in this subpart.
    (1) Management sub-indicator #1--Capital Fund. This management sub-
indicator examines the amount and percentage of funds provided to the 
PHA from the Capital Fund under section 9(d) of the Act, which remain 
unobligated by the PHA after three years, the timeliness of fund 
obligation, the adequacy of contract administration, the quality of the 
physical work, and the adequacy of budget controls. For funding under 
the HOPE VI Program, only components #3, #4, and #5 of this sub-
indicator are applicable. This management sub-indicator is 
automatically excluded if the PHA does not have section 9(d) capital 
funding.
    (2) Management sub-indicator #2--work orders. This management sub-
indicator examines the time it takes to complete or abate emergency 
work orders, the average number of days nonemergency work orders were 
active, and any progress a PHA has made during the preceding three 
years to reduce the period of time nonemergency maintenance work orders 
were active.

[[Page 1746]]

Implicit in this management sub-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.
    (3) Management sub-indicator #3--PHA annual inspection of units and 
systems. This management sub-indicator examines the percentage of units 
and systems that a PHA inspects on an annual basis in order to 
determine short-term maintenance needs and long-term Capital Fund 
needs. This management sub-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.
    (4) Management sub-indicator #4--Security. (i) This management sub-
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 6(j)(1)(I) (42 U.S.C. 1437d(j)(1)(I)), of applicant 
screening and resident eviction policies and procedures, and other 
anticrime strategies; coordination with local government officials and 
residents in the development on implementation of such strategies; and 
as applicable, PHA performance under any HUD drug prevention/crime 
reduction grants.
    (ii) Paragraph (a) of this section provides that the components and 
grades for each sub-indicator are the same as those for the 
corresponding indicator provided in Appendix 1 to the PHAS Notice on 
the Management Operations Scoring Process, except as may be otherwise 
noted. For Component #1, Tracking and Reporting Crime Related Problems, 
the following will be used to describe a Grade of A: The PHA Board, by 
resolution, has adopted policies and the PHA has implemented procedures 
and can document that it:
    (A) Tracks crime and crime-related problems in at least 90 percent 
of its developments;
    (B) Has a cooperative system for tracking and reporting incidents 
of crime to local police authorities to improve law enforcement and 
crime prevention; and
    (C) Coordinates with local government officials and its residents 
on the implementation of anticrime strategies.
    (5) Management sub-indicator #5--Economic Self-Sufficiency. The 
economic self-sufficiency sub-indicator measures the PHA's efforts to 
coordinate, promote or provide effective programs and activities to 
promote the economic self-sufficiency of residents. For this sub-
indicator, PHAs will be assessed for all the programs that the PHA has 
HUD funding to implement. Also, PHAs will receive credit for 
implementation of programs through partnerships with non-PHA providers, 
even if the programs are not funded by HUD or the PHA.
    (b) Reporting on performance under the Management Operations 
Indicator. (1) A PHA is required to submit electronically a 
certification of its performance under each of the management 
operations sub-indicators in accordance with Sec. 902.69(d).
    (2) If circumstances preclude a PHA from reporting electronically, 
HUD will consider granting short-term approval to allow a PHA to submit 
its management operations certification manually. A PHA that seeks 
approval to submit its certification manually must ensure that REAC 
receives a request for manual submission in writing two months prior to 
the submission due date of its Management Operations certification. The 
written request must include the reasons why the PHA cannot submit its 
certification electronically. REAC will respond to such a request and 
will manually forward its determination in writing to the PHA.


Sec. 902.45  Management operations scoring and thresholds.

    (a) Scoring. The Management Operations Indicator score provides an 
assessment of each PHA's management effectiveness. 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 sub-indicators. Under PHAS Indicator #3, REAC 
will calculate a score following the procedures described in the PHAS 
Notice on the Management Operations Scoring Process (PHAS MASS Notice 
3), which will be published in the Federal Register. HUD may revise 
this notice in the future, but HUD will publish for comment any 
significant proposed amendments to this notice. After comments have 
been considered, HUD will publish a notice adopting a final notice or 
amendment. The PHAS Notice on the Management Operations Scoring Process 
that is currently in effect can be found at the REAC Internet site at
http://www.hud.gov/reac or obtained from REAC's Technical Assistance 
Center at 888-245-4860 (this is a toll free number).
    (b) Thresholds. In order to receive a passing score under the 
Management Operations Indicator, the PHA must achieve a score of at 
least 18 points or 60 percent of the available points under this PHAS 
Indicator #3. If the PHA fails to receive a passing score on the 
Management Operations Indicator, the PHA shall be categorized as a 
substandard management agency.


