[Federal Register Volume 65, Number 52 (Thursday, March 16, 2000)]
[Rules and Regulations]
[Pages 14422-14429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6335]



[[Page 14421]]

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

Part V





Department of Housing and Urban Development





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



24 CFR Part 905



Allocation of Funds Under the Capital Fund; Capital Fund Formula; Final 
Rule

  Federal Register / Vol. 65, No. 52 / Thursday, March 16, 2000 / Rules 
and Regulations  

[[Page 14422]]


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

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Part 905

[Docket No. FR-4423-F-07]
RIN 2577-AB87


Allocation of Funds Under the Capital Fund; Capital Fund Formula; 
Final Rule

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

ACTION: Final rule.

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

SUMMARY: This final rule implements, as required by statute, a new 
formula system for allocation of funds to public housing agencies for 
their capital needs. This final rule follows publication of a proposed 
rule on September 14, 1999, which was developed through negotiated 
rulemaking, and takes into consideration, public comment received on 
the proposed rule.

DATES: Effective Date: April 17, 2000.

FOR FURTHER INFORMATION CONTACT: William Flood, Director, Office of 
Capital Improvements, Public and Indian Housing, Room 4134, Department 
of Housing and Urban Development, 451 Seventh Street, SW, Washington, 
DC 20410-0500; telephone (202) 708-1640 ext. 4185 (this telephone 
number is not toll-free). Hearing or speech-impaired individuals may 
access this number via TTY by calling the toll-free federal Information 
Relay Service at 1-800-877-8339.

SUPPLEMENTARY INFORMATION:  

I. Background

    Section 519 of the Quality Housing and Work Responsibility Act of 
1998 (Pub.L. 105-276, approved October 21, 1998) (referred to as the 
``Public Housing Reform Act'') amends section 9 of the United States 
Housing Act of 1937 (the 1937 Act) to provide a ``Capital Fund,'' to be 
established by HUD for the purpose of making assistance available to 
public housing agencies (PHAs) to carry out capital and management 
activities. Amended section 9 requires HUD to develop a formula for 
determining the amount of assistance provided to PHAs from the Capital 
Fund for a Federal fiscal year, and the formula is to include a 
mechanism to reward performance. The statute also requires that the 
Capital Fund formula is to be developed through negotiated rulemaking 
procedures.
    On September 14, 1999 (64 FR 49924), HUD published the proposed 
rule developed through negotiated rulemaking. The preamble to the 
proposed rule provided background information on the negotiated 
rulemaking process, the number and dates of meetings, the members of 
the negotiated rulemaking committee, and the issues considered by the 
committee during its negotiations. This preamble does not repeat that 
information.
    The September 14, 1999 proposed rule provided a 30-day public 
comment period. HUD received 10 public comments on this rule. Section 
III of this preamble presents the issues raised by the public 
commenters and HUD's responses to these comments. Section II, which 
follows, highlights the significant changes that are being made by HUD 
at this final rule stage.

II. Significant Differences Between This Final Rule and the 
September 14, 1999 Proposed Rule

    HUD has made the following changes to the proposed rule at this 
final rule stage.
    In Sec. 905.10(d) (Allocation for existing modernization needs 
under the CFF), HUD removed paragraphs (d)(1)(i) and (d)(1)(ii) which 
addressed the availability of statistically reliable data, and HUD's 
determination of existing modernization need based on that data. The 
estimates of existing modernization need will be determined as provided 
in the methods established by paragraph (d). With the removal of 
paragraph (d)(1) of the proposed rule, paragraph (d)(2) of the proposed 
rule (determination of existing modernization need for PHAs greater 
than or equal to 250 or more units in FFY 1999) is redesignated 
paragraph (d)(1) at the final rule stage.
    In Sec. 905.10(d)(1)(i)(C) of the rule (Sec. 905.10(d)(2)(i)(C) at 
the proposed rule stage) which addresses the proportion of units in a 
development in building completed in 1978 or earlier, HUD revised this 
paragraph at the final rule stage to provide that the proportion of 
units in such a development are those as of Federal Fiscal Year 1998.
    In Sec. 905.10(d)(1)(i)(D) of the rule (Sec. 905.10(d)(2)(i)(D) at 
the proposed rule stage), which addresses the cost of rehabilitating 
property in the PHA's area, HUD removed the reference to ``rolling 
three year average'' of the cost. The cost index is simply referred to 
as the cost index. This change is consistent with the formula agreed 
upon in negotiated rulemaking, which did not rely upon a rolling three-
year average of costs as a basic formula factor. HUD also revised this 
paragraph to provide that the applicable period is as of Federal Fiscal 
Year 1999.
    In Sec. 905.10(d)(1)(ii)(A) (Sec. 905.10(d)(2)(ii)(A) at the 
proposed rule stage), HUD changed the Date of Full Availability (DOFA) 
for newly constructed units from 1999 (the DOFA at the proposed rule 
stage) to 1991 (the DOFA at this final rule stage). The change in dates 
continues the Comprehensive Grant formula provision (that sets the date 
at 1991) and was part of the formula considered by the negotiated 
rulemaking committee.
    In Sec. 905.10(d)(1)(ii)(B) (Sec. 905.10(d)(2)(ii)(A) at the 
proposed rule stage), HUD made the same change in DOFA for acquired 
developments. The applicable date is now 1991, not 1999. The change in 
dates continues the Comprehensive Grant formula provision (that sets 
the date at 1991) and was part of the formula considered by the 
negotiated rulemaking committee.
    In Sec. 905.10(d), HUD added a new paragraph (d)(2) to address the 
determination of existing modernization need for the New York City and 
Chicago Housing Authorities.
    In Sec. 905.10(d), paragraph (3) continues to address determination 
of existing modernization need for PHAs with fewer than 250 units in 
FFY 1999. In Sec. 905.10(d)(3)(i)(C) and (d) and in 
Sec. 905.10(d)(3)(ii)(A) and (B), HUD made the same changes to these 
paragraphs as it did to the similar paragraphs in paragraph (d)(1).
    In Sec. 905.10(e) (Allocation for accrual needs under the CFF), HUD 
removed paragraphs (1)(i) and (ii) which addressed determination of 
accrual need on the basis of availability of statistically reliable 
data, for the same reasons that it removed this language from paragraph 
(d)(1). Paragraph (e)(2) of the proposed rule, which addressed PHAs 
allocation of accrual needs for PHAs greater than or equal to 250 or 
more units, is redesignated as paragraph (1) at this final rule stage.
    In Sec. 905.10(e)(1)(i)(E) and Sec. 905.10(e)(3)(i)(E) which 
address the cost index of rehabilitating property, HUD made the same 
revisions to these subsections that were made to this language in 
paragraph (d).
    In Sec. 905.10(e), HUD added a new paragraph (2) to address the 
allocation of accrual needs for the New York City and Chicago Housing 
Authorities.
    In Sec. 905.10(f) (Calculation of number of units), HUD added a new 
paragraph (2) that addresses replacement units. Paragraph (2) of the 
proposed rule that addressed conversion of units is redesignated 
paragraph (3) and revised by removing paragraphs (i) and (ii). 
Paragraph (i) provided that increases in the number of units resulting 
from conversion of existing units will be added to the overall unit 
count so long as the units are under ACC amendments