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) Method of assessment, generally. The assessment required under 
PHAS Indicator #4 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 completing implementation plan activities and 
developing a follow-up plan, if applicable, to address issues resulting 
from the survey, subject to independent audit.
    (c) PHA certification of completion of resident survey process. (1) 
At the completion of the resident survey process as described in this 
subpart, a PHA will be audited as part of the Independent Audit to 
ensure that the resident survey process has been managed as directed by 
HUD. PHAs are required to submit and certify their implementation plans 
electronically via the internet prior to the fiscal year end in 
accordance with Sec. 902.60(d). Follow-up plans, if applicable, must be 
made available for review and inspection at the principal office of the 
PHA during normal business hours as a supporting document to the PHA's 
Annual Plan in accordance with Sec. 903.23(d) of this title. The PHA 
must certify electronically that it will develop a follow-up plan, if 
applicable.
    (2) If circumstances preclude the PHA from reporting 
electronically, HUD will consider granting short-term approval to allow 
a PHA to submit its resident service and satisfaction certification 
manually. A PHA that seeks approval to submit the certification 
manually must ensure that REAC receives the PHA's written request for 
manual submission

[[Page 1747]]

two months before the submission due date of its resident service and 
satisfaction certification. The written request must include the 
reasons why the PHA cannot submit the certification electronically. 
REAC will respond to the PHA's request and will manually forward its 
determination in writing to the PHA.


Sec. 902.51  Updating of public housing unit address information.

    (a) Electronic updating. The survey process for the Resident 
Service and Satisfaction Indicator is dependent upon electronic 
updating, submission and certification of resident address and unit 
information by PHAs.
    (b) Unit address update and verification. The survey process for 
PHAS Indicator #4 begins with ensuring accurate information about the 
public housing unit addresses.
    (1) PHAs will be required to electronically update unit address 
information initially obtained by REAC from the recently revised form 
HUD-50058, Family Report. REAC will supply a list of current units 
(listed by development) to PHAs via the internet. PHAs will be asked to 
make additions, deletions and corrections to their unit address list.
    (2) After updating the list, PHAs must verify that the list of unit 
addresses under their jurisdiction is complete. Any incorrect or 
obsolete address information will have a detrimental impact on the 
survey results. A statistically valid number of residents cannot be 
selected to participate in the survey if the unit addresses are 
incorrect or obsolete. If a PHA does not verify the address information 
within two months of submission of the list of current units to the PHA 
by REAC, and the address information is not valid, REAC will not be 
able to conduct the survey at that PHA. Under those conditions, the PHA 
will not receive any points for the PHAS Resident Service and 
Satisfaction Indicator.
    (c) Electronic updating of the address list. (1) The preferred 
method for updating a unit address list is electronic updating via the 
internet.
    (2) If circumstances preclude a PHA from updating and submitting 
its unit address list electronically, HUD will consider granting short-
term approval to allow a PHA to submit the updated unit address list 
information manually. A PHA that seeks approval to update its unit 
address list manually must ensure that REAC receives the PHA's written 
request for manual submission one month before the submission due date. 
The written request must include the reasons why the PHA cannot update 
the list electronically. REAC will respond to the PHA's request upon 
receipt of the request.


Sec. 902.52  Distribution of survey to residents.

    (a) Sampling. A statistically valid number of units will be chosen 
to receive the Resident Service and Satisfaction Survey. These units 
will be randomly selected based on the total number of occupied and 
vacant units of the PHA. The Resident Service and Satisfaction 
assessment takes into account the different properties managed by a PHA 
by organizing the unit sampling based on the unit representation of 
each development in relation to the size of the entire PHA.
    (b) Survey distribution by third party organization. The Resident 
Service and Satisfaction survey will be distributed to the randomly 
selected sample of units of each PHA by a third party organization 
designated by HUD. The third party organization will also be 
responsible for:
    (1) Collecting, scanning and aggregating results of the survey;
    (2) Transmitting the survey results to HUD for analysis and 
scoring; and
    (3) Keeping individual responses to the survey confidential.


Sec. 902.53  Resident service and satisfaction scoring and thresholds.

    (a) Scoring. (1) 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.
    (i) 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:
    (A) Maintenance and repair (i.e., work order response);
    (B) Communications (i.e., perceived effectiveness);
    (C) Safety (i.e., perception of personal security);
    (D) Services; and
    (E) Neighborhood appearance.
    (ii) 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.
    (iii) 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.
    (2) Under PHAS Indicator #4, REAC will calculate a score following 
the procedures described in the PHAS Notice on the Resident Service and 
Satisfaction Survey Scoring Process (PHAS RASS Notice 3), which will be 
published in the Federal Register. HUD may revise this notice in the 
future, but HUD will publish for comment any significant proposed 
amendments to this notice. After comments have been considered, HUD 
will publish a notice adopting a final notice or amendment. The PHAS 
Notice on the Resident Service and Satisfaction Survey Process that is 
currently in effect can be found at the REAC Internet site at
http://www.hud.gov/reac or obtained from REAC's Technical Assistance 
Center at 888-245-4860 (this is a toll free number).
    (b) Thresholds. A PHA will not receive any points under PHAS 
Indicator #4 if the survey process is not managed as directed by HUD, 
the survey results are determined to be altered, or the public housing 
unit addresses are not updated as referenced in Sec. 902.51 of this 
document. A PHA will receive a passing score on the Resident Service 
and Satisfaction Indicator if the PHA receives at least 6 points, or 60 
percent 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 three full 
fiscal years following October 1, 1998, unless such change is approved 
by HUD (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 two months after the end of the PHA's fiscal 
year. An audited report of the year-end financial

[[Page 1748]]

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 two months after the end of the PHA's fiscal year, with no penalty 
applying, however, until the 16th day of the third month after the 
PHA's fiscal year end. An automatic one month extension will be granted 
for PHAs with fiscal years ending September 30, 1999 through June 30, 
2000.
    (1) The Management Operations certification shall be approved by 
PHA Board resolution, and signed and attested to by the Executive 
Director.
    (2) PHAs shall maintain documentation for three years verifying all 
certified indicators for HUD on-site review.
    (e) Failure to submit data by due date. (1) 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.
    (2) If all certifications or year-end financial information are not 
received within three months past the due date, the PHA will receive a 
presumptive rating of failure in all of the PHAS indicators, sub-
indicators and components required to be certified to, which shall 
result in a troubled designation or identification as troubled with 
respect to the program for assistance from the Capital Fund under 
section 9(d) of the Act.
    (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, including 
review by an independent auditor as authorized by section 6(j)(6) of 
the Act (42 U.S.C. 1437(d)(j)(6)). 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), sub-indicator(s) and/or component(s) shall receive a 
score of 0 for the relevant indicator(s), sub-indicator(s) and/or 
component(s), and its overall PHAS score shall be lowered.
    (g) Management operations assumed by an RMC (including DF-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.
    (1) For an RMC, that is not a DF-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.
    (2) For a DF-RMC, the DF-RMC must submit directly to HUD its 
certified statement concerning the management functions that it has 
undertaken. The DF-RMC's certification shall be approved by its 
Executive Director or Chief Executive Officer or responsible party.


Sec. 902.63  PHAS scoring.

    (a) 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 scored individually, and the scores for 
the components will be used to determine a single score for each of the 
PHAS indicators.
    (b) Adjustments to the PHAS score. (1) 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 adjusted (e.g., reduction 
in points) in accordance with the audited results.
    (2) A PHA's PHAS score under individual indicators, sub-indicators 
or components, or its overall PHAS score, may be changed by HUD in 
accordance with 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.
    (c) Issuance of score by HUD. An overall PHAS score will be issued 
by REAC for each PHA after the later of one month after the submission 
due date for financial data and certifications, or one month after 
submission by the PHA of its financial data and certifications. The 
overall PHAS score becomes the PHA's final PHAS score after any 
adjustments requested by the PHA and determined necessary under the 
processes provided in Secs. 902.25(c), 902.35(a)(3) and/or 902.68; any 
adjustments requested by the PHA and determined necessary under the 
appeal process provided in Sec. 902.69; and/or any adjustments 
determined necessary as a result of the independent public accountant 
(IPA) audit, as provided in paragraph (b) of this section.
    (d) Review of audit. For a PHA whose audit has been found deficient 
as a result of a quality control review of the IPA workpapers, a 
quality control review that is conducted by REAC as part of REAC's on-
going quality assurance process, REAC may, at its discretion, select 
the audit firm that will perform the audit of the PHA and may serve as 
the audit committee for the audit in question. This review is important 
to determine the accuracy of the scoring under the Financial Condition 
Indicator.
    (e) Posting and publication of PHAS scores. Each PHA (or RMC as the 
case may be) shall post a notice of its final PHAS score and status in 
appropriate conspicuous and accessible locations in its offices within 
two weeks of receipt of its final score and status. In addition, HUD 
will publish every PHA's score and status in the Federal Register and 
on HUD's internet site.


Sec. 902.67  Score and designation status.