[[Page 14423]]

by the reporting date. Paragraph (ii) provided that for purposes of 
calculating the number of converted units, HUD shall regard the 
converted size unit as the appropriate unit count.
    HUD retained paragraph (iii) but made revisions. The revised 
paragraph (iii) provides that for purposes of calculating the estimated 
need of converted units, HUD shall treat conversion in a development so 
that the total estimated need (total units times need per unit) of the 
development is unchanged by the conversion.
    In Sec. 905.10(f)(4) (Sec. 905.10(f)(3) at the proposed rule stage) 
which addresses reduction of units, HUD removed reference to 
conversion. Reduction of units is now based only on demolition or 
disposition.
    In Sec. 905.10(h)(2), regarding retention of current formula shares 
for some Moving to Work communities whose agreements in that program 
provide for this, HUD has added the modifier ``approximately'' to ``the 
formula share''. This is done in recognition that the replacement 
housing factor would not duplicate the prior calculation, but instead 
would be calculated annually in the same manner as the replacement 
factor provided under this rule. (In addition, the prior formula's 
replacement housing factor was for five years.) This change must occur 
for purposes of efficient formula administration and should not make a 
significant financial difference. Under the overall formula system, the 
share of a PHA with an MTW grant agreement under the new formula system 
(including the replacement housing component) may be the PHA's share 
under the old formula system (including the replacement housing 
component) for comparable units, if the PHA's MTW agreement provided 
for that share.
    In Sec. 905.10(i) (Replacement housing factor), HUD revised 
paragraph (i) at this final rule stage to remove all reference to 
conversion. The replacement housing factor is only applicable to 
demolition and disposition.
    In Sec. 905.10(j) (Performance reward factor), HUD revised this 
paragraph to reflect the status of implementation of the Public Housing 
Assessment System (PHAS).
    A new paragraph (k) was added to clarify the PHAs' authority to 
undertake collateralization, as provided under section 14(a) of the 
1937 Act, and to address the statutorily eligible expenses in section 
9(d)(1) of the U.S. Housing Act of 1937. This new paragraph is 
discussed in more detail in Section IV of this preamble.
    In addition to these changes, HUD also made several editorial and 
organizational changes throughout the rule for purposes of clarity.

III. Discussion of Public Comments

    This section presents HUD's responses to the significant issues 
raised by the individuals and entities who submitted comments on the 
September 14, 1999 proposed rule. The heading ``Comment'' states the 
comment made by a commenter or commenters and the heading ``HUD 
Response'' presents HUD's response to the issue or issues raised by the 
commenter or commenters.

General Comments

    Comment. The data collected by the consultant study was flawed. The 
preamble to the September 14, 1999 proposed rule notes that ``[a]s part 
of its deliberation of formula models and formula components, the 
committee considered at length a study conducted on capital needs in 
public housing by a consulting firm'' (64 FR 49924). Two commenters 
were highly critical of the study. The concerns of the commenters 
included that the study did not look at true capital needs, but only at 
the cost of restoring items to their original condition, the study did 
not adequately take into account different housing types, the study 
only looked at observable conditions, and there were flaws in the 
methods by which site costs were estimated. Another commenter stated 
that the preamble did not properly reflect that the negotiated 
rulemaking committee spent considerable time debating the merits of the 
study and the committee, overall, was critical of the study.
    HUD Response. HUD recognizes the limitations of the study used by 
the committee and the preamble to the proposed rule described these 
limitations. The study, however, was the best study available at the 
time, and HUD believes that the committee, cognizant of the limitations 
that the study presented, was able to address formula issues 
knowledgeably and appropriately. For example, as the preamble stated, 
given the limitations of the study, the committee decided to limit any 
reduction in funding in going from the old to the new formula to six 
percent of a PHA's Federal Fiscal Year 1999 formula share for 
comparable units.
    Comment. The rule should reflect the concern of the committee to 
base a performance bonus solely on the PHA's PHAS score. One commenter 
stated that the proposed rule did not adequately convey the opposition 
of many committee members to a performance bonus based exclusively on a 
PHA's PHAS score.
    HUD Response. The preamble to a negotiated rule need not (and in 
the majority of cases does not) relay every disagreement that committee 
members had during the deliberations of the rule. The minutes of the 
committee meetings accurately reflect all discussions, and are 
available for review by the public. The preamble should reflect any 
nonconsensus items, however. The committee reached consensus on all 
rule provisions, including the performance bonus.
    Comment. HUD should use FY 2000 appropriation numbers to conduct a 
``test run'' of the formula and make the results available to each PHA. 
Two commenters suggested that the final rule should provide a sample 
application of the formula using dollar figures. One of the commenters 
stated that PHAs cannot submit informed comments on the proposed rule 
without ``having at least estimates of what the formula would mean to 
them.'' The commenter further recommended that HUD extend the due date 
for the submission of public comments until such numbers are made 
available to the public.
    HUD Response. Provision of a sample application of the formula and 
an extension of the public comment period are not necessary, in view of 
the prior work of the negotiated rulemaking committee. The sample 
formula amounts that HUD provided to the committee for PHA size and 
geographic categories and for some representative PHAs were sufficient 
to guide the committee's decisions have been available through 
committee members (including national public housing organizations). 
Additionally, to safeguard against any possible dramatic changes in 
going from the old formula to the new, the rule limits funding 
reductions to six percent of a PHA's Federal Fiscal Year 1999 formula 
share for comparable units.
    Comment. The final rule should contain a definition section. One 
commenter suggested that the final rule contain a definitions section 
in order to clarify the meaning of several terms used throughout 
Sec. 905.10. The commenter recommended that the final rule provide 
definitions for the following terms: existing modernization needs; 
relative needs; accrual needs; calibration of existing modernization 
need; rolling three-year average; cost index; calibration of accrual 
need; total estimated existing modernization need; total accrual need; 
and ``Moving to Work.''
    HUD Response. Many of the terms are described within the formula 
itself or