    A PHA will receive a status designation corresponding to its final 
PHAS score as follows:
    (a) High performer. (1) 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 of the total available 
points under PHAS shall be designated a high performer.
    (2) A PHA shall not be designated a high performer if it scores 
below the threshold established for any indicator.
    (3) High performers will be afforded incentives that include relief 
from reporting and other requirements, as described in Sec. 902.71.
    (b) Standard performer. (1) A PHA that is not a high performer 
shall be designated a standard performer if:
    (i) The PHA achieves a total PHAS score of not less than 60 percent 
of the total available points under PHAS; and
    (ii) The PHA does not achieve less than 60 percent of the total 
points available

[[Page 1749]]

under one of the following indicators, PHAS Indicators #1, #2, or #3
    (2) All standard performers must correct reported deficiencies.
    (3) A PHA that achieves a total PHAS score of less than 70 percent, 
but not less that 60 percent, is required by the HUB/Program Center to 
submit an Improvement Plan to correct identified deficiencies.
    (4) A PHA that achieves a total PHAS score of less than 70 percent 
but not less than 60 percent is at risk of being designated troubled.
    (c) Troubled performer. A PHA that is designated as troubled may 
be:
    (1) Overall troubled. A PHA that achieves an overall PHAS score of 
less than 60 percent or achieves less than 60 percent of the total 
points available under more than one of the following indicators, PHAS 
Indicators #1, #2, or #3, shall be designated as troubled (overall), 
and referred to the TARC as described in Sec. 902.75.
    (2) Troubled in one area. (i) A PHA that achieves less than 60 
percent of the total points available under only one of the following 
indicators, PHAS Indicators #1, #2, or #3, shall be considered a 
substandard physical, substandard financial, or substandard management 
performer, and referred to the TARC as described in Sec. 902.75.
    (ii) In accordance with section 6(j)(2) of the Act, a PHA that 
receives less than 60 percent of the maximum calculation for the 
Capital Fund subindicator under PHAS Indicator #3 (Management 
Operations, subpart D of this part; see Sec. 902.43(a)(2)) will be 
subject to the sanctions, provided in section 6(j)(4), as appropriate.
    (d) Withholding designation. (1) In exceptional circumstances, even 
though a PHA has satisfied all of the PHAS Indicators for high 
performer or standard performer designation, HUD may conduct any review 
as it may determine necessary, and may deny or rescind incentives or 
high performer designation or standard performer designation, in the 
case of a PHA that:
    (i) Is operating under a special agreement with HUD;
    (ii) Is involved in litigation that bears directly upon the 
physical, financial or management performance of a PHA;
    (iii) Is operating under a court order;
    (iv) Demonstrates substantial evidence of fraud or misconduct, 
including evidence that the PHA's certifications, submitted in 
accordance with this part, are not supported by the facts, as evidenced 
by such sources as a HUD review, routine reports, an Office of 
Inspector General investigation/audit, an independent auditor's audit 
or an investigation by any appropriate legal authority; or
    (v) Demonstrates substantial noncompliance in one or more areas of 
a PHA's required compliance with applicable laws and regulations, 
including areas not assessed under the PHAS. Areas of substantial 
noncompliance include, but are not limited to, noncompliance with civil 
rights, nondiscrimination and fair housing laws and regulations, or the 
Annual Contributions Contract. Substantial noncompliance casts doubt on 
the capacity of a PHA to preserve and protect its public housing 
developments and operate them consistent with Federal laws and 
regulations.
    (2) If high performer designation is denied or rescinded, the PHA 
shall be designated either a standard performer or troubled performer 
depending on the nature and seriousness of the matter or matters 
constituting the basis for HUD's action. If standard performer 
designation is denied or rescinded, the PHA shall be designated 
troubled.
    (3) The denial or rescission of a designation of high performer or 
standard performer does not affect the PHA's numerical PHAS score.
    (4) A PHA that disagrees with the basis for denial or rescission of 
the designation may make a written request for reinstatement of the 
designation to the Assistant Secretary for Public and Indian Housing 
which request shall include reasons for the reinstatement.


Sec. 902.68  Technical review of results of PHAS Indicators #1 or #4.

    (a) Request for technical reviews. This section describes the 
process for requesting and granting technical reviews of physical 
inspection results and resident survey results.
    (1) For both reviews, the burden of proof is on the PHA to show 
that an error occurred.
    (2) For both reviews, a request for technical review must be 
submitted in writing to the Director of the Real Estate Assessment 
Center and must be received by REAC no later than 15 days following the 
issuance of the applicable results to the PHA (either the physical 
inspection results or the resident survey results). The request must be 
accompanied by the PHA's reasonable evidence that an error occurred.
    (b) Technical review of physical inspection results. (1) For each 
property inspected, REAC will provide the results of the physical 
inspection and a score for that property to the PHA. If the PHA 
believes that an objectively verifiable and material error (or errors) 
occurred in the inspection of an individual property, the PHA may 
request a technical review of the inspection results for that property.
    (2) For a technical review of physical inspection results, the 
PHA's request must be accompanied by the PHA's evidence that an 
objectively verifiable and material error has occurred. The 
documentation submitted by the PHA may be photographic evidence, 
written material from an objective source, such as a local fire marshal 
or building code official, or other similar evidence. The evidence must 
be more than a disagreement with the inspector's observations, or the 
inspector's finding regarding the severity of the deficiency.
    (3) A technical review of a property's physical inspection will not 
be conducted based on conditions that were corrected subsequent to the 
inspection, nor will REAC consider a request for a technical review 
that is based on a challenge to the inspector's findings as to the 
severity of the deficiency (i.e., minor, major or severe).
    (4) Upon receipt of a PHA's request for technical review of a 
property's inspection results, REAC will review the PHA's file and any 
objectively verifiable evidence produced by the PHA. If REAC's review 
determines that an objectively verifiable and material error (or 
errors) has been documented, then REAC may take one or a combination of 
the following actions:
    (i) Undertake a new inspection;
    (ii) Correct the physical inspection report;
    (iii) Issue a corrected physical condition score;
    (iv) Issue a corrected PHAS score.
    (5) In determining whether a new inspection of the property is 
warranted and a new PHAS score must be issued, REAC will review the 
PHA's file and evidence submitted to determine whether the evidence 
supports that there may have been a significant contractor error in the 
inspection which results in a significant change from the property's 
original physical condition score and the PHAS designation assigned to 
the PHA (i.e., high performer, standard performer, or troubled 
performer). If REAC determines that a new inspection is warranted, and 
the new inspection results in a significant change from the original 
physical condition score, and the PHA's PHAS score and PHAS 
designation, REAC shall issue a new PHAS score to the PHA.
    (6) Material errors are the only grounds for technical review of 
physical inspection results. Material errors are those that exhibit 
specific characteristics and meet specific

[[Page 1750]]

thresholds. The three types of material errors are:
    (i) Building data error. A building data error occurs if the 
inspection includes the wrong building or a building that was not owned 
by the PHA, including common or site areas that were not a part of the 
property. Incorrect building data that does not affect the score, such 
as the address, building name, year built, etc., would not be 
considered material, but is of great interest to HUD and will be 
corrected upon notice to REAC.
    (ii) Unit count error. A unit count error occurs if the total 
number of public housing units considered in scoring is incorrect. 
Since scoring uses total public housing units, REAC will examine 
instances where the participant can provide evidence that the total 
units used is incorrect.
    (iii) Non-existent deficiency error. A non-existent deficiency 
error occurs if the inspection cites a deficiency that does not exist.
    (7) A PHA's subsequent correction of deficiencies identified as a 
result of a property's physical inspection cannot serve as the basis 
for an appeal of the PHA's physical condition score.
    (c) Technical review of resident survey results. REAC will consider 
conducting a technical review of a PHA's resident survey results in 
cases where the contracted third party organization can be shown by the 
PHA to be in error.
    (1) The burden of proof rests with the PHA to provide objectively 
verifiable evidence that a technical error occurred. Examples include, 
but are not limited to, incorrect material being mailed to residents; 
or the PHA's units addresses were incorrect due to the third party 
organization's error, such as unit numbers being omitted from the 
addresses. A PHA that does not update its unit address list as 
described, above, will not be eligible for a technical review based on 
incorrect addresses.
    (2) Upon receipt of a PHA's request for technical review of 
resident survey results, REAC will review the PHA's file and evidence 
submitted by the PHA. If REAC's review determines that an error has 
been documented, REAC may take one or a combination of the following 
actions:
    (i) Undertake a new survey;
    (ii) Correct the resident survey results report;
    (iii) Issue a corrected resident services and satisfaction score;
    (iv) Issue a corrected PHAS score.


Sec. 902.69  PHA right of petition and appeal.