[[Page 14424]]

are terms carried over from the previous formula and, as a result, are 
terms that are familiar to PHAs.

Comments on the Proposed Rule Provisions

    Comment. What constitutes statistically reliable data? Two 
commenters expressed concern about the proposed rule language that 
provided for a determination of existing modernization need or accrual 
need based on the availability or unavailability of statistically 
reliable data. One commenter asked how PHAs would be assured that HUD 
is using statistically reliable data. The other commenter stated that 
HUD should accept that statistically reliable data generally are not 
available.
    HUD Response. The data used for this formula are from the 
consultant study referenced above. Thus, as noted earlier in this 
preamble, language that implied that the data relied upon for the 
formula might change in the future has been removed at the final rule 
stage.
    Comment. How will HUD determine the rolling three year average cost 
index for each area? One commenter questioned how this index would be 
determined.
    HUD Response. HUD has removed any reference to a three-year rolling 
average of the cost index. The current practice is to make annual 
adjustments in the formula based on annual changes in the cost index, 
and HUD's expectation is to continue current practice.
    Comment. Determination of non-metropolitan area. One commenter 
asked whether, in determining the extent to which units of a 
development were in a non-metropolitan area, HUD will make this 
determination based on each development and each scattered site home.
    HUD Response. The determination will be based on the location of 
each development. If a scattered site development has units in both 
metro and non-metro areas (as determined in FFY 1996), then the 
majority of units will decide the metro or non-metro designation of the 
development.
    Comment. The formula must provide for capital funding after the 
date of full availability (DOFA). Proposed Sec. 905.10(d)(2)(ii)(A) 
provided that ``[d]evelopments acquired by a PHA with a DOFA date of 
October 1, 1999 or thereafter will be considered by HUD to have a zero 
existing modernization need.'' One commenter asked whether this date 
would be revised each year. The commenter stated that while it is 
understandable that a development with a DOFA in the current fiscal 
year would not need much, if any, modernization that year, the 
commenter thought it is unrealistic to say that this development will 
not require modernization in the future.
    HUD Response. As noted earlier in this preamble, HUD has revised 
the rule to continue the current application of this provision, for 
which the date is October 1, 1991. The formula agreed upon in 
negotiated rulemaking has this basis. The agreed-upon formula is static 
except for changes in units and annual calibration of costs based on 
inflation in local areas. Thus, this provision will not change from 
year to year.
    Comment. HUD should provide examples regarding the application of 
the accrual formula. One commenter stated that the accrual need formula 
is too complex. The commenter stated that it would be difficult, if not 
impossible, to determine from the formula description how this will 
effect an actual housing authority.
    HUD Response. The accrual need formula should not be unfamiliar to 
PHAs. This formula is similar to the accrual need formula of the 
Comprehensive Grant Program.
    Comment. Replacement housing factor is unclear. The proposed rule 
provides that the replacement housing factor ``will be added for an 
additional 5 years if the planning, leveraging, obligation and 
expenditure requirements are met.'' The proposed rule also provides 
that, as ``a prior condition of a PHA's receipt of additional funds for 
replacement housing * * * for the second 5-year period or any portion 
thereof, a PHA must obtain a firm commitment of substantial additional 
funds other than public housing funds for replacement housing, as 
determined by HUD.'' A few commenters stated that this language was 
vague, and that HUD should clarify this provision at the final rule 
stage. The commenters stated that HUD needs to explain what it means by 
``firm commitment,'' ``planning,'' and ``leveraging'', among other 
terms used in this section.
    HUD Response. This language was negotiated specifically in 
negotiated rulemaking, and HUD will not add to it in the regulation. 
HUD will provide the necessary guidance before the beginning of the 
second five-year term.
    Comment. PHAs that receive HOPE VI or MROP funds should not be 
prevented from receiving funds under the replacement housing factor. 
One commenter requested that the Capital Fund formula not penalize PHAs 
that ``have taken the initiative to access additional HUD funding'' 
under programs such as the HOPE VI program or the Major Reconstruction 
of Obsolete Public Housing (MROP) program. The commenter recommended 
the removal of Sec. 905.10(i)(5)(iv) from the final rule.
    HUD Response. HUD and the committee determined it equitable to 
exclude under the replacement housing factor those units funded under 
HOPE VI, MROP, or other PIH development programs, because funding under 
these programs is sufficiently generous to outweigh formula funding 
under the Capital Fund. Thus, replacement factor funds will not be 
provided for public housing units fully funded from such sources. If 
the PHA obtains funding from HOPE VI, MROP, or other PIH development 
programs during the 10-year period for the replacement housing factor, 
future funding for the replacement housing factor covering the number 
of units funded under these other programs would cease. HUD also notes 
that, since replacement housing factor funds can be used only for 
replacement housing, such funding would cease if the PHA already had 
received funding from any source to replace all housing previously 
demolished or disposed of.
    Comment. HUD should aggressively invoke its authority to recapture 
and reallocate funds; Replacement housing factor should only be made 
available to PHAs committing to provide replacement units. Two 
commenters urged HUD to strengthen the recapture and reallocation 
provisions of the proposed rule. The commenters stated that PHAs that 
do not use the money for its designated purpose should not benefit from 
the funds. The commenters suggested that the language in the rule that 
HUD ``may'' recapture and reallocate replacement housing funds should 
be changed to HUD ``shall'' recapture and reallocate replacement 
housing funds. The commenters also suggested that a PHA's failure to 
obligate replacement housing funds on a timely basis should not result 
merely in a reduction of funding to the PHA for the second 5-year 
period of application of the replacement housing factor, but in 
elimination of those funds.
    Another commenter was concerned about perceived deficiencies in the 
proposed rule that would excuse PHAs receiving replacement factor funds 
from actually providing replacement housing. The commenter objected to 
the provision permitting a PHA to defer the obligation of replacement 
factor funds until the accumulation of adequate funds. The commenter 
stated that, since replacement factor funds will never cover all 
development costs, PHAs that do not diligently seek out additional 
resources will qualify for the 24-month