    (a) Appeal of troubled designation and petition for removal 
troubled designation. A PHA may:
    (1) Appeal its troubled designation (including designation as 
troubled with respect to its performance under the Capital Fund 
subindicator as provided in Sec. 902.67(c)(2)); and
    (2) Petition for removal of troubled designation.
    (b) Appeal of PHAS score. If a PHA believes that an objectively 
verifiable and material error (or errors) exists in any of the scores 
for its PHAS Indicators, which, if corrected, will result in a 
significant change in the PHA's PHAS score and its designation (i.e., 
as troubled, standard, or high performer), the PHA may appeal its PHAS 
score. A significant change in a PHAS score is a change that would 
cause the PHA's PHAS score to increase, resulting in a higher PHAS 
designation for the PHA (i.e., from troubled performer to standard 
performer, or from standard performer to high performer).
    (c) Appeal and petition procedures. (1) To appeal troubled 
designation or a PHAS score, a PHA must submit a request in writing to 
the Director of the Real Estate Assessment Center that must be received 
by REAC no later than 30 days following the issuance of the final PHAS 
score to the PHA. To petition removal of troubled designation, a PHA 
must submit its request in writing to the Director of the Real Estate 
Assessment Center. The written request must be received by REAC no 
later than 30 days after HUD's decision to refuse to remove the PHA's 
troubled designation.
    (2) An appeal of troubled designation or petition for removal of 
troubled designation must include the PHA's supporting documentation 
and reasons for the appeal. An appeal of a PHAS score must be 
accompanied by the PHA's reasonable evidence that an objectively 
verifiable and material error occurred. An appeal submitted to REAC 
without appropriate documentation will not be considered and will be 
returned to the PHA.
    (d) Consideration of appeal. (1) Consideration of appeal of PHAS 
score. Upon receipt of an appeal of a PHAS score from a PHA, REAC will 
review the PHA's file and the evidence submitted by the PHA to support 
that an error occurred. If REAC determines that an objectively 
verifiable and material error has been documented by the PHA, REAC may 
undertake a new inspection of the property, and/or a reexamination of 
the financial information, management information, or resident 
information (the components of the PHAS score), depending upon which 
PHAS Indicator the PHA believes was scored erroneously and the type of 
evidence submitted by the PHA to support its position that an error 
occurred.
    (2) Consideration of appeal of troubled designation or refusal to 
remove troubled designation. Upon receipt of an appeal of a troubled 
designation from a PHA, 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, from the Office of Public 
and Indian Housing, and from such other office or representative as the 
Secretary may designate (excluding, however, representation from the 
Troubled Agency Recovery Center). For purposes of reassessment, REAC 
will schedule a reinspection and/or acquire audit services, as 
determined by the Board, and a new score will be issued, if 
appropriate. Decisions by the Board will be reported to the PHA by the 
Assistant Secretary for Public and Indian Housing.
    (e) Final appeal decisions. HUD will make final decisions of 
appeals within 30 days of receipt of an appeal, and may extend this 
period for an additional 30 days if further inquiry is necessary. 
Failure by a PHA to submit supporting documentation with its request 
for appeal, or within any additional period granted by HUD is grounds 
for denial of an appeal. Final appeal decisions will be reported to the 
PHA by the Assistant Secretary for Public and Indian Housing.

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, and such 
other incentives that HUD may determine appropriate and permissible 
under program statutes or regulations:
    (1) Relief from specific HUD requirements. (i) 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.
    (ii) The development or developments of a PHA that receives a 
physical condition score of 90 percent or greater under PHAS Indicator 
#1 shall be subject to a physical inspection every other year rather 
than annually. (All developments of the high performer PHA are subject 
to inspection every other year, not only those inspected for

[[Page 1751]]

which the physical condition score of 90 percent or greater was 
achieved.)
    (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 achieve 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. Where permissible by statute or regulation, 
eligibility for high performers to receive bonus points in HUD's 
funding competitions, will be stated in HUD's notices of funding 
availability or other funding documents.
    (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.
    (1) 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.
    (2) 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, to submit an Improvement Plan to address specific 
deficiencies.
    (b) Submission of an Improvement Plan. (1) Within 30 days after the 
final PHAS score is issued, a standard performer with a score of less 
than 70 percent is required to submit an Improvement Plan to the HUB/
Program Center in accordance with paragraphs (d) and (e) of this 
section.
    (2) An RMC, unless a DF-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. A DF-RMC 
that is required to submit an Improvement Plan, also must develop its 
plan in consultation with its PHA, but must submit its plan directly to 
the HUB/Program Center.
    (3) On a risk management basis, the HUB/Program Center may require 
a standard performer with a score of not less than 70 percent to submit 
within 30 days after receipt of its final PHAS score an Improvement 
Plan, which includes the information stated in paragraph (d) of this 
section.
    (c) Correction of deficiencies. (1) Time period for correction. 
After a PHA's (or DF-RMC'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. A DF-RMC shall forward directly to the 
HUB/Program Center its 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 for each individual PHAS indicator, sub-indicator and/or 
component that was identified as a deficiency;
    (2) Identify any other performance and/or compliance deficiencies 
that were identified as a result of an on-site review of the PHA's 
operations;
    (3) Describe the procedures that will be followed to correct each 
deficiency;
    (4) Provide a timetable for the correction of each deficiency; and
    (5) 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 Improvement Plan (or RMC's 
Improvement Plan submitted to the HUB/Program Center through the RMC's 
PHA, or the DF-RMC's Improvement Plan submitted directly to the HUB/
Program Center), 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 or correct 
deficiencies. (1) 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.
    (2) The PHA (or DF-RMC 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.
    (3) If HUD finds the PHA's reasons for lack of progress 
unacceptable, HUD will notify the PHA that it will be referred to the 
area Troubled Agency Recovery Center (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, 
including the remedies available for substantial default.
    (4) In the case of a PHA's failure to correct deficiencies within 
the time specified in an Improvement Plan or such extensions as may be 
granted by HUD, if the TARC determines that it is appropriate to refer 
the PHA to the Departmental Enforcement Center (DEC), it will only do 
so after the PHA has had one year since the issuance of the PHAS score 
(or, in the case of an RMC, that is not a DF-RMC, notification of its 
score from a PHA) to correct its deficiencies.

[[Page 1752]]

Sec. 902.75  Referral to a Troubled Agency Recovery Center (TARC).

    (a) General. Upon a PHA's designation of troubled (including 
troubled in one area), in accordance with the requirements of section 
6(j)(2)(B) of the Act and in accordance with this part (or part 901, of 
this chapter if applicable), REAC shall refer each troubled PHA to the 
PHA's area TARC for remedial action. Remedial action by the TARC may 
include referral to the HUB/Program Center for oversight and 
monitoring. The actions to be taken by HUD and the PHA will include 
actions statutorily required, and such other actions as may be 
determined appropriate by HUD.
    (b) Memorandum of Agreement (MOA). Within 30 days of notification 
of a PHA's designation as a troubled performer (including substandard 
categorization), HUD will initiate activities to develop a 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, sub-indicators or components 
identified as a deficiency;
    (2) Performance targets for such periods specified by HUD (e.g., 
annual, semi-annual, quarterly, monthly), which may be the attainment 
of a higher score within an indicator, sub-indicator or component 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 designation or troubled with respect to the program for 
assistance from the Capital Fund under section 9(d) and Departmental 
recognition for the most improved PHAs;
    (7) The consequences of failing to meet the targets include but are 
not limited to, such sanctions as the imposition of budget and 
management controls by HUD, declaration of substantial default and 
subsequent actions, including referral to the DEC for judicial 
appointment of a receiver, limited denial of participation, suspension, 
debarment, or other actions deemed appropriate by the DEC; 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 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.
    (c) PHA review of MOA. The PHA will have 10 days to review the MOA. 
During this 10-day period, the PHA shall resolve any claimed 
discrepancies in the MOA with HUD, and discuss any recommended changes 
and target dates for improvement to be incorporated in the final MOA. 
Unless the time period is extended by HUD, the MOA is to be executed 15 
days following issuance of the preliminary MOA.
    (d) Maximum recovery period. (1) Expiration of one-year recovery 
period. Upon the expiration of the one-year period beginning on the 
date on which the PHA receives initial notice of troubled designation 
(including notice of substandard status) or October 21, 1998, whichever 
is later, the PHA shall improve its performance, as measured by the 
PHAS Indicators, by at least 50 percent of the difference between the 
most recent performance measurement and the measurement necessary to 
remove the PHA's designation as troubled or substandard status.
    (2) Expiration of two-year recovery period. Upon the expiration of 
the two-year period beginning on the later of the date on which the PHA 
receives initial notice of troubled designation (including notice of 
substandard status) or October 21, 1998, the PHA shall improve its 
performance and achieve an overall PHAS score of at least 60 percent, 
and achieve a score of at least 60 percent of the total points 
available under each of PHAS Indicators #1, #2 and #3.
    (e) Parties to the MOA. An MOA shall be executed by:
    (1) The PHA Board Chairperson (supported 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 TARC.
    (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 fails or refuses to execute a MOA within the 
period provided in paragraph (b) of this section, or a troubled PHA 
operating under an executed MOA does not show a substantial 
improvement, as provided in paragraph (d) of this section, toward a 
passing PHAS score following the issuance of the failing PHAS score by 
REAC, the TARC shall refer the PHA to the DEC in accordance with 
Sec. 902.77, and the DEC shall take the actions required by 
Sec. 902.77(a)(2).
    (2) For purposes of this paragraph (g), substantial improvement is 
defined as the improvement required by paragraphs (d)(1) and (d)(2) of 
this section. The maximum period of time for remaining in troubled 
status before being referred to the DEC is two years. Therefore, the 
PHA must make substantial improvement in each year of this two year 
period.
    (3) The following example illustrates the provisions of paragraph 
(g)(1) of this section:

    Example: A PHA receives a score of 50 percent; 60 percent is a 
passing score. The PHA is referred to the TARC. Within one year 
after the score is issued to the PHA, the PHA must achieve a 55 (50% 
of the points necessary to achieve a passing score of 60 points) to 
continue recovery efforts in the TARC. In the second year, the PHA 
must achieve a minimum score of 60 points (a passing score). If in 
the first year, the PHA fails to achieve the five-point increase,the 
PHA will be referred to the DEC. If in the first year, the PHA 
achieves the five-point increase but fails to achieve a passing 
score in the second year, the PHA will be referred to the DEC. The 
maximum period of time for remaining in troubled status before being 
referred to the DEC is two years.