[[Page 14425]]

extensions provided in the rule. The commenter also expressed concern 
about proposed Sec. 905.10(i)(2), which (according to the commenter) 
only requires ``PHAs seeking the second five years of funding * * * to 
demonstrate * * * that they have the funds to develop the replacement 
housing.'' The commenter stated that this provision would undermine the 
entire concept that a PHA that qualifies for the first five years of 
funding is one that seriously intends to replace demolished units.
    HUD Response. The requirements imposed in this regulation for 
obligating and expending replacement housing funds are an addition to 
the requirements generally applicable to obligation and expenditure of 
capital funds, and are designed to provide additional assurance that 
replacement housing factor funds are obligated and expended in a timely 
fashion. HUD will enforce the requirements accordingly.
    Comment. PHAs designated as standard and substandard performers 
under PHAS should not have funding reduced as a result of a performance 
bonus to high performing PHAs. One commenter objected to reducing 
formula funding for standard and substandard PHAs as a result of the 
performance bonus for high performing PHAs. The commenter stated that 
these PHAs desperately need Capital Funds for repairs and modernization 
in order to meet the ``stringent requirements'' of the PHAS.
    HUD Response. HUD does not agree that the PHAS imposes overly 
stringent requirements on PHAs The requirements imposed on PHAs are 
those imposed by statute and public housing program regulations, and 
are requirements directed to ensuring that PHAs use federal funds to 
provide decent, safe and sanitary housing to public housing residents. 
The PHAS assesses, among other things, whether PHAs are meeting this 
requirement.
    The negotiated rulemaking committee recognized that providing a 
bonus to high performing PHAs from the Capital Fund would necessarily 
mean a reduction in funding to PHAs that are not designated high 
performing. Nevertheless, the committee agreed that it was important 
and consistent with the requirements of the Public Housing Reform Act 
to reward high performing PHAs with a monetary incentive. Although 
there was criticism of the PHAS and objections were voiced and the 
issue debated, the committee reached consensus that the performance 
bonus would be based on the PHA's designation of high performer under 
the PHAS. That final rule was published, after an extensive additional 
consultation process with affected entities and their representatives, 
on January 11, 2000. In any event, PHAS is the performance evaluation 
system for PHAs, and thus it is proper to base the performance bonus on 
PHAS.
    Comment. Performance bonus should not be based on PHAS scores. Four 
commenters strongly objected to the use of high performing designation 
under PHAS for purposes of determining the performance bonus. The 
commenters stated that the ``current state of the PHAS shows it to be 
inaccurate and inconsistent, and it is still questionable whether it 
really measures what it is intended to measure.'' The commenters stated 
that it is premature to implement PHAS at this time and, therefore, it 
is premature to implement a Capital Fund formula bonus based on PHAS.
    HUD Response. HUD believes that much of the concern of the 
commenters about the PHAS was based on the PHAS advisory scores. The 
purpose of issuance of PHAS advisory scores during the transition 
period following publication of the PHAS final rule published on 
September 1, 1998 (63 FR 46596) was to test the PHAS, commence training 
on the PHAS, and solicit additional input from PHAs before the PHAS was 
scheduled to take effect on October 1, 1999. On October 21, 1999 HUD 
published a notice (64 FR 56676) that recognized the PHAS transition 
period needed to be extended for PHAs with fiscal years ending on 
September 30, 1999, or before December 31, 1999. In that notice, HUD 
advised that PHAs with fiscal years ending after December 31, 1999, 
would be the first PHAs to be issued PHAS scores. PHAs with fiscal 
years ending September 30, 1999 or December 31, 1999, will be issued 
PHAS advisory scores and be assessed (as HUD is required to do by 
statute) on the PHA's management operations under the criteria in 24 
CFR part 902, subpart D of the PHAS regulation. The notice recognized 
that these PHAs needed additional time to prepare for the transition to 
PHAS.
    In that notice, HUD also advised that it was continuing to work on 
the PHAS final rule and that HUD would issue a consensus-based final 
rule that would address the public comments and describe all changes to 
the PHAS regulation made as a result of the public comment and review 
process.
    Comment. Timeframes for performance bonus should be extended due to 
deficiencies with the PHAS. Two commenters suggested that due to the 
perceived deficiencies with PHAS, the time frame for implementation of 
the performance bonus is unrealistic. The commenters suggested that the 
time frame be extended in order to permit the PHAS to be finalized.
    HUD Response. As noted in Section II of the preamble and in the 
response to the preceding comment, HUD has revised the rule to provide 
that the performance bonus does not take effect until an entire year of 
the first PHAS scores have been issued.
    Comment. Final rule should clarify relationship between performance 
bonus and Capital Fund cap. Section 905.10(h) of the proposed rule 
provides that ``no PHA's [Capital Fund formula] share for units funded 
under the [Capital Fund formula] can be less than 94% of its formula 
share had the [Fiscal Year] 1999 formula system been applied to these 
eligible units.'' Section 905.10(j) provides that ``no PHA will lose 
more than 5% of its base formula amount as a result of the 
redistribution of funding from non-high performers to high 
performers.'' One commenter asked whether this 5% ``hold harmless'' 
provision is inclusive or exclusive of the 94% cap provided in 
Sec. 905.10(h). The commenter recommended that no PHA ``should receive 
a cut of more than 6 percent of its formula share for any reason, 
including bonuses to others.''
    HUD Response. The final agreement of the negotiated rulemaking 
committee is that the performance bonus computation is separate from 
(or exclusive of) the funding formula computations. A PHA could lose up 
to six percent of its original formula amount for comparable units 
under the funding formula computations (again, exclusive of the 
performance bonus computation) and then lose up to an additional five 
percent under the performance bonus computations. Some PHAs that lose 
the full six percent under the formula computation might benefit from 
the performance bonus computation.