    (h) Audit review. For a PHA designated as troubled, REAC will 
perform an audit review and may, at its discretion, select the audit 
firm that will perform the audit of the PHA and REAC may, at its 
discretion, serve as the audit committee for the audit in question.
    (i) Continuation of services to residents. To the extent feasible, 
while a PHA is under a referral to a TARC, all services to residents 
will continue uninterrupted.

[[Page 1753]]

Sec. 902.77  Referral to the Departmental Enforcement Center (DEC).

    (a) Referral of Troubled PHA to the DEC for failing to execute or 
meet MOA requirements. (1) Failure of a troubled PHA to execute or meet 
the requirements of a MOA in accordance with Sec. 902.75 constitutes a 
substantial default under Sec. 902.79 and may result in referral of the 
PHA to the DEC. The TARC will recommend to the Assistant Secretary for 
Public and Indian Housing that a troubled performer PHA be declared in 
substantial default. In accordance with Sec. 902.69, the Assistant 
Secretary shall notify the PHA of the default and allow the PHA an 
opportunity to cure the default. A PHA shall be referred to the DEC if 
the PHA fails to cure the default within the a period not to exceed 30 
days unless the Assistant Secretary for Public and Indian Housing 
determines that a longer period is appropriate.
    (2) Actions of the DEC. The DEC shall initiate:
    (i) The judicial appointment of a receiver, or
    (ii) An administrative receivership at HUD's option but only:
    (A) With respect to PHAs with fewer than 1250 units, or
    (B) While HUD's petition for judicial receivership is pending; and
    (iii) Upon the recommendation of the Assistant Secretary for Public 
and Indian Housing, the interventions provided in Sec. 902.83, and may 
initiate such other sanctions available to HUD, including, limited 
denial of participation, suspension, debarment, and referral to the 
appropriate Federal government agencies or offices for the imposition 
of civil or criminal sanctions.
    (b) Referral of PHAs in Substantial Default to the DEC. A PHA that 
is not designated as troubled but that has been found to be in 
substantial default under the provisions of Sec. 902.79 shall also be 
referred to the DEC. The Assistant Secretary for Public and Indian 
Housing makes the determination that a PHA is in substantial default. 
In accordance with Sec. 902.79, the Assistant Secretary shall notify 
the PHA of the default and allow the PHA an opportunity to cure the 
default. If the PHA fails to cure the default within the specified 
period time, the PHA shall be referred to the DEC. The DEC shall 
initiate the judicial appointment of a receiver or the interventions 
provided in Sec. 902.83 as recommended by the Assistant Secretary for 
Public and Indian Housing and may initiate such other sanctions 
available to HUD, including, limited denial of participation, 
suspension, debarment, and referral to the appropriate Federal 
government agencies or offices for the imposition of civil or criminal 
sanctions.
    (c) Receivership/Possession of PHA by HUD. (1) If a judicial 
receiver is appointed, the receiver, in addition to the powers provided 
by the court, shall have available the powers provided by section 
6(j)(3)(C) of the Act (42 U.S.C. 1437d(j)(3)(C)).
    (2) If HUD assumes responsibility for all or part of the PHA, the 
Secretary of HUD shall have available the powers provided by section 
6(j)(3)(D) of the Act (42 U.S.C. 1437d(j)(3)(D)).
    (3) If an administrative receiver is appointed, the Secretary may 
delegate to the administrative receiver any of the powers provided to 
the Secretary as described in paragraph (e)(2) of this section, in 
accordance with section 6(j)(3)(D).
    (4) The appointments of receivers, the actions of receivers, and 
HUD's responsibilities toward the receivers are governed by the 
provisions of section 6(j)(3).
    (d) To the extent feasible, while a PHA is under a referral to the 
DEC, 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 
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)(2), 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) 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

[[Page 1754]]

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 and with section 6(j)(3)(C) of the Act.
    (d) The appointment of a receiver pursuant to this section may be 
terminated upon the petition of any party, when the court determines 
that all defaults have been cured or the public housing agency is 
capable again of discharging its duties.
    (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 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.

    Dated: January 5, 2000.
Deborah Vincent,
General Deputy Secretary for Public and Indian Housing.

Donald J. LaVoy,
Acting Director, Real Estate Assessment Center.
[FR Doc. 00-591 Filed 1-10-00; 8:45 am]
BILLING CODE 4210-33-P