IV. Eligible Expenses

    As HUD's Notice on Status of Implementation of the Public Housing 
Reform Act, published on December 22, 1999 (64 FR 71799), noted, upon 
the effective date of this final rule, PHAs may begin to undertake the 
eligible activities listed in section 9(d)(1) of the Act. Section 
522(c)(2) of the Public Housing Reform Act states that despite the 
Act's repeal of section 14 of the United States Housing Act of 1937 
(1937 Act), PHAs may continue to use the authority provided under 
section 14(q) of that Act before implementation of the formula. In 
addition to the eligible expenses under section 9(d)(1), section 14(q) 
includes authorization for drawdown of funds on a schedule commensurate 
with construction draws

[[Page 14426]]

for deposit into an interest-bearing account to serve as collateral or 
credit enhancement for bonds issued by a public agency, for the 
construction or rehabilitation of a development. New section 35 of the 
1937 Act, added by the Public Housing Reform Act, provides somewhat 
broader authority of the same nature, to be used in accordance with 
regulations issued by HUD.
    HUD soon will issue proposed rules on the nonformula aspects of the 
Capital Fund and on mixed finance, which will address these provisions. 
For example, in the preamble to the proposed rule published on 
September 14, 1999 (64 FR 49925, first column), HUD stated that 
measures to promote more effective resident participation will be 
categorized as eligible Capital Fund management improvement expenses 
under appropriate regulations and provided examples of such eligible 
expenses. These rules also will cover such topics as the timing of 
expenditure of funding.
    To provide clarity and assure that there is no temporary lapse in 
PHAs' authority to undertake collateralization as they could do under 
section 14(q), however, HUD is adding a new paragraph (k) to this final 
rule that repeats the statutorily eligible expenses in section 9(d)(1) 
and adds a sentence identical to the collateralization authority in 
section 14(q)(1). This paragraph may be repealed, amended or moved once 
the referenced regulatory processes are completed.

V. Findings and Certifications

Environmental Impact

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

Regulatory Planning and Review

    The Office of Management and Budget has reviewed this rule under 
Executive Order 12866 (captioned ``Regulatory Planning and Review'') 
and 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 during regular business hours 
(7:30 a.m. to 5:30 p.m.) at the Office of the General Counsel, Rules 
Docket Clerk, Room 10276, U.S. Department of Housing and Urban 
Development, 451 Seventh Street, SW, Washington, DC 20410-0500.

Regulatory Flexibility Act

    The Secretary has reviewed this rule before publication and by 
approving it certifies, in accordance with the Regulatory Flexibility 
Act (5 U.S.C. 605(b)), that this rule would not have a significant 
economic impact on a substantial number of small entities. The rule 
would implement a new system for formula allocation of funds to PHAs 
for their capital needs. The new system is established to provide 
minimum impact on all PHAs, small and large. The new formula provides 
that no PHA can lose more than 6% of its formula share for comparable 
units in going from the old to the new formula. Accordingly, the 
formula will not have a significant economic impact on any PHA.

Federalism Impact

    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.

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) requires Federal agencies to assess the effects of 
their regulatory actions on State, local, and tribal governments and on 
the private sector. This rule does not impose, within the meaning of 
the UMRA, any Federal mandates on any State, local, or tribal 
governments or on the private sector.

List of Subjects in 24 CFR Part 905

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

Catalog

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

    For the reasons discussed in the preamble, part 905 is added to 
title 24 of the Code of Federal Regulations as follows:

PART 905-- THE PUBLIC HOUSING CAPITAL FUND PROGRAM

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


Sec. 905.10  Capital Fund formula (CFF).

    (a) General. This section describes the formula for allocation of 
capital funds to PHAs. The formula is referred to as the Capital Fund 
formula (CFF).
    (b) Emergency reserve and use of amounts. (1) In each Federal 
fiscal year after Federal Fiscal Year (FFY) 1999, from amounts approved 
in the appropriation act for funding under this part, HUD:
    (i) Shall reserve an amount not to exceed that authorized by 42 
U.S.C. 1437g(k) for--
    (A) Use for assistance in connection with emergencies and other 
disasters, and
    (B) Housing needs resulting from any settlement of litigation; and
    (ii) May reserve such other amounts for other purposes authorized 
by 42 U.S.C. 1437g(k).
    (2) Amounts set aside under paragraph (b) of this section may be 
used for assistance for any eligible use under the Capital Fund, 
Operating Fund, or tenant-based assistance in accordance with section 8 
of the U.S. Housing Act of 1937 (42 U.S.C. 1437f).
    (3) The use of any amounts as provided under paragraph (b) of this 
section relating to emergencies (other than disasters and housing needs 
resulting from settlement of litigation) shall be announced 
subsequently through Federal Register notice.
    (c) Formula allocation based on relative needs. After determining 
the amounts to be reserved under paragraph (b) of this section, HUD 
shall allocate the amount remaining in accordance with the CFF. The CFF 
measures the existing modernization needs and accrual needs of PHAs.
    (d) Allocation for existing modernization needs under the CFF. HUD 
shall allocate one-half of the available Capital Fund amount based on 
the relative existing modernization needs of PHAs, determined in 
accordance with this paragraph (d) of this section.
    (1) For PHAs greater than or equal to 250 or more units in FFY 
1999, except

[[Page 14427]]

the New York City and Chicago Housing Authorities, estimates of the 
existing modernization need will be based on the following:
    (i) Objective measurable data concerning the following PHA, 
community and development characteristics applied to each development:
    (A) The average number of bedrooms in the units in a development. 
(Equation co-efficient: 4604.7);
    (B) The total number of units in a development as of FFY 1999. 
(Equation co-efficient: 10.17);
    (C) The proportion of units, as of FFY 1998, in a development in 
buildings completed in 1978 or earlier. In the case of acquired 
developments, HUD will use the Date of Full Availability (DOFA) date 
unless the PHA provides HUD with the actual date of construction. When 
provided with the actual date of construction, HUD will use this date 
(or, for scattered sites, the average dates of construction of all the 
buildings), subject to a 50-year cap. (Equation co-efficient: 4965.4);
    (D) The cost index of rehabilitating property in the area as of FFY 
1999. (Equation co-efficient: -10608);
    (E) The extent to which the units of a development were in a non-
metropolitan area as defined by the Census Bureau during FFY 1996. 
(Equation co-efficient: 2703.9);
    (F) The PHA is located in the southern census region, as defined by 
the Census Bureau. (Equation co-efficient: -269.4);
    (G) The PHA is located in the western census region, as defined by 
the Census Bureau. (Equation co-efficient: -1709.5);
    (H) The PHA is located in the midwest census region as defined by 
the Census Bureau. (Equation co-efficient: 246.2)
    (ii) An equation constant of 13851.
    (A) Newly constructed units. Units with a DOFA date of October 1, 
1991, or thereafter, will be considered to have a zero existing 
modernization need.
    (B) Acquired developments. Developments acquired by a PHA with a 
DOFA date of October 1, 1991, or thereafter, will be considered by HUD 
to have a zero existing modernization need.
    (2) For New York City and Chicago Housing Authorities, based on a 
large sample of direct inspections. For purposes of this formula, prior 
to the cost calibration in paragraph (d)(4) of this section, the number 
used for the existing modernization need of family developments is 
$16,680 in New York, and $24,286 in Chicago, and the number for elderly 
developments is $14,622 in New York, and $16,912 in Chicago.
    (i) Newly constructed units. Units with a DOFA date of October 1, 
1991, or thereafter, will be considered to have a zero existing 
modernization need.
    (ii) Acquired developments. Developments acquired by a PHA with a 
DOFA date of October 1, 1991, or thereafter, will be considered by HUD 
to have a zero existing modernization need.
    (3) For PHAs with fewer than 250 units in FFY 1999, estimates of 
the existing modernization need will be based on the following:
    (i) Objective measurable data concerning the following PHA, 
community and development characteristics applied to each development:
    (A) The average number of bedrooms in the units in a development. 
(Equation co-efficient: 1427.1);
    (B) The total number of units in a development as of FFY 1999. 
(Equation co-efficient: 24.3);
    (C) The proportion of units, as of FFY 1998, in a development in 
buildings completed in 1978 or earlier. In the case of acquired 
developments, HUD will use the DOFA date unless the PHA provides HUD 
with the actual date of construction, in which case HUD will use the 
actual date of construction (or, for scattered sites, the average dates 
of construction of all the buildings), subject to a 50-year cap. 
(Equation co-efficient: -1389.7);
    (D) The cost index of rehabilitating property in the area, as of 
FFY 1999. (Equation co-efficient: -20163);
    (E) The extent to which the units of a development were in a non-
metropolitan area as defined by the Census Bureau during FFY 1996. 
(Equation co-efficient: 6157.7);
    (F) The PHA is located in the southern census region, as defined by 
the Census Bureau. (Equation co-efficient: 4379.2);
    (G) The PHA is located in the western census region, as defined by 
the Census Bureau. (Equation co-efficient: 3747.7);
    (H) The PHA is located in the midwest census region as defined by 
the Census Bureau. (Equation co-efficient: -2073.5)
    (ii) An equation constant of 24762.
    (A) Newly constructed units. Units with a DOFA date of October 1, 
1991, or thereafter, will be considered to have a zero existing 
modernization need.
    (B) Acquired developments. Developments acquired by a PHA with a 
DOFA date of October 1, 1991, or thereafter, will be considered by HUD 
to have a zero existing modernization need.
    (4) Calibration of existing modernization need for cost index of 
rehabilitating property in the area. The estimated existing 
modernization need, as determined under paragraphs (d)(1), (d)(2) or 
(d)(3) of this section, shall be adjusted by the values of the cost 
index of rehabilitating property in the area.
    (e) Allocation for accrual needs under the CFF. HUD shall allocate 
the other half of the remaining Capital Fund amount based on the 
relative accrual needs of PHAs, determined in accordance with paragraph 
(e) of this section.
    (1) For PHAs greater than or equal to 250 or more units, except the 
New York City and Chicago Housing Authorities, estimates of the accrual 
need will be based on the following:
    (i) Objective measurable data concerning the following PHA, 
community and development characteristics applied to each development:
    (A) The average number of bedrooms in the units in a development. 
(Equation co-efficient: 324.0);
    (B) The extent to which the buildings in a development average 
fewer than 5 units. (Equation co-efficient: 93.3);
    (C) The age of a development as of FFY 1998, as determined by the 
DOFA date. In the case of acquired developments, HUD will use the DOFA 
date unless the PHA provides HUD with the actual date of construction, 
in which case HUD will use the actual date of construction (or, for 
scattered sites, the average dates of construction of all the 
buildings), subject to a 50-year cap. (Equation co-efficient: -7.8);
    (D) Whether the development is a family development. (Equation co-
efficient: 184.5);
    (E) The cost index of rehabilitating property in the area, as of 
FFY 1999. (Equation co-efficient: -252.8);
    (F) The extent to which the units of a development were in a non-
metropolitan area as defined by the Census Bureau during FFY 1996. 
(Equation co-efficient: -121.3);
    (G) PHA size of 6600 or more units in FFY 1999. (Equation co-
efficient: -150.7);
    (H) The PHA is located in the southern census region, as defined by 
the Census Bureau. (Equation co-efficient: 28.4);
    (I) The PHA is located in the western census region, as defined by 
the Census Bureau. (Equation co-efficient: -116.9);
    (J) The PHA is located in the midwest census region as defined by 
the Census Bureau. (Equation co-efficient: 60.7)
    (ii) An equation constant of 1371.9,
    (2) For New York City and Chicago Housing Authorities, based on a 
large sample of direct inspections. For purposes of this formula, prior 
to the

[[Page 14428]]

cost calibration in paragraph (e)(4) of this section the number used 
for the accrual need of family developments is $1,395 in New York, and 
$1,251 in Chicago, and the number for elderly developments is $734 in 
New York, and $864 in Chicago.
    (3) For PHAs with fewer than 250 units, estimates of the accrual 
need will be based on the following:
    (i) Objective measurable data concerning the following PHA, 
community and development characteristics applied to each development:
    (A) The average number of bedrooms in the units in a development. 
(Equation co-efficient: 325.5);
    (B) The extent to which the buildings in a development average 
fewer than 5 units. (Equation co-efficient: 179.8);
    (C) The age of a development as of FFY 1998, as determined by the 
DOFA date. In the case of acquired developments, HUD will use the DOFA 
date unless the PHA provides HUD with the actual date of construction. 
When provided with the actual date of construction, HUD will use this 
date (or, for scattered sites, the average dates of construction of all 
the buildings), subject to a 50-year cap. (Equation co-efficient: 
-9.0);
    (D) Whether the development is a family development. (Equation co-
efficient: 59.3);
    (E) The cost index of rehabilitating property in the area, as of 
FFY 1999. (Equation co-efficient: -1570.5);
    (F) The extent to which the units of a development were in a non-
metropolitan area as defined by the Census Bureau during FFY 1996. 
(Equation co-efficient: -122.9);
    (G) The PHA is located in the southern census region, as defined by 
the Census Bureau. (Equation co-efficient: -564.0);
    (H) The PHA is located in the western census region, as defined by 
the Census Bureau. (Equation co-efficient: -29.6);
    (I) The PHA is located in the midwest census region as defined by 
the Census Bureau. (Equation co-efficient: -418.3)
    (ii) An equation constant of 3193.6.
    (4) Calibration of accrual need for the cost index of 
rehabilitating property in the area. The estimated accrual need, as 
determined under either paragraph (e)(2) or (e)(3) of this section, 
shall be adjusted by the values of the cost index of rehabilitation.
    (f) Calculation of number of units. (1) General. For purposes of 
determining the number of a PHA's public housing units, and the 
relative modernization needs of PHAs:
    (i) HUD shall count as one unit:
    (A) Each public housing and section 23 bond-financed unit under the 
ACC, except that it shall count as one-fourth of a unit each existing 
unit under Turnkey III program. Units receiving operating subsidy only 
shall not be counted.
    (B) Each existing unit under the Mutual Help program.
    (ii) HUD shall add to the overall unit count units that are added 
to a PHA's inventory so long as the units are under ACC amendment and 
have reached DOFA by the date that HUD establishes for the Federal 
Fiscal Year in which the CFF is being run (hereafter called the 
``reporting date''). Any such increase in units shall result in an 
adjustment upwards in the number of units under the CFF. New units 
reaching DOFA after the reporting date will be counted for CFF purposes 
as of the following Federal Fiscal Year.
    (2) Replacement units. Replacement units newly constructed as of 
and after October 1, 1998 that replace units in a development funded in 
FFY 1999 by the Comprehensive Grant formula system or the Comprehensive 
Improvement Assistance Program (CIAP) formula system will be given a 
new ACC number as a separate development and will be treated as a newly 
constructed development.
    (3) Conversion of units. The total estimated need (total units 
times need per unit) of the development is unchanged by conversion of 
unit sizes within buildings.
    (4) Reduction of units. For developments losing units as a result 
of demolition and disposition, the number of units on which capital 
funding is based will be the number of units reported as eligible for 
capital funding as of the reporting date. Units are eligible for 
funding until they are removed due to demolition and disposition in 
accordance with a schedule approved by HUD.
    (g) Computation of formula shares under the CFF. (1) Total 
estimated existing modernization need. The total estimated existing 
modernization need of a PHA under the CFF is the result of multiplying 
for each development the PHA's total number of formula units by its 
estimated existing modernization need per unit, as determined by 
paragraph (d) of this section, and calculating the sum of these 
estimated development needs.
    (2) Total accrual need. The total accrual need of a PHA under the 
CFF is the result of multiplying for each development the PHA's total 
number of formula units by its estimated accrual need per unit, as 
determined by paragraph (e) of this section, and calculating the sum of 
these estimated accrual needs.
    (3) PHA's formula share of existing modernization need. A PHA's 
formula share of existing modernization need under the CFF is the PHA's 
total estimated existing modernization need divided by the total 
existing modernization need of all PHAs.
    (4) PHA's formula share of accrual need. A PHA's formula share of 
accrual need under the CFF is the PHA's total estimated accrual need 
divided by the total existing accrual need of all PHAs.
    (5) PHA's formula share of capital need. A PHA's formula share of 
capital need under the CFF is the average of the PHA's share of 
existing modernization need and its share of accrual need (by which 
method each share is weighted 50%).
    (h) CFF capping. (1) For units that are eligible for funding under 
the CFF (including replacement housing units discussed below) a PHA's 
CFF share will be its share of capital need, as determined under the 
CFF, subject to the condition that no PHA's CFF share for units funded 
under CFF can be less than 94% of its formula share had the FFY 1999 
formula system been applied to these CFF eligible units. The FFY 1999 
formula system is based upon the FFY 1999 Comprehensive Grant formula 
system for PHAs with 250 or more units in FFY 1999 and upon the FFY 
1999 Comprehensive Improvement Assistance Program (CIAP) formula system 
for PHAs with fewer than 250 units in FFY 1999.
    (2) For a Moving to Work PHA whose agreement provides that its 
capital formula share is to be calculated in accordance with the 
previously existing formula, the PHA's CFF share, during the term of 
the agreement, may be approximately the formula share that the PHA 
would have received had the FFY 1999 formula funding system been 
applied to the CFF eligible units.
    (i) Replacement housing factor to reflect formula need for 
developments with demolition and disposition occurring on or after 
October 1, 1998--(1) Replacement housing factor generally. PHAs that 
have a reduction in units attributable to demolition and disposition of 
units during the period (reflected in data maintained by HUD) that 
lowers the formula unit count for the CFF calculations qualify for 
application of a replacement housing factor, subject to satisfaction of 
criteria stated in paragraph (i)(5) of this section.
    (2) When applied. The replacement housing factor will be added, 
where applicable:
    (i) For the first 5 years after the reduction in units described in 
paragraph (i)(1) of this section, and

[[Page 14429]]

    (ii) For an additional 5 years if the planning, leveraging, 
obligation and expenditure requirements are met. As a prior condition 
of a PHA's receipt of additional funds for replacement housing provided 
for the second 5-year period or any portion thereof, a PHA must obtain 
a firm commitment of substantial additional funds other than public 
housing funds for replacement housing, as determined by HUD.
    (3) Computation of replacement housing factor. The replacement 
housing factor consists of the difference between the CFF share without 
the CFF share reduction of units attributable to demolition and 
disposition, and the CFF share that resulted after the reduction of 
units attributable to demolition and disposition.
    (4) Replacement housing funding in FFY 1998 and 1999. Units that 
received replacement housing funding in FFY 1998 will be treated as if 
they had received two years of replacement housing funding by FFY 2000. 
Units that received replacement housing funding in FFY 1999 will be 
treated as if they had received one year of replacement housing funding 
as of FFY 2000.
    (5) PHA eligibility for replacement housing factor. A PHA is 
eligible for application of this factor only if the PHA satisfies the 
following criteria:
    (i) The PHA requests the application of the replacement factor;
    (ii) The PHA will use the funding in question only for replacement 
housing;
    (iii) The PHA will use the restored funding that results from the 
use of the replacement factor to provide replacement housing in 
accordance with the PHA's five-year PHA plan, as approved by HUD under 
part 903 of this chapter;
    (iv) The PHA has not received funding for public housing units that 
will replace the lost units under the public housing development, Major 
Reconstruction of Obsolete Public Housing, HOPE VI programs, or 
programs that otherwise provide for replacement with public housing 
units;
    (v) The PHA, if designated troubled by HUD and not already under 
the direction of HUD or a court-appointed receiver, in accordance with 
part 902 of this chapter, uses an Alternative Management Entity as 
defined in part 902 of this chapter for development of replacement 
housing and complies with any applicable provisions of its Memorandum 
of Agreement executed with HUD under that part; and
    (vi) The PHA undertakes any development of replacement housing in 
accordance with applicable HUD requirements and regulations.
    (6) Failure to provide replacement housing in a timely fashion. (i) 
A PHA will be subject to the actions described in paragraph (i)(7)(ii) 
of this section if the PHA does not:
    (A) Use the restored funding that results from the use of the 
replacement housing factor to provide replacement housing in a timely 
fashion, as provided in paragraph (i)(7)(i) of this section and in 
accordance with applicable HUD requirements and regulations; and
    (B) Make reasonable progress on such use of the funding, in 
accordance with HUD requirements and regulations.
    (ii) If a PHA fails to act as described in paragraph (i)(6)(i), HUD 
will require appropriate corrective action under these regulations; may 
recapture and reallocate the funds; or may take other appropriate 
action.
    (7) Requirement to obligate and expend replacement housing factor 
funds within specified period. (i) In addition to the requirements 
otherwise applicable to obligation and expenditure of funds, PHAs are 
required to obligate assistance received as a result of the replacement 
housing factor within:
    (A) 24 months from the date that funds become available to the PHA; 
or
    (B) With specific HUD approval, 24 months from the date that the 
PHA accumulates adequate funds to undertake replacement housing.
    (ii) To the extent the PHA has not obligated any funds provided as 
a result of the replacement housing factor within the times required by 
this paragraph, or expended such funds within a reasonable time, HUD 
shall reduce the amount of funds to be provided to the PHA as a result 
of the application of the second 5 years of the replacement housing 
factor.
    (j) Performance reward factor. (1) PHAs that are designated high 
performers under the Public Housing Assessment System (PHAS) for their 
most recent fiscal year can receive a performance bonus that is:
    (i) 3% above their base formula amount in the first five years 
these awards are given (for any year in this 5-year period in which the 
performance reward is earned); and
    (ii) 5% above their base formula amount in future years (for any 
year in which the performance reward is earned).
    (2) The performance bonus is subject only to the condition that no 
PHA will lose more than 5% of its base formula amount as a result of 
the redistribution of funding from non-high performers to high 
performers.
    (3) The first performance awards will be given based upon PHAS 
scores for PHA fiscal years ending December 31, 2000, March 31, 2001, 
June 30, 2001, and September 30, 2001, with PHAs typically having 
received those PHAS scores within approximately 3 months after the end 
of those fiscal years.
    (k) Eligible expenses. (1) Eligible expenses include the following:
    (i) Development, financing, and modernization of public housing 
projects, including the redesign, reconstruction, and reconfiguration 
of public housing sites and buildings (including accessibility 
improvements) and the development of mixed-finance projects;
    (ii) Vacancy reduction;
    (iii) Addressing deferred maintenance needs and the replacement of 
obsolete utility systems and dwelling equipment;
    (iv) Planned code compliance;
    (v) Management improvements;
    (vi) Demolition and replacement;
    (vii) Resident relocation;
    (viii) Capital expenditures to facilitate programs to improve the 
empowerment and economic self-sufficiency of public housing residents 
and to improve resident participation;
    (ix) Capital expenditures to improve the security and safety of 
residents; and
    (x) Homeownership activities, including programs under section 32 
of the 1937 Act (42 U.S.C. 1437z-4).
    (2) Such assistance may involve the drawdown of funds on a schedule 
commensurate with construction draws for deposit into an interest 
earning escrow account to serve as collateral or credit enhancement for 
bonds issued by a public agency for the construction or rehabilitation 
of the development.

    Dated: March 7, 2000.
Harold Lucas,
Assistant Secretary for Public and Indian Housing.
[FR Doc. 00-6335 Filed 3-15-00; 8:45 am]
BILLING CODE 4210-33-P